SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 333-59073
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P&L COAL HOLDINGS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4004153
- ----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Market Street, St. Louis, Missouri 63101-1826
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 342-3400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
P&L COAL HOLDINGS CORPORATION
UNAUDITED STATEMENT OF CONDENSED CONSOLIDATED OPERATIONS
FOR THE QUARTER AND PERIOD ENDED SEPTEMBER 30, 1998
(In thousands)
Quarter Period
Ended Ended
Sept. 30, 1998 Sept. 30, 1998
---------------- ----------------
REVENUES
Sales $ 537,387 $ 791,134
Other revenues 20,111 29,031
----------------- ----------------
Total revenues 557,498 820,165
OPERATING COSTS AND EXPENSES
Operating costs and expenses 464,534 677,281
Depreciation, depletion and amortization 51,783 77,474
Selling and administrative expenses 16,790 25,748
----------------- ----------------
OPERATING PROFIT 24,391 39,662
Interest expense (52,692) (75,846)
Interest income 6,726 7,753
----------------- ----------------
LOSS BEFORE INCOME TAXES (21,575) (28,431)
Income tax benefit (6,903) (8,472)
------------------ ----------------
NET LOSS $ (14,672) $ (19,959)
================== ================
See accompanying notes to unaudited condensed
consolidated financial statements.
P&L COAL HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
September 30, March 31,
1998 1998
---------------- ----------------
(in thousands) (in dollars)
Current assets
Cash and cash equivalents $ 326,250 $ 1
Accounts receivable, less allowance
for doubtful accounts of $9,665 and
$0, respectively 346,473 -
Materials and supplies 62,233 -
Coal inventory 173,029 -
Assets from trading and price risk
management activities 825,241 -
Other current assets 22,503 -
---------------- ----------------
Total current assets 1,755,729 1
Property, plant, equipment and mine
development, net of accumulated
depreciation, depletion and
amortization of $1,626,220
and $0, respectively 4,657,674 -
Investments and other assets 531,426 -
---------------- ----------------
Total assets $ 6,944,829 $ 1
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 73,876 $ -
Income taxes payable 18,010 -
Deferred income taxes 3,153 -
Liabilities from trading and price
risk management activities 473,322 -
Accounts payable and accrued expenses 731,075 -
---------------- ----------------
Total current liabilities 1,299,436 -
Long-term debt, less current maturities 2,304,422 -
Deferred income taxes 873,869 -
Accrued reclamation and other
environmental liabilities 460,744 -
Workers' compensation obligations 222,415 -
Accrued postretirement benefit costs 996,575 -
Obligation to industry fund 62,662 -
Other noncurrent liabilities 278,396 -
---------------- ----------------
Total liabilities 6,498,519 -
Stockholders' equity:
Preferred Stock - $.01 per share par value;
September 30, 1998 - 10,000,000 shares
authorized, 5,000,000 shares issued and
outstanding; March 31, 1998 zero shares
authorized, issued or outstanding 50 -
Common Stock - $.01 per share par value; September
30, 1998 - 25,000,000 shares authorized,
16,000,000 shares issued and outstanding; March 31,
1998 - 1,000 shares authorized, 1 share issued and
outstanding 160 1
Additional paid-in capital 479,790 -
Accumulated other comprehensive loss (13,731) -
Accumulated deficit (19,959) -
---------------- ----------------
Total stockholders' equity 446,310 1
---------------- ----------------
Total liabilities and stockholders'
equity $ 6,944,829 $ 1
================ ================
See accompanying notes to unaudited condensed
consolidated financial statements.
P&L COAL HOLDINGS CORPORATION
UNAUDITED STATEMENT OF CONDENSED CONSOLIDATED CASH FLOWS
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (19,959)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization 77,474
Deferred income taxes (13,652)
Amortization of debt discount and debt issuance costs 6,133
Net loss on property and equipment disposals 32
Net gain on contract restructuring (592)
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts receivable 96,398
Materials and supplies 2,155
Coal inventory 22,025
Other current assets 17,068
Accounts payable and accrued expense (114,570)
Income taxes payable 15,428
Net assets from trading and price risk management activities (6,836)
Accrued reclamation and related liabilities (1,516)
Workers' compensation obligations 676
Accrued postretirement benefit costs 3,239
Obligation to industry fund (1,004)
Royalty prepayment 135,903
Other, net (12,819)
-----------------
Net cash provided by operating activities 205,583
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment and mine development (82,464)
Acquisition of P&L Coal subsidiaries, net of $70,359 cash acquired (1,994,635)
Proceeds from contract restructuring 3,881
Proceeds from property and equipment disposals 5,170
-----------------
Net cash used in investing activities (2,068,048)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt (154,542)
Proceeds from short-term borrowings and long-term debt 1,863,498
Net capital contribution 480,000
Net change in due to/from affiliates 88
-----------------
Net cash provided by financing activities 2,189,044
Effect of exchange rate changes on cash and cash equivalents (329)
-----------------
Net increase in cash and cash equivalents 326,250
Cash and cash equivalents at beginning of period -
-----------------
Cash and cash equivalents at end of period $ 326,250
=================
See accompanying notes to unaudited condensed
consolidated financial statements.
