-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BHgPpA1kugMgtpa8BkCYdKdvLTq33vawqwlrngemVHdPpn3fPTlPaMAnq6yQ5YOF F9fJ7bcPygxw27ngZsmOPQ== 0000950134-02-014392.txt : 20021114 0000950134-02-014392.hdr.sgml : 20021114 20021114142826 ACCESSION NUMBER: 0000950134-02-014392 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEABODY ENERGY CORP CENTRAL INDEX KEY: 0001064728 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE SURFACE MINING [1221] IRS NUMBER: 134004153 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16463 FILM NUMBER: 02824247 BUSINESS ADDRESS: STREET 1: 701 MARKET ST CITY: ST LOUIS STATE: MO ZIP: 63101-1826 BUSINESS PHONE: 3143423400 MAIL ADDRESS: STREET 1: 701 MARKET ST CITY: ST LOUIS STATE: MO ZIP: 63101-1826 FORMER COMPANY: FORMER CONFORMED NAME: P&L COAL HOLDINGS CORP DATE OF NAME CHANGE: 19980623 10-Q 1 c72677e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 ----------------------------------------------- Commission File Number 1-16463 -------------------------------------------------------- PEABODY ENERGY 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) 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. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No Number of shares outstanding of each of the Registrant's classes of Common Stock, as of October 31, 2002: Common Stock, par value $0.01 per share, 52,311,855 shares outstanding. INDEX
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page ------- Unaudited Condensed Consolidated Statements of Operations for the Quarter and Nine Months Ended September 30, 2002 and 2001......................................2 Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001..................................................................3 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001..................................................4 Notes to Unaudited Condensed Consolidated Financial Statements.....................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................................22 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................29 Item 4. Controls and Procedures............................................................29 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................30 Item 2. Changes in Securities and Use of Proceeds..........................................31 Item 5. Other Information..................................................................31 Item 6. Exhibits and Reports on Form 8-K...................................................31
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. PEABODY ENERGY CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share and per share information)
Quarter Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ REVENUES Sales $ 688,967 $ 630,988 $ 1,967,541 $ 1,880,804 Other revenues 25,644 24,581 79,776 82,300 ------------ ------------ ------------ ------------ Total revenues 714,611 655,569 2,047,317 1,963,104 COSTS AND EXPENSES Operating costs and expenses 579,449 538,782 1,640,670 1,591,928 Depreciation, depletion and amortization 59,099 56,748 176,415 176,908 Selling and administrative expenses 25,132 25,579 72,193 80,456 Gain on sale of Peabody Resources Limited operations -- -- -- (171,735) Net gain on property and equipment disposals (389) (1,846) (3,475) (9,583) ------------ ------------ ------------ ------------ OPERATING PROFIT 51,320 36,306 161,514 295,130 Interest expense 25,813 28,853 76,754 107,627 Interest income (5,535) (179) (6,603) (3,269) ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 31,042 7,632 91,363 190,772 Income tax provision (benefit) (1,465) 997 4,568 44,265 Minority interests 3,471 2,575 10,948 8,124 ------------ ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS 29,036 4,060 75,847 138,383 Gain from disposal of discontinued operations -- -- -- (1,165) ------------ ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM 29,036 4,060 75,847 139,548 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $11,683 -- -- -- 36,149 ------------ ------------ ------------ ------------ NET INCOME $ 29,036 $ 4,060 $ 75,847 $ 103,399 ============ ============ ============ ============ BASIC EARNINGS PER COMMON SHARE: Income from continuing operations $ 0.56 $ 0.08 $ 1.46 $ 2.78 Gain from disposal of discontinued operations -- -- -- 0.02 Extraordinary loss from early extinguishment of debt -- -- -- (0.84) ------------ ------------ ------------ ------------ Net income $ 0.56 $ 0.08 $ 1.46 $ 1.96 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 52,176,646 51,943,624 52,106,359 40,656,306 ============ ============ ============ ============ DILUTED EARNINGS PER COMMON SHARE: Income from continuing operations $ 0.54 $ 0.08 $ 1.41 $ 2.70 Gain from disposal of discontinued operations -- -- -- 0.02 Extraordinary loss from early extinguishment of debt -- -- -- (0.82) ------------ ------------ ------------ ------------ Net income $ 0.54 $ 0.08 $ 1.41 $ 1.90 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53,649,383 53,653,950 53,777,145 41,869,607 ============ ============ ============ ============ DIVIDENDS DECLARED PER SHARE $ 0.10 $ 0.10 $ 0.30 $ 0.10 ============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements. 2 PEABODY ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share information)
(Unaudited) September 30, 2002 December 31, 2001 ------------------ ----------------- ASSETS Current assets Cash and cash equivalents $ 15,880 $ 38,622 Accounts receivable, less allowance for doubtful accounts of $1,614 at September 30, 2002 and $1,496 at December 31, 2001 165,484 178,076 Materials and supplies 39,061 38,734 Coal inventory 192,182 176,910 Assets from coal and emission allowance trading activities 74,982 60,509 Deferred income taxes 14,631 14,380 Other current assets 27,375 20,223 -------------- -------------- Total current assets 529,595 527,454 Property, plant, equipment and mine development, net of accumulated depreciation, depletion and amortization of $831,367 at September 30, 2002 and $684,557 at December 31, 2001 4,380,386 4,337,398 Investments and other assets 293,646 286,050 -------------- -------------- Total assets $ 5,203,627 $ 5,150,902 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings and current maturities of long-term debt $ 50,566 $ 46,499 Liabilities from coal and emission allowance trading activities 43,825 45,691 Accounts payable and accrued expenses 571,933 592,113 -------------- -------------- Total current liabilities 666,324 684,303 Long-term debt, less current maturities 997,278 984,568 Deferred income taxes 580,409 564,764 Accrued reclamation and other environmental liabilities 432,411 438,526 Workers' compensation obligations 209,989 207,720 Accrued postretirement benefit costs 962,029 962,166 Obligation to industry fund 44,386 49,710 Other noncurrent liabilities 173,818 176,593 -------------- -------------- Total liabilities 4,066,644 4,068,350 Minority interests 36,709 47,080 Stockholders' equity Preferred Stock - $0.01 per share par value; 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2002 or December 31, 2001 -- -- Series Common Stock - $0.01 per share par value; 40,000,000 shares authorized, no shares issued or outstanding as of September 30, 2002 or December 31, 2001 -- -- Common Stock - $0.01 per share par value; 150,000,000 shares authorized, 52,210,938 shares issued and 52,193,733 shares outstanding as of September 30, 2002 and 150,000,000 shares authorized, 52,027,451 shares issued and 52,010,246 shares outstanding as of December 31, 2001 522 520 Additional paid-in capital 954,853 951,528 Retained earnings 176,418 116,203 Employee stock loans (1,129) (2,391) Accumulated other comprehensive loss (30,347) (30,345) Treasury shares, at cost: 17,205 shares as of September 30, 2002 and December 31, 2001 (43) (43) -------------- -------------- Total stockholders' equity 1,100,274 1,035,472 -------------- -------------- Total liabilities and stockholders' equity $ 5,203,627 $ 5,150,902 ============== ==============
See accompanying notes to unaudited condensed consolidated financial statements. 3 PEABODY ENERGY CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended September 30, -------------------------------- 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 75,847 $ 103,399 Gain from disposal of discontinued operations -- (1,165) Extraordinary loss from early extinguishment of debt, net of taxes -- 36,149 ------------ ------------ Income from continuing operations 75,847 138,383 Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: Depreciation, depletion and amortization 176,415 174,644 Deferred income taxes 2,741 46,294 Amortization of debt discount and debt issuance costs 7,400 9,951 Gain on sale of Peabody Resources Limited operations -- (171,735) Net gain on property and equipment disposals (3,475) (9,583) Minority interests 10,948 8,124 Changes in current assets and liabilities, net of acquisitions: Sale of accounts receivable -- 15,000 Accounts receivable, net of sale 13,121 (76,529) Materials and supplies (327) 2,604 Coal inventory (14,101) (14,708) Net assets from coal and emission allowance trading activities (16,339) (11,381) Other current assets (3,956) 8,966 Accounts payable and accrued expenses (24,309) 31,260 Accrued reclamation and other environmental liabilities (4,075) (10,846) Workers' compensation obligations (331) (2,106) Accrued postretirement benefit costs (137) 944 Obligation to industry fund (5,866) (3,356) Other, net (4,962) (21,962) Net cash used in assets sold - Peabody Resources Limited operations -- (4,251) ------------ ------------ Net cash provided by operating activities 208,594 109,713 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, equipment and mine development (161,332) (166,096) Additions to advance mining royalties (8,052) (8,306) Acquisitions, net (46,012) (7,450) Proceeds from sale of Peabody Resources Limited operations -- 455,000 Proceeds from property and equipment disposals 16,521 8,924 Proceeds from sale-leaseback transactions -- 6,968 Net cash provided by discontinued operations -- 16,938 ------------ ------------ Net cash provided by (used in) investing activities (198,875) 305,978 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net change under revolving lines of credit 6,492 21,183 Proceeds from long-term debt -- 7,024 Payments of long-term debt (17,976) (894,412) Net proceeds from initial public offering -- 449,832 Distributions to minority interests (7,868) (4,404) Dividend received -- 19,916 Dividends paid (15,632) (5,194) Other 2,501 1,489 ------------ ------------ Net cash used in financing activities (32,483) (404,566) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents 22 -- Net increase (decrease) in cash and cash equivalents (22,742) 11,125 Cash and cash equivalents at beginning of year 38,622 33,094 ------------ ------------ Cash and cash equivalents at end of period $ 15,880 $ 44,219 ============ ============
See accompanying notes to unaudited condensed consolidated financial statements. 4 PEABODY ENERGY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (1) BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Peabody Energy Corporation (the "Company") and its controlled affiliates. All significant intercompany transactions, profits and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with current year presentation. The consolidated statements of operations and cash flows for the nine months ended September 30, 2001 include the results of the operations of Peabody Resources Limited, located in Australia, which were sold in January 2001. The accompanying condensed consolidated financial statements as of September 30, 2002 and for the quarters and nine months ended September 30, 2002 and 2001, and the notes thereto, are unaudited. However, in the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results of the periods presented. The balance sheet information as of December 31, 2001 has been derived from the Company's audited consolidated balance sheet. The results of operations for the quarter and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. In July 2001, the Company changed its fiscal year-end from March 31 to December 31. This change was first effective with respect to the nine months ended December 31, 2001. (2) ACQUISITIONS Allied Queensland Coalfields Party Limited On August 22, 2002, the Company purchased Allied Queensland Coalfields Party Limited ("AQC") and its controlled affiliates from Mirant Corporation for $21.2 million. As a result of the acquisition, the Company now controls the 1.3 million metric tonne per year Wilkie Creek Coal Mine and 680 million metric tonnes of in-place coal resources in Queensland, Australia. The acquisition was accounted for as a purchase, and the results of AQC's operations are included in the Company's Australian Mining Operations segment. Arclar Company, LLC On September 16, 2002, the Company purchased a 25% interest in Arclar Company, LLC ("Arclar"), for $14.9 million. The Company's 81.7%-owned Black Beauty Coal Company subsidiary owns the remaining 75% of Arclar. Arclar owns the Willow Lake and Cottage Grove mines in Southern Illinois and more than 50 million tons of coal reserves. With the Arclar purchase, the Company also acquired controlling interest of an entity that resulted in the consolidation of $12.5 million of long-term debt and related assets. The acquisition was accounted for as a purchase. Beaver Dam On June 26, 2002, the Company purchased Beaver Dam Coal Company, located in Western Kentucky, for $17.7 million. Through the acquisition, the Company obtained ownership of more than 100 million tons of coal reserves and 22,000 surface acres. The acquisition was accounted for as a purchase. The results of operations for each of these entities are included in the Company's consolidated results of operations from the effective date of each acquisition. Had the acquired entities' results of operations been included in the Company's results of operations since January 1, 2002, there would have been no material effect on the Company's consolidated statement of operations, financial condition or cash flows. (3) SECONDARY OFFERING On April 5, 2002, certain shareholders of the Company, including the Company's largest shareholder, Lehman Brothers Merchant Banking Partners II L.P. and affiliates (collectively "Lehman Brothers") sold 9,000,000 shares of common stock. Selling shareholders received all net proceeds. The Company did not sell any shares through the offering. 5 The underwriters of the secondary offering were granted the right to purchase up to an additional 1,100,000 shares of common stock to cover over-allotments. The underwriters exercised the over-allotment option, and on May 8, 2002, purchased an additional 148,000 shares. Lehman Brothers sold, in the aggregate, 8,155,000 shares in the offering, and their beneficial ownership of the Company's outstanding common stock declined from 57% to 41% immediately following the offering. (4) PREFERRED SHARE PURCHASE RIGHTS PLAN On July 23, 2002, the Board of Directors of the Company adopted a preferred share purchase rights plan (the "Rights Plan"). In connection with the Rights Plan, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $0.01 per share, of the Company. The Rights dividend was payable on August 12, 2002 to the stockholders of record on that date. The description and terms of the Rights are set forth in an Agreement, dated as of July 24, 2002, between the Company and EquiServe Trust Company, N.A., as Rights Agent. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to any offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company at a redemption price of $0.001 per Right prior to the time that a person or group has acquired beneficial ownership of 15% or more of the common stock of the Company. In addition, the Board of Directors is authorized to reduce the 15% threshold to not less than 10%. (5) EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT During the nine months ended September 30, 2001, the Company used substantially all of the net proceeds from its initial public offering and the sale of its Peabody Resources Limited operations to repay debt. The Company repaid the remaining $580.0 million in outstanding term loans under its Senior Credit Facilities and used $100.0 million to repay borrowings under the revolving credit facility that were used to repay a portion of the Company's 5% Subordinated Note. The Company also used $173.0 million of proceeds from the offering to repurchase $80.0 million in principal of the Senior Notes and $80.0 million in principal of the Senior Subordinated Notes pursuant to a tender offer. All of these debt repayments, except for $455.0 million of the term loan repayments, took place in the quarter ended June 30, 2001. The extraordinary loss of $36.1 million, net of income taxes, for the nine months ended September 30, 2001, represents the excess of cash paid over the carrying value of debt retired and the accelerated write-off of debt issuance costs related to the debt repaid. (6) ADOPTION OF NEW ACCOUNTING STANDARDS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS Nos. 141 and 142 did not have a material effect on the Company's financial condition or results of operations. Also effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide a single accounting model for measuring impairment of long-lived assets. The adoption of SFAS No. 144 did not have a material effect on the Company's financial condition or results of operations. (7) COAL INVENTORY Inventories consist of the following (dollars in thousands):
September 30, December 31, 2002 2001 ------------- ------------- Raw coal $ 19,732 $ 15,979 Work in process 140,579 137,808 Saleable coal 31,871 23,123 ------------- ------------- Total $ 192,182 $ 176,910 ============= =============
6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued (8) ASSETS AND LIABILITIES FROM COAL AND EMISSION ALLOWANCE TRADING ACTIVITIES For periods covered by this report, coal and emission allowance trading activities are accounted for using the fair value method, as required by Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Under such method, the derivative commodity instruments (forwards, options and swaps) with third parties are reflected at market value and are included in "Assets and liabilities from coal and emission allowance trading activities" in the consolidated balance sheets. In the absence of quoted values, financial commodity instruments are valued at fair value, considering the net present value of the underlying sales and purchase obligations and the volatility of the underlying commodity. Subsequent changes in market value are recorded as unrealized gains or losses in "Other revenues" in the period of change. Realized gains and losses on financially settled transactions are recorded as part of "Other revenues" as they occur. On October 25, 2002, the EITF rescinded EITF Issue No. 98-10. The rescission is effective for all energy trading contracts entered into after October 25, 2002. As a result of the rescission, energy trading contracts will be evaluated under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rescission is effective January 1, 2003 for contracts entered into prior to October 25, 2002. Accordingly, the effect of this rescission on energy trading contracts entered into prior to October 25, 2002 will be recorded as a cumulative effect of a change in accounting principle in January 2003. The accounting changes required by the ruling are anticipated to primarily affect the timing of the recognition of income or loss in earnings and not change the underlying economics or cash flows of transactions entered into by the Company's trading operations. The Company does not anticipate that the rescission of EITF Issue No. 98-10 will have a material effect on its results of operations in 2002 for transactions entered into after October 25, 2002. The Company is currently assessing the impact of this rescission on transactions entered into prior to October 25, 2002. EITF Issue No. 98-10 previously permitted the reporting of gains or losses on energy trading contracts on a gross or net basis in the statement of operations. In June 2002, the EITF discussed Issue No. 02-3, "Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF Issue No. 02-3 reexamined the issue of whether gains and losses on energy trading contracts should be reported gross or net in the statement of operations. In July 2002, the EITF published its consensus that all mark-to-market gains and losses on energy trading contracts should be shown net in the statement of operations, even if settled physically. This new consensus was effective for financial statements issued for periods ending after July 15, 2002 and requires reclassification of amounts in all prior periods presented. Since the Company already reports financially settled transactions and unrealized mark-to-market gains on a net basis, this revision had no impact on those transactions. However, beginning in the quarter ended September 30, 2002, the Company's physically settled trading transactions were recorded on a net basis as a part of "Other revenues," rather than on a gross basis within "Sales" and "Operating costs and expenses." This accounting change had no effect on operating profit or net income. For the quarter and nine months ended September 30, 2002, the Company had physically settled coal trades of 3.6 million tons and 10.5 million tons, respectively. In the corresponding prior periods, physical settlements were 2.4 million and 5.6 million tons, respectively. As a result of adopting EITF Issue No. 02-3, revenues and operating costs were reduced by $40.5 million and $121.3 million for the quarter and nine months ended September 30, 2002, respectively, and $26.7 million and $61.5 million for the corresponding prior periods. The fair value of the financial instruments related to coal and emission allowance trading activities as of September 30, 2002, are set forth below (dollars in thousands):
Fair Value ----------------------------- Assets Liabilities ----------- ----------- Forward contracts $ 64,313 $ 39,302 Option contracts 10,669 4,523 ----------- ----------- Total $ 74,982 $ 43,825 =========== ===========
Eighty-six percent of the contracts in the Company's trading portfolio as of September 30, 2002 were valued utilizing prices from over-the-counter market sources. The remaining 14% of the Company's contracts were valued based on over-the-counter market source prices adjusted for differences in coal quality and content, as well as contract duration. 7 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued As of September 30, 2002, the timing of the realization of the value of the Company's trading portfolio was as follows:
Year of Percentage Expiration of portfolio - ---------- ------------ 2002 12% 2003 43% 2004 39% 2005 5% 2006 1% ----------- 100% ===========
At September 30, 2002, 67% of the Company's credit exposure related to coal and emission allowance trading activities was with counterparties that are investment grade. The Company's coal trading operations traded 10.5 million tons and 13.8 million tons for the quarters ended September 30, 2002 and 2001, respectively, and 55.8 millions tons and 35.9 million tons for the nine months ended September 30, 2002 and 2001, respectively. (9) EARNINGS PER SHARE Quarter and Nine Months Ended September 30, 2001 Prior to its initial public offering in May 2001, the Company applied the "two-class method" of computing earnings per share as prescribed in SFAS No. 128, "Earnings Per Share." In accordance with SFAS No. 128, income or loss was allocated to preferred stock, Class A common stock and Class B common stock on a pro-rata basis. Basic and diluted earnings per share is calculated by dividing income from continuing operations, gain from disposal of discontinued operations, extraordinary loss from early extinguishment of debt and net income (loss), respectively, that was attributed to the Company's Class A and Class B common shares by the weighted average number of common shares outstanding for each class of common stock. A reconciliation of income from continuing operations, gain from disposal of discontinued operations, extraordinary loss from early extinguishment of debt and net income (loss) follows (dollars in thousands):
