<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1998.
REGISTRATION NO. 333-59073
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
P&L COAL HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1222 13-4004153
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
701 MARKET STREET
ST. LOUIS, MO 63101-1826
(314) 342-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JEFFERY L. KLINGER, ESQ.
P&L COAL HOLDINGS CORPORATION
701 MARKET STREET
ST. LOUIS, MO 63101-1826
(314) 342-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
WITH A COPY TO:
RISE B. NORMAN, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
(212) 455-2000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
<TABLE>
<CAPTION>
STATE OR
OTHER ADDRESS INCLUDING ZIP
JURISDICTION CODE, AND TELEPHONE
EXACT NAME OF OF I.R.S. NUMBER INCLUDING AREA
REGISTRANT GUARANTOR INCORPORATION EMPLOYER CODE, OF REGISTRANT
AS SPECIFIED OR IDENTIFICATION GUARANTOR'S PRINCIPAL
IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ----------------------- ------------- -------------- ----------------------------------------
<S> <C> <C> <C>
Affinity Mining Company West Virginia 25-1207512 800 Laidley Tower, P.O. Box 1233
Charleston, WV 25324, (304-344-0300)
Arid Operations, Inc. Delaware 84-1199578 14062 Denver West Parkway,
Suite 110
Golden, CO 80401-3301, (760-337-5552)
Big Sky Coal Company Delaware 81-0476071 P.O. Box 97
Coalstrip, MT 59323 (406-748-5750)
Blackrock First Capital West Virginia 55-0695451 800 Laidley Tower, P.O. Box 1233
Corporation Charleston, WV 25324, (304-344-0300)
Bluegrass Coal Company Delaware 43-1540253 701 Market Street, Suite 710
St. Louis, MO 63101-1826, (314-342-3400)
Caballo Coal Company Delaware 83-0309633 Caller Box 3037
Gillette, WY 82717, (307-687-6900)
Charles Coal Company Delaware 04-2698757 800 Laidley Tower, P.O. Box 1233
Charleston, WV 25324, (304-344-0300)
Coal Properties Corp. Delaware 04-2702708 800 Laidley Tower, P.O. Box 1233
Charleston, WV 25324, (304-344-0300)
Colony Bay Coal Company West Virginia 55-0604613 800 Laidley Tower
P.O. Box 1233
Charleston, WV 25324, (304-344-0300)
Cook Mountain Coal Com- Delaware 55-0732291 800 Laidley Tower, P.O. Box 3506
pany Charleston, WV 25324, (304-344-0300)
Cottonwood Land Company Delaware 43-1721982 301 N. Memorial Drive, Suite 334
St. Louis, MO 63102, (314-342-7610)
Darius Gold Mine Inc. Delaware 13-2899722 14062 Denver West Parkway
Suite 110
Golden, CO 63102, (303-271-3600)
EACC Camps, Inc. West Virginia 25-0600150 800 Laidley Tower, P.O. Box 1233
Charleston, WV 25324, (304-344-0300)
Eastern Associated Coal West Virginia 25-1125516 800 Laidley Tower, P.O. Box 1233
Corp. Charleston, WV 25324, (304-344-0300)
Eastern Royalty Corp. Delaware 04-2698759 800 Laidley Tower, P.O. Box 1233
Charleston, WV 25324, (304-344-0300)
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
STATE OR
OTHER ADDRESS INCLUDING ZIP
JURISDICTION CODE, AND TELEPHONE
EXACT NAME OF OF I.R.S. NUMBER INCLUDING AREA
REGISTRANT GUARANTOR INCORPORATION EMPLOYER CODE, OF REGISTRANT
AS SPECIFIED OR IDENTIFICATION GUARANTOR'S PRINCIPAL
IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------ ------------- -------------- -------------------------------------------
<S> <C> <C> <C>
Gold Fields Chile, S.A. Delaware 13-3004607 14062 Denver West Parkway
Suite 110
Golden, CO 63102, (303-271-3600)
Gold Fields Mining Delaware 36-2079582 14062 Denver West Parkway
Corporation Suite 110
Golden, CO 63102, (303-271-3600)
Gold Fields Operating Delaware 22-2204381 14062 Denver West Parkway
Co.--Ortiz Suite 110
Golden, CO 80401-3301, (303-271-3600)
Grand Eagle Mining, Inc. Kentucky 61-1250622 19070 Highway 1078 South
Henderson, KY 42420, (502-546-7926)
Hayden Gulch Terminal, Delaware 86-0719481 P.O. Box 882323
Inc. Steamboat Springs, CO 80488, (314-342-3400)
Independence Material Delaware 43-1750064 701 Market Street, Suite 840
Handling Company St. Louis, MO 63101-1826, (314-342-3400)
Interior Holdings Corp. Delaware 43-1700075 701 Market Street, Suite 730
St. Louis, MO 63101-1826, (314-342-3400)
James River Coal Delaware 55-0643770 701 Market Street, Suite 712
Terminal Company St. Louis, MO 63101-1826, (314-342-7600)
Juniper Coal Company Delaware 43-1744675 701 Market Street, Suite 716
St. Louis, MO 63101-1826, (314-342-3400)
Kayenta Mobile Home Delaware 86-0773596 1300 S. Yale
Park, Inc. Flagstaff, AZ 86001, (520-774-5253)
Martinka Coal Company Delaware 55-0716084 815 Laidley Tower, PO Box 1233
Charleston, WV 25324-0004, (304-344-0300)
Midco Supply and Illinois 43-6042249 P.O. Box 14542
Equipment Corporation St. Louis, MO 63178, (314-342-3400)
Mountain View Coal Delaware 25-1474206 800 Laidley Tower, P.O. Box 1233
Company Charleston, WV 25334-0004, (304-344-0300)
North Page Coal Corp. West Virginia 31-1210133 800 Laidley Tower, P.O. Box 1233
Charleston, WV 25334-0004, (304-344-0300)
Ohio County Coal Company Kentucky 61-1176239 19070 Highway 1078 South
Henderson, KY 42420, (502-546-7561)
Patriot Coal Company, Delaware 61-1258748 19070 Highway 1078 South
L.P. Henderson, KY 42420, (502-546-9430)
Peabody America, Inc. Delaware 93-1116066 701 Market Street, Suite 720
St. Louis, MO 63101-1826, (303-271-3600)
Peabody Coal Company Delaware 13-2606920 800 Laidley Tower
Charleston, WV 25301, (502-827-0800)
Peabody COALSALES Delaware 43-1610419 701 Market Street, Suite 830
Company St. Louis, MO 63101-1826, (314-342-7600)
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
ADDRESS INCLUDING ZIP
CODE, AND TELEPHONE
EXACT NAME OF STATE OR OTHER I.R.S. NUMBER INCLUDING AREA
REGISTRANT GUARANTOR JURISDICTION OF EMPLOYER CODE, OF REGISTRANT
AS SPECIFIED INCORPORATION IDENTIFICATION GUARANTOR'S PRINCIPAL
IN ITS CHARTER OR ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------ --------------- -------------- -----------------------------------------
<S> <C> <C> <C>
Peabody COALTRADE, Inc. Delaware 43-1666743 4405 Cox Road, Suite 220
Glen Allen, VA 23050-3395, (804-935-0345)
Peabody Development Delaware 43-1265557 301 North Memorial Drive
Company St. Louis, MO 63102, (314-342-7610)
Peabody Energy Delaware 43-1753832 701 Market Street, Suite 830
Solutions, Inc. St. Louis, MO 63101, (314-342-7600)
Peabody Holding Company, New York 13-2871045 701 Market Street, Suite 700
Inc. St. Louis, MO 63101-1826, (314-342-3400)
Peabody Natural Delaware 51-0332232 701 Market Street, Suite 718
Resources Company St. Louis, MO 63101, (314-342-3400)
Peabody Terminals, Inc. Delaware 31-1035824 701 Market Street, Suite 712
St. Louis, MO 63101, (314-342-3400)
Peabody Venezuela Coal Delaware 43-1609813 701 Market Street, Suite 715
Corp. St. Louis, MO 63101-1826, (314-342-3400)
Peabody Western Coal Delaware 86-0766626 P.O. Box 605
Company Kayenta, AZ 86033 (520-677-3201)
Pine Ridge Coal Company Delaware 55-0737187 810 Laidley Tower
Charleston, WV 25324, (304-344-0300)
Powder River Coal Delaware 43-0996010 1013 East Boxelder
Company Gillette, WY 82718, (307-687-6900)
Rio Escondido Coal Corp. Delaware 74-2666822 P.O. Box 66746
St. Louis, MO 63166, (314-342-3400)
Seneca Coal Company Delaware 84-1273892 Drawer D
Hayden, CO 81639 (970-276-3707)
Sentry Mining Company Delaware 43-1540251 701 Market Street, Suite 700
St. Louis, MO 63101-1826, (314-342-3400)
Snowberry Land Company Delaware 43-1721980 301 N. Memorial Drive, Suite 333
St. Louis, MO 63102, (314-342-3400)
Sterling Smokeless Coal West Virginia 55-0463558 800 Laidley Tower, P.O. Box 1233
Company Charleston, WV 25324, (314-344-0300)
Thoroughbred, L.L.C. Delaware 43-1686687 701 Market Street, Suite 815
St. Louis, MO 63101-1826, (314-342-3400)
</TABLE>
iii
<PAGE>
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT COVERS THE REGISTRATION OF AN AGGREGATE
PRINCIPAL AMOUNT OF $400,000,000 OF 8 7/8% SERIES B SENIOR NOTES DUE 2008 (THE
"SENIOR EXCHANGE NOTES") AND AN AGGREGATE PRINCIPAL AMOUNT OF $500,000,000 OF
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 (THE "SENIOR SUBORDINATED
EXCHANGE NOTES" AND TOGETHER WITH THE SENIOR EXCHANGE NOTES, THE "EXCHANGE
NOTES") OF P&L COAL HOLDINGS CORPORATION (THE "COMPANY") THAT MAY BE EXCHANGED
FOR EQUAL PRINCIPAL AMOUNTS OF THE COMPANY'S OUTSTANDING 8 7/8% SENIOR NOTES
DUE 2008 AND 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008, RESPECTIVELY (THE
"EXCHANGE OFFERS"). THIS REGISTRATION STATEMENT ALSO COVERS THE REGISTRATION
OF THE EXCHANGE NOTES FOR RESALE BY LEHMAN BROTHERS INC. IN MARKET-MAKING
TRANSACTIONS. THE COMPLETE PROSPECTUS RELATING TO THE EXCHANGE OFFERS (THE
"EXCHANGE OFFER PROSPECTUS") FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY NOTE.
FOLLOWING THE EXCHANGE OFFER PROSPECTUS ARE CERTAIN PAGES OF THE PROSPECTUS
RELATING SOLELY TO SUCH MARKET-MAKING TRANSACTIONS (THE "MARKET-MAKING
PROSPECTUS"), INCLUDING ALTERNATE FRONT AND BACK COVER PAGES, A SECTION
ENTITLED "RISK FACTORS--TRADING MARKET FOR THE EXCHANGE NOTES" TO BE USED IN
LIEU OF THE SECTION ENTITLED "RISK FACTORS--LACK OF PUBLIC MARKET FOR THE
EXCHANGE NOTES" AND ALTERNATE SECTIONS ENTITLED "USE OF PROCEEDS" AND "PLAN OF
DISTRIBUTION." IN ADDITION, THE MARKET-MAKING PROSPECTUS WILL NOT INCLUDE THE
FOLLOWING CAPTIONS (OR THE INFORMATION SET FORTH UNDER SUCH CAPTIONS) IN THE
EXCHANGE OFFER PROSPECTUS: "PROSPECTUS SUMMARY--THE EXCHANGE OFFERS," "RISK
FACTORS--CONSEQUENCES OF FAILURE TO EXCHANGE," "THE SENIOR EXCHANGE OFFER,"
"THE SENIOR SUBORDINATED EXCHANGE OFFER" AND "MATERIAL UNITED STATES FEDERAL
TAX CONSIDERATIONS." ALL OTHER SECTIONS OF THE EXCHANGE OFFER PROSPECTUS WILL
BE INCLUDED IN THE MARKET-MAKING PROSPECTUS.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
PRELIMINARY PROSPECTUS
PEABODY
P&L COAL HOLDINGS CORPORATION
OFFERS TO EXCHANGE $400,000,000 OF ITS
8 7/8% SERIES B SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR $400,000,000 OF ITS OUTSTANDING
8 7/8% SENIOR NOTES DUE 2008
AND $500,000,000 OF ITS
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR $500,000,000 OF ITS OUTSTANDING
9 5/8% SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFERS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998,
UNLESS EXTENDED.
----------
P&L Coal Holdings Corporation ("Peabody" or the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letters of Transmittal, to exchange an aggregate of up to
$400,000,000 principal amount of 8 7/8% Series B Senior Notes due 2008 (the
"Senior Exchange Notes") and an aggregate of up to $500,000,000 principal
amount of 9 5/8% Series B Senior Subordinated Notes due 2008 (the "Senior
Subordinated Exchange Notes" and together with the Senior Exchange Notes, the
"Exchange Notes") of the Company for an identical face amount of the issued and
outstanding 8 7/8% Senior Notes due 2008 (the "Old Senior Notes" and together
with the Senior Exchange Notes, the "Senior Notes") and 9 5/8% Senior
Subordinated Notes due 2008 (the "Old Senior Subordinated Notes" and together
with the Senior Subordinated Exchange Notes, the "Senior Subordinated Notes",
and together with the Old Senior Notes, the "Old Notes") respectively, of the
Company from the Holders thereof. As of the date of this Prospectus, there is
$400,000,000 aggregate principal amount of the Old Senior Notes and
$500,000,000 aggregate principal amount of the Old Senior Subordinated Notes
outstanding. The terms of the Senior Exchange Notes and of the Senior
Subordinated Exchange Notes are identical in all material respects to the Old
Senior Notes and to the Old Senior Subordinated Notes respectively, except that
the Exchange Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and therefore will not bear legends restricting
their transfer and will not contain certain provisions providing for an
increase in the interest rate on the Old Senior Notes and on the Old Senior
Subordinated Notes under certain circumstances described in the Senior Notes
Registration Rights Agreement and in the Senior Subordinated Notes Registration
Rights Agreement respectively, which provisions will terminate as to all of the
Senior Notes and Senior Subordinated Notes (collectively, the "Notes") upon the
consummation of the Senior Note Exchange Offer and the Senior Subordinated Note
Exchange Offer (as defined, collectively, the "Exchange Offers").
Interest on the Exchange Notes will be payable semi-annually on May 15 and
November 15 of each year, commencing November 15, 1998. Prior to May 15, 2003,
each series of the Exchange Notes will be redeemable at a redemption price
equal to 100% of the principal amount thereof plus either the Senior Notes Make
Whole Premium or the Senior Subordinated Notes Make Whole Premium plus, to the
extent not included in either the Senior Notes Make Whole Premium or the Senior
Subordinated Notes Make Whole Premium, accrued and unpaid interest and
Liquidated Damages if any, to the date of redemption. On or after May 15, 2003,
each series of Exchange Notes will be subject to redemption at the option of
the Company, in whole or in part, at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of redemption. In addition, at any time prior to May 15, 2001, the Company
may, at its option, redeem up to 35% of the aggregate principal amount of each
series of the Exchange Notes at a redemption price equal to (i) 108.875% of the
principal amount of the Senior Exchange Notes and (ii) 109.675% of the
principal amount of the Senior Subordinated Exchange Notes, in each case plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of redemption, with the net proceeds of one or more Equity Offerings; provided
that, in each case, at least 65% of the aggregate principal amount of Senior
Exchange Notes and at least 65% of the aggregate principal amount of Senior
Subordinated Exchange Notes remain outstanding immediately after the occurrence
of each such redemption. See "Description of the Senior Exchange Notes--
Optional Redemption" and "Description of the Senior Subordinated Exchange
Notes--Optional Redemption."
Upon the occurrence of a Change of Control, the holders of each series of the
Exchange Notes (the "Holders") will have the right to require the Company to
repurchase such series of Exchange Notes, in whole or in part, at a price equal
to 101% of the respective principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase. See
"Description of the Senior Exchange Notes--Repurchase at the Option of
Holders--Change of Control" and "Description of the Senior Subordinated
Exchange Notes--Repurchase at the Option of Holders--Change of Control."
The Senior Exchange Notes will be general unsecured obligations of the
Company, will rank senior in right of payment to all subordinated Indebtedness
of the Company and will rank equally in right of payment with all current and
future unsecured senior Indebtedness of the Company. All borrowings under the
Senior Credit Facilities are secured by a first priority Lien on certain of the
assets of the Company and its Domestic Subsidiaries. Certain of the Company's
current and future Restricted Subsidiaries that are Domestic Subsidiaries (the
"Guarantors") will fully and unconditionally, and jointly and severally,
guarantee the Senior Exchange Notes on a senior basis (the "Senior Subsidiary
Guarantees"). As of June 30, 1998, approximately $920.0 million was outstanding
under the Senior Credit Facilities. See "Capitalization," "Description of the
Senior Exchange Notes," "Description of the Senior Subordinated Exchange Notes"
and "Description of Certain Indebtedness."
The Senior Subordinated Exchange Notes will be general unsecured obligations
of the Company, subordinate in right of payment to all existing and future
Senior Debt (as defined) of the Company, including all borrowings under the
Senior Credit Facilities. The Guarantors will fully and unconditionally, and
jointly and severally, guarantee the Senior Subordinated Exchange Notes on a
senior subordinated basis (the "Subordinated Subsidiary Guarantees" and,
together with the Senior Subsidiary Guarantees, the "Subsidiary Guarantees").
As of June 30, 1998, the Company had approximately $2,121.5 million of
Indebtedness outstanding (excluding $290.9 million of non-recourse indebtedness
of Citizens Power), of which $1,318.8 million would have been Senior Debt
(excluding letters of credit). See "Capitalization" and "Description of the
Senior Subordinated Exchange Notes--Subordination."
(continued on next page)
<PAGE>
(continued from previous page)
The Old Senior Notes and Old Senior Subordinated Notes were issued and sold
on May 18, 1998 in a transaction not registered under the Securities Act in
reliance upon an exemption from the registration requirements thereof. The
initial purchaser of the Old Notes was Lehman Brothers Inc. (the "Initial
Purchaser" or "Lehman Brothers"). In general, the Old Senior Notes and Old
Senior Subordinated Notes may not be offered or sold unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act. The Exchange Notes are being offered
hereby in order to satisfy certain obligations of the Company contained in the
Senior Note Registration Rights Agreement and the Senior Subordinated Note
Registration Rights Agreement. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties, the Company believes that the Senior Exchange
Notes issued pursuant to the Senior Note Exchange Offer and in exchange for
Old Senior Notes and that the Senior Subordinated Exchange Notes issued
pursuant to the Senior Subordinated Note Exchange Offer in exchange for Old
Senior Subordinated Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business, such holder has
no arrangement with any person to participate in the distribution of such
Exchange Notes, and neither such holder nor any such other person is engaging
in or intends to engage in a distribution of such Exchange Notes. However, the
Company has not sought, and does not intend to seek, its own no-action letter,
and there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offers. This Prospectus, as
it may be amended or supplemented, may be used by a participating non-
affiliated broker-dealer in connection with resales of the Exchange Notes
where such Exchange Notes were acquired by such participating broker-dealer as
a result of market-making activities or other trading activities.
Notwithstanding the foregoing, each broker-dealer that receives Senior
Exchange Notes or Senior Subordinated Exchange Notes for its own account
pursuant to the Exchange Offers, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company
has agreed that, for a period of 180 days after the date of this Prospectus,
as amended as supplemented, it will make this prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." The Letters of Transmittal state that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution". Any person participating in the Exchange Offers who does not
acquire the Exchange Notes in the ordinary course of business must comply with
the registration and prospectus delivery requirements of the Securities Act.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the Exchange Notes. The Company does not
currently intend to list the Exchange Notes on any securities exchange or to
seek approval for quotation through any automated quotation system.
Accordingly, there can be no assurance as to the development or liquidity of
any market for the Exchange Notes.
The Exchange Offers are not conditioned upon any minimum aggregate principal
amount of Old Senior Notes or Old Senior Subordinated Notes being tendered for
exchange. The date of acceptance and exchange of the Old Senior Notes and the
Old Senior Subordinated Notes (the "Exchange Date") will be the fourth
business day following the Expiration Date. Old Senior Notes and Old Senior
Subordinated Notes tendered pursuant to the Exchange Offers may be withdrawn
at any time prior to the Expiration Date. The Company will not receive any
proceeds from the Exchange Offers. The Company will pay all of the expenses
incident to the Exchange Offers. The Expiration Date will be 5:00 p.m., New
York City Time, on , 1998, unless extended. The Company does not currently
intend to extend the Expiration Date.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE EXCHANGE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE
16.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. P&L Coal Holdings Corporation and its
subsidiaries, including predecessors, are collectively referred to herein as
"Peabody" or the "Company" unless the context otherwise requires. The estimates
of the Company's proven and probable reserves as of October 1, 1996 set forth
herein have been reviewed by the John T. Boyd Company ("Boyd") as of such date.
All references to "tons" are references to short tons and all references to low
sulfur coal are references to coal with a sulfur content of 1% or less by
weight. For definitions of certain coal-related terms see "Coal Industry
Overview" and "Glossary of Selected Terms." References to years relate to
calendar years, unless otherwise noted. The market data presented herein are
based upon estimates by management of the Company, utilizing various third
party sources where available. While management believes that such estimates
are reasonable and reliable, in certain cases, such estimates cannot be
verified by information available from independent sources. Accordingly, no
assurance can be given that such market data are accurate in all material
respects. Prospective investors should carefully consider the information set
forth under the heading "Risk Factors."
THE COMPANY
Peabody is the largest and one of the fastest growing private sector coal
producers in the world. Over the last seven years, management has transformed
the Company from a largely high sulfur, high cost domestic coal producer to a
predominantly low sulfur, low cost international coal company. In fiscal 1998,
the Company sold 167.5 million tons of coal worldwide, which were used to
generate more than 9% of the total electricity produced in the United States.
Based on the most recent data available, the Company's coal satisfied
approximately 2.5% of the world's 1995 electricity demands. Peabody's U.S.
market share was approximately 14.4% in 1997, approximately twice the market
share of its nearest competitor. Peabody has approximately 9.4 billion tons of
proven and probable coal reserves of which 47% is low sulfur and 53% is high
sulfur, which is the largest reserve base of any private sector coal producing
company in the United States. In fiscal 1998, the Company generated pro forma
operating revenues of more than $2.2 billion, pro forma EBITDA of $428.2
million and a pro forma net loss of $22.2 million.
The Company currently owns and operates 24 mines in the United States and
three mines in New South Wales, Australia and also sells coal produced by
third-party contractors from reserves controlled by the Company. In addition to
its U.S. and Australian coal businesses, the Company is also one of the leading
marketers of power in the United States through Citizens Power LLC (together
with its direct and indirect subsidiaries, "Citizens Power"), has a small gold
and copper exploration concession in Chile and has an equity interest in a
southern California landfill project. Peabody also has a 43.3% joint venture
interest in Black Beauty Coal Company ("Black Beauty"), Indiana's largest coal
producer, a 30% joint venture interest in Dominion Terminal Associates, one of
the largest U.S. coal export terminals and interests in certain other coal
transportation facilities.
The Company produces approximately 72% of its coal from the western United
States, compared to approximately 23% from the eastern United States and
approximately 5% from Australia. Peabody's coal production in the western
United States has grown from 37 million tons in 1990 to 114 million tons in
fiscal 1998. The Company's highly productive, primarily non-union western
operations produce low sulfur coal, which is attractive to utilities operating
under restrictions of the Clean Air Act of 1970 (the "Clean Air Act").
Peabody's large and diverse customer base includes more than 150 customers in
17 countries. In 1997, Peabody supplied 92% of its U.S. production to U.S.
electric utilities, 5% to the export market and 3% to the U.S. industrial
sector.
Peabody has a large portfolio of long-term coal supply agreements ("CSAs").
In fiscal 1998, 92% of Peabody's sales volume was sold under CSAs. As of March
31, 1998, the Company had CSAs for more than 1.0
1
<PAGE>
billion tons of coal, with terms ranging from one to 17 years and with an
average volume-weighted remaining term of 5.7 years. As its CSAs expire, the
Company intends to negotiate new contracts in order to maintain its high
percentage of volume sold through CSAs and low percentage of volume sold in the
spot market.
Over the last ten years, coal consumption in the United States has generally
experienced steady annual growth, reaching a record level of approximately 1.1
billion tons in 1996. This steady growth in coal consumption is correlated to
similar growth in the electric generation industry that in 1997 accounted for
more than 87% of domestic coal consumption. In 1997, coal-fired power plants
generated approximately 57% of the nation's electricity, followed by nuclear
(20%), hydroelectric (11%) and gas-fired (9%) facilities. Furthermore, because
coal is one of the least expensive and most abundant and reliable resources for
the production of electricity, the Company believes coal will become
increasingly important as electricity markets are deregulated in the United
States and privatized around the world. See "Coal Industry Overview."
A substantial majority of the Company's equity is owned by Lehman Brothers
Merchant Banking Partners II L.P., LB I Group Inc. and their affiliated co-
investors (collectively, "Lehman Merchant Banking"), each of which is an
affiliate of Lehman Brothers.
THE ACQUISITION AND THE FINANCINGS
On March 2, 1998, the Company, an affiliate of Lehman Brothers, entered into
a purchase agreement (the "Purchase Agreement") with The Energy Group PLC ("The
Energy Group"). The Purchase Agreement provides for the purchase by the Company
from The Energy Group (the "Acquisition") of all the common stock of Peabody
Holding Company, Inc., a New York corporation ("Peabody Holding Company"), and
certain other subsidiaries of The Energy Group (as more fully described below,
the "Acquired Companies"). The Acquisition was conditioned upon the tender
offer by Texas Utilities Company ("TU") to purchase all the outstanding common
shares of The Energy Group being declared unconditional in all respects and not
at that time being publicly opposed by the board of directors of The Energy
Group. See "The Acquisition."
On May 19, 1998, TU's tender offer was declared unconditional and the
Acquisition was consummated.
The Acquisition was funded by (i) $920.0 million of borrowings by the Company
pursuant to a $920.0 million senior secured term facility (the "Term Loan
Facility"), (ii) the offerings of $400.0 million aggregate principal amount of
Senior Notes and $500.0 million aggregate principal amount of Senior
Subordinated Notes (the "Offerings") and (iii) an equity contribution to the
Company by Lehman Merchant Banking and members of the Company's management of
$480.0 million. Such amounts were used to (a) pay an estimated $2,065.0 million
for the equity of the Acquired Companies, (b) pay $73.0 million of Citizens
Power Obligations of $92.0 million, (c) capitalize Citizens Power's energy
trading operations with $50.0 million, (d) increase cash balances by $34.4
million and (e) pay an estimated $75.0 million in transaction fees and expenses
incurred in connection with the Transactions. The Company also entered into a
$480.0 million senior revolving credit facility (the "Revolving Credit
Facility") to provide for the Company's working capital requirements following
the Acquisition. The Company also assumed (i) the 5% Subordinated Note of
$201.8 million and (ii) Peabody Resources Debt of $75.0 million. The Revolving
Credit Facility and the Term Loan Facility (collectively the "Senior Credit
Facilities") are provided by a group of banks led by Lehman Commercial Paper
Inc. ("LCPI"), an affiliate of the Initial Purchaser. The Senior Credit
Facilities and the Offerings are collectively referred to herein as the
"Financings." The Acquisition, the Financings and certain distributions to The
Energy Group made prior to the consummation of the Acquisition and the
Financings are collectively referred to as the "Transactions." See "The
Acquisition," "Use of Proceeds," "Capitalization" and "Description of Certain
Indebtedness."
2
<PAGE>
The sources and uses of the funds for the Transactions, consummated on May
19, 1998, are shown on the table below.
SOURCES OF FUNDS
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
Senior Credit Facilities(/1/)
Revolving Credit Facility....................................... $ --
Term Loan Facility.............................................. 920.0
Senior Notes...................................................... 398.8
Senior Subordinated Notes......................................... 498.6
Assumption of 5% Subordinated Note................................ 201.8
Assumption of Peabody Resources Debt(/2/)......................... 75.0
Equity Contribution(/3/).......................................... 480.0
--------
Total Sources................................................. $2,574.2
========
USES OF FUNDS
Purchase of Equity of the Acquired Companies...................... $2,065.0
Assumption of Peabody Resources Debt(/2/)......................... 75.0
Assumption of 5% Subordinated Note................................ 201.8
Capitalization of Citizens Power.................................. 50.0
Payment of Citizens Power Obligations(/4/)........................ 73.0
Increase in Cash Balance.......................................... 34.4
Estimated Transaction Fees and Expenses........................... 75.0
--------
Total Uses.................................................... $2,574.2
========
</TABLE>
- --------
(1) The Company received commitments of up to $1,400.0 million for the Senior
Credit Facilities, of which $920.0 million was borrowed under the Term Loan
Facility and $480.0 million is in the form of the Revolving Credit
Facility. On a pro forma basis at March 31, 1998, the Company would have
drawn $920.0 million under the Term Loan Facility and would have had no
amounts outstanding under the Revolving Credit Facility, which is expected
to provide working capital going forward. See "Description of Certain
Indebtedness."
(2) Peabody Resources' pro rata share of indebtedness incurred in the expansion
of the Warkworth mine and the development of the Bengalla mine. Peabody
Resources has a 43.75% interest in the Warkworth joint venture and a 35%
interest in the Bengalla joint venture and manages both joint ventures.
Includes $32.3 million of indebtedness incurred in April 1998. See
"Description of Certain Indebtedness."
(3) Equity contribution to the Company by Lehman Merchant Banking and members
of the Company's management of $480.0 million.
(4) Payment of remaining purchase price obligations to the former owners of
Citizens Power, which was acquired on May 19, 1997. See "Description of
Certain Indebtedness" and "Related Party Transactions."
RECENT DEVELOPMENTS
Peabody Natural Resources Company ("PNRC") and another subsidiary of the
Company signed an agreement with Chaco Energy Company ("Chaco"), dated
September 30, 1998 (the "Prepayment Agreement"), pursuant to which Chaco agreed
to prepay the non-recoupable advance royalty payments pursuant to a coal lease
between PNRC (formerly called Hanson Natural Resources Company), as lessor, and
Chaco, as lessee, regarding certain coal reserves in New Mexico. The amount of
the agreed payment was $163.4 million. The Prepayment Agreement also provides
that Chaco would convey its interests in the coal lease and its other related
mining and contract rights to a subsidiary of the Company for $27.5 million,
which would be netted against the prepayment amount owing by Chaco to PNRC. The
net amount paid by Chaco to the Company was $135.9 million. The transaction was
consummated on September 30, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
THE EXCHANGE OFFERS
SENIOR EXCHANGE NOTES
THE SENIOR EXCHANGE OFFER... The Company is offering to exchange pursuant to
the Senior Exchange Offer up to $400,000,000
aggregate principal amount of its new 8 7/8%
Series B Senior Notes due 2008 (the "Senior
Exchange Notes") for a like aggregate principal
amount of its outstanding 8 7/8% Senior Notes
due 2008 (the "Old Senior Notes" and together
with the Senior Exchange Notes, the "Senior
Notes"). The terms of the Senior Exchange Notes
are identical in all material respects
(including principal amount, interest rate and
maturity) to the terms of the Old Senior Notes
for which they may be exchanged pursuant to the
Senior Exchange Offer, except that the Senior
Exchange Notes are freely transferrable by
Holders thereof (other than as provided
herein), and are not subject to any covenant
regarding registration under the Securities
Act. See "The Senior Exchange Offer."
INTEREST PAYMENTS........... Interest on the Senior Exchange Notes shall
accrue from the last interest payment date (May
15 or November 15) on which interest was paid
on the Old Senior Notes so surrendered or, if
no interest has been paid on such Notes, from
May 18, 1998.
MINIMUM CONDITION........... The Senior Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Old Senior Notes being tendered for exchange.
EXPIRATION DATE; WITHDRAWAL
OF TENDER...................
The Senior Exchange Offer will expire at 5:00
p.m., New York City time, on , 1998, unless
the Senior Exchange Offer is extended, in which
case the term "Senior Expiration Date" means
the latest date and time to which the Senior
Exchange Offer is extended. Tenders may be
withdrawn at any time prior to 5:00 p.m., New
York City time, on the Senior Expiration Date.
See "The Senior Exchange Offer--Withdrawal
Rights."
SENIOR EXCHANGE DATE........ The date of acceptance (the "Senior Exchange
Date") for exchange of the Old Senior Notes
will be the fourth business day following the
Senior Expiration Date.
CONDITIONS TO THE SENIOR
EXCHANGE OFFER..............
The Senior Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. The Company currently expects that
each of the conditions will be satisfied and
that no waivers will be necessary. See "The
Senior Exchange Offer--Certain Conditions to
the Senior Exchange Offer". The Company
reserves the right to terminate or amend the
Senior Exchange Offer at any time prior to the
Senior Expiration Date upon the occurrence of
any such condition.
PROCEDURES FOR TENDERING
OLD SENIOR NOTES............
Each holder of Old Senior Notes wishing to
accept the Senior Exchange Offer must complete,
sign and date a letter of transmittal (the
"Senior Letter of Transmittal"), or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Senior Letter of
Transmittal, or such facsimile, together with
the Old Senior Notes and any other required
documentation to the Senior Exchange Agent (as
defined) at the address set forth therein. See
4
<PAGE>
"The Senior Exchange Offer--Procedures for
Tendering Old Senior Notes" and "Plan of
Distribution."
USE OF PROCEEDS............. There will be no proceeds to the Company from
the exchange of Senior Notes pursuant to the
Senior Exchange Offer.
FEDERAL INCOME TAX The exchange of Senior Notes pursuant to the
CONSIDERATIONS......... Senior Exchange Offer will not be a taxable
event for federal income tax purposes. See
"Material United States Federal Tax
Considerations."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS...........
Any beneficial owner whose Old Senior Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such beneficial owner's own
behalf, such beneficial owner must, prior to
completing and executing the Senior Letter of
Transmittal and delivering the Old Senior
Notes, either make appropriate arrangements to
register ownership of the Old Senior Notes in
such beneficial owner's name or obtain a
properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time. See "The
Senior Exchange Offer--Procedures for Tendering
Old Senior Notes."
GUARANTEED DELIVERY Holders of Old Senior Notes who wish to tender
PROCEDURES ................. their Old Senior Notes and whose Old Senior
Notes are not immediately available or who
cannot deliver their Old Senior Notes, the
Senior Letter of Transmittal or any other
documents required by the Senior Letter of
Transmittal to the Senior Exchange Agent prior
to the Senior Expiration Date must tender their
Old Senior Notes according to the guaranteed
delivery procedures set forth in "The Senior
Exchange Offer--Procedures for Tendering Old
Senior Notes."
ACCEPTANCE OF OLD SENIOR
NOTES AND DELIVERY OF
SENIOR EXCHANGE NOTES ...... The Company will accept for exchange any and
all Old Senior Notes which are properly
tendered in the Senior Exchange Offer prior to
5:00 p.m., New York City time, on the Senior
Expiration Date. The Senior Exchange Notes
issued pursuant to the Senior Exchange Offer
will be delivered promptly following the Senior
Expiration Date. See "The Senior Exchange
Offer--Acceptance of Old Senior Notes for
Exchange; Delivery of Senior Exchange Notes."
EFFECT ON HOLDERS OF OLD
SENIOR NOTES................
As a result of the making of, and upon
acceptance for exchange of all validly tendered
Old Senior Notes pursuant to the terms of the
Senior Exchange Offer, the Company will have
fulfilled a covenant contained in the
Registration Rights Agreement (the "Senior
Registration Rights Agreement") dated May 18,
1998, between the Company and Lehman Brothers
Inc. (the "Initial Purchaser") relating to the
Senior Notes, and, accordingly, there will be
no increase in the interest rate on the Old
Senior Notes pursuant to the terms of the
Senior Registration Rights Agreement, and the
holders of the Old Senior Notes will have no
further registration or other rights under the
Senior Registration Rights Agreement. Holders
of the Old Senior Notes who do not
5
<PAGE>
tender their Old Senior Notes in the Senior
Exchange Offer will continue to hold such Old
Senior Notes and will be entitled to all the
rights and limitations applicable thereto under
the Senior Note Indenture, except for any such
rights under the Senior Registration Rights
Agreement that by their terms terminate or
cease to have further effectiveness as a result
of the making of, and the acceptance for
exchange of all validly tendered Old Senior
Notes pursuant to, the Senior Exchange Offer.
All untendered Old Senior Notes will continue
to be subject to the restrictions on transfer
provided for in the Old Senior Notes and in the
Senior Note Indenture. To the extent that Old
Senior Notes are tendered and accepted in the
Senior Exchange Offer, the trading market for
untendered Old Senior Notes could be adversely
affected.
CONSEQUENCE OF FAILURE TO Holders of Old Senior Notes who do not exchange
EXCHANGE.................... their Old Senior Notes for Senior Exchange
Notes pursuant to the Senior Exchange Offer
will continue to be subject to the restrictions
on transfer of such Old Senior Notes as set
forth in the legend thereon as a consequence of
the offer or sale of the Old Senior Notes
pursuant to an exemption from, or in a
transaction not subject to, the registration
requirements of the Securities Act and
applicable state securities laws. In general,
the Old Senior Notes may not be offered or
sold, unless registered under the Securities
Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities
Act and applicable state securities laws. The
Company does not currently anticipate that it
will register the Old Senior Notes under the
Securities Act.
EXCHANGE AGENT.............. State Street Bank and Trust Company is serving
as exchange agent (the "Senior Exchange Agent")
in connection with the Senior Exchange Offer.
See "The Senior Exchange Offer--Exchange
Agent."
SENIOR SUBORDINATED EXCHANGE NOTES
THE SENIOR SUBORDINATED
EXCHANGE OFFER..............
The Company is offering to exchange pursuant to
the Senior Subordinated Exchange Offer up to
$500,000,000 aggregate principal amount of its
new 9 5/8% Series B Senior Subordinated Notes
due 2008 (the "Senior Subordinated Exchange
Notes" and together with the "Senior Exchange
Notes," the "Exchange Notes") for a like
aggregate principal amount of its outstanding 9
5/8% Senior Subordinated Notes due 2008 (the
"Old Senior Subordinated Notes" and together
with the Senior Subordinated Exchange Notes,
the "Senior Subordinated Notes" and together
with the Old Senior Notes, the "Old Notes").
The terms of the Senior Subordinated Exchange
Notes are identical in all material respects
(including principal amount, interest rate and
maturity) to the terms of the Old Senior
Subordinated Notes for which they may be
exchanged pursuant to the Senior Subordinated
Exchange Offer, except that the Senior
Subordinated Exchange Notes are freely
transferrable by Holders thereof (other than as
provided herein), and are not subject to any
covenant regarding registration under the
Securities Act. See "The Senior Subordinated
Exchange Offer."
6
<PAGE>
INTEREST PAYMENTS........... Interest on the Senior Subordinated Exchange
Notes shall accrue from the last interest
payment date (May 15 or November 15) on which
interest was paid on the Old Senior
Subordinated Notes so surrendered or, if no
interest has been paid on such Notes, from May
18, 1998.
MINIMUM CONDITION........... The Senior Subordinated Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Old Senior Subordinated
Notes being tendered for exchange.
EXPIRATION DATE; WITHDRAWAL
OF TENDER...................
The Senior Subordinated Exchange Offer will
expire at 5:00 p.m., New York City time, on
, 1998, unless the Senior Subordinated
Exchange Offer is extended, in which case the
term "Senior Subordinated Expiration Date"
means the latest date and time to which the
Senior Subordinated Exchange Offer is extended.
Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Senior
Subordinated Expiration Date. See "The Senior
Subordinated Exchange Offer--Withdrawal
Rights."
SENIOR SUBORDINATED The date of acceptance ("the Senior
EXCHANGE DATE............... Subordinated Exchange Date") for exchange of
the Old Senior Subordinated Notes will be the
fourth business day following the Senior
Subordinated Expiration Date.
CONDITIONS TO THE SENIOR
SUBORDINATED EXCHANGE
OFFER....................... The Senior Subordinated Exchange Offer is
subject to certain customary conditions, which
may be waived by the Company. The Company
currently expects that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Senior Subordinated
Exchange Offer--Certain Conditions to the
Senior Subordinated Exchange Offer." The
Company reserves the right to terminate or
amend the Senior Subordinated Exchange Offer at
any time prior to the Senior Subordinated
Expiration Date upon the occurrence of any such
condition.
PROCEDURES FOR TENDERING
OLD SENIOR SUBORDINATED
NOTES....................... Each holder of Old Senior Subordinated Notes
wishing to accept the Senior Subordinated
Exchange Offer must complete, sign and date a
letter of transmittal (the "Senior Subordinated
Letter of Transmittal"), or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Senior Subordinated
Letter of Transmittal, or such facsimile,
together with the Old Senior Subordinated Notes
and any other required documentation to the
Senior Subordinated Exchange Agent at the
address set forth therein. See "The Senior
Subordinated Exchange Offer--Procedures for
Tendering Old Senior Subordinated Notes" and
"Plan of Distribution."
USE OF PROCEEDS............. There will be no proceeds to the Company from
the exchange of Senior Subordinated Notes
pursuant to the Senior Subordinated Exchange
Offer.
FEDERAL INCOME TAX The exchange of Senior Subordinated Notes
CONSIDERATIONS......... pursuant to the Senior Subordinated Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Material United
States Federal Tax Considerations."
7
<PAGE>
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS...........
Any beneficial owner whose Old Senior
Subordinated Notes are registered in the name
of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
beneficial owner's own behalf, such beneficial
owner must, prior to completing and executing
the Senior Subordinated Letter of Transmittal
and delivering the Old Senior Subordinated
Notes, either make appropriate arrangements to
register ownership of the Old Senior
Subordinated Notes in such beneficial owner's
name or obtain a properly completed bond power
from the registered holder. The transfer of
registered ownership may take considerable
time. See "The Senior Subordinated Exchange
Offer--Procedures for Tendering Old Senior
Subordinated Notes."
GUARANTEED DELIVERY Holders of Old Senior Subordinated Notes who
PROCEDURES.................. wish to tender their Old Senior Subordinated
Notes and whose Old Senior Subordinated Notes
are not immediately available or who cannot
deliver their Old Senior Subordinated Notes,
the Senior Subordinated Letter of Transmittal
or any other documents required by the Senior
Subordinated Letter of Transmittal to the
Senior Subordinated Exchange Agent prior to the
Senior Subordinated Expiration Date must tender
their Old Senior Subordinated Notes according
to the guaranteed delivery procedures set forth
in "The Senior Subordinated Exchange Offer--
Procedures for Tendering Old Senior
Subordinated Notes."
ACCEPTANCE OF OLD SENIOR
SUBORDINATED NOTES AND
DELIVERY OF SENIOR
SUBORDINATED EXCHANGE
NOTES....................... The Company will accept for exchange any and
all Old Senior Subordinated Notes which are
properly tendered in the Senior Subordinated
Exchange Offer prior to 5:00 p.m., New York
City time, on the Senior Subordinated
Expiration Date. The Senior Subordinated
Exchange Notes issued pursuant to the Senior
Subordinated Exchange Offer will be delivered
promptly following the Senior Subordinated
Expiration Date. See "The Senior Subordinated
Exchange Offer--Acceptance of Old Senior
Subordinated Notes for Exchange; Delivery of
Senior Subordinated Exchange Notes."
EFFECT ON HOLDERS OF OLD
SENIOR SUBORDINATED NOTES...
As a result of the making of, and upon
acceptance for exchange of all validly tendered
Old Senior Subordinated Notes pursuant to the
terms of the Senior Subordinated Exchange
Offer, the Company will have fulfilled a
covenant contained in the Registration Rights
Agreement (the "Senior Subordinated
Registration Rights Agreement") dated May 18,
1998, between the Company and the Initial
Purchaser relating to the Senior Subordinated
Notes, and, accordingly, there will be no
increase in the interest rate on the Old Senior
Subordinated Notes pursuant to the terms of the
Senior Subordinated Registration Rights
8
<PAGE>
Agreement, and the holders of the Old Senior
Subordinated Notes will have no further
registration or other rights under the Senior
Subordinated Registration Rights Agreement.
Holders of the Old Senior Subordinated Notes
who do not tender their Old Senior Subordinated
Notes in the Senior Subordinated Exchange Offer
will continue to hold such Old Senior
Subordinated Notes and will be entitled to all
the rights and limitations applicable thereto
under the Senior Subordinated Note Indenture,
except for any such rights under the Senior
Subordinated Registration Rights Agreement that
by their terms terminate or cease to have
further effectiveness as a result of the making
of, and the acceptance for exchange of all
validly tendered Old Senior Subordinated Notes
pursuant to, the Senior Subordinated Exchange
Offer. All untendered Old Senior Subordinated
Notes will continue to be subject to the
restrictions on transfer provided for in the
Old Senior Subordinated Notes and in the Senior
Subordinated Note Indenture. To the extent that
Old Senior Subordinated Notes are tendered and
accepted in the Senior Subordinated Exchange
Offer, the trading market for untendered Old
Senior Subordinated Notes could be adversely
affected.
CONSEQUENCE OF FAILURE TO Holders of Old Senior Subordinated Notes who do
EXCHANGE.................... not exchange their Old Senior Subordinated
Notes for Senior Subordinated Exchange Notes
pursuant to the Senior Subordinated Exchange
Offer will continue to be subject to the
restrictions on transfer of such Old Senior
Subordinated Notes as set forth in the legend
thereon as a consequence of the offer or sale
of the Old Senior Subordinated Notes pursuant
to an exemption from, or in a transaction not
subject to, the registration requirements of
the Securities Act and applicable state
securities laws. In general, the Old Senior
Subordinated Notes may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. The
Company does not currently anticipate that it
will register the Old Senior Subordinated Notes
under the Securities Act.
SENIOR SUBORDINATED
EXCHANGE AGENT..............
State Street Bank and Trust Company is serving
as exchange agent (the "Senior Subordinated
Exchange Agent") in connection with the Senior
Subordinated Exchange Offer. See "The Senior
Subordinated Exchange Offer--Exchange Agent."
TERMS OF THE EXCHANGE NOTES
SENIOR EXCHANGE NOTES
SECURITIES OFFERED:......... $400.0 million in aggregate principal amount of
8 7/8% Series B Senior Notes due 2008 of the
Company.
MATURITY DATE:.............. May 15, 2008.
INTEREST PAYMENT DATES:..... May 15 and November 15, commencing November 15,
1998.
9
<PAGE>
MANDATORY REDEMPTION:....... The Company will not be required to make
mandatory redemption or sinking fund payments
with respect to the Senior Exchange Notes.
OPTIONAL REDEMPTION:........ Prior to May 15, 2003, the Senior Exchange
Notes will be redeemable at a redemption price
equal to 100% of the principal amount thereof
plus the applicable Senior Notes Make Whole
Premium, plus, to the extent not included in
the Senior Notes Make Whole Premium, accrued
and unpaid interest and Liquidated Damages, if
any, to the date of redemption. For purposes of
the foregoing, "Senior Notes Make Whole
Premium" means, with respect to a Senior Note,
an amount equal to the greater of (a) 104.438%
of the outstanding principal amount of such
Senior Exchange Note and (b) the excess of (i)
the present value of the remaining interest,
premium, if any, and principal payments due on
such Senior Exchange Note as if such Senior
Exchange Note were redeemed on May 15, 2003,
computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (ii)
the outstanding principal amount of such Senior
Exchange Note.
On or after May 15, 2003, the Senior Exchange
Notes will be redeemable at the option of the
Company, in whole or in part, at the redemption
prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the applicable date of redemption.
In addition, at any time prior to May 15, 2001,
on any one or more occasions the Company may,
at its option, redeem up to 35% of the
aggregate principal amount of the Senior
Exchange Notes at a redemption price equal to
108.875% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable date
of redemption, with the net cash proceeds of
one or more Equity Offerings; provided that at
least 65% aggregate principal amount of Senior
Exchange Notes remains outstanding immediately
after the occurrence of each such redemption.
See "Description of the Senior Exchange Notes--
Optional Redemption."
CHANGE OF CONTROL:.......... Upon the occurrence of a Change of Control,
each Holder of Senior Exchange Notes will have
the right to require the Company, and the
Company must offer, to purchase all or any part
of such Holder's Senior Exchange Notes at a
price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. See
"Description of the Senior Exchange Notes--
Repurchase at the Option of Holders--Change of
Control."
RANKING:.................... The Senior Exchange Notes will be general
unsecured obligations of the Company, will rank
senior in right of payment to all subordinated
Indebtedness of the Company and will rank
equally in right of payment with all current
and future unsecured senior Indebtedness of the
Company, including all borrowings under the
Senior Credit Facilities. However, all
borrowings under the Senior Credit Facilities
are secured by a first priority Lien on certain
of the assets of the Company and certain of its
Domestic
10
<PAGE>
Subsidiaries. As of June 30, 1998, the Company
had $920.0 million of Indebtedness outstanding
under the Senior Credit Facilities. See "Risk
Factors--Risks Relating to the Notes--
Substantial Leverage," "Capitalization" and
"Description of the Senior Exchange Notes."
SENIOR SUBSIDIARY Certain of the Company's current and future
GUARANTEES:................. Restricted Subsidiaries that are Domestic
Subsidiaries, if any, will fully and
unconditionally, and jointly and severally,
guarantee the Company's payment obligations
under the Senior Exchange Notes on a senior
basis. The Senior Subsidiary Guarantees will
rank senior to all existing and future
subordinated Indebtedness of the Guarantors and
equally with all other unsecured senior
Indebtedness of the Guarantors, including the
guarantees of Indebtedness under the Senior
Credit Facilities. Each Guarantor's obligations
under the Senior Credit Facilities, however,
will be secured by a first priority Lien on
certain of the assets of such Guarantor, and
the Senior Note Indenture restricts, but does
not prohibit, the Guarantors from incurring
additional secured Indebtedness. Accordingly,
such secured Indebtedness will rank prior to
the Senior Subsidiary Guarantees with respect
to such assets. See "Risk Factors--Risks
Relating to the Notes--Ranking--Secured
Indebtedness; Effective Subordination" and
"Description of the Senior Exchange Notes--
Senior Subsidiary Guarantees."
The Senior Exchange Notes will not be
guaranteed by certain other of the Company's
Domestic Subsidiaries or by any of the
Company's current or future Foreign
Subsidiaries (the "Non-Guarantor
Subsidiaries"). For fiscal 1998, after giving
effect to the Transactions, the Non-Guarantor
Subsidiaries accounted for 11% and 20% of pro
forma revenues and EBITDA, respectively, and,
as of March 31, 1998, the Non-Guarantor
Subsidiaries accounted for 27% of pro forma
assets.
CERTAIN COVENANTS:.......... The Senior Note Indenture contains certain
covenants that, among other things, limit the
ability of the Company and its Subsidiaries to
(i) incur additional Indebtedness and issue
preferred stock, (ii) pay dividends or make
certain other restricted payments, (iii) create
certain Liens, (iv) enter into certain
transactions with affiliates, (v) sell assets
of the Company or its Restricted Subsidiaries
or (vi) enter into certain mergers and
consolidations. In addition, under certain
circumstances, the Company will be required to
offer to purchase the Senior Exchange Notes
with the net cash proceeds of certain sales and
other dispositions of assets at a price equal
to 100% of the principal amount of the Senior
Exchange Notes, plus accrued and unpaid
interest and Liquidated Damages, if any,
thereon to the date of purchase. Citizens Power
will be designated as an Unrestricted
Subsidiary and will not be subject to many of
the covenants under the Senior Note Indenture.
See "Description of the Senior Exchange Notes--
Certain Covenants" and "--Repurchase at the
Option of Holders--Asset Sales."
11
<PAGE>
SENIOR SUBORDINATED EXCHANGE NOTES
SECURITIES OFFERED:......... $500.0 million in aggregate principal amount of
9 5/8% Series B Senior Subordinated Notes due
2008 of the Company.
MATURITY:................... May 15, 2008.
INTEREST PAYMENT DATES:..... May 15 and November 15, commencing November 15,
1998.
MANDATORY REDEMPTION:....... The Company will not be required to make
mandatory redemption or sinking fund payments
with respect to the Senior Subordinated
Exchange Notes.
Prior to May 15, 2003, the Senior Subordinated
OPTIONAL REDEMPTION:........ Exchange Notes will be redeemable at a
redemption price equal to 100% of the principal
amount thereof plus the applicable Senior
Subordinated Notes Make Whole Premium, plus, to
the extent not included in the Senior
Subordinated Notes Make Whole Premium, accrued
and unpaid interest and Liquidated Damages, if
any, to the date of redemption. For purposes of
the foregoing, "Senior Subordinated Notes Make
Whole Premium" means, with respect to a Senior
Subordinated Exchange Note, an amount equal to
the greater of (a) 104.813% of the outstanding
principal amount of such Senior Subordinated
Exchange Note and (b) the excess of (i) the
present value of the remaining interest,
premium, if any, and principal payments due on
such Senior Subordinated Exchange Note as if
such Senior Subordinated Exchange Note were
redeemed on May 15, 2003, computed using a
discount rate equal to the Treasury Rate plus
50 basis points, over (ii) the outstanding
principal amount of such Senior Subordinated
Note.
On or after May 15, 2003, the Senior
Subordinated Exchange Notes will be redeemable
at the option of Company, in whole or in part,
at the redemption prices set forth herein plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable date
of redemption. In addition, at any time prior
to May 15, 2001, on any one or more occasions
the Company may, at its option, redeem up to
35% of the aggregate principal amount of Senior
Subordinated Exchange Notes at a redemption
price equal to 109.625% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the
applicable date of redemption, with the net
cash proceeds of one or more Equity Offerings;
provided that at least 65% aggregate principal
amount of Senior Subordinated Exchange Notes
remains outstanding immediately after the
occurrence of each such redemption. See
"Description of the Senior Subordinated
Exchange Notes--Optional Redemption."
Upon the occurrence of a Change of Control,
CHANGE OF CONTROL:.......... each Holder of Senior Subordinated Exchange
Notes will have the right to require the
Company, and the Company must offer, to
purchase all or any part of such Holder's
Senior Subordinated Exchange Notes at a price
in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. See
"Description of the Senior Subordinated
Exchange Notes--Repurchase at the Option of
Holders--Change of Control."
12
<PAGE>
RANKING:.................... The Senior Subordinated Exchange Notes will be
general unsecured obligations of the Company
and will rank subordinate in right of payment
to all existing and future Senior Debt of the
Company and senior in right of payment to or
equally with all other indebtedness of the
Company. As of June 30, 1998, the Company had
$2,121.5 million of indebtedness outstanding
(excluding $290.9 million of non-recourse
indebtedness of Citizens Power), of which
$1,318.8 million would have been Senior Debt
under the Senior Credit Facilities (excluding
letters of credit) and the Senior Notes as of
June 30, 1998. See "Risk Factors--Risks
Relating to the Notes--Substantial Leverage,"
"Capitalization" and "Description of the Senior
Subordinated Exchange Notes--Subordination."
SUBORDINATED SUBSIDIARY
GUARANTEES:................ The Company's payment obligations under the
Senior Subordinated Exchange Notes will be
fully and unconditionally, and jointly and
severally, guaranteed on a senior subordinated
basis by the Guarantors. See "Description of
the Senior Subordinated Exchange Notes--
Subordinated Subsidiary Guarantees."
The Senior Subordinated Exchange Notes will not
be guaranteed by certain other of the Company's
Domestic Subsidiaries or by any of the
Company's current or future Foreign
Subsidiaries. For fiscal 1998, after giving
effect to the Transactions, the Non-Guarantor
Subsidiaries accounted for 11% and 20% of pro
forma revenues and EBITDA, respectively, and,
as of March 31, 1998, the Non-Guarantor
Subsidiaries accounted for 27% of pro forma
assets.
CERTAIN COVENANTS:.......... The Senior Subordinated Note Indenture contains
certain covenants that, among other things,
limit the ability of the Company and its
Subsidiaries to (i) incur additional
Indebtedness and issue preferred stock, (ii)
pay dividends or make certain other restricted
payments, (iii) create certain Liens, (iv)
enter into certain transactions with
affiliates, (v) sell assets of the Company or
its Restricted Subsidiaries or (vi) enter into
certain mergers and consolidations. In
addition, under certain circumstances, the
Company will be required to offer to purchase
the Senior Subordinated Exchange Notes with the
net cash proceeds of certain sales and other
dispositions of assets at a price equal to 100%
of the principal amount of the Senior
Subordinated Exchange Notes, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. Citizens Power
will be designated as an Unrestricted
Subsidiary and will not be subject to many of
the covenants under the Senior Subordinated
Note Indenture. See "Description of the Senior
Subordinated Exchange Notes--Certain Covenants"
and "--Repurchase at the Option of the
Holders--Asset Sales."
FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN EACH SERIES OF THE EXCHANGE NOTES, SEE "RISK
FACTORS."
13
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data of the Company. The
historical combined financial data for the year ended, and as of, March 31,
1998, for the six months ended, and as of, March 31, 1997 and for the years
ended, and as of, September 30, 1996, and 1995 have been derived from, and
should be read in conjunction with, the audited combined financial statements
of the Company included elsewhere in this Prospectus which have been audited by
Ernst & Young LLP, the Company's independent auditors. The table reflects the
fact that effective with The Energy Group's spin-off from Hanson PLC
("Hanson"), the Company switched from a fiscal year ended September 30 to a
fiscal year ended March 31.
The unaudited summary combined financial data for the twelve months ended,
and as of, March 31, 1997 and for the year ended, and as of, September 30, 1994
have been derived from Company records. In the opinion of the Company's
management, such unaudited financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial position and results of operations as of the dates and periods
indicated.
The unaudited pro forma financial data have been derived from, and should be
read in conjunction with, the Unaudited Pro Forma Condensed Financial
Statements and the related notes thereto included elsewhere herein. The
Unaudited Pro Forma Condensed Statement of Operations for the periods presented
gives pro forma effect to the Transactions as if they had occurred on April 1,
1997. The summary unaudited pro forma combined financial data are intended for
informational purposes only and should not be considered indicative of either
future results of operations or the results that might have occurred if the
Transactions had been consummated on the indicated date or had been in effect
for the period presented. See "Unaudited Pro Forma Condensed Financial
Statements," "Selected Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Combined/Consolidated
Financial Statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------------- ----------------------------------------------------------------
PRO FORMA PRO FORMA
THREE FISCAL TWELVE SIX
MONTHS YEAR FISCAL YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
--------- --------- ----------- --------- ---------
FISCAL YEARS ENDED SEPTEMBER
30,
JUNE 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, ------------------------------
1998 1998(/1/) 1998(/2/) 1997 1997 1996 1995(/3/) 1994(/4/)
--------- --------- ----------- --------- --------- -------- --------- ---------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
DATA:
Tons Sold............... 43.3 167.5 167.5 167.4 81.4 163.0 151.0 101.6
Revenues................ $ 555.1 $2,246.4 $2,244.4 $2,242.3 $1,064.1 $2,193.6 $2,175.8 $1,844.4
Cost of Goods Sold
(includes depreciation,
depletion and
amortization).......... 518.3 1,966.9 1,913.4 1,941.6 924.7 1,891.4 1,861.8 1,631.6
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit............ $ 36.8 $ 279.5 $ 331.0 $ 300.7 $ 139.4 $ 302.2 $ 314.0 $ 212.8
Impairment of Long-Lived
Assets(/5/)............ -- -- -- 890.8 -- 890.8 -- --
Selling and
Administrative
Expenses............... 21.0 83.6 83.6 80.7 41.4 75.7 81.3 73.1
Net Loss/(Gain) on
Property and Equipment
Disposals.............. (.3) (21.8) (21.8) (8.0) (4.1) (13.0) (12.9) (5.9)
-------- -------- -------- -------- -------- -------- -------- --------
Operating Profit
(Loss)................. $ 16.1 $ 217.7 $ 269.2 $ (662.8) $ 102.1 $ (651.3) $ 245.6 $ 145.6
======== ======== ======== ======== ======== ======== ======== ========
Net Income (Loss)....... $ (28.2) $ (22.2) $ 160.3 $ (449.3) $ 58.4 $ (446.3) $ 100.4 $ 79.4
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
COMPANY PREDECESSOR COMPANY
--------- ---------------------
AS OF AS OF AS OF
JUNE 30, MARCH 31, MARCH 31,
1998 1998(/2/) 1997
--------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital........ $ 372.5 $ 535.9 $ 167.1
Total Assets........... 7,643.6 6,355.2 5,025.8
Recourse Debt.......... 2,121.5 308.4 321.7
Non-Recourse Debt...... 290.9 293.9 --
Invested Capital....... 467.0 1,687.8 1,676.8
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
-------------------- ---------------------------------------------------------------------
PRO FORMA PRO FORMA
THREE FISCAL TWELVE SIX
MONTHS YEAR FISCAL YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
--------- --------- ----------- --------- ---------
FISCAL YEARS ENDED
SEPTEMBER 30,
JUNE 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, --------------------------------
1998 1998(/1/) 1998(/2/) 1997 1997 1996 1995(/3/) 1994(/4/)
--------- --------- ----------- --------- --------- ------ --------- ---------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(/6/)............. $ 65.6 $428.2 $461.0 $431.6 (/7/) $203.8 $437.4 (/7/) $435.9 $315.8
Net cash provided by
(used in):
Operating activities... (11.3) 181.7 181.7 323.2 62.8 211.5 272.5 153.1
Investing activities... (2,052.2) (129.9) (129.9) (106.6) (56.2) (105.6) (462.1) (108.5)
Financing activities... 2,249.3 (235.4) (235.4) (77.4) 94.2 16.0 179.0 (4.0)
Depreciation, Depletion
and Amortization....... 54.3 221.3 202.6 203.6 101.7 197.9 190.3 170.2
Capital Expenditures
Replacement of
Equipment and
Facilities............ $ 20.0 $ 90.9 $ 90.9 $ 89.1 $ 47.3 $ 88.7 $122.9 $ 77.3
New Mine and Expanded
Capacity.............. 127.2 75.4 75.4 59.4 29.2 63.4 65.1 58.4
-------- ------ ------ ------ ------ ------ ------ ------
Total Capital
Expenditures.......... $ 147.2 $166.3 $166.3 $148.5 $ 76.5 $152.1 $188.0 $135.7
======== ====== ====== ====== ====== ====== ====== ======
Ratio of Earnings to
Fixed Charges(/8/)..... -- 1.06x 5.77x -- 3.63x -- 3.63x 2.13x
Ratio of Net Debt to
EBITDA(/9/)............ 5.00x 4.67x
Ratio of EBITDA to Cash
Interest
Expense(/1//0/)........ 2.09x 2.28x
</TABLE>
- -------
(1) Reflects the acquisition of Citizens Power effective April 1, 1997,
including $344.2 million of working capital, $1,525.5 million of total
assets and $293.9 million of non-recourse indebtedness of Citizens Power
as of March 31, 1998 and for the period April 1, 1997 to March 31, 1998.