P&L COAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include the
consolidated operations and balance sheets of P&L Coal Holdings Corporation
("P&L Coal"), also known as Peabody Group. These financial statements include
the subsidiaries of Peabody Holding Company, Inc. ("Peabody Holding Company"),
Gold Fields Mining Corporation ("Gold Fields") which owns Lee Ranch Coal Company
("Lee Ranch"), Citizens Power LLC ("Citizens Power") and Peabody Resources
Holdings Pty Ltd. ("Peabody Resources"), an Australian company (collectively,
the "Company"). Through May 19, 1998, the Company was a wholly owned indirect
subsidiary of The Energy Group, PLC ("The Energy Group"). Effective May 20,
1998, the Company was acquired by P&L Coal, which at the time was wholly owned
by Lehman Merchant Banking Partners II and its affiliates ("Lehman Merchant
Banking"), an investment fund affiliated with Lehman Brothers Inc. The
transaction was part of the sale of The Energy Group to Texas Utilities Company.
P&L Coal, a holding company with no direct operations and nominal assets other
than its investment in its subsidiaries, was formed by Lehman Merchant Banking
on February 27, 1998 for the purpose of acquiring the Company and had no
significant activity until the acquisition.
The accompanying condensed consolidated financial statements at September 30,
1998 and for the quarter and period ended September 30, 1998, and the notes
thereto, are unaudited. However, in the opinion of management, these financial
statements reflect all adjustments necessary for a fair presentation of the
results of the periods presented. The results of operations for the period ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
Prior to the acquisition, "P&L Coal Group" represented the combined operations
of the same subsidiaries currently owned by P&L Coal. The financial statements
should be read in connection with P&L Coal Group's audited financial statements
as of March 31, 1998.
(2) Comprehensive Income
Effective with the quarter ended June 30, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires that noncash
changes in stockholders' equity be combined with net income and reported in a
new financial statement category entitled "comprehensive income." Adoption of
SFAS No. 130 had no impact on the results of the Company's operations. The
following table sets forth the components of comprehensive loss for the quarter
and period ended September 30, 1998 (in thousands):
Quarter ended Period ended
September 30, September 30,
1998 1998
-------------- -------------
Net loss $ (14,672) $ (19,959)
Foreign currency translation adjustment (6,024) (13,731)
-------------- -------------
Comprehensive loss $ (20,696) $ (33,690)
============== =============
(3) Commitments and Contingencies
Environmental claims have been asserted against a subsidiary of the Company at
17 sites in the United States. Some of these claims are based on the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, and on similar state statutes. The majority of these sites are related
to activities of former subsidiaries of the Company.
The Company's policy is to accrue environmental cleanup-related costs of a
noncapital nature when those costs are believed to be probable and can be
reasonably estimated. The quantification of environmental exposures requires an
assessment of many factors, including changing laws and regulations,
advancements in environmental technologies, the quality of information available
related to specific sites, the assessment stage of each site investigation,
preliminary findings and the length of time involved in remediation or
settlement. For certain sites, the Company also assesses the financial
capability of other potentially responsible parties and, where allegations are
based on tentative findings, the reasonableness of the Company's apportionment.
The Company has not anticipated any recoveries from insurance carriers or other
potentially responsible third parties in its Consolidated Balance Sheets. The
liabilities for environmental cleanup-related costs recorded in the Consolidated
Balance Sheet at September 30, 1998 were $67.7 million. This amount represents
those costs that the Company believes are probable and reasonably estimable. In
the event that future remediation expenditures are in excess of amounts accrued,
management does not anticipate that they will have a material adverse effect on
the financial position, results of operations or liquidity of the Company.
In addition, the Company at times becomes a party to claims, lawsuits,
arbitration proceedings and administrative procedures in the ordinary course of
business. Management believes that the ultimate resolution of pending or
threatened proceedings will not have a material effect on the financial
position, results of operations or liquidity of the Company.
(4) Indebtedness
As of September 30, 1998, the Company had total indebtedness of $2,378.3
million, consisting of the following:
(In millions)
8.875% Senior Notes due 2008 ("Senior Notes") $ 398.8
9.625% Senior Subordinated Notes due 2008 ("Senior
Subordinated Notes") 498.6
Term loans under Senior Credit Facilities 867.5
5.000% Subordinated Note 205.4
Non-Recourse Debt 301.0
Other 107.0
----------
$ 2,378.3
==========
The Senior Credit Facilities include a Revolving Credit Facility that provides
for aggregate borrowings of up to $150.0 million and letters of credit of up to
$330.0 million. As of September 30, 1998, the Company had no borrowings
outstanding under the Revolving Credit Facility. Interest rates on the revolving
loans under the Revolving Credit Facility are based on the Base Rate (as defined
in the Senior Credit Facilities), or LIBOR (as defined in the Senior Credit
Facilities) at the Company's option. On October 1, 1998, the Company entered
into two interest rate swaps to fix the interest cost on $500 million of
long-term debt outstanding under the Term Loan Facility. The Company will pay a
fixed rate of approximately 7.0% on $300 million of such long-term debt for a
period of three years, and on $200 million of such long-term debt for two years.