Quarter Ended Quarter Ended Quarter Ended Nine Months Ended March 31, 2001 June 30, 2001 September 30, 2001 September 30, 2001 -------------- ------------- ------------------ ------------------ Income from continuing operations attributed to: Preferred stock $ 25,257 $ -- $ -- $ 25,257 Class A/B common stock 99,160 9,906 4,060 113,126 ------------- ------------- ------------- ------------- $ 124,417 $ 9,906 $ 4,060 $ 138,383 ============= ============= ============= ============= Gain from disposal of discontinued operations attributed to: Preferred stock $ 236 $ -- $ -- $ 236 Class A/B common stock 929 -- -- 929 ------------- ------------- ------------- ------------- $ 1,165 $ -- $ -- $ 1,165 ============= ============= ============= ============= Extraordinary loss from early extinguishment of debt attributed to: Preferred stock $ (1,735) $ -- $ -- $ (1,735) Class A/B common stock (6,810) (27,604) -- (34,414) ------------- ------------- ------------- ------------- $ (8,545) $ (27,604) $ -- $ (36,149) ============= ============= ============= ============= Net income (loss) attributed to: Preferred stock $ 23,758 $ -- $ -- $ 23,758 Class A/B common stock 93,279 (17,698) 4,060 79,641 ------------- ------------- ------------- ------------- $ 117,037 $ (17,698) $ 4,060 $ 103,399 ============= ============= ============= =============
8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued In connection with the Company's initial public offering, all outstanding shares of preferred stock, Class A common stock and Class B common stock were converted into a single class of common stock on a one-for-one basis. For purposes of the weighted average share calculations for the quarter and nine months ended September 30, 2001, this conversion was assumed to have occurred as of April 1, 2001. A reconciliation of the weighted average shares outstanding as of September 30, 2002 and 2001, respectively, follows:
Quarter Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Weighted average shares outstanding - basic 52,176,646 51,943,624 52,106,359 40,656,306 Dilutive impact of stock options 1,472,737 1,710,326 1,670,786 1,213,301 ----------- ----------- ----------- ----------- Weighted average shares outstanding - diluted 53,649,383 53,653,950 53,777,145 41,869,607 =========== =========== =========== ===========
(10) COMPREHENSIVE INCOME The following table sets forth the components of comprehensive income for the quarter and nine months ended September 30, 2002 and 2001, respectively (dollars in thousands):
Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net income $ 29,036 $ 4,060 $ 75,847 $ 103,399 Reclassification adjustment resulting from the sale of Peabody Resources Limited operations -- -- -- 38,811 Foreign currency translation adjustment (2) -- (2) -- Minimum pension liability adjustment -- -- -- (862) ------------ ------------ ------------ ------------ Comprehensive income $ 29,034 $ 4,060 $ 75,845 $ 141,348 ============ ============ ============ ============
As a result of the sale of its Peabody Resources Limited operations, the Company recorded a reduction of the foreign currency translation adjustment account during the nine months ended September 30, 2001. (11) SEGMENT INFORMATION The Company reports its operations primarily through the following reportable operating segments: "U.S. Mining," "Trading and Brokerage," and "Australian Mining Operations." The principal business of the U.S. Mining segment is mining, preparation and sale of its steam coal, sold primarily to electric utilities, and metallurgical coal, sold to steel and coke producers. The Trading and Brokerage segment's principal business is the marketing and trading of coal and emission allowances. The Australian Mining Operations segment for 2002 consists of the operations of Allied Queensland Coalfields Party Limited and in 2001 consisted of the operations of Peabody Resources Limited. This segment's principal business is the same as the U.S. Mining Segment. "Corporate and Other" consists primarily of corporate overhead not directly attributable to the U.S. Mining or Trading and Brokerage operating segments, and resource management activities. The U.S. Mining segment results below also include costs related to past mining activities and a portion of consolidated net gains on property disposals. Past mining activities and net gains on property disposals are discussed separately from U.S. Mining results in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." 9 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued Operating segment results for the quarters and nine months ended September 30, 2002 and 2001 are as follows (dollars in thousands):
Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues: U.S. Mining $ 658,339 $ 599,890 $ 1,877,444 $ 1,757,194 Trading and Brokerage 51,443 52,601 152,182 160,441 Australian Mining Operations 1,435 -- 1,435 20,539 Corporate and Other 3,394 3,078 16,256 24,930 ------------ ------------ ------------ ------------ Total $ 714,611 $ 655,569 $ 2,047,317 $ 1,963,104 ============ ============ ============ ============ Operating Profit: U.S. Mining $ 69,950 $ 45,301 $ 193,116 $ 152,419 Trading and Brokerage 4,920 9,605 33,159 24,880 Australian Mining Operations 357 -- 357 4,326 Corporate and Other (23,907) (18,600) (65,118) 113,505(1) ------------ ------------ ------------ ------------ Total $ 51,320 $ 36,306 $ 161,514 $ 295,130 ============ ============ ============ ============
(1) Includes the pretax gain on the sale of the Company's Peabody Resources Limited operations of $171.7 million. A reconciliation of segment operating profit to consolidated income before income taxes follows (dollars in thousands):
Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------ ------------- ------------ ------------ Total segment operating profit $ 51,320 $ 36,306 $ 161,514 $ 295,130 Interest expense 25,813 28,853 76,754 107,627 Interest income (5,535) (179) (6,603) (3,269) Minority interests 3,471 2,575 10,948 8,124 ------------ ------------ ------------ ------------ Income before income taxes $ 27,571 $ 5,057 $ 80,415 $ 182,648 ============ ============ ============ ============
(12) COMMITMENTS AND CONTINGENCIES Environmental Environmental claims have been asserted against a subsidiary of the Company at 18 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 the estimation of liabilities recorded on its consolidated balance sheets. The undiscounted liabilities for environmental cleanup-related costs recorded as part of "Accrued reclamation and other 10 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued environmental liabilities" were $44.7 million and $46.6 million at September 30, 2002 and December 31, 2001, respectively. This amount represents those costs that the Company believes are probable and reasonably estimable. Navajo Nation On June 18, 1999, the Navajo Nation served the Company's subsidiaries, Peabody Holding Company, Inc., Peabody Coal Company and Peabody Western Coal Company ("Peabody Western"), with a complaint that had been filed in the U.S. District Court for the District of Columbia. Other defendants in the litigation are one customer, one current employee and one former employee. The Navajo Nation has alleged 16 claims, including Civil Racketeer Influenced and Corrupt Organizations Act, or RICO, violations and fraud and tortious interference with contractual relationships. The complaint alleges that the defendants jointly participated in unlawful activity to obtain favorable coal lease amendments. Plaintiff also alleges that defendants interfered with the fiduciary relationship between the United States and the Navajo Nation. The plaintiff is seeking various remedies including actual damages of at least $600 million, which could be trebled under the RICO counts, punitive damages of at least $1 billion, a determination that Peabody Western's two coal leases for the Kayenta and Black Mesa mines have terminated due to a breach of these leases and a reformation of the two coal leases to adjust the royalty rate to 20%. All defendants have filed motions to dismiss the complaint. On March 15, 2001, the court denied the Peabody defendants' motions to dismiss. Discovery for this litigation has commenced. In March 2000, the Hopi Tribe filed a motion to intervene in this lawsuit. The Hopi Tribe has alleged seven claims, including fraud. The Hopi Tribe is seeking various remedies, including unspecified actual and punitive damages and reformation of its coal lease. On March 15, 2001, the court granted the Hopi Tribe's motion. On April 17, 2001, the Company filed a motion to dismiss the Hopi complaint. On October 31, 2001, the court denied the Company's motion to dismiss the Hopi complaint. On February 21, 2002, the Company's subsidiaries commenced a lawsuit against the Navajo Nation in the U.S. District Court for the District of Arizona seeking enforcement of an arbitration award or, alternatively, to compel arbitration pursuant to the April 1, 1998 Arbitration Agreement with the Navajo Nation. The Company subsequently filed a motion for summary judgment in that litigation. Briefing of that motion was completed in June 2002 and oral arguments were held in July. The parties are now awaiting a decision by the court. On February 22, 2002, the Company's subsidiaries filed in the U.S. District for the District of Columbia a motion for leave to file an amended answer and conditional counterclaim. The counterclaim is conditional because the Company's subsidiaries contend that the lease provisions the Navajo Nation seeks to invalidate have previously been upheld in an arbitration proceeding and are not subject to further litigation. The U.S. District Court subsequently allowed our subsidiaries to file the amended answer and conditional counterclaim. On March 4, 2002, the Company's subsidiaries filed in the U.S. District Court for the District of Columbia a motion to transfer that case to Arizona or, alternatively, to stay the District of Columbia litigation. On March 29, 2002, the Navajo Nation filed a motion to dismiss the Arizona litigation and an alternative motion to transfer the Arizona litigation to the District of Columbia. On June 24, 2002, the U.S. District Court for the District of Columbia denied the Company's subsidiaries' motion to transfer and motion to stay. On July 15, 2002, the Company's subsidiaries filed an appeal of that decision with the District of Columbia Court of Appeals. While the outcome of litigation is subject to uncertainties, based on the Company's preliminary evaluation of the issues and the potential impact on us, we believe this matter will be resolved without a material adverse effect on the Company's financial condition or results of operations. Salt River Project Agricultural Improvement and Power District-Navajo Generating Station In May 1997, Salt River Project Agricultural Improvement and Power District, or Salt River, acting for all owners of the Navajo Generating Station, exercised their contractual option to review certain cumulative cost changes during a five-year period from 1992 to 1996. Peabody Western sells approximately 7 to 8 million tons of coal per year to the owners of the Navajo Generation Station under a long-term contract. In July 1999, Salt River notified Peabody Western that it believed the owners were entitled to a price decrease of $1.92 per ton as a result of the review. Salt River also claimed entitlement to a retroactive price adjustment to January 1997 and that an overbilling of $50.5 million had occurred during the same five-year period. In October 1999, Peabody Western notified Salt River that it believed it was entitled to a $2.00 per ton price increase as a result of the review. The parties were unable to settle the pricing dispute and Peabody Western filed a demand for arbitration in September 2000. The arbitration hearing was held from April 8 to April 12, 2002. On July 20, 2002, Peabody Western received a favorable decision from the arbitrators. The decision increases the price of coal by approximately $0.50 per ton from 1997 through 2001 and thereafter. As a result of the decision, the Company received pre-tax earnings of approximately $22 million during the quarter ended September 30, 2002. The exact impact of the ruling on the pricing of coal sales from January 1, 2002 11 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued forward will not be determined until Salt River completes a review of the cumulative cost changes under the contract for the years 1997 through 2001. On February 12, 2001, in a related action, Salt River, again acting for all owners of the Navajo Generating Station, filed a lawsuit against Peabody Western in the Superior Court in Maricopa County in Arizona. This lawsuit sought to compel arbitration of issues that Peabody Western did not believe were subject to arbitration, namely, (1) the effective date of any price change resulting from the resolution of the price review arbitration discussed above and (2) the validity of Salt River's $50.5 million claim for alleged overcharges by Peabody Western for the period from 1992 through 1996 (the five-year period that was the subject of the price review). If the court declined to compel arbitration of these issues, the lawsuit alternatively requested that the court find in favor of Salt River on these issues. The Company removed this matter to the U.S. District Court for the District of Arizona. On October 3, 2001, the U.S. District Court issued an order that compelled arbitration with respect to the effective date of any price change and conditionally compelling arbitration with respect to the validity of Salt River's $50.5 million claim. Although we filed an appeal of this decision with the U.S. Ninth Circuit Court of Appeals, the arbitrators received testimony on these claims during the April hearing. The arbitrators' July 20, 2002 ruling rejected Salt River's $50.5 million overcharge claim and stated that the effective date of the price change resulting from the review was January 1, 1997. The Company intends to seek a dismissal of its pending appeal. Southern California Edison Company-Mohave Generating Station In response to a demand for arbitration by one of our subsidiaries, Peabody Western, Southern California Edison and the other owners of the Mohave Generating Station filed a lawsuit on June 20, 1996 in the Superior Court of Maricopa County, Arizona. The lawsuit sought a declaratory judgment that mine decommissioning costs and retiree health care costs are not recoverable by Peabody Western under the terms of a coal supply agreement dated May 26, 1976. The contract expires in 2005. Peabody Western filed a motion to compel arbitration which was granted by the trial court. Southern California Edison, acting on behalf of all the owners of the Mohave Generating Station, appealed this order to the Arizona Court of Appeals, which denied its appeal. Southern California Edison, again acting on behalf of all the owners of the Mohave Generating Station, then appealed the order to the Arizona Supreme Court which remanded the case to the Arizona Court of Appeals and ordered the appellate court to determine whether the trial court was correct in determining that Peabody Western's claims are arbitrable. The Arizona Court of Appeals ruled that neither mine decommissioning costs nor retiree health care costs are to be arbitrated and that both issues should be resolved in litigation. The matter has been remanded to the Superior Court of Maricopa County, Arizona, where a trial was set for May 20, 2002. Peabody Western answered the complaint and asserted counterclaims. The court then permitted Southern California Edison, acting on behalf of all the owners of the Mohave Generating Station, to amend its complaint to add a claim of overcharges of at least $19.2 million by Peabody Western. By order filed July 2, 2001, the court granted Peabody Western's motion for summary judgment on liability with respect to retiree healthcare costs. Southern California Edison filed a motion for reconsideration, which was denied by the court on October 16, 2001. Peabody Western filed a supplemental motion for summary judgment on liability with respect to mine decommissioning costs. The court denied Peabody Western's supplemental motion for summary judgment in an order filed on February 6, 2002. The Company reached a mediated settlement with the owners of the Mohave Generating Station which resulted in the recognition of $15.1 million in pre-tax earnings during the quarter ended September 30, 2002. The settlement provides for customer reimbursement of mine decommissioning and certain other post-mining expenditures. The reimbursements will commence in January 2003 and continue on a monthly basis through December 2005, although the owners of the Mohave Generating Station have a prepayment option. The Mohave coal supply agreement is scheduled to expire on December 31, 2005. In addition, there is a dispute with the Hopi Tribe regarding the use of groundwater in the transportation of the coal by pipeline to the Mohave plant. The plant's owners have recently sought permission from the California Public Utilities Commission for authorization to begin certain interim spending on air pollution controls if the coal supply and water issues are resolved by December 31, 2002. The plant's owners and the Company are in active discussions to resolve the complex issues critical to the continuation of the operation of the Mohave plant and the renewal of the coal supply agreement after December 31, 2005. There is no assurance that the issues critical to the continued operation of the Mohave plant will be resolved. If these issues are not resolved in a timely manner, the operations of the Mohave plant will cease or be delayed beginning on December 31, 2005. The Mohave plant is the sole customer of the Black Mesa Mine, which produces and sells 4.5 to 5 million tons of coal per year. 12 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued Citizens Power In connection with the sale of Citizens Power, the Company has indemnified the buyer from certain losses resulting from specified power contracts and guarantees. No claims have been asserted against the Company under this indemnity. Social Security Administration In 1999, Eastern Associated Coal Corp. and Peabody Coal Company filed a lawsuit in the U.S. District Court for the Western District of Kentucky against the Social Security Administration asserting that the Social Security Administration, under the Coal Act, had improperly assigned certain beneficiaries to us. Subsequently, Peabody Coal and Eastern Associated moved for summary judgment on this claim. Summary judgment was granted and in 2000, the Social Security Administration filed an appeal of the district court's decision with the U.S. Court of Appeals for the Sixth Circuit. On June 21, 2001, the Sixth Circuit Court denied the Social Security Administration's appeal. The U.S. Supreme Court granted the federal government's petition for certiorari in January 2002 and the case was argued before the Supreme Court on October 8, 2002. We believe that the matter will be resolved without a material adverse effect on our financial condition or results of operations. However, should the Court rule against the Company's subsidiaries, earnings for the quarter ended December 31, 2002 would be affected by the ruling and resulting claim determined by the Social Security Administration. Other 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. At September 30, 2002, purchase commitments for capital expenditures were approximately $97.2 million. 13 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued (13) SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL 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 Senior Notes and Senior Subordinated Notes 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 the holders of the Senior Notes and Senior Subordinated Notes. The following unaudited condensed historical financial statement information is provided for such Guarantor/Non-Guarantor Subsidiaries. PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ Total revenues $ -- $ 1,587,904 $ 494,424 $ (35,011) $ 2,047,317 Costs and expenses Operating costs and expenses -- 1,284,431 391,250 (35,011) 1,640,670 Depreciation, depletion and amortization -- 138,783 37,632 -- 176,415 Selling and administrative expenses 340 57,256 14,597 -- 72,193 Net gain on property and equipment disposals -- (3,280) (195) -- (3,475) Interest expense 103,394 73,722 11,890 (112,252) 76,754 Interest income (51,437) (55,971) (11,447) 112,252 (6,603) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interests (52,297) 92,963 50,697 -- 91,363 Income tax provision (benefit) (2,522) 4,550 2,540 -- 4,568 Minority interests -- -- 10,948 -- 10,948 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (49,775) $ 88,413 $ 37,209 $ -- $ 75,847 ============ ============ ============ ============ ============
14 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2001 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ Total revenues $ -- $ 520,008 $ 156,206 $ (20,645) $ 655,569 Costs and expenses Operating costs and expenses -- 429,545 129,882 (20,645) 538,782 Depreciation, depletion and amortization -- 45,220 11,528 -- 56,748 Selling and administrative expenses 180 22,461 2,938 -- 25,579 Net (gain) loss on property and equipment disposals -- (1,870) 24 -- (1,846) Interest expense 24,044 25,508 1,504 (22,203) 28,853 Interest income (17,132) (5,202) (48) 22,203 (179) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interests (7,092) 4,346 10,378 -- 7,632 Income tax provision (benefit) (881) 51 1,827 -- 997 Minority interests -- -- 2,575 -- 2,575 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (6,211) $ 4,295 $ 5,976 $ -- $ 4,060 ============ ============ ============ ============ ============
15 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ Total revenues $ -- $ 1,587,904 $ 494,424 $ (35,011) $ 2,047,317 Costs and expenses Operating costs and expenses -- 1,284,431 391,250 (35,011) 1,640,670 Depreciation, depletion and amortization -- 138,783 37,632 -- 176,415 Selling and administrative expenses 340 57,256 14,597 -- 72,193 Net gain on property and equipment disposals -- (3,280) (195) -- (3,475) Interest expense 103,394 73,722 11,890 (112,252) 76,754 Interest income (51,437) (55,971) (11,447) 112,252 (6,603) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interests (52,297) 92,963 50,697 -- 91,363 Income tax provision (benefit) (2,522) 4,550 2,540 -- 4,568 Minority interests -- -- 10,948 -- 10,948 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (49,775) $ 88,413 $ 37,209 $ -- $ 75,847 ============ ============ ============ ============ ============
16 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ Total revenues $ -- $ 1,544,444 $ 486,639 $ (67,979) $ 1,963,104 Costs and expenses Operating costs and expenses -- 1,269,132 390,775 (67,979) 1,591,928 Depreciation, depletion and amortization -- 137,581 39,327 -- 176,908 Selling and administrative expenses 3,675 64,251 12,530 -- 80,456 Gain on sale of Peabody Resources Limited -- (171,735) -- -- (171,735) Net gain on property and equipment disposals -- (9,111) (472) -- (9,583) Interest expense 88,369 78,400 10,866 (70,008) 107,627 Interest income (51,606) (18,069) (3,602) 70,008 (3,269) ---------- ------------ ------------- ------------ ------------ Income (loss) before income taxes and minority interests (40,438) 193,995 37,215 -- 190,772 Income tax provision (benefit) (19,819) 51,850 12,234 -- 44,265 Minority interests -- -- 8,124 -- 8,124 ---------- ------------ ------------- ------------ ------------ Income (loss) from continuing operations (20,619) 142,145 16,857 -- 138,383 Gain from disposal of discontinued operations -- (1,165) -- -- (1,165) ---------- ------------ ------------- ------------ ------------ Income (loss) before extraordinary item (20,619) 143,310 16,857 -- 139,548 Extraordinary loss from early extinguishment of debt, net of income taxes 25,119 11,030 -- -- 36,149 ---------- ------------ ------------- ------------ ------------ Net income (loss) $ (45,738) $ 132,280 $ 16,857 $ -- $ 103,399 ========== ============ ============= ============ ============