(2) Reflects the acquisition of Citizens Power effective May 19, 1997,
including $294.2 million of working capital, $1,448.5 million of total
assets and $293.9 million of non-recourse indebtedness of Citizens Power
as of March 31, 1998 and for the period May 19, 1997 to March 31, 1998.
(3) Reflects the acquisition of the Caballo and the Rawhide coal mines in the
Powder River Basin effective November 1994.
(4) The Company experienced a United Mine Workers of America ("UMWA") work
stoppage from February 2, 1993 to December 16, 1993, which negatively
impacted the Company's Peabody Coal Company and Eastern Associated Coal
Corp. operations.
(5) Represents a one-time non-cash charge made pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121") which had no effect on the Company's cash flow.
(6) EBITDA is defined as income before deducting interest expense, income
taxes, depreciation, depletion and amortization and excludes any non-cash
compensation expense related to management stock transactions. EBITDA has
been reduced by costs associated with reclamation, retiree health care and
workers' compensation. EBITDA is not a substitute for operating income,
net income and cash flow from operating activities as determined in
accordance with generally accepted accounting principles as a measure of
profitability or liquidity. EBITDA is presented as additional information
because management believes it to be a useful indicator of the Company's
ability to meet debt service and capital expenditure requirements and
because it is expected that certain debt covenants of the Company will
utilize EBITDA to measure compliance with such covenants. Because EBITDA
is not calculated identically by all companies, the presentation herein
may not be comparable to other similarly titled measures of other
companies. Excludes $4.8 million, $10.8 million and $10.8 million of
EBITDA for Citizens Power for the pro forma three months ended June 30,
1998, pro forma fiscal year ended March 31, 1998, and fiscal year ended
March 31, 1998, respectively.
(7) EBITDA for the twelve months ended March 31, 1997 and September 30, 1996
excluded an $890.8 million charge for Impairment of Long-Lived Assets.
This is a one-time non-cash charge made pursuant to SFAS 121 and had no
effect on the Company's cash flow.
(8) For purposes of this computation, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of interest expense on all
indebtedness plus the interest component of lease rental expense. Earnings
were insufficient to cover fixed charges by $32.7 million for the pro
forma three months ended June 30, 1998. Earnings were insufficient to
cover fixed charges by $702.3 and $702.5 million for the twelve months
ended March 31, 1997 and the fiscal year ended September 30, 1996, due to
the SFAS 121 charges described above.
(9) For the purposes of the calculation, net debt consists of total debt less
cash and cash equivalents of $164.3 million at June 30, 1998 and $98.9
million at March 31, 1998. Also, excludes $290.9 million of non-recourse
indebtedness, $4.9 million of EBITDA and $47.3 million of cash at Citizens
Power as of and for the three months ended June 30, 1998. Excludes $293.9
million of non-recourse indebtedness, $10.8 million of EBITDA and $60.4
million of cash as of and for the year ended March 31, 1998 at Citizens
Power.
(10) For the purposes of this calculation, cash interest expense represents
total interest expense less non-cash interest charges, including
amortization of deferred financing costs and imputed interest from the 5%
Subordinated Note. Excludes $4.9 million and $10.8 million of EBITDA for
Citizens Power for the pro forma three months ended June 30, 1998 and the
pro forma fiscal year ended March 31, 1998, respectively.
15
<PAGE>
RISK FACTORS
Holders of Old Notes should consider carefully, in addition to the other
information contained in this Prospectus, the following factors before deciding
to tender Old Notes in the Exchange Offers. The risk factors set forth below
are generally applicable to the Old Notes as well as the Exchange Notes.
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH APPEAR IN A
NUMBER OF PLACES IN THIS PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY OR ITS OFFICERS WITH
RESPECT TO, AMONG OTHER THINGS, THE USE OF PROCEEDS OF THE OFFERINGS, THE
ABILITY TO ENTER INTO AND BORROW FUNDS UNDER THE SENIOR CREDIT FACILITIES, THE
TIMING OF THE COMMENCEMENT OF OPERATIONS AT NEW MINES, THE ABILITY TO
SUCCESSFULLY IMPLEMENT A NEW ORGANIZATIONAL STRUCTURE AND OPERATING STRATEGIES,
INCLUDING THE ACHIEVEMENT OF COST SAVINGS AND TRENDS AFFECTING THE COMPANY'S
FINANCIAL CONDITION OR RESULTS OF OPERATIONS. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, THE STATEMENTS UNDER "PROSPECTUS SUMMARY," "RISK FACTORS,"
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
"BUSINESS," "COAL INDUSTRY OVERVIEW" AND "REGULATORY MATTERS" LOCATED ELSEWHERE
HEREIN REGARDING INDUSTRY PROSPECTS AND THE COMPANY'S FINANCIAL POSITION ARE
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS THE DATE HEREOF.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-
LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS," "COAL INDUSTRY
OVERVIEW" AND "REGULATORY MATTERS."
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO
THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS.
RISKS RELATING TO THE EXCHANGE NOTES
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offers will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. The Company does not currently intend to register the Old
Notes under the Securities Act. Based on interpretations by the staff of the
Commission, the Company believes that Exchange Notes issued pursuant to the
Exchange Offers in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Old Notes were
acquired in the ordinary course of such Holders' business and such Holders have
no arrangement with any person to participate in the distribution of such
Exchange Notes. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
16
<PAGE>
SUBSTANTIAL LEVERAGE
As a result of the Transactions, the Company is highly leveraged and, at
June 30, 1998, the Company had total indebtedness of $2,121.5 million,
excluding $290.9 million of Citizens Power non-recourse debt, at June 30, 1998
(of which (i) $920.0 million consisted of Indebtedness under the Senior Credit
Facilities, (ii) $398.8 million consisted of the Senior Notes, (iii) $498.6
million consisted of the Senior Subordinated Notes and (iv) the balance
primarily consisted of the 5% Subordinated Note) and equity of $480.0 million.
In addition, the Company had available borrowings of up to $480.0 million
under the Revolving Credit Facility. Also after giving pro forma effect to the
Transactions, the Company's ratio of earnings to fixed charges would have been
1.06x for fiscal 1998. The Company and its Restricted Subsidiaries are
permitted to incur substantial additional indebtedness in the future. See
"Capitalization," "Selected Combined Financial Data," "Description of the
Senior Exchange Notes" and "Description of the Senior Subordinated Exchange
Notes."
The Company's ability to pay principal and interest or Liquidated Damages,
if any, on each series of the Notes and to satisfy its other debt service
obligations will depend upon the future operating performance of its
subsidiaries, which will be affected by prevailing economic conditions in the
markets they serve and financial, business and other factors, certain of which
are beyond their control. Based upon the current level of operations,
management believes that cash flow from operations and available cash,
together with available borrowings under the Senior Credit Facilities, will be
adequate to meet the Company's future liquidity needs for at least the next
several years. There can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will
be available under the Senior Credit Facilities in an amount sufficient to
enable the Company to service its indebtedness, including each series of the
Notes, or to fund its other liquidity needs. The Company may need to refinance
all or a portion of the principal of each series of the Notes on or prior to
maturity. There can be no assurance that the Company will be able to effect
any such refinancing on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to Holders of each series of the Notes, including, but not
limited to: (i) making it more difficult for the Company to satisfy its
obligations with respect to each series of the Notes, (ii) increasing the
Company's vulnerability to general adverse economic and industry conditions,
(iii) limiting the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, research and development or
other general corporate requirements, (iv) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment
of principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures,
research and development or other general corporate purposes, (v) limiting the
Company's flexibility in planning for, or reacting to, changes in its business
and the industries in which it competes and (vi) placing the Company at a
competitive disadvantage vis-a-vis less leveraged competitors. In addition,
the Indentures and the Senior Credit Facilities contain financial and other
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds. Failure by the Company to comply with such
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on the Company. In addition, the degree
to which the Company is leveraged could prevent it from repurchasing all of
the Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Certain Indebtedness--The Senior Credit Facilities,"
"Description of the Senior Exchange Notes--Repurchase at the Option of
Holders--Change of Control," and "Description of the Senior Subordinated
Exchange Notes--Repurchase at the Option of Holders--Change of Control."
RANKING
Secured Indebtedness; Effective Subordination. While Holders of Senior
Subordinated Notes are contractually subordinated to Senior Debt, holders of
any secured indebtedness of the Company or its subsidiaries have claims that
are prior to the claims of the Holders of each series of the Notes with
respect to the assets securing such other indebtedness. Notably, the Company
and certain of its subsidiaries (including the Guarantors) are parties to the
Senior Credit Facilities which are secured by certain Liens on the Guarantors.
The
17
<PAGE>
Senior Notes are effectively subordinated to all such secured indebtedness. In
the event of any distribution or payment of the assets of the Company in any
foreclosure, dissolution, winding-up, liquidation, reorganization or other
bankruptcy proceeding, holders of secured Indebtedness will have a prior claim
to the assets of the Company that constitute their collateral. Holders of the
Senior Notes will participate ratably with all holders of unsecured
Indebtedness of the Company that is deemed to be of the same class as the
Senior Notes, and potentially with all other general creditors of the Company,
based upon the respective amounts owed to each holder or creditor, in the
remaining assets of the Company. In any of the foregoing events, there can be
no assurance that there would be sufficient assets to pay amounts due on the
Senior Notes. As a result, Holders of Senior Notes may receive less, ratably,
than holders of secured indebtedness.
Citizens Power and its subsidiaries are currently the only Unrestricted
Subsidiaries of the Company. As of June 30, 1998, Citizens Power had an
aggregate of $290.9 million of indebtedness which is not recourse to the
Company and its other subsidiaries. The covenants under the Indentures do not
restrict the ability of Unrestricted Subsidiaries to incur additional non-
recourse indebtedness.
As of June 30, 1998, $920.0 million of secured Indebtedness of the Company
and its subsidiaries (all of which are borrowings under the Senior Credit
Facilities) was outstanding, and $480.0 million was available for additional
borrowing under the Senior Credit Facilities, including letters of credit. The
Indentures permit the incurrence of substantial additional secured
indebtedness by the Company and its Restricted Subsidiaries in the future.
Subordination of Senior Subordinated Notes. The Senior Subordinated Notes
are subordinated in right of payment to all current and future Senior Debt of
the Company and the Guarantors, which includes borrowings under the Senior
Credit Facilities and the Senior Notes. However, the Senior Subordinated Note
Indenture provides that the Company will not, and will not permit any of the
Guarantors to, incur or otherwise become liable for any indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Senior Subordinated Notes or any of the
Subordinated Subsidiary Guarantees. Upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, the holders of Senior Debt will be entitled to be
paid in full in cash or Cash Equivalents before any payment may be made with
respect to the Senior Subordinated Notes. In addition, the subordination
provisions of the Senior Subordinated Note Indenture provide that payments
with respect to the Senior Subordinated Notes will be blocked in the event of
a payment default on Senior Debt and may be blocked for up to 179 days each
year in the event of certain non-payment defaults on Senior Debt. In the event
of a bankruptcy, liquidation or reorganization of the Company, Holders of the
Senior Subordinated Notes will participate ratably with all holders of
subordinated indebtedness of the Company that are deemed to be of the same
class as the Senior Subordinated Notes, and potentially with all other general
creditors of the Company, based upon the respective amounts owed to each
holder or creditor, in the remaining assets of the Company. In any of the
foregoing events, there can be no assurance that there would be sufficient
assets to pay amounts due on the Senior Subordinated Notes. As a result,
Holders of Senior Subordinated Notes may receive less, ratably, than the
holders of Senior Debt.
As of June 30, 1998, the aggregate amount of Senior Debt of the Company and
its subsidiaries (including borrowings under the Senior Credit Facilities) was
$1,318.8 million, and $480.0 million was available for additional borrowing
under the Senior Credit Facilities, including letters of credit. The Senior
Subordinated Note Indenture permits the incurrence of substantial additional
indebtedness, including Senior Debt, by the Company and its Restricted
Subsidiaries in the future. See "Description of Certain Indebtedness."
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Company has no operations of its own and derives substantially all of
its revenue from its subsidiaries. Holders of indebtedness of, and trade
creditors of, subsidiaries of the Company would generally be entitled to
payment of their claims from the assets of the affected subsidiaries before
such assets were made available for
18
<PAGE>
distribution to the Company. Each of the Indentures permits the incurrence of
substantial additional indebtedness by the Company and its Restricted
Subsidiaries and permits significant investments by the Company in Restricted
Subsidiaries and requires certain Restricted Subsidiaries that are Domestic
Subsidiaries to guarantee each series of the Notes. In the event of a
bankruptcy, liquidation or reorganization of a subsidiary, holders of any of
such subsidiary's indebtedness will have a claim to the assets of the
subsidiary that is prior to the Company's interest in those assets.
As of June 30, 1998, the aggregate amount of indebtedness and other
liabilities of the Company's Restricted Subsidiaries (including trade
payables, land reclamation and environmental liabilities, workers'
compensation liabilities and retiree health care liabilities) was
approximately $5,665.4 million and $480.0 million was available to the
subsidiaries for additional borrowings under the Senior Credit Facilities
including letters of credit. If any subsidiary indebtedness were to be
accelerated, there can be no assurance that the assets of such subsidiary
would be sufficient to repay such indebtedness or that the assets of the
Company and of the other subsidiaries would be sufficient to repay in full the
indebtedness of the Company, including the Notes. See "Description of Certain
Indebtedness."
The Notes are not guaranteed by certain of the Company's Domestic
Subsidiaries or by any Foreign Subsidiaries of the Company. In fiscal 1998,
after giving effect to the Transactions, the Non-Guarantor Subsidiaries
accounted for 11% and 20% of pro forma revenues and EBITDA, respectively, and
as of March 31, 1998, the Non-Guarantor Subsidiaries accounted for 27% of pro
forma assets. The claims of creditors (including trade creditors) of any Non-
Guarantor Subsidiary will generally have priority as to the assets of such
subsidiaries over the claims of the holders of the Notes. As of June 30, 1998,
the amount of liabilities of such Non-Guarantor Subsidiaries was $1,724.1
million.
RESTRICTIVE DEBT COVENANTS
Each of the Indentures and the Senior Credit Facilities contains covenants
that restrict, among other things, the ability of the Company to incur
additional indebtedness, pay dividends, make certain investments and capital
expenditures, enter into transactions with affiliates, allow its Restricted
Subsidiaries to make certain payments, make certain asset dispositions, merge
or consolidate with, or transfer substantially all of its assets to another
person, encumber assets under certain circumstances or restrict dividends and
other payments from Restricted Subsidiaries. In addition, the Senior Credit
Facilities restrict the Company from prepaying certain of its indebtedness,
including the Notes. Under the Senior Credit Facilities, the Company is also
required to maintain specified financial covenants, including a minimum fixed
charge coverage ratio and maximum leverage ratio (each as defined in the
Senior Credit Facilities). No assurance can be given that the Company's future
operating results will be sufficient to enable compliance with such covenants,
or in the event of a default, to remedy such default. In the event of a
default under the Senior Credit Facilities, the Company could be prohibited
from making payments of principal and interest on the Notes and all amounts
due under the Senior Credit Facilities could be declared immediately due and
payable. The Indentures and the Senior Credit Facilities contain cross-default
provisions pursuant to which defaults under other indebtedness constitute
events of default. See "Description of Certain Indebtedness," "Description of
the Senior Exchange Notes--Certain Covenants" and "Description of the Senior
Subordinated Exchange Notes--Certain Covenants."
LIMITATION ON CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each Holder of either series of
Notes will have the right to require the Company to purchase all or a portion
of such Holder's Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the purchase date. Further, the provisions of the Indentures may
not afford Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company, if such transaction does not result in a Change of Control. A change
in control may result in a default under the Senior Credit Facilities. Upon a
default under the Senior Credit Facilities or other future Senior Debt, the
lenders thereunder could prohibit the Company from repurchasing the Notes or
could require the payment in full of all
19
<PAGE>
such Senior Debt before repurchase of the Notes. The Senior Subordinated
Indenture requires that prior to a repurchase of the Senior Subordinated Notes
upon a Change of Control, the Company must either repay all outstanding
indebtedness under the Senior Credit Facilities or obtain any required consent
to such repurchase. If the Company does not obtain such consent or repay its
outstanding indebtedness under the Senior Credit Facilities, the Company would
remain effectively prohibited from offering to purchase the Senior
Subordinated Notes. In such case, the Company's failure to offer to purchase
the Senior Subordinated Notes could become an Event of Default under the
Senior Subordinated Indenture. If a Change of Control were to occur, there can
be no assurance that the Company would have sufficient financial resources or
would be able to arrange financing to repay all of its obligations under the
Senior Credit Faculties, the Indentures and other indebtedness that may become
payable upon the occurrence of such Change of Control. See "Description of
Certain Indebtedness," "Description of the Senior Exchange Notes--Repurchase
at the Option of Holders--Change of Control" and "Description of the Senior
Subordinated Exchange Notes--Repurchase at the Option of Holders--Change of
Control."
LACK OF MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in May 1998 to a small number of institutional
investors and are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages (PORTAL) Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange or on any automated dealer quotation system. There is
currently no established market for the Exchange Notes and there can be no
assurance as to the liquidity of markets that may develop for the Exchange
Notes, the ability of the holders of the Exchange Notes to sell their Exchange
Notes or the price at which such holders would be able to sell their Exchange
Notes. If such markets were to exist, the Exchange Notes could trade at prices
that may be lower than the initial market value thereof depending on many
factors, including prevailing interest rates, the Company's operating results
and the markets for similar securities. The Initial Purchaser has advised the
Company that it currently intends to make a market with respect to the
Exchange Notes. However, the Initial Purchaser is not obligated to do so, and
any market making with respect to the Exchange Notes may be discontinued at
any time without notice. In addition, such market making activity may be
limited during the pendency of the Exchange Offer or the effectiveness of a
shelf registration statement in lieu thereof. Because Lehman Brothers Inc. is
an affiliate of the Company, following consummation of the Exchange Offer,
Lehman Brothers Inc. will be required to deliver a current "market-maker"
prospectus and otherwise comply with the registration requirements of the
Securities Act in connection with any secondary market sale of the Exchange
Notes, which may affect its ability to continue market-making activities. See
"Plan of Distribution".
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
FRAUDULENT CONVEYANCE
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company or any Guarantor, at the time it incurred the indebtedness evidenced
by each series of the Notes or its Subsidiary Guarantee, (i) (a) was or is
insolvent or rendered insolvent by reason of such occurrence or (b) was or is
engaged in a business or transaction for which the assets remaining with the
Company or such Guarantor constituted unreasonably small capital or (c)
intended or intends to incur, or believed or believes that it would incur,
debts beyond its ability to pay such debts as they mature and (ii) the
Company, or such Guarantor received or receives less than reasonably
equivalent value or fair consideration for the incurrence of such
indebtedness, then each series of the Notes and the Subsidiary Guarantees, and
any pledge or other security interest securing such indebtedness, could be
voided, or claims in respect of either series of the Notes or the Subsidiary
Guarantees could be subordinated to all other debts of the Company or such
Guarantor, as the case may be. In addition, the payment of interest and
principal by the Company pursuant to either series
20
<PAGE>
of the Notes or the payment of amounts by a Guarantor pursuant to a Subsidiary
Guarantee could be voided and required to be returned to the person making
such payment, or to a fund for the benefit of the creditors of the Company or
such Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets was less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature or (ii)
it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company believes that on a consolidated basis after
giving effect to the Transactions, it will not be insolvent, will not have
unreasonably small capital for the business in which it is engaged and will
not incur debts beyond its ability to pay such debts as they mature. There can
be no assurance, however, as to what standard a court would apply in making
such determinations or that a court would agree with the Company's or the
Guarantors' conclusions in this regard.
Certain subsidiaries of the Company that are endorsing Subsidiary Guarantees
on each series of the Notes have significant liabilities associated with
reclamation, workers' compensation (including black-lung), and retiree health
care. See "--Government Regulation of the Mining Industry" and "--
Postretirement Benefits and Pension Plan Liabilities." The Company has not
analyzed the solvency of these subsidiaries with respect to the standards a
court would apply in making a determination as to the solvency of such
subsidiaries on a stand-alone basis. There can be no assurance that funds may
be realized on such Subsidiary Guarantees or that the guarantees issued by
such Guarantor (if a court were to determine that such Guarantor did not
receive fair consideration or reasonably equivalent value for such guarantee)
would not be voided or subordinated under constructive fraudulent conveyance
laws.
RISKS RELATING TO THE COMPANY
POSSIBILITY OF TERMINATION OF LONG-TERM COAL SUPPLY CONTRACTS
A substantial portion of the Company's coal is sold pursuant to CSAs, which
are important to the stability and profitability of the Company's operations.
The execution of a satisfactory CSA is frequently the basis on which the
Company undertakes the development of coal reserves required to be supplied
under the contract. Peabody has a large portfolio of CSAs. In fiscal 1998, 92%
of Peabody's sales volume was sold under CSAs. At March 31, 1998, the
Company's CSAs had terms ranging from one to 17 years and had an average
volume-weighted remaining term of 5.7 years.
Many of the Company's CSAs contain price reopener provisions which provide
for the contract price to be adjusted upward or downward at specified times.
Failure of the parties to agree on a price pursuant to such reopener
provisions may lead to early termination of the contracts. Over the last few
years, several of the Company's CSAs have been renegotiated, bringing the
contract prices closer to the then current market prices, thus leading to a
reduction in the revenues from such contracts. A similar reduction in contract
prices has also been experienced in relation to the replacement of expiring
contracts. The CSAs also typically contain force majeure provisions allowing
temporary suspension of performance by the Company or the customer during the
duration of certain events beyond the control of the affected party. Most CSAs
contain provisions requiring the Company to deliver coal within certain ranges
for specific coal characteristics such as Btus, sulfur, ash, grindability and
ash fusion temperature. Failure to meet these specifications could result in
economic penalties or termination of the contracts.
The Company restructures its CSAs in the normal course of business. In
connection with such restructurings, the Company recognized gains ranging from
$4.4 million in fiscal 1993 to $49.3 million in fiscal
21
<PAGE>
1998. There can be no assurance that the Company will be able to realize such
gains in connection with future CSA restructurings.
The operating profit margins realized by the Company under its CSAs depend
on a variety of factors. In addition, price adjustment, price reopener and
other provisions may reduce the insulation from any short-term coal price
volatility provided by such contracts. If a substantial portion of the
Company's CSAs were modified or terminated, the Company could be materially
adversely affected to the extent that it is unable to find alternate buyers
for its coal at the same level of profitability. Because the price of coal has
declined in recent years, many of the Company's CSAs are for prices above
current spot market prices. There can be no assurance that the Company will be
able to replace these contracts at the same prices or with similar profit
margins when they expire. In addition, certain CSAs are the subject of ongoing
litigation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Long-Term Coal Contracts" and
"Business--Legal Proceedings."
TRANSPORTATION RISKS
Coal producers depend upon rail, barge, trucking, overland conveyor and
other systems to provide access to markets. While customers typically arrange
and pay for transportation of coal from the mine to the point of use,
disruption of these transportation services because of weather-related
problems, strikes, lock-outs or other events could temporarily impair the
Company's ability to supply coal to its customers and thus could adversely
affect the Company's business, financial condition and results of operations.
For example, the high volume of coal shipped from all southern Powder River
Basin mines (approximately 270 million tons in 1997, or 25% of all U.S. coal
shipments) could create temporary congestion on the rail system accessing that
region.
Transportation costs represent a significant portion of the total cost of
coal, and as a result, the cost of delivery is a critical factor in a
customer's purchasing decision. Increases in transportation costs could make
coal a less competitive source of energy or could make certain of the
Company's operations less competitive than other sources of coal. Such
increases could have a material adverse effect on the Company's ability to
compete and on its business, financial condition and results of operations.
In Australia, the Company transports coal using the Hunter River Valley
Railroad and the coal loading terminal at the Port of Newcastle. The Port of
Newcastle has had problems with ship congestion in the past. Such congestion
could delay shipments from Peabody Resources' Warkworth mine and the Bengalla
mine, currently under construction.
RISKS INHERENT TO MINING
The Company's mining operations are subject to conditions beyond the
Company's control which can increase the cost of mining at particular mines
for varying lengths of time. These conditions include weather and natural
disasters, unexpected maintenance problems, key equipment failures, variations
in coal seam thickness, variations in the amount of rock and soil overlying
the coal deposit, variations in rock and other natural materials and
variations in geological and other conditions.
RESTRUCTURING OF AUSTRALIAN COAL INDUSTRY
The coal mining industry in Australia is going through a process of
restructuring in an effort to improve the industry's international
competitiveness. This restructuring is directed at improving workforce
flexibility through training workers to perform multiple tasks and eliminating
existing inflexibilities in work practices. Certain major coal mining
companies have also attempted to employ non-union labor and to move away from
negotiated collective bargaining awards to individual contracts of employment.
While to date these changes have been accomplished without major industrial
disruption, there can be no assurance that this state of affairs will continue
or that further restructuring will not cause major work stoppages in the
future.
22
<PAGE>
GOVERNMENT REGULATION OF THE MINING INDUSTRY
General. The coal mining industry is subject to regulation by federal, state
and local authorities on matters such as employee health and safety,
permitting and licensing requirements, air quality standards, water pollution,
plant and wildlife protection, reclamation and restoration of mining
properties after mining is completed, the discharge of materials into the
environment, surface subsidence from underground mining and the effects that
mining has on groundwater quality and availability. In addition, the industry
is affected by significant legislation mandating certain benefits for current
and retired coal miners. Numerous governmental permits and approvals are
required for mining operations. The Company may be required to prepare and
present to federal, state or local authorities data pertaining to the effect
or impact that any proposed exploration for or production of coal may have
upon the environment. All requirements imposed by any such authority may be
costly and time-consuming and may delay commencement or continuation of
exploration or production operations. The possibility exists that new
legislation and/or regulations and orders may be adopted which may materially
adversely affect the Company's mining operations, its cost structure and/or
its customers' ability to use coal. New legislation, including proposals
related to the protection of the environment which would further regulate and
tax the coal industry, may also require the Company or its customers to change
their operations significantly or incur increased costs. Such factors and
legislation, if enacted, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Regulatory
Matters."
Reclamation and Mine Closure Accruals. The Federal Surface Mining Control
and Reclamation Act of 1977 ("SMCRA") and similar state statutes require that
mine property be restored in accordance with specified standards and an
approved reclamation plan and require that the Company obtain and periodically
renew permits for mining operations. The Company accrues for the costs of
final mine closure over the estimated useful mining life of the property and
expenses current mine disturbance as part of the ongoing mining process. The
establishment of the final mine closure reclamation liability and the current
disturbance is based upon permit requirements and requires various estimates
and assumptions, principally associated with costs and production levels.
Annually, the Company reviews its entire environmental liability under SMCRA
and makes necessary adjustments, including mine reclamation plan and permit
changes and revisions to costs and production levels to optimize mining and
reclamation efficiency. The economic impact of such adjustments is recorded to
the cost of coal sales. The long-term reclamation costs, mine-closing costs
and other environmental liability accruals totaled approximately $485.5
million on the Company's balance sheet as of June 30, 1998, $19.0 million of
which is categorized as Other Noncurrent Liabilities and $7.9 million of which
is a current liability. The amount that was included as an operating expense
for the pro forma twelve month period ended March 31, 1998 was $12.4 million,
while the related cash expense for such liability in such period was $39.1
million. For the quarter ended June 30, 1998, $3.4 million was included in
operating expense and $7.4 million of cash was expended for such liability.
Although the Company's management believes it is making adequate provisions
for all expected reclamation and other costs associated with mine closures,
future operating results would be adversely affected if such accruals were
later determined to be insufficient.
Impact of Clean Air Act Amendments on Coal Consumption. The Clean Air Act
and the Clean Air Act Amendments, and corresponding state laws that regulate
the emissions of materials into the air, affect coal mining operations both
directly and indirectly. Direct impacts on coal mining and processing
operations may occur through Clean Air Act permitting requirements and/or
emissions control requirements relating to particulate matter (e.g., "fugitive
dust"), including future regulation of fine particulate matter measuring 2.5
micrometers in diameter or smaller. In July 1997, the U.S. Environmental
Protection Agency ("EPA") adopted new, more stringent National Ambient Air
Quality Standards ("NAAQS") for particulate matter and ozone. As a result,
some states will be required to change their existing implementation plans to
attain and maintain compliance with the new NAAQS. Because coal mining
operations emit particulate matter, the Company's mining operations are likely
to be affected directly when the revisions to the NAAQS are implemented by the
states. State and federal regulations relating to implementation of the new
NAAQS may restrict the Company's ability to develop new mines or could require
the Company to modify its existing operations. The extent of the potential
direct impact of the new NAAQS on the coal industry will depend on the
policies and control strategies
23
<PAGE>
associated with the state implementation process under the Clean Air Act, but
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Clean Air Act indirectly affects coal mining operations by extensively
regulating the air emissions of SO/2/ and other compounds including nitrogen
oxides emitted by coal-fueled utility power plants. Title IV of the Clean Air
Act Amendments places limits on SO/2/ emissions from electric power generation
plants. The limits set baseline emission standards for such facilities.
Reductions in such emissions under Title IV of the Clean Air Act Amendments
will occur in two phases: (i) Phase I began in 1995 and applies only to
certain identified facilities; and (ii) Phase II is scheduled to begin in 2000
and will apply to all coal-fired power plants, including those subject to the
1995 restrictions. The affected utilities have been and may be able to meet
these requirements by, among other methods, switching to lower sulfur coal or
other low sulfur fuels, installing pollution control devices such as
scrubbers, reducing electricity generating levels or purchasing excess
emission allowances from other facilities. See "Coal Industry Overview--Coal
Markets." The effect of these provisions of the Clean Air Act Amendments on
the Company cannot be fully determined at this time. The Company believes that
implementation of Phase II will likely exert a downward pressure on the price
of higher sulfur coal, as additional coal-burning utility power plants become
subject to the restrictions of Title IV. This price effect is expected to
result after the large surplus of emission allowances which has accumulated in
connection with Phase I has been reduced, and before utilities electing to
comply with Phase II by installing sulfur-reduction technologies are able to
implement such a compliance strategy. The extent to which this expected price
decrease will materially adversely affect the Company will depend upon a
number of factors, including the Company's ability to secure CSAs for its coal
reserves with higher sulfur content.
The Clean Air Act Amendments also indirectly affect coal mining operations
by requiring utilities that currently are major sources of nitrogen oxides in
moderate or higher ozone nonattainment areas to install reasonably available
control technology ("RACT") for nitrogen oxides, which are precursors of
ozone. In addition, the recently issued, stricter ozone NAAQS standards, as
discussed above, are expected to be implemented by EPA by 2003. On September
24, 1998, EPA announced final rules (the "SIP call") governing NOx emissions
intended to reduce ozone concentrations in northeastern cities. The new rules
require additional NOx reductions in 22 states, including reductions in NOx
emissions from coal-fueled power plants located in midwestern and southern
states, sources purported to impact ozone in urban areas in the northeast.
Installation of RACT and additional control measures required under the SIP
call will make it more costly to operate coal-fired plants and, depending on
the requirements of individual state attainment plans and the development of
revised new source performance standards, could make coal a less attractive
fuel alternative in the planning and building of utility power plants in the
future. On September 16, 1998, EPA issued a new rule governing NOx emissions
from new sources. The rule, which is likely to face legal challenge, would
limit NOx emissions from new, significantly modified or reconstructed boilers
to amounts per megawatt-hour of gross electric output. The new rule would
require expensive NOx emission control technology for such coal-fired boilers,
which could affect the competitiveness of coal as a fuel for electricity
generation in the future. Any reduction in coal's share of the capacity for
power generation could have a material adverse effect on the Company's
business, financial condition and results of operations. The effect such
regulations or other requirements that may be imposed in the future could have
on the coal industry in general and on the Company in particular cannot be
predicted with certainty. No assurance can be given that the implementation of
the Clean Air Act Amendments, the new NAAQS or any other future regulatory
provisions will not materially adversely affect the Company.
Impact of the Framework Convention on Global Climate Change on the Coal
Industry. The United States, Australia and more than 160 other nations are
signatories to the 1992 Framework Convention on Global Climate Change (the
"Convention") which is intended to limit or capture emissions of greenhouse
gases, such as carbon dioxide. In December 1997 in Kyoto, Japan, the
signatories to the Convention established a binding set of emissions targets
for developed nations (the "Kyoto Protocol"). Although the specific limits
vary from country to country, under the terms of the Kyoto Protocol, the
United States would be required to reduce emissions to 93% of 1990 levels over
a five-year budget period from 2008 through 2012. Although the United States
has not ratified the Kyoto Protocol and no comprehensive regulations focusing
on greenhouse gas emissions are in place,
24
<PAGE>
efforts to control greenhouse gas emissions could result in reduced use of
coal if electric power generators switch to lower carbon sources of fuel. It
is unclear what impact, if any, greenhouse gas restrictions may have on the
Company's operations. There is no guarantee, however, that such restrictions,
if established through regulation or legislation, will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Impact of Federal and State Superfund Statutes on Coal Mining Operations and
Past Hard Rock Mining Operations. Risks of environmental liability are
inherent with respect to both current and past coal mining and hard rock
mining activities. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund") and similar state laws create
liability for investigation and remediation in response to releases of
substances hazardous to the environment and for damages to natural resources.
Under CERCLA and many state Superfund statutes, joint and several liability
may be imposed on waste generators, site owners and operators and others
regardless of fault.
In connection with the spin-off of The Energy Group from Hanson, The Energy
Group assumed environmental obligations associated with certain former non-
coal mining operations of Gold Fields Mining Corporation ("Gold Fields") and
its former parent company. Gold Fields, its predecessors and its former parent
company are or may become parties to environmental proceedings which have
commenced or may commence in the United States in relation to certain sites
previously owned or operated by those entities or companies associated with
them. The Company has agreed to indemnify Gold Field's former parent company
for any environmental claims resulting from any activities, operations or
conditions that occurred prior to the sale of Gold Fields to the Company. Gold
Fields is currently involved in environmental investigation or remediation at
six sites and is a defendant in litigation with private parties involving
three other sites. These nine sites were formerly owned or operated by Gold
Fields. EPA has placed three of these sites on the National Priorities List,
promulgated pursuant to CERCLA, and one of the sites is on a similar state
priority list. There are a number of other sites in the United States which
were previously owned or operated by such companies and which could give rise
to environmental proceedings in which Gold Fields could incur liabilities.
Where such sites were identified, the directors of The Energy Group
commissioned, in connection with the spin-off of The Energy Group, a review of
publicly available information by independent environmental consultants in
order to assess the estimated total amount of the liability per site and the
proportion of those liabilities which Gold Fields is likely to bear. The
available information on which to base this review was very limited since all
of the sites (except for three sites on which no remediation is currently
taking place) are no longer owned by Gold Fields.
On the basis of that review, The Energy Group has provided for the above
environmental liabilities relating to Gold Fields in the total sum of $73.6
million as of March 31, 1997. Significant uncertainty exists as to whether
these claims will be pursued against Gold Fields in all cases, and where they
are pursued, the amount of the eventual costs and liabilities, which could be
greater or less than this provision. As of June 30, 1998, the provision was
reduced to $68.0 million to reflect expenditures incurred during the period.
The Company believes that the remaining amount of the provision is adequate to
cover these environmental liabilities.
Although waste substances generated by coal mining and processing are
generally not regarded as hazardous substances for the purposes of CERCLA,
some products used by coal companies in operations, such as chemicals, and the
disposal of such products are governed by the statute. Thus, coal mines
currently or previously owned or operated by the Company, and sites to which
the Company sent waste materials, may be subject to liability under CERCLA and
similar state laws. In addition to the Gold Fields liabilities associated with
CERCLA and similar state laws, the Company's current and former coal mining
operations presently incur, and will continue to incur, expenditures
associated with the investigation and remediation of environmental matters,
including acid mine drainage, land subsidence, underground storage tanks,
solid and hazardous waste disposal and other matters.
25
<PAGE>
While the Company believes that it has identified costs likely to be
incurred for these environmental matters, and that those costs are not likely
to have a material adverse effect upon its business, financial condition and
results of operations, there can be no assurance that total costs and
liabilities for these environmental matters will not increase in the future.
The magnitude of such additional liabilities and the costs of complying with
these environmental laws cannot be predicted with certainty due to the lack of
specific information available with respect to many sites, the potential for
new or changed laws and regulations and for the development of new remediation
technologies and the uncertainty regarding the timing of work with respect to
particular sites. As a result, there can be no assurance that material
liabilities or costs related to environmental matters will not be incurred in
the future or that the Company's liquidity will not be adversely impacted by
such environmental liabilities or costs.
Black Lung and Workers' Compensation Obligations. Under the Black Lung
Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977,
as amended in 1981, each coal mine operator is required to secure payment of
federal black lung benefits to claimants who are current and former employees
and to a trust fund for the payment of benefits and medical expenses to
claimants who last worked in the coal industry prior to July 1, 1973. Less
than 7% of the miners currently seeking federal black lung benefits are
awarded such benefits by the federal government. The trust fund is funded by
an excise tax on production of up to $1.10 per ton for deep-mined coal and up
to $0.55 per ton for surface-mined coal, neither amount to exceed 4.4% of the
per ton sales price. This tax is passed on to the purchaser under many of the
Company's CSAs.
Legislation on black lung reform was introduced but not enacted in the last
Congress. It is possible that such legislation will be reintroduced for
consideration by the current Congress. Such legislation could restrict the
evidence that can be offered by a mining company, establish a standard for
evaluation of evidence that greatly favors black lung claimants, allow
claimants who have been denied benefits at any time since 1981 to refile their
claims for consideration under the new law, make surviving spouse benefits
significantly easier to obtain and retroactively waive repayment of
preliminarily awarded benefits that are later determined to have been
improperly paid. If this or similar legislation is passed, the number of
claimants who are awarded benefits could significantly increase. There can be
no assurance that such proposed legislation or other proposed changes in black
lung legislation will not have an adverse effect on the Company.
The U.S. Department of Labor has issued proposed amendments to the
regulations implementing the federal black lung laws which, among other
things, establish a presumption in favor of a claimant's treating physician
and limit a coal operator's ability to introduce medical evidence regarding
the claimant's medical condition. If adopted, the amendments could have an
adverse impact on the Company, the extent of which cannot be accurately
predicted.
Additionally, the Company is required to compensate employees for work-
related injuries. The Company's workers' compensation liabilities (including
black lung claims) totaled approximately $261.6 million on the Company's
balance sheet as of June 30, 1998, $39.7 million of which is a current
liability. The amount that was included as an operating expense for the pro
forma twelve month period ended March 31, 1998 was $25.2 million, while the
related cash expense for such liability was $41.9 million. For the quarter
ended June 30, 1998, $8.8 million was included in operating expense and $11.3
million of cash was expended for such liability.
POSTRETIREMENT BENEFITS AND PENSION PLAN LIABILITIES
The Company provides postretirement health and life insurance benefits to
eligible union and non-union employees. The Company has calculated the total
accumulated postretirement benefit obligation under SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") and
estimates that at June 30, 1998, the present value of such future obligation
was approximately $1,040.6 million, $48.9 million of which is a current
liability. These obligations have been estimated by the Company based on
assumptions described in the notes to the financial statements. If the
Company's assumptions do not materialize as expected, cash expenditures and
costs that the Company would incur could be materially higher than those
reflected in the Company's Unaudited Pro Forma Condensed Combined Financial
Statements.
26
<PAGE>
REPLACEMENT AND RECOVERABILITY OF RESERVES
The Company's future success depends upon its ability to find, develop or
acquire additional coal reserves that are economically recoverable. The
recoverable reserves of the Company will generally decline as reserves are
depleted, except to the extent that the Company conducts successful
exploration and development activities or acquires properties containing
recoverable reserves. To increase reserves and production, the Company must
continue its development, exploration and acquisition activities or undertake
other replacement activities. The Company's current strategy includes
increasing its reserve base through acquisitions of government leases and
other leases and producing properties and continuing to exploit its existing
properties. The federal government continually leases coal reserves through a
competitive bidding process. Companies such as Peabody may nominate specific
areas to be leased by the government by application. Companies that have
operations adjacent to these nominated lease areas have advantages in the bid
process since their mining infrastructure is in place and they could avoid the
cost of developing a new mine. Through this process, in June 1998, the Company
acquired an additional 532 million tons of low sulfur coal reserves in a lease
auction in the Powder River Basin adjacent to its Rochelle Mine. There can be
no assurance that the Company will be able to continue successfully leasing
additional reserves from the government. Additionally, there can be no
assurance that the Company's planned development and exploration projects and
acquisition activities will result in significant additional reserves or that
the Company will have continuing success developing additional mines. For a
discussion of the Company's reserves, see "Business--Coal Reserves." Most of
the Company's mining operations are conducted on properties owned or leased by
the Company. Because title to most of the Company's leased properties and
mineral rights is not thoroughly verified until a permit to mine the property
is obtained, the Company's right to mine certain of its reserves may be
materially adversely affected if defects in title or boundaries exist. In
addition, there is no assurance that the Company can successfully negotiate
new leases from the government or private parties or mining contracts for
properties containing additional reserves or maintain its leasehold interest
in properties on which mining operations are not commenced during the term of
the lease. See "Business--Coal Reserves."
SURETY BONDS
Federal and state laws require bonds to secure the Company's obligations to
reclaim lands disturbed for mining, to pay federal and state workers'
compensation and to satisfy other miscellaneous obligations (the "Surety
Bonds"). As of June 30, 1998, the Company had outstanding Surety Bonds with
third parties for post-mining reclamation totaling $369.3 million, with an
additional $269.1 million in self-bonding obligations. Furthermore, Surety
Bonds valued at an additional $233.1 million are in place for federal and
state workers' compensation obligations and other miscellaneous obligations.
These bonds are typically renewable on a yearly basis. No assurance can be
given that the Surety Bond holders will continue to renew the bonds or refrain
from demanding additional collateral upon such renewals. Furthermore, as a
result of the Financings, the Company is highly leveraged, making it unlikely
that the Company will be able to continue its self-bonding program and thus
requiring it to obtain additional third-party Surety Bonds. The failure to
maintain or the inability to acquire sufficient Surety Bonds, as required by
state and federal law, would have a material adverse effect on the Company and
therefore create certain risks for the purchasers of the Notes. Such failure
could result from a variety of factors including the following: (i) lack of
availability, higher expense or unreasonable terms of new Surety Bonds, (ii)
restrictions on the demand for collateral by current and future third-party
Surety Bond holders due to the terms of the Indentures or the Senior Credit
Facilities and (iii) the exercise by third-party Surety Bond holders of their
right to refuse to renew the surety.
PRICE FLUCTUATIONS AND MARKETS
The Company's results of operations are highly dependent upon the prices
received for the Company's coal. Although in fiscal 1998, 92% of the Company's
sales were made pursuant to CSAs, many of the Company's CSAs contain price
reopener provisions which provide for the contract price to be adjusted upward
or downward at specified times. See "Business--Long-Term Coal Contracts." Any
significant decline in prices for coal could have a material adverse effect on
the Company's business, financial condition, results of operations and
quantities
27
<PAGE>
of reserves recoverable on an economic basis. Should the industry experience
significant price declines from current levels or other adverse market
conditions, the Company may not be able to generate sufficient cash flow from
operations to meet its obligations, including debt service obligations under
the Notes, and make planned capital expenditures. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The availability of a ready market for the Company's coal production also
depends on a number of factors, including the demand and supply of low sulfur
coal and the availability of emission allowances.
See "--Government Regulation of the Mining Industry--Impact of Clean Air Act
Amendments on Coal Consumption."
COMPETITION
The coal industry is highly competitive, with numerous producers in all coal
producing regions. The Company competes with other large producers and
hundreds of small producers in the United States and abroad. Many of the
Company's customers are also customers of the Company's competitors. The
markets in which the Company sells its coal are highly competitive and
affected by factors beyond the Company's control. Continued demand for the
Company's coal and the prices that the Company will be able to obtain will
depend primarily on coal consumption patterns of the domestic electric utility
industry, which in turn are affected by the demand for electricity, coal
transportation costs, environmental and other governmental regulations and
orders, technological developments and the availability and price of competing
alternative energy sources such as oil, natural gas, nuclear energy and
hydroelectric energy. See "Regulatory Matters." In addition, during the mid-
1970s and early 1980s, a growing coal market and increased demand for coal
attracted new investors to the coal industry and spurred the development of
new mines and added production capacity throughout the industry. Although
demand for coal has grown over the recent past, the industry has since been
faced with over-capacity, which in turn has increased competition and lowered
prevailing coal prices. Moreover, because of greater competition for
electricity and increased pressure from customers and regulators to lower
electricity prices, public utilities are lowering fuel costs and requiring
competitive prices on their purchases of coal.
UNIONIZATION OF LABOR FORCE
Approximately 56% of the Company's U.S. coal employees, who accounted for
35% of Peabody's U.S. coal production in 1997, are represented by the UMWA.
The Australian coal mining industry is highly unionized and the majority of
workers employed at Peabody Resources are members of trade unions. Certain of
the Company's competitors have non-union work forces. Because of the increased
risk of strikes and other work-related stoppages in addition to higher labor
costs which may be associated with union operations in the coal industry, the
Company's non-unionized competitors may have a competitive advantage in areas
where they compete with the Company's unionized operations. If some or all of
the Company's current non-union operations were to become unionized, the
Company could incur an increased risk of work stoppages and higher labor
costs. The ten month long UMWA strike in 1993 had a material adverse effect on
the Company. The Company's Peabody Coal Company ("PCC") and Eastern Associated
Coal Corp. ("Eastern Associated") subsidiaries operate under a union contract
which is in effect through December 31, 2002 and the Company's Peabody Western
Coal Company ("Peabody Western") subsidiary operates under a union contract
which is in effect through August 31, 2000. Peabody Resources' Warkworth mine
operates under a labor agreement which expires in September 1999. Peabody
Resources' Ravensworth and Namara mines operated under a labor agreement which
expired in March 1998, and while negotiations on a new labor agreement are
ongoing and there have been no resulting work stoppages since the expiration
of the agreement, there can be no assurance that such negotiations will be
successful. There can be no assurance that the Company's unionized labor will
not go on strike upon expiration of existing contracts. See "Business--
Employees of the Company."
CONTROL BY LEHMAN MERCHANT BANKING
As a result of the Transactions, a substantial majority of the Company's
outstanding equity is owned by Lehman Merchant Banking. Lehman Merchant
Banking is able to control the election of the directors of the
28
<PAGE>
Company and to determine the corporate and management policies of the Company,
including decisions relating to any mergers or acquisitions of the Company,
sales of all or substantially all of the Company's assets and other
significant corporate transactions, which transactions may result in a Change
of Control under the Indentures. See "Ownership of Capital Stock."
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a number of key personnel, the loss of
which could have a material adverse effect on the Company. In addition, as the
Company's business develops and expands, the Company believes that its future
success will depend greatly on its continued ability to attract and retain
highly skilled and qualified personnel. The Company is negotiating employment
agreements with certain senior executive officers. There can be no assurance
that key personnel will continue to be employed by the Company or that the
Company will be able to attract and retain qualified personnel in the future.
The Company currently has not obtained key person life insurance to cover its
executive officers. Failure by the Company to retain or attract such key
personnel could have a material adverse effect on the Company. See
"Management."
LIMITED RIGHTS OF RECOVERY AGAINST SELLERS
The Acquisition is part of the acquisition of The Energy Group by TU. TU
acquired The Energy Group pursuant to a competitive bidding process in the
United Kingdom. As a result, the Company was subject to certain restrictions
on access to information imposed by U.K. law, as well as practical
restrictions imposed by the competitive process on its ability to obtain
representations, warranties and indemnity rights. Generally, the Company only
received representations, warranties and indemnities related to the seller's
authority to sell the Acquired Companies, its ownership of the Acquired
Companies and certain assignments of the benefit of certain limited tax
indemnities from Hanson. Consequently, there may be liabilities and
contingencies, such as environmental, tax, employee benefit or other items,
relating to the business of the Company for which the Company may not be
entitled to indemnification and which could have a material adverse effect on
the financial condition of the Company.
ABILITY TO IMPROVE PRODUCTIVITY AND REDUCE COSTS
The Company has historically improved productivity and reduced costs of its
operations. There can be no assurance that the Company will continue to
achieve comparable improvements in the future. In addition, while the Company
intends to implement plans to reduce operating costs and improve efficiencies,
there can be no assurance that such efforts will be successful.
IMPACT OF YEAR 2000 ISSUE
An issue exists for all companies that rely on computers as the year 2000
approaches. The year 2000 issue (the "Year 2000 Issue") is the result of the
past practice in the computer industry of using two digits rather than four to
identify the applicable year. This practice may result in incorrect results
when computers perform arithmetic operations, comparisons or data field
sorting and some non-information systems functions that rely on computers
involving years later than 1999. The Company has implemented a program that it
anticipates will be able to test its entire system using its internal
programming staff and outside computer consultants and intends to make any
necessary modifications to prevent disruption to its operations. Costs in
connection with any such modifications are not expected to be material.
However, if such modifications are not completed in a timely manner, the Year
2000 Issue may have a material adverse effect on the operations of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Year 2000 Issue."
29
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Old Notes for
Exchange Notes pursuant to the Exchange Offers.
The net proceeds received by the Company from the Offerings of the Old
Notes, together with the borrowings under the Term Loan Facility and the
equity contribution by Lehman Merchant Banking and management, were used upon
consummation of the Acquisition to (i) pay $2,065.0 million for the purchase
of the Acquired Companies, (ii) pay $73.0 million of the Citizens Power
Obligations of $92.0 million, (iii) capitalize Citizens Power's energy trading
operations with $50.0 million, (iv) increase cash balances by $34.4 million
and (v) pay an estimated $75.0 million in transaction fees and expenses
incurred in connection with the Transactions. See "The Acquisition" and
"Capitalization."
CAPITALIZATION
The following table sets forth the historical and pro forma capitalization
of the Company, excluding non-recourse long-term debt of Citizens Power of
$290.9 million as of June 30, 1998 and $293.9 million, as of May 19, 1998 and
March 31, 1998.
<TABLE>
<CAPTION>
AS OF AS OF AS OF
JUNE 30, 1998 MAY 19, 1998 MARCH 31, 1998
ACTUAL ACTUAL ACTUAL
------------- ------------ --------------
(IN MILLIONS)
<S> <C> <C> <C>
Senior Credit Facilities
Revolving Credit Facility...... $ -- $ -- $ --
Term Loan Facility............. 920.0 920.0 --
Senior Notes..................... 398.8 398.8 --
Senior Subordinated Notes........ 498.6 498.6 --
Existing U.S. Long-Term Debt..... 5.6 5.8 6.1
Peabody Resources Debt........... 76.6 75.0 44.7
5% Subordinated Note............. 202.9 201.8 192.6
Citizens Power Obligations....... 19.0 19.0 65.0
-------- -------- --------
Total Debt..................... $2,121.5 $2,119.0 $ 308.4
Stockholder equity/Invested
Capital......................... 467.0 480.0 1,687.8
-------- -------- --------
Total Capitalization....... $2,588.5 $2,599.0 $1,996.2
======== ======== ========
</TABLE>
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Financial Statements of the
Company are based on the audited and unaudited financial statements of the
Company appearing elsewhere in this Prospectus as adjusted to illustrate the
estimated pro forma effects of the Transactions. The unaudited pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The Unaudited Pro Forma Condensed
Financial Statements and accompanying notes should be read in conjunction with
the historical Financial Statements of the Company and other financial
information pertaining to the Company appearing elsewhere in this Prospectus,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Unaudited Pro Forma Condensed Financial Statements for the year ended
March 31, 1998 are presented on a combined basis, as the entities previously
were held under common ownership by The Energy Group. The Unaudited Pro Forma
Condensed Financial Statements for the three months ended June 30, 1998 are
presented on a consolidated basis, reflecting the Company's acquisition of the
entities previously owned by The Energy Group.
The Unaudited Pro Forma Condensed Financial Statements have been prepared to
give pro forma effect to the Transactions as if such transactions had occurred
on April 1, 1997 for the statement of operations for the three months ended
June 30, 1998 and for the statement of operations for the year ended March 31,
1998 (the "Unaudited Pro Forma Condensed Statements of Operations"). Together
the Unaudited Pro Forma Condensed Statements of Operations comprise the
"Unaudited Pro Forma Condensed Financial Statements." Note, the purchase
transaction is reflected in the June 30, 1998 balance sheet appearing
elsewhere, and accordingly, presentation of a pro forma balance sheet is not
required.
The unaudited pro forma adjustments are based upon preliminary estimates.
Actual adjustments will be based on the final purchase price subject to
purchase price adjustments and other analyses of fair values. The Unaudited
Pro Forma Condensed Financial Statements should be read in conjunction with
the historical Financial Statements and notes of the Company included
elsewhere in this Prospectus. The unaudited pro forma data are for
informational purposes only and may not be indicative of the results that
actually would have occurred had the Transactions been in effect on the dates
indicated or results that may be obtained in the future. Moreover, the
Unaudited Pro Forma Condensed Statements of Operations do not reflect any cost
reductions associated with any reorganization plans currently under
consideration.
The Unaudited Pro Forma Condensed Financial Statements reflect the
Acquisition with an estimated equity purchase price of $2,065.0 million plus
estimated transaction costs of $75.0 million. The Acquisition was financed
with $480.0 million of equity contributed by Lehman Merchant Banking and
borrowings of $1,817.4 million, of which $123.0 million was used to repay
existing debt and to capitalize Citizens Power.
31
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEAR YEAR
ENDED PURCHASE ENDED
MARCH 31, ACCOUNTING FINANCING MARCH 31,
1998(/1/) ADJUSTMENTS(/2/) ADJUSTMENTS(/2/) 1998(/1/)
---------- ---------------- ---------------- ---------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
REVENUES
Sales.......................................... $2,077.1 $ -- $ -- $2,077.1
Other Revenue.................................. 169.3 -- -- 169.3
-------- ------ ------- --------
Total Revenues............................... $2,246.4 $ -- $ -- $2,246.4
OPERATING COSTS AND EXPENSES
Operating Costs and Expenses................... 1,712.8 32.8a -- 1,745.6
Depreciation, Depletion and Amortization....... 202.6 18.7b 221.3
Selling and Administrative Expenses............ 83.6 -- -- 83.6
Net Loss/(Gain) on Property and Equipment
Disposals..................................... (21.8) -- -- (21.8)
-------- ------ ------- --------
OPERATING PROFIT (LOSS).......................... $ 269.2 $(51.5) $ -- $ 217.7
Interest Expense............................... (33.6) -- (8.3)d (207.7)
-- -- (165.8)e --
Interest Income................................ 14.9 -- (12.3)f 2.6
-------- ------ ------- --------
INCOME (LOSS) BEFORE INCOME TAX.................. $ 250.5 $(51.5) $(186.4) $ 12.6
Income Tax Provision (Benefit) ................ 90.2 (6.9)c (48.5)c 34.8
-------- ------ ------- --------
NET INCOME (LOSS)................................ $ 160.3 $(44.6) $(137.9) $ (22.2)
======== ====== ======= ========
Other Data:
EBITDA(/3/).................................... $ 428.2
Depreciation, Depletion and Amortization....... 221.3
Capital Expenditures........................... 166.3
Ratio of Earnings to Fixed Charges(/4/)........ 1.06x
Ratio of Net Debt to EBITDA(/5/)............... 4.67x
Ratio of EBITDA to Cash Interest Expense(/6/).. 2.28x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statement of Operations.
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
1. Includes the results of Citizens Power, which had revenues of $28.4
million and EBITDA of $10.8 million for the period April 1, 1997 to March 31,
1998.
2. Reflects the Statement of Operations as if the Transactions had taken
place effective April 1, 1997.
(a) Reflects the impact of adjusting employee-related liabilities to their
estimated fair value at the beginning of plan year based on a discount
rate of 7.25%. The increased cost primarily relates to the elimination
of unrecognized actuarial gains included in the historical combined
financial statements.
(b) Reflects an increase in depreciation depletion, and amortization
expense due to the impact of fair valuing certain assets at purchase
date. The expected useful lives on amortization periods of significant
assets have not changed from those disclosed in the footnotes to the
historical financial statements.
(c) Reflects the tax effects of the pro forma adjustments at a combined
federal and state income tax rate of approximately 25% because the
Company expects to be an alternative minimum tax ("AMT") tax payer for
the forseeable future.
(d) Reflects the additional interest expense resulting from the
capitalization of fees and other deferred financing costs in
conjunction with the Financings totaling $75.0 million, which will be
amortized over approximately nine years.
(e) Reflects the increase in interest expense associated with the Senior
Credit Facilities, the Senior Notes and the Senior Subordinated Notes
and other debt amortization costs related to the Transactions. For
purposes of this calculation, the assumed interest rate is 8.00% for
the Senior Credit Facilities and the yield interest rates of 8.92% for
the Senior Notes and 9.67% for the Senior Subordinated Notes applied to
the discounted value of the respective Notes. If the interest rate on
the Senior Credit Facilities changed by ( 1/8) percent, the effect on
interest expense would be $1.15 million per year.
(f) Reflects the decrease in interest income, assuming no excess cash for
investment.
3. EBITDA is defined as income before deducting interest expense, income
taxes, depreciation, depletion and amortization and excludes any non-cash
compensation expense related to management stock transactions. EBITDA has been
reduced by costs associated with reclamation, retiree health care and workers'
compensation. EBITDA is not a substitute for operating income, net income and
cash flow from operating activities as determined in accordance with generally
accepted accounting principles as a measure of profitability or liquidity.
EBITDA is presented as additional information because management believes it
to be a useful indicator of the Company's ability to meet debt service and
capital expenditure requirements and because it is expected that certain debt
covenants of the Company will utilize EBITDA to measure compliance with such
covenants. Because EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled measures
of other companies. Excludes $10.8 million EBITDA for Citizens Power.
4. For purposes of this computation, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest on
indebtedness plus the interest component of lease rental expense.
5. For the purpose of this calculation, net debt consists of total debt less
cash and cash equivalents of $98.9 million. Excludes $293.9 million of non-
recourse indebtedness, $10.8 million of EBITDA and $60.4 million of cash of
Citizens Power.
6. For the purpose of this calculation, cash interest expense represents
total interest expense less non-cash interest charges, including amortization
of deferred financing costs and imputed interest from the 5% Subordinated
Note. Excludes $10.8 million of EBITDA for Citizens Power.
7. The Unaudited Pro Forma Condensed Statement of Operations excludes
nonrecurring compensation expense of approximately $5.3 million for a stock
grant representing approximately 3% ownership of the Company, to be provided
to Company's key management. The Company will be required to recognize
compensation expense related to this stock grant in the period management and
Lehman Merchant Banking complete employment contract negotiations.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
PRO FORMA
HISTORICAL ACTUAL THREE MONTHS
PERIOD 4/1/98 PERIOD 5/20/98 PURCHASE ENDED
THROUGH THROUGH ACCOUNTING FINANCING JUNE 30,
5/19/98 6/30/98 ADJUSTMENTS(1) ADJUSTMENTS(1) 1998
------------- -------------- -------------- -------------- ------------
(IN MILLIONS EXCEPT RATIO)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales.......................... $280.7 $253.7 $534.4
Other revenue.................. 11.7 9.0 20.7
------ ------ ----- ------ ------
Total revenues............... 292.4 262.7 -- -- 555.1
OPERATING COSTS AND EXPENSES
Operating costs and expenses... 246.8 213.1 4.1 a 464.0
Depreciation, depletion and
amortization.................. 26.2 25.7 2.4 b 54.3
Selling and administrative
expenses...................... 12.1 8.9 21.0
Net gain on property
disposals..................... -- (0.3) (0.3)
------ ------ ----- ------ ------
OPERATING PROFIT (LOSS).......... 7.3 15.3 (6.5) -- 16.1
Interest expense............... (4.2) (23.2) (1.5) d (51.5)
(22.6) e
Interest income................ 1.7 1.0 2.7
------ ------ ----- ------ ------
INCOME (LOSS) BEFORE INCOME TAX.. 4.8 (6.9) (6.5) (24.1) (32.7)
Provision (Benefit) For Income
Taxes......................... 4.3 (1.6) (0.9) c (6.3) c (4.5)
------ ------ ----- ------ ------
NET INCOME (LOSS)................ $ 0.5 $ (5.3) $(5.6) $(17.8) $(28.2)
====== ====== ===== ====== ======
Other Data:
EBITDA (2)..................... $ 65.6
Depreciation, Depletion and
Amortization.................. 54.3
Capital Expenditures........... 147.2
Ratio of Earnings to Fixed
Charges(3).................... --
Ratio of Net Debt to
EBITDA(4)..................... 5.00x
Ratio of EBITDA to Cash
Interest Expense(5)........... 2.09x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statement of Operations
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
1. Reflects the Statement of Operations as if the Transactions had taken
place effective April 1, 1997.
(a) Reflects the impact of adjusting employee-related liabilities to their
estimated fair value at the beginning of plan year based on a discount
rate of 7.25%. The increased cost primarily relates to the elimination
of unrecognized actuarial gains included in the historical combined
financial statements.