The Revolving Credit Facility commitment matures in fiscal year 2005.
The Company made an optional prepayment of $50 million on the Senior Credit
Facilities in July 1998, which it applied against Term Loan B mandatory payments
in order of maturity, and a mandatory payment of $2.5 million on Term Loan A in
September 1998. The following table sets forth the amortization schedule for the
Senior Credit Facilities after giving effect to the payments:
(In millions)
Amortization Term Loan A Term Loan B
------------ ----------- -----------
Fiscal Year:
1999 $ 5.00 $ -
2000 13.75 -
2001 18.75 -
2002 42.50 -
2003 68.75 -
2004 93.75 -
2005 25.00 64.00
2006 - 408.25
2007 - 127.75
---------- ----------
$ 267.50 $ 600.00
========== ==========
The indentures governing the Senior Notes and Senior Subordinated Notes permit
the Company and its Restricted Subsidiaries (which include all subsidiaries of
the Company except Citizens Power and its subsidiaries) to incur additional
indebtedness, including secured indebtedness, subject to certain limitations. In
addition, among other customary restrictive covenants, the indentures prohibit
the Company and its Restricted Subsidiaries from creating or otherwise causing
any encumbrance or restriction on the ability of any Restricted Subsidiary that
is not a Guarantor to pay dividends or to make certain other upstream payments
to the Company or any of its Restricted Subsidiaries. The Revolving Credit
Facility and related Term Loan Facility also contain certain restrictions and
limitations including but not limited to financial covenants that will require
the Company to maintain and achieve certain levels of financial performance and
limit the payment of cash dividends and similar restricted payments. In
addition, the Senior Credit Facilities prohibit the Company from allowing its
Restricted Subsidiaries (which include all Guarantors) to create or otherwise
cause any encumbrance or restriction on the ability of any such Restricted
Subsidiary to pay any dividends or make certain other upstream payments subject
to certain exceptions. The Company was in compliance with all of the restrictive
covenants of its loan agreements as of September 30, 1998.
(5) Business Combinations
The acquisition by the Company was funded through borrowings by the Company
pursuant to a $920.0 million senior secured term facility, the offerings of
$400.0 million aggregate principal amount of Senior Notes and $500.0 million
aggregate principal amount of Senior Subordinated Notes, an equity contribution
to P&L Coal by Lehman Merchant Banking of $400.0 million, and an equity
contribution of $80.0 million from other parties, including Lehman Brothers Inc.
Such amounts were used to pay $2,065.0 million for the equity of the Company,
repay debt, increase cash balances and pay transaction fees and expenses
incurred with the acquisition. P&L Coal also entered into a $480.0 million
senior revolving credit facility to provide for the Company's working capital
requirements following the acquisition. The final purchase price is subject to
adjustment to the extent that total assets less current liabilities and
long-term debt as of March 31, 1998 differ from certain projected balances. This
adjustment is not expected to be material to the purchase price and is still
under review by the parties.
The acquisition has been accounted for under the purchase method of accounting.
Accordingly, the cost to acquire the Company has been allocated to the assets
acquired and liabilities assumed according to their respective estimated fair
values. The preliminary estimated fair values were determined based on
management's estimates.
The final purchase price allocation is dependent upon certain valuations that
have not progressed to a stage where there is sufficient information to make a
final allocation. With respect to several valuations, the Company is awaiting
additional information that it has arranged to obtain in order to finalize its
estimates. The Company intends to continue with its internal reviews regarding
asset and liability valuations and also has arranged to obtain independent
appraisals and surveys, as appropriate. In addition, the Company has requested
actuarial valuations to support the final adjustments to its employee-related
liabilities.
The purchase accounting adjustments presented below are preliminary, subject to
finalization of the purchase price, final management review and fair value
determination. Adjustments to the preliminary allocation would likely result in
changes to amounts assigned to property, plant, equipment and mine development
(including land and coal interests) and, accordingly, could impact depletion,
depreciation and amortization charged to future periods. Although not expected
to be material, the full impact of the final allocation is not known.
Below are the Company's historical balance sheet at May 19, 1998, the
preliminary purchase accounting adjustments and the preliminary opening balance
sheet. The historical balance sheet has been adjusted to include the effects of
the financing transactions described above.
Historical
Adjusted for
Effects of Purchase
Financing Accounting Preliminary
May 19, 1998 Adjustments May 19, 1998
------------- ------------- --------------
(In millions)
ASSETS
Total current assets $ 2,243.6 $ (11.5) $ 2,232.1
Property, plant, equipment
and mine development, net 3,668.2 897.9 4,566.1
Investments and other assets 600.9 91.0 691.9
------------- ------------- --------------
Total assets $ 6,512.7 $ 977.4 $ 7,490.1
============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $ 1,801.2 $ 20.0 $ 1,821.2
Long-term debt,
less current maturities 2,287.8 34.9 2,322.7
Deferred income taxes 662.1 229.8 891.9
Other noncurrent liabilities 1,849.2 125.1 1,974.3
------------- ------------- --------------
Total liabilties 6,600.3 409.8 7,010.1
Total stockholders' equity (87.6) 567.6 480.0
------------- ------------- --------------
Total liabilities and
stockholders' equity $ 6,512.7 $ 977.4 $ 7,490.1
============= ============= ==============
The preliminary opening balance sheet reflects the acquisition at a purchase
price of $2,065.0 million. Preliminary purchase accounting adjustments resulted
in a net increase in total assets of $977.4 million. Adjustments to the
preliminary allocation during the current quarter were not material. Various
assets and liabilities were adjusted to reflect their estimated fair value. The
majority of the excess purchase price is reflected as adjustments to the fair
value assigned to various land and coal interests, and the Company does not
anticipate recording any goodwill as a result of the acquisition. The impact of
the preliminary adjustments results in an additional deferred income tax
liability of $229.8 million.