17 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2002 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 3,387 $ 505 $ 11,988 $ -- $ 15,880 Accounts receivable 1,688 78,608 85,188 -- 165,484 Inventories -- 214,847 16,396 -- 231,243 Assets from coal and emission allowance trading activities -- 74,297 685 -- 74,982 Deferred income taxes -- 14,380 251 -- 14,631 Other current assets 139 16,725 10,511 -- 27,375 ---------- ------------ ------------ ------------ ------------ Total current assets 5,214 399,362 125,019 -- 529,595 Property, plant, equipment and mine development - at cost -- 4,680,578 531,175 -- 5,211,753 Less accumulated depreciation, depletion and amortization -- (729,710) (101,657) -- (831,367) ---------- ------------ ------------ ------------ ------------ Property, plant, equipment and mine development, net -- 3,950,868 429,518 -- 4,380,386 Investments and other assets 3,402,227 268,692 30,982 (3,408,255) 293,646 ---------- ------------ ------------ ------------ ------------ Total assets $3,407,441 $ 4,618,922 $ 585,519 $ (3,408,255) $ 5,203,627 ========== ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings and current maturities of long-term debt $ -- $ 10,401 $ 40,165 $ -- $ 50,566 Payables and notes payable to affiliates, net 1,509,230 (1,528,380) 19,150 -- -- Liabilities from coal and emission allowance trading activities -- 43,825 -- -- 43,825 Accounts payable and accrued expenses 26,745 486,855 58,333 -- 571,933 ---------- ------------ ------------ ------------ ------------ Total current liabilities 1,535,975 (987,299) 117,648 -- 666,324 Long-term debt, less current maturities 740,283 74,778 182,217 -- 997,278 Deferred income taxes -- 577,016 3,393 -- 580,409 Other noncurrent liabilities 564 1,811,888 10,181 -- 1,822,633 ---------- ------------ ------------ ------------ ------------ Total liabilities 2,276,822 1,476,383 313,439 -- 4,066,644 Minority interests -- -- 36,709 -- 36,709 Stockholders' equity 1,130,619 3,142,539 235,371 (3,408,255) 1,100,274 ---------- ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $3,407,441 $ 4,618,922 $ 585,519 $ (3,408,255) $ 5,203,627 ========== ============ ============ ============ ============
18 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 28,121 $ 1,018 $ 9,483 $ -- $ 38,622 Accounts receivable 523 50,448 127,105 -- 178,076 Inventories -- 201,771 13,873 -- 215,644 Assets from coal and emission allowance trading activities -- 60,509 -- -- 60,509 Deferred income taxes -- 14,380 -- -- 14,380 Other current assets 1,222 10,704 8,297 -- 20,223 ---------- ------------ ------------- ------------ ------------ Total current assets 29,866 338,830 158,758 -- 527,454 Property, plant, equipment and mine development - at cost -- 4,543,016 478,939 -- 5,021,955 Less accumulated depreciation, depletion and amortization -- (603,953) (80,604) -- (684,557) ---------- ------------ ------------- ------------ ------------ Property, plant, equipment and mine development, net -- 3,939,063 398,335 -- 4,337,398 Investments and other assets 3,296,950 232,521 45,086 (3,288,507) 286,050 ---------- ------------ ------------- ------------ ------------ Total assets $3,326,816 $ 4,510,414 $ 602,179 $ (3,288,507) $ 5,150,902 ========== ============ ============= ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings and current maturities of long-term debt $ -- $ 10,400 $ 36,099 $ -- $ 46,499 Payables and notes payable to affiliates, net 1,544,519 (1,561,645) 17,126 -- -- Liabilities from coal and emission allowance trading activities -- 45,691 -- -- 45,691 Accounts payable and accrued expenses 8,676 528,157 55,280 -- 592,113 ---------- ------------ ------------- ------------ ------------ Total current liabilities 1,553,195 (977,397) 108,505 -- 684,303 Long-term debt, less current maturities 702,623 81,186 200,759 -- 984,568 Deferred income taxes -- 564,764 -- -- 564,764 Other noncurrent liabilities 5,181 1,820,580 8,954 -- 1,834,715 ---------- ------------ ------------- ------------ ------------ Total liabilities 2,260,999 1,489,133 318,218 -- 4,068,350 Minority interests -- -- 47,080 -- 47,080 Stockholders' equity 1,065,817 3,021,281 236,881 (3,288,507) 1,035,472 ---------- ------------ ------------- ------------ ------------ Total liabilities and stockholders' equity $3,326,816 $ 4,510,414 $ 602,179 $ (3,288,507) $ 5,150,902 ========== ============ ============= ============ ============
19 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2002 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Consolidated ------------ ------------ ------------- ------------ Net cash provided by (used in) operating activities $ (49,420) $ 145,942 $ 112,072 $ 208,594 ------------ ------------ ------------- ------------ Additions to property, plant, equipment and mine development -- (116,839) (44,493) (161,332) Additions to advance mining royalties -- (5,713) (2,339) (8,052) Acquisitions, net -- (46,012) -- (46,012) Proceeds from property and equipment disposals -- 7,452 9,069 16,521 ------------ ------------ ------------- ------------ Net cash used in investing activities -- (161,112) (37,763) (198,875) ------------ ------------ ------------- ------------ Net change under revolving lines of credit 25,702 -- (19,210) 6,492 Payments of long-term debt -- (10,251) (7,725) (17,976) Distributions to minority interests -- -- (7,868) (7,868) Dividends paid (15,632) -- -- (15,632) Transactions with affiliates, net 12,115 33,265 (45,380) -- Other 2,501 -- -- 2,501 ------------ ------------ ------------- ------------ Net cash provided by (used in) financing activities 24,686 23,014 (80,183) (32,483) ------------ ------------ ------------- ------------ Effect of exchange rate changes on cash and equivalents -- -- 22 22 ------------ ------------ ------------- ------------ Net increase (decrease) in cash and cash equivalents (24,734) 7,844 (5,852) (22,742) Cash and cash equivalents at beginning of period 28,121 (7,339) 17,840 38,622 ------------ ------------ ------------- ------------ Cash and cash equivalents at end of period $ 3,387 $ 505 $ 11,988 $ 15,880 ============ ============ ============= ============
20 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued PEABODY ENERGY CORPORATION UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2001 (In thousands)
Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Consolidated ------------ ------------ ------------- ------------ Net cash provided by (used in) operating activities $ (8,602) $ 150,507 $ (32,192) $ 109,713 ------------ ------------ ------------- ------------ Additions to property, plant, equipment and mine development -- (105,739) (60,357) (166,096) Additions to advance mining royalties -- (6,934) (1,372) (8,306) Acquisition, net -- (7,450) -- (7,450) Proceeds from sale of Australian operations -- 455,000 -- 455,000 Proceeds from property and equipment disposals -- 6,735 2,189 8,924 Proceeds from sale-leaseback transactions -- -- 6,968 6,968 Net cash provided by (used in) discontinued operations (384) 13,114 4,208 16,938 ------------ ------------ ------------- ------------ Net cash provided by (used in) investing activities (384) 354,726 (48,364) 305,978 ------------ ------------ ------------- ------------ Net change under revolving line of credit -- -- 21,183 21,183 Proceeds from long-term debt -- -- 7,024 7,024 Payments of long-term debt (768,842) (120,372) (5,198) (894,412) Net proceeds from initial public offering 449,832 -- -- 449,832 Distributions to minority interests -- -- (4,404) (4,404) Dividend received -- 19,916 -- 19,916 Dividend paid (5,194) -- -- (5,194) Transactions with affiliates, net 332,297 (391,825) 59,528 -- Other 889 600 -- 1,489 ------------ ------------ ------------- ------------ Net cash provided by (used in) financing activities 8,982 (491,681) 78,133 (404,566) ------------ ------------ ------------- ------------ Net increase (decrease) in cash and cash equivalents (4) 13,552 (2,423) 11,125 Cash and cash equivalents at beginning of period 5 27,440 5,649 33,094 ------------ ------------ ------------- ------------ Cash and cash equivalents at end of period $ 1 $ 40,992 $ 3,226 $ 44,219 ============ ============ ============= ============
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report includes statements of our 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. These statements relate to future events or our future financial performance. We use words such as "anticipate," "believe," "expect," "may," "project," "will" or other similar words to identify forward-looking statements. Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding are forward-looking statements. These forward-looking statements are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks and actual results may differ materially from those discussed in these statements. Among the factors that could cause actual results to differ materially are: o growth in coal and power markets; o coal's market share of electricity generation; o timing of reductions in customer coal inventories; o the pace and extent of the economic recovery; o severity of weather; o railroad and other transportation performance and costs; o the ability to renew sales contracts upon expiration or renegotiation; o the ability to successfully implement operating strategies; o the effectiveness of our cost-cutting measures; o regulatory and court decisions; o future legislation; o credit, market and performance risk associated with our customers; o modification or termination of our long-term coal supply agreements; o reduction of purchases by major customers; o risks inherent to mining, including geologic conditions or unforeseen equipment problems; o replacement of recoverable reserves; o implementation of new accounting standards; o inflationary trends and interest rates; and o other factors, including those discussed in "Legal Proceedings." When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and all documents incorporated by reference. We will not update these statements unless the securities laws require us to do so. 22 FISCAL YEAR CHANGE In July 2001, we changed our fiscal year end from March 31 to December 31. The change was first effective with respect to the nine months ended December 31, 2001. FACTORS AFFECTING COMPARABILITY Sale of Peabody Resources Limited Operations In December 2000, we signed a share purchase agreement for the transfer of the stock in two U.K. holding companies which, in turn, owned our Peabody Resources Limited subsidiaries, to a subsidiary of Rio Tinto Limited. Our Peabody Resources Limited operations consisted of interests in six coal mines, as well as mining services in Brisbane, Australia. During the quarter ended March 31, 2001, we received $455.0 million related to the sale, which closed on January 29, 2001. We recorded a $171.7 million pretax gain on the sale. Discontinued Operations In August 2000, we sold Citizens Power, our subsidiary that marketed and traded electric power and energy-related commodity risk management products, to Edison Mission Energy. We classified Citizens Power as a discontinued operation as of March 31, 2000, and recorded an estimated loss on the sale of $78.3 million, net of income taxes. During the fiscal year ended March 31, 2001, we reduced our loss on the sale by $12.9 million; $1.2 million of the loss reduction was recorded in the quarter ended March 31, 2001. These reductions of the estimated loss reflected higher estimated proceeds from the monetization of Citizens' power contracts as part of the wind-down of Citizens' operations. QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001 Sales. Sales for the quarter ended September 30, 2002 increased $58.0 million, to $689.0 million, a 9.2% increase from the prior year quarter. The sales increase was driven by pricing increases in all regions, and a $27.7 million increase related to a favorable arbitration ruling resulting in a retroactive price increase on our Navajo station coal supply agreement. This ruling is discussed in detail in Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report. Our average sales price was 11.0% higher than the prior year quarter. The average price increase was favorably impacted by the arbitration ruling, and was negatively impacted by sales mix, as higher priced tons in the Appalachia and Midwest regions represented a lower percentage of overall sales in the current quarter compared to the prior year quarter. Beginning with the quarter ended September 30, 2002, the Company's physically settled trading transactions were recorded on a net basis as a part of "Other revenues," rather than on a gross basis within "Sales" and "Operating costs and expenses." This accounting change, discussed in Note 8 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report, had no effect on operating profit or net income. All prior period amounts were reclassified to conform with the current period presentation. U.S. mining and broker operations' sales volume was 46.1 million tons for the current quarter, compared to 46.9 million tons for the prior year quarter, a decrease of 1.7%. Volume at our Powder River Basin and Southwest operations increased slightly from prior year levels, while volume at our Appalachia and Midwest operations decreased from prior year levels as we reduced production to match softer than expected demand and encountered geologic difficulties at two of our eastern longwall mines. Sales in the Southwest region were $33.1 million higher than the prior year, primarily due to the effect of the arbitration ruling discussed previously. Powder River Basin sales increased $32.6 million, due to improved pricing combined with slightly higher sales volume. Appalachia region sales decreased $10.3 million as a result of lower volume driven by the suspension of the Big Mountain Mine in response to soft demand, and geologic problems at our Harris Mine. The effect of decreased volume in Appalachia more than offset improved per-ton pricing. Midwest region sales decreased $6.5 million, as higher prices were offset by lower volume due to geologic problems at the Camp No. 11 Mine, combined with softer demand for coal. Finally, sales from coal brokerage activities increased $7.7 million due to a favorable change in sales mix. Other Revenues. Other revenues increased $1.0 million to $25.6 million in the current quarter. The current quarter includes a $15.1 million gain related to a mediated settlement regarding the Mohave station coal supply agreement. This settlement is discussed in detail in Note 12 to the unaudited condensed consolidated financial statements included in Part I, 23 Item 1 of this report. Revenues from trading operations decreased $4.0 million in the current quarter, due to lower mark-to-market income on our trading portfolio. Trading activities were scaled back in the quarter in response to a decreasing number of creditworthy counterparties and lower liquidity in the traded coal market in the current year. Our trading volume decreased 3.3 million tons to 10.5 million tons traded during the quarter. The prior year quarter included $4.8 million related to the monetization of a coal brokerage agreement that had increased in value due to favorable market conditions. Finally, coal royalty income decreased $3.4 million as the prior year quarter included a $3.0 million non-refundable advance royalty payment. Operating Profit. Operating profit increased $15.0 million, or 41.3%, for the quarter ended September 30, 2002. U.S. mining operations' (excluding operating costs related to past mining activities and net gains on property disposals) operating profit increased $29.1 million. The increase was driven by the effect of the Navajo station arbitration ruling and Mohave station mediated settlement, which increased operating profit by $37.1 million. Partially offsetting the favorable resolution of these two customer issues were the effects of lower production, geologic difficulties, and higher maintenance and repairs expense, discussed in more detail below. In the west, the Southwest's operating profit increased $29.9 million, as the $37.1 million increase related to the Navajo station arbitration ruling and Mohave station mediated settlement was partially offset by higher expenses for truck, dragline and shovel maintenance and repairs. Powder River Basin region's operating profit increased $5.5 million as improved prices and slightly higher volume overcame higher repair and maintenance costs and higher royalty and tax expenses associated with improved prices. In the east, the Appalachia region's operating profit decreased $9.4 million due to higher per-ton mining costs related to the Big Mountain Mine suspension, geologic difficulties at the Harris longwall and lower than planned production levels. Operating profit in the Midwest region increased $3.2 million compared to the prior year quarter as improved pricing at our Black Beauty operations was partially offset by geologic difficulties at the Camp No. 11 mine, which lowered volume and increased per ton mining costs. Operating profit from trading and brokerage operations decreased $4.7 million over the prior year quarter, primarily due the scaling back of trading activities in response to a decreasing number of creditworthy counterparties and lower liquidity in the traded coal market in the current year. Operating costs related to past mining activities were $5.5 million higher in the current quarter, primarily due to $5.7 million of excise tax refunds included in the prior year quarter. In addition, net gain on property disposals were $1.4 million lower in the current year quarter. Interest Income. Interest income increased $5.3 million to $5.5 million in the current quarter, primarily due to $4.6 million in interest income related to excise tax refunds received during the quarter. Interest Expense. Interest expense for the quarter was $25.8 million, a $3.1 million decrease, or 10.7%, from the prior year quarter. The decrease in interest expense was primarily due to lower short-term interest rates in the current year quarter, which decreased the cost of our floating-rate debt. Income Taxes. For the quarter ended September 30, 2002, there was an income tax benefit of $1.5 million on income before income taxes and minority interests of $31.0 million, compared to income tax expense of $1.0 million on income before income taxes and minority interests of $7.6 million in the prior year quarter. The tax benefit recorded in the current quarter reflects the reduction of our effective tax rate from 10.0% for the six months ended June 30, 2002 to 5.0% for the nine months ended September 30, 2002. The reduction in our effective tax rate reflects the increase in the benefit from the percentage depletion tax deduction as a percentage of our pretax income, as well as our ability to utilize existing net operating loss carryforwards. We had $630.9 million of net operating loss carryforwards available for federal income tax purposes as of December 31, 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Sales. Sales for the nine months ended September 30, 2002 increased $86.7 million, or 4.6%, to $1,967.5 million. Excluding Australian mining operations, sales increased $101.4 million, a 5.4% increase from the prior year period. The sales increase was driven by pricing increases in all regions. Average sales price was 6.9% higher than the prior year period. The average price increase was impacted by the $27.7 million arbitration ruling on pricing under the Navajo station coal supply agreement, but was slightly mitigated by sales mix, as higher priced tons in the Appalachia and Midwest regions represented a lower percentage of overall sales in the current period compared to the prior year period. 24 U.S. mining and broker operations' sales volume for the nine months ended September 30, 2002 was 137.3 million tons which approximated prior year volume of 138.4 million tons. We had lower sales volume at our Appalachia and Midwest operations, driven by softened market demand as a result of mild weather early in the year, a slower U.S. economy, and more recently, the aggressive management of stockpile levels by customers. These volume decreases more than offset slightly higher sales volume at our Powder River Basin operations. Powder River Basin sales increased $110.7 million, due to improved pricing and slightly higher volume in the current year period. Sales in the Southwest region were $35.5 million higher than the prior year, primarily due to the effect of the arbitration ruling discussed previously, combined with slightly higher pricing and volume. Appalachia region sales decreased $1.1 million, as a result of lower volume from the suspension of the Big Mountain mine in response to soft demand and longwall difficulties on the Harris longwall. Midwest region sales decreased $29.2 million, as higher prices were more than offset by lower volume due to geologic problems at the Camp No. 11 Mine and a delay in the startup of two new mines in the region, combined with softer coal demand in the current year. Finally, sales from coal brokerage activities decreased $14.6 million due to a change in sales mix. Sales from our Australian mining operations decreased $14.6 million compared to the prior year period. The current nine-month period includes $1.4 million of sales related to the AQC operations purchased in the current quarter, while the prior year period includes $16.0 million of sales from our Peabody Resources Limited operations that were sold in January 2001. Other Revenues. Other revenues for the nine months ended September 30, 2002 decreased $2.5 million from the prior year period, to $79.8 million. The current quarter includes a $15.1 million gain related to a mediated settlement regarding the Mohave station coal supply agreement. Revenues from trading operations increased $8.2 million, primarily due to improved year over year trading results, including $10.0 million related to a forward sale that will settle during 2003 and 2004. These improvements were offset by significantly lower coal royalty revenues. Other revenues in the prior year period included $12.0 million in non-refundable advance royalties, $9.9 million related to the monetization of coal brokerage agreements that had increased in value due to favorable market conditions and $4.5 million of mining services revenues from our Peabody Resources Limited operations. Selling and Administrative Expenses. Selling and administrative expenses of $72.2 million for the nine months ended September 30, 2002 were $8.3 million lower than the prior year period, due to the reduction of corporate expenses in response to difficult market conditions in the current year, combined with stock compensation charges recorded in the prior year period related in part to our initial public offering. Gain on Sale of Peabody Resources Limited Operations. On January 29, 2001, we sold our Peabody Resources Limited operations to Coal & Allied, a 71%-owned subsidiary of Rio Tinto Limited. The selling price was $446.8 million, plus the assumption of all liabilities. We recorded a pretax gain of $171.7 million on the sale. The gain on sale was $124.2 million after taxes, or $2.42 per diluted common share for the nine months ended September 30, 2001. Net Gain on Property and Equipment Disposals. Net gain on property and equipment disposals of $3.5 million was $6.1 million lower than the prior year period. The current period included a $2.4 million gain related to a rail track sale, while the prior year period included a $6.4 million gain on the sale of certain idle coal reserves and other small reserve and equipment sales. Operating Profit. Excluding the effect of the gain on sale of Peabody Resources Limited operations, operating profit increased $38.1 million, or 30.9%, to $161.5 million. Operating profit from U.S. operations increased $42.1 million, or 35.3%, to $161.2 million for the nine months ended September 30, 2002. The prior year period included operating profit of $4.3 million from Peabody Resources Limited operations. The increase at the U.S. operations was driven by higher operating profit of $65.1 million from U.S. mining operations (excluding operating costs related to past mining activities and net gains on property disposals) as a result of higher overall pricing due to contracts signed in 2001, combined with the effect of the Navajo station arbitration ruling and Mohave station mediated settlement, which increased operating profit by $37.1 million. In the west, the Powder River Basin region's operating profit increased $23.5 million as improved prices and higher volume overcame higher royalty and tax expenses associated with improved prices and higher repair and maintenance costs. The Southwest region's operating profit increased $21.4 million as the $37.1 million increase related to the Navajo arbitration ruling and Mohave mediated settlement was partially offset by higher truck, dragline and shovel maintenance and repairs expense. In addition, two outages of the Southwest region's coal transportation pipeline contributed to higher costs in the current year period. 