(b) Reflects an increase in depreciation depletion, and amortization
expense due to the impact of fair valuing certain assets at purchase
date. The expected useful lives on amortization periods of significant
assets have not changed from those disclosed in the footnotes to the
historical financial statements.
(c) Reflects the tax effects of the pro forma adjustments at a combined
federal and state income tax rate of approximately 25% because the
Company expects to be an alternative minimum tax ("AMT") tax payer for
the forseeable future.
(d) Reflects the additional interest expense resulting from the
capitalization of fees and other deferred financing costs in
conjunction with the Financings totaling $75.0 million, which will be
amortized over approximately nine years.
(e) Reflects the increase in interest expense associated with the Senior
Credit Facilities, the Senior Notes and the Senior Subordinated Notes
and other debt amortization costs related to the Transactions. For
purposes of this calculation, the assumed interest rate is 8.00% for
the Senior Credit Facilities and the yield interest rates of 8.92% for
the Senior Notes and 9.67% for the Senior Subordinated Notes applied to
the discounted value of the respective Notes. If the interest rate on
the Senior Credit Facilities changed by ( 1/8) percent, the effect on
interest expense would be $1.15 million per year.
2. EBITDA is defined as income before deducting interest expense, income
taxes, depreciation, depletion and amortization and excludes any non-cash
compensation expense related to management stock transactions. EBITDA has been
reduced by costs associated with reclamation, retiree health care and workers'
compensation. EBITDA is not a substitute for operating income, net income and
cash flow from operating activities as determined in accordance with generally
accepted accounting principles as a measure of profitability or liquidity.
EBITDA is presented as additional information because management believes it
to be a useful indicator of the Company's ability to meet debt service and
capital expenditure requirements and because it is expected that certain debt
covenants of the Company will utilize EBITDA to measure compliance with such
covenants. Because EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled measures
of other companies. Excludes $4.8 million EBITDA for Citizens Power.
3. For purposes of this computation, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest on
indebtedness plus the interest component of lease rental expense. Earnings
were insufficient to cover fixed charges by $32.7 million.
4. For the purpose of this calculation, net debt consists of total debt less
cash and cash equivalents of $164.3 million. Excludes $290.9 million of non-
recourse indebtedness, $4.8 million of EBITDA and $47.3 million of cash of
Citizens Power.
5. For the purpose of this calculation, cash interest expense represents
total interest expense less non-cash interest charges, including amortization
of deferred financing costs and imputed interest from the 5% Subordinated
Note. Excludes $4.8 million of EBITDA for Citizens Power.
6. The Unaudited Pro Forma Condensed Statement of Operations excludes
nonrecurring compensation expense of approximately $5.3 million for a stock
grant representing approximately 3% ownership of the Company, to be provided
to Company's key management. The Company will be required to recognize
compensation expense related to this stock grant in the period management and
Lehman Merchant Banking complete employment contract negotiations.
35
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data for the year ended, and as
of, March 31, 1998, for the six months ended, and as of, March 31, 1997 and
for the years ended, and as of, September 30, 1996 and 1995 have been derived
from, and should be read in conjunction with, the audited combined financial
statements of the Company included elsewhere in this Prospectus which have
been audited by Ernst & Young LLP, the Company's independent auditors. The
table reflects the fact that effective with The Energy Group's spin-off from
Hanson, the Company switched from a fiscal year ended September 30 to a fiscal
year ended March 31.
The unaudited selected financial data for the period May 20, 1998 through
June 30, 1998 and for the period April 1, 1998 through May 19, 1998 and for
the year ended, and as of, September 30, 1994 and 1993 and for the twelve
months ended, and as of, March 31, 1997 have been derived from the Company's
records. In the opinion of the Company's management, such unaudited financial
statements reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of the dates and periods indicated. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Combined/Consolidated
Financial Statements of the Company and related notes included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------- -----------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEAR TWELVE MONTHS SIX MONTHS FISCAL YEARS ENDED
PERIOD PERIOD ENDED ENDED ENDED SEPTEMBER 30,
MAY 20, 1998 APRIL 1, 1998 ----------- ------------- ---------- -----------------------------------
THROUGH THROUGH MARCH 31, MARCH 31, MARCH 31,
JUNE 30, 1998 MAY 19, 1998 1998(/1/) 1997 1997 1996 1995(/2/) 1994(/4/)
------------- ------------- ----------- ------------- ---------- -------- --------- ---------
(IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERA-
TIONS DATA:
Tons Sold......... 20.6 22.7 167.5 167.4 81.4 163.0 151.0 101.6
Revenues.......... 262.7 292.4 $2,244.4 $2,242.3 $1,064.1 $2,193.6 $2,175.8 $1,844.4
Cost of Goods Sold
(includes
depreciation,
depletion and
amortization).... 238.4 273.0 1,913.4 1,941.6 924.7 1,891.4 1,861.8 1,631.6
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit...... 24.3 19.4 $ 331.0 $ 300.7 $ 139.4 $ 302.2 $ 314.0 $ 212.8
Impairment of
Long-Lived As-
sets(/5/)........ -- -- -- 890.8 -- 890.8 -- --
Selling and Admin-
istrative Ex-
penses........... 9.0 12.0 83.6 80.7 41.4 75.7 81.3 73.1
Net Loss/(Gain) on
Property and
Equipment
Disposals........ -- -- (21.8) (8.0) (4.1) (13.0) (12.9) (5.9)
-------- -------- -------- -------- -------- -------- -------- --------
Operating Profit
(Loss)........... 15.3 7.4 $ 269.2 $ (662.8) $ 102.1 $ (651.3) $ 245.6 $ 145.6
======== ======== ======== ======== ======== ======== ======== ========
Net Income
(Loss)........... (5.3) .5 $ 160.3 $ (449.3) $ 58.4 $ (446.3) $ 100.4 $ 79.4
======== ======== ======== ======== ======== ======== ======== ========
1993(/3/)(/4/)
--------------
<S> <C>
RESULTS OF OPERA-
TIONS DATA:
Tons Sold......... 85.7
Revenues.......... $1,580.1
Cost of Goods Sold
(includes
depreciation,
depletion and
amortization).... 1,482.8
--------------
Gross Profit...... $ 97.3
Impairment of
Long-Lived As-
sets(/5/)........ --
Selling and Admin-
istrative Ex-
penses........... 69.0
Net Loss/(Gain) on
Property and
Equipment
Disposals........ (6.8)
--------------
Operating Profit
(Loss)........... $ 35.1
==============
Net Income
(Loss)........... $ (40.7)
==============
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------- -----------------------------------------------------------------------------
AS OF AS OF AS OF
JUNE 30, MARCH 31, MARCH 31, AS OF SEPTEMBER 30,
------------- ------------- ----------- ---------------------------------------------------
1998 1998(/1/) 1997 1996 1995 1994 1993
------------- ------------- ----------- ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DA-
TA:
Working Capital
(deficiency).... 372.5 $ 535.9 $ 167.1 $ (129.5) $ (104.3) $ 280.5 $ 99.7
Total Assets..... 7,643.6 6,355.2 5,025.8 4,916.7 5,676.9 5,560.1 5,263.3
Recourse Debt.... 2,121.5 308.4 321.7 456.9 600.8 578.4 550.0
Non-Recourse
Debt............ 290.9 293.9 -- -- -- -- --
Invested Capi-
tal............. 467.0 1,687.8 1,676.8 1,383.7 1,651.0 1,656.6 1,376.9
<CAPTION>
<S> <C>
BALANCE SHEET DA-
TA:
Working Capital
(deficiency)....
Total Assets.....
Recourse Debt....
Non-Recourse
Debt............
Invested Capi-
tal.............
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------- -----------------------------------------------------------------------------------------
FISCAL YEAR TWELVE MONTHS SIX MONTHS FISCAL YEARS ENDED
PERIOD PERIOD ENDED ENDED ENDED SEPTEMBER 30,
MAY 20, 1998 APRIL 1, 1998 ----------- ------------- ---------- -----------------------------------
THROUGH THROUGH MARCH 31, MARCH 31, MARCH 31,
JUNE 30, 1998 MAY 19, 1998 1998(/1/) 1997 1997 1996 1995(/2/) 1994(/4/)
------------- ------------- ----------- ------------- ---------- -------- --------- ---------
(IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL
DATA:
EBITDA(/6/)...... 34.9 34.8 $ 461.0 $ 431.6(/7/) $ 203.8 $ 437.4(/7/) $ 435.9 $ 315.8
Net cash provided
by (used in):
Operating activi-
ties............ 19.3 (30.6) 181.7 323.2 62.8 211.5 272.5 153.1
Investing activi-
ties............ (2,033.0) (19.2) (129.9) (106.6) (56.2) (105.6) (462.1) (108.5)
Financing activi-
ties............ 2,225.7 23.6 (235.4) (77.4) 94.2 16.0 179.0 (4.0)
Depreciation,
Depletion and
Amortization.... 25.7 26.2 202.6 203.6 101.7 197.9 190.3 170.2
Capital Expendi-
tures
Replacement of
Equipment and
Facilities...... 10.6 10.4 $ 90.9 $ 89.1 $ 47.3 $ 88.7 $ 122.9 $ 77.3
New Mine and
Expanded
Capacity........ 10.4 29.1 75.4 59.4 29.2 63.4 65.1 58.4
-------- -------- -------- -------- -------- -------- -------- --------
Total Capital
Expenditures... $ 21.0 $ 39.5 $ 166.3 $ 148.5 $ 76.5 $ 152.1 $ 188.0 $ 135.7
======== ======== ======== ======== ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges(/8/).. -- 1.72x 5.77x -- 3.63x -- 3.63x 2.13x
<CAPTION>
1993(/3/)(/4/)
--------------
<S> <C>
OTHER FINANCIAL
DATA:
EBITDA(/6/)...... $ 163.3
Net cash provided
by (used in):
Operating activi-
ties............ 126.9
Investing activi-
ties............ (131.8)
Financing activi-
ties............ (10.7)
Depreciation,
Depletion and
Amortization.... 128.2
Capital Expendi-
tures
Replacement of
Equipment and
Facilities...... $ 63.7
New Mine and
Expanded
Capacity........ 96.6
--------------
Total Capital
Expenditures... $ 160.3
==============
Ratio of Earnings
to Fixed Charges(/8/).. --
</TABLE>
(footnotes on following page)
36
<PAGE>
- --------
(1) Reflects the acquisition of Citizens Power effective May 19, 1997,
including $10.8 million of EBITDA, $294.2 million of working capital,
$1,448.5 million of total assets and $293.9 million of non-recourse
indebtedness of Citizens Power as of March 31, 1998 and for the period May
19, 1997 to March 31, 1998.
(2) Reflects the acquisition of the Caballo and the Rawhide coal mines in the
Powder River Basin effective November 1994.
(3) Reflects the acquisition of the Company's Australian and Lee Ranch
operations effective April 1993 and June 1993, respectively.
(4) The Company experienced a UMWA work stoppage from February 2, 1993 to
December 16, 1993, which negatively impacted the Company's Peabody Coal
Company and Eastern Associated Coal Corp. operations.
(5) Represents a one-time non-cash charge made pursuant to SFAS 121, which had
no effect on the Company's cash flow.
(6) EBITDA is defined as income before deducting interest expense, income
taxes, depreciation, depletion and amortization and excludes any non-cash
compensation expense related to management stock transactions. EBITDA has
been reduced by costs associated with reclamation, retiree health care and
workers' compensation. EBITDA is not a substitute for operating income,
net income and cash flow from operating activities as determined in
accordance with generally accepted accounting principles as a measure of
profitability or liquidity. EBITDA is presented as additional information
because management believes it to be a useful indicator of the Company's
ability to meet debt service and capital expenditure requirements and
because it is expected that certain debt covenants of the Company will
utilize EBITDA to measure compliance with such covenants. Because EBITDA
is not calculated identically by all companies, the presentation herein
may not be comparable to other similarly titled measures of other
companies. Excludes EBITDA of $6.1 million for the period May 20, 1998
through June 30, 1998, ($1.2 million) for the period April 1, 1998 through
May 19, 1998 and $10.8 million for the fiscal year ended March 31, 1998
for Citizens Power.
(7) EBITDA for twelve months ended March 31, 1997 and the twelve months ended
September 30, 1996 excluded an $890.8 million charge for Impairment of
Long-Lived Assets. This is a one-time non-cash charge made pursuant to
SFAS 121 which had no effect on the Company's cash flow.
(8) For purposes of this computation, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of interest expense on all
indebtedness plus the interest component of lease rental expense. Earnings
were insufficient to cover fixed charges by $6.9 million, $702.3 million,
$702.5 million and $21.8 million for the period May 20, 1998 through June
30, 1998, for the twelve months ended March 31, 1997, the fiscal year
ended September 30, 1996 and the fiscal year ended September 30, 1993,
respectively, due to the SFAS 121 charges described above.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the audited and unaudited Combined/Consolidated
Financial Statements of the Company and the notes thereto included elsewhere
in this Prospectus. The financial statements contained in this Prospectus are
of the Company's predecessors.
Prior to March 7, 1997, the Company was a wholly-owned indirect subsidiary
of Hanson. During 1996 and 1997, Hanson spun-off its operations into four
separate companies. As part of this tax-free distribution plan, on February
24, 1997 Hanson spun off The Energy Group to hold the energy business of
Hanson. In addition, on March 7, 1997, a subsidiary of Hanson sold the
outstanding common stock of Peabody Holding Company to a subsidiary of The
Energy Group and combined it with other Hanson energy companies, including
Peabody Resources, in The Energy Group.
GENERAL
Peabody is the largest and one of the fastest growing private sector coal
producers in the world. The Company currently owns and operates 24 mines in
the United States and three mines in New South Wales, Australia and also sells
coal produced by third-party contractors from reserves controlled by the
Company. The Company's total U.S. and Australian annual sales have increased
from 93.3 million tons in the year ended September 30, 1990 to 167.5 million
tons in the year ended March 31, 1998 (81.4 million tons in the six months
ended March 31, 1997). Management estimates the Company's U.S. market share
has grown from 9% in the year ended September 30, 1990. For the year ended
March 31, 1998, the Company's estimated U.S. market share was 14.4%.
The Company's U.S. operations are managed through six principal units:
Powder River Coal Company ("Powder River"), Peabody Western, Eastern
Associated, PCC, Lee Ranch Coal Company ("Lee Ranch") and Patriot Coal Company
("Patriot Coal"). In 1997, the Company's 24 U.S. mines sold coal to more than
150 U.S. power plants, including many of the largest U.S. utilities. The
Company's Australian subsidiary, Peabody Resources, is one of Australia's ten
largest coal producers. Peabody Resources manages and owns or holds joint
venture interests in three surface mines in New South Wales, Australia and the
Company believes that it is well positioned to serve the growing market in the
Pacific Rim. A fourth mine, Bengalla, is currently under development and is
scheduled to begin operations in calendar year 1999. For the year ended March
31, 1998, the Company's share of sales from these mines totaled 7.3 million
tons, and its share of the proven and probable reserves associated with these
operations totaled 290 million tons.
As of October 1, 1996, Peabody owned or controlled approximately 9.4 billion
tons of proven and probable coal reserves, an increase from approximately 7.0
billion tons in 1990. The Company has the largest coal reserve base of any
private sector coal producing company in the United States. The Company has a
substantial base of low sulfur coal reserves, which consisted of approximately
4.4 billion tons as of October 1, 1996, and additional low sulfur coal
reserves are available for lease from private parties or federal, state or
tribal governments, especially in the Powder River Basin. A substantial
portion of the remaining high sulfur coal reserves are located near coal-fired
power stations which the Company believes may make them attractive for
development because of lower transportation costs. The Clean Air Act
Amendments limit the ability of some of the Company's customers to burn higher
sulfur coals unless they install scrubbers or purchase emission allowances.
The development of the Company's high sulfur coal reserves is dependent on the
cost of such emission allowances, the cost and availability of low sulfur coal
and whether electric utilities install scrubbers to meet the more stringent
SO/2/ emissions requirements of Phase II of the Clean Air Act Amendment in
2000. Approximately 50% of the Company's current high sulfur coal production
was sold to power plants which have already installed scrubbers.
Approximately 92% of the Company's U.S. coal sales volume for the twelve
months ended March 31, 1998 was sold to domestic electric utilities,
approximately 5% was exported to electric utility and steel making customers
and approximately 3% was sold to U.S. industrial customers. For the year ended
March 31, 1998,
38
<PAGE>
92% of Peabody's sales volume was sold under CSAs and as of March 31, 1998 the
Company had CSAs for approximately 1.0 billion tons of coal. At March 31,
1998, Peabody's CSAs had terms ranging from one to 17 years, with an average
volume-weighted remaining term of 5.7 years. Such contracts are negotiated in
the ordinary course of business. Most of the Company's U.S. coal supply
contracts which have terms greater than three years are subject to periodic
price adjustments or "reopener" provisions under which the contract price is
subject to periodic adjustment by either party to reflect the changes in the
market price of coal. Furthermore, a majority of the Company's coal supply
contracts with terms greater than one year currently have prices which exceed
the price at which such coal could be sold in the spot market. Over the last
few years, several of these contracts have been renegotiated, bringing the
contract prices closer to the then current spot market prices, thus leading to
a reduction in the revenues from such contracts. A similar reduction in
contract prices has also been experienced in relation to the replacement of
expiring contracts.
The Company restructures its CSAs in the normal course of business. In
connection with such restructurings, the Company recognized gains ranging from
$4.4 million in fiscal 1993 to $49.3 million for the fiscal year ended March
31, 1998. There can be no assurance that the Company will be able to realize
such gains in connection with future restructurings of CSAs.
For the fiscal year ended March 31, 1998, approximately 73% of Peabody
Resources' 7.3 million-ton share of coal produced by the Australian mines was
sold under CSAs to the New South Wales power utility, Macquarie Generation.
The remainder was exported to Pacific Rim countries. Coal from the Ravensworth
and Narama mines is sold to Macquarie Generation under contracts which expire
in 2000 and 2012, respectively. The contracts have price adjustment provisions
which are based on the qualities of coal delivered and changes in indices of
mining costs. All of the output from the Warkworth mine is exported;
approximately 75% is sold under contracts, including contracts with the other
joint venture partners in Warkworth, and approximately 25% is sold on the spot
market. Peabody Resources' Australian export contracts normally provide for
annual price renegotiations.
To date, the effect of expiring and repriced contracts has been mitigated by
lower operating costs and expansions and acquisitions that increased sales
volumes. The Company believes that based on RDI's estimates of future coal
prices and the Company's portfolio of CSAs, the adverse impact of expiring and
repriced contracts will be smaller in the next five years than it was in the
past five years. There can be no assurance that any reductions in revenues
resulting therefrom will continue to be mitigated by improvements in
productivity or increased sales volumes or will not be affected by greater
than expected declines in coal prices. The following table indicates the
recent historical trends in spot market pricing by supply region in the United
States for the coal industry.
HISTORICAL STEAM COAL SPOT PRICES
(Nominal Dollars per Ton, Free on Board at Mine)
<TABLE>
<CAPTION>
POUNDS
BTUS SO/2/ PER MILLION ESTIMATED
REGION/BASIN PER POUND BTUS 1995 1996 1997
- -------------------------- --------- ----------------- ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Central Appalachia........ greater than 12,500 less than or equal to 1.2 $25.00 $26.78 $27.16
greater than 12,500 1.21-1.70 24.63 25.04 25.53
greater than 12,500 1.71-2.5 24.27 24.81 25.42
less than 12,500 less than or equal to 1.2 22.06 23.98 24.42
less than 12,500 1.21-1.70 21.17 22.93 23.35
less than 12,500 1.71-2.5 21.13 21.80 22.18
Northeastern Appalachia... greater than 12,750 1.2-2.5 $22.62 $22.70 $23.20
greater than 12,750 greater than 2.5 21.92 21.28 21.46
Illinois Basin............ greater than 11,000 greater than 2.5 $18.62 $18.65 $18.99
less than 11,000 greater than 2.5 17.17 17.15 17.22
Southern Powder River Ba-
sin...................... greater than 8,800 less than or equal to 1.2 $ 4.34 $ 4.00 $ 4.00
less than 8,800 less than or equal to 1.2 3.27 3.14 3.12
Northern Powder River Ba-
sin...................... greater than 8,800 less than or equal to 1.2 $ 6.09 $ 6.25 $ 6.25
Four Corners.............. greater than 9,500 less than or equal to 1.2 $13.79 $13.81 $14.14
</TABLE>
- --------
Source: RDI, Outlook for Coal, Winter 1996 -1997.
39
<PAGE>
The current Asian financial crisis may impact the Company in fiscal 1999 by
lowering export prices and volumes. Export sales to Asia are likely to be
lower than anticipated with expected growth being somewhat moderated over the
next several years. With the oversupply situation, export prices have also
fallen from previous years. This situation may also lead to an oversupply and
downward pricing pressure on domestic coal markets as well. A large percentage
of the Company's Australian production is sold to domestic utilities under
CSAs, and is not expected to be impacted by the Asian situation. The total
percentage of the Company's export sales was 6% of which only 37% was exported
to Asia. The impact of the fluctuation in the Australian dollar is discussed
in detail in "--Liquidity and Capital Resources."
ACQUISITION OF CITIZENS POWER
In May 1997, all of the common membership interests in Citizens Power and
its subsidiaries were acquired. Citizens Power markets and trades electric
power, other energy-related commodities and power-related commodity risk
management products. Citizens Power also provides energy contract
restructuring services to the electric power industry. The acquisition of
Citizens Power was accounted for as a purchase and, accordingly, the Company's
combined financial statements include the operating results of Citizens Power
from the closing date forward.
Citizens Power, as a licensed power marketer, markets and trades electric
power and energy-related commodity products, including forwards, futures,
options and swaps. Pricing for such products may be variable or fixed.
Variable pricing is generally tied to published indices. Citizens Power also
provides services and price risk management capabilities to the electric power
industry. Price risk management activities include the restructuring of power
sales and power supply agreements. The Company generally balances forward
sales and purchase contracts to mitigate market risk and secure cash flow
streams.
Citizens Power accounts for these trading and price risk management
activities using the fair value method, such that forwards, futures, swaps and
other financial instruments with third parties are reflected at market value
and are included in "Assets or liabilities from trading and price risk
management activities" in the consolidated and combined balance sheets. In the
absence of quoted value, financial instruments are valued at fair value,
considering the net present value of the underlying sales and purchase
obligations, the volatility of the underlying commodity, appropriate reserves
for market and credit risks and other factors, as determined by the Company's
management. Subsequent changes to fair value, resulting gains and losses are
included in "Sales" in the statements of consolidated and combined income.
RESULTS OF OPERATIONS
The tables presented below summarize the results of operations and cash
flows for the Company and the "Predecessor Company" ("P&L Coal Group") for the
periods indicated. The discussion is based on a comparison of the results for
the three months ended June 30, 1998 versus the P&L Coal Group results for the
quarter ended June 30, 1997. The results of operations and cash flows for the
three months ended June 30, 1998 reflect the results of the Company from April
1 to June 30, 1998 and the results of P&L Coal Group for April 1 to May 19,
1998 (collectively referred to in the discussion as the "Company"). The
Company acquired P&L Coal Group on May 19, 1998 and prior to such date had no
separate operations.
The results of operations and cash flows for the period ended June 30, 1998
may not be directly comparable to the other periods indicated as a result of
the effects of valuation of assets and liabilities recorded in accordance with
Accounting Principles Board Opinion No. 16.
40
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
--------------- ----------------------------
UNAUDITED
UNAUDITED UNAUDITED FOR THE
FOR THE PERIOD FOR THE PERIOD QUARTER ENDED
5/20/98-6/30/98 4/1/98-5/19/98 6/30/97
--------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
TONS SOLD......................... 20.6 22.7 41.3
REVENUES
Sales........................... $253,747 $280,680 $519,565
Other Revenue................... 8,920 11,728 67,975
-------- -------- --------
Total Revenues................ 262,667 292,408 587,540
OPERATING COSTS AND EXPENSES
Operating costs and expenses.... 212,747 246,801 444,589
Depreciation, depletion and
amortization................... 25,691 26,218 51,232
Selling and administrative
expenses....................... 8,958 12,017 24,264
-------- -------- --------
OPERATING PROFIT.................. $ 15,271 $ 7,372 $ 67,455
======== ======== ========
</TABLE>
Three Months Ended June 30, 1998 Compared with Three Months Ended June 30,
1997
For the first quarter ended June 30, 1998, the Company had sales of $534.4
million, an increase of $14.9 million, or 2.9%, compared to the first quarter
ended June 30, 1997. This increase resulted largely from higher sales volumes
in the Powder River Basin and the Southern Appalachia region and favorable
electricity and trading revenues from Citizens Power ($6.2 million), partially
offset by lower pricing from Australian customers and the impact of
unfavorable foreign exchange rates. Other revenues, however, decreased by
$47.3 million compared to the same quarter in the prior year, primarily due to
the inclusion in the prior year's first quarter of a $29.0 million gain
related to the restructuring of a coal supply contract combined with $20.0
million of decreased revenues from Australia's mining services projects which
completed several large projects in last year's first quarter.
Operating profit of $22.6 million for the quarter ended June 30, 1998 was
$44.8 million less than the prior year's quarter, which included $29.0 million
from the gain on the CSA restructuring, $10.1 million from the elimination of
actuarial gains associated with certain employee related liabilities as a
result of purchase accounting, and $4.0 million in profits from completed
construction projects in Australia and Malaysia. The purchase accounting
adjustments reflected as of June 30, 1998 are preliminary and subject to
adjustment once requested information to value assets and measure liabilities
is obtained. These preliminary values were based upon management's initial
estimates, including extrapolations of certain actuarially determined employee
related obligations. Although not expected to be material, the full impact of
the final allocation is not known. The results for the quarter ended June 30,
1998 reflect a $10.0 million increase in "Operating costs and expenses"
compared to the prior year's quarter ended June 30, 1997 due to the
elimination of actuarial gains that were being amortized as reduced cost
accruals. The results for the quarter ended June 30, 1998 also reflect a $1.8
million increase in "Depreciation, depletion and amortization" based upon the
preliminary purchase price allocation. The current quarter's results were also
impacted by decreased gains on property sales, unfavorable foreign exchange
rates and operating difficulties at the Company's Midwest mines partially
offset by slightly increased earnings from Citizens Power's power trading and
price risk management activities. Selling and administrative expenses were
$21.0 million for the first quarter of 1999, down $3.3 million or 13.6% from
the same quarter of 1998. Savings from the organizational restructuring
contributed to these favorable results. The Company's productivity in the
United States increased 4.5% (weighted average) over the same period last
year.
41
<PAGE>
Financial Condition/Cash Flows
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
--------------- ----------------------------
UNAUDITED UNAUDITED UNAUDITED
FOR THE FOR THE FOR THE
PERIOD PERIOD QUARTER ENDED
5/20/98-6/30/98 4/1/98-5/19/98 6/30/97
--------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in)
operating activities............ $ 19,273 $ (30,558) $ (45,835)
Net cash used in investing
activities...................... (2,103,392) (19,248) (39,407)
Net cash provided by financing
activities...................... 2,225,650 23,636 18,682
</TABLE>
Three Months Ended June 30, 1998 Compared with Three Months Ended June 30,
1997
Net cash used in operating activities for the quarter ended June 30, 1998
was $11.3 million, an increase of $34.6 million from net cash used in
operating activities for the quarter ended June 30, 1997 primarily due to
favorable working capital.
Net cash used in investing activities for the quarter ended June 30, 1998
was $57.6 million (excluding the acquisition of P&L Coal Subsidiaries for
$2,065.0 million) compared to $39.4 million for the quarter ended June 30,
1997. Proceeds of $30.0 million from the contract restructuring impacted the
prior year's quarter. The Company made capital expenditures of $60.5 million
and $55.0 million for the quarters ended June 30, 1998 and 1997, respectively.
Net cash provided by financing activities for the quarter ended June 30,
1998 was $2,249.3 million, which included $1,817.4 million in borrowings and a
$480.0 million capital contribution to fund the P&L Coal acquisition.
The following table summarizes the results of operations for the fiscal
years ended September 30, 1996 and 1995, the six months ended March 31, 1997
and 1996 and the fiscal year ended March 31, 1998 and the twelve months ended
March 31, 1997.
<TABLE>
<CAPTION>
FISCAL YEARS
UNAUDITED SIX MONTHS ENDED ENDED
TWELVE MONTHS -------------------- SEPTEMBER 30,
FISCAL YEAR ENDED UNAUDITED ------------------
ENDED MARCH MARCH 31, MARCH 31, MARCH 31,
31, 1998 1997 1997 1996 1996 1995
----------- ------------- --------- --------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Tons Sold............... 167.5 167.4 81.4 77.0 163.0 151.0
Revenues................ $2,244.4 $2,242.3 $1,064.1 $1,069.9 $2,193.6 $2,175.8
Cost of Goods Sold (in-
cludes depreciation,
depletion and amortiza-
tion).................. 1,913.4 1,941.6 924.7 933.1 1,891.4 1,861.8
-------- -------- -------- -------- -------- --------
Gross Profit............ $ 331.0 $ 300.7 $ 139.4 $ 136.8 $ 302.2 $ 314.0
Impairment of Long-Lived
Assets(/1/)............ -- 890.8 -- -- 890.8 --
Selling and Administra-
tive Expenses.......... 83.6 80.7 41.4 39.9 75.7 81.3
Net Loss/(Gain) on Prop-
erty and Equipment
Disposals.............. (21.8) (8.0) (4.1) (9.1) (13.0) (12.9)
-------- -------- -------- -------- -------- --------
Operating Profit
(Loss)................. $ 269.2 $ (662.8) $ 102.1 $ 106.0 $ (651.3) $ 245.6
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1)Represents a one-time non-cash charge pursuant to SFAS 121 which had no
effect on the Company's cash flow.
Fiscal Year Ended March 31, 1998 Compared with Twelve Months Ended March 31,
1997
For the year ended March 31, 1998, the Company had revenues of $2.2 billion
and operating profit of $269.2 million. The 1998 revenues were $2.1 million
higher and operating profit increased $932.0 million compared to the same
period in the prior year. The lower earnings in 1997 primarily resulted from a
one-time non-cash charge of $890.8 million due to the adoption of the
valuation methodology of SFAS 121, which related to the impairment of certain
inactive and undeveloped coal reserves. Most of the impairment write-down
resulted from reduced values for specific properties with indications of
unfavorable market conditions primarily relating to various properties
containing coal reserves with a sulfur content that does not meet the air
emissions limitations under the Clean Air Act Amendments. Excluding the impact
of this charge, operating income would have been $228.0 million for the twelve
months ended March 31, 1997.
42
<PAGE>
Coal sales of 167.5 million tons for the fiscal year ended March 31, 1998
approximated volume for the year ended March 31, 1997. Low sulfur coal sales
represented 81% of total sales volume for the fiscal year ended March 31, 1998
and sales under CSAs of one year or more represented 92% of sales volume for
the same period. Management estimates the Company had a U.S. market share of
approximately 14.4% during the period. The Company's mines in Australia had
coal sales of 7.3 million tons for both the fiscal year ended March 31, 1998
and the twelve months ended March 31, 1997.
Revenues of $2.2 billion for the fiscal year ended March 31, 1998 increased
$2.1 million compared to the prior year, primarily as a result of
restructuring the Tucson Electric Power ("TEPCo") contract at the Company's
Lee Ranch operation ($49.3 million additional revenue in that period)
partially offset by lower export pricing and softer markets in Australia and
the Powder River Basin. The Company also realized $11.6 million in gains from
a CSA restructuring for the twelve months ended March 31, 1997. The TEPCo
contract restructuring consisted of up-front payments in exchange for
terminating the existing CSA and the subsequent agreement to a new long-term
contract. The Company was able to realize a gain on the restructuring of this
CSA since the termination fee required no future performance. The new
contract, containing provisions at prevailing market terms, met the customer's
desire for a reduced price of coal in the future. The Company determined that
this payment was adequate compensation after considering the risk-adjusted
discounted net present values, the impact of relaxed quality standards on
mining costs and the benefits of a new agreement with a longer term.
Operating profit of $269.2 million for the fiscal year ended March 31, 1998
was $41.2 million more than the prior year, excluding the $890.8 million SFAS
121 charge. The improved earnings were primarily due to recognizing $49.3
million gain on the Tucson Electric Power contract restructuring combined with
$8.4 million of operating profit contributed by Citizens Power from power
trading and price risk management activities during the period and increased
gains on property sales. Operating difficulties at the Eastern Associated
mines, lower export pricing and lower prices in the Powder River Basin
adversely impacted operating income. The Company's productivity in the United
States remained strong, with an average of almost 92 tons per manshift for the
period, while the Australian operations increased productivity by
approximately 7% over the prior year. This had the effect of increasing gross
profit margins (excluding Citizens Power) to 14.5% of revenues for the fiscal
year ended March 31, 1998 as compared to 13.3% for the prior year. Selling and
administrative expenses were 3.7% of revenues in 1998 compared to 3.6% in the
prior year. The net gain on property and equipment disposals was $15.8 million
favorable to the prior year primarily due to a $14.7 million gain on a sale of
property. The Company's Australian operations contributed $44.8 million of
operating profit for the fiscal year ended March 31, 1998 and $47.4 million in
the prior year.
Effective January 1998, a subsidiary of the Company purchased an additional
10% interest in Black Beauty Coal Company for $37.7 million in cash and as a
result, increased its ownership in the partnership to 43.3%.
Six Months Ended March 31, 1997 Compared with Six Months Ended March 31, 1996
For the six months ended March 31, 1997, the Company had revenues of $1.1
billion and operating profit of $102.1 million. Revenues and operating profit
were slightly lower ($5.8 million and $3.9 million, respectively) compared to
the six months ended March 31, 1996. The impact of the increased sales volume
of 4.4 million tons during the six months ended March 31, 1997 was more than
offset by unfavorable pricing variances and lower gains from surplus property
sales as compared to the prior period.
Coal sales of 81.4 million tons for the six months ended March 31, 1997
increased 6% from 77.0 million tons for the six months ended March 31, 1996.
The higher volume was primarily from the Powder River operations, as volumes
were increased over 10% due to improved customer demand and the installation
of a crusher conveyor system. The Company's mines in Australia had coal sales
of 3.5 million tons for the six months ended March 31, 1997, an increase of
19% from the previous period, resulting from favorable customer demand. Low
sulfur coal sales represented 81% of total sales volume for the six months
ended March 31, 1997 and sales under CSAs represented 89% of total sales
volume in that period.
Revenues of $1.1 billion for the six months ended March 31, 1997 decreased
slightly from the six months ended March 31, 1996. The positive impact of a 6%
growth in sales volume was more than offset by a decline in
43
<PAGE>
pricing during the period. The decline in pricing was primarily at Powder
River as expiring and repriced contracts and a soft spot market reduced the
average price per ton. The Company also realized gains from CSA restructurings
were $11.6 million and $22.0 million for the six month period ended March 31,
1997 and 1996, respectively.
Operating profit of $102.1 million was $3.9 million lower than for the six
months ended March 31, 1996. The Company's cost reduction measures and
productivity (i.e. tons per manshift) enhancements continued to have a
positive impact on operating profit which was more than offset by a decline in
coal prices and lower gains from surplus property sales. The success of the
cost reduction initiative improved productivity approximately 13%, with the
Company's U.S. operating companies averaging 93 tons per employee per manshift
for the six month period which represented a Company record. The Company's
Australian productivity also showed significant improvement increasing more
than 17% from the equivalent period in the previous year. This had the impact
of improving gross profit margins to 13.1% of revenues for the six months
ended March 31, 1997 as compared to 12.8% of revenues for the six months ended
March 31, 1996. Selling and administrative expenses remained substantially
stable at 3.9% and 3.7% of revenues for 1997 and 1996, respectively. The
Company's Australian operations contributed $22.3 million of operating profit
in the six months ended March 31, 1997, up from $16.1 million for the
comparable period in 1996.
Fiscal Year Ended September 30, 1996 Compared with Fiscal Year Ended
September 30, 1995
For the fiscal year ended September 30, 1996, the Company had revenues of
$2.2 billion and an operating loss of $651.3 million. The 1996 revenues
increased $17.8 million from 1995 levels, while operating profit decreased
$896.9 million from 1995. The lower earnings in 1996 were primarily due to a
one-time, non-cash charge of $890.8 million as a result of adopting the
valuation methodology of SFAS 121, principally related to the impairment of
certain inactive and undeveloped coal reserves, primarily high sulfur coal
reserves affected by the Clear Air Act Amendments. See note 1 to Combined
Financial Statements. Excluding the impact of this charge, operating income
would have been $239.5 million for the fiscal year ended September 30, 1996.
Coal sales of 163.0 million tons in the fiscal year ended September 30, 1996
increased 8% from 151.0 million tons in the fiscal year ended September 30,
1995. The higher volume was primarily attributable to an 18.5% increase in the
Company's Powder River Basin production volume including a full year's
contribution from the Caballo and Rawhide mines acquired in November 1994. The
Company's Australian operations sold 6.7 million tons of coal in the fiscal
year ended September 30, 1996, compared to 7.3 million tons in 1995. The
Company's overall production reflected the impact of its continued investment
aimed at improving productivity, in particular at Powder River. Low sulfur
coal sales represented 82% of total sales volume in the year ended September
30, 1996, up from 80% in 1995. Sales under long-term contracts represented 88%
of sales volume in 1996 and management estimates the Company's market share in
the United States rose from 14% in the fiscal year ended September 30, 1995 to
15% in the fiscal year ended September 30, 1996.
Revenues were $2.2 billion in the fiscal year ended September 30, 1996,
which were $17.8 million higher than revenues for the fiscal year ended
September 30, 1995. The positive impact of higher sales volumes in 1996 was
offset by lower pricing of three high sulfur coal contracts at PCC (estimated
at $25 to $30 million) as price per ton was 10% lower than the prior year.
Revenues were also adversely affected by reduced demand at the Company's
western operations, as customers purchased lower priced hydro-electric
generation that was available due to unusually high rain and snowfall in the
western United States. Stabilizing spot prices in the higher sulfur markets in
the last six months of the year also favorably impacted profits. The Company
also realized gains from CSA restructurings totaling $22.0 million and $23.9
million for the fiscal years ended September 30, 1996 and 1995, respectively.
Excluding the one-time, non-cash charge of $890.8 million arising from the
implementation of SFAS 121, operating income of $239.5 million for the fiscal
year ended September 30, 1996 decreased $6.1 million from $245.6 million for
the fiscal year ended September 30, 1995. The 1996 operating results were
affected by lower customer demand at the Company's western operations, the re-
pricing of certain high sulfur coal contracts (which
44
<PAGE>
management estimates accounted for a decrease in profit of $25 to $30 million)
and operational difficulties at PCC and Eastern Associated during the first
nine months of the year. Offsetting the above impacts was a reduction in costs
due to measures implemented during 1996 as part of continuing efforts to
reduce production costs. These included employee reductions, improvements in
working practices permitted under new union contracts and the effects of
investment in more efficient equipment. The success of the Company's cost
reduction initiatives was evidenced by an improvement in productivity, as tons
per manshift improved 17% in absolute terms over 1995 and 3% on a weighted
average mine by mine basis taking into account the shift in sources of
production. Operating profit in 1996 also included the benefit of $23.3
million related to the reversal of an excess accrual of the Company's
liability for the UMWA Combined Fund established under the Coal Industry
Retiree Health Benefit Act of 1992 (the "Coal Act"). This reversal resulted
from the Company's successful appeal of U.S. government beneficiary
assignments and its active participation in the administrative process with
respect to this fund. The effect of these items was to reduce gross profit
margins to 13.8% in 1996 from 14.4% of revenues for 1995. Selling and
administrative costs were $5.6 million lower than in 1995 as the Company
continued to streamline and consolidate support functions. As a percentage of
revenues, selling and administrative expenses were 3.5% in 1996 and 3.7% in
1995.
The Company's Australian operating profits of $48.5 million for the fiscal
year ended September 30, 1996 increased from $37.9 million for the fiscal year
ended September 30, 1995. The improved earnings were primarily related to
increased volume of mining services projects during 1996.
ROYALTIES--INCOME AND EXPENSE
Royalty income generally results from the lease or sub-lease of mineral
rights to third parties. These agreements generally provide for payments based
upon a percentage of the selling price or an amount per ton of coal produced.
Certain agreements require minimum annual lease payments regardless of the
extent to which minerals are produced from the leasehold. The term of these
agreements generally ranges from specified periods of five to twenty years or
can be for an unspecified period until all reserves are depleted.
A substantial amount of the coal mined by the Company is produced from
reserves leased from the owner of the coal. One of the major lessors is the
U.S. Government, from whom the Company leases substantially all of the coal
mined in Wyoming, Montana and Colorado under terms set by Congress and
administered by the U.S. Bureau of Land Management. The terms of these leases
are generally for an initial term of 10 years but may be extended by diligent
development and mining of the reserve until all economically recoverable
reserves are depleted. The Company has met the diligent development
requirements for substantially all of these federal leases either directly
through production or by including the lease as a part of a logical mining
unit with other leases upon which development has occurred. Annual production
on these federal leases must total at least 1% of the original amount of coal
in the entire logical mining unit. Royalties are payable monthly at a rate of
12.5% of the gross realization from the sale of the coal mined using surface
mining methods and at the rate of 8% of the gross realization for coal
produced using underground mining methods. The Company also leases the coal
production at its Arizona mines from The Navajo Nation and the Hopi Tribe
under leases that are administered by the U.S Department of the Interior.
These leases expire once mining activities cease. The royalty rates are also
generally based upon a percentage of the gross realization from the sale of
coal. These rates are subject to redetermination every ten years under the
terms of the leases. The remainder of the leased coal is generally leased from
state governments, land holding companies and various individuals. The
duration of these leases varies greatly. Typically, the lease terms are
automatically extended as long as active mining continues. Royalty payments
are generally based upon a specified rate per ton or a percentage of the gross
realization from the sale of the coal. Many of these leases require the
Company to pay minimum annual rental payments.
INCOME TAXES
Since March 7, 1997, the Company has filed one consolidated U.S. federal
income tax return with its subsidiaries. At March 31, 1998, U.S. federal and
state income taxes were determined on that basis. Prior to March 7, 1997, the
Company consisted of two separate U.S. federal consolidated groups, Peabody
Holding Company and Peabody Investments, Inc., parent of Gold Fields ("Peabody
Investments").
45
<PAGE>
For the fiscal years ended September 30, 1996 and 1995, Peabody Holding
Company and its subsidiaries were included in a consolidated federal income
tax return with other Hanson affiliates. Peabody Holding Company had a tax
sharing arrangement with Hanson whereby federal income taxes were computed as
part of a consolidated group of companies. For purposes of these financial
statements, Peabody Holding Company determined its federal tax provision
(benefit) based on its expected allocated share of the consolidated group tax
position. State taxes were determined on a separate return basis. Under the
tax sharing arrangement, Hanson allocated the consolidated federal income tax
liability to the members of the consolidated group by applying a ratio of each
member's separate taxable income to the sum of the separate taxable incomes of
all members having taxable income for the years. If the consolidated group had
taxable income, a member having a taxable loss did not receive a benefit for
that loss. If the consolidated group had a taxable loss, only members having a
taxable loss received a benefit for that loss.
Peabody Investments was the common parent of a separate consolidated tax
group. The group included its interest in the operations of Hanson Natural
Resources Company ("HNRC"). HNRC was a partnership which historically included
the operations of Lee Ranch, Cavenham Timber and Western Rock Quarries. For
purposes of these statements, Peabody Investments determined its federal and
state tax provision as if Lee Ranch was the only operation included for the
fiscal years ended September 30, 1996 and 1995.
The following summarizes the Company's effective tax rates for the periods
indicated:
<TABLE>
<S> <C>
Quarter ended June 30, 1998....................................... 23.0%
Fiscal year ended March 31, 1998.................................. 36.0%
Six months ended March 31, 1997................................... 32.0%
Fiscal years ended:
September 30, 1996.............................................. 36.5%
September 30, 1995.............................................. 47.9%
</TABLE>
As indicated in the notes to the Combined Financial Statements, the
effective tax rates are impacted significantly by changes in valuation
allowances, statutory depletion in excess of book depletion and the effect of
tax sharing agreements.
The Company and its U.S. subsidiaries are expected to be AMT taxpayers
prospectively due primarily to the percentage depletion tax deduction. As a
result of its AMT status, the Company and its subsidiaries' expected federal
and state current income tax provision rate is 12%. The expected federal and
state deferred income tax provision rate is 13% for a projected combined
federal and state gross income tax provision rate of 25%.
Pursuant to The Energy Group spin-off from Hanson in February 1997, The
Energy Group entered into Tax Sharing Agreements (each, a "TSA") with both
Hanson and Millennium Chemicals Inc. ("Millennium"), a former Hanson company.
Hanson has agreed to indemnify The Energy Group for all Peabody Investments'
federal and state income tax liabilities arising prior to February 25, 1997,
with the exception of those liabilities arising from the operations of Lee
Ranch subsequent to its acquisition in June 1993.
The Millennium TSA requires Millennium to indemnify The Energy Group and its
subsidiaries for all federal income tax liabilities arising from tax years in
which Peabody Holding Company and its subsidiaries were members of Hanson's
Anglo-American affiliated group (July 3, 1990 through September 30, 1996).
With respect to state income taxes, the Millennium TSA indemnifies The Energy
Group for Arizona income taxes in the years in which Peabody Holding Company
and subsidiaries filed a consolidated return with the Anglo-American group
(fiscal years 1994 to 1996).
Peabody Holding Company and its subsidiaries have AMT credit carryforwards
of approximately $50.6 million (as of the tax year ending June 30, 1997) but
are limited to utilization against regular tax liabilities generated by
Peabody Holding Company and its subsidiaries' members. As a result, the
deferred asset representing the AMT credits is fully offset with a valuation
allowance.
Peabody Holding Company and its subsidiaries currently have regular tax net
operating loss ("NOL") carryforwards of $48.7 million and AMT NOL's of $18.9
million (as of the tax year ending June 30, 1997). All except $4.7 million of
the regular tax NOL and $0.7 million of the AMT NOL are limited to utilization
against
46
<PAGE>
income generated by Peabody Holding Company and its subsidiaries. Deferred tax
assets representing the NOLs are fully offset with valuation allowances.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended March 31, 1998
was $181.7 million, a decrease of $141.6 million from net cash provided by
operating activities for the twelve months ended March 31, 1997. This decrease
was primarily due to lower earnings from mining activities and increased
working capital requirements due to Citizens Power. Net cash provided by
operating activities was $62.8 million for the six months ended March 31,
1997. Net cash provided by operating activities was $211.5 million for the
year ended September 30, 1996, compared to $272.5 for the year ended September
30, 1995. The decrease between 1996 and 1995 resulted principally from an
increase in working capital requirements.
Net cash used in investing activities for the year ended March 31, 1998 was
$129.9 million compared to $106.6 million for the year ended March 31, 1997.
This increase was primarily the result of increased capital expenditures of
$27.8 million, a $20.8 million cash payment for the acquisition of Citizens
Power and the $37.7 million cash payment for the additional interest in Black
Beauty Coal Company which was partially offset by $57.5 million in proceeds
from CSA restructurings. Net cash used in investing activities was $56.2
million for the six months ended March 31, 1997. In the year ended September
30, 1996, net cash used in investing activities was $105.6 million, a decrease
of $356.5 million compared to the year ended September 30, 1995. The decrease
between 1996 and 1995 was primarily the result of the acquisition of the
Caballo and Rawhide coal mines in 1995 for $356.2 million. In addition,
approximately $59.6 million in proceeds from contract renegotiations and the
sale of a business unit were received in 1995, which was partially offset by a
cash settlement received totaling $6.1 million for an arbitrated dispute with
a customer for payment of retiree health care and reclamation liabilities
under a CSA in 1994.
The Company made capital expenditures of $166.3 million and $148.5 million
for the years ended March 31, 1998 and 1997, respectively, and $76.5 million
in the six months ended March 31, 1997. Capital expenditures totaled $152.1
million and $188.0 million for the years ended September 30, 1996 and 1995,
respectively. Of the $166.3 million in capital expenditures for the year ended
March 31, 1998, $90.9 million was for replacement capital and $75.4 million
was for expanding capacity and developing mines. The Company expects to make
$208.1 million of capital expenditures in the twelve months ending March 31,
1999, of which $89.5 million will be for replacement of equipment and
facilities and $118.6 million will be for expanding capacity and developing
new mines, primarily the new Bengalla mine in Australia.
Net cash used in financing activities for the year ended March 31, 1998 was
$235.4 million, primarily for dividends and loans to The Energy Group. Net
cash provided by financing activities was $94.2 million for the six months
ended March 31, 1997. Net cash provided by financing activities was $16.0
million for the year ended September 30, 1996, compared with $179.0 million
provided by financing activities for the year ended September 30, 1995,
principally representing the contribution to invested capital by Hanson for
the acquisition of the Caballo and the Rawhide coal mines in 1995.
The Company has five qualified single employer defined benefit pension
plans, which the Pension Benefit Guaranty Corporation ("PBGC") calculated as
being underfunded. As a result, the Company has entered into an agreement with
the PBGC to alleviate the underfunding of Peabody Holdings' pension plans,
pursuant to which the Company has agreed to: (i) accelerate minimum funding
payments that the Company would otherwise be required to make during 1998,
(ii) make certain contributions in excess of such minimum funding and (iii)
provide a letter of credit to support a fraction of the pension plans'
unfunded liabilities.
On September 30, 1998, the Company received $135.9 million as prepayment of
non-recoupable advance royalty payments related to certain leased coal
reserves in New Mexico from Chaco pursuant to a Prepayment Agreement signed on
the same date. Chaco also conveyed to the Company its interest in the coal
reserve lease and other related mining and contracts rights for $27.5 million.
No gain or loss will be recognized from the transaction since the net present
value of the future royalties was previously recognized as an asset.
47
<PAGE>
FINANCING ARRANGEMENTS
Prior to the Acquisition, the Company financed its operations and capital
and other expenditures through a combination of cash generated from
operations, external borrowings, operating leases and loans and invested
capital provided most recently by The Energy Group, and prior to February
1997, from Hanson or its U.S. affiliates. The Company's ability to generate
cash from operations depends upon numerous factors, some of which are outside
the control of the Company, including economic, climatic and geological
conditions and changes in taxation regimes in the United States, Australia and
other countries in which the Company operates.
Historical interest expense, net of interest income, was as follows for the
periods indicated (in millions):
<TABLE>
<S> <C>
Fiscal year ended March 31, 1998................................ $18.7
Six months ended March 31, 1997................................. 16.1
Fiscal years ended: September 30, 1996.......................... 51.2
September 30, 1995........................................ 52.9
</TABLE>
Third-party long-term debt has remained relatively stable throughout the
periods, with the exception of 1997, when Citizens Power, through its
subsidiaries, incurred substantial indebtedness in its operations, primarily
on a non-recourse basis. In 1996 debt owed to Hanson was converted into
equity, resulting in a reduction of interest expense. In addition, the Company
received a cash contribution in 1995 which resulted in substantial cash
balances on which the Company earned income.
As a result of the Acquisition, the Company has substantial indebtedness and
significant debt service obligations. As of March 31, 1998, after giving pro
forma effect to the Transactions, the Company would have had total
indebtedness of approximately $2,098.0 million of which (i) $920.0 million
consists of indebtedness under the Senior Credit Facilities, (ii) $398.8
million consists of the Senior Notes, (iii) $498.6 million consists of the
Senior Subordinated Notes and (iv) $280.6 million consists of existing
indebtedness. The Indentures governing the Senior Notes and Senior
Subordinated Notes permit the Company and its Restricted Subsidiaries to incur
additional indebtedness, including secured indebtedness, subject to certain
limitations. In addition, among other customary restrictive covenants, the
Indentures prohibit the Company and its Restricted Subsidiaries from creating
or otherwise causing any encumbrance or restriction on the ability of any
Restricted Subsidiary that is not a Guarantor to pay dividends or to make
certain other upstream payments to the Company or any of its Restricted
Subsidiaries. As of March 31, 1998, after giving pro forma effect to the
Transactions, the aggregate of Citizens Power's indebtedness that is non
recourse and Peabody Resources' Australian indebtedness was $370.8 million. In
addition, the Senior Credit Facilities contain additional and more restrictive
covenants and will require the Company to maintain specified financial ratios
and satisfy certain tests relating to its financial condition. See "Risk
Factors" and "Description of Certain Indebtedness." After giving pro forma
effect to the Transactions as of March 31, 1998, the Company's ratio of
earnings to fixed charges would have been 1.06x.
The Company is continually engaged in evaluating potential acquisitions. The
Company expects that funding for future acquisitions may come from a variety
of sources, depending on the size and nature of any such acquisitions. None of
the potential acquisitions under review are considered probable. Potential
sources of capital include cash generated from operations, borrowings under
the Revolving Credit Facility, additional equity investments from Lehman
Merchant Banking and other external debt or equity financing. There can be no
assurance that such additional capital sources will be available to the
Company on terms which the Company finds acceptable, or at all.
In connection with the Acquisition, the Company entered into the Senior
Credit Facilities which include a Revolving Credit Facility, providing for
aggregate borrowings of up to $480.0 million including letters of credit of
$330.0 million. Interest rates on the revolving loans under the Revolving
Credit Facility are based on the Base Rate (as defined in the Senior Credit
Facilities), or LIBOR (as defined in the Senior Credit Facilities) at the
Company's option. The Revolving Credit Facility commitment matures six years
after the consummation of the Financings. The Revolving Credit Facility and
related Term Loan Facility contain certain restrictions and limitations
including but not limited to financial covenants that will require the Company
to maintain and achieve certain levels of financial performance and limit the
payment of cash dividends and similar restricted payments.
48
<PAGE>
In addition, the Senior Credit Facilities prohibit the Company from allowing
its Restricted Subsidiaries (which include all Guarantors) to create or
otherwise cause any encumbrance or restriction on the ability of any such
Restricted Subsidiary to pay any dividends or make certain other upstream
payments subject to certain exceptions.
The following table sets forth the amortization schedule for the Senior
Credit Facilities:
<TABLE>
<CAPTION>
AMORTIZATION TERM LOAN A TERM LOAN B
------------ ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Year 1 $ 10.0 $ 6.5
Year 2 15.0 6.5
Year 3 20.0 6.5
Year 4 50.0 6.5
Year 5 75.0 6.5
Year 6 100.0 6.5
Year 7 -- 100.0
Year 8 -- 511.0
------ ------
$270.0 $650.0
====== ======
</TABLE>
The Company's ability to pay principal and interest or Liquidated Damages,
if any, on each series of the Notes and to satisfy its other debt service
obligations or to fund planned capital expenditures will depend upon the
future operating performance of its subsidiaries, which will be affected by
prevailing economic conditions in the markets they serve and financial,
business and other factors, certain of which are beyond their control. Based
upon the current level of operations, management believes that cash flow from
operations and available cash, together with available borrowings under the
Revolving Credit Facility, will be adequate to meet the Company's future
liquidity needs for at least the next several years. Certain of the Guarantors
are subject to existing agreements which could, in certain circumstances,
restrict the ability of such guarantors to pay dividends or make certain other
upstream payments to the Borrower. However, the Borrower believes as of the
date hereof, that the terms of such agreements will not restrict such upstream
payments in a manner that would adversely affect the Borrower's ability to
perform its obligations. There can be no assurance that the Company's business
will generate sufficient cash flow from operations or that future borrowings
will be available under the Senior Credit Facilities in an amount sufficient
to enable the Company to service its indebtedness, including each series of
the Notes, or to fund its other liquidity needs. The Company may need to
refinance all or a portion of the principal of each series of the Notes on or
prior to maturity. There can be no assurance that the Company will be able to
effect any such refinancing on commercially reasonable terms or at all. See
"Risk Factors."
CONTINGENCIES--CERTAIN ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive and changing regulations
in the United States and Australia regarding environmental matters. As of June
30, 1998, the Company had accrued $485.5 million for reclamation and
environmental obligations. The Company's expenditures relating to reclamation
and environmental matters were approximately $7.4 million for the quarter
ended June 30, 1998, $39.1 million for the year ended March 31, 1998, $20.4
million for the six months ended March 31, 1997, and $70.5 million and $64.4
million for the years ended September 30, 1996 and 1995, respectively.
Gold Fields, its predecessors and its former parent company are or may
become parties to environmental proceedings which have commenced or may
commence in the United States in relation to certain sites previously owned or
operated by those entities or companies associated with them. The Company has
agreed to indemnify Gold Fields' former parent company for any environmental
claims resulting from any activities, operations or conditions that occurred
prior to the sale of Gold Fields to the Company. Gold Fields is currently
involved in environmental investigation or remediation at six sites and is a
defendant in litigation with private parties involving three other sites.
These nine sites were formerly owned or operated by Gold Fields. The EPA has
placed three of these sites on the National Priorities List, promulgated
pursuant to CERCLA, and one of the sites
49
<PAGE>
is on a similar state priority list. There are a number of further sites in
the United States which were previously owned or operated by such companies
and which could give rise to environmental proceedings in which Gold Fields
could incur liabilities.
Where such sites were identified, the directors of The Energy Group
commissioned, in connection with the spin-off of The Energy Group, a review of
publicly available information by independent environmental consultants in
order to assess the estimated total amount of the liability per site and the
proportion of those liabilities which Gold Fields is likely to bear. The
available information on which to base this review was very limited because
all of the sites except for three (on which no remediation is currently taking
place) are no longer owned by Gold Fields.
On the basis of that review, The Energy Group provided for an aggregate of
$73.6 million as of March 31, 1997 for the above environmental liabilities
relating to Gold Fields. Significant uncertainty exists as to whether these
claims will be pursued against Gold Fields in all cases, and if they are
pursued, the amount of the eventual costs and liabilities, which could be
greater or less than this provision. As of June 30, 1998, the provision was
reduced to $68.0 million (which is included in the overall liability of $485.5
million) to reflect expenditures incurred during such period. The Company
believes that the remaining amount of the provision is adequate to cover these
environmental liabilities. See note 18 to the Combined Financial Statements
included herein.
Although waste substances generated by coal mining and processing are
generally not regarded as hazardous substances for the purposes of CERCLA,
some products used by coal companies in operations, such as chemicals, and the
disposal of such products, are governed by the statute. Thus, coal mines
currently or previously owned or operated by the Company, and sites to which
the Company sent waste materials, may be subject to liability under CERCLA and
similar state laws.
While the Company believes that it has identified costs likely to be
incurred for environmental matters and that those costs are not likely to have
a material adverse effect upon the Company's business or financial position,
there can be no assurance that the Company's total costs and liabilities for
environmental matters will not increase in the future. The magnitude of such
additional liabilities and the costs of complying with environmental laws and
containing or remediating contamination cannot be predicted with certainty due
to the lack of specific information available with respect to many sites, the
potential for new or changed laws and regulations and for the development of
new remediation technologies and the uncertainty regarding the timing of work
with respect to particular sites. As a result, there can be no assurance that
material liabilities or costs related to environmental matters will not be
incurred in the future or that the Company's liquidity will not be adversely
impacted by such environmental liabilities or costs.
FOREIGN CURRENCY
The functional currency of the Company's Australian operations is the local
currency except that all export sales, which accounted for 25% of the
Company's Australian sales by volume in 1998, were priced in U.S. dollars.
Assets and liabilities of the Company's Australian operations are generally
translated at current exchange rates and related translation adjustments are
reported as a component of invested capital. Income statement accounts are
translated at the average rates during the period. In recent years, the value
of the Australian Dollar versus the U.S. Dollar has declined as summarized
below:
AUSTRALIAN DOLLAR VS. US DOLLAR
<TABLE>
<CAPTION>
AVERAGE CURRENT
------- -------
<S> <C> <C>
August 1998..................................................... .6207 .5680
June 1998....................................................... .6324 .6025
March 1998...................................................... .7188 .6720
March 1997...................................................... .7863 .7838
September 1996.................................................. .7703 .7548
</TABLE>
The impact of the currency translation in combining the results of
operations and financial position of such operations has not been material to
the financial position of the Company.
50
<PAGE>
INFLATION
Inflation in the United States has been relatively low in recent years and
did not have a material impact on the Company's results of operations for the
quarter ended June 30, 1998, the year ended March 31, 1998, the twelve months
ended March 31, 1997, the six months ended March 31, 1997, or the years ended
September 30, 1996 or 1995.
IMPACT OF YEAR 2000 ISSUE
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the Year 2000. This could cause a system failure or
miscalculations resulting in disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the Year 2000 and thereafter. The Company has
undertaken a company-wide Year 2000 compliance project, staffed with a diverse
team of personnel representing all levels of the organization. The Company
also retained an outside consulting firm to assist in the assessment and
assist in ensuring the proper project structure to address the Year 2000
issue. With respect to information technology ("IT") systems, the assessment
is complete. The Company is now in the remediation phase of the project
whereby it is updating or replacing existing applications. The testing and
implementation phases of the project will occur in calendar 1998 and 1999.
Additionally, the Company is also conducting an assessment of its non-IT
technology which consists primarily of embedded technology at the Company's
mining facilities (e.g., security systems, mine monitoring systems, plant
operating systems, coal loading and scale facilities, equipment, etc.). The
Company has also established another task force to address the Year 2000
embedded technology concerns for those applications outside the main frame
systems. The Company is in the assessment phase and plans to have site
readiness action plans for remediation and testing completed by June 1999.
In addition, the Company is conducting an assessment of Year 2000 exposures
related to the Company's suppliers and customers. The Company has identified
its key suppliers and customers and has sent out a request for information on
their Year 2000 compliance status. The Company has dedicated resources to
monitor these parties' progress as they address the Year 2000 issue.
Additional requests will be sent, responses will be tracked and contingency
plans will be developed as required to address potential failures of these
parties to be prepared for the Year 2000.
The total cost of the project associated with the Year 2000 issue is
estimated at approximately $6.5 million (21% of the IT budget for fiscal year
1999), which includes $1.4 million for the purchase of new software and
hardware that will be capitalized and $5.1 million that will be expensed as
incurred. To date, the Company has incurred approximately $1.1 million
primarily for assessment of the Year 2000 issue and development of a
modification plan. The Company believes that the total costs associated with
modifying its current systems will not have a material adverse effect on its
results of operations or financial position.