The preliminary purchase accounting adjustments include a $40.0 million
liability for estimated costs associated with a restructuring plan resulting
from the business combination. The estimate is comprised of costs associated
with exiting certain activities and consolidating and restructuring certain
management and administrative functions and includes costs resulting from a plan
to involuntarily terminate or relocate employees. As of September 30, 1998, the
Company has finalized its involuntary termination and employee relocation plan
and continues to finalize the cost of exiting certain business activities. Costs
associated with the exit and restructuring plans are being charged against the
liability as incurred. The net cash outlays and non-cash costs charged against
the liability through September 30, 1998 total approximately $16.8 million and
$2.3 million, respectively. The Company expects the majority of the remaining
charges to occur within the next six months. If the ultimate amount of cost
expended is less than the amount recorded as a liability, the excess will reduce
the cost of the acquisition. Any amount of cost exceeding the amount recorded as
a liability will be recorded as an additional element of the cost of the
acquisition if determined within the allocation period and, thereafter, will be
included as a charge to earnings in the period in which the adjustment is
determined.
The following unaudited pro forma results of operations for the quarter and
periods ended September 30, 1998 and 1997 assume the acquisition had occurred at
the beginning of each fiscal year. The pro forma results of the Company would be
as follows (dollars in thousands):
Period Six Months
Ended Ended
September 30, September 30,
1998 1997
------------- --------------
Total revenues $ 1,112,573 $ 1,144,697
Operating profit 40,502 121,188
Income (loss) before income taxes (54,283) 22,986
Net income (loss) (42,897) 15,834
Guarantor Information
In accordance with the indentures governing the Senior Notes and Senior
Subordinated Notes, certain wholly owned U.S. subsidiaries of the Company have
fully and unconditionally guaranteed the debt associated with the purchase on a
joint and several basis. Separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented because management
believes that such information is not material to investors. The following
condensed historical financial statement information is provided for such
Guarantor/Non-guarantor Subsidiaries.
P&L Coal Holdings Corporation
Unaudited Supplemental Condensed Statements of Consolidated Operations
For the Quarter Ended September 30, 1998
(In thousands)
Non-
Parent Guarantor guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Total
revenues $ - $ 519,104 $ 38,394 $ - $ 557,498
Costs and
expenses:
Operating
costs and
expenses - 435,611 28,923 - 464,534
Depreciation,
depletion and
amortization - 44,290 7,493 - 51,783
Selling and
administrative
expenses - 16,392 398 - 16,790
Interest
expense 49,560 2,368 764 - 52,692
Interest
income (1,193) (5,443) (90) - (6,726)
------------ ----------- ------------ ------------ ------------
Income
(loss)
before
income
taxes (48,367) 25,886 906 - (21,575)
Income tax
provision
(benefit) (12,098) 3,962 1,233 - (6,903)
------------ ----------- ------------ ------------ ------------
Net income
(loss) $ (36,269) $ 21,924 $ (327) $ - $ (14,672)
============ =========== ============ ============ ============
P&L Coal Holdings Corporation
Unaudited Supplemental Condensed Statements of Consolidated Operations
Period Ended September 30, 1998
(In thousands)
Non-
Parent Guarantor guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Total
revenues $ - $ 753,837 $ 66,328 $ - $ 820,165
Costs and
expenses:
Operating
costs and
expenses - 633,040 44,241 - 677,281
Depreciation,
depletion and
amortization - 66,339 11,135 - 77,474
Selling and
administrative
expenses - 25,105 643 - 25,748
Interest
expense 69,261 5,525 1,060 - 75,846
Interest
income (1,836) (5,817) (100) - (7,753)
------------ ----------- ------------ ------------ ------------
Income
(loss)
before
income
taxes (67,425) 29,645 9,349 - (28,431)
Income tax
provision
(benefit) (17,108) 4,950 3,686 - (8,472)
------------ ----------- ------------ ------------ ------------
Net income
(loss) $ (50,317) $ 24,695 $ 5,663 $ - $ (19,959)
============ =========== ============ ============ ============
P&L Coal Holdings Corporation
Unaudited Supplemental Condensed Consolidated Balance Sheets
September 30, 1998
(In thousands)
Non-
Parent Guarantor guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
ASSETS