25 In the east, operating profit in the Midwest region increased $11.8 million compared to the prior year period, as lower overall sales levels and geologic difficulties at the Camp No. 11 mine were more than offset by improved pricing and lower fuel and maintenance and repair costs at Black Beauty. The Appalachia region's operating profit increased $8.3 million due to strong sales price improvement, which overcame higher per ton mining costs due to lower than planned production volume, the suspension of the Big Mountain mine in response to lower demand and difficulties at the Harris mine's longwall. Operating profit from trading and brokerage operations increased $8.3 million over the prior year period, primarily due to the $10.0 million transaction discussed above in "Other Revenues." Our trading volume increased from 35.9 million tons traded in the prior year period to 55.8 million tons traded in the nine months ended September 30, 2002. Operating costs related to past mining activities were $19.0 million higher in the nine months ended September 30, 2002, primarily due to $14.1 million of higher excise tax refunds in the prior year period. In addition, the current year period includes higher closed and suspended mine costs. U.S. operations' operating profit was also affected by lower coal royalty income and profit from resource management activities of $13.8 million, lower selling and administrative costs of $8.3 million and lower net gains on property and equipment disposals of $6.1 million Interest Expense. Interest expense for the nine months ended September 30, 2002 was $76.8 million, a decrease of $30.8 million, or 28.6%, from the prior year period. The decrease in borrowing cost was due to the significant long-term debt repayments made during calendar 2001, and lower short-term interest rates in the current year. Utilizing proceeds from the sale of our Peabody Resources Limited operations in January 2001 and our initial public offering in May 2001, we reduced long-term debt by approximately $0.8 billion during 2001. Currently, our debt balance is approximately $1.05 billion. Interest Income. Interest income increased $3.3 million, to $6.6 million, for the nine months ended September 30, 2002. The current year includes $4.6 million in interest income received related to excise tax refunds, while the prior year period included interest earned on cash received from the sale of our Peabody Resources Limited operations in January 2001. Income Taxes. For the nine months ended September 30, 2002, income tax expense was $4.6 million on income before income taxes and minority interests of $91.4 million, compared to income tax expense of $44.3 million on income before income taxes and minority interests of $190.8 million in the prior year period. Our effective income tax rate was 5.0% for the nine months ended September 30, 2002. Overall, our effective tax rate is sensitive to changes in the estimate of annual profitability and the relative benefit of the percentage depletion tax deduction. It is also impacted by our ability to utilize the $630.9 million of net operating loss carryforwards available for federal income tax purposes as of December 31, 2001, and in the prior year by the sale of our Peabody Resources Limited operations. Gain from Disposal of Discontinued Operations. During the nine months ended September 30, 2001, we reduced our loss on the sale of Citizens Power by $1.2 million. Extraordinary Loss from Early Extinguishment of Debt. During the nine months ended September 30, 2001, we repaid debt using proceeds from the sale of our Australian operations and our initial public offering. We recorded an extraordinary loss of $36.1 million, net of income taxes, which represented the excess of cash paid over the carrying value of the debt retired and the write-off of debt issuance costs associated with the debt retired. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $208.6 million for the nine months ended September 30, 2002, an increase of $98.9 million from the prior year period. Current year income from continuing operations, excluding the after-tax effect of the gain on sale of Peabody Resources Limited operations and other property sales, was $67.7 million higher than the prior year period. Working capital cash usages were $13.9 million lower in the current year period, and reclamation and workers' compensation spending was $11.9 million lower in the current year period. Current period working capital cash flows included the receipt of $26.8 million of excise tax refunds. Cash flow in the prior year nine-month period benefited from $15.0 million of proceeds received related to the expansion of our accounts receivable securitization program. Net cash used in investing activities was $198.9 million for the nine months ended September 30, 2002, compared to cash provided by investing activities of $306.0 million in the prior year period. The prior year period included $455.0 26 million of proceeds from the sale of our Australian operations, and $16.9 million of proceeds related to the sale of Citizens Power. Capital expenditures decreased $4.8 million, to $161.3 million, in the current year period. These capital expenditures were primarily for the replacement of mining equipment, the expansion of capacity at certain mines and projects to improve the efficiency of mining operations. Finally, the current year period includes higher acquisition expenditures of $38.1 million. The current year acquisitions are discussed in detail in Note 2 to the condensed consolidated financial statements included in Part I, Item 1 of this report. Net cash used by financing activities was $32.5 million for the nine months ended September 30, 2002, compared with cash used in financing activities of $404.6 million in the prior year period. The prior year includes $449.8 million of net proceeds from our initial public offering. Net debt repayments were $869.4 million higher in the prior year period, principally as a result of the usage of proceeds received from the sale of our Peabody Resources Limited operations and our initial public offering to repay debt. In the current year, we had lower net revolving line of credit borrowings of $14.7 million. The prior year period also included a $19.9 million dividend received from our Peabody Resources Limited operations. In addition, we increased dividends paid to our shareholders by $10.4 million in the current year period. As of September 30, 2002, our total indebtedness consisted of the following (dollars in thousands): 9.625% Senior Subordinated Notes ("Senior Subordinated Notes") due 2008 $ 391,465 8.875% Senior Notes ("Senior Notes") due 2008 316,477 5.0% Subordinated Note 83,872 Senior unsecured notes under various agreements 83,571 Unsecured revolving credit agreement 83,729 Revolving Credit Facility under Senior Credit Facility 25,700 Other 63,030 ----------- $ 1,047,844 ===========
As of September 30, 2002, our revolving credit and letter of credit borrowing facilities included the $480.0 million Revolving Credit Facility under our Senior Credit Facility and Black Beauty's $140.0 million revolving credit facility. The Revolving Credit Facility has a borrowing sub-limit of $350.0 million and a letter of credit sub-limit of $330.0 million. Together, these facilities total $620.0 million, and have a total of $490.0 million available for borrowing. As of September 30, 2002, outstanding borrowings under the Revolving Credit Facility were $25.7 million. Black Beauty's revolving credit facility borrowings totaled $83.7 million. We were in compliance with the restrictive covenants of all of our and our subsidiaries' debt agreements as of September 30, 2002. During the quarter, Fitch Ratings, Inc. affirmed its investment-grade BBB rating on the corporate senior unsecured notes and unsecured bank revolver of Black Beauty. On October 2, 2002, Moody's assigned us an SGL-1 liquidity rating. Under Moody's rating system, SGL-1 means "very good" liquidity. Moody's SGL ratings, an assessment of liquidity, are used to supplement the current Moody's credit ratings for companies rated from "Ba1" to "C." In March 2000, we established an accounts receivable securitization program. Under the program, undivided interests in a pool of eligible trade receivables that have been contributed to our wholly-owned, bankruptcy-remote subsidiary are sold, without recourse, to a multi-seller, asset-backed commercial paper conduit ("Conduit"). Purchases by the Conduit are financed with the sale of highly rated commercial paper. We used proceeds from the sale of the accounts receivable to repay long-term debt, effectively reducing our overall borrowing costs. The securitization program is currently scheduled to expire in 2007. Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (as amended by SFAS No. 140) the securitization transactions have been recorded as sales, with those accounts receivable sold to the Conduit removed from the consolidated balance sheet. The amount of undivided interests in accounts receivable sold to the Conduit was $140.0 million as of September 30, 2002 and December 31, 2001. We have designated interest rate swaps with notional amounts totaling $150.0 million as a fair value hedge of our Senior Notes. Under the swaps, we pay a floating rate based upon the six-month LIBOR rate for a period of seven years ending May 15, 2008. The applicable rate was 6.07% as of September 30, 2002. As a result of these swaps, we realized interest savings of $3.1 million during the nine months ended September 30, 2002. 27 We had $97.2 million of commitments for capital expenditures at September 30, 2002, that are primarily related to acquiring additional coal reserves and mining equipment. The majority of these commitments relate to spending targeted for 2003. Total capital expenditures for calendar year 2002 are expected to range from $180 million to $200 million, and have been and will be primarily used to acquire additional low sulfur coal reserves, develop existing reserves, replace or add equipment and fund cost reduction initiatives. We anticipate funding capital expenditures primarily through operating cash flow. We believe the risk of generating lower than anticipated operating cash flow in 2002 is reduced by our high level of sales commitments (all of 2002 planned production is committed) and lower borrowing costs as a result of our significant debt reductions in 2001. OTHER Recent Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for fiscal years beginning after June 15, 2002 (effective January 1, 2003 for the Company). We are currently assessing the impact of this new Statement. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." SFAS No. 145 requires that gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In addition, SFAS No. 145 requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This Statement is effective for fiscal years beginning after May 15, 2002 (effective January 1, 2003 for the Company). We are currently assessing the impact of this new Statement. On October 25, 2002, the EITF rescinded EITF Issue No. 98-10. The effects of the rescission are discussed in Note 8 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Trading Activities We market and trade coal and emission allowances. These activities give rise to commodity price risk, which represents the potential loss that can be caused by a change in the market value of a particular commitment. We actively measure, monitor and adjust traded position levels to remain within risk limits prescribed by management. For example, we have policies in place that limit the amount of total exposure we may assume at any point in time. We account for coal and emission allowance trading using the fair value method, which requires us to reflect financial instruments with third parties, such as forwards, futures, options and swaps, at market value in the consolidated financial statements. We perform a value at risk analysis on our trading portfolio, which includes over-the-counter and brokerage trading of coal and emission allowances. Our value at risk model is based on the industry standard risk-metrics variance/co-variance approach. This captures our exposure related to both option and forward positions. Our value at risk model assumes a 15-day holding period and a 95% one-tailed confidence interval. The use of value at risk allows management to aggregate pricing risks across products in the portfolio, compare risk on a consistent basis and identify the drivers of risk. Due to the subjectivity in the choice of the liquidation period, reliance on historical data to calibrate the models and the inherent limitations in the value at risk methodology, including the use of delta/gamma adjustments related to options, we perform regular stress, back testing and scenario analysis to estimate the impacts of market changes on the value of the portfolio. The results of these analyses are used to supplement the value at risk methodology and identify additional market-related risks. During the nine months ended September 30, 2002, the low, high and average values at risk for our coal trading portfolio were $0.3 million, $3.9 million and $1.9 million, respectively. Our emission allowance value at risk averaged $0.1 million during the nine months ended September 30, 2002, and did not exceed $0.2 million during that period. Fifty-five percent of the value of our trading portfolio is scheduled to be realized by the end of calendar year 2003, and 94% of the value of our trading portfolio is scheduled to be realized by the end of calendar year 2004. We also monitor other types of risk associated with our coal and emission allowance trading activities, including credit, market liquidity and counterparty nonperformance. Non-trading Activities We manage our commodity price risk for non-trading purposes through the use of long-term coal supply agreements, rather than through the use of derivative instruments. We currently have sales commitments for all of our planned calendar 2002 production. Some of the products used in our mining activities, such as diesel fuel, are subject to price volatility. We, through our suppliers, utilize forward contracts to manage the exposure related to this volatility. We have exposure to changes in interest rates due to our existing level of indebtedness. As of September 30, 2002, after taking into consideration the effects of interest rate swaps, we had $734.4 million of fixed-rate borrowings and $313.4 million of variable-rate borrowings outstanding. A one percentage point increase in interest rates would result in an annualized increase to interest expense of $3.1 million on our variable-rate borrowings. With respect to our fixed-rate borrowings, a one percentage point increase in interest rates would result in a $36.6 million decrease in the fair value of these borrowings. ITEM 4. CONTROLS AND PROCEDURES. The Chief Executive Officer and Executive Vice President and Chief Financial Officer have evaluated our disclosure controls and procedures within 90 days of the filing of this report and have concluded that there are no significant deficiencies or material weaknesses. There have been no significant changes in our internal controls or in other factors subsequent to the date of our most recent evaluation that could significantly affect these controls. 29 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Navajo Nation See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report relating to certain legal proceedings brought against us by the Navajo Nation and Hopi Tribe. Salt River Project Agricultural Improvement and Power District-Price Review See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report relating to certain legal and arbitration proceedings involving the Salt River Project Agricultural Improvement and Power District. Southern California Edison Company See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report relating to certain legal proceedings and a mediated settlement agreement reached with Southern California Edison Company. Social Security Administration See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report relating to certain legal proceedings involving the Social Security Administration. Indiana Michigan Power Company On September 27, 2001, our subsidiaries, Caballo Coal Company and Peabody COALSALES Company, filed suit in the U.S. District Court for the Eastern District of Missouri against Indiana Michigan Power Company, AEP Energy Services, Inc. and American Electric Power Service Corporation. Our subsidiaries contend that Indiana Michigan Power and American Electric Power Service Corporation breached their obligations under a coal supply agreement dated January 17, 1974. The agreement provides for a price renegotiation every five years. Our subsidiaries called for a price renegotiation in 2001, effective for coal delivered during 2002 through 2006. Our subsidiaries assert that Indiana Michigan Power and American Electric Power Service Corporation did not negotiate in good faith in that they did not submit a competitive offer to supply coal, as required under the contract, when they did not accept the $8.35 per ton offer submitted by our subsidiaries. Our subsidiaries are seeking specific performance of the agreement, injunctive relief, declaratory judgment, damages for breach of contract and damages for tortious interference committed by AEP Energy Services. In January 2002, the court denied our motion for a preliminary injunction and the appellate court upheld the denial of that motion. Since the court did not grant our motion for a preliminary injunction, we are not shipping any coal to Indiana Michigan Power under this contract. Indiana Michigan Power contends that the contract terminated on December 31, 2001, which ended its obligation to purchase 3.5 million tons of coal annually. While the outcome of litigation is subject to uncertainties, based on our preliminary evaluation of the issues and the potential impact on us, we believe that the only potential adverse impact on us, if Indiana Michigan Power is ultimately successful, will be our inability to ship further coal to the utility under the contract. Department of Justice During 2001, along with other coal producers in the Powder River Basin in Wyoming, we received a request for information from the U.S. Department of Justice regarding an alleged agreement to restrict production of coal from this region. In June 2002, we received notification from the U.S. Department of Justice that it had closed that investigation. Kentuckians for the Commonwealth v. Rivenburgh On May 8, 2002, the U.S. District Court for the Southern District of West Virginia issued an injunction against the U.S. Army Corps of Engineers from issuing any new Section 404 Clean Water Act permits that involved the placement of fill without a primary constructive purpose for the fill. On June 17, 2002, the Court denied a motion for a stay that was filed by a coal association and the federal government. On July 3, 2002, the defendants filed an appeal with the Fourth Circuit Court of Appeals. This decision has had no immediate impact on our operations. However, if it is not reversed, it may 30 affect our subsidiaries' ability to extend the life of their preparation plants or open new mines in the future. If the decision is not reversed, our current operations would be unaffected for approximately five years. While the outcome of litigation is subject to uncertainties, based on our preliminary evaluation of the issues and the potential impact on us, we believe this matter will be resolved without a material adverse effect on our financial condition or results of operations. West Virginia Flooding Litigation Three of our subsidiaries have been named in four separate complaints filed in Boone, Kanawha and Wyoming Counties, West Virginia. These cases collectively include 622 plaintiffs who are seeking damages for property damage and personal injuries arising out of flooding that occurred in southern West Virginia in July of 2001. The plaintiffs have sued coal, timber, railroad and land companies under the theory that mining, construction of haul roads and removal of timber caused natural surface waters to be diverted in an unnatural way, thereby causing damage to the plaintiffs. The West Virginia Supreme Court has ruled that these four cases, along with over 10 additional flood damage cases not involving our subsidiaries, be handled pursuant to the Court's Mass Litigation rules. As a result of this ruling, the cases have been transferred to the Circuit Court of Raleigh County in West Virginia to be handled by a panel consisting of three circuit court judges. They will, among other things, determine whether the individual cases should be consolidated or returned to their original circuit courts. While the outcome of litigation is subject to uncertainties, based on our preliminary evaluation of the issues and the potential impact on us, we believe this matter will be resolved without a material adverse effect on our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Please see Note 4 to the accompanying unaudited condensed consolidated financial statements (in Part I, Item 1 of this report) related to the adoption by our Board of Directors of a preferred share purchase rights plan. ITEM 5. OTHER INFORMATION. Thoroughbred Energy Campus On October 11, 2002, Kentucky's air quality agency issued an air permit for the Thoroughbred Energy Campus, our proposed 1,500 megawatt coal-fueled generating station to be built in western Kentucky. On November 12, 2002, two environmental groups filed an administrative challenge to the permit and have sought to have the permit revoked. We will participate in the administrative hearing since we believe that the permit was properly issued. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits See Exhibit Index at page 35 of this report. (b) Reports on Form 8-K On July 19, 2002, we filed a Form 8-K, under Item 5, Other Events and Regulation FD Disclosure, announcing our issuance of a press release concerning earnings per share for the quarter ended June 30, 2002 and revised guidance on Adjusted EBITDA and earnings per share for the year ended December 31, 2002. On July 22, 2002, we filed a Form 8-K, under item 5, Other Events and Regulation FD Disclosure, announcing our issuance of a press release regarding a favorable arbitration ruling related to pricing of our coal sales to the Navajo Generating Station in Page, Arizona. On July 23, 2002, we filed a Form 8-K, under Item 5, Other Events, announcing that the Board of Directors of the Company adopted a preferred share purchase rights plan, as discussed in Note 4 to the accompanying condensed consolidated financial statements. On October 17, 2002, we filed a Form 8-K, under Item 5, Other Events and Regulation FD Disclosure, announcing our issuance of a press release concerning Adjusted EBITDA and earnings per share for the quarter ended December 31, 2002 and revised guidance on Adjusted EBITDA and earnings per share for the year ended December 31, 2002. 31 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. PEABODY ENERGY CORPORATION Date: November 14, 2002 By: RICHARD A. NAVARRE -------------------------------------------------- Richard A. Navarre Executive Vice President and Chief Financial Officer (Principal Financial Officer)