The project is estimated to be 25% complete and the goal of management is to
have all systems and equipment Year 2000 ready by October 1999. The Company
believes that with modifications to existing software and conversion to new
software, the Year 2000 issue will not present significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed in a timely fashion, the Year
2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the appropriate modifications to deal with the Year 2000 Issue are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events. However, there can be no assurance that these
estimates will be
51
<PAGE>
achieved. The Company currently does not have a Year 2000 contingency plan;
however, the Company intends to develop one in 1999.
REORGANIZATION PLANS
The Company has recently announced a new organizational structure for its
U.S. operations. The objective of the new structure is to become a more
innovative, agile organization to reduce costs, and to assure that the
administrative and support function reside at the appropriate levels of the
organization.
Under the new organizational structure, operating units (single mines or
groups of mines) will report to group executives by region, under the
leadership of the President and Chief Operating Officer. Commercial
activities, including sales and marketing, mining business development, land
and resource management and commercial services will be under the Chief
Commercial Officer. Technical, transactional and administrative support
functions will be consolidated as shared services in St. Louis with some
functions residing in Charleston, West Virginia, and Gillette, Wyoming.
The new structure, which the Company intends to implement by September 30,
1998, is expected to streamline decision making and reporting. It is also
expected to result in a reduction of approximately 100 administrative and
other support positions throughout the Company, in the closing of offices in
Flagstaff, Arizona, and reductions in staffing in the Charleston, Gillette and
Henderson offices.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued
which establishes new rules for the reporting and display of comprehensive
income and its components. The Company intends to adopt this statement for its
1999 fiscal year.
Also in June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") was issued which establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company's 1999 fiscal year and requires comparative
information from earlier years be restated to conform to requirements of this
standard. The Company is evaluating the requirements of SFAS 131 and the
effects, if any, on the Company's current reporting and disclosures.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" was issued which improves and standardizes
disclosures by eliminating certain existing reporting requirements and adding
new disclosures. The statement addresses disclosure issues only and does not
change the measurement of recognition provisions specified in previous
statements. The statement supersedes SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
Company intends to adopt this statement for its 1999 fiscal year.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133") was issued which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
This Statements amends FASB Statement No. 52, Foreign Currency Translation, to
permit special accounting for a hedge of a foreign currency forecasted
transaction with a derivative. It supersedes FASB Statements No. 80,
Accounting for Future Contracts, No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk, and No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. It amends FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments, to
include in Statement 107
52
<PAGE>
the disclosure provisions about concentrations of credit risk from FASB
Statement No. 105. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is evaluating the
requirements of SFAS 133 and the effect, if any, on the Company's current
reporting and disclosures.
With respect to the recent accounting pronouncements outlined above, only
SFAS No. 133 is expected to impact the Company's financial position and
results of operations. The Company is evaluating the requirements of this
pronouncement, and the impact of adoption on the financial statements is not
known at this time. The other pronouncements are expected to impact the
Company's reporting and disclosure requirements only.
53
<PAGE>
COAL INDUSTRY OVERVIEW
The information provided in "Coal Industry Overview" regarding future coal
consumption was obtained from the Energy Information Administration ("EIA"),
the independent statistical and analytical agency within the U.S. Department
of Energy, and RDI. The assumptions upon which EIA's forecasts are based
include, among other things, assumptions regarding trends in various economic
sectors (residential, transportation, industrial, etc.), economic growth
rates, technological improvements and demand for other energy sources and are
described more fully in EIA's Annual Energy Outlook 1997. RDI does not set
forth the assumptions upon which their projections are based. Although the
Company believes that these sources are reliable, it can give no assurance
that such projections will prove to have been correct. See "Risk Factors."
INTRODUCTION
Coal is one of the world's major energy sources whose primary role is to
provide fuel for the generation of electricity. According to the EIA, in 1995
26% of the world's primary energy supply came in the form of coal and coal was
responsible for approximately 37% of the world's electricity generation. In
the United States, coal's share of the domestic primary energy supply was 31%
in 1995, while coal's share of U.S. electricity generation has risen
consistently to a record level of 57% in 1997.
The major coal producers in the world are China, the United States, Russia,
Ukraine, India and Australia, although coal is produced in some 60 countries
worldwide. The United States enjoys the world's largest reserve base, with an
estimated 29% of the world's recoverable bituminous and subbituminous coal
reserves, followed by the former Soviet Union, China, India, South Africa and
Australia. An estimated 70% of the world's fossil energy resources are in the
form of coal.
The U.S. coal industry operates under a highly developed regulatory regime
which governs all mining and mine safety activities, including environmental
issues and land reclamation after completion of mining activities. These
include laws requiring that mined lands be restored to a condition equal to or
better than that existing before mining. While inherently dangerous, coal
mining in the United States has become a relatively safe occupation, relying
on sophisticated technology and a skilled work force to become one of the
safest, most productive coal markets in the world. See "Regulatory Matters."
The coal industry has been heavily influenced in recent years by significant
gains in coal mine productivity, changes in air quality laws, growth in
utility coal consumption and industry consolidation. According to the U.S.
Department of Labor, the number of operating mines declined 51% over the last
ten years, while overall coal production increased approximately 20%. During
the same period, average coal mine productivity has nearly doubled due to
changes in work practices, new technologies and an increase in production in
Wyoming's Powder River Basin coal region, where thick, easily accessible coal
seams result in high productivity. The overall productivity gains have
contributed to stability in coal prices in recent years. A major trend in the
industry has been the shift to low sulfur coal production, driven by the Clean
Air Act Amendments, which imposed significant restrictions on SO/2/ emissions
from coal-fired power plants.
COAL CHARACTERISTICS
There are four types of coal: lignite, subbituminous, bituminous and
anthracite. Each has characteristics that make it more or less qualified for
different end uses. In general, coal of all geological composition is
characterized by end use as either "steam coal" or "metallurgical coal,"
sometimes known as "met coal." Steam coal is used by utilities for electricity
generation and by industrial facilities to produce steam, electricity or both.
Metallurgical coal is refined into coking coal, which is used in the
production of steel. Heat value and sulfur content, the most important
variables in the profitable marketing and transportation of coal, determine
the best end use of a particular type of coal.
Heat Value
The heat value of coal is commonly measured in British thermal units. A
British thermal unit ("Btu") is the amount of heat needed to raise one pound
of water one degree Fahrenheit. Coal found in the eastern and
54
<PAGE>
midwestern regions of the United States tends to have a heat content ranging
from 10,000 to 13,400 Btus per pound. Most coal found in the western United
States ranges from 8,000 to 10,000 Btus per pound.
Lignite is a brownish-black coal with a heat content that generally ranges
from 6,500 to 8,300 Btus per pound. Major lignite operations are located in
Texas, North Dakota, Montana and Louisiana. Lignite is used almost exclusively
in power plants located adjacent to or near such mines because any
transportation costs, coupled with mining costs, would render its use
uneconomical. The Company does not have any lignite reserves.
Subbituminous coal is a black coal with a heat content that ranges from
7,800 to 9,500 Btus per pound. Most subbituminous reserves are located in
Montana, Wyoming, Colorado, New Mexico, Washington and Alaska. Subbituminous
coal is used almost exclusively by electric utilities and some industrial
consumers. The Company has extensive subbituminous reserves in the Powder
River Basin of Wyoming.
Bituminous coal is a "soft" black coal with a heat content that ranges from
10,500 to 14,000 Btus per pound. This coal is located primarily in Appalachia,
Arizona, the Midwest, Colorado and Utah, and is the type most commonly used
for electric power generation in the United States. Bituminous coal is used
for utility and industrial steam purposes, and as a feed stock for coke, which
is used in steel production. All of the Company's reserves in Arizona,
Colorado, Illinois, Indiana, Kentucky and West Virginia, as well as its
reserves in New South Wales, Australia, are ranked as bituminous coal.
Anthracite coal is a "hard" coal with a heat content that can be as high as
15,000 Btus per pound. A limited amount of anthracite deposits is located
primarily in the Appalachian region of Pennsylvania, and is used primarily for
industrial and home heating purposes. The Company does not have any anthracite
reserves.
Sulfur Content
Sulfur content can vary from seam to seam and sometimes within each seam.
When coal is burned, it produces SO/2/, the amount of which varies depending
on the chemical composition and the concentration of sulfur in the coal. Low
sulfur coal has a variety of definitions, but it is used in this document to
refer to coal with a sulfur content of 1% or less by weight. Demand for low
sulfur coal has increased, and is expected to continue to increase, as
electric utilities strive to reduce SO/2/ emissions. Phase II requirements are
expected to create additional demand for low sulfur coal. As of October 1,
1996, 47% of Peabody's coal reserves and 81% of its fiscal 1998 coal sales
were low sulfur. U.S. SO/2/ emissions from electric power generation have
decreased 28% from 1980 levels, while U.S. coal consumption has increased 46%.
See "Risk Factors--Risks Relating to the Company--Government Regulation of the
Mining Industry--Impact of Clean Air Act Amendments on Coal Consumption."
Subbituminous coal typically has a lower sulfur content than bituminous
coal, but some bituminous coal in southern West Virginia, eastern Kentucky,
Colorado and Utah, also has low sulfur content.
Higher sulfur coal can be burned in plants equipped with sulfur-reduction
technology, as the scrubbing process reduces SO/2/ emissions by 50% to 90%.
Plants without scrubbers can burn high sulfur coal by purchasing emission
allowances on the open market, which allow the user to emit a ton of SO/2/.
Some older coal-fired plants have been retrofitted with scrubbers. Any new
coal-fired generation built in the United States will likely use clean coal
burning technology.
Other Important Characteristics
Ash. Ash is the inorganic residue remaining after combustion of coal. As
with sulfur content, ash content varies from seam to seam. Ash content is also
an important characteristic of coal because power plants must handle and
dispose of ash following combustion.
Moisture. Moisture content of coal varies by the type of coal, the region
where it is mined and the location of coal within a seam. In general, high
moisture content decreases the heat value and increases the weight of the
coal, thereby making it more expensive to transport.
55
<PAGE>
Location/Ease of Extraction. It is generally easier to mine a coal seam that
is thick and close to the surface. Typically, coal mining operations will
begin at the part of the coal seam that is easiest and most economical to
mine. In the coal industry, this characteristic is referred to as "low ratio."
As the seam is mined, it becomes more difficult and expensive to mine because
the seam either becomes thinner or protrudes more deeply into the earth,
requiring removal of the material over the seam (the "overburden"). For
example, many seams of coal in the Midwest are 5 to 10 feet thick and hundreds
of feet below the surface. In contrast, seams in the Powder River Basin of
Wyoming may be 80 feet thick and only 50 feet below the surface.
Coking Properties of Metallurgical Coal. When some types of coal are super-
heated in the absence of oxygen, they form a hard, dry, caking form of coal
called coke, which is chiefly used in the steel production process as a fuel
and reducing agent to smelt iron ore in a blast furnace.
COAL COSTS
Cost Comparison of Fuel Types
Coal generated 57% of the electricity in the United States in 1997. Coal
attained this dominant market share because of its relatively low cost and its
availability throughout the United States. On an average, all-in cost per
megawatt-hour ("MWh") basis, coal-fired generation is less expensive than
electricity generated from natural gas or nuclear power. Hydroelectric power
is inexpensive but is limited geographically and there are few suitable sites
for new hydroelectric power dams.
The table below illustrates the relative cost advantage of coal over certain
other power generation sources.
AVERAGE TOTAL GENERATING COSTS(/1/)
<TABLE>
<CAPTION>
1990(/2/) 1997(/3/)
--------- ---------
<S> <C> <C>
Coal........................................................ $20.06 $17.24
Nuclear..................................................... 22.36 18.98
Hydro....................................................... 3.04 5.86
Natural Gas................................................. 28.84 35.12
</TABLE>
- --------
(1) Average annual generating costs per MWh produced for all U.S. power
plants; costs are all-in and include the cost of fuel, depreciation of
plant, and overhead and maintenance.
(2) Source: RDI PowerData, 1996, FERC Form 1 Data.
(3) Source: Monthly operating data from RDI, 1998 from FERC reports.
Cost Structure
Coal Prices
Coal prices vary dramatically and are affected by a number of factors. Two
general characteristics are particularly important; first, coal prices vary
widely depending upon the region in which the coal is produced, and second,
utility purchases of coal, in which both mine-mouth coal prices and
transportation are considered, strongly influence other coal prices. Other
factors that influence coal prices are geological characteristics such as seam
thickness, overburden ratios and depth of underground reserves, transportation
costs, regional coal production capacity relative to demand and coal quality
characteristics such as heat value, ash, moisture and sulfur content. Powder
River Basin coal is relatively inexpensive to mine ($3 to $5 per ton, based on
Company estimates) because the seams are thick and typically close to the
surface. As a result, open-cast mining methods are used. The large capital
costs associated with dragline mining and truck and shovel mining (a dragline
can cost up to $50 million) are amortized over millions of tons of coal
produced. Powder River Basin mines are highly productive and labor is a much
smaller component of the cost structure. Eastern U.S. coal is more expensive
to mine ($15 to $25 per ton, based on Company estimates) than western U.S.
coal because it has a high percentage of underground coal and its surface coal
tends to have thinner coal seams. Additionally, underground mining has higher
labor (including reserves for labor benefits and health care) and capital
costs
56
<PAGE>
(including modern mining equipment and construction of extensive ventilation
systems) than those of surface mining.
Industrial coal generally costs more to produce and is shipped in smaller
volumes and therefore is priced $3 to $5 per ton more than steam coal used by
utilities. Metallurgical coal has higher carbon and lower ash content and is
usually priced $4 to $10 per ton higher than steam coal produced in the same
regions. Even higher prices are paid for special coking coal with low
volatility characteristics. The following chart summarizes recent steam coal
prices by supply region. As indicated, in 1997 steam coal prices ranged from
$3 to $27 per ton, depending upon the quality and source region of the coal.
The chart also indicates generally stable prices over the past three years,
after a period in which average coal prices declined by 12% from 1990 to 1995,
in nominal dollars.
HISTORICAL STEAM COAL SPOT PRICES
(Nominal Dollars per Ton, Free on Board at Mine)
<TABLE>
<CAPTION>
BTUS POUNDS SO/2/
PER PER MILLION ESTIMATED
REGION/BASIN POUND BTUS 1995 1996 1997
- ---------------------------------- ------- ------------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Central Appalachia................ >12,500 ^1.2 $25.00 $26.78 $27.16
>12,500 1.21-1.70 24.63 25.04 25.53
>12,500 1.71-2.5 24.27 24.81 25.42
<12,500 ^1.2 22.06 23.98 24.42
<12,500 1.21-1.70 21.17 22.93 23.35
<12,500 1.71-2.5 21.13 21.80 22.18
Northeastern Appalachia........... >12,750 1.2-2.5 $22.62 $22.70 $23.20
>12,750 >2.5 21.92 21.28 21.46
Illinois Basin.................... >11,000 >2.5 $18.62 $18.65 $18.99
<11,000 >2.5 17.17 17.15 17.22
Southern Powder River Basin....... >8,800 ^1.2 $ 4.34 $ 4.00 $ 4.00
<8,800 ^1.2 3.27 3.14 3.12
Northern Powder River Basin....... >8,800 ^1.2 $ 6.09 $ 6.25 $ 6.25
Four Corners...................... >9,500 ^1.2 $13.79 $13.81 $14.14
</TABLE>
- --------
Source:RDI, Outlook for Coal, Winter 1996-1997.
Transportation
Coal for domestic consumption is generally sold at the mine and
transportation costs are normally borne by the purchaser. Export coal is
usually sold at the loading port, and coal producers are responsible for
shipment to the export coal-loading facility and the buyer pays the ocean
freight. Coal for electricity generation is purchased on the basis of its
delivered cost per million Btus. Most utilities arrange long-term shipping
contracts with rail or barge companies to assure stable delivered costs.
Transportation is often a large component of the buyer's cost. Although the
customer pays the freight, transportation cost is still important to coal
mining companies because the customer may choose a supplier largely on the
cost of transportation. According to RDI, in 1995, transportation costs
represented 69%, 28% and 25% of the overall cost of coal produced in the
western United States, eastern United States and mid-western United States,
respectively.
According to the National Mining Association, in 1996, approximately 75% of
all U.S. coal was shipped by rail or barge, making these modes the keys to
domestic coal distribution. Trucks and overland conveyors are used to haul
coal over shorter distances, while lake carriers and ocean colliers move coal
to export markets,
57
<PAGE>
although some domestic coal is shipped over the Great Lakes. Railroads move
more coal than any other commodity, and in 1996 coal accounted for 22% of
total U.S. rail freight revenue and 44% of total freight tonnage. Most coal
mines are served by a single rail company, but much of the Powder River Basin
is served by two competing rail carriers, the BNSF (Burlington Northern/Santa
Fe) and the Union Pacific. Rail competition in this major coal producing
region is important, since rail costs constitute up to 75% of the delivered
cost of Powder River Basin coal in remote markets. Rail rates for the Powder
River Basin are lower when evaluated on a ton per mile basis because the
relatively flat and straight rail routes out of the region allow heavily
loaded trains to operate with less manpower and locomotive power than rail
routes in other regions.
COAL REGIONS
Coal is mined from coalfields throughout the United States, with the major
production centers located in the Powder River Basin (PRB), Central
Appalachia, Northern Appalachia, the Illinois Basin and in other western
coalfields. The Company operates mines in all of these major coal producing
regions. The map below shows the significant U.S. coal supply regions.
U.S. COAL SUPPLY REGIONS
[MAP OF THE UNITED STATES APPEARS HERE]
- -------------
Source: RDI.
Powder River Basin
The Powder River Basin contains some of the most attractive coal reserves in
the world. The Powder River Basin covers more than 12,000 square miles in
northeastern Wyoming and 7,000 square miles in southeastern Montana.
Demonstrated coal reserves total approximately 165 billion tons. Quality
varies between lignite and subbituminous, with current production of
subbituminous coal averaging 9,100 Btus per pound and 0.5% sulfur in Montana,
to 8,600 Btus per pound and 0.3% sulfur in Wyoming. The mines just north and
south of Gillette, Wyoming, are categorized as southern Powder River Basin
mines. The coal in the southern Powder River Basin is ranked as subbituminous
with an extremely favorable sulfur content.
Production in the southern Powder River Basin has increased from
approximately 7 million tons in 1970 to 270 million tons in 1997, and now
accounts for 30% of U.S. electric utility coal consumption by volume. The
58
<PAGE>
southern Powder River Basin has grown into the largest coal supply region in
the United States. From 1989 to 1996, the region's compounded annual
production growth rate was 6.2% compared to an overall compounded annual
production growth rate of 1.2% for the total U.S. coal industry. The southern
Powder River Basin markets 98% of its coal to U.S. electric utilities,
principally in the region between the Rocky Mountains and the Appalachian
Mountains. The Company has five active mining operations in the Powder River
Basin: one in Montana and four in northeastern Wyoming.
Central Appalachia
Central Appalachia contains coalfields in eastern Kentucky, southwestern
Virginia and central and southern West Virginia. Production in Central
Appalachia has decreased slightly from approximately 289 million tons in 1990
to 281 million tons in 1996. Production declined in all major sections of
Central Appalachia except for southern West Virginia, which has grown due to
the expansion of more economically attractive surface mines. The region has
experienced significant consolidation in the last several years due to modest
demand growth and strong competition from western coal. Central Appalachian
operations market approximately 58% of their coal to electrical utilities,
principally in the South Atlantic region. Central Appalachia also sells
extensively to the export market and industrial customers. Geologic conditions
in Central Appalachia led to the creation of over 100 significant coal-beds,
60 of which are currently mined. A variety of mining techniques are used as
seams are found on mountaintops and below valley floors. The coal of Central
Appalachia has an average heat content of 12,500 Btus per pound and is
generally low sulfur. The Company operates five underground mines in southern
West Virginia producing low sulfur steam and metallurgical coal.
Northern Appalachia
High and medium sulfur coal is found in the Northern Appalachian coalfields
of western Pennsylvania, southeastern Ohio and northern West Virginia. Coal
demand in the region has increased slightly in recent years and, according to
RDI, is expected to remain stable. Production in the region was approximately
156 million tons in 1997, up from 145 million tons in 1995. Much of the
production in this region is concentrated in a few highly productive longwall
mining operations in southeastern Pennsylvania and northern West Virginia.
Despite its medium sulfur content (1.5% to 2.0% sulfur), coal from the
Pittsburgh seam produced from these mines is considered attractive to utility
coal customers because of its high heat content (approximately 13,000 Btus per
pound). The Company operates one mine in this region.
Illinois Basin
The Illinois Basin is approximately 48,000 square miles in aerial extent
under most of Illinois, western Indiana and western Kentucky. The area has
experienced significant consolidation in the last several years. The Illinois
Basin is a declining production center due to the region's relatively high
sulfur coal and competition from lower sulfur western coal. Production in the
Illinois Basin peaked at 141 million tons in both 1984 and 1990. Since 1990,
production has decreased by 20% due to displacement by lower sulfur, lower
cost coal. In 1996, production stabilized in several of the Illinois Basin's
sub-regions, including Central Illinois, due to stabilizing demand and limited
capacity. Illinois Basin production is marketed primarily to local utility and
industrial customers. The Southwestern Illinois sub-region has an expanded
customer base, including "scrubbed" utilities in Indiana and Florida.
Demonstrated reserves total an estimated 120 billion tons of bituminous coal.
The coal seams dip toward the center of the basin and outcrop along its
border. Approximately 20 coal seams have been identified in the region.
Current production quality ranges from 10,000 to 12,500 Btus per pound and 1%
to 4% sulfur, with production averaging 11,300 Btus per pound and 2.6% sulfur.
The Company has extensive reserves and nine active mining operations (four
surface mines and five underground mines) in the Illinois Basin coal region:
six in western Kentucky, two in Indiana and one in Illinois. In addition, the
Company has a 43.3% interest in Black Beauty, Indiana's largest coal producer.
Western Bituminous Coal Regions
The western bituminous coal regions include the Hanna Basin in Wyoming, the
Uinta Basin of northwestern Colorado and Utah, the Four Corners Region in New
Mexico and Arizona and the Raton Basin in southern
59
<PAGE>
Colorado. These regions produce high quality, low sulfur steam coal for
selected markets in the region, for export through West Coast ports and for
shipments to some Midwestern power plants for which Powder River Basin's
subbituminous coals are not suitable. Production in these regions has
increased from 104 million tons in 1995 to 108 million tons in 1997. The
Company has extensive reserves in these regions, as well as four operating
mines.
Lignite Production Regions
Lignite is mined in North Dakota, Texas and Louisiana. The Company does not
have any lignite reserves.
Australia
The location and quantity of coal reserves in Australia are also well
established, and economical coalfields have been identified in all states in
Australia except Tasmania and the Northern Territory. The majority of
Australia's coal reserves have high heat content, are low sulfur and are
located near ocean ports, making Australia the world's leading coal exporter,
exporting primarily to the Pacific Rim. The majority of Australian coal
production is concentrated in the Bowen Basin in Queensland, in the Hunter
River Valley and Southern coalfields of New South Wales and in Northern
Victoria. The Company operates three mines and is developing a fourth mine in
the Hunter River Valley in New South Wales.
World Coal Production
Global coal production was approximately 5.1 billion tons in 1995, according
to the Organization for Economic Cooperation and Development ("OECD") and the
International Energy Agency ("IEA"). The leading producers (in order of
volume) are China, the United States, the former Soviet Union (primarily
Russia and Ukraine), India and Australia, although coal is produced in many
countries. According to the OECD/IEA, world coal consumption will increase 45%
between 1995 and 2015. Because coal is used primarily as a fuel for the
generation of electricity (coal is currently responsible for 37% of worldwide
electricity generation), the growth in coal demand is being driven by
worldwide electricity demand, which is projected to increase by 54% between
1995 and 2015, according to the OECD/IEA. Much of this growth is projected to
occur in the developing countries of Asia and the Pacific Rim.
COAL MINING TECHNIQUES
Coal mining operations commonly use four distinct techniques to extract coal
from the ground. The most appropriate technique is determined by coal seam
characteristics such as location, logistics and recoverable reserve base.
Drill hole data are used initially to define the size, depth and quality of
the coal reserve area before committing to a specific extraction technique.
All coal mining techniques rely heavily on technology; consequently,
technological improvements have resulted in increased productivity. The four
most common mining techniques are continuous mining, longwall mining, truck
and shovel mining and dragline mining.
Continuous Mining. Continuous mining is an underground mining method in
which main airways and transportation entries are evacuated and remote-
controlled continuous miners extract coal from "rooms," leaving "pillars" to
support the roof. Shuttle cars are used to transport coal from the face to the
conveyor belt for transport to the surface. This method is often used to mine
smaller coal blocks or thin seams and seam recovery is typically approximately
50%. Productivity for continuous mining averages 25 to 50 tons per manshift.
Longwall Mining. Longwall mining is an underground mining method that uses
hydraulic jacks or shields, varying from five feet to 12 feet in height, to
support the roof of the mine while a mobile cutting sheerer advances through
the coal. Chain belts then move the coal to a standard deep mine conveyer
system for delivery to the surface. Continuous mining is used to develop
access to long rectangular panels of coal which are then mined with longwall
equipment, allowing controlled subsidence behind the advancing machinery.
Longwall mining is highly productive, but it is effective only for large
blocks of medium to thick coal seams. High capital costs associated with
longwall mining demand a large, contiguous reserve base. Seam recovery using
longwall mining is typically 70% and productivity averages 48 to 80 tons per
manshift.
60
<PAGE>
Truck and Shovel Mining. Truck and shovel mining is an open-cast method
which uses large electric- powered shovels to remove overburden which is used
to backfill pits after the coal is removed. Shovels load coal in haul trucks
for transportation to the preparation plant or rail loadout. Seam recovery
using the truck and shovel method is typically 90%. Productivity depends on
equipment, geological composition and mining ratios and varies between 250 to
400 tons per manshift in the Powder River Basin and 30 to 80 tons per manshift
in eastern U.S. regions.
Dragline Mining. Dragline mining is an open-cast method which uses large
capacity electric-powered draglines to remove overburden to expose the coal
seams. Shovels load coal in haul trucks for transportation to the preparation
plant and then to the rail loadout. Truck capacity can range from 80 to 300
tons per load. Seam recovery using the dragline method is typically 90% or
more and productivity levels are similar to those for truck and shovel mining.
Once the raw coal is mined, it is often crushed, sized and washed in
preparation plants where the product consistency and heat content are
improved. This process involves crushing the coal to the required size,
removing impurities and, where necessary, blending with other coal to match
customer specification. A coal mine's yield is defined as the ratio of clean
output tonnage to raw material tonnage.
TECHNOLOGY
Coal mining technology is continually evolving, improving, among other
things, underground mining systems and larger earth-moving equipment for
surface mines. For example, longwall mining technology has increased the
average recovery of coal from large blocks of underground coal from 50% to
70%. At larger surface mines, haul trucks have capacities of 240 to 320 tons,
which is nearly double the maximum capacity of the largest haul trucks used a
decade ago. This increase in capacity, along with larger shovels and
draglines, has increased overall mine productivity. According to EIA data,
overall coal mine productivity, measured in tons produced per manshift, has
increased 96% from 1985 to 1995.
COAL MARKETS
World Coal Market
Approximately 5.1 billion tons of coal were consumed worldwide in 1995.
According to EIA's International Energy Outlook 1997, demand is expected to
grow at 1.9% per annum through 2015. Coal demand in developing nations is
expected to grow at roughly eight times that in industrialized nations. The
chart below illustrates historical and projected coal demand.
TOTAL WORLD CONSUMPTION, 1995-2015
<TABLE>
<CAPTION>
1995-2015
REGION 1995 2000P 2005P 2010P 2015P CAGR
- --------------------------------------- ----- ----- ----- ----- ----- ---------
(TONS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Industrialized......................... 2,866 2,971 3,017 3,057 3,096 0.4%
Developing............................. 2,238 2,648 3,118 3,672 4,285 3.3%
----- ----- ----- ----- -----
Total............................ 5,104 5,619 6,135 6,729 7,381 1.9%
===== ===== ===== ===== =====
</TABLE>
- --------
Source:EIA, International Energy Outlook 1997.
U.S. Market
Approximately 1.1 billion tons of coal were consumed in the United States in
1997 and, according to RDI's Outlook for Coal, Winter 1996-1997, domestic
consumption is expected to grow at 1.8% annually from 1995 through 2015.
Domestic utility demand for coal, currently 87% of domestic consumption, is
projected to increase at an average annual rate of 1.9% from 1995 to 1.2
billion tons in 2015. Coal use at industrial/commercial facilities and at non-
utility generators is projected to grow by 16.1 million tons and 4.9 million
tons, respectively,
61
<PAGE>
from 1997 to 2015. Overall, coal use at coke plants and steel mills is
projected to decrease, but steam coal consumption at these plants is expected
to increase by 10.6 million tons as a result of deregulation in the market for
electricity.
HISTORICAL AND PROJECTED U.S. COAL CONSUMPTION, 1995-2015
<TABLE>
<CAPTION>
CAGR
SECTOR 1995 1997P 2000P 2005P 2010P 2015P 1995-2015
- ------------------------ ------- ------- ------- ------- ------- ------- ---------
(TONS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Utility................. 826.9 890.2 944.8 1,002.1 1,084.5 1,209.7 1.9 %
Industrial.............. 79.5 82.3 81.3 82.4 92.2 98.4 1.1 %
Non-Utility Generators.. 15.9 17.2 21.9 21.9 22.2 22.1 1.7 %
Coke Plants/Steel Mills
Met Quality........... 30.1 27.8 28.4 24.7 18.5 14.7 (3.5)%
Steam Quality......... 5.1 7.0 10.0 12.4 16.9 17.6 6.4 %
------- ------- ------- ------- ------- -------
Total Domestic...... 957.5 1,024.5 1,086.4 1,143.5 1,234.3 1,362.5 1.8 %
Export.................. 89.6 95.9 100.8 105.1 109.6 116.0 1.3 %
------- ------- ------- ------- ------- -------
Total............... 1,047.1 1,120.4 1,187.2 1,248.6 1,343.9 1,478.5 1.7 %
======= ======= ======= ======= ======= =======
</TABLE>
- --------
Source:RDI, Outlook for Coal, Winter 1996-1997.
U.S. Electricity Market
As the table below indicates, coal generated 57% of the electricity in the
United States in 1997.
DOMESTIC ELECTRICITY FUEL SOURCES COMPARISON
<TABLE>
<CAPTION>
1990 1996 1997
----- ----- -----
<S> <C> <C> <C>
Coal....................................................... 55% 56% 57%
Nuclear.................................................... 21 22 20
Hydro...................................................... 10 11 11
Natural Gas................................................ 9 9 9
Other...................................................... 5 2 3
----- ----- -----
Total.................................................. 100% 100% 100%
===== ===== =====
</TABLE>
- --------
Source:EIA Monthly Energy Review, February 1998.
The domestic coal industry's principal end market users are domestic
electric utilities. According to RDI, these utilities are expected to
experience a growing demand for coal as demand for electricity increases.
Coal-fired generation is used in most cases to meet base-load requirements, so
coal use generally grows at the pace of electricity growth. However, in recent
years, coal's share of the generation market has gradually increased due to
its relative low cost. Although it is anticipated that few, if any, new coal-
fired generation plants will be built, coal-fired plants can still take market
share (or at least maintain market share in a growing market) due to the
potential for increased capacity utilization. In aggregate, domestic coal-
fired plants currently run at 65% capacity utilization (optimal sustainable
capacity utilization is 85% for a typical plant, though most can run at higher
rates for short periods). By 2010, coal-fired plants would have to run at
approximately 82% of capacity, assuming all the same plants were running at
today's efficiency levels and that market share remains constant. Gas-fired
electricity generation, which is used for intermediate and peak-load demand,
is anticipated to gain market share at the expense of nuclear generation, or
where peak-load capacity is needed.
Over the past several years, largely as a result of SO/2/ gas emissions
limitations mandated by the Clean Air Act, demand has shifted toward lower
sulfur coal.
62
<PAGE>
Regional Coal Markets
In 1995, Phase I of the Clean Air Act required high sulfur coal plants to
reduce their emissions of SO/2/. As a result of large-scale switching to very
low sulfur Powder River Basin coal, many Phase I-affected plants overcomplied
with the SO/2/ requirements, creating a surplus of emission allowances. This
industry-wide surplus led to the formation of a market for SO/2/ emissions
credits. In 2000, Phase II of the Clean Air Act will tighten restrictions on
sulfur emissions from 2.5 to 1.2 lbs. of SO/2/ per million Btus or lower.
Surplus emission credits from Phase I will allow some generators to delay
retrofitting old plants with expensive scrubbers. Eventually, owners of these
plants will have to retrofit or switch to Phase II compliance coal, most
likely Powder River Basin or other western low sulfur coal, as the following
exhibit indicates.
U.S. COAL DEMAND BY PRODUCTION REGION(/1/)
<TABLE>
<CAPTION>
1996-2015
1996 1997P 2000P 2005P 2010P 2015P CAGR
----- ----- ----- ----- ----- ----- ---------
(TONS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Northern Appalachia............... 155 156 154 150 156 176 0.7 %
Central/Southern Appalachia....... 310 324 330 341 369 407 1.4 %
Illinois Basin.................... 116 113 102 99 106 116 0.0 %
Southern Powder River Basin....... 253 273 306 329 376 421 2.7 %
Northern Powder River Basin....... 37 43 58 67 69 75 3.8 %
Other Western United States....... 101 108 145 165 184 201 3.7 %
Lignite........................... 90 90 80 84 71 69 (1.4)%
Other............................. 11 8 8 9 9 9 (1.1)%
----- ----- ----- ----- ----- -----
Total....................... 1,073 1,115 1,183 1,244 1,340 1,474 1.7 %
===== ===== ===== ===== ===== =====
</TABLE>
- --------
Source:RDI Outlook for Coal, Winter 1996-1997.
(1) Does not equal consumption due to imports and changes in stockpiles.
According to Standard & Poor's DRI World Energy Service--U.S. Outlook Fall
1997, to date, the majority of the utilities affected by the Clean Air Act
Amendments have chosen to switch to low sulfur coals at the expense of high
sulfur coal due to the high cost of scrubbers and the availability of low
cost, low sulfur coal in the Powder River Basin.
Export Market
The international coal trade outlook for exporters is shown below.
EXPORT MARKET--THE INTERNATIONAL COAL TRADE OUTLOOK FOR EXPORTERS
<TABLE>
<CAPTION>
IMPORTERS
-----------------------------------------------
1995 ACTUAL 2015 PROJECTED
----------------------- -----------------------
EXPORTERS EUROPE ASIA OTHER TOTAL EUROPE ASIA OTHER TOTAL
- -------------------------------- ------ ---- ----- ----- ------ ---- ----- -----
(TONS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australia....................... 22 120 8 150 18 194 8 220
United States................... 53 18 18 89 72 22 27 121
South Africa.................... 41 21 4 66 36 50 5 91
South America................... 17 0 9 26 55 0 17 72
Canada.......................... 5 27 6 38 8 30 1 39
China........................... 3 24 1 28 0 41 0 41
Other........................... 39 38 11 88 29 57 0 86
---- ---- ---- ---- ---- ---- ---- ----
Total..................... 180 248 57 485 218 394 58 670
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
Source:EIA International Energy Outlook, 1997.
63
<PAGE>
As shown in the above table, according to the EIA, the international market
for coal is predicted to expand. The primary beneficiaries from this expansion
will be Australia (which serves the growing Asian markets), and the new, low
sulfur coal producers such as Indonesia, Colombia and Venezuela. The largest
growth in coal use is projected to come from Indonesia, India and China, which
have extensive coal reserves and are currently investing heavily in new
generating plants. The Pacific Rim countries, namely Japan, Taiwan and Korea,
are forecast to have some of the fastest growing import demand for coal
through 2015; consequently, the countries supplying this area will benefit
from this growth. Australia's exports are expected to increase by over 47%
during this period, linked primarily to this demand. The demand for
metallurgical coal in the international export market has historically been
higher than the demand for steam coal. However, metallurgical coal's share of
total world coal export market is projected to fall from its 1995 level of 40%
to 28% by 2015 as the demand for steam coal by electric utilities is projected
to increase more rapidly than the demand for metallurgical coal.
The Company is not aware of any new studies that attempt to reflect the
impact of the current Asian financial crisis on the long-term growth of coal
demand. While growth near term may be negatively impacted, the need for
industrial expansion and electricity generation may not change and the
projected long-term coal demands may remain strong. The Asian market has been
one of the fastest growing regions for electricity and coal.
DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY
In October 1992, the National Energy Policy Act was signed in the United
States, giving wholesale suppliers access to the transmission lines of power
generators. In April 1996, the Federal Energy Regulatory Commission ("FERC")
issued orders establishing rules providing for open access to electricity
transmission systems, thereby initiating consumer choice in electricity
purchasing and encouraging competition in the generation of electricity. While
the underlying deregulation process is still proceeding at a federal level,
the detailed implementation and planning has been left to the individual
states.
As the timing of deregulation has been left to the states, the pace of
change differs significantly from state to state. To date, ten states have
enacted programs leading to the full deregulation of the retail electricity
market; 39 other states are considering such programs. Due to the uncertainty
around timing and implementation of deregulation in each state, it is
difficult to predict the impact on the electric utilities.
Full-scale deregulation of the power industry, when implemented, will enable
both industrial and residential customers to shop for the lowest cost supply
of power and the best service available. This fundamental change in the power
industry is expected to compel electric utilities to be more aggressive in
developing and defending market share, to be more focused on their pricing and
cost structures and to be more flexible in reacting to changes in the market.
A possible consequence of the deregulation is anticipated downward pressure
on fuel prices. In addition, there has been a move by the utility companies
towards shorter-term contracts compared to the relatively long-term contracts
of the recent past that locked in volume and pricing terms. However, because
coal-fired generation is competitive with most other forms of generation, a
competitive electricity market may stimulate greater demand for coal to be
burned in plants with currently unused capacity. The Company estimates that as
much as 200 million tons of additional coal could be consumed annually if the
electricity market were rationalized and the most efficient coal-fired power
plants were used to their full capacity.
64
<PAGE>
BUSINESS
OVERVIEW
Peabody is the largest and one of the fastest growing private sector coal
producers in the world. Over the last seven years, management has transformed
the Company from a largely high sulfur, high cost domestic coal producer to a
predominantly low sulfur, low cost international coal company. In fiscal 1998,
the Company sold 167.5 million tons of coal worldwide, which were used to
generate more than 9% of the total electricity produced in the United States.
Based on the most recent data available, the Company's coal satisfied
approximately 2.5% of the world's 1995 electricity demands. Peabody's U.S.
market share was approximately 14.4% in 1997, approximately twice the market
share of its nearest competitor. Peabody has approximately 9.4 billion tons of
proven and probable coal reserves, which is the largest reserve base of any
private sector coal producing company in the United States. In fiscal 1998,
the Company generated pro forma operating revenues of more than $2.2 billion
and pro forma EBITDA of $439.0 million.
The Company currently owns and operates 24 mines in the United States and
three mines in New South Wales, Australia and also sells coal produced by
third-party contractors from reserves controlled by the Company. In addition
to its U.S. and Australian coal businesses, the Company is also one of the
leading marketers of power in the United States through Citizens Power, has a
small gold and copper exploration concession in Chile and has an equity
interest in a southern California landfill project. Peabody also has joint
venture interests in Black Beauty, Indiana's largest coal producer, in
Dominion Terminal Associates, one of the largest U.S. coal export terminals
and in certain other coal transportation facilities.
The Company produces approximately 72% of its coal from the western United
States, compared to approximately 23% from the eastern United States and
approximately 5% from Australia. Peabody's coal production in the western
United States has grown from 37 million tons in 1990 to 114 million tons in
fiscal 1998. The Company's highly productive, primarily non-union western
operations produce low sulfur coal, which is attractive to utilities operating
under restrictions of the Clean Air Act. Peabody's large and diverse customer
base includes more than 150 customers in 17 countries. In 1997, Peabody
supplied 92% of its U.S. production to U.S. electric utilities, 5% to the
export market and 3% to the U.S. industrial sector.
Peabody has a large portfolio of CSAs. In fiscal 1998, 92% of Peabody's
sales volume was sold under CSAs. As of March 31, 1998, the Company had CSAs
for more than 1.0 billion tons of coal with terms ranging from one to 17 years
and with an average volume-weighted remaining term of 5.7 years. As its CSAs
expire, the Company intends to negotiate new contracts in order to maintain
its high percentage of volume sold through CSAs and low percentage of volume
sold in the spot market.
COMPANY HISTORY
Peabody, Daniels and Co. was founded in 1883 by Francis S. Peabody as a
small Chicago retail coal business. Two years later, Daniels sold his interest
and the name changed to Peabody & Co. In 1895, Peabody & Co. entered the
mining business when it opened its first mine located in Illinois. In 1929,
Peabody Coal Company was listed on the Chicago Stock Exchange and later, in
1949, on the New York Stock Exchange. In 1955, Peabody Coal Company, which was
still primarily an underground mine operator, merged with Sinclair Coal
Company of Kansas City, Missouri, a major surface mining company.
By 1968, Peabody Coal Company was operating 37 mines, producing
approximately 54 million tons per annum, and had coal reserves exceeding 5
billion tons. Peabody Coal Company entered the Australian market for the first
time in 1962 through a joint venture agreement with an Australian construction
company and a Japanese trading company.
In 1968, Kennecott Copper Corporation acquired Peabody Coal Company, a move
that the U.S. Federal Trade Commission ruled in violation of the Clayton Anti-
Trust Act. In 1977, after an adverse legal ruling against Kennecott, it sold
Peabody Coal Company for $1.1 billion to Peabody Holding Company, a highly
leveraged
65
<PAGE>
holding company formed by a consortium consisting of Newmont Mining Corp.,
Williams Cos., Bechtel Group Inc., Boeing Corporation, Fluor Corp. and The
Equitable Life Assurance Society.
Peabody Holding Company continued to grow during the 1980s through expansion
and acquisition. In 1983, Peabody Holding Company opened the North Antelope
mine, its first mine in the Powder River Basin and the following year it
acquired the West Virginia coal properties of ARMCO Steel to expand both its
low sulfur operations and its geographical base. In 1987, Peabody Holding
Company purchased Coal Properties Corp. and Eastern Associated, which included
seven operating mines and substantial low sulfur reserves.
In July 1990, Peabody Holding Company was acquired by Hanson and since then
the Company has made ten major acquisitions totaling more than $1.1 billion.
In 1993, Hanson acquired the Lee Ranch mine in New Mexico and the following
year acquired a one third interest in Black Beauty, which was subsequently
increased to a 43.3% interest in February 1998. The Company strengthened its
position in the Powder River Basin in 1994 with the acquisitions of the
Caballo and Rawhide mines from Exxon Coal USA Inc.
In 1993, a major coal operation in Australia, Peabody Resources, was
acquired from Costain Group in anticipation of the growing Pacific Rim market
for coal.
In February 1997, Hanson spun off The Energy Group with its subsidiaries,
Eastern Group and Peabody Holding Company, and became a publicly traded
company in the United Kingdom.
On May 19, 1997, The Energy Group purchased Citizens Power from Lehman
Brothers and certain other parties initiating its entry into the rapidly
growing power marketing industry. Citizens Power obtained the first marketing
license from FERC in 1989. Since that time, it has continued to solidify its
position as an innovator in the U.S. power marketing industry.
The Company was incorporated under the laws of Delaware on February 27,
1998, in anticipation of consummation of the Acquisition. On May 19, 1997, the
Company consummated the Acquisition. See "The Acquisition."
The Company's principal executive office is located at 701 Market Street,
St. Louis, Missouri 63101-1826, telephone: (314) 342-3400.
COMPETITIVE STRENGTHS
The Company believes that it benefits from the following competitive
strengths, which have enabled it to become the largest private sector producer
of coal in the world:
Market Leader. The Company is the largest private sector producer of coal in
the world with a market share of 14.4% in the United States in fiscal 1998 and
a market share of approximately 3.0% worldwide in 1995, according to the
latest available data. In 1997, the Company had a 35% market share in the
Powder River Basin, the largest and fastest growing U.S. coal production
region and the United States' largest known source of low cost, low sulfur
coal. The Company also has the largest reserve base of any U.S. coal producer,
with approximately 9.4 billion tons of proven and probable coal reserves which
based on current rates of production, the Company believes could last for more
than 50 years.
Diversity of Operations and Customers. The Company's mining operations are
broad and diverse and serve a wide range of customers. The Company owns and
operates 24 U.S. mines and sells coal to more than 150 U.S. power plants,
including many of the largest U.S. utilities. The Company also exports coal to
customers in 15 foreign countries. Approximately 72% of the Company's coal
production comes from the western United States, while 10% comes from
Appalachia, 13% from the Illinois Basin and 5% from Australia. Because of the
geographical mix of its reserves, the Company can source coal from several
regions, increasing its ability to meet the various needs of its customers and
reducing customers' transportation costs. Through Citizens Power, the Company
engages in power and energy sales and trading, transaction and asset
restructuring and fuel and power integration.
High Percentage of Low Sulfur Coal. The Clean Air Act Amendments require
electric utilities to reduce SO/2/ and other acidic emissions from coal-fired
power plants in a two-phase process that began in 1995 with
66
<PAGE>
Phase I. Phase II requires further emission reductions by 2000. Utilities may
choose to meet these standards by (i) burning low sulfur coal or other low
sulfur fuels, (ii) installing scrubbers or (iii) purchasing or trading
emission allowances. Power plants that do not use their full allotment of
emission allowances provided under the Clean Air Act Amendments can sell their
extra emission allowances on the open market or use them at their other
facilities to offset emissions from higher sulfur coal. To date, the majority
of affected utilities have chosen to switch to low sulfur coal at the expense
of high sulfur coal due to the high cost of scrubbers and the availability of
low cost, low sulfur coal from the Powder River Basin. According to the
Department of Energy, high sulfur coal production declined 17.6% from 1990 to
1996, while low sulfur coal production increased 18.0% over the same period.
The Company has increased its sales of low sulfur coal from 52.6 million tons
to 135.5 million tons during the same period of time. As of October 1, 1996,
47% of Peabody's proven and probable coal reserves was of low sulfur coal and
81% of its 1998 coal sales was of low sulfur coal. As a result of its
significant presence in the Powder River Basin, which has very low sulfur
coal, Peabody is well positioned to benefit from the impact of the Clean Air
Act Amendments. Over 57% of Peabody's total production and 55% of sales come
from the Powder River Basin, where Peabody has a 35% market share. RDI
estimates that production from coal mines in the Powder River Basin is
expected to grow from 272.7 million tons to 421.3 million tons between 1997
and 2015.
Portfolio of Long-Term Contracts. Peabody has a large portfolio of CSAs. As
of March 31, 1998, the Company had CSAs for more than 1.0 billion tons of
coal, with terms ranging from one to 17 years and with an average volume-
weighted average remaining term of 5.7 years. As a result, its exposure to any
fluctuation in spot market prices is relatively limited. The Company has
historically replaced CSAs as they have expired.
Efficient Operations. Through its production volume, centralized information
technology system, marketing programs and land management functions, the
Company is able to achieve operating and corporate efficiencies. From fiscal
1990 to fiscal 1998, the Company has increased its sales volume from 93.3
million tons to 167.5 million tons (including recent acquisitions) while
simultaneously reducing the number of employees in its coal operations from
10,700 to 7,500. During this period, the Company increased its average
productivity (in terms of coal production per manshift) by 179% in the United
States and, since the acquisition of Peabody Resources in 1993, by 37% in
Australia. According to the U.S. Department of Labor, the Company's four
Powder River Basin mines were the four most productive coal mines in the
United States in 1996 as measured in tons per manshift.
Innovative Research and Development. The Company emphasizes research and
development of new technologies in the coal industry. Since the Company is one
of the largest users of equipment in the industry, manufacturers work with it
to design and to produce equipment that will bring added value to the coal
industry. Some of the Company's recent efforts have led to several
innovations, including state-of-the-art haul trucks, the adaptation of global
positioning satellite technology and nuclear quality analysis equipment. As a
result of these efforts, many of the Company's mines have become among the
most productive in the industry.
Experienced Management. Irl F. Engelhardt, who became Chief Executive
Officer of the Company in 1991, and other members of the senior management
team have a proven record of increasing productivity, making strategic
acquisitions and developing and maintaining strong customer relations. The
management team, whose members have an average of 19 years experience in the
coal industry and 15 years experience with the Company, has transformed the
Company into a predominantly low sulfur, low cost international coal company.
STRATEGY
Anticipating the effect of the Clean Air Act Amendments, the Company
endeavored to become the leading low sulfur coal producer in the United
States. In 1990, low sulfur coal constituted only 56% of the Company's sales
volume; by 1998, it had increased to 81%. In 1990, 77% of the Company's U.S.
coal production came from union mines; by 1998, the percentage had dropped to
35%. The Company has concentrated on controlling costs, and the average cost
per ton declined 25% during the same period, aided by the expansion of its low
cost Powder River Basin operations. The Company also anticipated the growth in
international coal demand, primarily in Asia and the Pacific Rim. This
anticipated growth was the impetus for the acquisition of Peabody
67
<PAGE>
Resources in 1993. To capitalize on U.S. electricity deregulation and the
convergence of U.S. energy markets, the Company acquired Citizens Power, a
leading power trading and energy contract restructuring firm in 1997.
As the chart below shows, the Company has demonstrated the ability to
transform itself in response to changing market conditions.
TRANSFORMATION OF PEABODY 1990 TO 1998(/1/)
<TABLE>
<CAPTION>
1990 1998 % CHANGE
----- ----- --------
<S> <C> <C> <C>
Sales Volume (mm tons)............................... 93.3 167.5 80%
U.S. Market Share(/2/)............................... 9.1% 14.4% 58
Low Sulfur Sales Volume (mm tons).................... 52.6 135.5 158
Coal Reserve Base (mm tons).......................... 7,000 9,365(/3/) 34
Low Sulfur Reserves (mm tons)........................ 2,500 4,392(/3/) 76
Productivity tons/manshift (U.S. mines).............. 32.9 91.8 179
Average Cost(/4/)/Ton Sold ($)....................... 19.33 10.21 (47)
Non-Union Production (mm tons)....................... 20.9 98.1 369
</TABLE>
- --------
Source: Peabody.
(1)Fiscal year 1990 and fiscal 1998.
(2)Market share is calculated by dividing Peabody's U.S. sales volume by total
demand for coal in the United States.
(3)As of October 1, 1996.
(4) Operating costs and expenses, excluding Depreciation, Depletion and
Amortization, Selling and Administrative Expenses and Net Loss/(Gain).
In the future, the Company's strategy will concentrate on the following five
principal objectives:
Capitalize on U.S. Electricity Deregulation. Using its extensive customer
base, portfolio of CSAs and its access to the energy trading and contract
restructuring capabilities of Citizens Power, the Company intends to build on
the opportunities presented by electricity deregulation. The Company estimates
that as much as 200 million tons of additional coal could be consumed annually
if the electricity market were rationalized and the most efficient coal-fired
power plants were used to their full capacity. The Company believes that its
ability to furnish low cost fuel and/or low cost electricity from generating
sources with access to low cost fuel will allow it to capitalize on these
opportunities.
Expand Low Sulfur and International Operations. In a deregulated
environment, coal-fired generation will remain a competitive source of power
and the Company intends to continue expanding into growing segments of the
coal market. The Company expects growth to come from expansion of its low
sulfur, low cost coal operations in the Powder River Basin, as well as
expansion of its international operations. The Company believes increased
participation in the rapidly expanding Black Beauty joint venture, and
possible development of new "greenfield" mining operations on low sulfur
reserves in the western United States will provide the opportunity to enhance
the size and profitability of the Company.
Further Reduce Costs. Peabody continues its focus on cost reductions at its
current operations. The Company believes that prudent capital investment in
new production technologies and the adoption of innovative labor-management
practices under the Labor Management Positive Change Program, a program
designed to improve the competitiveness of its unionized mines, will enable it
to continue to increase productivity. The Labor Management Positive Change
Program has improved productivity and lowered production cost at several
locations in the Eastern and Midwest regions of the U.S. The Labor Management
Positive Change Program has achieved this by implementing changes such as
alternative work scheduling, elimination of certain restrictive past
practices, implementation of new incentive programs and joint identification
of productivity enhancements and cost savings ideas. The Company intends to
continue the program in the future. Streamlining of the Company's selling and
administrative functions will further reduce expenses, which the Company
believes to be among the lowest among major coal producers on a per ton basis,
as will careful management of the Company's workers' compensation, retiree,
reclamation and health care liability costs and a continued focus on worker
safety.
68
<PAGE>
Leverage Energy Marketing With Citizens Power. The Company will focus on the
strategic integration of its extensive coal customer base with the power
trading and contract restructuring capabilities of Citizens Power. Through
Citizens Power, the Company expects to offer a variety of innovative coal
sales transactions and energy contract restructuring products to help electric
utility customers remain competitive in a deregulated environment. For
example, coal contracts may be restructured with power off-takes to compensate
for lower coal prices, or NUG contracts may be restructured using low-priced
generation from coal tolling agreements as a replacement. As energy markets
converge, the Company is prepared to offer a variety of energy products to
suit these changing market circumstances.
Pursue Strategic Acquisitions. The Company may pursue strategic acquisitions
and/or joint ventures within the U.S. and Australian coal industries, and as
appropriate opportunities arise, the Company may acquire other strategic
energy assets including electric generating facilities, natural gas and energy
production assets.
COAL RESERVES
The Company had an estimated 9.4 billion tons of proven and probable
reserves as of October 1, 1996, approximately 47% of which was low sulfur
coal. The Company's non-operational reserves are generally held by Peabody
Development which is responsible for acquiring coal assets for future
development and disposing of non-strategic coal interests. Of the Company's
reserves, approximately 48% is owned by the Company and approximately 52% is
leased.
Below is a table summarizing the locations and reserves of the Company's
major operating units.
<TABLE>
<CAPTION>
PROVEN AND PROBABLE
RESERVES AS OF OCTOBER 1, 1996(/1/)
-----------------------------------
(TONS IN MILLIONS)
OWNED LEASED TOTAL
OPERATING COMPANIES LOCATIONS TONS TONS TONS
- ------------------------------------ ----------------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Eastern Associated.................. West Virginia 256 720 976
PCC................................. Illinois Basin 638 240 878
Peabody Western..................... Arizona, Colorado and Montana 2 665 667
Powder River........................ Powder River Basin 90 2,413 2,503
Lee Ranch........................... New Mexico 727 7 734
Peabody Resources................... Australia -- 290 290
Peabody Development................. Throughout United States 2,784 437 3,221
Other............................... Throughout United States 8 88 96
----------- ----------- -----------
Total........................... 4,505 4,860 9,365
=========== =========== ===========
</TABLE>
- --------
(1) Reserves have been adjusted to take account of losses involved in
producing a saleable product.
Reserve estimates are based on geological data assembled and analyzed by the
Company's staff, which includes more than 100 geologists and engineers,
located both at the individual mines and at the Company's headquarters. The
reserve estimates are reviewed periodically to reflect new drilling or other
data received and production of coal from the reserves. Accordingly, reserve
estimates will change from time to time reflecting mining activities, analysis
of new engineering and geological data, changes in reserve holdings,
modification of mining methods and other factors. Reserve information,
including the quantity and quality (where available) of reserves as well as
production rates, surface ownership, lease payments and other information
relating to the Company's coal reserve and land holdings, is maintained
through a computerized land management system developed by the Company.
The Company's reserve estimates are predicated on information obtained from
its extensive drilling program, which totals nearly 500,000 individual drill
holes. Data from individual drill holes is input into a computerized drill
hole system from which the depth, thickness and, where core drilling is used,
the quality of
69
<PAGE>
the coal, are determined. The density of the drill pattern determines whether
the reserves will be calculated as proven or probable. The drill hole data is
then input into the computerized land management system which overlays the
geological data with data on ownership or control of the mineral and surface
interests to determine the extent of the reserves in a given area. In
addition, the Company periodically engages Boyd, independent mining and
geological consultants, to review the Company's estimates of its coal
reserves. The most recent of these reviews, which was completed October 1,
1996, includes a review of the procedures used by the Company to prepare its
internal reserve estimates, verifying the accuracy of selected property
reserve estimates and retabulating reserve groups according to standard
classifications of reliability.
The private leases normally have terms of between 10 and 20 years, and
usually give the Company the right to renew the lease for a stated period or
to maintain the lease in force until the exhaustion of minable and
merchantable coal contained on the relevant site. These private leases provide
for royalties to be paid to the lessor either as a fixed amount per ton or as
a percentage of the sales price. Many leases also require payment of a lease
bonus or minimum royalty, payable either at the time of execution of the lease
or in periodic installments.
Private leases are invariably maintained by active production. Leases
containing unassigned reserves may expire or such leases may be renewed
periodically. As mines deplete or reserves are assigned, production is often
commenced in a new mine to replace the depleted capacity. With a portfolio of
approximately 9.4 billion tons, the Company believes that it has sufficient
reserves to replace capacity from depleting mines for the foreseeable future
and that its reserve base is one of the Company's strengths. The Company
believes that the current level of production at its major mines is
sustainable.
As of April 1, 1998, the Company held 22 federal coal leases which are
administered by the U.S. Department of the Interior pursuant to the Federal
Coal Leasing Amendments Act of 1976. These leases cover the Company's
principal reserves in Wyoming and other reserves in Montana and Colorado. Each
of these leases continues indefinitely provided that there is diligent
development of the lease and continued operation of the related mine or mines.
The Bureau of Land Management has asserted the right to adjust the terms and
conditions of these leases, including rent and royalties, after the first 20
years of their life and at ten yearly intervals thereafter. Annual rents under
the Company's federal coal leases are now set at $3.08 per acre. Production
royalties on federal leases are set by statute at 12.5% of the gross proceeds
of coal mined and sold for surface mined coal and 8% for underground mined
coal. Similar provisions govern three coal leases with the Navajo and Hopi
Indian tribes. These leases cover coal contained in 65,000 acres of land in
northern Arizona lying within the boundaries of the Navajo National and Hopi
Indian reservations.
Consistent with industry practice, the Company conducts only limited
investigation of title to its coal properties prior to leasing. Title to lands
and reserves of the lessors or grantors and the boundaries of the Company's
leased properties are not completely verified until such time as the Company
prepares to mine such reserves.
70
<PAGE>
MINING OPERATIONS
The following provides a description of the operating characteristics of the
principal mines and reserves of each of the Company's U.S. and Australian
mining units. Production figures are for fiscal 1998.
THE COMPANY'S MINING UNITS
[MAP OF THE UNITED STATES APPEARS HERE]
UNITED STATES
Within the United States, the Company has six principal operating companies:
Powder River, Peabody Western, Eastern Associated, PCC, Lee Ranch and Patriot
Coal.
POWDER RIVER
Powder River owns and manages four low sulfur, non-union surface mines in
Wyoming that produced approximately 91.7 million tons of coal in 1998, or
approximately 35% of total coal production in the southern Powder River Basin,
the largest U.S. coal producing region. As of March 31, 1998, Powder River
employed 1,024 people. According to the U.S. Department of Labor, in 1996
Powder River had the four most productive and efficient mines, as measured in
tons per manshift, in the United States: the North Antelope, Rochelle, Caballo
and Rawhide mines. In 1997, Powder River shipped approximately 57% of the total
coal produced by the Company. The Rochelle, Caballo and North Antelope mines
are serviced by the BNSF and Union Pacific railroads, while the Rawhide mine is
serviced by the BNSF. The Company's significant reserves in the Powder River
Basin enable it to increase and decrease production among Powder River's mines
to respond to market conditions. The Company recently announced that it will
reduce production at the Rawhide mine and shift production under certain CSAs
to its other Powder River Basin mines.
Powder River's coal reserves are classified as surface minable and
subbituminous with seam thicknesses varying from 70 to 105 feet. The sulfur
content of the coal in current production ranges from 0.2% to 0.5% and the heat
value ranges from 8,250 to 8,850 Btus per pound.
71
<PAGE>
The following table provides a summary of the main characteristics of the
principal mines of Powder River:
<TABLE>
<CAPTION>
AVERAGE
TYPE SULFUR SEAM 1998
MINE MINE TYPE OF COAL CONTENT THICKNESS PRODUCTION
- --------------------------------- --------- ------- ------- --------- ----------
(FEET) (TONS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
POWDER RIVER
North Antelope/Rochelle......... surface steam low 76.0/75.5 60.6
Caballo......................... surface steam low 70.0 20.6
Rawhide......................... surface steam low 105.0 10.5
-------
Total.......................... 91.7
=======
</TABLE>
North Antelope/Rochelle
The North Antelope/Rochelle Business Unit is composed of two mines: the
North Antelope mine and the Rochelle mine which produced approximately 60.6
million tons of coal in 1998.
The North Antelope mine is located 65 miles south of Gillette, Wyoming. In
1996 it was ranked as the most productive mine in the United States and is
currently among the five largest U.S. coal mines. The mine uses a dragline
along with truck and shovel methods to mine coal.
The Rochelle mine is located next to the North Antelope mine and was the
second largest coal mine in the United States in 1996. In 1996, it was ranked
as the second most productive mine in the United States. It uses modern truck
and shovel methods and has two 15,000-ton silos and a 55,000-ton slot storage
facility. The Rochelle mine produces premium quality coal with a sulfur
content averaging 0.22% and a heat value ranging from 8,500 to 8,800 Btus per
pound.
Raw coal is crushed, sized and stored in three 15,000-ton storage silos and
bunkers in preparation for the automatic batch loading system, which can load
coal into 100-ton rail cars in 100 to 115 car unit trains at a rate of 6,000
tons per hour. The business unit has dual railroad tracks, capable of loading
two trains simultaneously and in an efficient manner.
Caballo
The Caballo mine is located 20 miles south of Gillette, Wyoming. In 1998, it
produced approximately 20.6 million tons of coal. Caballo is a truck and
shovel operation with a coal handling system which includes two 12,000-ton
silos and two 11,000-ton silos.