Current assets
Cash and
cash
equivalents $ - $ 261,809 $ 64,441 $ - $ 326,250
Accounts
receivable 951 221,888 123,634 - 346,473
Receivables
from affiliates,
net - - - - -
Inventories - 197,011 38,251 - 235,262
Assets from
trading and
price risk
management
activities - - 825,241 - 825,241
Other current
assets - 13,415 9,088 - 22,503
----------- ------------ ------------ ------------ ------------
Total current
assets 951 694,123 1,060,655 - 1,755,729
Property, plant,
equipment and
mine development
at cost - 5,736,788 547,106 - 6,283,894
Less accumulated
depreciation,
depletion
and amortization - (1,435,613) (190,607) - (1,626,220)
----------- ------------ ------------ ------------ ------------
- 4,301,175 356,499 - 4,657,674
Investments and
other assets 2,462,074 304,274 104,026 (2,338,948) 531,426
----------- ------------ ------------ ------------ ------------
Total assets $ 2,463,025 $ 5,299,572 $ 1,521,180 $ (2,338,948)$ 6,944,829
=========== ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term
borrowings
and current
maturities
of long-term
debt $ 10,000 $ 21,635 $ 42,241 $ - $ 73,876
Payable to
affiliates, net 82,463 (79,443) (3,020) - -
Income taxes
payable 6,778 5,648 5,584 - 18,010
Liabilities from
trading and
price risk
management
activities - - 473,322 - 473,322
Accounts payable
and accrued
expenses 136,115 426,294 171,819 - 734,228
----------- ------------ ------------ ------------ ------------
Total current
liabilities 235,356 374,134 689,946 - 1,299,436
Long-term debt,
less current
maturities 1,781,359 181,285 341,778 - 2,304,422
Deferred income
taxes - 813,334 60,535 - 873,869
Other noncurrent
liabilities - 2,006,375 14,417 - 2,020,792
----------- ------------ ------------ ------------ ------------
Total
liabilities 2,016,715 3,375,128 1,106,676 - 6,498,519
Stockholders'
equity 446,310 1,924,444 414,504 (2,338,948) 446,310
----------- ------------ ------------ ------------ ------------
Total
liabilities
and
stockholders'
equity $2,463,025 $5,299,572 $1,521,180 $ (2,338,948)$ 6,944,829
=========== ============ =========== ============ ============
P&L Coal Holdings Corporation
Unaudited Supplemental Condensed Statements of Consolidated Cash Flows
Period Ended September 30, 1998
(In thousands)
Non-
Parent Guarantor guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
Net cash provided
by (used in)
operating
activities $ (68,617) $ 271,259 $ 2,941 $ - $ 205,583
----------- ------------ ------------ ------------ ------------
Additions to
property, plant,
equipment and
mine
development - (53,989) (28,475) - (82,464)
Acquisitions of
P&L Coal
Subsidiaries (1,994,635) - - - (1,994,635)
Proceeds from
contract
restructuring - 3,881 - - 3,881
Proceeds from
property and
equipment
disposals - 5,002 168 - 5,170
----------- ------------ ------------ ------------ ------------
Net cash used in
investing
activities (1,994,635) (45,106) (28,307) - (2,068,048)
Payments of
long-term debt (52,500) (76,324) (25,718) - (154,542)
Proceeds from
short-term
borrowings and
Long-term debt 1,817,390 - 46,108 - 1,863,498
Net capital
contribution 398,000 - 82,000 - 480,000
Dividends paid
Net change in
due to/from
affiliates (22,489) 76,677 (54,100) - 88
----------- ------------ ------------ ------------ ------------
Net cash provided
by financing
activities 2,140,401 353 48,290 - 2,189,044
Effect of exchange
rate changes on
cash and cash
equivalents - - (329) - (329)
----------- ------------ ------------ ------------ ------------
Net increase in
cash and cash
equivalents 77,149 226,506 22,595 - 326,250
Cash and cash
equivalents at
beginning of
period - - - - -
----------- ------------ ------------ ------------ ------------
Cash and cash
equivalents at
end of period $ 77,149 $ 226,506 $ 22,595 $ - $ 326,250
=========== =========== =========== =========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The table presented below summarizes the results of operations and cash flows
for the Company and the "Predecessor Company" (P&L Coal Group) for the periods
presented. The discussion is based on a comparison of the results of P&L Coal
for the quarter and period ended September 30, 1998 versus the P&L Coal Group
results for the three and six-month periods ended September 30, 1997.
The results of operations and cash flows for the period ended September 30, 1998
may not be directly comparable to the other periods indicated as a result of the
effects of restatement of assets and liabilities to their estimated fair market
value in accordance with the application of purchase accounting pursuant to
Accounting Principles Board Opinion No. 16.