32 CERTIFICATION I, Irl F. Engelhardt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Peabody Energy Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 IRL F. ENGELHARDT ----------------------- Irl F. Engelhardt, Chief Executive Officer 33 CERTIFICATION I, Richard A. Navarre, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Peabody Energy Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 RICHARD A. NAVARRE ------------------------------- Richard A. Navarre Executive Vice President and Chief Financial Officer 34 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 Third Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement No. 333-55412). 3.2* Amended and Restated By-Laws of the Company 4.23 Rights Agreement, dated as of July 24, 2002, between the Company and EquiServe Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designations of Series A Junior Preferred Stock of the Company as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C). (Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A, filed on July 24, 2002.) 4.24* Seventh Supplemental Senior Note Indenture dated as of August 14, 2002 among the Registrant, each Senior Note Guarantor (as defined in the Senior Note Indenture) and State Street Bank and Trust Company, as Senior Note Trustee 4.25* Seventh Supplemental Senior Subordinated Note Indenture dated as of August 14, 2002 among the Registrant, each Senior Subordinated Note Guarantor (as defined in the Senior Subordinated Note Indenture) and State Street Bank and Trust Company, as Senior Subordinated Note Trustee 10.29* Settlement Agreement and Mutual Release as of October 1, 2002, by and among Peabody Western Coal Company and Southern California Edison, Salt River Project Agricultural Improvement and Power District, Los Angeles Department of Water and Power and Nevada Power Company 99.1* Certification of the September 30, 2002 Quarterly Report on Form 10-Q, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Peabody Energy Corporation's Chief Executive Officer 99.2* Certification of the September 30, 2002 Quarterly Report on Form 10-Q, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Peabody Energy Corporation's Executive Vice President and Chief Financial Officer
* Filed herewith. 35 EX-3.2 3 c72677exv3w2.txt AMENDED/RESTATED BY-LAWS EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF PEABODY ENERGY CORPORATION ARTICLE I MEETING OF STOCKHOLDERS Section 1.1. Place of Meeting. Meetings of the stockholders of the Corporation shall be held at such place either within or without the State of Delaware as the Board of Directors may determine. Section 1.2. Annual Meetings. (A) Annual meetings of stockholders shall be held, at a date, time and place fixed by the Board of Directors and stated in the notice of meeting, to elect a Board of Directors and to transact such other business as may properly come before the meeting. (B) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (1) pursuant to the Corporation's notice of meeting delivered pursuant to Article 1, Section 4 of these By-Laws, (2) by or at the direction of the Chairman of the Board or (3) by any stockholder of the Corporation who is entitled to vote at the meeting, who complied with the notice procedures set forth in subparagraphs (B) and (C) of this Section 2 and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. (C) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (3) of paragraph (B) of these By-Laws, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, and, in the case of business other than nominations, such other business must be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred and twenty (120) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty (20) days, or delayed by more than seventy (70) days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than one hundred and twenty (120) days prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (1) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (2) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (3) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (a) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (b) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (D) Notwithstanding anything in the second sentence of paragraph (C) of these By-Laws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. Section 1.3. Special Meetings. (A) Except as otherwise required by law, special meetings of the stockholders may be called pursuant to the provisions of the Third Amended and Restated Certificate of Incorporation of the Corporation, filed with the Delaware Secretary of State on May 21, 2001 (the "Charter"). (B) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting pursuant to Article I, Section 4 of these By- Laws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in these By-Laws and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice as required by paragraph (C) of Section 2 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the seventieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Section 1.4. Notice. Except as otherwise provided by law, at least ten (10) and not more than sixty (60) days before each meeting of stockholders, written notice of the time, date and place of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder. -2- Section 1.5. Quorum. At any meeting of stockholders, the holders of record, present in person or by proxy, of a majority of the Corporation's issued and outstanding capital stock shall constitute a quorum for the transaction of business, except as otherwise provided by law. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the meeting shall have power to adjourn the meeting from time to time until a quorum is present. Section 1.6. Voting. Except as otherwise provided by law or by the Charter, all matters submitted to a meeting of stockholders shall be decided by vote of the holders of record of a majority of the Corporation's issued and outstanding capital stock present in person or by proxy. Section 1.7. General. (A) Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in these By-Laws. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with these By-Laws, to declare that such defective nomination shall be disregarded or that such proposed business shall not be transacted. (B) For purposes of these By-Laws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or disclosure in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (C) For purposes of this By-Law, no adjournment nor notice of adjournment of any meeting shall be deemed to constitute a new notice of such meeting for purposes of this Article, and in order for any notification required to be delivered by a stockholder pursuant to this Article to be timely, such notification must be delivered within the periods set forth above with respect to the originally scheduled meeting. Subject to applicable law, the Board of Directors may elect to postpone any previously scheduled meeting of stockholders. (D) Notwithstanding the foregoing provisions of this Article, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in these By-Laws. Nothing in these By-Laws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE II DIRECTORS Section 2.1. Number, Election and Removal of Directors. The number of Directors that shall constitute the Board of Directors shall be not less than three nor more than -3- 15. Within the limits specified in the Charter, the number of Directors shall be determined by the Board of Directors or by the stockholders. The Directors shall be elected by the stockholders at their annual meeting in the manner set forth in the Charter. Vacancies and newly created directorships resulting from any increase in the number of Directors may be filled pursuant to the terms of the Charter. Directors may be removed only for cause, and only by the affirmative vote of at least 75 percent in voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting as a single class. Section 2.2. Meetings. Regular meetings of the Board of Directors shall be held at such times and places as may from time to time be fixed by the Board of Directors or as may be specified in a notice of meeting. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman or President and shall be called by the President or Secretary if directed by a majority of the Directors. Telegraphic or written notice of each special meeting of the Board of Directors shall be sent to each Director not less than two days before such meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of the stockholders. Notice need not be given of regular meetings of the Board of Directors. Section 2.3. Quorum. One-third of the entire Board of Directors shall constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, the Directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until such a quorum is present. Except as otherwise provided by law, the Certificate of Incorporation of the Corporation, these By-Laws or any contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. Section 2.4. Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the entire Board, designate one or more committees, including without limitation an Executive Committee, to have and exercise such power and authority as the Board of Directors shall specify. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Director to act at the meeting in place of any such absent or disqualified member. ARTICLE III OFFICERS Section 3.1. General. The officers of the Corporation shall consist of a Chairman of the Board of Directors, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer and such other additional officers with such titles (including, without limitation, a Chief Operating Officer and a Chief Financial Officer) as the Board of Directors shall from time to time determine, all of whom shall be elected by and shall serve at the pleasure of the Board of Directors. Subject to applicable law, an officer may hold more than one office, if so elected by the Board of Directors. Such officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. Such officers shall also -4- have such powers and duties as from time to time may be conferred by the Board of Directors. All officers shall be subject to the supervision and direction of the Board of Directors. The Chairman of the Board shall be chosen from among the directors. The Board of Directors may from time to time elect, or the Chief Executive Officer or President may appoint, such other officers (including one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents, as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board of Directors or by the Chief Executive Officer or President, as the case may be. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board, need such officers be directors of the Corporation. Section 3.2. Election and Term of Office. The officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after the annual meeting of stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign, but any officer may be removed from office at any time as provided in Section 3.3. Section 3.3. Removal. Any officer elected, or agent appointed, by the Board of Directors may be removed by the affirmative vote of a majority of the entire Board of Directors whenever, in their judgment, the best interests of the Corporation would be served thereby. Any officer or agent appointed by the Chief Executive Officer or the President may be removed by the Chief Executive Officer or the President, as the case may be, whenever, in such officer's judgment, the best interests of the Corporation would be served thereby. Such removal shall be without prejudice to the contractual rights, if any, of the person so removed; provided that no elected officer shall have any contractual rights against the Corporation for compensation beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan. Section 3.4. Vacancies. A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. Any vacancy in an office appointed by the Chief Executive Officer or the President because of death, resignation, or removal may be filled by the Chief Executive Officer or the President. ARTICLE IV INDEMNIFICATION To the fullest extent permitted by the Delaware General Corporation Law, the Corporation shall indemnify any current or former Director or officer of the Corporation and may, at the discretion of the Board of Directors, indemnify any current or former employee or agent of the Corporation against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any threatened, pending or -5- completed action, suit or proceeding brought by or in the right of the Corporation or otherwise, to which he was or is a party or is threatened to be made a party by reason of his current or former position with the Corporation or by reason of the fact that he is or was serving, at the request of the Corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. ARTICLE V GENERAL PROVISIONS Section 5.1. Notices. Whenever any statute, the Certificate of Incorporation or these By-Laws require notice to be given to any Director or stockholder, such notice may be given in writing by mail, addressed to such Director or stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Such notice shall be deemed to have been given when it is deposited in the United States mail. Notice to Directors may also be given by telegram. Section 5.2. Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors. -6- EX-4.24 4 c72677exv4w24.txt SEVENTH SUPPLEMENTAL SENIOR NOTE INDENTURE EXHIBIT 4.24 SEVENTH SUPPLEMENTAL SENIOR NOTE INDENTURE SEVENTH SUPPLEMENTAL SENIOR NOTE INDENTURE (this "Supplemental Senior Note Indenture"), dated as of August 14, 2002 among BEAVER DAM COAL COMPANY, a Delaware corporation (the "Guaranteeing Subsidiary"), a subsidiary of Peabody Energy Corporation (formerly P&L Coal Holdings Corporation) (or its permitted successor), a Delaware corporation (the "Company") the Company, the other Senior Note Guarantors (as defined in the Senior Note Indenture referred to herein) and State Street Bank and Trust Company, as Senior Note Trustee under the Senior Note Indenture referred to below (the "Senior Note Trustee"). WITNESSETH WHEREAS, the Company has heretofore executed and delivered to the Senior Note Trustee a Senior Note Indenture (the "Senior Note Indenture"), dated as of May 18, 1998 providing for the issuance of an aggregate principal amount of up to $550.0 million of 8-7/8% Senior Notes due 2008 (the "Senior Notes"); WHEREAS, the Senior Note Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Senior Note Trustee a supplemental Senior Note Indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company's Obligations under the Senior Notes and the Senior Note Indenture on the terms and conditions set forth herein (the "Senior Subsidiary Guarantee"); and WHEREAS, pursuant to Section 9.01 of the Senior Note Indenture, the Senior Note Trustee is authorized to execute and deliver this Supplemental Senior Note Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guaranteeing Subsidiary and the Senior Note Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Senior Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Senior Note Indenture. 2. AGREEMENT TO GUARANTEE. The Guaranteeing Subsidiary hereby agrees as follows: (a) Along with all Senior Note Guarantors named in the Senior Note Indenture, to jointly and severally Guarantee to each Holder of a Senior Note authenticated and delivered by the Senior Note Trustee and to the Senior Note Trustee and its successors and assigns, irrespective of the validity and enforceability of the Senior Note Indenture, the Senior Notes or the obligations of the Company hereunder or thereunder, that: (i) the principal of and interest on the Senior Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Senior Notes, if any, if lawful, and all other obligations of the Company to the Holders or the Senior Note Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Senior Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Senior Note Guarantors shall be jointly and severally obligated to pay the same immediately. (b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Senior Notes or the Senior Note Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Senior Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Senior Note Guarantor. (c) The following is hereby waived: diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever. (d) This Senior Subsidiary Guarantee shall not be discharged except by complete performance of the obligations contained in the Senior Notes and the Senior Note Indenture. (e) If any Holder or the Senior Note Trustee is required by any court or otherwise to return to the Company, the Senior Note Guarantors, or any custodian, Senior Note Trustee, liquidator or other similar official acting in relation to either the Company or the Senior Note Guarantors, any amount paid by either to the Senior Note Trustee or such Holder, this Senior Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. (f) The Guaranteeing Subsidiary shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations 2 guaranteed hereby until payment in full of all obligations guaranteed hereby. (g) As between the Senior Note Guarantors, on the one hand, and the Holders and the Senior Note Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 of the Senior Note Indenture for the purposes of this Senior Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibitions preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6 of the Senior Note Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Senior Note Guarantors for the purpose of this Senior Subsidiary Guarantee. (h) The Senior Note Guarantors shall have the right to seek contribution from any non-paying Senior Note Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Senior Subsidiary Guarantee. (i) Pursuant to Section 10.04 of the Senior Note Indenture, after giving effect to any maximum amount and any other contingent and fixed liabilities that are relevant under any applicable Bankruptcy or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Senior Note Guarantor in respect of the obligations of such other Senior Note Guarantor under Article 10 of the Senior Note Indenture shall result in the obligations of such Senior Note Guarantor under its Senior Subsidiary Guarantee not constituting a fraudulent transfer or conveyance. 3. EXECUTION AND DELIVERY. Each Guaranteeing Subsidiary agrees that the Senior Subsidiary Guarantees shall remain in full force and effect notwithstanding any failure to endorse on each Senior Note a notation of such Senior Subsidiary Guarantee. 4. GUARANTEEING SUBSIDIARY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. (a) The Guaranteeing Subsidiary may not consolidate with or merge with or into (whether or not such Senior Note Guarantor is the surviving Person) another corporation, Person or entity whether or not affiliated with such Senior Note Guarantor unless: (i) subject to Section 10.04 of the Senior Note Indenture, the Person formed by or surviving any such consolidation or merger (if other than a Senior Note Guarantor or the Company) unconditionally assumes all the obligations of such Senior Note Guarantor, 3 pursuant to a supplemental Senior Note Indenture in form and substance reasonably satisfactory to the Senior Note Trustee, under the Senior Notes, the Senior Note Indenture and the Senior Subsidiary Guarantee on the terms set forth herein or therein; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. (b) In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation, by supplemental Senior Note Indenture, executed and delivered to the Senior Note Trustee and satisfactory in form to the Senior Note Trustee, of the Senior Subsidiary Guarantee endorsed upon the Senior Notes and the due and punctual performance of all of the covenants and conditions of the Senior Note Indenture to be performed by the Senior Note Guarantor, such successor corporation shall succeed to and be substituted for the Senior Note Guarantor with the same effect as if it had been named herein as a Senior Note Guarantor. Such successor corporation thereupon may cause to be signed any or all of the Senior Subsidiary Guarantees to be endorsed upon all of the Senior Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Senior Note Trustee. All the Senior Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under the Senior Note Indenture as the Senior Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of the Senior Note Indenture as though all of such Senior Subsidiary Guarantees had been issued at the date of the execution hereof. (c) Except as set forth in Articles 4 and 5 of the Senior Note Indenture, and notwithstanding clauses (a) and (b) above, nothing contained in the Senior Note Indenture or in any of the Senior Notes shall prevent any consolidation or merger of a Senior Note Guarantor with or into the Company or another Senior Note Guarantor, or shall prevent any sale or conveyance of the property of a Senior Note Guarantor as an entirety or substantially as an entirety to the Company or another Senior Note Guarantor. 5. RELEASES. (a) In the event of a sale or other disposition of all of the assets of any Senior Note Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all to the capital stock of any Senior Note Guarantor, then such Senior Note Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the capital stock of such Senior Note Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or 4 substantially all of the assets of such Senior Note Guarantor) will be released and relieved of any obligations under its Senior Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Senior Note Indenture, including without limitation Section 4.10 of the Senior Note Indenture. Upon delivery by the Company to the Senior Note Trustee of an Officer's Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of the Senior Note Indenture, including without limitation Section 4.10 of the Senior Note Indenture, the Senior Note Trustee shall execute any documents reasonably required in order to evidence the release of any Senior Note Guarantor from its obligations under its Senior Subsidiary Guarantee. (b) Any Senior Note Guarantor not released from its obligations under its Senior Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Senior Notes and for the other obligations of any Senior Note Guarantor under the Senior Note Indenture as provided in Article 10 of the Senior Note Indenture. 6. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, stockholder or agent of the Guaranteeing Subsidiary, as such, shall have any liability for any obligations of the Company or any Guaranteeing Subsidiary under the Senior Notes, any Senior Subsidiary Guarantees, the Senior Note Indenture or this Supplemental Senior Note Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Senior Notes by accepting a Senior Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Senior Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 7. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL SENIOR NOTE INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 8. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Senior Note Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 9. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 5 10. THE SENIOR NOTE TRUSTEE. The Senior Note Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Senior Note Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Company. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Senior Note Indenture to be duly executed and attested, all as of the date first above written. BEAVER DAM COAL COMPANY /s/ STEVEN F. SCHAAB ---------------------------------- Name: S. F. Schaab Title: Vice President 6 EX-4.25 5 c72677exv4w25.txt SEVENTH SUPPLEMENTAL SENIOR SUBORDINATED NOTE EXHIBIT 4.25 SEVENTH SUPPLEMENTAL SENIOR SUBORDINATED NOTE INDENTURE SEVENTH SUPPLEMENTAL SENIOR SUBORDINATED NOTE INDENTURE (this "Supplemental Senior Subordinated Note Indenture"), dated as of August 14, 2002, among BEAVER DAM COAL COMPANY, a Delaware corporation (the "Guaranteeing Subsidiary"), a subsidiary of Peabody Energy Corporation (formerly P&L Coal Holdings Corporation) (or its permitted successor), a Delaware corporation (the "Company"), the Company, the other Senior Subordinated Note Guarantors (as defined in the Senior Subordinated Note Indenture referred to herein) and State Street Bank and Trust Company, as Senior Subordinated Note Trustee under the Senior Subordinated Note Indenture referred to below (the "Senior Subordinated Note Trustee"). WITNESSETH WHEREAS, the Company has heretofore executed and delivered to the Senior Subordinated Note Trustee a Senior Subordinated Note Indenture (the "Senior Subordinated Note Indenture"), dated as of May 18, 1998 providing for the issuance of an aggregate principal amount of up to $650.0 million of 9-5/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"); WHEREAS, the Senior Subordinated Note Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Senior Subordinated Note Trustee a supplemental Senior Subordinated Note Indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company's Obligations under the Senior Subordinated Notes and the Senior Subordinated Note Indenture on the terms and conditions set forth herein (the "Subordinated Subsidiary Guarantee"); and WHEREAS, pursuant to Section 9.01 of the Senior Subordinated Note Indenture, the Senior Subordinated Note Trustee is authorized to execute and deliver this Supplemental Senior Subordinated Note Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guaranteeing Subsidiary and the Senior Subordinated Note Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Senior Subordinated Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Senior Subordinated Note Indenture. 2. AGREEMENT TO GUARANTEE. The Guaranteeing Subsidiary hereby agrees as follows: (a) Along with all Senior Subordinated Note Guarantors named in the Senior Subordinated Note Indenture, to jointly and severally Guarantee to each Holder of a Senior Subordinated Note authenticated and delivered by the Senior Subordinated Note Trustee and to the Senior Subordinated Note Trustee and its successors and assigns, irrespective of the validity and enforceability of the Senior Subordinated Note Indenture, the Senior Subordinated Notes or the obligations of the Company hereunder or thereunder, that: (i) the principal of and interest on the Senior Subordinated Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Senior Subordinated Notes, if any, if lawful, and all other obligations of the Company to the Holders or the Senior Subordinated Note Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Senior Subordinated Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Senior Subordinated Note Guarantors shall be jointly and severally obligated to pay the same immediately. (b) Notwithstanding the foregoing, it is agreed and acknowledged that the Subordinated Subsidiary Guarantee hereunder is subordinated to the Senior Debt of such Subordinated Senior Note Guarantor as set forth in Article 10 and in Article 11 of the Senior Subordinated Note Indenture. (c) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Senior Subordinated Notes or the Senior Subordinated Note Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Senior Subordinated Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Senior Subordinated Note Guarantor. (d) The following is hereby waived: diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever. 2 (e) This Subordinated Subsidiary Guarantee shall not be discharged except by complete performance of the obligations contained in the Senior Subordinated Notes and the Senior Subordinated Note Indenture. (f) If any Holder or the Senior Subordinated Note Trustee is required by any court or otherwise to return to the Company, the Senior Subordinated Note Guarantors, or any custodian, Senior Subordinated Note Trustee, liquidator or other similar official acting in relation to either the Company or the Senior Subordinated Note Guarantors, any amount paid by either to the Senior Subordinated Note Trustee or such Holder, this Subordinated Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. (g) The Guaranteeing Subsidiary shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. (h) As between the Senior Subordinated Note Guarantors, on the one hand, and the Holders and the Senior Subordinated Note Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 of the Senior Subordinated Note Indenture for the purposes of this Subordinated Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6 of the Senior Subordinated Note Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Senior Subordinated Note Guarantors for the purpose of this Subordinated Subsidiary Guarantee. (i) The Senior Subordinated Note Guarantors shall have the right to seek contribution from any non-paying Senior Subordinated Note Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Subordinated Subsidiary Guarantee. (j) Pursuant to Section 11.02 of the Senior Subordinated Note Indenture, after giving effect to any maximum amount and any other contingent and fixed liabilities that are relevant under any applicable Bankruptcy or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Senior Subordinated Note Guarantor in respect of the obligations of such other Senior Subordinated Note Guarantor under Article 11 of the Senior Subordinated Note Indenture shall result in the obligations of such Senior 3 Subordinated Note Guarantor under its Subordinated Subsidiary Guarantee not constituting a fraudulent transfer or conveyance. 3. EXECUTION AND DELIVERY. Each Guaranteeing Subsidiary agrees that the Subordinated Subsidiary Guarantees shall remain in full force and effect notwithstanding any failure to endorse on each Senior Subordinated Note a notation of such Subordinated Subsidiary Guarantee. 4. GUARANTEEING SUBSIDIARY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. (a) The Guaranteeing Subsidiary may not consolidate with or merge with or into (whether or not such Senior Subordinated Note Guarantor is the surviving Person) another corporation, Person or entity whether or not affiliated with such Senior Subordinated Note Guarantor unless: (i) subject to Section 11.05 of the Senior Subordinated Note Indenture, the Person formed by or surviving any such consolidation or merger (if other than a Senior Subordinated Note Guarantor or the Company) unconditionally assumes all the obligations of such Senior Subordinated Note Guarantor, pursuant to a supplemental Senior Subordinated Note Indenture in form and substance reasonably satisfactory to the Senior Subordinated Note Trustee, under the Senior Subordinated Notes, the Senior Subordinated Note Indenture and the Subordinated Subsidiary Guarantee on the terms set forth herein or therein; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. (b) In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation, by supplemental Senior Subordinated Note Indenture, executed and delivered to the Senior Subordinated Note Trustee and satisfactory in form to the Senior Subordinated Note Trustee, of the Subordinated Subsidiary Guarantee endorsed upon the Senior Subordinated Notes and the due and punctual performance of all of the covenants and conditions of the Senior Subordinated Note Indenture to be performed by the Senior Subordinated Note Guarantor, such successor corporation shall succeed to and be substituted for the Senior Subordinated Note Guarantor with the same effect as if it had been named herein as a Senior Subordinated Note Guarantor. Such successor corporation thereupon may cause to be signed any or all of the Subordinated Subsidiary Guarantees to be endorsed upon all of the Senior Subordinated Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Senior Subordinated Note Trustee. All the Subordinated Subsidiary Guarantees 4 so issued shall in all respects have the same legal rank and benefit under the Senior Subordinated Note Indenture as the Subordinated Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of the Senior Subordinated Note Indenture as though all of such Subordinated Subsidiary Guarantees had been issued at the date of the execution hereof. (c) Except as set forth in Articles 4 and 5 of the Senior Subordinated Note Indenture, and notwithstanding clauses (a) and (b) above, nothing contained in the Senior Subordinated Note Indenture or in any of the Senior Subordinated Notes shall prevent any consolidation or merger of a Senior Subordinated Note Guarantor with or into the Company or another Senior Subordinated Note Guarantor, or shall prevent any sale or conveyance of the property of a Senior Subordinated Note Guarantor as an entirety or substantially as an entirety to the Company or another Senior Subordinated Note Guarantor. 5. RELEASES. (a) In the event of a sale or other disposition of all of the assets of any Senior Subordinated Note Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all to the capital stock of any Senior Subordinated Note Guarantor, then such Senior Subordinated Note Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the capital stock of such Senior Subordinated Note Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Senior Subordinated Note Guarantor) will be released and relieved of any obligations under its Subordinated Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Senior Subordinated Note Indenture, including without limitation Section 4.10 of the Senior Subordinated Note Indenture. Upon delivery by the Company to the Senior Subordinated Note Trustee of an Officer's Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of the Senior Subordinated Note Indenture, including without limitation Section 4.10 of the Senior Subordinated Note Indenture, the Senior Subordinated Note Trustee shall execute any documents reasonably required in order to evidence the release of any Senior Subordinated Note Guarantor from its obligations under its Subordinated Subsidiary Guarantee. (b) Any Senior Subordinated Note Guarantor not released from its obligations under its Subordinated Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Senior Subordinated Notes 5 and for the other obligations of any Senior Subordinated Note Guarantor under the Senior Subordinated Note Indenture as provided in Article 11 of the Senior Subordinated Note Indenture. 6. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, stockholder or agent of the Guaranteeing Subsidiary, as such, shall have any liability for any obligations of the Company or any Guaranteeing Subsidiary under the Senior Subordinated Notes, any Subordinated Subsidiary Guarantees, the Senior Subordinated Note Indenture or this Supplemental Senior Subordinated Note Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Senior Subordinated Notes by accepting a Senior Subordinated Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Senior Subordinated Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 7. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL SENIOR SUBORDINATED NOTE INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 8. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Senior Subordinated Note Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 9. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 10. THE SENIOR SUBORDINATED NOTE TRUSTEE. The Senior Subordinated Note Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Senior Subordinated Note Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Company. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Senior Subordinated Note Indenture to be duly executed and attested, all as of the date first above written. BEAVER DAM COAL COMPANY /s/ STEVEN F. SCHAAB -------------------------------------------- Name: S. F. Schaab Title: Vice President 6 EX-10.29 6 c72677exv10w29.txt SETTLEMENT AGREEMENT AND MUTUAL RELEASE EXHIBIT 10.29 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release ("Agreement") is made and entered into this 16th day of October 2002, by and among Peabody Western Coal Company ("Peabody"), on the one hand, and Southern California Edison Company ("Edison"), Salt River Project Agricultural Improvement and Power District ("SRP"), the City of Los Angeles by and through the Department of Water and Power ("LADWP"), and Nevada Power Company ("NPC"), on the other hand (collectively referred to in this Agreement as the "Participants"). Peabody and the Participants are hereinafter sometimes individually referred to in this Agreement as a "Party" and collectively as the "Parties." I. RECITALS A. Peabody owns and operates the Black Mesa Mine ("BMM"), a surface coal mine located in Northeastern Arizona, under leases between Peabody and the Navajo and Hopi Tribes ("Indian Leases"). BMM includes an undivided forty percent (40%) share of all facilities used jointly with the Kayenta Mine ("Joint Facilities"). B. The Participants own and operate the Mohave Generating Station ("MGS"), a coal-fired electric power plant located in Clark County, Nevada. C. Peabody, through its predecessor in interest, Peabody Coal Company ("PCC") and the Participants entered into the Amended Mohave Project Coal Supply Agreement ("CSA") on May 26, 1976, in which Peabody agreed to sell and deliver and the Participants agreed to purchase and receive, the coal requirements of the MGS as provided for in the CSA. D. By document dated March 26, 1985, PCC and the Participants entered into a Memorandum of Administrative Guidelines ("MOAG") setting forth certain procedures to be employed in the administration of the CSA. E. Effective as of December 31, 1995, PCC assigned all of its rights, obligations and interests in the Indian Leases, the CSA, and the MOAG to Peabody. F. Pursuant to the CSA, PCC and later Peabody has mined, and Peabody continues to mine, coal from the BMM and ships it to the MGS by means of a slurry pipeline. The MGS is BMM's only customer, and BMM is the sole source of coal for the MGS. G. Pursuant to Section 1.01 of the CSA, the Initial Term of the CSA ends on December 31, 2005. The Participants have the right to extend the 1 Initial Term for a period or periods of time not exceeding fifteen (15) years, as provided in Sections 1.02 and 1.03 of the CSA. As of the date of this Agreement, however, the Participants have not elected to exercise their extension right. H. Beginning in 1994, certain disputes arose between PCC and the Participants about the financial responsibility for two categories of mining costs: (1) Retiree Health Care Costs ("RHCC") and (2) Final Reclamation Costs ("FRC"). RHCC refers to the costs alleged to be recoverable from the Participants under the CSA, whether accounted for on a cash, accrual or other basis, of health care benefits (including, but not limited to, any medical, dental, vision or mental health care), and life insurance Peabody will or may provide after 2005 for retired Peabody employees at the BMM who, upon satisfying certain vesting requirements, are or would be entitled to receive such benefits from Peabody for themselves and/or their dependents, including forty percent (40%) of all such costs relating to the Joint Facilities. FRC refers to the costs alleged to be recoverable from the Participants under the CSA, whether accounted for on a cash, accrual or other basis, of closing, decommissioning and reclaiming the BMM after 2005, including environmental monitoring, to comply with Peabody's reclamation obligations under applicable requirements, including forty percent (40%) of all such costs relating to the Joint Facilities and also including costs for bonding, insurance, security, administration, taxes and other items as described in Donald Schaible's June 2000 report in the Action (as defined in recital I below). RHCC and FRC are sometimes jointly referred to in this Agreement as "the Disputed Costs." The Parties' respective estimates of the Disputed Costs prepared before the mediation referenced below in recital K were based upon the CSA expiring December 31, 2005, and do not represent the amount of costs Peabody may experience if the CSA is extended beyond December 31, 2005. The assignment referenced above in recital E included all of PCC's claims and rights against the Participants with respect to the Disputed Costs. Accordingly, references in this Agreement to RHCC, FRC or the Disputed Costs include the subject costs in dispute regardless of whether they concern the period before or after PCC's assignment to Peabody. The Participants disputed PCC's claim for recovery of RHCC and FRC. I. While attempting to negotiate a resolution of the foregoing dispute, Peabody and the Participants entered into a "Non-Waiver Agreement," which had an effective date of December 12, 1994. On June 20, 1996, after the Parties were unable to negotiate a resolution of their dispute, the Participants filed an action against Peabody in the Superior Court of Maricopa County, Arizona (the "Court"), entitled "Southern California Edison Company, et al. vs. Peabody Western Coal Company," Case No. CV 96-10844 (the "Action"), seeking a declaratory judgment that the Participants do not owe the Disputed Costs. Peabody filed a counterclaim in the Action seeking both a declaratory judgment on that question and damages. After the Court 2 realigned the parties, the Participants asserted a counterclaim for damages for alleged overpayments to Peabody under the CSA for certain reclamation costs. The Participants and Peabody each asserted numerous affirmative defenses to the others' claims. J. For several years, the Parties have engaged in extensive discovery and motion practice regarding the claims in the Action and the Disputed Costs. Additionally, the Court has issued several interlocutory opinions or rulings regarding various issues, including without limitation, liability for FRC and RHCC and several defenses to liability asserted by the Participants. K. The Parties engaged in settlement discussions and, on June 17, 2002, participated in a full-day mediation conducted by Antonio Piazza, at which time the Parties reached a tentative settlement agreement in principle to resolve all claims and counterclaims that were asserted, or could have been asserted, in the Action pertaining to the Disputed Costs. L. Without admitting any liability for the various disputes and claims between and among them, the Parties have now jointly prepared this Agreement to fully and finally resolve all claims and counterclaims that were asserted, or could have been asserted, in the Action pertaining to the Disputed Costs. NOW THEREFORE, the Parties agree as follows: II. COVENANTS 1. Settlement Payments By the Participants. 1.1 Principal Payment. In consideration of the covenants, undertakings, releases and other consideration provided for herein, the Participants shall, subject to the provisions of paragraph 2, pay Peabody the principal amount of Thirty-One Million Dollars ($31,000,000.00) (the "Principal") in the manner specified below. 1.2 Interest. The Participants shall further pay to Peabody interest on the unpaid balance of the Principal at the annual rate of eight percent (8%), with interest accruing beginning on September 1, 2002 (the "Interest"). 1.3 Installments. Subject to paragraphs 1.4 and 1.5, the Participants shall pay the Principal and Interest in thirty-six (36) equal monthly installments of Nine Hundred and Ninety-Four Thousand Six Hundred and Thirty-Five Dollars and 3 Thirteen Cents ($994,635.13) commencing in January 2003 (the "Installments"). Each monthly Installment shall be due concurrently with the date on which payment is due under the CSA for coal delivered in the previous month. For example, if the payment for coal delivered in December 2002 is due on January 19, 2003, then the first Installment payment required under this paragraph shall likewise be due on January 19, 2003. The amount of the Installments reflects the Interest provided for in paragraph 1.2 but not royalties and taxes provided for in paragraph 1.5. Except as provided for in paragraph 1.4 with respect to advance payments of Installments due in future months (as to which interest shall be adjusted as specified in paragraph 1.4 and Exhibit A to this Agreement), if the Participants pay each currently due Installment concurrently with a timely payment of the regular monthly coal payment due under the CSA for deliveries by Peabody in the preceding month, no adjustment for the Interest component of the Installment shall be required regardless of whether the date of each actual Installment payment corresponds to the date (the 18th day of each payment month) that was assumed by the Parties in Exhibit A for the purpose of calculating the amount of the monthly Installments. If the Participants fail to timely pay any Installment for reasons other than those provided for below in paragraph 2, interest shall accrue on the overdue Installment at the annual rate of eight percent (8%) from the date that the Installment was due until the date the Installment is paid. 1.4 Prepayment. Any or all of the Participants may, concurrently with the making of any regular monthly coal payment under the CSA, pay, without penalty, any or all of the Installments or portion thereof prior to the due date that would otherwise apply under paragraph 1.3. If, in accordance with the preceding sentence, any or all of the Participants pay any Installment or portion thereof prior to the due date described in paragraph 1.3, the amount of such Installment payment shall be discounted by the amount of Interest, calculated at the annual rate of eight percent (8%), avoided as a result of paying the Installment or portion thereof prior to the due date. For convenience, the Parties have attached hereto as Exhibit A a table that shows, on a monthly basis beginning with September 2002, and on both a collective and individual Participant basis, the agreed to net present value at such eight percent (8%) discount rate of all remaining unpaid Installments (including, for the months beginning January 2003, the Installment that is scheduled to be paid to Peabody in that month) based on an assumed payment date of the 18th day of each of the months shown in the table 4 (recognizing that the actual payment date may vary from the 18th of the month as provided for in paragraph 1.3 and in this paragraph 1.4) and assuming also that all prior required Installments have been paid when due and no advance payment of any Installment under the provisions of this paragraph 1.4 has previously been made by a Participant. Unless a particular advance payment (either by an individual Participant or jointly by two or more Participants) leaves no balance owing to Peabody by any of the Participants, the Parties shall, within ten (10) business days after the making of any advance payment(s), recalculate the monthly amount of the remaining Installments that are due from the Participants as to which a balance is still owing. Exhibits A and A-1 hereto illustrate an example prepayment scenario under this paragraph 1.4. 