Rawhide
The Rawhide mine is located ten miles north of Gillette, Wyoming. In 1998,
it produced approximately 10.5 million tons of low sulfur coal using truck and
shovel mining methods. Rawhide has four 11,000-ton silos and two 12,000-ton
silos.
PEABODY WESTERN
Peabody Western, based in Flagstaff, Arizona, manages two surface mines in
Arizona, one in Colorado and one in Montana, which together ship approximately
17.8 million tons of low sulfur coal annually and employed 1,027 people as of
March 31, 1998. All of Peabody Western's coal is sold to electricity
generating plants.
72
<PAGE>
The following table provides a summary of the main characteristics of the
principal mines of Peabody Western:
<TABLE>
<CAPTION>
AVERAGE
TYPE SULFUR SEAM 1998
MINE MINE TYPE OF COAL CONTENT THICKNESS PRODUCTION
- ------------------------------ --------- ------- -------- --------- ----------
(FEET) (TONS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
PEABODY WESTERN
Black Mesa................... surface steam low 6.6(/1/) 4.5
Kayenta...................... surface steam low 5.9(/1/) 7.4
Big Sky...................... surface steam low/high 21.4 4.3
Seneca....................... surface steam low 9.9 1.6
-------
Total....................... 17.8
=======
</TABLE>
- --------
(1) Up to six seams mined.
Black Mesa
The Black Mesa mine, located on the Navajo and Hopi Indian reservations in
Arizona, produced approximately 4.5 million tons of steam coal in 1998 using
two draglines. The mine sells its coal under a CSA. Its coal is crushed, mixed
with water and then transported 273 miles through the underground Black Mesa
Pipeline to Southern California Edison's Mohave Generating Station near
Laughlin, Nevada. The mine and the pipeline were designed to deliver coal
exclusively to the power plant, which has no other source of coal.
Kayenta
The Kayenta mine is adjacent to the Black Mesa mine. Approximately 7.4
million tons of steam coal were produced in 1998 using three draglines in
three mining areas. It sells all of its coal under a CSA. The coal is crushed,
then carried 17 miles by conveyor belt to storage silos where it is loaded on
to a private rail link and transported 83 miles to the Navajo Generating
Station, operated by The Salt River Project near Page, Arizona. The mine and
the railroad were designed to deliver coal exclusively to the power plant,
which has no other source of coal.
Big Sky
The Big Sky mine is located in the northern end of the Powder River Basin
near Colstrip, Montana. The mine produces 4.3 million tons of steam coal
annually with one dragline. The coal is shipped by rail to several major
electric utility customers in the upper midwestern United States.
Seneca
The Seneca mine near Hayden, Colorado ships about 1.6 million tons of low
sulfur steam coal annually and operates two draglines in two mining areas. The
Seneca mine's coal is hauled by truck to a nearby generating station where it
is sold under a CSA.
EASTERN ASSOCIATED
Eastern Associated, based in Charleston, West Virginia, owns or manages four
business units consisting of six mines and related facilities in West Virginia
and employed 1,618 people as of March 31, 1998. Eastern Associated also
controls two mining sites at which coal is produced by contractors and
processed at the Company's facilities. These operations produced approximately
16.2 million tons of metallurgical and steam coal in 1998 which was sold to
customers in the United States and abroad.
Approximately 40% of Eastern Associated's coal is exported to customers in
Canada and 12 other countries worldwide. The remainder is sold to customers in
the United States. Approximately 55% of Eastern Associated's production is
sold to domestic electric utilities under CSAs.
73
<PAGE>
The following table provides a summary of the main characteristics of the
principal mines of Eastern Associated:
<TABLE>
<CAPTION>
AVERAGE
TYPE SULFUR SEAM 1998
MINE MINE TYPE OF COAL CONTENT THICKNESS PRODUCTION
- ----------------------------- ----------- --------- ------- --------- ----------
(FEET) (TONS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
EASTERN ASSOCIATED
Big Mountain
Robin Hood underground steam low 4.8/5.6 1.8
.......................
Federal No. 2............... underground steam high 6.8 4.4
Pond Fork Business Unit..... underground steam/met low 5.2 2.5
Contract Mines.............. underground met low 2.5/5.6 5.8
Wells Business Unit(/1/).... underground steam/met low 5.2 1.7
-----
Total...................... 16.2
=====
</TABLE>
- --------
(1) The Wells Business Unit consists of the Lightfoot No. 1 and No. 2 mines.
Big Mountain/Robin Hood
The Big Mountain/Robin Hood Business Unit is based near Prenter, West
Virginia. Big Mountain No. 16 mine uses continuous miners, which produced 1.3
million tons of steam coal in 1998. Robin Hood No. 9 mine uses continuous
miners which produced 500,000 tons of steam and metallurgical coal in 1998.
Federal No. 2
The Federal No. 2 mine, near Fairview, West Virginia, produced 4.4 million
tons of steam coal in 1998 using longwall mining. Coal produced from the
Federal No. 2 mine has a sulfur content only slightly above that of low sulfur
coal and, as a result, is more marketable than most high sulfur coal.
Pond Fork Business Unit and Contract Mines
The Pond Fork Business Unit consists of the Harris No. 1 mine and the
Rocklick preparation plant. The Harris No. 1 mine, near Bald Knob, West
Virginia, produced approximately 2.5 million tons of low sulfur steam coal in
1998. This business unit uses a longwall and two continuous miner sections.
The Harris preparation plant has the capability to load coal on two competing
rail systems thereby enabling it to minimize transportation costs. The
Rocklick preparation plants process coal produced from Eastern Associated
reserves by contract mining companies. This preparation plant, located in West
Virginia, along with the Kopperston preparation plant which closed in June
1998, processed approximately 5.8 million tons of steam and metallurgical coal
in 1998.
Wells
The Wells Business Unit in Boone County, West Virginia, produced 1.7 million
tons of metallurgical and steam coal during 1998. The business unit consists
of the Lightfoot No. 1 and No. 2 mines and the Wells preparation plant. The
Lightfoot No. 1 mine, near Wharton, West Virginia, produced approximately
700,000 tons of steam and metallurgical coal in 1998 with two continuous miner
sections. The Lightfoot No. 2 mine, also near Wharton, operates two continuous
miner sections and produced 1.0 million tons of steam and metallurgical coal
during the same year.
PEABODY COAL COMPANY ("PCC")
PCC, based in Charleston, West Virginia, operates six mines in the
midwestern United States which collectively produced 19.4 million tons of coal
in 1998. PCC's four underground and two surface mines, along with five
preparation plants and three barge loading facilities, are located in
Kentucky, Illinois and Indiana and employed 1,893 people as of March 31, 1998.
74
<PAGE>
More than 90% of PCC's coal is shipped to 12 electric utilities in seven
states, principally in the Midwest. Most of this coal is sold under CSAs of
five or more years in length. Eight percent of sales are to U.S. industrial
customers who use the coal to produce their own electricity and steam power.
About 49% of PCC's coal is transported to customers by river barge, 49% by
rail and most of the balance is carried on overland conveyor belts to nearby
power plants.
The following table provides a summary of the main characteristics of the
principal mines of PCC:
<TABLE>
<CAPTION>
AVERAGE
TYPE SULFUR SEAM 1998
MINE MINE TYPE OF COAL CONTENT THICKNESS PRODUCTION
- ------------------------------ ----------- ------- ------- --------- ----------
(FEET) (TONS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
PCC
Camp No. 1 and No. 11........ underground steam high 5.1/4.9 6.5
Hawthorn..................... surface steam high 3.0 3.3
Marissa...................... underground steam high 6.5 4.0
Midwest Business Unit
(Ken(/1/) and Martwick)..... underground steam high 4.5/4.8 1.6
Lynnville 9.0 4.0
Squaw Creek(/1/) surface steam high 6.0
.........................
-----
Total....................... 19.4
=====
</TABLE>
- --------
(1) The Ken and Squaw Creek mines were depleted in 1997.
Camp
The Camp Business Unit, near Morganfield, Kentucky, produced 6.5 million
tons of coal in 1998. The Camp No. 1 mine has five continuous miner sections
using both continuous haulage systems and shuttle car haulage. The Camp No. 11
mine uses PCC's one longwall mining machine and three continuous miners for
development.
Hawthorn
The Hawthorn mine near Carlisle, Indiana, produced 3.3 million tons of steam
coal in 1998 using three draglines.
Marissa
The Marissa Business Unit, located near Marissa, Illinois, produced 4.0
million tons of coal. It consists of the Marissa underground mine, the
Randolph Preparation Plant and associated transportation facilities. The
Marissa mine uses six continuous miners.
Midwest
The Midwest Business Unit near Graham, Kentucky, produced 1.6 million tons
of coal in 1998. The business unit consists of the Ken surface mine, which
closed in 1997, the Martwick underground mine and the Gibraltar Preparation
Plant and Dock. The business unit is also responsible for reclaiming PCC's
closed or suspended mining operations throughout the midwest.
Lynnville/Squaw Creek
The Lynnville/Squaw Creek Business Unit, near Lynnville, Indiana, produced
approximately 4.0 million tons of coal in 1998. The Squaw Creek mine, which
produced approximately 1.4 million tons of coal, closed in 1997 due to
depletion of its reserves. The Lynnville mine uses two draglines and an
electric shovel and produced 3.0 million tons of coal in 1998.
75
<PAGE>
LEE RANCH
The Lee Ranch mine located near Grants, New Mexico, produced 4.7 million
tons of low sulfur coal in 1998 and employed 252 people as of March 31, 1998.
Lee Ranch shipped its coal to two customers in Arizona and New Mexico under
CSAs. It is a surface mine and uses truck and shovel mining.
PATRIOT COAL
Patriot Coal operates one surface mine and one underground mine in Henderson
County, Kentucky and one surface mine in Ohio County, Kentucky. Patriot Coal
produced approximately 1.7 million tons of coal in 1998. The underground mine
has two continuous miner sections and the surface mines use truck and shovel
equipment. The business unit also has a preparation plant and dock. There were
151 persons employed at the three mines and related facilities as of March 31,
1998.
AUSTRALIA
PEABODY RESOURCES
Peabody Resources, headquartered in Sydney, New South Wales, manages and
operates the Ravensworth, Narama and Warkworth mines in the Hunter River
Valley, New South Wales which together shipped 10.8 million tons of low sulfur
coal in 1998. Peabody Resources' share of this production is more than 7.3
million tons, of which 73% is sold domestically under CSAs and 25% is exported
to Pacific Rim countries, principally under CSAs. Peabody Resources owns 100%
of Ravensworth, 50% of Narama and 43.75% of Warkworth. Peabody Resources
employed 1,013 people as of March 31, 1998.
Peabody Resources manages and holds a 35% interest in Bengalla, a joint
venture which is developing a new surface mine in the upper Hunter River
Valley. Peabody Resources also operates a Mining Services Division, based in
Brisbane, Queensland, which provides specialist tunneling and underground
contract mining services to the mining and civil engineering industries.
The following table provides a summary of the main characteristics of
Peabody Resources' mines:
<TABLE>
<CAPTION>
COMPANY
SHARE OF
TYPE SULFUR AVERAGE SEAM 1998 EQUITY
MINE MINE TYPE OF COAL CONTENT THICKNESS(/1/) PRODUCTION INTEREST
- ------------------------ --------- --------- ------- -------------- ---------- --------
(FEET) (TONS IN
MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PEABODY RESOURCES
Ravensworth............ surface steam low 5.5 4.4 100.00%
Narama................. surface steam low 4.8 1.1 50.00%
Warkworth.............. surface steam/met low 8.0 1.8 43.75%
Bengalla(/2/).......... surface -- low -- -- 35.00%
-----
Total................. 7.3
=====
</TABLE>
- --------
(1) Includes multiple seams.
(2) Under development. It is scheduled to begin production in 1999.
Ravensworth/Narama
The Ravensworth mine, 12 miles northwest of Singleton, New South Wales, is
managed by Peabody Resources under a CSA which expires in 2001 and requires
the Company to produce about 4.5 million tons per year from coal reserves
owned by Macquarie Generation, one of New South Wales' state electric
utilities. The eight coal seams at the Ravensworth mine range from one to 26
feet thick. The overburden is pre-stripped using trucks and power shovels,
followed by draglines to uncover the lower two seams. The coal is trucked from
the pit to a crushing plant and then shipped raw by overland conveyor belt to
Macquarie Generation's nearby Bayswater and Liddell power stations.
76
<PAGE>
The Narama mine opened in January 1993 and is operated as an extension of
the adjacent Ravensworth facility using similar mining techniques in the same
coal seams. The Narama joint venture, of which Peabody Resources owns 50%,
holds a 20-year contract running to the year 2012 to supply about 2.3 million
tons annually to Macquarie Generation.
Warkworth
The Warkworth mine, seven miles southwest of Singleton, New South Wales,
produced approximately 4.1 million tons of steam and metallurgical coals in
1998 (the Company's portion of which is approximately 1.8 million tons),
primarily for export. Peabody Resources manages and owns 43.75% of the
Warkworth Associates Joint Venture which owns the mine.
Coal at the Warkworth mine is produced from three pits using truck and
shovel pre-stripping and dragline stripping techniques to uncover four to six
seams. This diverse range of products is processed at Warkworth's preparation
plant and blended to customer specifications before being carried by overland
conveyor to the Mount Thorley rail loop and then by rail to the port of
Newcastle. Warkworth owns 13.9% of the Mount Thorley facility and 4.2% of a
coal loading terminal at the port.
Bengalla
Peabody Resources also manages and holds a 35% interest in the Bengalla
joint venture which has been awarded mineral rights and a permit to develop a
new surface mine near Muswellbrook, New South Wales, in the upper Hunter River
Valley. The Company expects the new mine to produce up to six million tons of
steam coal per year for export beginning in 1999. The joint venture partners
include Taiwanese and Korean electric utilities and Japanese and Korean
trading companies.
PEABODY DEVELOPMENT COMPANY
As of October 1, 1996, Peabody Development owned or controlled approximately
3.2 billion tons of the Company's unassigned proven and probable reserves and
managed over 100,000 acres of land. Peabody Development also operates a
computerized land management system which maintains a record of the Company's
U.S. coal reserves and coal-related land holdings, and is responsible for the
disposal of surplus lands and non-strategic reserves.
OTHER
Peabody holds a 43.3% interest in Black Beauty, which is Indiana's largest
coal producer and which operates ten mines in Indiana and two mines in
southern Illinois. Black Beauty is a non-union (except for one of the Illinois
operations), relatively low cost producer of high and low sulfur coal which is
attractive to midwestern utilities, particularly in Indiana. The other
participants are Pittsburg and Midway Coal Mining Co., with a 33.3% interest,
and Black Beauty Resources, Inc., with a 23.3% interest. Black Beauty operates
13 mines which shipped 12.6 million tons of coal in 1997.
Dominion Terminal Associates is one of the largest U.S. coal export
facilities with throughput capacity of approximately 24.0 million tons
annually. Dominion Terminal Associates, located in Newport News, Virginia, is
30% owned by the Company. The other participants are Arch Coal, Inc., with a
17.5% interest, The Pittston Company, with a 32.5% interest and Westmoreland
Coal Company, with a 20% interest. In addition, the Company owns a 28%
interest in LRCS Limited Partnership, which owns a rail spur to the Lee Ranch
mine.
LONG-TERM COAL CONTRACTS
United States
Peabody has a large portfolio of CSAs. For the year ended March 31, 1998,
92% of Peabody's sales volume was sold under CSAs. As of March 31, 1998, the
Company had CSAs for more than 1.0 billion tons of coal with terms ranging
from one to 17 years and with an average volume-weighted remaining term of 5.7
years.
77
<PAGE>
Typically, customers enter into CSAs to secure reliable sources of coal at
predictable prices, while the Company seeks stable sources of revenue to
support the investments required to open, expand, maintain or improve
productivity at mines needed to supply such contracts. Such contracts are
negotiated in the ordinary course of business. See "--Legal Proceedings."
Contract Terms
The terms of CSAs result from bidding and extensive negotiations with
customers. Consequently, the terms of such contracts typically vary
significantly in many respects, including price adjustment features, price
reopener terms, coal quality requirements, quantity parameters, flexibility
and adjustment mechanics, permitted sources of supply, treatment of
environmental constraints, options to extend and force majeure, termination
and assignment provisions.
Price reopeners are present in most of the recently negotiated contracts
over three years in duration and usually occur midway through a contract or
every two to three years, depending upon the length of the contract. Reopeners
allow the contract price to be renegotiated in order to be in line with the
market price prevailing at the time. In some circumstances, the utilities have
an option to terminate the contract if prices have increased by over 10% from
the price at the commencement of the contract or if the parties do not agree
on a new price. The Company attempts to have similar termination rights if the
price falls by 10% or if the parties do not agree on a new price.
Base prices are set at the start of a contract and are then adjusted at
intervals for changes due to inflation and, in many cases, changes in costs
such as taxes, reclamation fees, black lung charges and royalties. The
inflation adjustments are measured by public indices, the most common of which
is the implicit price deflator for the gross domestic product as published by
the U.S. Department of Commerce. The base price is then adjusted to a
negotiated market price when there is a price reopener.
Quality and volumes for the coal are stipulated in CSAs, although buyers
normally have the option to vary volume by up to 10% if necessary. Variations
to the quality and volumes of coal may lead to adjustments in the contract
price. CSAs typically stipulate procedures for quality control, sampling and
weighing. Most CSAs contain provisions requiring the Company to deliver coal
within certain ranges for specific coal characteristics such as Btus, sulfur,
ash, grindability and ash fusion temperature. Failure to meet these
specifications could result in economic penalties or termination of the
contracts.
Contract provisions in some cases set out how coal volumes will be made up
in the event of a force majeure, including such events as strikes, adverse
mining conditions or serious transportation problems. More recent contracts
stipulate that this tonnage can be made up by mutual agreement or at the
discretion of the buyer. Buyers often insert similar clauses covering changes
in environmental laws. The Company has negotiated the right to supply coal
that complies with any new environmental requirements rather than allowing the
contract to terminate if the customer claims that the coal type supplied
previously may no longer be used. CSAs typically contain termination clauses
if either party fails to comply with the terms and conditions of the contract.
In certain contracts, the Company has a right of substitution, allowing it
to provide coal from different mines as long as it is of a certain specified
quality and will be sold at the same delivered cost.
The terms set out above are common to most contracts. There are certain
contracting terms that differ between a standard "eastern U.S." contract and a
standard "western U.S." contract. One difference relates to the sampling
locations: in the eastern U.S. region, approximately 50% of customers require
that the coal is sampled and weighed at the destination whereas in the western
United States all samples are still taken at source. Also, historically, the
duration of contracts has been shorter in eastern U.S. regions; they are now
more of a similar length, although a larger percentage of eastern U.S. coal is
purchased on the spot market compared to western U.S. coal. Traditionally, the
eastern U.S. market is a short-term market as there are a larger number of
smaller mining operations in the eastern U.S. coal market and customers can
therefore negotiate new contracts more frequently in order to obtain a better
price. This has also led to a larger number of spot market transactions in
eastern U.S. regions. Western U.S. contracts normally stipulate that certain
production taxes and coal royalties
78
<PAGE>
are reimbursed in full by the buyer rather than being a pricing component
within the contract. These items are a significant portion of the western U.S.
coal price while they are a less material portion of the eastern U.S. coal
price.
Historically, CSAs were priced above the spot prices for coal. However, in
the past several years the price of coal has been very competitive, with new
contracts being priced at or near existing spot rates.
The length of sales contracts has decreased significantly over the last two
decades as competition in the coal industry has increased and, more recently,
as the electricity generators have prepared themselves for the Clean Air Act
Amendments and the impending deregulation of their industry. The Company
believes that the average length of CSAs was 20 years in the 1970s and 10
years in the 1980s but it fell to one to two years in the early 1990s.
However, in the last three years, there has been a return to longer term
contracts of five to ten years in length, but customers have insisted on price
reopeners every two or three years, which provide them with the security of
having coal under contract and knowing that the price will not significantly
exceed market.
The Company's portfolio of utility coal sales is more heavily weighted
towards contract sales, while the coal industry generally has a greater
reliance on spot sales. These CSAs tend to limit the Company's exposure to any
fluctuation in spot market prices and the uncertainty of marketing its
production capacity. The premiums that the Company gains on these contracts
allow it to price incrementally on other deals with additional sales being
made on the spot market at the market price prevailing at the time of the
sale, helping the Company increase its market share.
Contract Expirations
Peabody's CSAs have an average volume-weighted remaining term of 5.7 years.
As the Company's CSAs expire, the Company intends to negotiate new contracts
in order to maintain its high percentage of volume sold through CSAs and low
percentage of volume sold into the spot market. When a coal company's
contracts expire, that company is exposed to the risk of having to sell coal
into the spot market, which may be subject to lower and more volatile prices.
The total sales commitments corresponding to the contracts set out above are
approximately 1.0 billion tons of coal, assuming all the contracts run through
to their expiration date. Powder River contracts comprise approximately 53% of
this total commitment. This tonnage commitment may vary depending on future
performance, buyer contractual elections and other contractual provisions.
The Company's profits could decline as its major contracts are repriced from
the existing prices to the estimated future spot rates at the contract
reopener or expiration dates. The Company has assumed that the volume of coal
sales will remain unchanged and new sales outlets will be found as current
contracts expire. The challenge for the Company is to negotiate prices at
above-spot rates to lessen the potential loss of profits.
Australia
In fiscal 1998, approximately 73% of Peabody Resources' 7.3 million-ton
share of coal produced by the Australian mines was sold under CSAs to the New
South Wales power utility, Macquarie Generation. The remainder was exported to
Pacific Rim countries. Coal from the Ravensworth and the Narama mines is sold
to Macquarie Generation under contracts which expire in 2000 and 2012,
respectively. The contracts have price adjustment provisions which are based
on the qualities of coal delivered and changes in indices of mining costs. All
of the output from the Warkworth mine is exported: 75% is sold under
contracts, including contracts with the other joint venture partners in
Warkworth, and the remaining 25% is sold on the spot market. Peabody
Resources' export contracts normally provide for annual price renegotiations.
See "--Legal Proceedings."
TRANSPORTATION
Coal for domestic consumption is usually sold at the mine and transportation
costs are normally borne by the purchaser. Export coal is usually sold at the
loading port. The ocean freight is paid by the purchaser. Shipping costs from
the mine to the port are usually borne by the producer.
79
<PAGE>
The majority of the Company's sales volume is shipped by rail, but a portion
of the Company's production is shipped by other modes. For example, coal from
the Company's Camp complex in Kentucky is shipped by barge to its customer,
TVA's Cumberland plant in Tennessee. Coal from the Black Mesa mine in Arizona
is transported by a 273-mile coal-water pipeline to the Mohave Power Station
in southern Nevada. Coal from the Seneca mine in Colorado is transported by
truck to a nearby power plant. Other mines transport coal by rail and barge or
by rail and lake carrier on the Great Lakes. The Company shipped approximately
3.5 million tons in fiscal 1998 to Dominion Terminals Associates' loading port
in Newport News, Virginia, a coal loading port in which the Company has a 30%
interest. From this facility, one of the largest coal export facilities in the
United States, the coal is exported to customers in Japan, Europe and South
America. All coal from the Company's Powder River Basin mines is shipped by
rail, and two competing railroads, the BNSF and the Union Pacific, serve three
of the Company's four southern Powder River Basin mines. Approximately 8,000
unit trains are loaded each year to accommodate the coal shipped by the
Company's four mines in the southern Powder River Basin which totaled 91.7
million tons in fiscal 1998. A unit train generally consists of 100 to 110
rail hopper cars, each car capable of holding 100 to 120 tons of coal.
Managing the loading of trains and barges is the responsibility of the
Company's two transportation departments, with one responsible for the western
U.S. coal mines and the other for the eastern U.S. mines. Due to its modern
coal-loading facilities and the experience of its transportation coordinators,
management believes the Company enjoys good relationships with the rail
carriers and barge companies.
Peabody Resources ships all of its coal production from the Ravensworth and
Narama mines, which account for 75% of its total sales, by overland conveyer
to the nearby Macquarie Generation's Bayswater and Liddell power stations.
Coal from Peabody Resources' Warkworth operations is shipped to Newcastle by
rail, where it is sold to export customers. Peabody Resources owns 13.9% of
the Mount Thorley railroad load out facility and 4.2% of the coal loading
facility at the port.
SALES AND MARKETING
COALSALES and COALTRADE undertake the sales and marketing functions for the
Company's U.S. operating subsidiaries, including exports from the United
States. COALSALES charges each mining subsidiary for acting as an agent in the
sale and marketing of the coal produced, and it generates profits through its
brokering and agency activities. COALTRADE buys and resells coal produced by a
number of third parties. As of March 31, 1998, they had 53 employees located
at five sites.
The Company annually prepares a marketing plan that sets out the sales
targets for the next five years by region, coal type and markets. The
strategic plan formulates and concentrates the ongoing work carried out by the
sales and marketing teams to increase the Company's sales in different markets
and to expand present markets through different sales and marketing
initiatives. The sales teams at each location are responsible for formulating
the marketing plan for their region. This regional plan is reviewed by the
president of each company and then passed on to the marketing services team.
The overall group plan is then formalized and authorized.
The majority of sales contracts won by the Company are through competitive
tenders; although, where the Company is aware of an opportunity, it may
approach its customers or potential customers with a sales proposal. The
pricing process for these approaches is similar, although pricing for tenders
is usually more competitive.
COMPETITION
The markets in which the Company sells its coal are highly competitive. The
top twenty producers in the U.S. coal industry produce approximately 70% of
total U.S. coal, although there are approximately 1,000 coal producers in the
United States. The Company's principal competitors in its coal operations are
other large coal producers. The Company's largest competitors are Cyprus Amax
Coal Company, CONSOL Coal Group, ARCO Coal Co., Kennecott Energy Co., Arch
Coal, Inc., Zeigler Coal Holding Company, Kerr-McGee Coal Corp. and A.T.
Massey Coal Company, which collectively produced approximately 36% of total
U.S. coal production in 1996.
80
<PAGE>
1996 U.S. PRODUCTION VOLUMES OF MAJOR COAL PRODUCERS
<TABLE>
<CAPTION>
PRODUCTION
COMPANY TOTAL PRODUCTION SHARE GEOGRAPHIC FOCUS
- ------------------------ ------------------ ---------- ----------------
(TONS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
PEABODY................. 156.7 14.7% NATIONAL
Cyprus Amax............. 75.4 7.1 National
CONSOL.................. 71.6 6.7 NAPP, CAPP, ILB
ARCO Coal(/1/).......... 50.9 4.8 SPRB, WB
Arch Coal............... 47.4 4.5 CAPP, ILB
Kennecott............... 45.1 4.2 SPRB, NPRB, WB
A.T. Massey............. 31.9 3.0 CAPP
Zeigler Coal(/2/)....... 31.4 3.0 National
Kerr-McGee(/3/)......... 31.3 2.9 SPRB, ILB
Texas Utilities......... 29.2 2.7 Texas Lignite
------- -----
Top 10 Total........... 570.9 53.6%
Other Producers......... 493.0 46.4
------- -----
U.S. Total............. 1,063.9 100.0%
</TABLE>
- --------
Source:NMA, Facts About Coal, 1997-98 (for individual production); EIA for
U.S. total production.
Key: NAPP=Northern Appalachia; CAPP=Central Appalachia; SAPP=Southern
Appalachia; ILB=Illinois Basin; WB=Western Bituminous; SPRB=Southern
Powder River Basin; and NPRB=Northern Powder River Basin.
(1) Arch Coal acquired ARCO Coal's U.S. coal reserves in June 1998.
(2) Zeigler Coal was acquired by AEI Resources Holding Inc. in September 1998.
(3) Kennecott acquired Kerr-McGee's Powder River Basin coal reserves, which
represented approximately 24.5 million tons of coal production in 1996, in
June 1998.
The markets in which the Company sells its coal are affected by a number of
factors beyond the Company's control. Continued demand for the Company's coal
and the prices obtained by the Company depend primarily on the coal
consumption patterns of the electricity industries in the United States and
the Pacific Rim countries, the availability, location (and therefore the cost
of transportation), price of competing coal and alternative electricity
generation and fuel supply sources such as natural gas, oil, nuclear and
hydroelectric. Coal consumption patterns are affected primarily by the demand
for electricity, environmental and other governmental regulations and
technological developments. In recent years there has been excess coal
production capacity in the United States due to increased development of large
surface mining operations in the western United States, more efficient mining
equipment and techniques and reduced consumption of high sulfur coal.
Competition resulting from excess capacity tends to cause producers to reduce
prices and to pass productivity gains achieved at the mines through to
customers. The Company competes on the basis of coal quality, delivered price,
customer service and support and reliability.
In the six years ended December 31, 1996, Australian saleable coal
production increased by 18% or 3.4% per annum. Total Australian coal
production rose 3.1% in 1996. The Company's principal Australian competitors
are coal companies owned by large mineral or oil producing companies, although
one of the top ten competitors is a state-owned enterprise.
SUPPLIERS
The main types of goods purchased by the Company are mining equipment and
replacement parts, explosives, fuel, tires and lubricants. The Company also
purchases coal from third parties to satisfy some of its customer contracts.
Purchases of capital goods, materials and services are approximately $550
million per annum, which is approximately 25% of the Company's annual revenue.
The supplier base providing these goods has been relatively consistent in
recent years as the Company has many long established relationships with its
key suppliers.
Between 25% and 30% of goods and services are supplied by the top ten
suppliers, and some 70% of goods are provided by the top 100 suppliers. It is
with these main suppliers that the large contracts are held. The Company does
not have any supply arrangements with related parties and all transactions are
carried out on an
81
<PAGE>
arm's length basis. Peabody considers all suppliers of a particular category
of supplies to be interchangeable and does not consider the Company to be
vulnerable to over-dependence on any one supplier.
Since 1990, the Company has invested approximately $400 million to replace
depleting mines with new, more profitable production capacity and to position
the Company for continued earnings growth in high growth markets.
Approximately $900 million was invested to replace assets at existing
operations. Long term planning is essential since there are long lead times
between order and delivery for most of the large capital items. A new
stripping shovel, for example, may take up to a year to obtain, and a truck
between four and six months. Capital equipment suppliers deliver the goods to
the mines and help the Company install the equipment.
CERTAIN LIABILITIES
The Company's long-term liabilities in the United States for pensions,
retiree health care, work-related injuries and illnesses, and mine reclamation
reflect the Company's commitment to its employees and to environmental
stewardship. The total amount of these liabilities reflects the size,
diversity and changing nature of the Company, which has been transformed from
a historically midwestern, union-oriented, high sulfur producer into a much
larger, predominantly low sulfur producer from nearly every U.S. coal region
and Australia. The majority of these liabilities relate to the past operations
of operating subsidiaries, which used to have a greater number of employees
and mines than exist today in the transformed Company.
All U.S. coal companies are subject to laws and regulations governing mine
reclamation and other environmental liabilities for work-related injuries and
illnesses. In addition, labor contracts with the UMWA and voluntary
arrangements with non-union employees include long-term benefits, notably
health care coverage for retired and future retirees and their dependents. The
Company provides reserves for a substantial portion of these obligations.
These obligations fall into four principal categories: reclamation, workers'
compensation (including black lung), pensions and retiree health care.
Reclamation. All coal mining companies must return the land on which they
mine to its original state. Reclamation liabilities primarily represent the
future costs to restore surface lands to productivity levels equal to or
greater than pre-mining conditions, as required by SMCRA. In limited
instances, this liability is recoverable from customers under the terms of
CSAs. Short-term ongoing reclamation activities are undertaken as areas are
disturbed in the mining process. Long-term reclamation and mine closing costs
are projected and accrued for during the mine life. Other environmental
liabilities such as air and water quality are also recorded. The long-term
reclamation costs, mine-closing costs and other environmental liability
accruals totaled approximately $485.5 million on the Company's pro forma
balance sheet as of June 30, 1998, $19.0 million of which is categorized as
Other Noncurrent Liabilities and $7.9 million of which is a current liability.
The amount that is included as an operating expense for the pro forma year
ended March 31, 1998 was $12.4 million, while the related cash expense for
such liability was $39.1 million. For the quarter ended June 30, 1998, $3.4
million was included in operating expense and $7.4 million of cash was
expended for such liability. See "--Environmental" and "Regulatory Matters."
Workers' Compensation. These liabilities represent the actuarial estimates
for compensable, work-related injuries (traumatic claims) and occupational
disease, primarily black lung disease (pneumoconiosis). The Federal Black Lung
Benefits Act requires employers to pay black lung awards to former employees
who filed claims after July 1, 1973. Prior claims are paid from the Black Lung
Trust Fund, which is supported by an excise tax on all U.S. coal production.
On a pro forma basis, these liabilities will be discounted at 7.25%. These
liabilities totaled approximately $261.6 million on the Company's balance
sheet as of June 30, 1998, $39.7 million of which is a current liability. The
amount that was included as an operating expense for the pro forma year ended
March 31, 1998 was $25.2 million, while the related cash expense for such
liability was $41.9 million. For the quarter ended June 30, 1998, $8.8 million
was included in operating expense and $11.3 million of cash was expended for
such liability.
Pension Related Provisions. These costs represent the unfunded actuarially-
estimated cost of paying pension benefits to current active employees when
they retire. Provisions for active employees reflect their service to date and
additional amounts are provided so that the total liability is accrued when
the employee
82
<PAGE>
actually retires. Annual contributions to the pension plans are determined by
consulting actuaries based on ERISA minimum funding standards. On a pro forma
basis, these liabilities will be discounted at 7.25%. These liabilities
totaled approximately $1.8 million on the Company's balance sheet as of June
30, 1998, $4.4 million of which is a current liability. The amount that was
included as an operating expense for the pro forma year ended March 31, 1998
was $7.3 million, while the related cash expense for such liability was $5.5
million. For the quarter ended June 30, 1998, $1.0 million was included in
operating expense and $11.2 million of cash was expended for such liability.
Retiree Health Care. Consistent with SFAS 106, the Company records a
liability representing the estimated cost of providing retiree health care
benefits to current retirees and active employees who will retire in the
future. Provisions for active employees represent the amount recognized to
date, based on their service to date; additional amounts are provided
periodically so that the total liability is accrued when the employee retires.
On a pro forma basis, these liabilities will be discounted at 7.25%.
A second category of retiree health care obligations represents the
liability for future contributions to the UMWA Combined Fund created by
federal law in 1992. This multi-employer fund provides health care benefits to
a closed group of former employees who retired prior to 1977; no new retirees
will be added to this group. The liability is subject to increases or
decreases in per capita health care costs, offset by the mortality curve in
this aging population of beneficiaries.
The retiree health care liabilities totaled approximately $1,040.6 million
on the Company's balance sheet as of June 30, 1998, $48.9 million of which is
a current liability. The amount that was included as an operating expense in
the pro forma year ended March 31, 1998 was $76.2 million, while the related
cash expense for such liability was $49.1 million. For the quarter ended June
30, 1998, $19.7 million was included in operating expense and $15.3 million of
cash was expended for such liability. Obligations to the Combined Fund totaled
$72.4 million on the Company's balance sheet as of June 30, 1998, $8.8 million
of which is a current liability. The amount that was credited to operating
income for the pro forma year ended March 31, 1998 was $0.5 million, while the
related cash expense for such liability was $11.8 million. For the quarter
ended June 30, 1998, $0.3 million was credited to operating expense and $2.1
million of cash was expended for such liability.
The active management of these liabilities is a key focus of senior
executives. While variances have occurred within a category of liability, as a
whole cash expenses for these liabilities has approximated the amounts charged
to earnings. Provisions for these liabilities reflect standard U.S. coal
industry accounting practices. These costs are borne by the operating
subsidiaries from which the obligations arose.
RESEARCH AND DEVELOPMENT
The Company places great emphasis on research and development of new
technologies in the coal industry. The Company's engineering staff and
purchasing departments work with manufacturers to design and produce equipment
that management believes will add value to the business. For example, the
Company has worked with a manufacturer to design larger trucks to haul
overburden and coal at various mines throughout the Company. The Company was
the first to use 265-ton haul trucks, which are now standard in the industry.
In Arizona, the Company helped to design custom-built 300-ton haul trucks.
The Company also conducts research and development in-house. For example,
the Company helped develop a remote controlled continuous miner. Previously,
continuous miners were driven manually and, due to the difficulty of obtaining
a clear view of the coal seam, were not always accurate. Remote controlled
continuous miners are now standard throughout the industry.
The Company is the largest user of nuclear analyzers among coal producers,
according to the manufacturer of this sophisticated equipment. Nuclear quality
analyzers allow continuous analysis of certain coal quality parameters such as
sulfur content. Their use ensures consistent product quality and helps
customers meet stringent air emission requirements.
The Company also uses GPS (global positioning satellite) technology
extensively in its larger surface mining operations to ensure proper mine
layout.
83
<PAGE>
CITIZENS POWER
Industry Overview
Electricity is the most prevalent commodity sold in the U.S. economy, with
retail volume in 1997 exceeding $214 billion according to EIA. While the
independent power marketing industry is in a developmental stage, in 1997 the
volume of megawatt hours traded grew 418% from the volume traded in 1996,
according to FERC.
The U.S. electricity market is highly fragmented with more than 3,000
entities selling power on a wholesale and retail basis, including more than
200 investor-owned utilities, 50 major federal and municipally-owned utilities
and hundreds of municipal power entities and rural co-operatives.
Historically, these entities have been highly-regulated, but with the onset of
deregulation, the Company expects the role of power marketing companies to
continue to grow. The Company believes that deregulation will create new
market opportunities for power and fuel trading, energy contract restructuring
and for new products, such as options, to facilitate the rationalization of
the electricity market.
Citizens Power Overview
Citizens Power is a licensed power marketer that trades and markets electric
power and other energy commodities and related commodity risk management
products. According to FERC, for the quarter ended December 31, 1997, Citizens
Power was among the top ten of more than 200 FERC-licensed power marketers as
measured by number of megawatt hours bought and sold. Citizens Power also
structures and trades electricity and fuel-related risk management products
and provides services related to the restructuring of generation and
transmission assets.
Citizens Power obtained the first power marketing license from FERC in 1989.
Since that time, the Company has continued to solidify its position as an
innovator in the U.S. power marketing industry. At present, Citizens Power is
an integrated energy company with business activities in three main areas: (i)
power/energy sales and trading, (ii) transaction/asset restructuring and (iii)
fuel/power integration.
Power/Energy Sales and Trading
The Company executes short-term, intermediate-term and long-term trades of
both physically and financially settled electricity and natural gas contracts
and the Company is also preparing to enter the oil and coal trading markets.
The Company's trading activities provide transmission coverage throughout the
United States, maximizing access to counterparties and increasing liquidity.
The Company uses its trading activities as a platform to develop higher margin
structured risk management products and to support its asset restructurings.
The Company manages its trading exposure with a value-at-risk measurement,
limiting the exposure to certain defined limits.
Transaction/Asset Restructuring
Transaction restructuring creates value by correcting inefficiencies in
ownership, operation, dispatching, pricing, risk allocation, regulation of
power supply assets and contractual relationships. The transactions enhance
value by using financial leverage and tax-advantaged structures, managing and
reducing the forward curve of power costs, reallocating transactional risks
and arbitraging supply costs and discount rates.
There is approximately 35,000MW of NUG capacity in the United States. This
capacity is purchased through long-term contracts which are priced
significantly above the current market rates. The Company uses its expertise
to restructure these assets, creating solutions for all participants. Each
transaction is unique and requires an established trading infrastructure,
strong industry-wide relationships and complex negotiations with multiple
parties. Although many competitors have attempted to structure their own
transactions, the Company believes it is the only power marketer which has
successfully closed this type of transaction.
Fuel/Power Integration
Through Citizens Power's Powerfuels group, the Company restructures fuel
contracts by replacing long-term above-market coal contracts with higher
profit integrated power/coal/gas transactions. In addition, the
84
<PAGE>
Company aggressively pursues coal switching opportunities to obtain new
markets by packaging coal, power, technical assistance and financing. Cross-
commodity swaps, coal tolling and other structured products provide
opportunities to increase overall market share, profitability and risk
mitigation. The Company also pursues long-term Orimulsion(R) conversion supply
contracts and plant conversion/acquisition projects. Orimulsion is a
Venezuelan fuel oil that burns cleanly if scrubbed. Florida is currently
examining the use of Orimulsion and, if accepted, the Company believes other
states will follow.
Information Technology
Citizens Power has made significant investments in an integrated information
technology infrastructure. The Power Trade System ("PTS") links the risk
management, trading and accounting functions providing for integrated market,
credit and operational risk management. PTS was designed from the existing
infrastructure and developed using the latest client-server technology,
allowing for flexible in-house customization and expansion. The system has
significant capacity for increasing trading volumes.
EMPLOYEES OF THE COMPANY
As of March 31, 1998, the Company had a total of 7,344 employees, 5,466 of
whom worked in coal production, 1,878 of whom worked in the management of its
coal business and 116 of whom worked in Citizens Power. Of these employees,
6,331 worked in the United States and 1,013 worked in foreign countries.
Approximately 56% of the Company's U.S. coal employees are affiliated with
unions. Relations with organized labor are extremely important to the
viability of the Company. Union labor west of the Mississippi is represented
by the UMWA and falls under the Western Surface Agreement, which was ratified
in 1996 and is effective through August 31, 2000. Union labor east of the
Mississippi is also represented by the UMWA but falls under the National
Bituminous Coal Wage Agreement ("NBCWA"). On December 16, 1997, the NBCWA, a
five-year labor agreement effective from January 1, 1998 to December 31, 2002,
was ratified by the UMWA. The agreement, which was ratified 10 months prior to
expiration of the current agreement, sets forth terms that both sides felt
were positive.
The Australian coal mining industry is highly unionized and the majority of
workers employed at Peabody Resources are members of trade unions. These
employees are represented by three unions: the United Mine Workers, which
represents the production employees, and two unions that represent the other
staff. Since the Company acquired Peabody Resources in 1993, there have not
been any significant disputes or stoppages at mines operated by Peabody
Resources. The miners at Warkworth mine signed a three year labor agreement
which expires in September 1999. The miners at the Ravensworth and Narama
mines signed a two year labor agreement which expired in March 1998, but
negotiations are ongoing and there have been no resulting work stoppages to
date.
LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings arising in
the ordinary course of its business. Management believes it is adequately
reserved for these liabilities and that there is no individual case pending
that could have a material adverse effect on the Company or its financial
condition or results of operations. The Company's significant legal
proceedings are discussed below. Concurrent adverse resolution of such
proceedings could have a material effect on the results of operations for a
particular interim or annual period.
Eastern Enterprises
On November 1, 1993, Eastern Enterprises filed suit in the U.S. District
Court for the District of Massachusetts against the Social Security
Administration and the Combined Fund claiming that the Coal Act, as applied to
Eastern Enterprises, violated the due process and taking clauses of the Fifth
Amendment. See "Regulatory Matters." In 1994, Eastern Enterprises filed a
third party complaint against Peabody Holding Company, Eastern Associated and
Eastern Associated's parent company, Coal Properties Corp., seeking
indemnification or contribution with respect to any liability that Eastern
Enterprises may have under the Coal Act. Eastern Enterprises claimed that the
amount of its Coal Act liabilities was approximately $100 million.
85
<PAGE>
The District Court held in 1996 that the Coal Act was constitutional.
Eastern Enterprises filed an appeal with the First Circuit Court of Appeals,
which affirmed the district court's decision. The U.S. Supreme Court accepted
Eastern Enterprises' petition for certiorari on the constitutional claims. In
a plurality decision issued on June 26, 1998, the Supreme Court found that the
Coal Act as applied to Eastern Enterprises violated the takings clause of the
Fifth Amendment. The UMWA beneficiaries that were assigned to Eastern
Enterprises will continue to receive retiree health care benefits from the
Combined Fund. The cost of providing benefits to these "orphans" should be
borne by the AML fund, which is provided for in the Coal Act.
Peabody Holding Company and its subsidiaries will seek to have the third-
party complaint dismissed because Eastern Enterprises now has no liability
under the Coal Act.
The Company has asserted substantial defenses, but based on the Company's
preliminary evaluation of the issues and the potential impact, the Company
believes that the matter will be resolved without a material adverse effect on
its financial condition or results of operations.
Salt River Project Agricultural Improvement and Power District
The Salt River Agricultural Improvement and Power District and the other
owners of the Navajo Generating Station (collectively "Salt River") filed a
lawsuit on September 27, 1996 in the Superior Court of Maricopa County in
Arizona seeking a declaratory judgment that certain costs relating to final
reclamation, environmental monitoring work and mine decommissioning ("Mine
Decommissioning Costs"), and costs relating to life insurance and retiree
health care benefits ("Retiree Health Care Costs") are not recoverable by
Peabody Western under the terms of a CSA dated February 18, 1977. The contract
expires in 2011.
Peabody Western filed a Motion to Compel Arbitration of these claims, which
was partially granted by the trial court. The trial court ruled that the Mine
Decommissioning Costs were subject to arbitration but that the Retiree Health
Care Costs were not subject to arbitration. Peabody Western has filed an
appeal of the order denying arbitration of the Retiree Health Care Costs with
the Arizona Court of Appeals which was denied by the Court. Peabody Western
then filed an appeal with the Arizona Supreme Court, which was recently
denied. Peabody Western and Salt River are proceeding to arbitrate the Mine
Decommissioning Costs issue.
If Salt River is successful in the arbitration and litigation, the Company's
financial condition and results of operations may be adversely affected.
However, based on the Company's preliminary evaluation of the issues and the
potential impact on the Company, and while the outcome of litigation and
arbitration is subject to uncertainties, the Company believes that the matter
will be resolved without a material adverse affect on its financial condition
or results of operations.
Southern California Edison Company
In response to a demand for arbitration by Peabody Western, Southern
California Edison Company and the other owners of the Mohave Generating
Station (collectively "Edison") 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 CSA dated May 26, 1976.
The contract will expire in 2005.
Peabody Western filed a Motion to Compel Arbitration, which was granted, by
the trial court. Edison appealed this order to the Arizona Court of Appeals,
which denied its appeal. The Arizona Supreme Court recently heard an appeal by
Edison on whether these issues are arbitrable under the CSA. The parties have
agreed to a stay of the arbitration until the Arizona Supreme Court determines
whether the issues are the subject of arbitration under the CSA.
If Edison is successful in the matter, the Company's financial condition and
results of operations may be adversely affected. However, based on the
Company's preliminary evaluation of the issues and the potential impact on the
Company, and while the outcome of litigation is subject to uncertainties, the
Company believes that the matter will be resolved without a material adverse
affect on its financial condition or results of operations.
86
<PAGE>
Public Service Company of Colorado
In August 1996, Seneca Coal Company ("Seneca") filed a demand for
arbitration in accordance with the terms of an Amended Revised Coal Supply
Agreement dated December 1, 1971 (the "1971 Agreement") between Seneca and
three electric utilities, Public Service Company of Colorado, Salt River
Project Agricultural Improvement District and PacifiCorp (the "Hayden
Participants"). The Hayden Participants own the Hayden Electric Generating
Station at Hayden, Colorado. The arbitration demand requested the entry of an
award for Seneca and against the Hayden Participants for amounts attributable
to final reclamation, mine decommissioning and environmental monitoring of the
Seneca mine and life insurance and post-retirement health care costs ("post-
mine closure costs").
In September 1996, the Hayden Participants filed a complaint for declaratory
judgment in the District Court for the City and County of Denver seeking a
judicial declaration that they were not responsible for post-mine closure
costs as a matter of law. The Hayden Participants also requested declaratory
and other relief with respect to other claims against Seneca.
The arbitration provision in the 1971 Agreement limits the jurisdiction of
the arbitrators to resolution of disputed issues of fact but the arbitrators
are to determine the arbitrability of any dispute in the first instance.
Accordingly, Seneca filed a motion to stay the judicial proceedings with
respect to the issue of responsibility under the 1971 Agreement for post-mine
closure costs pending the outcome of the arbitration. The District Court
granted the motion in January 1997.
Seneca has furnished the Hayden Participants with reports prepared by
experts regarding estimated post-mine closure costs. Pre-hearing discovery is
under way in the arbitration and hearings will take place late in calendar
1998. A decision from the arbitrators is expected in early 1999. The District
Court's application of legal principles to the facts as found by the
arbitrators will take place thereafter.
The outcome of the arbitration and the subsequent judicial proceeding is
uncertain. Entry of a judgment that the Hayden Participants are not
responsible for post-mine closure costs may adversely affect the Company's
financial condition and results of operations. Based on the Company's
preliminary evaluation of the issues, and while the outcome of litigation is
subject to uncertainties, the Company believes that the dispute will be
resolved without a material adverse effect on its financial condition or
results of operations.
Macquarie Generation
In September 1997, Peabody Resources filed a lawsuit against Macquarie
Generation in the Supreme Court of New South Wales, Commercial Division,
seeking damages for certain coal deliveries which were not paid by Macquarie
Generation and for a declaratory judgment regarding the assignment to
Macquarie Generation of two long-term CSAs for the Ravensworth and Narama
mines. The contracts expire in 2001 and 2012, respectively. Macquarie
Generation later agreed that the two contracts were properly assigned to it.
Macquarie Generation subsequently filed a cross-claim against Peabody
Resources alleging that Peabody Resources breached the labor escalation
provisions in the CSAs, committed misrepresentations regarding the labor costs
and violated the Australian trade practices and fair trading laws in relation
to the Narama contract. Macquarie Generation sought to terminate or rescind
the Narama CSA and has sought damages from Peabody Resources for alleged
breaches of both contracts. Even though the Company continues delivering coal,
Macquarie Generation has unilaterally reduced the price that it is paying for
coal deliveries under the Narama contract. Peabody Resources has vigorously
opposed Macquarie Generation's claims and will seek to enforce Macquarie
Generation's obligations under the contracts. A trial regarding these issues
began on September 7, 1998 and concluded on September 25, 1998. On September
22, 1998, Macquarie Generation withdrew its breach of contract claims.
If Macquarie Generation is successful in the litigation, the Company's
earnings and cash flow may be adversely affected depending on other sales
opportunities. However, based on the Company's preliminary evaluation of the
issues and the potential impact on the Company, and while the outcome of
litigation is subject to uncertainties, the Company believes that the matter
will be resolved without a material adverse effect on its financial condition
or results of operations.
87
<PAGE>
Minerals Management Services
The Minerals Management Service issued a preliminary administrative decision
in August 1992, determining that Powder River had underpaid royalties owed to
the federal government. Since that time, no further action has been taken by
the agency to issue a final, appealable decision. Pending such decision, the
Company plans to appeal. Criminal and civil investigations were begun by the
federal government in 1993 and 1996, respectively, to examine Powder River's
activities with respect to the transactions at issue in the administrative
matter. Powder River has fully cooperated with these investigations by
providing documents and witnesses for interview. To date, no civil or criminal
charges have been brought against the Company. If such claims are made and a
case is successfully argued against the Company, the Company's financial
condition and results of operations may be adversely affected. However, based
on the Company's preliminary evaluation of the issues and the potential impact
on the Company, and while the outcome of any potential litigation is subject
to uncertainties, the Company believes that the matter will be resolved
without a material adverse affect on its financial condition or results of
operations.
ENVIRONMENTAL
Federal and State Superfund Statutes
The Comprehensive Environmental Response, Compensation and Liability Act and
similar state laws create liability for investigation and remediation in
response to releases of hazardous substances in the environment and for
damages to natural resources. Under CERCLA and many state Superfund statutes,
joint and several liability may be imposed on waste generators, site owners
and operators and others regardless of fault.
Gold Fields, its predecessors and its former parent company are or may
become parties to environmental proceedings which have commenced or may
commence in the United States in relation to certain sites previously owned or
operated by those entities or companies associated with them. The Company has
agreed to indemnify Gold Fields' former parent company for any environmental
claims resulting from any activities, operations or conditions that occurred
prior to the sale of Gold Fields to the Company. Gold Fields is currently
involved in environmental investigation or remediation at six sites and is a
defendant in litigation with private parties involving three other sites.
These nine sites were formerly owned or operated by Gold Fields. EPA has
placed three of these sites on the National Priorities List, promulgated
pursuant to the CERCLA and one of the sites is on a similar state priority
list. There are a number of further sites in the United States which were
previously owned or operated by such companies which could give rise to
environmental proceedings in which Gold Fields could incur liabilities.
Where such sites were identified, the directors of The Energy Group
commissioned, in connection with the spin-off of The Energy Group, a review of
publicly available information by independent environmental consultants in
order to assess the estimated total amount of the liability per site and the
proportion of those liabilities which Gold Fields is likely to bear. The
available information on which to base this review was very limited since all
of the sites except for three sites (on which no remediation is currently
taking place) are no longer owned by Gold Fields.
On the basis of that review, The Energy Group provided for the above
environmental liabilities relating to Gold Fields in the total sum of $73.6
million as of March 31, 1997. Significant uncertainty exists as to whether
these claims will be pursued against Gold Fields in all cases, and where they
are pursued, the amount of the eventual costs and liabilities, which could be
greater or less than this provision. As of June 30, 1998, the provision was
reduced to $68.0 million to reflect expenditures incurred during the period.
The Company believes that the remaining amount of the provision is adequate to
cover these environmental liabilities.
Although waste substances generated by coal mining and processing are
generally not regarded as hazardous substances for the purposes of CERCLA,
some products used by coal companies in operations, such as chemicals, and the
disposal of such products are governed by the statute. Thus, coal mines
currently or previously owned or operated by the Company, and sites to which
the Company sent waste materials, may be subject to liability under CERCLA and
similar state laws. See "Risk Factors--Risks Relating to the Company--
Government Regulation of the Mining Industry" and "Regulatory Matters."
88
<PAGE>
REGULATORY MATTERS
The Company's operations are subject to extensive regulation in the United
States and Australia regarding production, sale, distribution, health and
safety and environmental matters.
UNITED STATES
The U.S. coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permitting
and licensing requirements, air quality standards, water pollution, plant and
wildlife protection, the reclamation and restoration of mining properties
after mining has been completed, the discharge of materials into the
environment, surface subsidence from underground mining and the effects of
mining on groundwater quality and availability. In addition, the industry is
affected by significant legislation mandating certain benefits for current and
retired coal miners. Numerous federal, state and local governmental permits
and approvals are required for mining operations. The Company believes that
all permits currently required to conduct its present mining operations have
been obtained. The Company may be required to prepare and present to federal,
state or local authorities data pertaining to the effect or impact that a
proposed exploration for or production of coal may have on the environment.
Such requirements could prove costly and time-consuming, and could delay
commencement or continuation of exploration or production operations. Future
legislation and administrative regulations may emphasize the protection of the
environment and, as a consequence, the activities of the Company may be more
closely regulated. Such legislation and regulations, as well as future
interpretations and more rigorous enforcement of existing laws, may require
substantial increases in equipment and operating costs to the Company and
delays, interruptions or a termination of operations, the extent of which
cannot be predicted. See "Risk Factors--Risks Relating to the Company--
Government Regulation of the Mining Industry."
The Company's independent operating subsidiaries endeavor to conduct mining
operations in compliance with all applicable federal, state and local laws and
regulations. However, because of extensive and comprehensive regulatory
requirements, violations during mining operations occur from time to time in
the industry. None of the violations to date or the monetary penalties
assessed upon the Company's subsidiaries has been material.
Mine Health and Safety
Stringent health and safety standards have been imposed by federal
legislation since the Coal Mine Health and Safety Act of 1969 was adopted.
That legislation resulted in increased operating costs and reduced
productivity. The Federal Mine Health and Safety Act of 1977 significantly
expanded the enforcement of health and safety standards and imposed health and
safety standards on all aspects of mining operations.
Most of the states in which the Company operates have state programs for
mine health and safety regulation and enforcement. In combination, federal and
state health and safety regulation in the coal mining industry is perhaps the
most comprehensive and pervasive system for protection of employee health and
safety affecting any segment of U.S. industry. While regulation has a
significant effect on the Company's operating costs, its U.S. competitors are
subject to the same degree of regulation.
One of the Company's long-term goals is to achieve excellent health and
safety performance as measured by accident frequency rates and other measures.
The Company believes that attainment of this goal is inherently tied to the
attainment of productivity and financial goals. The Company seeks to implement
this goal by: training employees in safe work practices; openly communicating
with employees; establishing, following and improving safety standards;
involving employees in establishing safety standards; and recording, reporting
and investigating all accidents, incidents and losses to avoid reoccurrences.
As evidence of the effectiveness of the Company's safety program, the
Company's accident rate has fallen by 80% during the period from October 1,
1990 to March 31, 1998.
89
<PAGE>
[BAR GRAPH APPEARS HERE]
Inquiry & Illness Rate (/1/): Mining vs. Other U.S. Industries, 1995
Mining................................ 6.2
Services.............................. 6.4
Wholesale & Retail Trade.............. 7.5
Transportation & Public Utilities..... 9.1
Agriculture, Forestry & Fishing....... 9.7
Nondurable Goods...................... 9.9
Manufacturing......................... 10.6
Construction.......................... 11.6
Durable Goods......................... 12.8
- ---------------
Source: U.S. Bureau of Labor Statistics.
(/1/) Incidence rates per 100 full-time employees; total cases.
Black Lung
Under the Black Lung Benefits Revenue Act of 1977 and the Black Lung
Benefits Reform Act of 1977, as amended in 1981, each coal mine operator is
required to secure payment of federal black lung benefits to claimants who are
current and former employees and to a trust fund for the payment of benefits
and medical expenses to claimants who last worked in the coal industry prior
to July 1, 1973. Less than 7% of the miners currently seeking federal black
lung benefits are awarded such benefits by the federal government. The trust
fund is funded by an excise tax on production of up to $1.10 per ton for deep-
mined coal and up to $0.55 per ton for surface-mined coal, neither amount to
exceed 4.4% of the sales price. This tax is passed on to the purchaser under
many of the Company's coal sales agreements.
Legislation was introduced in the last Congress on black lung reform.
Although this legislation died when Congress adjourned in 1997, it is expected
that such legislation will be reintroduced for consideration by the current
Congress. The legislation, which is expected to be introduced, would restrict
the evidence that can be offered by a mining company, establish a standard for
evaluation of evidence that greatly favors black lung claimants, allow
claimants who have been denied benefits at any time since 1981 to refile their
claims for consideration under the new law, make surviving spouse benefits
significantly easier to obtain and retroactively waive repayment of
preliminarily awarded benefits that are later determined to have been
improperly paid. If this or similar legislation is passed, the number of
claimants who are awarded benefits could significantly increase. There can be
no assurance that such proposed legislation or other proposed changes in black
lung legislation will not have an adverse effect on the Company.
The U.S. Department of Labor has issued proposed amendments to the
regulations implementing the federal black lung laws which, among other
things, establish a presumption in favor of a claimant's treating physician
and limit a coal operator's ability to introduce medical evidence regarding
the claimant's medical condition. If adopted, the amendments could have an
adverse impact on the Company, the extent of which cannot be accurately
predicted.
Coal Industry Retiree Health Benefit Act of 1992
The Coal Act was enacted to provide for the funding of health benefits for
certain UMWA retirees. The Coal Act established the Combined Fund into which
"signatory operators" and "related persons" are obligated to pay annual
premiums for beneficiaries. The Coal Act also created a second benefit fund
("1992 Fund") for
90
<PAGE>
miners who retired between July 21, 1992 and September 30, 1994 and whose
former employers are no longer in business. Companies which are liable under
the Coal Act must pay premiums to the Combined Fund. Annual payments made by
PCC and Eastern Associated under the Coal Act are less than half of the
amounts paid prior to the enactment of that Act. Liabilities associated with
the Coal Act totaled $72.4 million on the Company's balance sheet as of June
30, 1998, $8.8 million of which is a current liability. The amount that was
credited to operating income for the pro forma twelve month period ended March
31, 1998 was $0.5 million, while the related cash expense for such liability
was $11.8 million. For the quarter ended June 30, 1998, $0.3 million was
credited to operating expense and $2.1 million of cash was expended for such
liability.
Environmental Laws
The Company is subject to various federal, state and foreign environmental
laws. These laws require approval of many aspects of coal mining operations,
and both federal and state inspectors regularly visit the Company's mines and
other facilities to ensure compliance.
Surface Mining Control and Reclamation Act. SMCRA, which is administered by
the Office of Surface Mining Reclamation and Enforcement ("OSM"), establishes
mining and reclamation standards for all aspects of surface mining as well as
many aspects of deep mining. SMCRA and similar state statutes, among other
things, require that mined property be restored in accordance with specified
standards and an approved reclamation plan. In addition, the Abandoned Mine
Land Fund, which is part of SMCRA, imposes a fee on all current mining
operations the proceeds of which are used to restore mines closed before 1977.
The maximum tax is $0.35 per ton on surface-mined coal and $0.15 per ton on
deep-mined coal. Under many of the CSAs to which the Company is a party, the
fee is passed on to the purchaser. The Company accrues for the liability
associated with all end of mine reclamation on a rateable basis as the coal
reserve is being mined.
SMCRA also requires that comprehensive environmental protection and
reclamation standards be met during the course of and upon completion of
mining activities. For example, SMCRA requires the Company to restore a
surface mine to approximate original contour as contemporaneously as
practicable with surface coal mining operations. The mine operator must submit
a bond or otherwise secure the performance of these reclamation obligations.
The issuance and renewal of permits for surface mining operations must be
obtained from OSM or, where state regulatory agencies have adopted federally
approved state programs under SMCRA, the appropriate state regulatory
authority. The Company accrues for the liability associated with all end of
mine reclamation on a ratable basis as the coal reserve is being mined. The
estimated cost of reclamation, and the corresponding accrual on the Company's
financial statements, is restated annually. The earliest a reclamation bond
can be released is five years after reclamation to the approximate original
contour has been achieved.