Company Predecessor Company
---------------------------- -------------------------------------------
Three Months For The Three Months Six Months
Ended Period Ended Period Ended Ended
September 30, September 30, April 1, 1998 September 30, September 30,
to
1998 1998 May 19, 1998 1997 1997
------------- ------------- -------------- ------------- --------------
Tons sold
(In millions) 44.3 64.8 22.7 42.1 83.5
============== ============= ============== ============= ==============
(In thousands)
Revenues:
Sales $ 537,387 $ 791,134 $ 280,680 $ 503,345 $ 1,022,910
Other
revenues 20,111 29,031 11,728 53,812 121,787
------------- ------------- -------------- ------------- --------------
Total
revenues 557,498 820,165 292,408 557,157 1,144,697
Operating costs
and
expenses 533,107 780,503 285,036 485,333 1,005,418
------------- ------------- -------------- ------------- --------------
Operating
profit $ 24,391 $ 39,662 $ 7,372 $ 71,824 $ 139,279
============= ============= ============== ============= ==============
Net income
(loss) $ (14,672) $ (19,959) $ 476 $ 48,519 $ 95,828
============= ============= ============== ============= ==============
Other Data:
EBITDA (1)$ 76,174 $ 117,136 $ 33,590 $ 126,478 $ 245,165
============= ============= ============== ============= ==============
Cash provided
by (used in):
Operating activities $ 205,583 $ (30,558) $ 50,242
Investing activities (2,068,048) (19,248) (75,060)
Financing activities 2,189,044 23,636 26,293
========== ========== ===========
(1) EBITDA is defined as income before deducting net interest expense, income
taxes, depreciation, depletion and amortization and excludes any non-cash
compensation expense related to management stock transactions. EBITDA has
been reduced by costs associated with reclamation, retiree health care and
workers' compensation. EBITDA is not a substitute for operating income, net
income and cash flow from operating activities as determined in accordance
with generally accepted accounting principles as a measure of profitability
or liquidity. EBITDA is presented as additional information because
management believes it to be a useful indicator of the Company's ability to
meet debt service and capital expenditure requirements. Because EBITDA is
not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
The amounts presented include EBITDA for Citizens Power of ($4.4 million),
$1.6 million, ($1.3 million), ($1.2 million) and $1.3 million for the
quarter ended September 30, 1998, the period ended September 30, 1998, the
period from April 1 to May 19, 1998, the quarter ended September 30, 1997
and the six months ended September 30, 1997, respectively.
For purposes of the comparisons to prior year operating results, the results of
operations and cash flows for the period ended September 30, 1998 reflect the
results of P&L Coal from April 1 to September 30, 1998 (the Company acquired P&L
Coal Group on May 19, 1998 and prior to such date had no separate operations)
and the results of P&L Coal Group for April 1 to May 19, 1998.
Sales. For the second quarter ended September 30, 1998, the Company had sales of
$537.4 million, an increase of $34.1 million, or 6.8%, compared to the second
quarter ended September 30, 1997. For the period ended September 30, 1998, sales
increased $48.9 million, or 4.8%, over the prior six-month period. The increase
for both periods was primarily due to an increase in brokered tons, as a result
of the Company's strategy to become more active in coal trading. Revenues from
brokered tons increased $33.0 million on a quarterly basis, and $53.3 million
for the period ended September 30, 1998. Sales related to domestic mining
activities experienced significant improvements for both periods at Southern
Appalachia and Southwest regions as a result of production efficiencies, but
these improvements were offset by decreases in revenues relating to Australia
caused by adverse weather conditions and weaker demand.
Other Revenues. Other revenues declined $33.7 million versus the second quarter
ended September 30, 1997, primarily as a result of $18.9 in lower mining
services revenues in Australia and a $9.6 million gain recognized in the prior
year from a coal supply contract restructuring. Other revenues also declined
$81.0 million for the six-month period, mainly due to $38.7 million in lower
revenues from coal supply contract restructurings and $35.7 million in lower
mining services revenues in Australia.
Operating Profit. Operating profit for the quarter ended September 30, 1998 was
$24.4 million, compared with $71.8 million for the prior-year quarter. This
decrease of $47.4 million was primarily due to the following: $14.2 million of
actuarial gains in the prior year associated with certain employee-related
liabilities that are non-recurring as a result of purchase accounting, a $9.6
million gain in the prior year from the restructuring of a coal supply contract,
$5.9 million lower results from Australia due to declining mining services
projects, unfavorable exchange rates and poor weather conditions, $3.8 million
in lower power trading and price risk management activities by Citizens Power,
and $3.5 million of additional depletion and amortization associated with
purchase accounting adjustments to write-up the Company's net assets to fair
value and higher operating expenses.
Operating profit declined $92.2 million to $47.0 million for the six-month
period, primarily due to a $38.7 million gain in the prior year from a coal
supply contract restructuring, $27.3 million of prior year actuarial gains, a
decline in operating profit from Australia of $12.2 million due to declining
mining services projects, unfavorable exchange rates and poor weather
conditions, $5.3 million of additional depletion and amortization associated
with purchase accounting and $2.9 million in lower profit from energy contract
restructuring transactions.
Interest Expense. Interest expense increased $43.7 million to $52.7 million for
the quarter ended September 30, 1998, and increased $61.9 million compared to
the six months ended September 30, 1997. This increase is the result of the
borrowings necessary to fund the acquisition of the P&L Coal Group on May 19,
1998.
Income Taxes. The Company's effective tax rate for the quarter and period ended
September 30, 1998 was 32.0% and 17.5%, respectively. The effective tax rate is
primarily impacted by two factors - the percentage depletion tax deduction
utilized by the Company and its U.S. subsidiaries that creates an alternative
minimum tax (AMT) situation, and the level of contribution by the Australian
business to the consolidated results of operations, which is taxed at a higher
rate than the U.S. Based upon these factors, the Company anticipates that
adjustments to the effective tax rate will be necessary on a quarterly basis.