1.5 Royalties and Taxes. Consistent with and pursuant to the provisions of the CSA pertaining to royalties and taxes, including but not limited to the provisions in section 6.02 regarding protests and refunds, the Participants shall pay to Peabody the royalties and taxes associated with the payments made by the Participants under this Agreement. In accordance with the historical billing practice under the CSA with respect to payments for coal delivered, the royalties and taxes associated with each Installment shall be paid by the Participants to Peabody concurrently with the payment of the Installment and at the same royalty and tax rates as apply to coal delivered by Peabody in the month preceding the Installment payment (which rates shall be identified by Peabody in its coal invoices to the Participants under the CSA). Royalties and taxes associated with an advance payment made by a Participant as provided in paragraph 1.4 shall be the responsibility of the Participant which makes such advance payment and shall be paid to Peabody concurrently with the advance payment at the same royalty and tax rates as apply to coal delivered by Peabody in the month preceding the advance payment (which rates shall be identified by Peabody in its coal invoices to the Participants under the CSA). If Peabody subsequently receives a refund or credit of all or any portion of a royalty or tax reimbursement payment made by the Participants, or any of them, in connection with the payment of any Installment, Peabody shall promptly transmit or credit to the appropriate Participant(s) the full amount of the refund or credit, including any interest paid or credited to Peabody by the entity making the refund or giving the credit. 5 1.6 No Joint and Several Liability. All payment obligations of the Participants under this Agreement shall be several and not joint and shall be in the proportion of their respective interests in the Mohave Project, which are as follows: Edison: 56%; SRP: 20%; LADWP: 10%; NPC: 14%. 1.7 Default in Payment. If a Participant defaults in payment of its proportionate share of any Installment required under paragraph 1 of this Agreement, such default shall constitute, as to that Participant only, a breach of both this Agreement and the CSA. Such default by a particular Participant shall not, however, be deemed a breach of either this Agreement or the CSA by any Participant who is not in default of its obligations under paragraph 1 of this Agreement. 2. Effect of Subsequent Events on Participants' Settlement Payment Obligation. 2.1 Cessation of Coal Purchases. If the Participants terminate the CSA prior to December 31, 2005, or if they otherwise stop accepting coal deliveries from Peabody before that date (other than as a result of the circumstances described in the first sentence of paragraph 2.2), the Participants shall not, by virtue of such early termination or cessation of coal purchases, be entitled to any offset or reduction in the payments specified in paragraphs 1.3 and 1.5 above (other than those that result from advance payments as provided for in paragraph 1.4). 2.2 Offset for Deficiency in Coal Delivery. If during any month from September 2002 through November 2005 Peabody fails, for a reason other than a force majeure (as defined in Section 14 of the CSA), to deliver coal to the Black Mesa Pipeline in the quantities required by the CSA (a "Deficient Delivery"), the Participants shall be entitled to a prorated offset against the payments specified in paragraph 1 above. For purposes of the preceding sentence, any coal that is properly rejected by the Participants under Section 5.04 of the CSA that is in excess of the first 100,000 tons of coal that has been so rejected following the date of this Agreement shall not be included in determining the quantity of coal delivered by Peabody in a particular month. If a Deficient Delivery occurs during the months of September, October or November of 2002, the prorated offset for each such month in which the deliveries are deficient shall be computed by multiplying $203, 835.62 for September, $210,630.14 for October, and $203,835.62 for November (i.e. the amount of interest which will accrue each such month on the $31,000,000 6 Principal) times the percentage by which Peabody's delivery of coal for such month was deficient, and the offset shall be applied against the Installment due in January 2003. If a Deficient Delivery occurs during any month from December 2002 through November 2005, the prorated offset for each such month in which the deliveries are deficient shall be computed by multiplying $994,635.13 times the percentage by which Peabody's delivery of coal for such month was deficient, and each such offset shall be applied against the Installment that is due the following month, or, if the balance owed by the Participants under this Agreement at that time is insufficient to permit the offset in full, any excess over the amount offset shall be refunded by Peabody to the Participants within twenty (20) days after the end of the month in which the deliveries were deficient. The provisions of this paragraph 2.2 are for the purposes of this Agreement only and, as provided for in paragraph 5.4, shall not be construed as modifying or otherwise affecting Peabody's delivery obligations under the CSA. 2.3 No Release of Other Claims. Other than with respect to the Parties' respective claims and defenses related to the Disputed Costs, which are resolved by this Agreement, nothing in this paragraph or this Agreement shall be read as limiting or otherwise restricting the damages or other remedies that either the Participants or Peabody may seek for any alleged breach of the CSA. 3. Claims by Third Parties. 3.1 Position of the Parties and Cooperation. The Parties agree and believe that the payments and other undertakings in this Agreement should not cause or result in any claims by third parties. Specifically, but without limitation, the Parties do not believe that interest, penalties or late payment charges can or should be assessed on any royalty or tax payments associated with the payments made by the Participants as provided for herein. In the event this position of the Parties is challenged by the Navajo Nation, the Hopi Tribe, the United States on behalf of the Tribe(s), the State of Arizona, and/or any agencies, departments, courts, tribunals, or political subdivisions of the foregoing, or by any other third parties (collectively, "Governmental Entities"), then the Parties agree to cooperate with one another in good faith to defend against such a challenge. Notwithstanding the foregoing, neither Party shall be responsible to the other for such claims by third parties except as expressly provided for herein. 7 3.2 Post-12/11/94 Governmental Claims. 3.2.1 Included Claims. If any Governmental Entity asserts a claim or challenge to the Parties' position mentioned in paragraph 3.1 above in connection with the payments provided for in this Agreement, which claim or challenge relates, in whole or in part, to additional liabilities (including, but not limited to, interest, penalties, late payment charges, legal fees and other litigation costs) Peabody is alleged to have to any such Governmental Entity based on a claim or determination by a Governmental Entity that royalties or taxes that are the responsibility of the Participants under paragraph 1.5 of this Agreement became due earlier than the dates of associated payments made by the Participants pursuant to paragraphs 1.1 through 1.4 of this Agreement but after December 11, 1994 ("Post-12/11/94 Governmental Claims"), then the Parties agree to the following procedure, and the Participants agree to indemnify Peabody, in accordance with the provisions of paragraphs 3.2.2 through 3.2.5 of this Agreement. 3.2.2 Notice and Defense Procedures. Within seven (7) business days after receipt of a Post-12/11/94 Governmental Claim, Peabody shall provide written notification of such claim to the Participants. Within twelve (12) business days after their receipt of Peabody's notice, the Participants shall provide written instructions to Peabody as to whether it should resist the Post-12/11/94 Governmental Claim or acquiesce to it. If the Participants instruct Peabody to defend against the Post-12/11/94 Governmental Claim, Peabody shall do so until instructed otherwise by the Participants. If no such written instructions are provided by the Participants within such twelve (12) business days period following receipt of Peabody's written notification of such a Post-12/11/94 Governmental Claim, then Peabody may acquiesce to such claim; provided, however, if Peabody determines to defend against such a claim in the absence of any instruction to do so by the Participants, Peabody shall be solely responsible for all associated legal fees and other litigation costs. 3.2.3 Participation by the Participants. If the Participants instruct Peabody to defend against a Post-12/11/94 Governmental Claim as provided for in paragraph 3.2.2, then the Participants, or any of them, may elect by written notice to Peabody to participate directly with Peabody (a) in any proceeding involving such a claim, and (b) in any communications with other parties to such 8 a proceeding regarding the merits of the claim or claims. Whether or not such direct participation is sought by the Participants, the Participants shall be entitled (i) to a reasonable opportunity, upon request, to review and comment on any drafts of pleadings or other documents prepared by or on behalf of Peabody prior to the time such pleadings or other documents are filed or otherwise submitted in connection with any proceeding involving a Post-12/11/94 Governmental Claim and (ii) to prompt receipt of copies of all filings in the proceeding and of Peabody's communications to or from other parties in the proceeding. Peabody shall not be entitled to include in invoices to the Participants, or attempt to otherwise pass through to them via any price adjustment mechanism in the CSA, any litigation costs or payments arising from any settlement entered into by Peabody that would resolve, in whole or in part, a Post-12/11/94 Governmental Claim, unless the settlement has been approved in writing by the Participants. 3.2.4 Indemnity by the Participants. The Participants agree, subject to the provisions of paragraphs 3.2.2, 3.2.3 and 3.2.5, that they shall indemnify, defend and save Peabody harmless from and against any and all Post-12/11/94 Governmental Claims, including, but not limited to, interest, penalties, late payment charges, additional royalties and taxes payable with respect to any interest, penalties or late payment charges as may be imposed, reasonable legal fees and other litigation costs incurred by Peabody as a result of its compliance with instructions from the Participants. If Peabody acquiesces to any Post-12/11/94 Governmental Claim with written approval by the Participants or in the absence of written instructions from the Participants in accordance with paragraph 3.2.2, or if a final non-appealable order is issued by an appropriate legal authority which sustains such Post-12/11/94 Governmental Claim, and Peabody is thereby obligated to pay interest, penalties, late payment charges, additional royalties and taxes payable with respect to any interest, penalties or late payment charges as may be imposed, or other charges to a Governmental Entity, the Participants shall, subject to paragraph 3.2.5, reimburse Peabody for such additional amounts. The Participants shall not be liable to Peabody for any interest, penalties or other charges imposed by a Governmental Entity as a result of any filing errors by Peabody or any delay by Peabody in remitting royalties or taxes received by Peabody from the Participants under paragraph 1.5 of this Agreement. Notwithstanding the foregoing, if a Governmental Entity asserts a Post-12/11/94 Governmental Claim but an Award Regarding Pre-12/12/94 Claims (as defined 9 in subparagraph 3.2.5(b) below) is made in the same proceeding, then paragraphs 3.2.5 and 3.3.2 shall apply instead of this paragraph for the purpose of allocating the indemnity obligations of the Parties. 3.2.5 Overlapping Claims. To the extent a claim or challenge concerns both Pre-12/12/94 Governmental Claims (as defined in paragraph 3.3.1) and Post-12/11/94 Governmental Claims, then: (a) The Participants shall only be obligated to indemnify Peabody for interest, penalties, late payment charges, additional royalties and taxes payable with respect to any interest, penalties or late payment charges as may be imposed, and other charges, if any, awarded against Peabody or its predecessors with respect to the Post-12/11/94 Governmental Claims ("Award Regarding Post-12/11/94 Claims"); and (b) If the Participants instruct Peabody to defend against the Post-12/11/94 Governmental Claim, the Participants shall only be obligated to indemnify Peabody for reasonable legal fees and other litigation costs in the proportion that the Award Regarding Post-12/11/94 Claims bears to the sum of that award and the amount of interest, penalties, late payment charges, additional royalties and taxes payable with respect to any interest, penalties or late payment charges as may be imposed, and other charges, if any, awarded against Peabody or its predecessors with respect to the Pre-12/12/94 Governmental Claims ("Award Regarding Pre-12/12/94 Claims"). 3.3 Pre-12/12/94 Governmental Claims. 3.3.1 Indemnity by Peabody. Peabody agrees, subject to the provisions of paragraph 3.3.2, that it shall defend, indemnify and hold the Participants harmless from and against any and all additional liabilities (including, but not limited to, interest, penalties, late payment charges, additional royalties and taxes payable with respect to any interest, penalties or late payment charges as may be imposed, legal fees and other litigation costs) Peabody may have or incur to any Governmental Entity based on a claim by a Governmental Entity that royalties or taxes that are the responsibility of the Participants under paragraph 1.5 of this Agreement became due on a date or dates before December 12, 1994 ("Pre-12/12/94 Governmental Claims"). Notwithstanding the foregoing, if a Governmental Entity asserts a Pre-12/12/94 Governmental Claim but an Award Regarding Post-12/11/94 Claims (as defined in subparagraph 3.2.5(a) 10 above) is made in the same proceeding, then paragraphs 3.2.5 and 3.3.2 shall apply instead of this paragraph for the purpose of allocating the indemnity obligations of the Parties. 3.3.2 Overlapping Claims. To the extent a claim or challenge concerns both Pre-12/12/94 Governmental Claims and Post-12/11/94 Governmental Claims, Peabody shall only be obligated to indemnify the Participants for any Award Regarding Pre-12/12/94 Claims. Peabody's reasonable legal fees and other litigation costs shall, in this situation, be shared pro rata by the Participants (considered as a single party for this purpose) and Peabody in accordance with their respective shares of the liability for interest, penalties or other charges that is assessed against Peabody or its predecessors in the relevant proceeding or proceedings (i.e., in the same manner described in subparagraph 3.2.5(b)); provided, however, that such sharing shall not apply to legal fees and other litigation costs for which Peabody is solely responsible under paragraph 3.2.2. 3.4 Definition of Litigation Costs. As used in this paragraph 3, the term "litigation costs" means reasonable charges by courts, court reporters, outside legal counsel, outside experts, and mediators, and reasonable charges of a similar nature, and does not include any internal costs of the Parties. 4. Mutual Releases and Dismissal of Action. 4.1 Release of the Participants by Peabody. For and in consideration of the covenants, undertakings, payments, release and other consideration set forth in this Agreement, and subject to the provisions of paragraph 4.3 below, Peabody, on behalf of itself and each of its predecessors (including, but not limited to, PCC), successors and assigns, by operation of law or otherwise, hereby releases and forever discharges the Participants, their predecessors in interest, and each of their respective past, present and future shareholders, related and affiliated business entities, officers, directors, employees, attorneys, legal representatives, agents, and insurers (all such persons and entities hereinafter collectively referred to as the "Participants Released") from any and all claims, counterclaims, actions or causes of action, demands of any nature whatsoever, past, or present, whether arising out of any alleged violation of any federal or state statute, negligence, breach of contract, fraud, warranty or any other theory, whether legal or equitable, and the consequences thereof, including any claims, losses, costs or damages, including compensatory and punitive damages, in 11 each case whether known or unknown, liquidated or unliquidated, fixed or contingent, direct or indirect, which Peabody and its related or affiliated business entities, or its predecessors, successors, and assigns ever had, now have, or may in the future claim to have against any of the Participants Released arising from, concerning or pertaining to (i) the Disputed Costs as defined herein, (ii) the Action and/or (iii) any of the claims in the Action, including, but not limited to, all counterclaims in the Action. 4.2 Release of Peabody by the Participants. For and in consideration of the covenants, undertakings, release and other consideration set forth in this Agreement, and subject to the provisions of paragraph 4.3 below, the Participants, on behalf of themselves and each of their respective predecessors, successors and assigns, by operation of law or otherwise, hereby release and forever discharge Peabody, its predecessors in interest (including, but not limited to, PCC), and each of their respective past, present and future shareholders, related and affiliated business entities, officers, directors, employees, attorneys, legal representatives, agents, and insurers (all such persons and entities hereinafter collectively referred to as the "Peabody Parties Released") from any and all claims, counterclaims, actions or causes of action, demands of any nature whatsoever, past or present, whether arising out of any alleged violation of any federal or state statute, negligence, breach of contract, fraud, warranty or any other legal theory, whether legal or equitable, and the consequences thereof, including any claims, losses, costs or damages, including compensatory and punitive damages, in each case whether known or unknown, liquidated or unliquidated, fixed or contingent, direct or indirect, which the Participants and their respective related or affiliated business entities, or their predecessors, successors, and assigns ever had, now have, or may in the future claim to have against any of the Peabody Parties Released arising from, concerning or pertaining to (i) the Disputed Costs as defined herein, (ii) the Action and/or (iii) any of the claims in the Action, including, but not limited to, all counterclaims in the Action. 4.3 Release Limitation. The releases set forth in paragraphs 4.1 and 4.2 assume that the CSA will terminate on or before December 31, 2005. If the CSA should, instead, be extended beyond that date or replaced by another coal supply agreement whose term ends after December 31, 2005, the provisions of paragraph 6.2 shall apply and such releases shall not apply to the Disputed Costs or be construed to apply to the final 12 reclamation costs or retiree health care costs associated with such extended or replacement agreement. 4.4 Dismissal of Action. No later than ten (10) business days after the execution of this Agreement, the Parties' respective counsel will execute and file a stipulation for dismissal with prejudice of the Action, with each Party to bear its own respective attorneys' fees and costs, in the form attached as Exhibit B. The Participants may conduct a reasonable audit of Peabody's books and records, to be completed no later than one-hundred eighty (180) days from the effective date of this Agreement, for the purpose of confirming that none of Peabody's attorneys' fees and litigation costs (as defined in paragraph 3.4) incurred in connection with the disputes that are resolved in this Agreement have previously been included in invoices to the Participants under the CSA. If such audit discloses, or Peabody independently learns, that such attorneys' fees and/or litigation costs of Peabody were, in fact, included in any invoices that the Participants have paid, the amount of such attorneys' fees and/ or litigation costs shall be promptly refunded by Peabody to the Participants, without interest. Peabody shall not be obligated to conduct its own investigation of whether any such fees or litigation costs were invoiced to the Participants. 4.5 Representations and Warranties of the Parties. The Participants represent and warrant, and it is a condition of this mutual release, that they are the sole owners of the claims released by the Participants; that they collectively represent one-hundred percent (100%) of the interests in the MGS; and that the undersigned are duly authorized by their respective governing boards or bodies to execute this Agreement. Peabody represents and warrants, and it is a condition of this mutual release, that it is the sole owner of the claims released by Peabody herein, and that the undersigned is duly authorized by Peabody's board to execute this Agreement. 4.6 Claims Under this Agreement. It is specifically understood and agreed that the foregoing releases shall not constitute a waiver, release or abandonment of any claim by any Party for breach by any other Party of any term, condition, or provision of this Agreement. 5. Effect of Settlement. 5.1 No Admission of Liability. The Parties, and each of them, acknowledge that this Agreement constitutes the settlement of 13 disputed claims. Nothing herein shall constitute or be deemed to constitute any admission of liability by the Participants or Peabody. The Participants and Peabody expressly deny any and all liability for the claims and/or counterclaims asserted in the Action. 5.2 The Settlement is Not a Precedent. The Parties agree that this settlement shall not establish a precedent with respect to any other existing or potential dispute under the CSA or under any other coal supply agreement. 5.3 No Res Judicata or Collateral Estoppel Effect to Court Orders. The Parties agree that the Court orders and rulings in the Action shall not have res judicata or collateral estoppel effect against any of the Participants or Peabody. The Parties agree and recognize that all such orders and rulings were not final and were subject to reconsideration and/or appeal, and that, as a result of this settlement, both Peabody and the Participants have foregone whatever rights they may have had to pursue reconsideration and/or eventual appeal of any such orders and rulings. No Party has waived its rights, if any, (i) to offer or otherwise use such orders and rulings in other proceedings or (ii) to object to such use. 5.4 Relationship to the CSA and Other Agreements. Except to the extent specifically set forth herein, nothing contained in this Agreement shall be interpreted to amend, supersede or otherwise impact or affect the obligations of or release any claim of any Party under the terms of the CSA, any extension thereof, the MOAG, or any other agreements and memoranda between the Parties regarding or pertaining to the CSA, including, but not limited to, any provision in the CSA, the MOAG or otherwise that provides the Participants with the right to periodically audit Peabody's accounts and records pertaining to its billings to the Participants under the CSA. 6. No Double Recovery by Peabody. 