All states in which the Company's active mining operations are located have
achieved primary jurisdiction for SMCRA enforcement through approved state
programs. Although the Company does not anticipate significant permit issuance
or renewal problems, there can be no assurance that the Company's permits will
be renewed or granted in the future or that permit issues will not adversely
affect operations. Under previous SMCRA regulations, responsibility for any
coal operator currently in violation of SMCRA could be imputed to other
companies deemed, according to regulations, to "own or control" the coal
operator. Sanctions included being blocked from receiving new permits and
rescission or suspension of existing permits. Because of a recent federal
court action invalidating these SMCRA ownership and control regulations, the
scope and potential impact of the "ownership and control" requirements on the
Company are unclear. OSM has responded to the court action by promulgating
interim regulations, which more narrowly apply the ownership and control
standards to coal companies. Although the federal action should have by
analogy a precedential effect on state regulations dealing with "ownership and
control," which are in many instances similar to the invalidated federal
regulations, it is not certain what impact the federal court decision will
have on these state regulations.
The Clean Air Act. The Clean Air Act and the Clean Air Act Amendments, and
corresponding state laws that regulate the emissions of materials into the
air, affect coal mining operations both directly and indirectly. Direct
impacts on coal mining and processing operations may occur through Clean Air
Act permitting requirements and/or emissions control requirements relating to
particulate matter (e.g., "fugitive dust") including future regulation of fine
particulate matter measuring 2.5 micrometers in diameter or smaller. In July
1997, EPA adopted new, more stringent NAAQS for particulate matter and ozone.
As a result, some states will
91
<PAGE>
be required to change their existing implementation plans to attain and
maintain compliance with the new NAAQS. Because coal mining operations emit
particulate matter, the Company's mining operations and utility customers are
likely to be directly affected when the revisions to the NAAQS are implemented
by the states. State and federal regulations relating to implementation of the
new NAAQS may restrict the Company's ability to develop new mines or could
require the Company to modify its existing operations. The extent of the
potential direct impact of the new NAAQS on the coal industry will depend on
the policies and control strategies associated with the state implementation
process under the Clean Air Act, but could have a material adverse effect on
the Company's financial condition and results of operations.
The Clean Air Act indirectly affects coal mining operations by extensively
regulating the air emissions of SO/2/ and other compounds including nitrogen
oxides emitted by coal-fueled utility power plants. Title IV of the Clean Air
Act Amendments places limits on SO/2/ emissions from electric power generation
plants. The limits set baseline emission standards for such facilities.
Reductions in such emissions occurred in Phase I in 1995 and additional
reductions will occur in Phase II in 2000 and will apply to all coal-fired
power plants, including those subject to the 1995 restrictions. The affected
utilities have been and may be able to meet these requirements by, among other
ways, switching to lower sulfur fuels, installing pollution control devices
such as scrubbers, reducing electricity generating levels or purchasing or
trading emission allowances. Specific emission sources will receive these
emission allowances, which utilities and industrial concerns can trade or sell
to allow other units to emit higher levels of SO/2/. The effect of these
provisions of the Clean Air Act Amendments on the Company cannot be completely
ascertained at this time. The Company believes that implementation of Phase II
will likely exert a downward pressure on the price of higher sulfur coal, as
additional coal-burning utility power plants become subject to the
restrictions of Title IV. This price effect is expected to result after the
large surplus of emission allowances which has accumulated in connection with
Phase I has been reduced, and before utilities electing to comply with Phase
II by installing sulfur-reduction technologies are able to implement such a
compliance strategy.
The Clean Air Act Amendments also require that utilities that currently are
major sources of nitrogen oxides in moderate or higher ozone nonattainment
areas install RACT for nitrogen oxides, which are precursors of ozone. In
addition, the recently issued, stricter ozone standards, as discussed above,
are expected to be implemented by EPA by 2003. The Ozone Transport Assessment
Group ("OTAG"), formed to make recommendations to EPA for addressing ozone
problems in the eastern United States, submitted its final recommendations to
EPA in June 1997. Based on the OTAG's recommendations, EPA recently announced
a SIP call, that would require 22 eastern states to make substantial
reductions in nitrogen oxide emissions. Under this proposal, EPA expects that
states will achieve these reductions by requiring power plants to make
substantial reductions in their nitrogen oxide emissions. Installation of RACT
and additional control measures required under the SIP call will make it more
costly to operate coal-fired utility power plants and, depending on the
requirements of individual state attainment plans and the development of
revised new source performance standards, could make coal a less attractive
fuel alternative in the planning and building of utility power plants in the
future.
In addition, the Clean Air Act Amendments require a study of utility power
plant emissions of certain toxic substances, including mercury, and direct EPA
to regulate these substances, if warranted. In a recent report, EPA indicated
that although it plans to further study the issue, it does not plan to propose
regulations in the near future. However, future federal or state regulatory or
legislative activity may seek to reduce mercury emissions and such
requirements, if enacted, could result in reduced use of coal if utilities
switch to other sources of fuel.
Clean Water Act. The Clean Water Act of 1972 affects coal mining operations
by imposing restrictions on effluent discharge into water. Regular monitoring,
reporting requirements and performance standards are preconditions for the
issuance and renewal of permits governing the discharge of pollutants into
water.
Resource Conservation and Recovery Act. The Resource Conservation and
Recovery Act ("RCRA"), which was enacted in 1976, affects coal mining
operations by imposing requirements for the treatment, storage and disposal of
hazardous wastes. Coal mining operations covered by SMCRA permits are exempted
from regulation under RCRA by statute; however the Company cannot predict
whether this exclusion will continue.
92
<PAGE>
Federal and State Superfund Statutes. CERCLA and similar state laws affect
coal mining and hard rock operations by creating liability for investigation
and remediation in response to releases of hazardous substances to the
environment and for damages to natural resources. Under CERCLA, joint and
several liability may be imposed on waste generators, site owners and
operators and others regardless of fault. See "Business--Environmental--
Federal and State Superfund Statutes."
Global Climate Change. The United States, Australia and over 160 other
nations are signatories to the Convention which is intended to limit or
capture emissions of greenhouse gases such as carbon dioxide. In December 1997
in Kyoto, Japan, the signatories to the Convention established a binding set
of emissions targets for developed nations in the Kyoto Protocol. Although the
specific limits under the terms of the Kyoto Protocol vary from country to
country, under the terms of the Kyoto Protocol, the United States would be
required to reduce emissions to 93% of 1990 levels over a five-year budget
period from 2008 through 2012. Although the United States has not ratified the
Kyoto Protocol and no comprehensive regulations focusing on greenhouse gas
emissions are in place, such restrictions, whether through ratification of the
Kyoto Protocol or other efforts to stabilize or reduce greenhouse gas
emissions, could adversely impact the price and demand for coal. According to
EIA's Annual Energy Outlook for 1998, coal accounts for 34% of greenhouse gas
emissions in the United States, and efforts to control greenhouse gas
emissions could result in reduced use of coal if electric generators switch to
lower carbon sources of fuel.
AUSTRALIA
The Australian mining industry is regulated by Australian federal, state and
local governments with respect to environmental issues such as land
reclamation, water quality, air quality, dust control and noise, planning
issues such as approvals to expand existing mines or to develop new mines and
health and safety issues. The Australian federal government retains control
over the level of foreign investment and export approvals. Industrial
relations are regulated under both federal and state laws. Australian state
governments also require coal companies to post deposits or give other
security against land which is being used for mining, with those deposits
being returned or security released after satisfactory rehabilitation.
Mining and exploration in Australia is generally carried on under leases or
licenses granted by state governments. Mining leases, which are typically for
an initial term of up to 21 years (but which may be renewed), contain
conditions relating to such matters as minimum annual expenditures,
restoration and rehabilitation. Surface rights are typically acquired direct
from landowners and, in the absence of agreement, there is an arbitration
provision in the mining law.
Environmental
Primary responsibility for environmental regulation in Australia is vested
in the state, rather than the federal system. Each state and territory in
Australia has its own environmental and planning regime for the development of
mines. In addition, each state and territory also has a specific act dealing
with mining in particular, regulating the granting of mining licenses and
leases. The mining legislation in each state and territory operates
concurrently with environmental and planning legislation. The mining
legislation governs mining licenses and leases, including the restoration of
land, following the completion of mining activities. Apart from the grant of
the rights to mine itself (which are covered by the mining statutes), all
licensing, permitting, consent and approval requirements are contained in the
various state and territory environmental and planning statutes.
The particular provisions of the various state and territory environmental
and planning statutes vary depending upon the jurisdiction. Despite the
variation in particulars, each state and territory has a system involving at
least two major phases: obtaining the developmental application and, if that
is granted, obtaining the detailed operational pollution control licenses
(which authorize emissions up to a maximum level) and pollution control
approvals (which authorize the installation of pollution control equipment and
devices). In the first regulatory phase, an application to a regulatory
authority (be it a local council or a specially constituted planning tribunal)
is filed. The relevant authority will either grant a conditional consent, an
unconditional consent, or deny the application based on the details of the
application and on any submissions or objections
93
<PAGE>
lodged by members of the public. If the developmental application is granted,
the detailed pollution control license may then be issued and such license may
regulate: emissions to atmosphere; emissions in waters; noise impacts
(including impacts from blasting); dust impacts; the generation, handling,
storage and transportation of waste; and requirements for
rehabilitation/restoration of land.
Each state and territory in Australia also has either a specific statute or
certain sections in other environmental and planning statutes relating to the
contamination of land and vesting powers in the various regulatory authorities
in respect of the remediation of contaminated land. Those statutes are based
on varying policies--the primary difference between the statutes is that in
certain states and territories, liability for remediation is placed upon the
occupier of land, regardless of the culpability of that occupier for the
contamination. In other states and territories, primary liability for
remediation is placed on the original polluter, whether or not the polluter
still occupies the land. If the original polluter cannot itself carry out the
remediation, then a number of the statutes contain provisions which enable
recovery of the costs of remediation from the polluter as a debt.
Many of the environmental planning statutes across the states and
territories contain "third party" appeal rights in relation, particularly, to
the first regulatory phase. This means that any party has a right to take
proceedings for a threatened or actual breach of the statute, without first
having to establish that any particular interest of that person (other than a
member of the public) stands to be affected by the threatened or actual
breach. As a result, this makes third party challenges to consents for the
carrying out of development relatively common.
Accordingly, in most states and territories throughout Australia, the
carrying out of mining activities involves a number of regulatory phases.
Following exploratory investigations pursuant to a mining license, the
activity proposed to be carried out must be the subject of an application for
the activity or development. This phase of the regulatory process, as noted
above, usually involves the preparation of extensive documents to constitute
the application, addressing all of the environmental impacts of the proposed
activity. It also generally involves extensive notification and consultation
with other relevant statutory authorities and members of the public. Once a
decision is made that the development can proceed (by the grant of a
development consent, permit or other approval) then a formal mining lease can
be obtained under the mining statute. In addition, operational licenses and
approvals can then be applied for and obtained in relation to pollution
control devices and emissions to the atmosphere, to waters and for noise. The
obtaining of licenses and approvals, during the operational phase, generally
does not involve any extensive notification or consultation with members of
the public, as most of these issues are anticipated to be resolved in the
first regulatory phase.
Occupational Health and Safety
The combined effect of various state and federal statutes requires an
employer to ensure that persons employed in a mine are safe from injury risks
by providing a safe working environment and systems of work; safe machinery,
equipment, plant and substances; and appropriate information, instruction,
training and supervision.
In recognition of the specialized nature of mining and mining activities,
specific occupational health and safety obligations have been mandated under
state legislation that deals specifically with the coal mining industry.
Company employers, owners, directors and managers, persons in control of work
places, mine managers, supervisors and employees are all subject to these
duties.
It is mandatory for an employer to have insurance coverage in respect of the
compensation of injured workers; similar schemes are in effect throughout
Australia which are of a no fault nature and which provide for benefits up to
a prescribed level. The specific benefits vary from jurisdiction to
jurisdiction, but generally include the payment of weekly compensation to an
incapacitated employee, together with payment of medical, hospital and related
expenses. The injured employee has a right to sue his or her employer for
further damages if a case in negligence can be established.
94
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages as of March 1, 1998 and current
positions with the Company and its subsidiaries of the Company's executive
officers and Directors. The terms of the Directors of the Company will expire
upon the election and qualification of successors at the annual meetings of
stockholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- --------------------------------------------------
<S> <C> <C>
Irl F. Engelhardt....... 51 Chairman, Chief Executive Officer and Director
Richard M. Whiting...... 43 President, Chief Operating Officer and Director
William E. James........ 52 Chairman, Citizens Power
Roger B. Walcott, Jr. .. 42 Executive Vice President
W. Howard Carson........ 47 Chief Commercial Officer
Robert D. Humphris...... 55 Managing Director--Australia
Mark Maisto............. 42 Chief Executive Officer and President, Citizens
Power
Larry H. Fox............ 57 Vice President--Powder River Basin Operations
George J. Holway........ 48 Vice President, Chief Financial Officer
Christopher G. Farrand.. 56 Vice President, Corporate Affairs
Jeffery L. Klinger...... 50 Vice President, Legal Services and Secretary
Richard A. Navarre...... 37 Vice President, Sales & Marketing and President of
Peabody
COALSALES Company
Sharon K. Schergen...... 42 Vice President--Human Resources
Alan H. Washkowitz...... 57 Director
Henry E. Lentz.......... 53 Director
Roger H. Goodspeed...... 47 Director
</TABLE>
Irl F. Engelhardt served as President and Chief Executive Officer of Peabody
Group from 1990 to 1995 and Chairman and Chief Executive Officer of the
Company since 1993 and has been a Director of the Company since June 1998.
Since joining Peabody in 1979, he has held various officer level positions at
the Company in the executive, sales, business development and administrative
areas, including serving as Chairman of Peabody Resources Ltd. (Australia) and
Chairman of Citizens Power. Mr. Engelhardt also served as an executive
director of The Energy Group from February 1997 to May 1998, Chairman of
Cornerstone Construction & Materials, Inc. from September 1994 to May 1995 and
Chairman of Suburban Propane Company from May 1995 to February 1996. He also
served as a Director and Group Vice President of Hanson Industries from 1995
to 1996. Mr. Engelhardt is past chairman of the National Mining Association,
Chairman of the Coal Industry Advisory Board of the International Energy
Agency, Chairman of the Center for Energy and Economic Development and a
director of Mercantile Bank of St. Louis, N.A.
Richard M. Whiting was promoted to President and Chief Operating Officer of
the Company in January 1998 and has been a Director of the Company and a
member of the Management Committee since June 1998. He served as President of
Peabody COALSALES Company from June 1992 to January 1998. Since joining the
Company in 1976, Mr. Whiting has held a number of operations, sales and
engineering positions both at the corporate offices and at field locations.
From 1989 to 1990, Mr. Whiting served as Vice President of Engineering and
Operations Support. Mr. Whiting had previously served on the Transportation
Committee of the National Mining Association and is currently Chairman of the
National Mining Association's Safety and Health Committee.
William E. James resigned as Chief Executive Officer of Citizens Power in
September 1998 but will remain as Chairman. He was Chief Executive Officer of
Citizens Power since May 1997, and was Chief Executive Officer from September
1994 of its predecessor, Citizens Lehman Power L.L.C., a joint venture with
Lehman Brothers. He also served on the Executive Management Committee of
Peabody. He was the co-founder of Citizens Energy Corporation in 1979, and
from 1987 to 1996, served as the Chairman and Chief Executive
95
<PAGE>
Officer of Citizens Corporation, a diversified international energy holding
company. Mr. James is currently a director of Tempus Fugit Corporation and
Apanage Corporation.
Roger B. Walcott, Jr. joined Peabody in June 1998 as Executive Vice
President and a member of Peabody's Management Committee. From 1981 to 1998,
he was a Senior Vice President & Director with The Boston Consulting Group
where he served a variety of clients in strategy and operational assignments.
He was also Chairman of The Boston Consulting Group's Human Resource
Capabilities Committee. Mr. Walcott holds an MBA with high distinction from
the Harvard Business School and a BA in economics from Duke University.
W. Howard Carson was named Chief Commercial Officer and a member of
Peabody's Management Committee in June 1998. Prior to that, he had been
President of Peabody Western since 1993. Previously, he has served as Vice
President of Finance and Administration for PCC from 1991 to 1993. He joined
the Company in 1979 from Arthur Andersen and has held numerous financial
positions including Vice President of Accounting and Vice President of
Corporate Planning for Peabody.
Robert D. Humphris has been Managing Director--Australia and a member of
Peabody's Management Committee since May 1998. Prior to that, he had been
Managing Director of Peabody Resources since April 1993. He has held
management positions at various mining companies in the United Kingdom and
Australia, including Managing Director of mining operations for Costain
Australia Limited, which was subsequently acquired by Hanson. He was actively
involved in Costain's real estate and construction activities in Australia.
Mr. Humphris is a past chairman of the New South Wales Minerals Council of the
Australian Coal Association. He is a member of the Coal Industry Advisory
Board of the International Energy Agency, the Business Council of Australia
and the State Minerals Advisory Council. He has been named to the managing
board of the Port of Newcastle in Australia.
Mark Maisto was named Chief Executive Officer of Citizens Power in September
1998. He was also named a member of Peabody's Management Committee at that
time. He has been President of Citizens Power since February 1998. He joined
the Company in 1997 as Executive Vice President of Citizens Power. Prior to
joining Citizens Power he was a Senior Vice President at Lehman Brothers. At
Lehman Brothers, he specialized in corporate and project finance working with
electric utility companies. Prior to joining Lehman Brothers in 1987, Mr.
Maisto was employed at GE Capital, where he was Director--Utility Finance. Mr.
Maisto holds an M.B.A. from New York University.
Larry H. Fox was named Vice President--Powder River Basin Operations in June
1998. Prior to that, he was President of Powder River since 1989. Mr. Fox
previously served as Vice President of Powder River and General Manager of
North Antelope Coal Company. Prior to that he also held several mine
operations positions within the Company, including Mine Superintendent at the
Big Sky mine in Montana and Director of Operations for the Rocky Mountain
Division. He joined the Company in 1962. Mr. Fox currently serves as President
of the Wyoming Mining Association and is a member of the Wyoming Coal
Operators Committee.
George J. Holway was appointed to his current position as Vice President and
Chief Financial Officer in June 1998. Prior to that, he had been Vice
President of Corporate Development with responsibilities for the Company's
mining business development and land functions. After first joining the
Company in 1980, Mr. Holway served in several financial positions at Peabody
Holding Company including Vice President and Controller of Peabody Holding
Company from 1990 to 1992. In 1992, he left the Company to become Chief
Financial Officer of Zeigler Coal Holding Company, a position he held until he
rejoined the Company in November 1996. Prior to joining the Company in 1980,
Mr. Holway was employed by Arthur Andersen & Co..
Christopher G. Farrand has been Vice President of Corporate Affairs of the
Company since June 1992. From April 1991 to June 1992, he served as President
of Peabody Development Company. Between 1981 and 1992 he worked as Vice
President of Government Relations for both PCC and Peabody Holding Company.
Mr. Farrand joined the Company as Director of Corporate Planning for PCC in
1978. Prior to working for the Company, Mr. Farrand held several positions in
the U.S. Department of Interior, including Deputy Under Secretary in 1977 and
1978 and Deputy Assistant Secretary from 1974 to 1976. He currently serves on
the board of directors of the National Coal Association and the Keystone
Energy Board.
96
<PAGE>
Jeffery L. Klinger was named as Vice President of Legal Services and
Secretary in May 1998. Prior to that, he had been Vice President, Secretary
and Chief Legal Officer since October 1990. From 1986 to October 1990, he
served as Eastern Regional Counsel for Peabody Holding Company and from 1982
to 1986 as Director of Legal and Public Affairs, Eastern Division of PCC and
joined the Company as Director of Legal and Public Affairs, Indiana Division
of PCC from 1978 to 1982. He is a past President of the Indiana Coal Council
and is currently a trustee and member of the Executive Committee of the
Eastern Mineral Law Foundation.
Richard A. Navarre was named as Vice President of Sales & Marketing in May
1998, and has also been President of Peabody COALSALES Company since January
of 1998. He previously served as President of Peabody Energy Solutions, Inc.
From 1996 to 1997, he was Vice President of Finance and prior to that served
as Vice President and Controller of the Company. He joined the Company in 1993
as Director of Financial Planning. Prior to joining Peabody, Mr. Navarre was
with KPMG Peat Marwick. Mr. Navarre is a member of the Trade and International
Affairs Committee and the Transportation Committee of the National Mining
Association.
Sharon K. Schergen has been Vice President--Human Resources since 1991 with
executive responsibility for employee development, benefits, compensation,
employee relations and affirmative action programs. She joined the Company in
1981 as Manager--Salary Administration and has held a series of employee
relations, compensation, and salaried benefits positions. Prior to joining
Peabody, Ms. Schergen, who earned degrees in social work and psychology and an
MBA, was a personnel representative for Ford Motor. Ms. Schergen is a member
of the National Mining Association's Human Resource Committee.
Alan H. Washkowitz became a Director in May 1998. He is also a Managing
Director of Lehman Brothers and the head of the firm's Merchant Banking Group,
responsible for the oversight of Lehman Brothers Merchant Banking Portfolio
Partnership L.P. Mr. Washkowitz joined Kuhn Loeb & Co. in 1968 and became a
general partner of Lehman Brothers in 1978 when Kuhn Loeb & Co. was acquired.
Prior to joining the Merchant Banking Group, Mr. Washkowitz headed Lehman
Brothers's Financial Restructuring Group. He is currently a director of
Illinois Central Corporation, L-3 Communications Corporation, K&F Industries,
Inc. and McBride plc. Mr. Washkowitz holds an M.B.A. from Harvard University
and a J.D. from Columbia University.
Henry E. Lentz became a Director in February 1998. He is also a Managing
Director of Lehman Brothers and a principal of the firm's Merchant Banking
Group. Mr. Lentz joined Lehman Brothers in 1971 and became a Managing Director
in 1976. In 1988, Mr. Lentz left Lehman Brothers to serve as Vice Chairman of
Wasserstein Perella Group, Inc. In 1993, he returned to Lehman Brothers as a
Managing Director and, prior to joining the Merchant Banking Group, served as
head of the firm's worldwide energy practice. Mr. Lentz is currently a
director of Rowan Companies, Inc. and Imperial Holly Corporation. Mr. Lentz
holds an M.B.A., with honors, from the Wharton School of the University of
Pennsylvania.
Roger H. Goodspeed became a Director in May 1998. He is also a Managing
Director of Lehman Brothers. He joined Lehman Brothers in 1974 and became a
Managing Director in 1984. During his tenure at Lehman Brothers, he has served
in management positions for several different groups. In 1994, he became
Chairman of Citizens Lehman Power, an electric power marketing joint venture
50% owned by Lehman Brothers until the joint venture was sold to The Energy
Group in 1997. Mr. Goodspeed remains a director of the ongoing entity,
Citizens Power. Mr. Goodspeed received an M.B.A. from the University of
California, Los Angeles.
COMPENSATION OF DIRECTORS
The directors of the Company do not receive compensation for their services
as directors.
97
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the predecessors of
the Company for the account of each of the chief executive officer and the
five most highly compensated executive officers (the "Named Executive
Officers") for their services in all capacities to the predecessors of the
Company during the fiscal year ended March 31, 1998.
SUMMARY COMPENSATION TABLE FOR FISCAL 1998
SALARY AND INCENTIVE COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ ---------------------------------------------
NAME AND PRINCIPAL RESTRICTED SECURITIES
POSITION DURING FISCAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
1998 SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYMENTS COMPENSATION
- ---------------------- -------- -------- ------------ ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Irl F. Engelhardt....... $550,000 $412,500 $ -- $ -- $ -- $42,644 $ --
Chairman and Chief
Executive Officer
Peter B. Lilly.......... 333,463 247,715 -- -- -- 32,264 2,498,381(/1/)
William E. James........ 300,000 540,000 -- -- -- -- --
Chief Executive
Officer--Electric &
Natural Gas and Chief
Executive Officer of
Citizens Power
Robert D. 273,225 163,946 -- -- -- 45,304 --
Humphris(/2/)..........
Managing Director
Peabody Resources
Mark Maisto............. 250,000 300,000 -- -- -- -- --
President and Chief
Operating Officer of
Citizens Power
Richard M. Whiting...... 244,851 182,501 -- -- -- 12,326 --
President and Chief
Operating Officer
</TABLE>
- --------
(1) Mr. Lilly's last date of employment was January 19, 1998. All Other
Compensation of $2,498,381 relates to Mr. Lilly's departure from the
Company.
(2) Mr. Humphris' compensation was converted to U.S. dollars using an exchange
rate of $0.75 U.S. per Australian dollar. The exchange rate on March 26,
1998 was $0.6692 U.S. per Australian dollar (for adjustment purposes).
PENSION BENEFITS
The Company's Salaried Employees Retirement Plan (the "Pension Plan") is a
"defined benefit" plan. The Pension Plan provides a monthly annuity to
salaried employees when they retire. A salaried employee must have at least
five years of service to be vested in the Pension Plan. A full benefit is
available to a retiree at age 62. A retiree can begin receiving a benefit as
early as age 55; however, a 4% reduction factor applies for each year a
retiree receives a benefit prior to age 62.
An individual's retirement benefit under the Pension Plan is equal to the
sum of (A) 1.112% of the average monthly earnings over 60 consecutive months
up to the "covered compensation limit" multiplied by the employee's years of
service (not to exceed 35 years) and (B) 1.5% of the average monthly earnings
over 60 consecutive months over the "covered compensation limit" multiplied by
the employee's years of service (not to exceed 35 years).
98
<PAGE>
The estimated annual benefits payable upon retirement at age 62, the normal
retirement age, for the Named Executive Officers are as follows:
<TABLE>
<S> <C>
Irl. F. Engelhardt.................................................. $314,460
Richard M. Whiting.................................................. 152,817
</TABLE>
Messrs. James, Maisto and Humphris are not eligible for the Pension Plan.
The Company has three supplemental retirement plans, which provide pension
benefits to executives whose pay exceeds legislative limits for qualified
pension plans.
BENEFIT PLANS
The Company intends to establish or maintain benefit plans for its
employees, which will provide substantially similar benefits to those provided
by The Energy Group and its affiliates and subsidiaries for the Company's
employees prior to the Acquisition.
MANAGEMENT INCENTIVE COMPENSATION PLANS
The Company expects to establish an incentive compensation plan that will
provide a bonus to selected employees based on the participant's base salary,
target level, individual performance rating and organizational performance
rating.
STOCK OPTION PLAN
The Company intends to adopt an option plan for key employees of the
Company, pursuant to which the Company expects to grant options to purchase
shares of Common Stock (inclusive of the grants under the Employment
Agreements, see below under "Employment Agreements"). It is expected that the
options will have terms as discussed below under "Employment Agreements."
EMPLOYMENT AGREEMENTS
The Company expects to enter into employment agreements (the "Employment
Agreements") with Mr. Engelhardt, the Chairman and Chief Executive Officer
(the "CEO"), Messrs. Maisto, Walcott, Whiting, Humphris and approximately
eight other key executive officers (collectively, the "Executives"). The CEO's
Employment Agreement will provide for an initial term of three years and the
other Executives' Employment Agreements will provide for initial terms of two
years, each of which shall extend thereafter on a day-to-day basis such that
the CEO's Employment Agreement will continually have a three year term and the
other Executives, subsequent to their initial one year of employment, will
continually have a one-year term. Upon a termination without cause or
resignation for good reason, the Executive will be entitled to the following
benefits during the Continuation Period (as defined below): (i) base salary,
(ii) bonus actually paid in the year prior to such termination, except that,
instead of such actual bonus amount, the CEO shall receive an amount equal to
100% of his final base salary in each of the three years following such
termination, (iii) a one-time prorated bonus for the year of termination
(based on actual performance multiplied by a fraction, the numerator of which
is the number of business days such Executive was employed during the year of
termination and the denominator of which is the total number of business days
during such year) and (iv) continuation of qualified and nonqualified pension,
life insurance, medical, hospitalization and other benefits; provided,
however, that the Company shall not be obligated to provide any benefits under
tax qualified plans which are not permitted by the terms of each such plan or
by applicable law or could jeopardize the plan's tax status; provided,
further, that any such coverage shall terminate to the extent that Executive
is offered or obtains comparable coverage from any other employer. The
"Continuation Period" shall be (i) for the CEO, a period of three years and
(ii) for the other Executives, the balance of the initial two-year term if
termination occurs during the first year of such initial term, or for a period
of one year thereafter. The Employment Agreements will provide for
confidentiality during employment and at all times thereafter. It is also
expected that the Employment Agreements will include a noncompetition and
nonsolicitation covenant which will be effective during the employment term
and for one year thereafter.
99
<PAGE>
The Executives acquired, in the aggregate, 3% of the Company's initial
fully-diluted equity (the "Class B Shares"), issued as Class B Common Stock in
connection with the Acquisition. With respect to the Class B Shares, the
Company shall provide a full recourse loan for the amount of the tax liability
to each Executive, and to certain of these Executives, an additional full
recourse loan for the amount of the value of the stock, with a five-year
principal balloon payment which accelerates to the date which is six months
following any termination of employment or disposition of the stock, with
interest payable throughout the term of the loan at the applicable federal
rate.
The Company expects to grant the Executives and other employees options (the
"Options") exercisable for common stock to purchase an aggregate of 7% of the
Company's initial fully-diluted equity; 50% of the Options shall be granted as
"Time Options" in the form of Incentive Stock Options (as defined in Section
422 of the Code), to the extent permitted, and 50% of the Options shall be
granted in the form of nonqualified stock options as "Performance Options."
Time Options shall become exercisable with respect to 20% of the shares
subject to such Options on each of the first five anniversaries of the date of
the closing of the transaction if the Executive's employment continues through
and including such date, subject to acceleration upon (i) death, (ii)
disability (iii) a Change of Control or (iv) a Recapitalization Event.
Performance Options shall become exercisable at the end of nine and one-half
years, whether or not the applicable performance targets are achieved, but
become exercisable earlier with respect to up to 20% of the shares subject to
the Performance Options, on each of the first five anniversaries of the date
of the closing of the Transactions, to the extent certain performance targets,
as determined by the Board of Directors and based on net debt and EBITDA, are
met or exceeded. Performance Options accelerate upon (i) a Change of Control,
(ii) a Recapitalization Event or (iii) an initial public offering. "Change of
Control," for the purposes of this section, shall mean an acquisition of all
or substantially all of the direct and indirect assets of the Company and its
subsidiaries (by merger, consolidation, recapitalization event, stock or asset
sale or otherwise), whereby immediately following any such transaction (i)
Lehman Merchant Banking owns less than 50% of the Company's outstanding voting
securities that Lehman Merchant Banking owned (excluding the sell down of
approximately $75 million anticipated to occur after the closing of the
Acquisition) after the closing of the Acquisition or (ii) any person
individually owns more of the Company's then outstanding voting securities
entitled to vote generally than Lehman Merchant Banking. "Recapitalization
Event" shall mean a recapitalization, reorganization, stock dividend or other
special corporate restructuring which results in an extraordinary distribution
to the stockholders of cash and/or securities through the use of leveraging or
otherwise but which does not result in a Change of Control.
The Company also expects to grant the Executives performance-based options
(the "Superperformance Options") exercisable for common stock to purchase an
aggregate of 7% of the Company's initial fully-diluted equity.
Superperformance Options shall vest upon the earlier of (i) achievement of
certain financial performance targets and the earliest of completion of (x) an
initial public offering, (y) a Change of Control or (z) a Recapitalization
Event; and (ii) nine and one-half years from the date of grant. Vesting of
Superperformance Options shall accelerate as follows: (i) upon completion of
an initial public offering during the first 36 months following the closing of
the Acquisition, at least 2.5% of the Superperformance Options shall vest and
the balance shall vest in accordance with the achievement of certain financial
performance targets, or (ii) upon a Change of Control or a Recapitalization
Event during the first 36 months following the closing of the Acquisition, at
least 5.0% of the Superperformance Options shall vest.
The Options and the Superperformance Options will have an exercise price
equal to the price per share of the Class A Common Stock paid by Lehman
Merchant Banking.
The Options and the Superperformance Options shall have a 10-year term;
provided, however, that exercisable Options shall expire earlier upon
termination of employment as follows: (i) upon termination for cause or a
resignation without good reason, immediately upon such termination; (ii) upon
termination without cause, resignation for good reason, death, disability or
retirement, one year after termination of employment. Unexercisable Options
and Superperformance Options will terminate upon termination of employment,
unless acceleration in connection with such termination is explicitly provided
for.
100
<PAGE>
Upon a Change of Control, the Board of Directors may terminate the Options
and Superperformance Options, so long as the Executives are cashed out at the
Change of Control price or are permitted to exercise their Options and
Superperformance Options prior to the Change of Control (except as otherwise
provided).
STOCKHOLDERS AGREEMENTS
The Company intends to enter into stockholders agreements with employees of
the Company who own shares, or have options to purchase shares, of Common
Stock. Such stockholders agreements are expected to contain, among other
things, puts/calls, drag-along, tag-along, voting, corporate governance and
registration rights provisions.
101
<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information concerning ownership of
the capital stock as of July 8, 1998: (i) persons who beneficially own more
than 5% of the outstanding shares of capital stock; (ii) each person who is a
director of the Company; (iii) each person who is a Named Executive Officer;
and (iv) all directors and executive officers of the Company as a group. The
Company's capital stock consists of its Class A common stock (the "Class A
Common Stock"), its Class B Common Stock, ("Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock") and its Non-
Convertible, Exchangeable Preferred Stock (the "Preferred Stock"). Class B
Common Stock has voting rights and other attributes similar to Class A Common
Stock (except that Class A Common Stock will have a liquidation preference)
and will convert to Class A Common Stock upon consummation of a Change of
Control, an initial public offering or a Recapitalization Event or, in any
event, after nine years. Of the $480.0 million equity contribution made in
connection with the Acquisition, $100.0 million was in the form of Preferred
Stock. The Preferred Stock bears the same voting powers, dividend rights and
other rights as, and votes as a single class with, the Common Stock, except
for the following: (i) upon the occurrence of any merger, consolidation, sale
of all or substantially all assets, liquidation, dissolution or winding up of
the Company, the holders of the Preferred Stock will receive a preferential
distribution of available assets equal to the cost per share before the
holders of the Common Stock receive any distributions (following which the
holders of Common Stock will receive a similar preferential distribution of
any remaining available assets equal to the same cost per share, and
thereafter the shares of Common Stock and Preferred Stock will receive equal
distributions per share of any remaining available assets), (ii) the Company
may, at any time at its discretion, exchange all or part of the shares of
Preferred Stock for an equal number of shares of Common Stock and (iii) the
Company may, at its discretion and only for the first six months after the
issuance of shares of the Preferred Stock, redeem all or part of the shares of
Preferred Stock for an amount equal to the cost per share.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
-------------------------------
CLASS A CLASS B PERCENTAGE
COMMON COMMON PREFERRED OF STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK STOCK STOCK OUTSTANDING
- ------------------------------------ ---------- ------- --------- -----------
<S> <C> <C> <C> <C>
Lehman Brothers Merchant Banking
Partners II L.P., LB I Group
Inc. and their affiliated 19,000,000 -- 5,000,000 97%
co-investors....................
c/o Lehman Brothers Holdings
Inc.
3 World Financial Center
200 Vesey Street
New York, NY 10285
Named Executive Officers......... -- -- (/1/) -- (/1/)
All executive officers and direc-
tors as a group
(33 persons).................... -- -- (/1/) -- -- (/1/)
---------- --- --------- ---
19,000,000 -- (/1/) 5,000,000 97%(/1/)
========== === ========= ===
</TABLE>
- --------
(1) Certain employees of the Company will acquire, in the aggregate, 3% of the
Company's initial fully-diluted capital stock in the form of 742,268
shares of Class B Common Stock. As of the date hereof, the allocation of
the Class B Shares among such employees has not been approved by the Board
of Directors.
102
<PAGE>
THE ACQUISITION
THE ACQUISITION
The statements made under this heading relating to the Acquisition are
summaries of the agreements described therein. While the Company believes that
these summaries include the material terms of the Acquisition, they are
qualified in their entirety by reference to such agreements.
THE PURCHASE AGREEMENT
The Company and The Energy Group entered into the Purchase Agreement dated
March 2, 1998. The Purchase Agreement provides, among other things, for the
purchase by the Company from The Energy Group of the Acquired Companies,
consisting of the equity interests described below. As consideration for such
interests, the Company paid $2,065.0 million (the "Purchase Price"), subject
to further adjustment as described below, to The Energy Group. Pursuant to the
Purchase Agreement, upon the consummation of the purchase (the "Closing"), the
Company acquired: (i) all of the common stock of Peabody Holding Company, (ii)
all of the common stock of Gold Fields, (iii) all of the membership interests
of Citizens Power, (iv) the 1% interests in CL Hartford, L.L.C., a Delaware
limited liability company, and Citizens Power Sales, a Delaware general
partnership ("CP Sales"), both subsidiaries of Citizens Power, (v) all of the
shares of Darex Capital Inc., a company incorporated in the Republic of
Panama, and (vi) all of the ordinary shares of Peabody Australia Limited,
which together with Darex Capital Inc. owns Peabody Resources.
The Acquisition was conditioned upon the tender offer by TU to purchase all
the outstanding common shares of The Energy Group (the "TU Offer") becoming or
being declared unconditional in all respects (see "The Participation
Agreement" below) and not at that time being publicly opposed by the board of
directors of The Energy Group. For additional information regarding the
relationship between the Acquisition and the TU Offer, as well as among Lehman
Merchant Banking, the Company and TU, see "The Participation Agreement" below.
The Acquisition was further conditioned upon satisfaction or waiver of the
following conditions: (i) the consent to the Acquisition by the Australian
Foreign Investment Review Board ("FIRB"), (ii) the issuance of an approval
order by FERC and (iii) the absence of any statute, rule, regulation, court or
executive order, decree, or other order of any kind that would prohibit,
restrain or restrict the Acquisition (all aforementioned conditions, the
"Purchase Conditions"). FIRB provided its consent to the Acquisition on
April 1, 1998 and FERC provided its consent to the Acquisition on April 24,
1998. On May 19, 1998, the TU's tender offer was declared unconditional and
the Acquisition was consummated.
The Purchase Agreement contains only limited representations from each party
relating to corporate authorization, due execution and lack of conflict with
organizational documents, material agreements and laws. In addition, The
Energy Group has made further representations regarding title to equity
interests in the Acquired Companies and capitalization of the Acquired
Companies and their subsidiaries (collectively, the "Acquired Group"). See
"Risk Factors--Risks Relating to the Company--Limited Rights of Recovery
Against Sellers."
THE PARTICIPATION AGREEMENT
Lehman Merchant Banking and TU entered into the Participation Agreement,
dated March 1, 1998 (the "Participation Agreement"), which, among other
things, governs the basis on which TU made the TU Offer and the Company agreed
to consummate the Acquisition, and also governs the relationship between The
Energy Group and the Acquired Group after the Acquisition. Pursuant to the
terms of the Participation Agreement, Lehman Merchant Banking agreed to cause
the Company to consummate the Acquisition upon satisfaction of the Purchase
Conditions according to the terms of the Purchase Agreement. In addition, at
the Closing, Lehman Merchant Banking caused the Company to pay a portion of
the Citizens Power Obligations and to assume all outstanding indebtedness of
the Acquired Group, provided that non-recourse debt will remain non-recourse.
TU also agreed to cause The Energy Group to provide credit support for certain
of Citizens Power's asset restructuring debt in order to make effective
consents to the Acquisition by Citizens Power's note holders.
103
<PAGE>
Lehman Merchant Banking and TU further agreed that the Purchase Price would
be adjusted (i) to the extent the total assets less current liabilities and
long-term debt of the Acquired Group shown on an audited balance sheet as of
March 31, 1998 differ from agreed-upon projections and (ii) to the extent of
any dividends or distributions from, or contributions to, the Acquired Group
after March 31, 1998 and before the Closing. The Participation Agreement
contains a Company representation and warranty to TU that, for U.S. federal
income taxation purposes, The Energy Group's adjusted tax basis in the shares
of Peabody Holding Company as of January 31, 1998 was equal to the portion of
the Purchase Price allocated to such shares (up to $1.8 billion). Following
the Closing, the Company will cause the rest of the Acquired Group to assume
such warranty.
TU agreed not to revise or amend the terms and conditions of the TU Offer in
a manner that could reasonably be expected to materially and adversely affect
Lehman Merchant Banking, the Acquired Group, the Acquisition or the Financings
and not to waive any conditions of the TU Offer without Lehman Merchant
Banking's consent where Lehman Merchant Banking demonstrates that the matter
or circumstance giving rise to the right to invoke the condition arose after
the date of the Participation Agreement, could reasonably be expected to
materially and adversely affect the Acquired Group or the purchase of the
equity of the Acquired Companies (including the financing thereof) and is of
material significance in the context of the TU Offer. TU has also agreed not
to extend the TU Offer to an expiration date beyond four months from the
announcement date of the TU Offer.
The Company will indemnify TU and its affiliates and subsidiaries (including
The Energy Group and its subsidiaries) against all past, present and future
claims, suits or liabilities arising from or out of the Acquired Group,
including environmental and employee benefits claims or liabilities against
PII and Peabody Global Investment, Inc. ("PGII," collectively with PII, the
former holding companies for the U.S. Peabody coal business) arising from
events occurring prior to the Closing. Similarly, TU has agreed to indemnify
Lehman Merchant Banking, the Company and their affiliates and subsidiaries
against all past, present and future claims, suits or liabilities relating to
The Energy Group, except for those relating to the Acquired Group.
The parties have agreed that the Acquired Group will not be liable for any
U.S., Australian or United Kingdom tax liability (including subdivisions
thereof) of the portion of The Energy Group purchased by TU, and The Energy
Group will similarly not be liable for such tax liability of the Acquired
Group. The parties have further agreed that TU and The Energy Group, on the
one hand and Lehman Merchant Banking, on the other hand, will not be liable to
the other for any tax imposed by any jurisdiction as a result of the
allocation of the Purchase Price as between the U.S. and Australian tax
jurisdictions. In conjunction with the signing of the Participation Agreement,
the parties also agreed upon a Tax Allocation Agreement that was entered into
among PII, the Company and certain of their affiliates (collectively, the "PII
Group") at the Closing and, among other things, allocates the tax liabilities
among the entities in the PII Group on the basis of the taxes that would have
been incurred if they were stand-alone entities.
104
<PAGE>
RELATED PARTY TRANSACTIONS
Messrs. Washkowitz, Lentz and Goodspeed, directors of the Company, are
investors in Lehman Merchant Banking. Lehman Merchant Banking owns a
substantial majority of the Company's outstanding shares of capital stock
after the Acquisition. Lehman Brothers and its affiliates received aggregate
fees of approximately $90 million in cash for advising on the Acquisition and
arranging the financing therefor and were reimbursed for its expenses in
connection therewith. In addition, Lehman Brothers received customary fees in
connection with advising on and arranging financing for the purchase of The
Energy Group by Texas Utilities. From time to time in the future, Lehman
Merchant Banking or its affiliates may receive customary fees for services
rendered to the Company in connection with financings, divestitures,
acquisitions and certain other transactions. See "Management--Directors and
Executive Officers of the Company" and "Ownership of Capital Stock."
Lehman Brothers and LCPI, the Syndication Agent, Arranger and Administrative
Agent for the Senior Credit Facilities, are both affiliates of Lehman Merchant
Banking, and both received customary fees for their services in connection
with the Financings. See "Description of Certain Indebtedness" and "Plan of
Distribution."
The Citizens Power Obligations relate to the continuing payment obligations
resulting from the May 19, 1997 acquisition of Citizens Power. The Energy
Group purchased Citizens Power from Lehman Brothers Holdings Inc. ("LBHI")
(which owned 50%), Citizens Energy Corporation (14%), Mr. James (16%) and
certain employees of Citizens Power (20%) (collectively, the "Selling
Shareholders") for $120 million, which was divided into two parts: (i) an
upfront cash payment of $20 million; and (ii) the Citizens Power Obligations,
comprised of: (a) a payment based upon the net asset value of Citizens Power
("NAV") as of the date of sale (subject to certain adjustments based upon
events between the date of sale and June 30, 1997) up to a maximum of $30
million; and (b) NAV increase payments with respect to the fiscal years ending
March 31, 2000, 2001 and 2002, which when combined with initial NAV payment
would be no greater than $100 million. The agreement among The Energy Group
and the Selling Shareholders protected the Selling Shareholders in the event
of any material change, including a change of control at The Energy Group,
which would adversely affect Citizens Power's ability to attain the expected
NAV increases. As of January 1, 1998, due to the high likelihood of a change
of control of The Energy Group, Peabody guaranteed the selling shareholders
$65 million of the future payments as follows: (i) $30 million for the initial
NAV payment; and (ii) $35 million for the NAV increase payments. As a result
of the Transactions, the Company has agreed to indemnify The Energy Group in
respect of the Citizens Power Obligations. The Company negotiated to pay the
Selling Shareholders $72.96 million on May 19, 1998 and $20.0 million plus
interest on April 3, 2000 in consideration of the Citizens Power Obligations.
Mr. Goodspeed, a director of the Company, and certain employees of Citizens
Power received a portion of the proceeds received by LBHI. See "Description of
Certain Indebtedness."
LBHI, an affiliate of Lehman Brothers, agreed to provide a guarantee
facility (the "Guaranty Facility") to trading counterparties of CP Sales, a
trading subsidiary of Citizens Power, for trades initiated after the
Acquisition. The Guaranty Facility will be available for 364 days after the
date of the Acquisition. LBHI will be paid a minimum fee to establish the
Guaranty Facility and will be reimbursed for the legal and out-of-pocket costs
associated with establishing and documenting the Guaranty Facility. An
additional fee will be calculated based on the trading volumes of CP Sales
and, to the extent such volume-based fee exceeds the minimum, such additional
amount will be paid to LBHI. The volume based fee will increase should CP
Sales continue to use the Guaranty Facility after six months. LBHI will
benefit from cash collateral relative to its exposure on the trading book and
financial covenants on Citizens Power and CP Sales, any violation of which
would cause the Guaranty Facility to terminate.
TRANSACTIONS WITH AFFILIATES
COALSALES purchased 126,601 tons of coal from Black Beauty for $3.0 million
in fiscal 1998 and continues to purchase coal from Black Beauty in the
ordinary course of business. The terms of these transactions
105
<PAGE>
are comparable to those negotiated with independent third parties. Certain
executive officers of the Company, which is a non-controlling general partner
of Black Beauty, serve on the partnership committee of Black Beauty.
Partnership committee members of Black Beauty do not receive a fee for their
services.
STOCKHOLDERS AGREEMENTS
The Company will enter into stockholders agreements which are expected to
contain, among other things, drag-along, tag-along, voting, corporate
governance and registration rights provisions.
106
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following are summaries of the material terms and conditions of the
Senior Credit Facilities and certain indebtedness and are qualified in their
entirety by reference to the Senior Credit Facilities and the other agreements
summarized below.
THE SENIOR CREDIT FACILITIES
The Senior Credit Facilities are provided by a syndicate of banks and other
financial institutions led by LCPI, as Arranger and Syndication Agent and by
the First National Bank of Chicago as Administrative Agent. The Senior Credit
Facilities provide for $920.0 million of term loans and for $480.0 million in
revolving credit loans. The Revolving Credit Facility will includes borrowing
capacity available for letters of credit and for borrowings on same-day notice
(the "Swingline Loans"). The Term Loan Facility is comprised of a $270.0
million Tranche A Term Loan, which has a maturity of six years and a $650.0
million Tranche B Term Loan, which has a maturity of eight years. The
Revolving Credit Facility commitment terminates six years after the date of
initial funding of the Senior Credit Facilities.
All borrowings under the Senior Credit Facilities bear interest, at the
Company's option, at either: (A) a "base rate" equal to, for any day, the
higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b)
the rate of interest in effect for such day as publicly announced from time to
time by the Administrative Agent under the Senior Credit Facilities, as such
bank's "corporate base rate," "reference rate," "prime rate" or the
substantial equivalent thereof plus (i) in the case of the Tranche A Term
Loan, the Revolving Credit Facility and the Swingline Loans, a debt to EBITDA-
dependent rate ranging from 1.250% to 0.500% per annum or (ii) in the case of
the Tranche B Term Loan, a debt to EBITDA-dependent rate ranging from 1.375%
to 1.000% per annum or (B) a "LIBOR rate" equal to, for any Interest Period
(as in the Senior Credit Facilities), with respect to LIBOR Loans comprising
part of the same borrowing, the London Interbank Offered Rate of interest per
annum for such Interest Period as determined by the Administrative Agent, plus
(i) in the case of the Tranche A Term Loan and the Revolving Credit Facility,
a debt to EBITDA-dependent rate ranging from 2.250% to 1.500% per annum or
(ii) in the case of the Tranche B Term Loan, a debt to EBITDA-dependent rate
ranging from 2.375% to 2.000% per annum.
The Company must pay a commitment fee calculated at a debt to EBITDA-
dependent rate ranging from .500% to .375% per annum of the available unused
commitment under the Revolving Credit Facility, in each case in effect on each
day. Such fees are payable quarterly in arrears and upon termination of the
Revolving Credit Facility.
The Company must pay a letter of credit fee calculated at a debt to EBITDA-
dependent rate ranging from 2.250% to 1.500% per annum of the face amount of
each letter of credit and a fronting fee calculated at a rate equal to 0.250%
per annum of the aggregate face amount of each letter of credit. Such fees are
payable quarterly in arrears and upon the termination of the Revolving Credit
Facility. In addition, the Company is required to pay customary transaction
charges in connection with any letters of credit.
The foregoing debt to EBITDA-dependent rates range from the high rate
specified if the ratio of debt to EBITDA is greater than 4.75 to 1.0 to the
low rate specified if such ratio is less than 3.75 to 1.0.
The Term Loans are subject to the following amortization schedule:
<TABLE>
<CAPTION>
AMORTIZATION TERM LOAN A TERM LOAN B
------------ ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Year 1 $ 10.0 $ 6.5
Year 2 15.0 6.5
Year 3 20.0 6.5
Year 4 50.0 6.5
Year 5 75.0 6.5
Year 6 100.0 6.5
Year 7 -- 100.0
Year 8 -- 511.0
------ ------
$270.0 $650.0
====== ======
</TABLE>
107
<PAGE>
Borrowings under the Senior Credit Facilities will be subject to mandatory
prepayment (i) with the net proceeds of any incurrence of indebtedness (other
than indebtedness permitted therein), (ii) with the proceeds of certain asset
sales and (iii) on an annual basis with (A) 75% of the Company's excess cash
flow (as defined in the Senior Credit Facilities) if the ratio of the
Company's debt to EBITDA is greater than 4.0 to 1.0 or (B) 50% of such excess
cash flow if such ratio is less than or equal to 4.0 to 1.0.
The Company's obligations under the Senior Credit Facilities are secured by
a lien on certain of the tangible and intangible assets of the Company and its
direct and indirect domestic subsidiaries (other than Citizens Power and its
subsidiaries), including: (i) a pledge by the Company and its direct and
indirect domestic subsidiaries (other than Citizens Power and its
subsidiaries) of all of the capital stock of their respective domestic
subsidiaries and 65% of the capital stock of the Company's first-tier foreign
subsidiaries, (ii) certain coal reserves of the Company and its direct and
indirect domestic subsidiaries, (iii) certain CSAs and other material
contracts to which the Company or any of its direct or indirect domestic
subsidiaries (other than Citizens Power and its subsidiaries) is a party and
(iv) substantially all other personal property of the Company. In addition,
indebtedness under the Senior Credit Facilities will be guaranteed by the
Company's direct and indirect domestic subsidiaries (other than Citizens Power
and its subsidiaries). See "Description of the Senior Subordinated Notes--
Subordination" and "Risk Factors--Risks Relating to the Notes--Ranking."
The Senior Credit Facilities contain customary covenants and restrictions on
the Company's ability to engage in certain activities. In addition, the Senior
Credit Facilities provide that the Company must meet or exceed certain
interest coverage ratios and must not exceed a leverage ratio. The Senior
Credit Facilities also include customary events of default.
5% SUBORDINATED NOTE
A note (the "5% Subordinated Note") which matures on March 1, 2007 is held
by Prudential Insurance Company of America. As of June 30, 1998, $202.9
million of aggregate principal amount was outstanding under the note. The note
is a subordinated and unsecured obligation of the Company's subsidiary,
Peabody Holding Company. The terms of the note permit the merger,
consolidation or the sale of assets of Peabody Holding Company, as long as the
successor corporation following the merger or consolidation (if Peabody
Holding Company does not survive) expressly assumes payment of principal and
interest on and performance of the covenants and conditions of the note.
CITIZENS POWER OBLIGATIONS
On May 19, 1997, The Energy Group purchased Citizens Power from LBHI (which
owned 50%), Citizens Energy Corporation (14%), Mr. James (16%) and certain
employees of Citizens Power (20%) for $120 million, which was divided into two
parts: (i) an upfront cash payment of $20 million; and (ii) future payments
(the "Citizens Power Obligations"), comprised of: (a) a NAV payment based upon
the NAV as of the date of sale (subject to certain adjustments based upon
events between the date of sale and June 30, 1997) up to a maximum of $30
million; and (b) NAV increase payments with respect to the fiscal years ending
March 31, 2000, 2001 and 2002, which when combined with the initial NAV
payment would be no greater than $100 million. The agreement among The Energy
Group and the Selling Shareholders protected the Selling Shareholders in the
event of any material change, including a change of control at The Energy
Group, which would adversely affect Citizens Power's ability to attain the
expected NAV increases. As of January 1, 1998, due to the high likelihood of a
change of control of The Energy Group, Peabody guaranteed the Selling
Shareholders $65 million of the future payments as follows: (i) $30 million
for the initial NAV payment; and (ii) $35 million for the NAV increase
payments. As a result of the Transactions, the Company has agreed to indemnify
The Energy Group in respect of the Citizens Power Obligations. The Company has
negotiated to pay the Selling Shareholders $72.96 million on May 19, 1998 and
$20.0 million plus interest on April 3, 2000 in consideration of the Citizens
Power Obligations. Mr. Goodspeed, who will be a director of the Company after
the Acquisition, and certain employees of Citizens Power will receive a
portion of the proceeds received by LBHI.
108
<PAGE>
CITIZENS POWER NON-RECOURSE INDEBTEDNESS
Citizens Power issued non-recourse notes to finance four asset restructuring
transactions. Four special purpose limited liability companies were formed to
carry out these transactions. Notes issued in connection with these
transactions had an aggregate principal amount outstanding of $290.9 million
at June 30, 1998.
SURETY BONDS
Federal and state laws require Surety Bonds to secure the Company's
obligations to reclaim lands disturbed for mining, to pay federal and state
workers' compensation and to satisfy other miscellaneous obligations. The
amount of these bonds varies constantly, depending upon the amount of acreage
disturbed and the degree to which each property has been reclaimed. Under
federal law, partial bond release is provided as mined lands (i) are
backfilled and graded to approximate original contour, (ii) are re-vegetated
and (iii) achieve pre-mining vegetative productivity levels on a sustained
basis for a period of five to ten years.
As of June 30, 1998, the Company had outstanding surety bonds with third
parties for post-mining reclamation totaling $369.3 million, with an
additional $269.1 million in self-bonding obligations. Surety bonds valued at
an additional $233.1 million are in place for federal and state workers'
compensation obligations and other miscellaneous obligations.
PEABODY RESOURCES PERFORMANCE BONDS
Peabody Finance Limited, a subsidiary of Peabody Resources, has A$80.0
million outstanding in performance bonds (the "Performance Bonds") associated
with the mining operations in Australia. Each of the Performance Bonds is
guaranteed by The Energy Group. In each case, the guarantee is an
unconditional and irrevocable guarantee of Peabody Finance Limited's
obligations under the relevant bond facility, to be released only when all
amounts under the facility have been repaid or all outstanding Performance
Bonds issued under the facility have expired and the facility itself has
expired or been cancelled. The Company expects that these guarantees will be
replaced by letters of credit under the Senior Credit Facilities.
PEABODY RESOURCES DEBT
Peabody Resources has incurred obligations in connection with its joint
venture interests in the Warkworth and Bengalla mines. Its proportionate share
of incurred debt incurred in connection with a project finance loan for the
ongoing construction and development of its share of the Bengalla Mine
amounted to $20.4 million as of June 30, 1998. At the Warkworth Mine, Peabody
Resources has finance and operating leases in connection with its share of the
operation and expansion of the mine, which totaled $20 million as of June 30,
1998.
At June 30, 1998, Peabody Resources also had a $120.5 million (A$200
Million) standby commercial paper facility under which it borrowed short-term
funds for working capital purposes. The facility was administered by a local
Australian bank and was supported by a guarantee from The Energy Group. At
June 30, 1998, borrowings under the facility totaled approximately $36.2
million (A$60 million), with a maturity date of August 6, 1998. The average
interest rate on such borrowings was 5.1%.
In August of 1998, Peabody Resources entered into a borrowing agreement with
three Australian banks which provided up to $63.3 million (A$105 million) of
borrowing facilities for working capital purposes and up to $24.7 million
(A$41 million) for bank guarantees. Short-term borrowings under these
facilities were used to repay all outstanding indebtedness under the
commercial paper facility, and that facility was terminated.
Peabody Resources joint venture indebtedness, commercial paper obligations
and short-term bank borrowings are collectively referred to as "Peabody
Resources Debt."
109
<PAGE>
THE SENIOR EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Senior Letter of Transmittal
(which together constitute the Senior Exchange Offer), to exchange up to $400
million aggregate principal amount of Senior Exchange Notes for a like
aggregate principal amount of Old Senior Notes properly tendered on or prior
to the Senior Expiration Date and not withdrawn as permitted pursuant to the
procedures described below. The Senior Exchange Offer is being made with
respect to all of the Old Senior Notes.
As of the date of this Prospectus, $400 million aggregate principal amount
of the Old Senior Notes is outstanding. This Prospectus, together with the
Senior Letter of Transmittal, is first being sent on or about , 1998,
to all holders of Old Senior Notes known to the Company. The Company's
obligation to accept Old Senior Notes for exchange pursuant to the Senior
Exchange Offer is subject to certain conditions set forth under "--Certain
Conditions to the Senior Exchange Offer" below. The Company currently expects
that each of the conditions will be satisfied and that no waivers will be
necessary.
PURPOSE OF THE SENIOR EXCHANGE OFFER
The Old Senior Notes were issued on May 18, 1998 in a transaction exempt
from the registration requirements of the Securities Act. Accordingly, the Old
Senior Notes may not be reoffered, resold, or otherwise transferred unless so
registered or unless an applicable exemption from the registration and
prospectus delivery requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Senior Notes, the
Company entered into the Senior Registration Rights Agreement, which requires
the Company to file with the Commission a registration statement relating to
the Senior Exchange Offer not later than 90 days after the date of issuance of
the Old Senior Notes, and to use its best efforts to cause the registration
statement relating to the Senior Exchange Offer to become effective under the
Securities Act not later than 180 days after the date of issuance of the Old
Senior Notes and the Senior Exchange Offer to be consummated not later than 30
days after the date of the effectiveness of the Registration Statement (or use
its best efforts to cause to become effective by the 180th calendar day after
the date of issuance a shelf registration statement with respect to resales of
the Old Senior Notes). In the event that the Company fails to meet any of
these deadlines (a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder of Old Senior Notes, with respect to the
first 90-day period immediately following the occurrence of the first
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Old Senior Notes held by such Holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal
amount of Old Senior Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages for all Registration Defaults of $.05 per week per $1,000
principal amount of Old Senior Notes. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease. A copy of the Senior
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Senior Exchange Offer is being made by the Company to satisfy its
obligations with respect to the Senior Registration Rights Agreement. The term
"holder," with respect to the Senior Exchange Offer, means any person in whose
name Old Senior Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder, or any person whose Old Senior Notes are held of record by The
Depository Trust Company. Other than pursuant to the Senior Registration
Rights Agreement, the Company is not required to file any registration
statement to register any outstanding Old Senior Notes. Holders of Old Senior
Notes who do not tender their Old Senior Notes or whose Old Senior Notes are
tendered but not accepted would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act, if they
wish to sell their Old Senior Notes.
110
<PAGE>
The Company is making the Senior Exchange Offer in reliance on the position
of the staff of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the
staff would make a similar determination with respect to the Senior Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, the Company believes that the Senior Exchange
Notes issued pursuant to the Senior Exchange Offer in exchange for Old Senior
Notes may be offered for resale, resold and otherwise transferred by a Holder
(other than any Holder who is a broker-dealer or an "affiliate" of the Company
within the meaning of Rule 405 of the Securities Act) without further compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such Senior Exchange Notes are acquired in the ordinary
course of such Holder's business and that such Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Senior Exchange
Notes. See "--Resale of Senior Exchange Notes." Each broker-dealer that receives
Senior Exchange Notes for its own account in exchange for Old Senior Notes,
where such Old Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Senior Exchange
Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Senior Letter of Transmittal accompanying this Prospectus,
$1,000 in principal amount of Senior Exchange Notes for each $1,000 in
principal amount of the Old Senior Notes. The terms of the Senior Exchange
Notes are identical in all material respects to the terms of the Old Senior
Notes for which they may be exchanged pursuant to this Senior Exchange Offer,
except that the Senior Exchange Notes will generally be freely transferable by
Holders thereof and will not be subject to any covenant regarding
registration. The Senior Exchange Notes will evidence the same indebtedness as
the Old Senior Notes and will be entitled to the benefits of the Senior Note
Indenture. See "Description of the Senior Exchange Notes."
The Senior Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Senior Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Senior Exchange Notes issued pursuant to the Senior Exchange Offer in exchange
for the Old Senior Notes may be offered for sale, resold or otherwise
transferred by any holder without compliance with the registration and
prospectus delivery provisions of the Securities Act. Instead, based on an
interpretation by the staff of the Commission set forth in a series of no-
action letters issued to third parties, the Company believes that Senior
Exchange Notes issued pursuant to the Senior Exchange Offer in exchange for
Old Senior Notes may be offered for sale, resold and otherwise transferred by
any Holder of such Senior Exchange Notes (other than any such holder that is a
broker-dealer or is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Senior Exchange Notes are acquired in the ordinary course of such holder's
business and such holder has no arrangement or understanding with any person
to participate in the distribution of such Senior Exchange Notes and neither
such holder nor any other such person is engaging in or intends to engage in a
distribution of such Senior Exchange Notes. Since the Commission has not
considered the Senior Exchange Offer in the context of a no-action letter,
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Senior Exchange Offer. Any holder
who is an affiliate of the Company or who tenders in the Senior Exchange Offer
for the purpose of participating in a distribution of the Senior Exchange
Notes cannot rely on such interpretation by the staff of the Commission and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Senior Exchange Notes. Each broker-
dealer that receives Senior Exchange Notes for its own account in exchange for
Old Senior Notes, where such Old Senior
111
<PAGE>
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Senior Exchange Notes. See
"Plan of Distribution".