Liquidity and Capital Resources
Net cash provided by operating activities was $175.0 million, which is comprised
mainly of a royalty prepayment (see discussion below) and a non-cash addition
for depreciation, depletion and amortization, partially offset by working
capital changes.
Net cash used in investing activities was $2,087.3 million, primarily consisting
of $103.1 million of capital expenditures and $2,065.0 for the acquisition of
P&L Coal Group. The Company had $82.6 million of committed capital expenditures
(primarily related to coal reserves and mining machinery) at September 30, 1998.
It is anticipated these capital expenditures will be funded through available
cash and credit facilities.
Net cash provided by financing activities was $2,212.7 million, reflecting a
$480.0 million equity contribution and $1,817.4 million in borrowings to fund
the acquisition. The Company also repaid $174.0 of long-term debt during the
period, including $50.0 million in prepayments and $2.5 million in scheduled
payments on acquisition debt.
On September 30, 1998, the Company received $135.9 million as prepayment of
non-recoupable advance royalty payments related to certain leased coal reserves
in New Mexico pursuant to a prepayment agreement signed on the same date. The
Company also received an interest in a coal reserve lease and other related
mining and contracts rights with an estimated fair value of $27.5 million. No
gain or loss was recognized from the transaction since the net present value of
the future royalties was previously recognized as an asset.
The Company has five qualified single employer defined benefit pension plans,
which the Pension Benefit Guaranty Corporation ("PBGC") calculated as being
underfunded using PBGC methodology. As a result, the Company has entered into an
agreement with the PBGC to alleviate the underfunding of the Company's pension
plans, pursuant to which the Company has agreed to: (i) accelerate minimum
funding payments of $9.6 million that the Company would otherwise have been
required to make during fiscal 1999, (ii) make certain contributions in excess
of such minimum funding and (iii) provide a letter of credit to support a
fraction of the pension plans' unfunded liabilities. The fair market value of
the plans' assets was $468.7 million at March 31, 1998, the date of the last
actuarial valuation determination. The pension funding assumptions included a
9.0% return on plan assets. Future funding and pension expense could be
adversely impacted by changes in the rate of return on plan assets from those
assumed in the actuarial valuation determination.
As of September 30, 1998, the Company had total indebtedness of $2,378.3
million, consisting of the following:
(In millions)
8.875% Senior Notes due 2008 ("Senior Notes") $ 398.8
9.625% Senior Subordinated Notes due 2008 ("Senior
Subordinated Notes") 498.6
Term loans under Senior Credit Facilities 867.5
5.000% Subordinated Note 205.4
Non-Recourse Debt 301.0
Other 107.0
----------
$ 2,378.3
==========
The Senior Credit Facilities include a Revolving Credit Facility that provides
for aggregate borrowings of up to $150.0 million and letters of credit of up to
$330.0 million. As of September 30, 1998, the Company had no borrowings
outstanding under the Revolving Credit Facility. Interest rates on the revolving
loans under the Revolving Credit Facility are based on the Base Rate (as defined
in the Senior Credit Facilities), or LIBOR (as defined in the Senior Credit
Facilities) at the Company's option. On October 1, 1998, the Company entered
into two interest rate swaps to fix the interest cost on $500 million of
long-term debt outstanding under the Term Loan Facility. The Company will pay a
fixed rate of approximately 7.0% on $300 million of such long-term debt for a
period of three years, and on $200 million of such long-term debt for two years.
The Revolving Credit Facility commitment matures in fiscal year 2005.
The Company made an optional prepayment of $50 million on the Senior Credit
Facilities in July 1998, which it applied against Term Loan B mandatory payments
in order of maturity, and a mandatory payment of $2.5 million on Term Loan A in
September 1998. The following table sets forth the amortization schedule for the
Senior Credit Facilities after giving effect to the payments:
(In millions)
Amortization Term Loan A Term Loan B
------------ ------------- -------------
Fiscal Year:
1999 $ 5.00 $ -
2000 13.75 -
2001 18.75 -
2002 42.50 -
2003 68.75 -
2004 93.75 -
2005 25.00 64.00
2006 - 408.25
2007 - 127.75
---------- ----------
$ 267.50 $ 600.00
========== ==========
The indentures governing the Senior Notes and Senior Subordinated Notes permit
the Company and its Restricted Subsidiaries (which include all subsidiaries of
the Company except Citizens Power and its subsidiaries) to incur additional
indebtedness, including secured indebtedness, subject to certain limitations. In
addition, among other customary restrictive covenants, the indentures prohibit
the Company and its Restricted Subsidiaries from creating or otherwise causing
any encumbrance or restriction on the ability of any Restricted Subsidiary that
is not a Guarantor to pay dividends or to make certain other upstream payments
to the Company or any of its Restricted Subsidiaries. The Revolving Credit
Facility and related Term Loan Facility also contain certain restrictions and
limitations including but not limited to financial covenants that will require
the Company to maintain and achieve certain levels of financial performance and
limit the payment of cash dividends and similar restricted payments. In
addition, the Senior Credit Facilities prohibit the Company from allowing its
Restricted Subsidiaries (which include all Guarantors) to create or otherwise
cause any encumbrance or restriction on the ability of any such Restricted
Subsidiary to pay any dividends or make certain other upstream payments subject
to certain exceptions. The Company was in compliance with all of the restrictive
covenants of its loan agreements as of September 30, 1998.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires the recognition of all derivatives as assets or liabilities within
the balance sheet, and requires both the derivatives and the underlying exposure
to be recorded at fair value. Any gain or loss resulting from changes in fair
value will be recorded as part of the results of operations, or as a component
of comprehensive income or loss, depending upon the intended use of the
derivative. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is evaluating the requirements of
this Statement and has not yet determined the impact of adoption on the
financial statements.