6.1 Absent Post-2005 Coal Deliveries. Peabody acknowledges that unless it supplies coal to MGS after December 31, 2005, pursuant to an extension of the CSA or a new coal supply agreement, the payments required by paragraph 1, as they may be adjusted pursuant to paragraph 2, constitute full satisfaction of any obligation the Participants may have to reimburse Peabody for the Disputed Costs and that, except as provided for in paragraph 3 of this Agreement, no price increases, additional 14 charges or other obligations shall be imposed on the Participants for or as a result of either RHCC or FRC, regardless of any change in the nature or the scope of those costs, including, but not limited to, those that result from changes in accounting or invoicing practices or in either the assumed facts or applicable law. In accordance with the preceding sentence, the price of coal under the CSA for deliveries of coal on or before December 31, 2005 shall not be affected, directly or indirectly, by any payment made or cost incurred pursuant to this Agreement. In addition to the RHCC and FRC that are the subject of the Action and which are addressed in this Agreement, it is expected that during the current remaining term of the CSA Peabody will pay, or will accrue on a short term basis in accordance with Peabody's historical practice relating to BMM, additional amounts in respect of (i) the costs of providing, on or before December 31, 2005, health care, life insurance and related benefits to current retirees and those who will hereafter retire through and including December 31, 2005 and (ii) costs associated with the normal, on-going reclamation of the BMM prior to January 1, 2006 (both categories of such additional amounts, regardless of the manner in which they are accounted for by Peabody, being collectively referred to in this Agreement as "On-Going Costs"). Peabody warrants and represents that it will not attempt to re-categorize or accelerate any RHCC or FRC as On-Going Costs so as to be able to charge the Participants for such costs under the invoicing provisions of the CSA. In order to implement the foregoing, the Parties have further agreed that the following post-CSA procedures and remedies, together with such remedies as may be afforded to the Participants through periodic audits under the CSA of the type referenced in paragraph 5.4 above, shall constitute the sole procedures and remedies for determining whether there has been a double recovery by Peabody and for adjusting therefor. 6.1.1 Final Reclamation Costs. Subject to paragraph 6.2, Peabody shall not be entitled to bill and recover FRC from the Participants as On-Going Costs. To ensure no such double-recovery with respect to FRC, the Parties have prepared and approved Exhibit C hereto, which summarizes various categories of post-CSA reclamation work, rates for such work, volumes for such work, and related estimated costs for such work. Beginning on January 2, 2006, the Participants shall be permitted to make one or more inspections of the BMM, arrange for aerial photographs to be taken of the BMM, and conduct such reasonable examination and audit of Peabody's books and records (including but not limited to contracts, invoices, ledgers, 15 evidence of payment, other accounting records, aerial photographs, maps and other engineering materials) as are necessary and sufficient (i) to make a meaningful comparison between the post-CSA reclamation work that is expected at that time and the post-CSA reclamation work that was assumed in the preparation of Exhibit C and (ii) to make a meaningful determination as to whether any FRC-related costs not listed directly on Exhibit C (such as bonding expenses, insurance premiums, security and administration costs, and taxes) have been accelerated and billed to the Participants as On-Going Costs. Peabody shall be responsible for maintaining its books and records in a form that will permit the Participants to meaningfully conduct the post-2005 audit referenced above in this paragraph. Upon reasonable request, Peabody shall also cooperate fully in making available to the Participants' inside and outside auditors its relevant books and records, as well as such Peabody personnel as may be required to explain such books and records. The Participants' comparison analysis and audit findings shall be completed and provided to Peabody in writing by June 30, 2006. Peabody shall have thirty (30) days to review the analysis and audit findings. If Peabody objects to all or a portion of the comparison analysis and/or audit findings, the Parties shall attempt to resolve the dispute through good faith negotiations. If the Parties are unable to resolve the dispute through such negotiations, the dispute shall be resolved in a manner to be determined at that time. If Peabody does not object within thirty (30) days and if the comparison analysis and/or audit findings conclude that work that was assumed in Exhibit C to occur post-CSA has already been performed and/or that costs that were assumed to occur post-CSA have already been paid by the Participants (collectively, "Accelerated Work/Costs"), then Peabody shall, except as provided below, refund to the Participants within forty (40) days of its receipt of the comparison analysis and/or audit findings, as applicable, all base refund amounts as determined in accordance with Exhibit C and Schedules 1-4 attached thereto or, in the case of FRC-related costs not directly listed in Exhibit C or its schedules, the amounts paid by the Participants as On-Going Costs, plus the additional amounts specified in paragraph 6.1.3 below. If Peabody objects to the comparison analysis and/or audit findings, then any refund owing to the Participants under this paragraph shall, as to any disputed amounts only, be due and payable ten (10) days following a final determination, either through agreement or another dispute resolution process, of the amount, if any, that is owed by Peabody to the Participants with respect to Accelerated Work/Costs. Refund amounts that are 16 not in dispute shall be due and payable within the forty (40) day period specified above. Notwithstanding the foregoing, no refund shall be due from Peabody to the Participants based on the above-described comparison analysis or audit with respect to a particular item of work or costs if Peabody establishes, to the reasonable satisfaction of the Participants, that the Participants have not been invoiced for such item as an On-Going Cost under the terms of the CSA. Except as provided in Paragraph 6.2, under no circumstances shall the provisions of this Agreement, including this Paragraph 6.1.1, be construed as requiring (a) the Participants to compensate or reimburse Peabody for its actual FRC except through the payments that are provided for in paragraph 1, as they may be adjusted under the provisions of paragraph 2, or (b) Peabody to refund or credit to the Participants any amounts with respect to FRC other than as provided for in this paragraph 6.1.1 or as may be determined to be owing to the Participants as a result of an audit under the CSA of the type referenced in paragraph 5.4 (but in no event shall the Participants be entitled to recover the same costs as a refund under this paragraph 6.1.1 and as a refund or credit pursuant to the Participants' audit rights under the CSA). 6.1.2 Retiree Health Care Costs. Subject to paragraph 6.2, Peabody shall not be entitled to bill and recover RHCC from the Participants as On-Going Costs. To ensure no double-recovery with respect to RHCC, Peabody shall, in all further invoices for coal delivered to MGS through December 31, 2005, continue to invoice the Participants on the historical pay-as-you-go basis for its current costs for retiree health care provided on or before December 31, 2005. To the extent consistent with Peabody's historic practice relating to BMM, such invoices may also include accruals of the estimated amounts of the payments to be made by Peabody within one-hundred eighty (180) days thereafter for medical care provided to eligible retirees and their eligible dependents by the end of the month covered by the coal invoice but not reported to Peabody by that date ("IBNR Accruals"). IBNR Accruals shall be limited to health care provided on or before December 31, 2005. The Participants shall pay such invoiced costs (both actual retiree health care costs and IBNR Accruals) in the same fashion they have paid them historically on a pay-as-you-go basis. Accordingly, except with respect to the payments that are provided for in paragraph 1, as they may be adjusted under the provisions of paragraph 2, Peabody shall not bill the Participants or otherwise seek reimbursement from them under the CSA or otherwise for any RHCC, whether under Financial Accounting Standard ("FAS") 17 106 or any other mechanism, and shall not seek to recover RHCC as On-Going Costs. The IBNR Accruals billed by Peabody in accordance with this paragraph 6.1.2 shall be subject to the same accounting, adjustment and audit procedures currently and historically employed by the Parties or authorized by the CSA. The Parties agree that the IBNR Accruals will be adjusted to actual costs as soon as practicable but no later than one-hundred eighty (180) days after billing. In order to confirm Peabody's compliance with the foregoing provisions, the Participants shall, commencing January 2, 2006, be entitled to conduct a final audit of Peabody's books and records as they apply to retiree health care costs, which audit shall be completed no later than October 31, 2006. Peabody shall be responsible for maintaining its books and records in a form that will permit the Participants to meaningfully conduct the final post-2005 audit referenced above in this paragraph. Upon reasonable request, Peabody shall also cooperate fully in making available to the Participants' inside and outside auditors its relevant books and records, as well as such Peabody personnel as may be required to explain such books and records. Peabody shall have thirty (30) days to review the audit report. If Peabody objects to all or a portion of the audit report, the Parties shall attempt to resolve the dispute through good faith negotiations. If the Parties are unable to resolve the dispute through such negotiations, the dispute shall be resolved in a manner to be determined at that time. If Peabody does not object within thirty (30) days and if such audit concludes that any RHCC was billed to and paid for by the Participants as an item of On-Going Costs, Peabody shall, within forty (40) days of Peabody's receipt of the audit findings, refund to the Participants the amount of the RHCC they paid as On-Going Costs, plus the additional amounts specified in paragraph 6.1.3 below. If Peabody objects to the audit findings, then any refund owing to the Participants under this paragraph shall, as to the disputed amounts only, be due and payable ten (10) days following a final determination, either through agreement or another dispute resolution process, of the amount, if any, that is owed by Peabody to the Participants with respect to RHCC improperly billed to the Participants as On-Going Costs. Refund amounts that are not in dispute shall be due and payable within the forty (40) day period specified above. Except as provided for in paragraph 6.2, under no circumstances shall the provisions of this Agreement, including this Paragraph 6.1.2, be construed as requiring (a) the Participants to compensate or reimburse Peabody for its actual RHCC except through the payments that are provided for in Paragraph 1, as they may be adjusted under the provisions of Paragraph 2, or (b) Peabody to 18 refund or credit to the Participants any amounts with respect to RHCC other than as provided for in this paragraph 6.1.2 or as may be determined to be owing to the Participants as a result of an audit under the CSA of the type referenced in paragraph 5.4 (but in no event shall the Participants be entitled to recover the same costs as a refund under this paragraph 6.1.2 and as a refund or credit pursuant to the Participants' audit rights under the CSA). 6.1.3 Calculation of Double Recovery Refunds. Refunds to the Participants under paragraphs 6.1.1 and 6.1.2 of FRC or RHCC improperly billed as On-Going Costs shall consist of a base amount or amounts, a royalties and taxes adjustment and an accrued interest component, each of which shall be paid concurrently within the period specified for refunds in paragraphs 6.1.1 and 6.1.2. In the case of FRC, the base amount(s) shall be calculated as specified in Exhibit C to this Agreement and Schedules 1-4 to Exhibit C or, in the case of FRC-related costs not directly listed in Exhibit C or its schedules, shall be equal to the amounts paid by the Participants as On-Going Costs. In the case of RHCC, the base amount(s) shall be equal to the amount of accelerated RHCC that was invoiced to and paid by the Participants. The royalties and taxes adjustment shall be calculated by applying to each base amount subject to refund the royalty and tax rates that were applicable at the time the accelerated FRC or RHCC, as the case may be, was paid by the Participants and shall include any additional royalties and taxes paid in respect of such associated royalties and taxes. If, however, the actual date of payment of the base amount cannot be determined with reasonable certainty, then the royalty and tax rates applicable to Peabody's January 2004 invoice under the CSA for coal delivered in December 2003 shall be applied. Simple interest at eight percent (8%) per annum shall be added to both the base refund amount(s) and the royalties and taxes adjustment. Such interest component shall be calculated for the period beginning when the accelerated FRC or RHCC, as the case may be, was paid by the Participants and extending through and including the date of Peabody's refund payment. If the date of payment by the Participants of accelerated FRC or RHCC cannot be determined with reasonable certainty, then interest on both the base amount and the royalties and taxes adjustment shall be calculated beginning January 1, 2004. 6.2 During an Extension or Replacement of the CSA. If the CSA is extended pursuant to sections 1.02 and 1.03 of the CSA, or the 19 Parties enter into a replacement coal supply agreement, then the Parties shall take such reasonable steps as are necessary to ensure that: (1) the Participants receive full credit for the payments made by them under this Agreement and for the associated time value of money, with such full credit and associated time value of money to be applied in a manner mutually agreeable to the Parties and incorporated into the extended CSA or replacement coal supply agreement; and (2) the extended CSA or the replacement coal supply agreement shall include provisions that resolve the issue of cost responsibility of the Participants for retiree health care costs and final reclamation costs. 7. Miscellaneous Provisions. 7.1 Calculation of Interest. All interest imposed or deducted pursuant to this Agreement shall be calculated as simple interest, with no compounding. 7.2 Cooperation of the Parties. The Parties will cooperate with one another in good faith by providing information, allowing access to BMM, and preparing and executing such additional documents as may be reasonably required to effectuate and carry out the purposes of this Agreement. The Participants shall be permitted to make inspections of the BMM, arrange for aerial photographs to be taken of the BMM, and conduct such reasonable examination and audit of Peabody's books and records (including but not limited to accounting records, aerial photographs, maps and other engineering materials) as is necessary and sufficient to effectuate and carry out the purposes of this Agreement and/or to enforce the provisions of this Agreement. 7.3 Survival of Obligations; Indemnity. Notwithstanding any provisions of this Agreement to the contrary, the warranties, representations and undertakings of this Agreement shall survive the mutual releases herein. Each of the Parties shall indemnify and hold the other Parties harmless from and against any claim, demand, damage, debt, account, liability, obligation, cost, expense, lien, action or cause of action of any nature suffered or incurred as a result of any breach by that Party of a covenant, representation or warranty set forth in this Agreement. 7.4 Arms-Length Agreement. This Agreement represents a compromise and settlement of certain pending disputes between 20 the Parties and is entered into following arms-length negotiations and mediation. The Parties have read this Agreement carefully and completely, have had the advice and assistance of legal counsel, and have not been influenced to any extent whatsoever by any representations or statements made by any Party other than those in this Agreement. No promises, inducements or considerations have been offered and accepted or given, except as herein set forth. 7.5 Ambiguities. This Agreement was jointly drafted by the Parties and therefore ambiguities in this Agreement are not to be construed against any Party on the basis that it was the drafter. 7.6 Amendment. This Agreement may be amended or modified, in whole or in part, only by an agreement in writing executed by all Parties hereto and making specific reference to this Agreement. 7.7 Waiver. None of the provisions of this Agreement shall be considered waived by a Party unless such waiver is given in writing. The failure of a Party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights under this Agreement shall not be construed as a waiver of any such provisions or the relinquishment of any such rights for the future, but the same shall continue and remain in full force and effect. 7.8 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument. 7.9 Headings. The headings of the paragraphs of this Agreement are for convenience only and in no way alter, amend, modify, limit or restrict the contractual obligations of the Parties. 7.10 Binding on Successors and Assigns. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the Parties hereto and their respective successors and assigns. 7.11 Entire Agreement. This Agreement, together with the attached exhibits, contains the full and integrated statement of each and every term and provision agreed to by the Parties for purposes of settling the Action. All prior negotiations and agreements between the Parties hereto with respect to the settlement of the Action are superseded by this Agreement, and there are no 21 representations, warranties, understandings or agreements of the Parties relating to the settlement of the Action other than those expressly set forth herein or in an attached exhibit, except as subsequently modified in writing, executed by all parties. 7.12 Governing Law. This Agreement shall be governed by and construed and interpreted according to the laws of the State of Nevada, determined without reference to conflicts of law principles. 7.13 Return of Confidential Documents. Within sixty (60) days after the execution of this Agreement by all of the Parties, the Parties, and each of them, shall comply with the provisions of the Stipulation of Confidentiality executed by counsel for the Parties on or about January 30, 1998, and the subsequent letter agreement executed by counsel for the Parties on or about March 2, 2001, requiring the return or destruction of Confidential Materials (and all copies of such documents), including all documents stamped "confidential" pursuant to the Stipulation or letter agreement. 7.14 Limited Waiver of Mediation Privilege. Notwithstanding any provision of law to the contrary and any confidentiality agreement previously entered into by the Parties, including, but not limited to, the confidentiality agreement executed by the Parties at the time of the mediation referenced in recital K, any of the Parties may, for the limited purpose of demonstrating the reasonableness of this settlement to any regulatory or other governmental authority having jurisdiction over the Party, disclose to such regulatory body or other governmental authority the content of the Parties' negotiations that resulted in this settlement, including, but not limited to, the statements of the Parties' representatives and the mediator at or in connection with the mediation. In making any disclosure as permitted in this paragraph 7.14, the Party making the disclosure shall use reasonable best efforts to seek to have the disclosed information maintained by the regulatory body or other governmental authority as confidential information. 7.15 No Third Party Rights. This Agreement shall not be interpreted as creating any right or benefits of any kind or nature whatsoever in any third party or class of persons not parties to it. 7.16 Notices. Notices under this Agreement shall be in writing and shall be deemed properly given if delivered by hand or sent by 22 facsimile (receipt verified), by overnight courier, or by first class mail, postage prepaid to the person specified below: Peabody: PEABODY WESTERN COAL COMPANY Attention: President 701 Market Street St. Louis, MO 63101 Telephone: 314-342-3400 Facsimile: 314-342-3419 Edison: SOUTHERN CALIFORNIA EDISON COMPANY Attention: Manager, Energy Supply & Management 2244 Walnut Grove Avenue Rosemead, California 91770 Telephone: 626-302-3241 Facsimile: 626-302-3254 SRP: SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT Attention: Manager, Fuels Department P.O. Box 52025 Mail Stop POB 001 Phoenix, Arizona 85072 Telephone: 602-236-4311 Facsimile: 602-236-4322 LADWP: DEPARTMENT OF WATER AND POWER CITY OF LOS ANGELES Attention: Assistant General Manager, Power Generation Department of Water and Power City of Los Angeles 111 North Hope Street, Room 1522 Los Angeles, CA 90012 Telephone: 213-367-4435 Facsimile: 213-367-0313 NPC: NEVADA POWER COMPANY Attention: Manager of Fuels 6226 West Sahara Avenue Las Vegas, Nevada 89146 Telephone: 702-367-5996 Facsimile: 702-227-2455 23 Written notices shall be deemed delivered on the fifth business day after deposit in the United States mail, or when received if sent by facsimile or overnight courier or delivered by hand. The designated address of a Party set forth above may be changed at any time upon written notice by the Party given in accordance with this paragraph 7.16. 7.17 When Effective. This Agreement shall become effective and binding when it has been executed by all of the Parties. IN WITNESS WHEREOF, the Parties hereto have caused this Settlement Agreement and Mutual Release to be executed by their duly authorized officers as of the dates set forth under their respective signatures. PEABODY WESTERN COAL COMPANY By: ----------------------------------- Name: John L. Wasik ----------------------------------- Title: President ----------------------------------- Date: ----------------------------------- SOUTHERN CALIFORNIA EDISON COMPANY By: ----------------------------------- Name: Harold B. Ray ----------------------------------- Title: Executive Vice President ----------------------------------- Date: ----------------------------------- 24 SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By: ----------------------------------- Name: David G. Areghini ----------------------------------- Title: Associate General Manager Power, Construction and Engineering Services ----------------------------------- Date: ----------------------------------- NEVADA POWER COMPANY By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- Date: ----------------------------------- DEPARTMENT OF WATER AND POWER THE CITY OF LOS ANGELES BY BOARD OF WATER AND POWER COMMISSIONERS OF THE CITY OF LOS ANGELES By: ----------------------------------- Name: Enrique Martinez ----------------------------------- Title: Assistant General Manager ----------------------------------- Date: ----------------------------------- And By: ----------------------------------- Name: John C. Burmahln ----------------------------------- Title: Secretary ----------------------------------- Date: ----------------------------------- 25 EX-99.1 7 c72677exv99w1.txt CERTIFICATION - CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, Irl F. Engelhardt, Chairman and Chief Executive Officer of Peabody Energy Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Peabody Energy Corporation. Dated: November 12, 2002 /s/ IRL F. ENGELHARDT ------------------------------------ Irl F. Engelhardt Chairman and Chief Executive Officer EX-99.2 8 c72677exv99w2.txt CERTIFICATION - CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, Richard A. Navarre, Executive Vice President and Chief Financial Officer of Peabody Energy Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Peabody Energy Corporation. Dated: November 12, 2002 /s/ RICHARD A. NAVARRE ---------------------------------- Richard A. Navarre Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----