Interest on the Senior Exchange Notes will accrue from the last interest
payment date on which interest was paid on the Old Senior Notes so surrendered
or, if no interest has been paid on such Old Senior Notes, from May 18, 1998.
Tendering holders of the Old Senior Notes will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Senior
Letter of Transmittal, transfer taxes with respect to the exchange of the Old
Senior Notes pursuant to the Senior Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Senior Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1998 unless the Company, in its sole discretion, has extended the
period of time for which the Senior Exchange Offer is open (such date, as it
may be extended, is referred to herein as the "Senior Expiration Date"). The
Senior Expiration Date will be at least 20 business days after the
commencement of the Senior Exchange Offer in accordance with Rule 14e-1(a)
under the Exchange Act. The Company expressly reserves the right, at any time
or from time to time, to extend the period of time during which the Senior
Exchange Offer is open, and thereby delay acceptance for exchange of any Old
Senior Notes, by giving oral or written notice to the Senior Exchange Agent
and by giving written notice of such extension to the holders thereof no later
than 9:00 a.m. New York City time on the next business day after the
previously scheduled Senior Expiration Date. During any such extension, all
Old Senior Notes previously tendered will remain subject to the Senior
Exchange Offer unless properly withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Senior Exchange Offer and not to accept for exchange any Old Senior Notes not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "--Certain Conditions to the Senior Exchange Offer"
which have not been waived by the Company and (ii) amend the terms of the
Senior Exchange Offer in any manner which, in its good faith judgment, is
advantageous to the holders of the Old Senior Notes, whether before or after
any tender of the Old Senior Notes. If any such termination or amendment
occurs, the Company will notify the Senior Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Senior Notes as promptly as practicable.
For purposes of the Senior Exchange Offer, a "business day" means any day
other than Saturday, Sunday or a date on which banking institutions are
required or authorized by New York State law to be closed, and consists of the
time period from 12:01 a.m. through 12:00 midnight, New York City time. Unless
the Company terminates the Senior Exchange Offer prior to 5:00 p.m., New York
City time, on the Senior Expiration Date, the Company will exchange the Senior
Exchange Notes for the Old Senior Notes on the Senior Exchange Date.
PROCEDURES FOR TENDERING OLD SENIOR NOTES
The tender to the Company of Old Senior Notes by a Holder thereof as set
forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Senior Letter of Transmittal.
A Holder of Old Senior Notes may tender the same by (i) properly completing
and signing the Senior Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Senior Letter of Transmittal shall be
deemed to include a facsimile thereof) and delivering the same, together with
the certificate or certificates representing the Old Senior Notes being
tendered and any required signature guarantees and any other documents
required by the Senior Letter of Transmittal, to the Senior Exchange Agent at
its address set forth below on or prior to the Senior Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
112
<PAGE>
THE METHOD OF DELIVERY OF OLD SENIOR NOTES, SENIOR LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. NO OLD SENIOR NOTES OR SENIOR
LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
If tendered Old Senior Notes are registered in the name of the signer of the
Senior Letter of Transmittal and the Senior Exchange Notes to be issued in
exchange therefor are to be issued (and any untendered Old Senior Notes are to
be reissued) in the name of the registered holder (which term, for the
purposes described herein, shall include any participant in The Depository
Trust Company (also referred to as a "book-entry transfer facility") whose
name appears on a security listing as the owner of Old Senior Notes), the
signature of such signer need not be guaranteed. In any other case, the
tendered Old Senior Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed
by the registered holder, and the signature on the endorsement or instrument
of transfer must be guaranteed by a bank, broker, dealer, credit union,
savings association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Senior Exchange Notes and/or Old Senior Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Senior Notes, the signature in the Senior Letter
of Transmittal must be guaranteed by an Eligible Institution.
The Senior Exchange Agent will make a request within two business days after
the date of receipt of this Prospectus to establish accounts with respect to
the Old Senior Notes at the book-entry transfer facility for the purpose of
facilitating the Senior Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the book-entry
transfer facility's system may make book-entry delivery of Old Senior Notes by
causing such book-entry transfer facility to transfer such Old Senior Notes
into the Senior Exchange Agent's account with respect to the Old Senior Notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of Old Senior Notes may be effected through book-
entry transfer into the Senior Exchange Agent's account at the book-entry
transfer facility, an appropriate Senior Letter of Transmittal with any
required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Senior Exchange Agent
at its address set forth below on or prior to the Senior Expiration Date, or,
if the guaranteed delivery procedures described below are complied with,
within the time period provided under such procedures.
If a holder desires to accept the Senior Exchange Offer and time will not
permit a Senior Letter of Transmittal or Old Senior Notes to reach the Senior
Exchange Agent before the Senior Expiration Date or the procedure for book-
entry transfer cannot be completed on a timely basis, a tender may be effected
if the Senior Exchange Agent has received at its address set forth below on or
prior to the Senior Expiration Date, a letter, telegram or facsimile
transmission (receipt confirmed by telephone and an original delivered by
guaranteed overnight courier) from an Eligible Institution setting forth the
name and address of the tendering holder, the names in which the Old Senior
Notes are registered and, if possible, the certificate numbers of the Old
Senior Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that within three business days after the Senior Expiration
Date, the Old Senior Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Old Senior Notes into the Senior Exchange Agent's
account at the book-entry transfer facility), will be delivered by such
Eligible Institution together with a properly completed and duly executed
Senior Letter of Transmittal (and any other required documents). Unless Old
Senior Notes being tendered by the above-described method are deposited with
the Senior Exchange Agent within the time period set forth above (accompanied
or preceded by a properly completed Senior Letter of Transmittal and any other
required documents), the Company may, at its option, reject the tender. Copies
of the notice of guaranteed delivery ("Senior Notice of Guaranteed Delivery")
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Senior Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Senior Letter of
Transmittal accompanied by the Old Senior Notes (or a confirmation
113
<PAGE>
of book-entry transfer of such Old Senior Notes into the Senior Exchange
Agent's account at the book-entry transfer facility) is received by the Senior
Exchange Agent, or (ii) a Senior Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) from
an Eligible Institution is received by the Senior Exchange Agent. Issuances of
Senior Exchange Notes in exchange for Old Senior Notes tendered pursuant to a
Senior Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) by an Eligible Institution
will be made only against deposit of the Senior Letter of Transmittal (and any
other required documents) and the tendered Old Senior Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Senior Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Old
Senior Notes not properly tendered or not to accept any particular Old Senior
Notes which acceptance might, in the judgment of the Company or its counsel,
be unlawful. The Company also reserves the absolute right to waive any defects
or irregularities or conditions of the Senior Exchange Offer as to any
particular Old Senior Notes either before or after the Senior Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Senior Notes in the Senior Exchange Offer). The interpretation of
the terms and conditions of the Senior Exchange Offer (including the Senior
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Senior Notes for exchange must be cured
within such reasonable period of time as the Company shall determine. Neither
the Company, the Senior Exchange Agent nor any other person shall be under any
duty to give notification of any defect or irregularity with respect to any
tender of Old Senior Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Senior Letter of Transmittal is signed by a person or persons other
than the registered holder or holders of Old Senior Notes, such Old Senior
Notes must be endorsed or accompanied by appropriate powers of attorney, in
either case signed exactly as the name or names of the registered holder or
holders appear on the Old Senior Notes.
If the Senior Letter of Transmittal or any Old Senior Notes or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Senior Exchange Notes acquired pursuant to the Senior Exchange
Offer are being acquired in the ordinary course of business of the person
receiving such Senior Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other person has an arrangement
or understanding with any person to participate in the distribution of such
Senior Exchange Notes and that neither the holder nor any such other person is
an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company, or if it is an affiliate it will comply with the registration and
prospectus requirements of the Securities Act to the extent applicable.
Each broker-dealer that receives Senior Exchange Notes for its own account
in exchange for Old Senior Notes where such Old Senior Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection
with any resale of such Senior Exchange Notes. Lehman Brothers Inc.'s ability
to make a market in the Senior Exchange Notes will be subject to the
availability of a current market-maker prospectus. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE SENIOR LETTER OF TRANSMITTAL
The Senior Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Senior Exchange Offer:
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Senior Notes to the Company and irrevocably constitutes
and appoints the Senior Exchange Agent as the Transferor's
114
<PAGE>
agent and attorney-in-fact to cause the Old Senior Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Old
Senior Notes and to acquire Senior Exchange Notes issuable upon the exchange
of such tendered Notes, and that, when the same are accepted for exchange, the
Company will acquire good and unencumbered title to the tendered Old Senior
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The Transferor also warrants that it will,
upon request, execute and deliver any additional documents deemed by the
Senior Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Senior Notes or transfer
ownership of such Old Senior Notes on the account books maintained by a book-
entry transfer facility. The Transferor further agrees that acceptance of any
tendered Old Senior Notes by the Company and the issuance of Senior Exchange
Notes in exchange therefor shall constitute performance in full by the Company
of certain of its obligations under the Senior Registration Rights Agreement.
All authority conferred by the Transferor will survive the death or incapacity
of the Transferor and every obligation of the Transferor shall be binding upon
the heirs, legal representatives, successors, assigns, executors and
administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Senior Exchange Notes offered hereby in the ordinary course of such
Transferor's business and that such Transferor has no arrangement with any
person to participate in the distribution of such Senior Exchange Notes. Each
holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of Senior Exchange Notes.
Each Transferor which is a broker-dealer receiving Senior Exchange Notes for
its own account must acknowledge that it will deliver a prospectus in
connection with any resale of such Senior Exchange Notes. By so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. In
connection with the offering of the Old Senior Notes, the Company agreed to
file and maintain, subject to certain limitations, a registration statement
that would allow Lehman Brothers Inc. to engage in market-making transactions
with respect to the Senior Exchange Notes. The Company has agreed to bear
registration expenses incurred under such agreement.
WITHDRAWAL RIGHTS
Tenders of Old Senior Notes may be withdrawn at any time prior to the Senior
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter
must be received by the Senior Exchange Agent at the address set forth herein
prior to the Senior Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having tendered the Old Senior Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Senior Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Senior Notes), (iii) specify the principal amount of Old Senior Notes
to be withdrawn, (iv) include a statement that such holder is withdrawing his
election to have such Old Senior Notes exchanged, (v) be signed by the holder
in the same manner as the original signature on the Senior Letter of
Transmittal by which such Old Senior Notes were tendered or as otherwise
described above (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Senior Note
Trustee under the Senior Note Indenture register the transfer of such Old
Senior Notes into the name of the person withdrawing the tender and (vi)
specify the name in which any such Old Senior Notes are to be registered, if
different from that of the Depositor. The Senior Exchange Agent will return
the properly withdrawn Old Senior Notes promptly following receipt of notice
of withdrawal. If Old Senior Notes have been tendered pursuant to the
procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at the book-entry transfer facility to be
credited with the withdrawn Old Senior Notes or otherwise comply with the
book-entry transfer facility procedure. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by the
Company and such determination will be final and binding on all parties.
Any Old Senior Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Senior Exchange Offer. Any Old
Senior Notes which have been tendered for exchange but which
115
<PAGE>
are not exchanged for any reason will be returned to the holder thereof
without cost to such holder (or, in the case of Old Senior Notes tendered by
book-entry transfer into the Senior Exchange Agent's account at the book-entry
transfer facility pursuant to the book-entry transfer procedures described
above, such Old Senior Notes will be credited to an account with such book-
entry transfer facility specified by the holder) as soon as practicable after
withdrawal, rejection of tender or termination of the Senior Exchange Offer.
Properly withdrawn Old Senior Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Senior Notes" above
at any time on or prior to the Senior Expiration Date.
ACCEPTANCE OF OLD SENIOR NOTES FOR EXCHANGE; DELIVERY OF SENIOR EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Senior Exchange
Offer, the Company will accept, promptly on the Exchange Date, all Old Senior
Notes properly tendered and will issue the Senior Exchange
Notes promptly after such acceptance. See "--Certain Conditions to the Senior
Exchange Offer" below. For purposes of the Senior Exchange Offer, the Company
shall be deemed to have accepted properly tendered Old Senior Notes for
exchange when, as and if the Company has given oral or written notice thereof
to the Senior Exchange Agent.
For each Old Senior Note accepted for exchange, the holder of such Old
Senior Note will receive a Senior Exchange Note having a principal amount
equal to that of the surrendered Old Senior Note.
In all cases, issuance of Senior Exchange Notes for Old Senior Notes that
are accepted for exchange pursuant to the Senior Exchange Offer will be made
only after timely receipt by the Senior Exchange Agent of certificates for
such Old Senior Notes or a timely book-entry confirmation of such Old Senior
Notes into the Senior Exchange Agent's account at the book-entry transfer
facility, a properly completed and duly executed Senior Letter of Transmittal
and all other required documents. If any tendered Old Senior Notes are not
accepted for any reason set forth in the terms and conditions of the Senior
Exchange Offer or if Old Senior Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged
Old Senior Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Senior Notes tendered by book-entry transfer
into the Senior Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such non-
exchanged Old Senior Notes will be credited to an account maintained with such
book-entry transfer facility) as promptly as practicable after the expiration
of the Senior Exchange Offer.
CERTAIN CONDITIONS TO THE SENIOR EXCHANGE OFFER
Notwithstanding any other provision of the Senior Exchange Offer, or any
extension of the Senior Exchange Offer, the Company shall not be required to
accept for exchange, or to issue Senior Exchange Notes in exchange for, any
Old Senior Notes and may terminate or amend the Senior Exchange Offer (by oral
or written notice to the Senior Exchange Agent or by a timely press release)
if at any time before the acceptance of such Old Senior Notes for exchange or
the exchange of the Senior Exchange Notes for such Old Senior Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Senior Exchange
Offer which, in the sole judgment of the Company, might materially impair
the ability of the Company to proceed with the Senior Exchange Offer or
have a material adverse effect on the contemplated benefits of the Senior
Exchange Offer to the Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Senior Notes or the
Senior Exchange Notes or that may materially impair the contemplated
benefits of the Senior Exchange Offer to the Company; or
116
<PAGE>
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Senior Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of
the Senior Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law, statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Senior Exchange Offer
or have a material adverse effect on the contemplated benefits of the
Senior Exchange Offer to the Company; or
(f) there shall occur a change in the current interpretation by the staff
of the Commission which permits the Senior Exchange Notes issued pursuant
to the Senior Exchange Offer in exchange for Old Senior Notes to be offered
for resale, resold and otherwise transferred by holders thereof (other than
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act provided that such
Senior Exchange Notes are acquired in the ordinary course of such Holders'
business and such holders have no arrangement with any person to
participate in the distribution of such Senior Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any governmental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Senior Exchange Offer, (iii) a declaration
of a banking moratorium or any suspension of payments in respect of banks
by Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the
United States, (v) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood of
affecting, the extension of credit by banks or other leading institutions
in the United States, or (vi) in the case of any of the foregoing existing
at the time of the commencement of the Senior Exchange Offer, a material
acceleration or worsening thereof.
The Company expressly reserves the right to terminate the Senior Exchange
Offer and not accept for exchange any Old Senior Notes upon the occurrence of
any of the foregoing conditions (which represent all of the material
conditions to the acceptance by the Company of properly tendered Old Senior
Notes). In addition, the Company may amend the Senior Exchange Offer at any
time prior to the Senior Expiration Date if any of the conditions set forth
above occur. Moreover, regardless of whether any of such conditions has
occurred, the Company may amend the Senior Exchange Offer in any manner which,
in its good faith judgment, is advantageous to holders of the Old Senior
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time. If the Company waives or
amends the foregoing conditions, it will, if required by law, extend the
Senior Exchange Offer for a minimum of five business days from the date that
the Company first gives notice, by public announcement or otherwise, of such
waiver or amendment, if the Senior Exchange Offer would otherwise expire
within such five business-day period. Any determination by the Company
concerning the events described above will be final and binding upon all
parties.
In addition, the Company will not accept for exchange any Old Senior Notes
tendered, and no Senior Exchange Notes will be issued in exchange for any such
Old Senior Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or
117
<PAGE>
the qualification of the Senior Note Indenture under the Trust Indenture Act
of 1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
The Senior Exchange Offer is not conditioned upon any minimum principal
amount of Old Senior Notes being tendered for exchange.
SENIOR EXCHANGE AGENT
State Street Bank & Trust Company has been appointed as the Senior Exchange
Agent for the Senior Exchange Offer. All executed Senior Letters of
Transmittal should be directed to the Senior Exchange Agent at one of the
addresses set forth below:
By Hand/Overnight Courier: By Mail:
State Street Bank and Trust Company
State Street Bank and Trust Company Two International Place
P.O. Box 778 Boston, Massachusetts 02110
Boston, Massachusetts 02102 Attn: Corporate Trust Department
Attn: Corporate Trust Department Kellie Mullen
Kellie Mullen
By Facsimile: (617) 664-5314
Attn.: Corporate Trust Department
Telephone: (617) 664-5587
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Senior Letter of Transmittal and requests for Senior
Notices of Guaranteed Delivery should be directed to the Senior Exchange Agent
at the address and telephone number set forth in the Senior Letter of
Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE SENIOR LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE SENIOR LETTER OF TRANSMITTAL, WILL NOT
CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Senior Exchange Offer and will not make any payments to brokers, dealers or
others soliciting acceptances of the Senior Exchange Offer. The Company,
however, will pay the Senior Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and other related documents to
the beneficial owners of the Old Senior Notes and in handling or forwarding
tenders for their customers.
The estimated cash expenses to be incurred in connection with the Senior
Exchange Offer will be paid by the Company and are estimated in the aggregate
to be approximately $ which includes fees and expenses of the
Senior Exchange Agent, Senior Note Trustee, registration fees, accounting,
legal, printing and related fees and expenses.
No person has been authorized to give any information or to make any
representations in connection with the Senior Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Senior Exchange Offer is not being
made to (nor will tenders be accepted from or on behalf
118
<PAGE>
of) holders of Old Senior Notes in any jurisdiction in which the making of the
Senior Exchange Offer or the acceptance thereof would not be in compliance
with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Senior
Exchange Offer in any such jurisdiction and extend the Senior Exchange Offer
to holders of Old Senior Notes in such jurisdiction. In any jurisdiction in
which the securities laws or blue sky laws of which require the Senior
Exchange Offer to be made by a licensed broker or dealer, the Senior Exchange
Offer is being made on behalf of the Company by one or more registered brokers
or dealers which are licensed under the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Senior Notes pursuant to the Senior Exchange Offer. If, however,
certificates representing Senior Exchange Notes or Old Senior Notes for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the registered
holder of the Old Senior Notes tendered, or if tendered Old Senior Notes are
registered in the name of any person other than the person signing the Senior
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old Senior Notes pursuant to the Senior Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Senior Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Senior Exchange Notes will be recorded at the carrying value of the Old
Senior Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the exchange of Senior Exchange Notes for Old
Senior Notes. Expenses incurred in connection with the issuance of the Senior
Exchange Notes will be amortized over the term of the Senior Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Senior Notes who do not exchange their Old Senior Notes for
Senior Exchange Notes pursuant to the Senior Exchange Offer will continue to
be subject to the restrictions on transfer of such Old Senior Notes as set
forth in the legend thereon. Old Senior Notes not exchanged pursuant to the
Senior Exchange Offer will continue to remain outstanding in accordance with
their terms. In general, Old Senior Notes may not be offered or sold unless
registered under the Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will
register the Old Senior Notes under the Securities Act.
Participation in the Senior Exchange Offer is voluntary, and holders of Old
Senior Notes should carefully consider whether to participate. Holders of Old
Senior Notes are urged to consult their financial and tax advisors in making
their own decision on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Senior Notes pursuant to the terms of, this Senior
Exchange Offer, the Company will have fulfilled a covenant contained in the
Senior Registration Rights Agreement. Holders of Old Senior Notes who do not
tender their Old Senior Notes in the Senior Exchange Offer will continue to
hold such Old Senior Notes and will be entitled to all the rights and
limitations applicable thereto under the Senior Note Indenture, except for any
such rights under the Senior Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Senior Exchange Offer. All untendered Old Senior Notes will continue to
be subject to the restrictions on transfer set forth in the Senior Note
Indenture. To the extent that Old Senior Notes are tendered and accepted in
the Senior Exchange Offer, the trading market for untendered Old Senior Notes
could be adversely affected.
119
<PAGE>
The Company may in the future seek to acquire, subject to the terms of the
Senior Note Indenture, untendered Old Senior Notes in open market or privately
negotiated transactions, through subsequent exchange offers or otherwise. The
Company has no present plan to acquire any Old Senior Notes which are not
tendered in the Senior Exchange Offer.
RESALE OF SENIOR EXCHANGE NOTES
The Company is making the Senior Exchange Offer in reliance on the position
of the staff of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter and there can be no
assurance that the Staff would make a similar determination with respect to
the Senior Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff, the Company believes
that the Senior Exchange Notes issued pursuant to the Senior Exchange Offer in
exchange for Old Senior Notes may be offered for resale, resold and otherwise
transferred by a Holder (other than any Holder who is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 of the Securities
Act) without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Senior Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Senior Exchange Notes. However, any holder who is an "affiliate"
of the Company or who has an arrangement or understanding with respect to the
distribution of the Senior Exchange Notes to be acquired pursuant to the
Senior Exchange Offer, or any broker-dealer who purchased Old Senior Notes
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act (i) could not rely on the applicable
interpretations of the staff and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act. A broker-dealer who
holds Old Senior Notes that were acquired for its own account as a result of
market-making or other trading activities may be deemed to be an "underwriter"
within the meaning of the Securities Act and must, therefore, deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of Senior Exchange Notes. Each such broker-dealer that receives
Senior Exchange Notes for its own account in exchange for Old Senior Notes,
where such Old Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge in the
Senior Letter of Transmittal that it will deliver a prospectus in connection
with any resale of such Senior Exchange Notes. Lehman Brothers Inc.'s ability
to make a market in the Senior Exchange Notes will be subject to the
availability of a current market-maker prospectus. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Senior Exchange Notes may not be offered or sold unless they
have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied
with. The Company has agreed, pursuant to the Senior Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the Senior Exchange Notes for offer or sale under the securities or
blue sky laws of such jurisdictions as any Holder of the Senior Exchange Notes
reasonably requests in writing. Such registration or qualification may require
the imposition of restrictions or conditions (including suitability
requirements for offerees or purchasers) in connection with the offer or sale
of any Senior Exchange Notes.
120
<PAGE>
THE SENIOR SUBORDINATED EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Senior Subordinated Letter of
Transmittal (which together constitute the Senior Subordinated Exchange
Offer), to exchange up to $500 million aggregate principal amount of Senior
Subordinated Exchange Notes for a like aggregate principal amount of Old
Senior Subordinated Notes properly tendered on or prior to the Senior
Subordinated Expiration Date and not withdrawn as permitted pursuant to the
procedures described below. The Senior Subordinated Exchange Offer is being
made with respect to all of the Old Senior Subordinated Notes.
As of the date of this Prospectus, $500 million aggregate principal amount
of the Old Senior Subordinated Notes is outstanding. This Prospectus, together
with the Senior Subordinated Letter of Transmittal, is first being sent on or
about , 1998, to all holders of Old Senior Subordinated Notes known to
the Company. The Company's obligation to accept Old Senior Subordinated Notes
for exchange pursuant to the Senior Subordinated Exchange Offer is subject to
certain conditions set forth under "--Certain Conditions to the Senior
Subordinated Exchange Offer" below. The Company currently expects that each of
the conditions will be satisfied and that no waivers will be necessary.
PURPOSE OF THE SENIOR SUBORDINATED EXCHANGE OFFER
The Old Senior Subordinated Notes were issued on May 18, 1998 in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the Old Senior Subordinated Notes may not be reoffered, resold,
or otherwise transferred unless so registered or unless an applicable
exemption from the registration and prospectus delivery requirements of the
Securities Act is available.
In connection with the issuance and sale of the Old Senior Subordinated
Notes, the Company entered into the Senior Subordinated Registration Rights
Agreement, which requires the Company to file with the Commission a
registration statement relating to the Senior Subordinated Exchange Offer not
later than 90 days after the date of issuance of the Old Senior Subordinated
Notes, and to use its best efforts to cause the registration statement
relating to the Senior Subordinated Exchange Offer to become effective under
the Securities Act not later than 180 days after the date of issuance of the
Old Senior Subordinated Notes and the Senior Subordinated Exchange Offer to be
consummated not later than 30 days after the date of the effectiveness of the
Registration Statement (or use its best efforts to cause to become effective
by the 180th calendar day after the date of issuance a shelf registration
statement with respect to resales of the Old Senior Subordinated Notes). In
the event that the Company fails to meet any of these deadlines (a
"Registration Default"), then the Company will pay Liquidated Damages to each
Holder of Old Senior Subordinated Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default
in an amount equal to $.05 per week per $1,000 principal amount of Old Senior
Subordinated Notes held by such Holder. The amount of the Liquidated Damages
will increase by an additional $.05 per week per $1,000 principal amount of
Old Senior Subordinated Notes with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages for all Registration Defaults of $.05 per week per $1,000
principal amount of Old Senior Subordinated Notes. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. A copy of
the Senior Subordinated Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The Senior Subordinated Exchange Offer is being made by the Company to
satisfy its obligations with respect to the Senior Subordinated Registration
Rights Agreement. The term "holder," with respect to the Senior Subordinated
Exchange Offer, means any person in whose name Old Senior Subordinated Notes
are registered on the books of the Company or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose Old Senior Subordinated Notes are held of record by The
Depository Trust Company. Other than pursuant to the Senior Subordinated
Registration Rights Agreement, the Company is
121
<PAGE>
not required to file any registration statement to register any outstanding
Old Senior Subordinated Notes. Holders of Old Senior Subordinated Notes who do
not tender their Old Senior Subordinated Notes or whose Old Senior
Subordinated Notes are tendered but not accepted would have to rely on
exemptions to registration requirements under the securities laws, including
the Securities Act, if they wish to sell their Old Senior Subordinated Notes.
The Company is making the Senior Subordinated Exchange Offer in reliance on
the position of the staff of the Commission as set forth in certain
interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can
be no assurance that the staff would make a similar determination with respect
to the Senior Subordinated Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the Staff, the
Company believes that the Senior Subordinated Exchange Notes issued pursuant
to the Senior Subordinated Exchange Offer in exchange for Old Senior
Subordinated Notes may be offered for resale, resold and otherwise transferred
by a Holder (other than any Holder who is a broker-dealer or an "affiliate" of
the Company within the meaning of Rule 405 of the Securities Act) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such Senior Subordinated Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Senior Subordinated Exchange Notes. See "--Resale of Senior
Subordinated Exchange Notes". Each broker-dealer that receives Senior
Subordinated Exchange Notes for its own account in exchange for Old Senior
Subordinated Notes, where such Old Senior Subordinated Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Senior Subordinated Exchange Notes. See "Plan of
Distribution".
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Senior Subordinated Letter of Transmittal accompanying this
Prospectus, $1,000 in principal amount of Senior Subordinated Exchange Notes
for each $1,000 in principal amount of the Old Senior Subordinated Notes. The
terms of the Senior Subordinated Exchange Notes are identical in all material
respects to the terms of the Old Senior Subordinated Notes for which they may
be exchanged pursuant to this Senior Subordinated Exchange Offer, except that
the Senior Subordinated Exchange Notes will generally be freely transferable
by Holders thereof and will not be subject to any covenant regarding
registration. The Senior Subordinated Exchange Notes will evidence the same
indebtedness as the Old Senior Subordinated Notes and will be entitled to the
benefits of the Senior Subordinated Note Indenture. See "Description of the
Senior Subordinated Exchange Notes".
The Senior Subordinated Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Senior Subordinated Notes being tendered for
exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Senior Subordinated Exchange Notes issued pursuant to the Senior Subordinated
Exchange Offer in exchange for Old Senior Subordinated Notes may be offered
for sale, resold or otherwise transferred by any holder without compliance
with the registration and prospectus delivery provisions of the Securities
Act. Instead, based on an interpretation by the staff of the Commission set
forth in a series of no-action letters issued to third parties, the Company
believes that Senior Subordinated Exchange Notes issued pursuant to the Senior
Subordinated Exchange Offer in exchange for Old Senior Subordinated Notes may
be offered for sale, resold and otherwise transferred by any Holder of such
Senior Subordinated Exchange Notes (other than any such holder that is a
broker-dealer or is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Senior Subordinated Exchange Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such Senior Subordinated Exchange
Notes and neither such holder nor any other such person is engaging in or
intends to engage in a distribution of such Senior Subordinated Exchange
Notes. Since the
122
<PAGE>
Commission has not considered the Senior Subordinated Exchange Offer in the
context of a no-action letter, there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Senior
Subordinated Exchange Offer. Any holder who is an affiliate of the Company or
who tenders in the Senior Subordinated Exchange Offer for the purpose of
participating in a distribution of the Senior Subordinated Exchange Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Senior Subordinated Exchange Notes.
Each broker-dealer that receives Senior Subordinated Exchange Notes for its
own account in exchange for Old Senior Subordinated Notes, where such Old
Senior Subordinated Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Senior
Subordinated Exchange Notes. See "Plan of Distribution".
Interest on the Senior Subordinated Exchange Notes will accrue from the last
interest payment date on which interest was paid on the Old Senior
Subordinated Notes so surrendered or, if no interest has been paid on such Old
Senior Subordinated Notes, from May 18, 1998.
Tendering holders of the Old Senior Subordinated Notes will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Senior Subordinated Letter of Transmittal, transfer taxes with respect to the
exchange of Old Senior Subordinated Notes pursuant to the Senior Subordinated
Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Senior Subordinated Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998 unless the Company, in its sole discretion, has
extended the period of time for which the Senior Subordinated Exchange Offer
is open (such date, as it may be extended, is referred to herein as the
"Senior Subordinated Expiration Date"). The Senior Subordinated Expiration
Date will be at least 20 business days after the commencement of the Senior
Subordinated Exchange Offer in accordance with Rule 14e-1(a) under the
Exchange Act. The Company expressly reserves the right, at any time or from
time to time, to extend the period of time during which the Senior
Subordinated Exchange Offer is open, and thereby delay acceptance for exchange
of any Old Senior Subordinated Notes, by giving oral or written notice to the
Senior Subordinated Exchange Agent and by giving written notice of such
extension to the holders thereof no later than 9:00 a.m. New York City time on
the next business day after the previously scheduled Senior Subordinated
Expiration Date. During any such extension, all Old Senior Subordinated Notes
previously tendered will remain subject to the Senior Subordinated Exchange
Offer unless properly withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Senior Subordinated Exchange Offer and not to accept for exchange any Old
Senior Subordinated Notes not theretofore accepted for exchange upon the
occurrence of any of the events specified below under "--Certain Conditions to
the Senior Subordinated Exchange Offer" which have not been waived by the
Company and (ii) amend the terms of the Senior Subordinated Exchange Offer in
any manner which, in its good faith judgment, is advantageous to the holders
of the Old Senior Subordinated Notes, whether before or after any tender of
the Old Senior Subordinated Notes. If any such termination or amendment
occurs, the Company will notify the Senior Subordinated Exchange Agent and
will either issue a press release or give oral or written notice to the
holders of the Old Senior Subordinated Notes as promptly as practicable.
For purposes of the Senior Subordinated Exchange Offer, a "business day"
means any day other than Saturday, Sunday or a date on which banking
institutions are required or authorized by New York State law to be closed,
and consists of the time period from 12:01 a.m. through 12:00 midnight, New
York City time. Unless the Company terminates the Senior Subordinated Exchange
Offer prior to 5:00 p.m., New York City time, on the Senior Subordinated
Expiration Date, the Company will exchange the Senior Subordinated Exchange
Notes for the Old Senior Subordinated Notes on the Senior Subordinated
Exchange Date.
123
<PAGE>
PROCEDURES FOR TENDERING OLD SENIOR SUBORDINATED NOTES
The tender to the Company of Old Senior Subordinated Notes by a Holder
thereof as set forth below and the acceptance thereof by the Company will
constitute a binding agreement between the tendering holder and the Company
upon the terms and subject to the conditions set forth in this Prospectus and
in the accompanying Senior Subordinated Letter of Transmittal.
A Holder of Old Senior Subordinated Notes may tender the same by (i)
properly completing and signing the Senior Subordinated Letter of Transmittal
or a facsimile thereof (all references in this Prospectus to the Senior
Subordinated Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or
certificates representing the Old Senior Subordinated Notes being tendered and
any required signature guarantees and any other documents required by the
Senior Subordinated Letter of Transmittal, to the Senior Subordinated Exchange
Agent at its address set forth below on or prior to the Senior Subordinated
Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
THE METHOD OF DELIVERY OF OLD SENIOR SUBORDINATED NOTES, SENIOR SUBORDINATED
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. NO OLD
SENIOR SUBORDINATED NOTES OR SENIOR SUBORDINATED LETTERS OF TRANSMITTAL SHOULD
BE SENT TO THE COMPANY.
If tendered Old Senior Subordinated Notes are registered in the name of the
signer of the Senior Subordinated Letter of Transmittal and the Senior
Subordinated Exchange Notes to be issued in exchange therefor are to be issued
(and any untendered Old Senior Subordinated Notes are to be reissued) in the
name of the registered holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company (also referred
to as a "book-entry transfer facility") whose name appears on a security
listing as the owner of Old Senior Subordinated Notes), the signature of such
signer need not be guaranteed. In any other case, the tendered Old Senior
Subordinated Notes must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the
registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Senior Subordinated Exchange Notes and/or Old Senior Subordinated Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Old Senior Subordinated Notes,
the signature in the Senior Subordinated Letter of Transmittal must be
guaranteed by an Eligible Institution.
The Senior Subordinated Exchange Agent will make a request within two
business days after the date of receipt of this Prospectus to establish
accounts with respect to the Old Senior Subordinated Notes at the book-entry
transfer facility for the purpose of facilitating the Senior Subordinated
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Senior Subordinated Notes by causing such
book-entry transfer facility to transfer such Old Senior Subordinated Notes
into the Senior Subordinated Exchange Agent's account with respect to the Old
Senior Subordinated Notes in accordance with the book-entry transfer
facility's procedures for such transfer. Although delivery of Old Senior
Subordinated Notes may be effected through book-entry transfer into the Senior
Subordinated Exchange Agent's account at the book-entry transfer facility, an
appropriate Senior Subordinated Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Senior Subordinated Exchange
Agent at its address set forth below on or prior to the Senior Subordinated
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures.
If a holder desires to accept the Senior Subordinated Exchange Offer and
time will not permit a Senior Subordinated Letter of Transmittal or Old Senior
Subordinated Notes to reach the Senior Subordinated Exchange
124
<PAGE>
Agent before the Senior Subordinated Expiration Date or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the Senior Subordinated Exchange Agent has received at its address
set forth below on or prior to the Senior Subordinated Expiration Date, a
letter, telegram or facsimile transmission (receipt confirmed by telephone and
an original delivered by guaranteed overnight courier) from an Eligible
Institution setting forth the name and address of the tendering holder, the
names in which the Old Senior Subordinated Notes are registered and, if
possible, the certificate numbers of the Old Senior Subordinated Notes to be
tendered, and stating that the tender is being made thereby and guaranteeing
that within three business days after the Senior Subordinated Expiration Date,
the Old Senior Subordinated Notes in proper form for transfer (or a
confirmation of book-entry transfer of such Old Senior Subordinated Notes into
the Senior Subordinated Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Senior Subordinated Letter of Transmittal
(and any other required documents). Unless Old Senior Subordinated Notes being
tendered by the above-described method are deposited with the Senior
Subordinated Exchange Agent within the time period set forth above
(accompanied or preceded by a properly completed Senior Subordinated Letter of
Transmittal and any other required documents), the Company may, at its option,
reject the tender. Copies of the notice of guaranteed delivery ("Senior
Subordinated Notice of Guaranteed Delivery") which may be used by Eligible
Institutions for the purposes described in this paragraph are available from
the Senior Subordinated Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Senior Subordinated
Letter of Transmittal accompanied by the Old Senior Subordinated Notes (or a
confirmation of book-entry transfer of such Old Senior Subordinated Notes into
the Senior Subordinated Exchange Agent's account at the book-entry transfer
facility) is received by the Senior Subordinated Exchange Agent, or (ii) a
Senior Subordinated Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) from an Eligible
Institution is received by the Senior Subordinated Exchange Agent. Issuances
of Senior Subordinated Exchange Notes in exchange for Old Senior Subordinated
Notes tendered pursuant to a Senior Subordinated Notice of Guaranteed Delivery
or letter, telegram or facsimile transmission to similar effect (as provided
above) by an Eligible Institution will be made only against deposit of the
Senior Subordinated Letter of Transmittal (and any other required documents)
and the tendered Old Senior Subordinated Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Senior Subordinated Notes tendered for exchange
will be determined by the Company in its sole discretion, which determination
shall be final and binding. The Company reserves the absolute right to reject
any and all tenders of any particular Old Senior Subordinated Notes not
properly tendered or not to accept any particular Old Senior Subordinated
Notes which acceptance might, in the judgment of the Company or its counsel,
be unlawful. The Company also reserves the absolute right to waive any defects
or irregularities or conditions of the Senior Subordinated Exchange Offer as
to any particular Old Senior Subordinated Notes either before or after the
Senior Subordinated Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Senior Subordinated Notes
in the Senior Subordinated Exchange Offer). The interpretation of the terms
and conditions of the Senior Subordinated Exchange Offer (including the Senior
Subordinated Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Old Senior Subordinated Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Senior Subordinated Exchange
Agent nor any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Old Senior Subordinated
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Senior Subordinated Letter of Transmittal is signed by a person or
persons other than the registered holder or holders of Old Senior Subordinated
Notes, such Old Senior Subordinated Notes must be endorsed or accompanied by
appropriate powers of attorney, in either case signed exactly as the name or
names of the registered holder or holders appear on the Old Senior
Subordinated Notes.
If the Senior Subordinated Letter of Transmittal or any Old Senior
Subordinated Notes or powers of attorney are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others
125
<PAGE>
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority to so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Senior Subordinated Exchange Notes acquired pursuant to the Senior
Subordinated Exchange Offer are being acquired in the ordinary course of
business of the person receiving such Senior Subordinated Exchange Notes,
whether or not such person is the holder, that neither the holder nor any such
other person has an arrangement or understanding with any person to
participate in the distribution of such Senior Subordinated Exchange Notes and
that neither the holder nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company, or if it is an
affiliate it will comply with the registration and prospectus requirements of
the Securities Act to the extent applicable.
Each broker-dealer that receives Senior Subordinated Exchange Notes for its
own account in exchange for Old Senior Subordinated Notes where such Old
Senior Subordinated Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of such Senior
Subordinated Exchange Notes. Lehman Brothers Inc.'s ability to make a market
in the Senior Subordinated Exchange Notes will be subject to the availability
of a current market-maker prospectus. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE SENIOR SUBORDINATED LETTER OF TRANSMITTAL
The Senior Subordinated Letter of Transmittal contains, among other things,
the following terms and conditions, which are part of the Senior Subordinated
Exchange Offer:
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Senior Subordinated Notes to the Company and irrevocably
constitutes and appoints the Senior Subordinated Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Old Senior Subordinated
Notes to be assigned, transferred and exchanged. The Transferor represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the Old Senior Subordinated Notes and to acquire Senior Subordinated
Exchange Notes issuable upon the exchange of such tendered Notes, and that,
when the same are accepted for exchange, the Company will acquire good and
unencumbered title to the tendered Old Senior Subordinated Notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Senior Subordinated
Exchange Agent or the Company to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Senior Subordinated Notes or
transfer ownership of such Old Senior Subordinated Notes on the account books
maintained by a book-entry transfer facility. The Transferor further agrees
that acceptance of any tendered Old Senior Subordinated Notes by the Company
and the issuance of Senior Subordinated Exchange Notes in exchange therefor
shall constitute performance in full by the Company of certain of its
obligations under the Senior Subordinated Registration Rights Agreement. All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon
the heirs, legal representatives, successors, assigns, executors and
administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Senior Subordinated Exchange Notes offered hereby in the ordinary course of
such Transferor's business and that such Transferor has no arrangement with
any person to participate in the distribution of such Senior Subordinated
Exchange Notes. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of
Senior Subordinated Exchange Notes. Each Transferor which is a broker-dealer
receiving Senior Subordinated Exchange Notes for its own account must
acknowledge that it will deliver a prospectus in connection with any resale of
such Senior Subordinated Exchange Notes. By so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. In connection with the
126
<PAGE>
offering of the Old Senior Subordinated Notes, the Company agreed to file and
maintain, subject to certain limitations, a registration statement that would
allow Lehman Brothers Inc. to engage in market-making transactions with
respect to the Senior Subordinated Exchange Notes. The Company has agreed to
bear registration expenses incurred under such agreement.
WITHDRAWAL RIGHTS
Tenders of Old Senior Subordinated Notes may be withdrawn at any time prior
to the Senior Subordinated Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter
must be received by the Senior Subordinated Exchange Agent at the address set
forth herein prior to the Senior Subordinated Expiration Date. Any such notice
of withdrawal must (i) specify the name of the person having tendered the Old
Senior Subordinated Notes to be withdrawn (the "Depositor"), (ii) identify the
Old Senior Subordinated Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Old Senior Subordinated Notes),
(iii) specify the principal amount of Old Senior Subordinated Notes to be
withdrawn, (iv) include a statement that such holder is withdrawing his
election to have such Old Senior Subordinated Notes exchanged, (v) be signed
by the holder in the same manner as the original signature on the Senior
Subordinated Letter of Transmittal by which such Old Senior Subordinated Notes
were tendered or as otherwise described above (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Senior Subordinated Note Trustee under the Senior Subordinated Note
Indenture register the transfer of such Old Senior Subordinated Notes into the
name of the person withdrawing the tender and (vi) specify the name in which
any such Old Senior Subordinated Notes are to be registered, if different from
that of the Depositor. The Senior Subordinated Exchange Agent will return the
properly withdrawn Old Senior Subordinated Notes promptly following receipt of
notice of withdrawal. If Old Senior Subordinated Notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal
must specify the name and number of the account at the book-entry transfer
facility to be credited with the withdrawn Old Senior Subordinated Notes or
otherwise comply with the book-entry transfer facility procedure. All
questions as to the validity of notices of withdrawals, including time of
receipt, will be determined by the Company and such determination will be
final and binding on all parties.
Any Old Senior Subordinated Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Senior Subordinated
Exchange Offer. Any Old Senior Subordinated Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Old Senior
Subordinated Notes tendered by book-entry transfer into the Senior
Subordinated Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such Old
Senior Subordinated Notes will be credited to an account with such book-entry
transfer facility specified by the holder) as soon as practicable after
withdrawal, rejection of tender or termination of the Senior Subordinated
Exchange Offer. Properly withdrawn Old Senior Subordinated Notes may be
retendered by following one of the procedures described under "--Procedures
for Tendering Old Senior Subordinated Notes" above at any time on or prior to
the Senior Subordinated Expiration Date.
ACCEPTANCE OF OLD SENIOR SUBORDINATED NOTES FOR EXCHANGE; DELIVERY OF SENIOR
SUBORDINATED EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Senior
Subordinated Exchange Offer, the Company will accept, promptly on the Senior
Subordinated Exchange Date, all Old Senior Subordinated Notes properly
tendered and will issue the Senior Subordinated Exchange Notes promptly after
such acceptance. See " --Certain Conditions to the Senior Subordinated
Exchange Offer" below. For purposes of the Senior Subordinated Exchange Offer,
the Company shall be deemed to have accepted properly tendered Old Senior
Subordinated Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Senior Subordinated Exchange Agent.
127
<PAGE>
For each Old Senior Subordinated Note accepted for exchange, the holder of
such Old Senior Subordinated Note will receive a Senior Subordinated Exchange
Note having a principal amount equal to that of the surrendered Old Senior
Subordinated Note.
In all cases, issuance of Senior Subordinated Exchange Notes for Old Senior
Subordinated Notes that are accepted for exchange pursuant to the Senior
Subordinated Exchange Offer will be made only after timely receipt by the
Senior Subordinated Exchange Agent of certificates for such Old Senior
Subordinated Notes or a timely book-entry confirmation of such Old Senior
Subordinated Notes into the Senior Subordinated Exchange Agent's account at
the book-entry transfer facility, a properly completed and duly executed
Senior Subordinated Letter of Transmittal and all other required documents. If
any tendered Old Senior Subordinated Notes are not accepted for any reason set
forth in the terms and conditions of the Senior Subordinated Exchange Offer or
if Old Senior Subordinated Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Old
Senior Subordinated Notes will be returned without expense to the tendering
holder thereof (or, in the case of Old Senior Subordinated Notes tendered by
book-entry transfer into the Senior Subordinated Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such non-exchanged Old Senior Subordinated Notes
will be credited to an account maintained with such book-entry transfer
facility) as promptly as practicable after the expiration of the Senior
Subordinated Exchange Offer.
CERTAIN CONDITIONS TO THE SENIOR SUBORDINATED EXCHANGE OFFER
Notwithstanding any other provision of the Senior Subordinated Exchange
Offer, or any extension of the Senior Subordinated Exchange Offer, the Company
shall not be required to accept for exchange, or to issue Senior Subordinated
Exchange Notes in exchange for, any Old Senior Subordinated Notes and may
terminate or amend the Senior Subordinated Exchange Offer (by oral or written
notice to the Senior Subordinated Exchange Agent or by a timely press release)
if at any time before the acceptance of such Old Senior Subordinated Notes for
exchange or the exchange of the Senior Subordinated Exchange Notes for such
Old Senior Subordinated Notes, any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Senior
Subordinated Exchange Offer which, in the sole judgment of the Company,
might materially impair the ability of the Company to proceed with the
Senior Subordinated Exchange Offer or have a material adverse effect on the
contemplated benefits of the Senior Subordinated Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Senior Subordinated Notes
or the Senior Subordinated Exchange Notes or that may materially impair the
contemplated benefits of the Senior Subordinated Exchange Offer to the
Company; or
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Senior Subordinated Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of
the Senior Subordinated Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law, statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Senior Subordinated
Exchange Offer or have a material adverse effect on the contemplated
benefits of the Senior Subordinated Exchange Offer to the Company; or
128
<PAGE>
(f) there shall occur a change in the current interpretation by the staff
of the Commission which permits the Senior Subordinated Exchange Notes
issued pursuant to the Senior Subordinated Exchange Offer in exchange for
Old Senior Subordinated Notes to be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such Senior
Subordinated Exchange Notes are acquired in the ordinary course of such
Holders' business and such holders have no arrangement with any person to
participate in the distribution of such Senior Subordinated Exchange Notes;
or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any governmental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Senior Subordinated Exchange Offer, (iii)
a declaration of a banking moratorium or any suspension of payments in
respect of banks by Federal or state authorities in the United States
(whether or not mandatory), (iv) a commencement of a war, armed hostilities
or other international or national crisis directly or indirectly involving
the United States, (v) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood of
affecting, the extension of credit by banks or other leading institutions
in the United States, or (vi) in the case of any of the foregoing existing
at the time of the commencement of the Senior Subordinated Exchange Offer,
a material acceleration or worsening thereof.
The Company expressly reserves the right to terminate the Senior
Subordinated Exchange Offer and not accept for exchange any Old Senior
Subordinated Notes upon the occurrence of any of the foregoing conditions
(which represent all of the material conditions to the acceptance by the
Company of properly tendered Old Senior Subordinated Notes). In addition, the
Company may amend the Senior Subordinated Exchange Offer at any time prior to
the Senior Subordinated Expiration Date if any of the conditions set forth
above occur. Moreover, regardless of whether any of such conditions has
occurred, the Company may amend the Senior Subordinated Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the
Old Senior Subordinated Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time. If the Company waives or
amends the foregoing conditions, it will, if required by law, extend the
Senior Subordinated Exchange Offer for a minimum of five business days from
the date that the Company first gives notice, by public announcement or
otherwise, of such waiver or amendment, if the Senior Subordinated Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be
final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Senior
Subordinated Notes tendered, and no Senior Subordinated Exchange Notes will be
issued in exchange for any such Old Senior Subordinated Notes, if at such time
any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Senior Subordinated Note Indenture under the Trust
Indenture Act of 1939, as amended. In any such event the Company is required
to use every reasonable effort to obtain the withdrawal of any stop order at
the earliest possible time.
The Senior Subordinated Exchange Offer is not conditioned upon any minimum
principal amount of Old Senior Subordinated Notes being tendered for exchange.
129
<PAGE>
SENIOR SUBORDINATED EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as the Senior
Subordinated Exchange Agent for the Senior Subordinated Exchange Offer. All
executed Senior Subordinated Letters of Transmittal should be directed to the
Senior Subordinated Exchange Agent at one of the addresses set forth below:
By Hand/Overnight Courier: By Mail:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Boston, Massachusetts Two International Place Boston,
02102 Attn: Corporate Trust Department Massachusetts 02110 Attn: Corporate
Kellie Mullen Trust Department Kellie Mullen
By Facsimile: (617) 664-5314
Attn.: Corporate Trust Department
Telephone: (617) 664-5587
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Senior Subordinated Letter of Transmittal and
requests for Senior Subordinated Notices of Guaranteed Delivery should be
directed to the Senior Subordinated Exchange Agent at the address and
telephone number set forth in the Senior Subordinated Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE SENIOR SUBORDINATED
LETTER OF TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR
TELEX NUMBER OTHER THAN THE ONES SET FORTH ON THE SENIOR SUBORDINATED LETTER
OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Senior Subordinated Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Senior Subordinated Exchange
Offer. The Company, however, will pay the Senior Subordinated Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. The Company will
also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of
this and other related documents to the beneficial owners of the Old Senior
Subordinated Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Senior
Subordinated Exchange Offer will be paid by the Company and are estimated in
the aggregate to be approximately $ which includes fees and
expenses of the Senior Subordinated Exchange Agent, Senior Subordinated
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Senior Subordinated Exchange Offer
other than those contained in this Prospectus. If given or made, such
information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the
respective dates as of which information is given herein. The Senior
Subordinated Exchange Offer is not being made to (nor will tenders be accepted
from or on behalf of) holders of Old Senior Subordinated Notes in any
jurisdiction in which the making of the Senior Subordinated Exchange Offer or
the acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, at its discretion, take such action as
it may deem necessary to make the Senior Subordinated Exchange Offer in any
such jurisdiction and extend the Senior Subordinated
130
<PAGE>
Exchange Offer to holders of Old Senior Subordinated Notes in such
jurisdiction. In any jurisdiction in which the securities laws or blue sky
laws of which require the Senior Subordinated Exchange Offer to be made by a
licensed broker or dealer, the Senior Subordinated Exchange Offer is being
made on behalf of the Company by one or more registered brokers or dealers
which are licensed under the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Senior Subordinated Notes pursuant to the Senior Subordinated Exchange
Offer. If, however, certificates representing Senior Subordinated Exchange
Notes or Old Senior Subordinated Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Senior Subordinated
Notes tendered, or if tendered Old Senior Subordinated Notes are registered in
the name of any person other than the person signing the Senior Subordinated
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old Senior Subordinated Notes pursuant to the Senior
Subordinated Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Senior Subordinated
Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
ACCOUNTING TREATMENT
The Senior Subordinated Exchange Notes will be recorded at the carrying
value of the Old Senior Subordinated Notes as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss
for accounting purposes will be recognized by the Company upon the exchange of
Senior Subordinated Exchange Notes for Old Senior Subordinated Notes. Expenses
incurred in connection with the issuance of the Senior Subordinated Exchange
Notes will be amortized over the term of the Senior Subordinated Exchange
Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Senior Subordinated Notes who do not exchange their Old
Senior Subordinated Notes for Senior Subordinated Exchange Notes pursuant to
the Senior Subordinated Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Senior Subordinated Notes as set forth in
the legend thereon. Old Senior Subordinated Notes not exchanged pursuant to
the Senior Subordinated Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, Old Senior Subordinated Notes may not
be offered or sold unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. The Company does not currently
anticipate that it will register the Old Senior Subordinated Notes under the
Securities Act.
Participation in the Senior Subordinated Exchange Offer is voluntary, and
holders of Old Senior Subordinated Notes should carefully consider whether to
participate. Holders of Old Senior Subordinated Notes are urged to consult
their financial and tax advisors in making their own decision on what action
to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Senior Subordinated Notes pursuant to the terms of, this
Senior Subordinated Exchange Offer, the Company will have fulfilled a covenant
contained in the Senior Subordinated Registration Rights Agreement. Holders of
Old Senior Subordinated Notes who do not tender their Old Senior Subordinated
Notes in the Senior Subordinated Exchange Offer will continue to hold such Old
Senior Subordinated Notes and will be entitled to all the rights and
limitations applicable thereto under the Senior Subordinated Note Indenture,
except for any such rights under the Senior Subordinated Registration Rights
Agreement that by their terms terminate or cease to have further effectiveness
as a result of the making of this Senior Subordinated Exchange Offer. All
untendered Old Senior Subordinated Notes will continue to be subject to the
restrictions on transfer set forth in the Senior Subordinated Note Indenture.
To the extent that Old Senior Subordinated Notes are tendered and accepted in
the Senior
131
<PAGE>
Subordinated Exchange Offer, the trading market for untendered Old Senior
Subordinated Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Senior Subordinated Note Indenture, untendered Old Senior Subordinated Notes
in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company has no present plan to acquire any
Old Senior Subordinated Notes which are not tendered in the Senior
Subordinated Exchange Offer.
RESALE OF SENIOR SUBORDINATED EXCHANGE NOTES
The Company is making the Senior Subordinated Exchange Offer in reliance on
the position of the staff of the Commission as set forth in certain
interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can
be no assurance that the Staff would make a similar determination with respect
to the Senior Subordinated Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff, the
Company believes that the Senior Subordinated Exchange Notes issued pursuant
to the Senior Subordinated Exchange Offer in exchange for Old Senior
Subordinated Notes may be offered for resale, resold and otherwise transferred
by a Holder (other than any Holder who is a broker-dealer or an "affiliate" of
the Company within the meaning of Rule 405 of the Securities Act) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such Senior Subordinated Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Senior Subordinated Exchange Notes. However, any holder who is an
"affiliate" of the Company or who has an arrangement or understanding with
respect to the distribution of the Senior Subordinated Exchange Notes to be
acquired pursuant to the Senior Subordinated Exchange Offer, or any broker-
dealer who purchased Old Senior Subordinated Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities
Act (i) could not rely on the applicable interpretations of the staff and (ii)
must comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Senior Subordinated
Notes that were acquired for its own account as a result of market-making or
other trading activities may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of Senior Subordinated Exchange Notes. Each such broker-dealer that receives
Senior Subordinated Exchange Notes for its own account in exchange for Old
Senior Subordinated Notes, where such Old Senior Subordinated Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge in the Senior Subordinated Letter
of Transmittal that it will deliver a prospectus in connection with any resale
of such Senior Subordinated Exchange Notes. Lehman Brothers Inc.'s ability to
make a market in the Senior Subordinated Exchange Notes will be subject to the
availability of a current market-maker prospectus. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Senior Subordinated Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with. The Company has agreed, pursuant to the Senior Subordinated Registration
Rights Agreement and subject to certain specified limitations therein, to
register or qualify the Senior Subordinated Exchange Notes for offer or sale
under the securities or blue sky laws of such jurisdictions as any holder of
the Senior Subordinated Exchange Notes reasonably requests in writing. Such
registration or qualification may require the imposition of restrictions or
conditions (including suitability requirements for offerees or purchasers) in
connection with the offer or sale of any Senior Subordinated Exchange Notes.
132
<PAGE>
DESCRIPTION OF THE SENIOR EXCHANGE NOTES
The following is a summary of the material terms of the Senior Exchange
Notes and is qualified in its entirety by reference to the Indenture (the
"Senior Notes Indenture") between the Company and State Street Bank and Trust
Company, as trustee (the "Senior Note Trustee").
GENERAL
The Old Senior Notes were issued and the Senior Exchange Notes will be
issued pursuant to the Senior Note Indenture. The terms of the Senior Exchange
Notes include those stated in the Senior Note Indenture and those made part of
the Senior Note Indenture by reference to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"). The Senior Exchange Notes are subject to all such
terms, and Holders of Senior Exchange Notes are referred to the Senior Note
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Senior Note Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Senior Note Indenture, including the definitions therein of certain terms used
below. Copies of the proposed form of Senior Note Indenture and Senior
Registration Rights Agreement are available as set forth below under
"Available Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to P&L Coal Holdings
Corporation and not to any of its Subsidiaries.
On May 18, 1998, the Company issued $400.0 million aggregate principal
amount of Old Senior Notes under the Senior Note Indenture. The terms of the
Senior Exchange Notes are identical in all material respects to the Old Senior
Notes, except for certain transfer restrictions and registration and other
rights relating to the exchange of the Old Senior Notes for Senior Exchange
Notes. The Senior Note Trustee will authenticate and deliver Senior Exchange
Notes for original issue only in exchange for a like principal amount of Old
Senior Notes. Any Old Senior Notes that remain outstanding after the
consummation of the Senior Exchange Offer, together with the Senior Exchange
Notes, will be treated as a single class of securities under the Senior Note
Indenture. Accordingly, all references herein to specified percentages in
aggregate principal amount of the outstanding Senior Exchange Notes shall be
deemed to mean, at any time after the Senior Exchange Offer is consummated,
such percentage in aggregate principal amount of the Old Senior Notes and
Senior Exchange Notes then outstanding.
The Senior Exchange Notes will be general unsecured obligations of the
Company and will rank equally in right of payment with all current and future
senior Indebtedness of the Company, including the Senior Credit Facilities.
However, the Company and its Restricted Subsidiaries are parties to Senior
Credit Facilities and all borrowings thereunder are secured by a first
priority Lien on certain of the assets of the Company and its Restricted
Subsidiaries. As a result, the Senior Exchange Notes are effectively
subordinated to the Senior Credit Facilities to the extent of such collateral.
As of June 30, 1998, $920.0 million was outstanding under the Senior Credit
Facilities. The Senior Note Indenture permits substantial additional
borrowings under the Senior Credit Facilities in the future. See "Risk
Factors--Risks Relating to the Notes--Ranking--Secured Indebtedness; Effective
Subordination."
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Senior Exchange
Notes. The Senior Exchange Notes will be effectively subordinated to all
Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of the Company's Subsidiaries. Any right of the Company
to receive assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the Senior Exchange
Notes to participate in those assets) will be effectively subordinated to the
claims of that Subsidiary's creditors, except to the extent that the Company
is itself recognized as a creditor of such Subsidiary, in which case the
claims of the Company would still be subordinate to any security in the assets
of such Subsidiary and any indebtedness of such Subsidiary senior to that held
by the Company. As of June 30, 1998, the Company's Subsidiaries had
approximately $5,665.4 million of Indebtedness (including trade payables, land
reclamation and environmental liabilities, workers' compensation liabilities
and retiree health care liabilities). See "Risk Factors--Risks Relating to the
Notes--Holding Company Structure; Effective Subordination."
133
<PAGE>
All of the Company's Subsidiaries other than Citizens Power and its
Subsidiaries are Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants set forth in the Senior Note
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount to $550.0
million, of which $400.0 million was issued in the Offering, and will mature
on May 15, 2008. Interest on the Senior Exchange Notes will accrue at the rate
of 8 7/8% per annum and will be payable semi-annually in arrears on May 15 and
November 15, commencing on November 15, 1998, to Holders of record on the
immediately preceding May 1 and November 1. Additional Senior Notes may be
issued from time to time after the Offering, subject to the provisions of the
Senior Note Indenture described below under the caption "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock." Interest on the
Senior Exchange Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from May 18, 1998. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal, premium, if any, and interest and Liquidated Damages, if
any, on the Senior Exchange Notes will be payable at the office or agency of
the Company maintained for such purpose within the City and State of New York
or, at the option of the Company, payment of interest and Liquidated Damages,
if any, may be made by check mailed to the Holders of the Senior Exchange
Notes at their respective addresses set forth in the register of Holders of
Senior Exchange Notes; provided that all payments of principal, premium,
interest and Liquidated Damages, if any, with respect to Senior Exchange Notes
the Holders of which have given wire transfer instructions to the Company will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Senior Note Trustee maintained for such purpose. The Senior Exchange Notes
will be issued in denominations of $1,000 and integral multiples thereof.
SENIOR SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Exchange Notes are fully
and unconditionally, and jointly and severally, guaranteed (the "Senior
Subsidiary Guarantees") by the Senior Note Guarantors. The obligations of each
Senior Note Guarantor under its Senior Subsidiary Guarantee will be limited to
the maximum amount that would not constitute a fraudulent conveyance under
applicable law. See "Risk Factors--Risks Relating to the Notes--Fraudulent
Conveyance Matters." Notwithstanding the foregoing, no Subsidiary of the
Company will be required to endorse a Senior Subsidiary Guarantee unless such
Subsidiary is required to, and does, simultaneously execute a Guarantee of the
Senior Credit Facilities.
As of October 6, 1998, the Senior Subsidiary Guarantors were: Affinity
Mining Company, Arid Operations Inc., Big Sky Coal Company, Blackrock First
Capital Corporation, Bluegrass Coal Company, Caballo Coal Company, Charles
Coal Company, Coal Properties Corp., Colony Bay Coal Company, Cook Mountain
Coal Company, Cottonwood Land Company, Darius Gold Mine, Inc., EACC Camps,
Inc., Eastern Associated Coal Corp., Eastern Royalty Corp., Gold Fields Chile,
S.A., Gold Fields Mining Corporation , Gold Fields Operating Co.--Oritz, Grand
Eagle Mining, Inc., Hayden Gulch Terminal, Inc., Independence Material
Handling Company, Interior Holdings Corp., James River Coal Terminal Company,
Juniper Coal Company, Kayenta Mobile Home Park, Inc., Martinka Coal Company,
Midco Supply and Equipment Corporation, Mountain View Coal Company, North Page
Coal Corp., Ohio County Coal Company, Patriot Coal Company L.P., Peabody
America, Inc., Peabody COALSALES Company, Peabody COALTRADE, Inc., Peabody
Coal Company, Peabody Development Company, Peabody Energy Solutions, Inc.,
Peabody Holding Company, Inc., Peabody Natural Resources Company, Peabody
Terminals, Inc., Peabody Venezuela Coal Corp., Peabody Western Coal Company,
Pine Ridge Coal Company, Power River Coal Company, Rio Escondido Coal Corp.,
Seneca Coal Company, Sentry Mining Company, Snowberry Land Company, Sterling
Smokeless Coal Company, and Thoroughbred, L.L.C.