Impact of Year 2000 Issue. Some of the Company's older computer programs were
written using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognizes a
date using "00" as the year 1900 rather than the Year 2000. This could cause a
system failure or miscalculations resulting in disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in other normal business activities. The Company has
completed an assessment and will have to modify or replace portions of its
software so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. The Company has undertaken a company-wide
Year 2000 compliance project, staffed with a diverse team of personnel
representing all levels of the organization. The Company also retained an
outside consulting firm to assist in the assessment and assist in ensuring the
proper project structure to address the Year 2000 issue. With respect to
information technology ("IT") systems, the assessment is complete. The Company
is now in the remediation phase of the project whereby it is updating or
replacing existing applications. The testing and implementation phases of the
project will occur in calendar 1998 and 1999.
Additionally, the Company is also conducting an assessment of its non-IT
technology which consists primarily of embedded technology at the Company's
mining facilities (e.g., security systems, mine monitoring systems, plant
operating systems, coal loading and scale facilities, equipment, etc.). The
Company has also established another task force to address the Year 2000
embedded technology concerns for those applications outside the main frame
systems. The Company is in the assessment phase and plans to have site readiness
action plans for remediation and testing completed by June 1999.
Finally, the Company is conducting an assessment of Year 2000 exposures related
to the Company's suppliers. The Company has identified its key suppliers and has
sent out a request for information on their Year 2000 compliance status. The
Company has dedicated resources to monitor these parties' progress as they
address the Year 2000 issue. Additional requests will be sent, responses will be
tracked and contingency plans will be developed as required to address potential
failures of these parties to be prepared for the Year 2000.
The total cost of the project associated with the Year 2000 issue is estimated
at approximately $6.5 million (21% of the IT budget for fiscal year 1999), which
includes $1.4 million for the purchase of new software and hardware that will be
capitalized and $5.1 million that will be expensed as incurred. To date, the
Company has incurred approximately $1.3 million primarily for assessment of the
Year 2000 issue and development of a modification plan. The Company believes
that the total costs associated with modifying its current systems will not have
a material adverse effect on its results of operations or financial position.
Software modifications are estimated to be 52% complete and the goal of
management is to have all systems and equipment Year 2000 ready by October 1999.
The Company believes that with modifications to existing software and conversion
to new software, the Year 2000 issue will not present significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed in a timely fashion, the Year
2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the appropriate modifications to deal with the Year 2000 Issue are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events. However, there can be no assurance that these
estimates will be achieved. The Company currently does not have a Year 2000
contingency plan; however, the Company intends to develop one in 1999.
Forward Looking Statements. This quarterly report and certain press releases and
statements the Company makes from time to time include statements of the
Company's and management's expectations, intentions, plans and beliefs that
constitute "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are intended to come within the safe harbor protection provided by those
sections. Forward looking statements involve risks and uncertainties, and a
variety of factors could cause actual results to differ materially from the
Company's current expectations, including but not limited to: market conditions
and fluctuations in the demand for coal as an energy source, weather conditions,
the continued availability of long-term coal supply contracts, railroad
performance, foreign currency translation, changes in the government regulation
of the mining industry, risks inherent to mining, changes in the Company's
leverage position, the ability to successfully implement operating strategies,
the impact of Year 2000 compliance by the Company or those entities with which
the Company does business and other factors discussed in the Company's filings
with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to such forward
looking statements that may be made to reflect events or circumstances after the
date hereof, or thereof, as the case may be, or to reflect the occurrence of
anticipated events.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
See the Exhibit Index at page 18 of this report.
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P&L COAL HOLDINGS CORPORATION
Date: November 12, 1998 By:/s/George J. Holway
------------------------------------------
George J. Holway
Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation of P&L Coal Holdings
Corporation (Incorporated by reference to Exhibit 3.1 of the Company's
Form S-4 Registration Statement No. 333-59073).
3.2 By-Laws of P&L Coal Holdings Corporation (Incorporated by reference to
Exhibit 3.2 of the Company's Form S-4 Registration Statement No.
333-59073).
10.9 Royalty Prepayment Agreement by and among Peabody Natural Resources
Company, Gallo Finance Company and Chaco Energy Company, dated
September 30, 1998.
27 Financial Data Schedule (filed electronically with the SEC only).