134
<PAGE>
The Senior Exchange Notes will not be guaranteed by certain of the Company's
Domestic Subsidiaries or by any Foreign Subsidiaries of the Company. For the
fiscal year ended March 31, 1998, after giving effect to the Transactions, the
Non-Guarantor Subsidiaries accounted for 11% and 20% of pro forma revenues and
EBITDA, respectively, and, as of March 31, 1998, the Non-Guarantor
Subsidiaries accounted for 27% of pro forma assets. The claims of creditors
(including trade creditors) of any Non-Guarantor Subsidiary will generally
have priority as to the assets of such Subsidiaries over the claims of the
holders of the Senior Exchange Notes. As of June 30, 1998, the amount of
liabilities of such Non-Guarantor Subsidiaries was approximately $1,724.1
million.
The Senior Note Indenture provides that no Senior Note Guarantor may
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 the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Senior Note
Guarantor) assumes all the obligations of such Senior Note Guarantor pursuant
to a supplemental indenture in form and substance reasonably satisfactory to
the Senior Note Trustee, under the Senior Exchange Notes, the Senior Note
Indenture and the Senior Registration Rights Agreement; (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists; and
(iii) the Company would be permitted by virtue of the Company's pro forma
Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock."
The Senior Note Indenture provides that in the event of (a) a sale or other
disposition of all of the assets of any Senior Note Guarantor, by way of
merger, consolidation or otherwise, (b) a sale or other disposition of all of
the capital stock of any Senior Note Guarantor or (c) the designation of a
Senior Note Guarantor as an Unrestricted Subsidiary in accordance with the
terms of the Senior Note Indenture, then such Senior Note Guarantor (in the
event of a sale or other disposition, by way of such a 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 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 any such sale or other
disposition are applied in accordance with the applicable provisions of the
Senior Note Indenture and any such designation of a Senior Note Guarantor as
an Unrestricted Subsidiary complies with all applicable covenants. See
"Repurchase at the Option of Holders--Asset Sales."
"Senior Note Guarantors" means each of (i) the Company's Domestic
Subsidiaries at the date of the closing of the Acquisition, other than
Citizens Power and the Subsidiaries of Citizens Power at the date of the
Senior Note Indenture and (ii) any other subsidiary that executes a Senior
Subsidiary Guarantee in accordance with the provisions of the Senior Note
Indenture, and their respective successors and assigns.
OPTIONAL REDEMPTION
The Senior Exchange Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice.
Prior to May 15, 2003, the Senior Exchange Notes will be redeemable at a
redemption price equal to 100% of the principal amount thereof plus the
applicable Senior Notes Make Whole Premium, plus, to the extent not included
in the Senior Notes Make Whole Premium, accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption. For purposes of the
foregoing, "Senior Notes Make Whole Premium" means, with respect to a Senior
Exchange Note, an amount equal to the greater of (a) 104.438% of the
outstanding principal amount of such Senior Exchange Note and (b) the excess
of (1) the present value of the remaining interest, premium, if any, and
principal payments due on such Senior Exchange Note as if such Senior Exchange
Note were redeemed on May 15, 2003, computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (2) the outstanding principal
amount of such Senior Exchange Note.
On or after May 15, 2003, the Senior Exchange Notes are redeemable at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Liquidated Damages, if
135
<PAGE>
any, thereon to the applicable redemption date, if redeemed during the twelve-
month period beginning on May 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.......................................................... 104.438%
2004.......................................................... 102.958%
2005.......................................................... 101.479%
2006 and thereafter........................................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
the closing of the Acquisition, the Company may on any one or more occasions
redeem up to 35% of the aggregate principal amount of Senior Exchange Notes
issued under the Senior Note Indenture at a redemption price of 108.875% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of
one or more Equity Offerings; provided that at least 65% of the aggregate
principal amount of Senior Exchange Notes issued remain outstanding
immediately after the occurrence of such redemption (excluding Senior Exchange
Notes held by the Company and its Subsidiaries); and provided, further, that
such redemption shall occur within 120 days of the date of the closing of such
Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Exchange Notes are to be redeemed or
purchased in an offer to purchase at any time, selection of Senior Exchange
Notes for redemption or purchase will be made by the Senior Note Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Exchange Notes are listed, or, if the
Senior Exchange Notes are not so listed, on a pro rata basis, by lot or by
such method as the Senior Note Trustee shall deem fair and appropriate;
provided that no Senior Exchange Notes of $1,000 or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each Holder of Senior
Exchange Notes to be redeemed at its registered address. Notices of redemption
may not be conditional. If any Senior Exchange Note is to be redeemed in part
only, the notice of redemption that relates to such Senior Exchange Note shall
state the portion of the principal amount thereof to be redeemed. A new Senior
Exchange Note in principal amount equal to the unredeemed portion thereof will
be issued in the name of the Holder thereof upon cancellation of the original
Senior Exchange Note. Senior Exchange Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Senior Exchange Notes or portions of them called for
redemption.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Senior Exchange
Notes will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Senior
Exchange Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase (the "Change of Control Payment").
Within ten days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Senior Exchange
Notes on the date specified in such notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed
(the "Change of Control Payment Date"), pursuant to the procedures required by
the Senior Note Indenture and described in such notice. The Company will
comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior
Exchange Notes as a result of a Change of Control.
136
<PAGE>
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Exchange Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with
the Paying Agent an amount equal to the Change of Control Payment in respect
of all Senior Exchange Notes or portions thereof so tendered and (3) deliver
or cause to be delivered to the Senior Note Trustee the Senior Exchange Notes
so accepted together with an Officers' Certificate stating the aggregate
principal amount of Senior Exchange Notes or portions thereof being purchased
by the Company. The Paying Agent will promptly mail to each Holder of Senior
Exchange Notes so tendered the Change of Control Payment for such Senior
Exchange Notes, and the Senior Note Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Senior
Exchange Note equal in principal amount to any unpurchased portion of the
Senior Exchange Notes surrendered, if any; provided that each such new Senior
Exchange Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Senior Note Indenture will provide that, prior to complying with
the provisions of this covenant, but in any event within 90 days following a
Change of Control, the Company will either repay all outstanding Senior Debt
other than the Senior Exchange Notes or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt other than the Senior
Exchange Notes to permit the repurchase of Senior Exchange Notes required by
this covenant. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Senior Note Indenture are applicable.
Except as described above with respect to a Change of Control, the Senior Note
Indenture does not contain provisions that permit the Holders of the Senior
Exchange Notes to require that the Company repurchase or redeem the Senior
Exchange Notes in the event of a takeover, recapitalization or similar
transaction.
The Company's other senior indebtedness contains prohibitions on certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of Senior Exchange Notes of their right to require the Company to
repurchase the Senior Exchange Notes could cause a default under such other
senior indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Company. Finally, the Company's
ability to pay cash to the Holders of Senior Exchange Notes upon a repurchase
may be limited by the Company's then existing financial resources. See "Risk
Factors--Risks Relating to the Notes--Limitation on Change of Control Offer."
The Senior Credit Facilities currently prohibit the Company from purchasing
any Senior Exchange Notes or Senior Subordinated Exchange Notes, and also
provide that certain change of control events with respect to the Company
would constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Senior
Exchange Notes, the Company could seek the consent of its lenders to the
purchase of Senior Exchange Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited from purchasing
Senior Exchange Notes. In such case, the Company's failure to purchase
tendered Senior Exchange Notes would constitute an Event of Default under the
Senior Note Indenture which would, in turn, constitute a default under the
Senior Credit Facilities.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Senior Note Indenture applicable to a Change of Control Offer
made by the Company and purchases all Senior Exchange Notes validly tendered
and not withdrawn under such Change of Control Offer or if the Company
exercises its option to purchase the Senior Exchange Notes.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than a Principal or a Related
137
<PAGE>
Party of a Principal (as defined below), (ii) the adoption of a plan relating
to the liquidation or dissolution of the Company, (iii) the consummation of
any transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of
the Company (measured by voting power rather than number of shares) or (iv)
the first day on which a majority of the members of the Board of Directors of
the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Senior Exchange Notes
to require the Company to repurchase such Senior Exchange Notes as a result of
a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of the Company and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the closing of the Acquisition or (ii) was nominated
for election or elected to such Board of Directors with the approval of a
majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
"Principals" means Lehman Brothers Merchant Banking Partners II L.P., any of
its respective Affiliates and executive officers of the Company as of the date
of the closing of the Acquisition.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
ASSET SALES
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(i) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value as determined in good faith by the Company (evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Senior Note Trustee with respect to any Asset Sale determined to have a value
greater that $25.0 million) of the assets or Equity Interests issued or sold
or otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of cash, Cash
Equivalents or Marketable Securities; provided that the following amounts
shall be deemed to be cash: (w) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet), of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Senior Exchange Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability, (x) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from
such transferee that are converted by the Company or such Restricted
Subsidiary into cash within 180 days following the closing of such Asset Sale
(to the extent of the cash received), (y) any Designated Noncash Consideration
received by the Company or any of its Restricted Subsidiaries in such Asset
Sale; provided that the aggregate fair market value (as determined above) of
such Designated Noncash Consideration, taken together with the fair market
value at the time of receipt of all other Designated Noncash Consideration
received pursuant to this clause (y) less the amount of Net Proceeds
previously realized in cash
138
<PAGE>
from prior Designated Noncash Consideration is less than 5% of Total Assets at
the time of the receipt of such Designated Noncash Consideration (with the
fair market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent changes
in value) and (z) Additional Assets received in an exchange of assets
transaction.
Within 360 days after the receipt of any cash Net Proceeds from an Asset
Sale, the Company or such Restricted Subsidiary, at its option, may apply such
cash Net Proceeds, at its option, (a) to repay Indebtedness of the Company or
any Restricted Subsidiary that is not subordinated in right of payment to
Indebtedness under a Credit Facility, (b) to the acquisition of a majority of
the assets of, or a majority of the Voting Stock of, another Permitted
Business, the making of a capital expenditure or the acquisition of other
assets or Investments that are used or useful in a Permitted Business or (c)
to apply the cash Net Proceeds from such Asset Sale to an Investment in
Additional Assets. Any cash Net Proceeds from Asset Sales that are not applied
or invested as provided in the first sentence of this paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $15.0 million, the Company will be required to make an offer to all
Holders of Senior Exchange Notes and all holders of other Indebtedness that
ranks equally with the Senior Exchange Notes containing provisions similar to
those set forth in the Senior Note Indenture with respect to offers to
purchase or redeem with the proceeds of sales of assets (an "Asset Sale
Offer") to purchase the maximum principal amount of Senior Exchange Notes and
such other Indebtedness that may be purchased out of the Excess Proceeds, at
an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the date of purchase, in accordance with the procedures set forth in
the Senior Note Indenture and such other Indebtedness. To the extent that any
Excess Proceeds remain after consummation of an Asset Sale Offer, the Company
may use such Excess Proceeds for any purpose not otherwise prohibited by the
Senior Note Indenture. If the aggregate principal amount of Senior Exchange
Notes and such other Indebtedness tendered into such Asset Sale Offer
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Senior Note Trustee shall select the Senior Exchange Notes and such other
Indebtedness to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on
account of the Company's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries) or to the direct or indirect holders of the Company's or any of
its Restricted Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company; (iii) make any
payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness that is subordinated to the
Senior Exchange Notes or any Senior Subsidiary Guarantee, except a payment of
interest or principal at Stated Maturity or Indebtedness permitted under
clause (viii) of the covenant described under "--Incurrence of Indebtedness
and Issuance of Preferred Stock;" or (iv) make any Restricted Investment (all
such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time
of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge
139
<PAGE>
Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the closing of the Acquisition (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v), (ix), (x) and (xii) of the
next succeeding paragraph), is less than the sum, without duplication, of
(i) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the closing of the Acquisition to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds or
the fair market value of property other than cash received by the Company
since the date of the closing of the Acquisition as a contribution to its
common equity capital or from the issue or sale of Equity Interests of the
Company (other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that either any Existing Citizens
Power Investment or any Restricted Investment that reduced the amount
available for Restricted Payments under this clause (c) is sold for cash or
otherwise liquidated or repaid for cash or any dividend or payment is
received by the Company or a Restricted Subsidiary after the date of the
closing of the Acquisition in respect of such Investment, 100% of the
amount of Net Proceeds or dividends or payments (including the fair market
value of property) received in connection therewith, up to the amount of
the Existing Citizens Power Investment on the date of the closing of the
Acquisition or the Restricted Investment that reduced this clause (c), as
the case may be, and thereafter 50% of the amount of Net Proceeds or
dividends or payments (including the fair market value of property)
received in connection therewith (except that the amount of dividends or
payments received in respect of payments of Obligations in respect of such
Investments, such as taxes, shall not increase the amounts under this
clause (c)), plus (iv) to the extent that any Unrestricted Subsidiary of
the Company is redesignated as a Restricted Subsidiary after the date of
the closing of the Acquisition, 100% of the fair market value of the
Company's Investment in such Subsidiary as of the date of such
redesignation up to the amount of the Restricted Investments made in such
Subsidiary that reduced this clause (c) and 50% of the excess of the fair
market value of the Company's Investment in such Subsidiary as of the date
of such redesignation over (1) the amount of the Restricted Investment that
reduced this clause (c) and (2) any amounts that increased the amount
available as a Permitted Investment; provided, further, that if Citizens
Power or any of its Subsidiaries is designated as a Restricted Subsidiary,
the amount of the fair market value of the Investment therein on the date
of the Senior Note Indenture shall also be credited to this clause (c);
provided, further, that any amounts that increase this clause (c) shall not
duplicatively increase amounts available as Permitted Investments.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Senior Note Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of
the Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence
of Permitted Refinancing Indebtedness;
(iv) dividends or distributions by a Restricted Subsidiary of the
Company so long as, in the case of any dividend or distribution payable
on or in respect of any class or series of securities issued by a
140
<PAGE>
Restricted Subsidiary, the Company or a Restricted Subsidiary receives
at least its pro rata share of such dividend or distribution in
accordance with its Equity Interests in such class or series of
securities;
(v) Investments in Unrestricted Subsidiaries having an aggregate fair
market value not to exceed the amount, at the time of such Investment,
substantially concurrently contributed in cash or Cash Equivalents to
the common equity capital of the Company after the date of the closing
of the Acquisition; provided that any such amount contributed shall be
excluded from the calculation made pursuant to clause (c) above;
(vi) the payment of dividends on the Company's Common Stock,
following the first public offering of the Company's Common Stock after
the date of the closing of the Acquisition, of up to 6% per annum of
the net proceeds received by the Company in such public offering, other
than public offerings with respect to the Company's Common Stock
registered on Form S-8;
(vii) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any present or former employee or
director of the Company (or any of its Restricted Subsidiaries)
pursuant to any management equity subscription agreement or stock
option agreement or any other management or employee benefit plan in
effect as of the date of the closing of the Acquisition; provided that
(A) the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $2.0 million in
any twelve-month period (with unused amounts in any calendar year being
carried over to succeeding calendar years subject to a maximum (without
giving effect to the following proviso) of $5.0 million in any calendar
year); provided further that such amount in any calendar year may be
increased by an amount not to exceed (x) the cash proceeds from the
sale of Equity Interests of the Company or a Restricted Subsidiary to
members of management and directors of the Company and its Subsidiaries
that occurs after the date of the closing of the Acquisition, plus (y)
the cash proceeds of key-man life insurance policies received by the
Company and its Restricted Subsidiaries after the date of the closing
of the Acquisition, less (z) the amount of any Restricted Payments
previously made pursuant to clauses (x) and (y) of this subparagraph
(vii); and, provided further, that cancellation of Indebtedness owing
to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Equity
Interests of the Company or a Restricted Subsidiary will not be deemed
to constitute a Restricted Payment for purposes of this covenant or any
other provision of the Senior Note Indenture and (B) no Default or
Event of Default shall have occurred and be continuing immediately
after such transaction;
(viii) repurchases of Equity Interests deemed to occur upon exercise
of stock options if such Equity Interests represent a portion of the
exercise price of such options;
(ix) the repurchase, redemption or other acquisition or retirement
for value of the Senior Subordinated Exchange Notes pursuant to the
provisions described under the caption "Description of the Senior
Subordinated Exchange Notes--Optional Redemption;" provided that the
amount of any Equity Offering used to effect such a repurchase,
redemption or other acquisition or retirement for value shall be
excluded from the calculation made pursuant to clause (c) above;
(x) the repurchase, redemption or other acquisition or retirement for
value of the Senior Subordinated Exchange Notes pursuant to the
provisions described under the caption "Description of the Senior
Subordinated Exchange Notes--Repurchase at the Option of Holders--
Change of Control" and "Description of the Senior Subordinated Exchange
Notes--Repurchase at the Option of Holders--Asset Sales;" provided
that, as of the date of such repurchase, redemption or other
acquisition or retirement for value, no Default or Event of Default
shall have occurred and be continuing or, with the passage of time,
would occur as a consequence thereof;
(xi) the repurchase, redemption or other acquisition or retirement
for value of the Senior Subordinated Exchange Notes pursuant to the
provisions described under the caption "Description of the Senior
Subordinated Exchange Notes--Escrow of Proceeds; Special Mandatory
Redemption of
141
<PAGE>
Senior Subordinated Exchange Notes;" provided that the amount of any
such repurchase, redemption, acquisition or retirement shall be
excluded from the calculation made pursuant to clause (c) above; and
(xii) other Restricted Payments not otherwise prohibited by this
covenant in an aggregate amount not to exceed $25.0 million under this
clause (xii).
All of the Company's Subsidiaries other than Citizens Power and its
Subsidiaries are Restricted Subsidiaries. The Board of Directors may designate
any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default. For purposes of making such determination, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash) in the Subsidiary so designated will be deemed
to be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements in the definition of "Unrestricted Subsidiary" as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Senior Note Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of
such date under the covenant described under the caption "Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on
a pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would
be in existence following such designation.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any noncash Restricted Payment or any adjustment made
pursuant to paragraph (c) of this covenant shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Senior Note Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $25.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to
the Senior Note Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed.
If any Restricted Investment is sold or otherwise liquidated or repaid or
any dividend or payment is received by the Company or a Restricted Subsidiary
and such amounts may be credited to clause (c) above, then such amounts will
be credited only to the extent of amounts not otherwise included in
Consolidated Net Income and that do not otherwise increase the amount
available as a Permitted Investment.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company may incur
Indebtedness (including Acquired
142
<PAGE>
Debt) or issue shares of Disqualified Stock and the Company's Restricted
Subsidiaries may incur Indebtedness or issue Disqualified Stock or preferred
stock if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock or preferred stock is issued would have
been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or preferred stock
had been issued, as the case may be, at the beginning of such four-quarter
period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of term Indebtedness under Credit
Facilities (and the Guarantee thereof by the Senior Note Guarantors);
provided that the aggregate principal amount of all term Indebtedness
outstanding under this clause (i) after giving effect to such incurrence
does not exceed an amount equal to $920.0 million;
(ii) the incurrence by the Company of revolving credit Indebtedness and
letters of credit (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company and its
Restricted Subsidiaries thereunder) under Credit Facilities (and the
Guarantee thereof by the Senior Note Guarantors); provided that the
aggregate principal amount of all revolving credit Indebtedness outstanding
under this clause (ii) after giving effect to such incurrence does not
exceed an amount equal to $480.0 million;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company, the Senior Note Guarantors and the
Senior Subordinated Note Guarantors of Indebtedness represented by the
Senior Exchange Notes, the Senior Subordinated Exchange Notes, the Senior
Subsidiary Guarantees and the Subordinated Subsidiary Guarantees limited in
aggregate principal amount, without duplication, to amounts outstanding
under the Senior Note Indenture and the Senior Subordinated Note Indenture
as of their respective dates;
(v) (A) the guarantee by the Company or any of the Senior Note Guarantors
of Indebtedness of the Company or a Restricted Subsidiary of the Company or
(B) the incurrence of Indebtedness of a Restricted Subsidiary to the extent
that such Indebtedness is supported by a letter of credit, in each case
that was permitted to be incurred by another provision of this covenant;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (including Capital Lease Obligations) to finance the
acquisition (including by direct purchase, by lease or indirectly by the
acquisition of the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of such acquisition) or improvement of property
(real or personal) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding
pursuant to this clause (vi) and including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (vi), does not exceed an amount equal to
5% of Total Assets at the time of such incurrence;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Senior Note Indenture
to be incurred under the first paragraph hereof or clauses (iii), (iv) or
(vii) of this paragraph;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Senior Subordinated Exchange Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary thereof and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary
143
<PAGE>
thereof shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause (viii);
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred in the ordinary course of business
for the purpose of risk management and not for the purpose of speculation;
(x) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (x), and
the issuance of preferred stock by Unrestricted Subsidiaries;
(xi) the incurrence of Indebtedness solely in respect of performance,
surety and similar bonds or completion or performance guarantees
(including, without limitation, performance guarantees pursuant to coal
supply agreements or equipment leases), to the extent that such incurrence
does not result in the incurrence of any obligation for the payment of
borrowed money to others;
(xii) the incurrence of Indebtedness arising from agreements of the
Company or a Restricted Subsidiary providing for indemnification,
adjustment of purchase price or similar obligations, in each case, incurred
or assumed in connection with the disposition of any business, assets or a
Subsidiary; provided, however that (i) such Indebtedness is not reflected
on the balance sheet of the Company or any Restricted Subsidiary
(contingent obligations referred to in a footnote to financial statements
and not otherwise reflected on the balance sheet will not be deemed to be
reflected on such balance sheet for purposes of this clause (i)) and (ii)
the maximum assumable liability in respect of all such Indebtedness shall
at no time exceed the gross proceeds including noncash proceeds (the fair
market value of such noncash proceeds being measured at the time received
and without giving effect to any subsequent changes in value) actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition;
(xiii) the guarantee by the Company or any of the Senior Note Guarantors
of additional Indebtedness relating to Black Beauty Coal Company not to
exceed $50.0 million in aggregate principal amount outstanding at any one
time under this clause (xiii);
(xiv) the incurrence of Indebtedness relating to the Bengalla Joint
Venture or the Warkworth Associates Joint Venture in an aggregate amount
not to exceed $100.0 million in aggregate principal amount outstanding at
any one time under this clause (xiv); and
(xv) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (xv), not to exceed $250.0
million.
The Senior Note Indenture also provides that the Company will not incur, and
will not permit its Restricted Subsidiaries to incur, any Indebtedness
(including Permitted Debt) that is contractually subordinated in right of
payment to any other Indebtedness of the Company or such Restricted Subsidiary
unless such Indebtedness is also contractually subordinated in right of
payment to the Senior Exchange Notes, or the Senior Subsidiary Guarantees, as
the case may be, on substantially identical terms; provided, however, that no
Indebtedness of the Company or any Restricted Subsidiary shall be deemed to be
contractually subordinated in right of payment to any other Indebtedness of
the Company or any Restricted Subsidiary solely by virtue of being unsecured.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xv) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed
to be an incurrence of
144
<PAGE>
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Fixed Charges of the Company as accrued.
LIENS
The Senior Note Indenture provides that the Company will not and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or otherwise cause or suffer to exist or become effective any
Lien of any kind (other than Permitted Liens) upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
Senior Note Indenture and the Senior Exchange Notes are secured on an equal
and ratable basis with the obligations so secured until such time as such
obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary that is not a Senior
Note Guarantor to (i)(a) pay dividends or make any other distributions to the
Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2)
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets
to the Company or any of its Restricted Subsidiaries. However, the foregoing
restrictions will not apply to encumbrances or restrictions existing under or
by reason of (a) Existing Indebtedness as in effect on the date of the closing
of the Acquisition, (b) the Senior Credit Facilities as in effect as of the
date of the closing of the Acquisition, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the Senior
Credit Facilities as in effect on the date of the closing of the Acquisition,
(c) the Senior Note Indenture, the Senior Subordinated Note Indenture, the
Senior Exchange Notes and the Senior Subordinated Exchange Notes, (d)
applicable law or any applicable rule, regulation or order, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Senior Note Indenture to be incurred, (f)
customary non-assignment provisions in leases and other agreements entered
into in the ordinary course of business and consistent with past practices,
(g) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii)
above on the property so acquired, (h) any agreement for the sale of a
Restricted Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale, (i) Permitted Refinancing Indebtedness, provided
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced, (j)
secured Indebtedness otherwise permitted to be incurred pursuant to the
provisions of the covenant described above under the caption "--Liens" that
limits the right of the debtor to dispose of the assets securing such
Indebtedness, (k) provisions with respect to the disposition or distribution
of assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business, (l) restrictions on cash or
other deposits or net worth imposed by customers or lessors under contracts or
leases entered into in the ordinary course of business and (m) any
encumbrances or restrictions imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in
clauses (a) through (l) above, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are, in the good faith judgment of the Company's Board of
Directors,
145
<PAGE>
not materially more restrictive in the aggregate with respect to such dividend
and other payment restrictions than those (considered as a whole) contained in
the dividend or other payment restrictions prior to such amendment,
modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Senior Note Indenture provides that the Company may not consolidate or
merge with or into (whether or not the Company is the surviving corporation),
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Senior Registration
Rights Agreement, the Senior Exchange Notes and the Senior Note Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Senior Note Trustee; (iii) immediately after such transaction no Default or
Event of Default exists; and (iv) except in the case of a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company,
immediately after giving pro forma effect to such transaction, as if such
transaction had occurred at the beginning of the applicable four-quarter
period, (A) the entity surviving such consolidation or merger would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or (B) the Fixed Charge Coverage Ratio for the
Company or the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made would,
immediately after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, not be less
than such Fixed Charge Coverage Ratio for the Company and its Restricted
Subsidiaries immediately prior to such transaction. The Senior Note Indenture
also provides that the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. The provisions of this covenant will not be
applicable to a sale, assignment, transfer, conveyance or other disposition of
assets between or among the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing clause (iv), (i) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (ii) the Company may merge with an Affiliate that
has no significant assets or liabilities and was formed solely for the purpose
of changing the jurisdiction of organization of the Company in another State
of the United States or the form of organization of the Company so long as the
amount of Indebtedness of the Company and its Restricted Subsidiaries is not
increased thereby and provided that the successor assumes all the obligations
of the Company under the Senior Registration Rights Agreement, the Senior
Exchange Notes and the Senior Note Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Senior Note Trustee.
TRANSACTIONS WITH AFFILIATES
The Senior Note Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction") involving aggregate payments or consideration in
excess of $5.0 million, unless (i) such Affiliate Transaction is on terms that
are materially no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Senior Note Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration
146
<PAGE>
in excess of $10.0 million, a resolution of the Board of Directors set forth
in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $25.0 million, an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment
banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions: (i) any employment agreement or other compensation
plan or arrangement for employees entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
the past practice of the Company or such Restricted Subsidiary, (ii)
transactions between or among the Company and/or its Restricted Subsidiaries,
(iii) payment of reasonable fees to officers, directors, employees or
consultants of the Company, (iv) Restricted Payments that are permitted by,
and Investments that are not prohibited by, the provisions of the Senior Note
Indenture described above under the caption "--Restricted Payments," (v)
indemnification payments made to officers, directors and employees of the
Company or any Restricted Subsidiary pursuant to charter, bylaw, statutory or
contractual provisions; (vi) the payment of customary annual management,
consulting and advisory fees and related expenses to Lehman Merchant Bank and
its Affiliates; (vii) payments by the Company or any of its Restricted
Subsidiaries to Lehman Merchant Bank and its Affiliates made for any financial
advisory, financing, underwriting or placement services or in respect of other
investment banking activities, including, without limitation, in connection
with acquisitions or divestitures which payments are approved by a majority of
the Board of Directors of the Company in good faith; (viii) the existence of,
or the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders' agreement (including any
registration rights agreement or purchase agreement related thereto) to which
it is a party as of the date of the closing of the Acquisition and any similar
agreements which it may enter into thereafter; provided, however, that the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under any future amendment to any such existing
agreement or under any similar agreement entered into after the date of the
closing of the Acquisition shall only be permitted by this clause (viii) to
the extent that the terms of any such amendment or new agreement are not
otherwise disadvantageous to the Holders in any material respect; (ix)
transactions pursuant to the terms of the Transaction Documents in effect on
the date of the closing of the Acquisition; (x) transactions with Unrestricted
Subsidiaries, customers, clients, suppliers, joint venture partners or
purchasers or sellers of goods or services, in each case in the ordinary
course of business (including, without limitation, pursuant to joint venture
agreements) and otherwise in compliance with the terms of the Senior Note
Indenture which are, in the aggregate (taking into account all the costs and
benefits associated with such transactions), materially no less favorable to
the Company or its Restricted Subsidiaries than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person, in the reasonable determination of the
Board of Directors of the Company or the senior management thereof, or are on
terms at least as favorable as might reasonably have been obtained at such
time from an unaffiliated party; (xi) guarantees of performance by the Company
and its Restricted Subsidiaries of Unrestricted Subsidiaries in the ordinary
course of business, except for guarantees of Obligations in respect of
borrowed money; and (xii) pledges of Equity Interests of Unrestricted
Subsidiaries for the benefit of lenders of Unrestricted Subsidiaries.
ADDITIONAL SENIOR SUBSIDIARY GUARANTEES
The Senior Note Indenture provides that if the Company or any of its
Domestic Subsidiaries shall acquire or create another Domestic Subsidiary
after the date of the Senior Note Indenture and such Domestic Subsidiary
provides a guarantee of the Senior Credit Facilities, then such newly acquired
or created Domestic Subsidiary shall execute a supplemental indenture in form
and substance satisfactory to the Senior Note Trustee providing that such
Domestic Subsidiary shall become a Senior Note Guarantor under the Senior Note
Indenture, provided, however, this covenant shall not apply to any Domestic
Subsidiary that has been properly designated as an Unrestricted Subsidiary in
accordance with the Senior Note Indenture for so long as it continues to
constitute an Unrestricted Subsidiary.
147
<PAGE>
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken
as a whole.
PAYMENTS FOR CONSENT
The Senior Note Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Senior Exchange Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Senior Note Indenture or
the Senior Exchange Notes unless such consideration is offered to be paid or
is paid to all Holders of the Senior Exchange Notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
REPORTS
The Senior Note Indenture provides that, whether or not required by the
rules and regulations of the Commission, so long as any Senior Exchange Notes
are outstanding, the Company will furnish to the Holders of Senior Exchange
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
its consolidated Subsidiaries (showing in reasonable detail, either on the
face of the financial statements or in the footnotes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company) and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified
in the Commission's rules and regulations. In addition, following the
consummation of the exchange offer contemplated by the Senior Registration
Rights Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified
in the Commission's rules and regulations (unless the Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the Senior Note Guarantors have agreed that, for so long as any Senior
Exchange Notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Senior Note Indenture provides that each of the following constitutes an
Event of Default: (i) default for 30 days in the payment when due of interest
on, or Liquidated Damages, if any, with respect to, the Senior Exchange Notes;
(ii) default in payment when due of the principal of or premium, if any, on
the Senior Exchange Notes; (iii) failure by the Company or any of its
Subsidiaries to make the offer required or to purchase any of the Senior
Exchange Notes as required under the provisions described under the captions
"--Change of Control," or "--Asset Sales;" (iv) failure by the Company or any
of its Subsidiaries for 30 days after notice to comply with the provisions of
the covenants entitled "--Restricted Payments" or "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" or failure by the Company or
any of its Subsidiaries for 60 days after notice to comply with any of its
other agreements in the Senior Note Indenture or the Senior Exchange Notes;
(v) default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is created
after the date of the Senior Note Indenture, which default
148
<PAGE>
results in the acceleration of such Indebtedness prior to its express maturity
and the principal amount of any such Indebtedness aggregates $50.0 million or
more; (vi) failure by the Company or any of its Restricted Subsidiaries or any
group of Restricted Subsidiaries that, taken as a whole, would be a
Significant Subsidiary to pay final judgments aggregating in excess of $50.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) except as permitted by the Senior Note Indenture, any Senior
Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Senior Note Guarantor, or any Person acting on behalf of any
Senior Note Guarantor, shall deny or disaffirm its obligations under its
Senior Subsidiary Guarantee; (viii) certain events of bankruptcy or insolvency
with respect to the Company, any of its Significant Subsidiaries that are
Restricted Subsidiaries or any group of Restricted Subsidiaries that, taken as
a whole, would be a Significant Subsidiary; and (ix) any failure of the
Company to deposit the required amounts into the Escrow Account pursuant to
the Escrow Letter or any failure of the proceeds of the Escrow Account to be
applied as required under the Escrow Letter.
If any Event of Default occurs and is continuing, the Senior Note Trustee or
the Holders of at least 25% in principal amount of the then outstanding Senior
Exchange Notes may declare all the Senior Exchange Notes to be due and payable
immediately; provided, that so long as any Indebtedness permitted to be
incurred pursuant to the Senior Credit Facilities shall be outstanding, such
acceleration shall not be effective until the earlier of (i) an acceleration
of any such Indebtedness under the Senior Credit Facilities or (ii) five
business days after receipt by the Company of written notice of such
acceleration of the Senior Exchange Notes. Notwithstanding the foregoing, in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary that is a
Restricted Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Senior
Exchange Notes will become due and payable without further action or notice.
Holders of the Senior Exchange Notes may not enforce the Senior Note Indenture
or the Senior Exchange Notes except as provided in the Senior Note Indenture.
Subject to certain limitations, Holders of a majority in principal amount of
the then outstanding Senior Exchange Notes may direct the Senior Note Trustee
in its exercise of any trust or power. The Senior Note Trustee may withhold
from Holders of the Senior Exchange Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Senior Exchange Notes
pursuant to the optional redemption provisions of the Senior Note Indenture,
an equivalent premium shall also become and be immediately due and payable to
the extent permitted by law upon the acceleration of the Senior Exchange
Notes. If an Event of Default occurs prior to May 15, 2003 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding paying the premium upon redemption of
the Senior Exchange Notes prior to May 15, 2003, then the premium specified in
the Senior Note Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Senior Exchange Notes.
The Holders of a majority in aggregate principal amount of the Senior
Exchange Notes then outstanding by notice to the Senior Note Trustee may on
behalf of the Holders of all of the Senior Exchange Notes waive any existing
Default or Event of Default and its consequences under the Senior Note
Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Senior Exchange Notes.
The Company is required to deliver to the Senior Note Trustee annually a
statement regarding compliance with the Senior Note Indenture, and the Company
is required upon becoming aware of any Default or Event of Default, to deliver
to the Senior Note Trustee a statement specifying such Default or Event of
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Person controlling such Person, as such, shall have any liability for
any obligations of the Company under the Senior Exchange Notes,
149
<PAGE>
the Senior Subsidiary Guarantees, the Senior Note Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Senior Exchange Notes by accepting a Senior Exchange Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Exchange 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.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Exchange Notes
("Legal Defeasance") except for (i) the rights of Holders of outstanding
Senior Exchange Notes to receive payments in respect of the principal of,
premium, if any, and interest and Liquidated Damages, if any, on such Senior
Exchange Notes when such payments are due from the trust referred to below,
(ii) the Company's obligations with respect to the Senior Exchange Notes
concerning issuing temporary Senior Exchange Notes, registration of Senior
Exchange Notes, mutilated, destroyed, lost or stolen Senior Exchange Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Senior Note Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Senior
Note Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Senior Note Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Senior
Exchange Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Senior Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Senior Note Trustee, in trust, for
the benefit of the Holders of the Senior Exchange Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the outstanding Senior Exchange
Notes on the stated maturity or on the applicable redemption date, as the case
may be, and the Company must specify whether the Senior Exchange Notes are
being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, the Company shall have delivered to the Senior Note
Trustee an opinion of counsel in the United States reasonably acceptable to
the Senior Note Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Senior Note Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Senior Exchange Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Senior Note Trustee an opinion of counsel in the United
States reasonably acceptable to the Senior Note Trustee confirming that the
Holders of the outstanding Senior Exchange Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than
a Default or Event of Default resulting from the borrowing of funds to be
applied to such deposit) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
effective date of such defeasance (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a
default under any material agreement or instrument (other than the Senior Note
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Senior Note Trustee, at or prior to the effective date
of such defeasance, an opinion of counsel to the effect that at the effective
date of such defeasance, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting
150
<PAGE>
creditors' rights generally; (vii) the Company must deliver to the Senior Note
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Senior Exchange Notes
over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(viii) the Company must deliver to the Senior Note Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Exchange Notes in accordance with
the Senior Note Indenture. The Registrar and the Senior Note Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Senior Note Indenture. The Company is
not required to transfer or exchange any Senior Exchange Note selected for
redemption. Also, the Company is not required to transfer or exchange any
Senior Exchange Note for a period of 15 days before a selection of Senior
Exchange Notes to be redeemed.
The registered Holder of a Senior Exchange Note will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Senior Note
Indenture or the Senior Exchange Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the
Senior Exchange Notes then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or
exchange offer for, Senior Exchange Notes), and any existing default or
compliance with any provision of the Senior Note Indenture or the Senior
Exchange Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Senior Exchange Notes (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Senior Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Exchange Notes held by a non-consenting Holder):
(i) reduce the principal amount of Senior Exchange Notes whose Holders must
consent to an amendment, supplement or waiver, (ii) reduce the principal of or
change the fixed maturity of any Senior Exchange Note or alter the provisions
with respect to the redemption of the Senior Exchange Notes (other than
provisions relating to the covenants described above under the caption "--
Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Senior Exchange Note, (iv) waive a Default
or Event of Default in the payment of principal of or premium, if any, or
interest on the Senior Exchange Notes (except a rescission of acceleration of
the Senior Exchange Notes by the Holders of at least a majority in aggregate
principal amount of the Senior Exchange Notes and a waiver of the payment
default that resulted from such acceleration), (v) make any Senior Exchange
Note payable in money other than that stated in the Senior Exchange Notes,
(vi) make any change in the provisions of the Senior Note Indenture relating
to waivers of past Defaults or the rights of Holders of Senior Exchange Notes
to receive payments of principal of or premium, if any, or interest on the
Senior Exchange Notes, (vii) waive a redemption payment with respect to any
Senior Exchange Note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(viii) make any change in the foregoing amendment and waiver provisions or
(ix) release any Senior Subordinated Note Guarantor from any of its
obligations under its Subordinated Subsidiary Guarantee or this Senior
Subordinated Note Indenture, except in accordance with the terms of this
Senior Subordinated Note Indenture.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Exchange Notes, the Company and the Senior Note Trustee may amend or
supplement the Senior Note Indenture or the Senior Exchange Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Senior
Exchange Notes in addition to or in place of certificated Senior Exchange
Notes, to provide for the assumption of the Company's obligations to Holders
of Senior Exchange Notes in the case of a merger or consolidation or sale of
all or substantially all of
151
<PAGE>
the Company's assets, to make any change that would provide any additional
rights or benefits to the Holders of Senior Exchange Notes or that does not
adversely affect the legal rights under the Senior Note Indenture of any such
Holder, to comply with requirements of the Commission in order to effect or
maintain the qualification of the Senior Note Indenture under the Trust
Indenture Act to provide for the issuance of additional Senior Subordinated
Exchange Notes in accordance with the limitations set forth in this Senior
Subordinated Note Indenture as of the date hereof or to allow any Senior
Subordinated Note Guarantor to execute a supplemental Senior Subordinated Note
Indenture and/or a Subordinated Subsidiary Guarantee with respect to the
Senior Subordinated Exchange Notes.
CONCERNING THE SENIOR NOTE TRUSTEE
The Senior Note Indenture contains certain limitations on the rights of the
Senior Note Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Senior Note Trustee
will be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Senior
Note Trustee, subject to certain exceptions. The Senior Note Indenture
provides that in case an Event of Default shall occur (which shall not be
cured), the Senior Note Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Senior Note Trustee will be under no
obligation to exercise any of its rights or powers under the Senior Note
Indenture at the request of any Holder of Senior Exchange Notes, unless such
Holder shall have offered to the Senior Note Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Senior Exchange Notes will be issued in
fully registered form. Except as described in the next paragraph, the Senior
Exchange Notes initially will be represented by permanent global Senior
Exchange Notes, in definitive, fully registered form without interest coupons
(the "Global Senior Exchange Notes") and will be deposited with the Senior
Note Trustee as custodian for The Depositary Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC.
Except as set forth below, the Global Senior Exchange Notes may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Senior
Exchange Notes may not be exchanged for Senior Exchange Notes in certificated
form except in the limited circumstances described below. See "--Exchange of
Book-Entry Senior Exchange Notes for Certificated Senior Exchange Notes."
Except in the limited circumstances described below, owners of beneficial
interests in the Global Senior Exchange Note will not be entitled to receive
physical delivery of Certificated Senior Exchange Notes (as defined below).
The Senior Note Trustee will act as Paying Agent and Registrar. The Senior
Exchange Notes may be presented for registration of transfer and exchange at
the offices of the Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of the respective settlement systems and are
subject to changes by them from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
152
<PAGE>
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser, banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Senior Exchange Notes, DTC will credit the
accounts of Participants designated by the Initial Purchaser with portions of
the principal amount of the Global Senior Exchange Notes and (ii) ownership of
such interests in the Global Senior Exchange Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants
and the Indirect Participants (with respect to other owners of beneficial
interest in the Global Senior Exchange Notes).
Investors in the Global Senior Exchange Note may hold their interests
therein directly through DTC, if they are Participants in such system, or
indirectly through organizations which are Participants in such system. All
interests in a Global Senior Exchange Note may be subject to the procedures
and requirements of DTC. The laws of some states require that certain persons
take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Senior
Exchange Note to such persons will be limited to that extent. Because DTC can
act only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Senior Exchange Note to pledge such interests to persons
or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL SENIOR EXCHANGE
NOTES WILL NOT HAVE SENIOR EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF SENIOR EXCHANGE NOTES IN CERTIFICATED FORM AND
WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE
SENIOR NOTE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Senior Exchange Note registered in
the name of DTC or its nominee will be payable to DTC in its capacity as the
registered Holder under the Senior Note Indenture. Under the terms of the
Senior Note Indenture, the Company and the Senior Note Trustee will treat the
persons in whose names the Senior Exchange Notes, including the Global Senior
Exchange Notes, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Senior Note Trustee nor any agent of
the Company or the Senior Note Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Senior Exchange Notes, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Senior Exchange Notes or (ii) any other matter relating to the actions
and practices of DTC or any of its Participants or Indirect Participants. DTC
has advised the Company that its current practice, upon receipt of any payment
in respect of securities such as the Senior Exchange Notes (including
principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Exchange Notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the Senior Note
Trustee or the Company. Neither the Company nor the Senior Note Trustee will
be liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the Senior Exchange
153
<PAGE>
Notes, and the Company and the Senior Note Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee for
all purposes.
The Global Senior Exchange Notes are expected to be eligible to trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity
in such interests will, therefore, settle in immediately available funds,
subject in all cases to the rules and procedures of DTC and its Participants.
See "--Same Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Senior Exchange Notes only at the direction of one or
more Participants to whose account DTC has credited the interests in the
Global Senior Exchange Notes and only in respect of such portion of the
aggregate principal amount of the Senior Exchange Notes as to which such
Participant or Participants has or have given such direction. However, if
there is an Event of Default under the Senior Exchange Notes, DTC reserves the
right to exchange the Global Senior Exchange Notes for legended Senior
Exchange Notes in certificated form, and to distribute such Senior Exchange
Notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Senior Exchange Notes among Participants in DTC, it
is under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Senior Note Trustee nor any of their respective agents will have any
responsibility for the performance by DTC or its participants or indirect
participants of its obligations under the rules and procedures governing its
operations.
EXCHANGE OF BOOK-ENTRY SENIOR EXCHANGE NOTES FOR CERTIFICATED SENIOR EXCHANGE
NOTES
A Global Senior Exchange Note is exchangeable for definitive Senior Exchange
Notes in registered certificated form ("Certificated Senior Exchange Notes")
if (i) DTC (x) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Senior Exchange Notes and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Senior Note Trustee in writing that it elects to cause the
issuance of the Certificated Senior Exchange Notes or (iii) there shall have
occurred and be continuing a Default or Event of Default with respect to the
Senior Exchange Notes. In addition, beneficial interests in a Global Senior
Exchange Note may be exchanged for Certificated Senior Exchange Notes upon
request but only upon prior written notice given to the Senior Note Trustee by
or on behalf of DTC in accordance with the Senior Note Indenture. In all
cases, Certificated Senior Exchange Notes delivered in exchange for any Global
Senior Exchange Note or beneficial interests therein will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the depositary (in accordance with its customary procedures).
EXCHANGE OF CERTIFICATED SENIOR EXCHANGE NOTES FOR BOOK-ENTRY SENIOR EXCHANGE
NOTES
Senior Exchange Notes issued in certificated form may be exchanged for
beneficial interests in any Global Senior Exchange Note.
SAME DAY SETTLEMENT AND PAYMENT
The Senior Note Indenture will require that payments in respect of the
Senior Exchange Notes represented by the Global Senior Exchange Notes
(including principal, premium, if any, interest and Liquidated Damages, if
any) be made by wire transfer of immediately available funds to the accounts
specified by the Global Senior Exchange Note Holder. With respect to Senior
Exchange Notes in certificated form, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. The Senior Exchange Notes represented
by the Global Senior
154
<PAGE>
Exchange Notes are expected to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such Senior
Exchange Notes will, therefore, be required by DTC to be settled in
immediately available funds. The Company expects that secondary trading in any
certificated Senior Exchange Notes will also be settled in immediately
available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Note Indenture.
Reference is made to the Senior Note Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Acquisition" means the acquisition by the Company of: (i) all of the common
stock of Peabody Holding Company, (ii) all of the common stock of Gold Fields
Mining Corp., (iii) all of the membership interests of Citizens Power, (iv)
the 1% interests in CL Hartford, L.L.C., a Delaware limited liability company,
and Citizens Power Sales, a Delaware general partnership, both subsidiaries of
Citizens Power, (v) all of the shares of Darex Capital Inc., a company
incorporated in the Republic of Panama, and (vi) all of the ordinary shares of
Peabody Australia LTD, which together with Darex Capital, Inc. owns Peabody
Resources.
"Additional Assets" means (i) any property or assets (other than Capital
Stock, Indebtedness or rights to receive payments over a period greater than
180 days, other than with respect to coal supply contract restructurings) that
is usable by the Company or a Restricted Subsidiary in a Permitted Business or
(ii) the Capital Stock of a Person that is at the time, or becomes, a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Senior Note Indenture described above under the caption "--
Change of Control" and/or the provisions described above under the caption "--
Merger, Consolidation or Sale of Assets" and not by the provisions of the
Asset Sale covenant), and (ii) the issue or sale by the Company or any of its
Restricted Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $5.0 million or (b) for Net Proceeds in excess of $5.0
million. Notwithstanding the foregoing, the following items shall not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a
Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary,
(iii) a Restricted Payment that is permitted by, or an Investment that is not
prohibited by, the covenant described above under the caption "--Restricted
Payments," (iv) a disposition of Cash Equivalents or obsolete equipment, (v)
foreclosures
155
<PAGE>
on assets, (vi) the sale or discount, in each case without recourse, of
accounts receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof and (vii) the factoring
of accounts receivable arising in the ordinary course of business pursuant to
arrangements customary in the industry.
"Bengalla Joint Venture" means Bengalla Mining Co. Pty Limited, Bengalla
Agricultural Co. Pty Limited and Bengalla Coal Sales Co. Pty Ltd. which are
the joint venture companies related to the Bengalla mine in New South Wales,
Australia.
"Black Beauty Coal Company" means the Indiana general partnership among
Thoroughbred, L.L.C., Black Beauty Resources, Inc. and Pittsburg and Midway
Coal Mining Co., and any Person collectively owned by those three partners
including, but not limited to, Eagle Coal Company and Falcon Coal Company.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed or insured by the U.S.
Government or any agency thereof, (b) certificates of deposit and time
deposits with maturities of one year or less from the date of acquisition and
overnight bank deposits of any lender under the Senior Credit Facilities or of
any commercial bank having capital and surplus in excess of $500.0 million,
(c) repurchase obligations of any lender under the Senior Credit Facilities or
of any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than 90 days with respect to securities
issued or fully guaranteed or insured by the United States Government, (d)
commercial paper of a domestic issuer rated at least A-2 by Standard and
Poor's Rating Group ("S&P") or P-2 by Moody's Investors Service, Inc.
("Moody's"), or carrying an equivalent rating by a nationally recognized
rating agency if both of S&P and Moody's cease publishing ratings of
investments, (e) securities with maturities of one year or less from the date
of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States, by any political subdivision or taxing
authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government (as the case may be) are
rated at least A by S&P or A by Moody's, (f) securities with maturities of one
year or less from the date of acquisition backed by standby letters of credit
issued by any lender under the Senior Credit Facilities or any commercial bank
satisfying the requirements of clause (b) of this definition or (g) shares of
money market mutual or similar funds which invest exclusively in assets
satisfying the requirements of clauses (a) through (f) of this definition.
"Citizens Power" means Citizens Power LLC, a Delaware limited liability
company and its direct and indirect Subsidiaries.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) provision
for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (ii) consolidated
interest expense of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs, deferred financing
fees and original issue discount, noncash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred
156
<PAGE>
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus
(iii) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale (to the extent such losses were deducted in
computing such Consolidated Net Income), plus (iv) depreciation, depletion,
amortization (including amortization of goodwill and other intangibles) and
other noncash expenses (including, without limitation, writedowns and
impairment of property, plant and equipment and intangibles and other long-
lived assets) (excluding any such noncash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Restricted Subsidiaries for such period to the extent that
such depreciation, depletion, amortization and other noncash expenses were
deducted in computing such Consolidated Net Income, minus (v) noncash items
increasing such Consolidated Net Income for such period (other than accruals
in accordance with GAAP), plus (vi) without duplication for amounts otherwise
included in Consolidated Cash Flow, the amount of the Company's and its
Restricted Subsidiaries' proportionate share of the Consolidated Cash Flow of
Black Beauty Coal Company and its Subsidiaries for such period (calculated in
proportion to the Company's and its Restricted Subsidiaries common equity
ownership), in each case, on a consolidated basis and determined in accordance
with GAAP. Notwithstanding the foregoing, the provision for taxes on the
income or profits of, and the depreciation, depletion and amortization and
other noncash expenses of, a Restricted Subsidiary that is not a Senior Note
Guarantor shall be added to Consolidated Net Income to compute Consolidated
Cash Flow only to the extent that a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior governmental approval (that has not been obtained),
and without direct or indirect restriction pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Restricted Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income of any Person that is not a Subsidiary or that is
accounted for by the equity method of accounting shall be included only to the
extent of the amount of dividends or distributions paid in cash to the
referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any
Restricted Subsidiary that is not a Senior Note Guarantor shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the cumulative effect of a change in accounting
principles shall be excluded, and (v) the Net Income (or loss) of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries.
"Credit Facilities" means, with respect to the Company or any of its
Restricted Subsidiaries, one or more debt facilities (including, without
limitation, the Senior Credit Facilities) or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow from such
lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time. Indebtedness under Credit Facilities
outstanding on the date on which Senior Notes are first issued and
authenticated under the Senior Note Indenture shall be deemed to have been
incurred on such date in reliance on the exception provided by clause (i) of
the definition of Permitted Indebtedness.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
157
<PAGE>
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Senior Exchange Notes mature; provided, however, that any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to
such provisions unless such repurchase or redemption complies with the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Domestic Subsidiary" means a Subsidiary that is (i) formed under the laws
of the United States of America or a state or territory thereof or (ii) as of
the date of determination, treated as a domestic entity or a partnership or a
division of a domestic entity for United States federal income tax purposes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company, other than any private sales to
an Affiliate of the Company.
"Escrow Account" means the escrow account maintained pursuant to the Escrow
Letter.
"Escrow Letter" means that certain escrow letter dated March 2, 1998, by and
among Lazard Brothers & Co., Limited, The Energy Group PLC, Peabody
Investments Inc. and P&L Coal Holdings Corporation.
"Existing Citizens Power Investment" means the Investments in Citizens Power
by the Company and its Restricted Subsidiaries as of the date of the closing
of the Acquisition.
"Existing Indebtedness" means up to $292.5 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the Senior Credit Facilities, the Senior Exchange
Notes, the Senior Exchange Subordinated Notes and related Guarantees) in
existence on the date of the closing of the Acquisition, until such amounts
are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount,
noncash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letters of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations, but excluding amortization
of debt issuance costs) and (ii) the consolidated interest of such Person and
its Restricted Subsidiaries that was capitalized during such period, and (iii)
any interest expense on the portion of Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by
a Lien on assets of such Person or one of its Restricted Subsidiaries (whether
or not such Guarantee or Lien is called upon) and (iv) the product of (a) all
dividend payments, whether or not in cash, on any series of preferred stock of
such Person or any of its Restricted Subsidiaries, other than dividend
payments on Equity Interests payable solely in Equity Interests of the Company
(other than Disqualified Stock) or to the Company or a Restricted Subsidiary
of
158
<PAGE>
the Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the effective combined federal, state and
local tax rate of such Person for such period, expressed as a decimal, in each
case, for the Company and its Restricted Subsidiaries on a consolidated basis
and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash
Flow of such Person and its Restricted Subsidiaries for such period to the
Fixed Charges of such Person and its Restricted Subsidiaries for such period.
In the event that the referrent Person or any of its Restricted Subsidiaries
incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions and including pro forma cost savings permitted by Article 11 of
Regulation S-X, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be given pro
forma effect as if they had occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, and (iii) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"Foreign Subsidiaries" means Subsidiaries of the Company that are not
Domestic Subsidiaries.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Senior Note Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange, interest rate or commodity swap
agreements, currency exchange, interest rate or commodity cap agreements and
currency exchange, interest rate or commodity collar agreements and (ii) other
agreements or arrangements designed to protect such Person against
fluctuations in currency exchange, interest rates or commodity prices, in each
case for the purpose of risk management and not for speculation.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations, if
and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP,
159
<PAGE>
as well as all Indebtedness of others secured by a Lien on any asset of such
Person (whether or not such Indebtedness is assumed by such Person) and, to
the extent not otherwise included, the Guarantee by such Person of any
indebtedness of any other Person, but excluding from the definition of
"Indebtedness," any of the foregoing that constitutes (1) an accrued expense,
(2) trade payables and (3) Obligations in respect of reclamation, workers'
compensation, including black lung, pensions and retiree health care, in each
case to the extent not overdue for more than 90 days. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness issued with original issue discount,
and (ii) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees, other than performance guarantees
provided for the benefit of Citizens Power, of any portion of Indebtedness or
other obligations), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Restricted
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are (i) traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; and (ii)
issued by a corporation having a total equity market capitalization of not
less than $250.0 million; provided that the excess of (A) the aggregate amount
of securities of any one such corporation held by the Company and any
Restricted Subsidiary over (B) ten times the average daily trading volume of
such securities during the 20 immediately preceding trading days shall be
deemed not to be Marketable Securities; as determined on the date of the
contract relating to such Asset Sale.
"Net Income" means, with respect to any Person, the net income or loss of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
or loss, together with any related provision for taxes on such extraordinary
or nonrecurring gain or loss.
"Net Proceeds" means the aggregate proceeds (cash or property) received by
the Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any noncash consideration received in any Asset Sale) or the
sale or disposition of any Investment, net of the direct costs relating to
such Asset Sale, sale or disposition, (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax
160
<PAGE>
credits or deductions and any tax sharing arrangements), and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Non-Guarantor Subsidiaries" means (i) Citizens Power and its direct and
indirect Subsidiaries, (ii) the Company's future Unrestricted Subsidiaries and
(iii) the Company's current and future Foreign Subsidiaries.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness) other than a pledge of the Equity Interests of any Unrestricted
Subsidiaries, (b) is directly or indirectly liable (as a guarantor or
otherwise) other than by virtue of a pledge of the Equity Interests of any
Unrestricted Subsidiaries, or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than the Senior Exchange Notes being offered hereby) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
"Obligations" means any principal, premium (if any), interest, penalties,
fees, charges, expenses, indemnifications, reimbursement obligations, damages,
Guarantees and other liabilities and amounts payable under the documentation
governing any Indebtedness or in respect thereto.
"Permitted Business" means coal production, coal mining, coal brokering,
coal transportation, mine development, power marketing, electricity
generation, power/energy sales and trading, energy transactions/asset
restructurings, risk management products associated with energy, fuel/power
integration and other energy related businesses, ash disposal, environmental
remediation, coal, natural gas, petroleum or other fossil fuel exploration,
production, marketing, transportation and distribution and other related
businesses, and activities of the Company and its Subsidiaries as of the date
of the closing of the Acquisition and any business or activity that is
reasonably similar thereto or a reasonable extension, development or expansion
thereof or ancillary thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person, in one transaction
or a series of related transactions, is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the Company; (d)
any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of the Company; (e) any Investment
existing on the date of the closing of the Acquisition (an "Existing
Investment") and any Investment that replaces, refinances or refunds an
Existing Investment, provided that the new Investment is in an amount that
does not exceed the amount replaced, refinanced or refunded and is made in the
same Person as the Investment replaced, refinanced or refunded, (f) advances
to employees not in excess of $10.0 million outstanding at any one time; (g)
Hedging Obligations permitted under clause (ix) of the "--Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant; (h) loans and advances
to officers, directors and employees for business-related travel expenses,
moving expenses and other similar expenses, in each case incurred in the
ordinary course of business; (i) any Investment in a Permitted Business
(whether or not an Investment in an Unrestricted Subsidiary) having an
aggregate fair market value, when taken together with all other Investments
made pursuant to this clause (i), does not exceed in aggregate amount the sum
of (1) 10% of Total Assets at the time of such Investment (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value) plus (2) 100% of the Net
Proceeds from the sale or disposition of any Investment previously made
pursuant to this clause (i) or 100% of the amount of any dividend,
distribution or payment from any such Investment, net of income taxes paid or
payable in respect thereof, in each case up to the amount of the Investment
that was made pursuant to this clause (i) and 50% of the amount of such Net
Proceeds or 50% of such dividends, distributions or payments, in each case
received in excess of the amount of the Investments made pursuant to this
clause (i); (j) guarantees (including Guarantees) of Indebtedness permitted
under the covenant "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" (k) any Investment acquired by the Company
161
<PAGE>
or any of its Restricted Subsidiaries (A) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted Subsidiary
in connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts receivable
or (B) as a result of the transfer of title with respect to any secured
Investment in default as a result of a foreclosure by the Company or any of
its Restricted Subsidiaries with respect to such secured Investment; (l) any
Investment in Black Beauty Coal Company having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (l),
that are at the time outstanding not to exceed $50.0 million (with any write-
down or write-off of any such Investment deemed to remain outstanding); (m)
Investments in Citizens Power having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (m), that are
at that time outstanding not to exceed $50.0 million at the time of such
Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value);
(n) any Investment in the Bengalla Joint Venture and the Warkworth Associates
Joint Venture having an aggregate fair market value, taken together with all
other Investments made pursuant to this clause (n), that are at the time
outstanding, not to exceed $25.0 million (with any write-down or write-off of
any such Investment deemed to remain outstanding); (o) that portion of any
Investment by the Company or a Restricted Subsidiary in a Permitted Business
to the extent that the Company or such Restricted Subsidiary will receive in a
substantially concurrent transaction an amount in cash equal to the amount of
such Investment (or the fair market value of such Investment), net of any
obligation to pay taxes or other amounts in respect of the receipt of such
cash; provided that the receipt of such cash does not carry any obligation by
the Company or such Restricted Subsidiary to repay or return such cash; and
(p) the forgiveness or cancellation of any payable due from Citizens Power and
its direct and indirect Subsidiaries outstanding on the date of the closing of
the Acquisition; provided, however, that with respect to any Investment, the
Company may, in its sole discretion, allocate all or any portion of any
Investment to one or more of the above clauses so that the entire Investment
would be a Permitted Investment.
"Permitted Liens" means (i) Liens securing Indebtedness under Credit
Facilities that were permitted by the terms of the Senior Note Indenture to be
incurred; (ii) Liens in favor of the Company; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance or other kinds
of social security; (vii) Liens existing on the date of the closing of the
Acquisition; (viii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be required
in conformity with GAAP shall have been made therefor; (ix) Liens on assets of
Senior Note Guarantors to secure Senior Debt of such Senior Note Guarantors
that was permitted by the Senior Note Indenture to be incurred; (x) Liens
incurred in the ordinary course of business of the Company or any Restricted
Subsidiary of the Company with respect to obligations that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary; (xi) Liens on assets of Foreign
Subsidiaries to secure Indebtedness that was permitted by the Senior Note
Indenture to be incurred; (xii) statutory liens of landlords, mechanics,
suppliers, vendors, warehousemen, carriers or other like Liens arising in the
ordinary course of business; (xiii) judgment Liens not giving rise to an Event
of Default so long as any appropriate legal proceeding that may have been duly
initiated for the review of such judgment shall not have been finally
terminated or the period within which such legal proceeding may be initiated
shall not have expired; (xiv) easements, rights-of-way, zoning and similar
restrictions and other similar encumbrances or title defects incurred or
imposed, as applicable, in the ordinary course of business and
162
<PAGE>
consistent with industry practices which, in the aggregate, are not
substantial in amount, and which do not in any case materially detract from
the value of the property subject thereto (as such property is used by the
Company or its Subsidiaries) or interfere with the ordinary conduct of the
business of the Company or such Subsidiaries; provided, however, that any such
Liens are not incurred in connection with any borrowing of money or any
commitment to loan any money or to extend any credit; (xv) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (vi) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" and other purchase money Liens to finance
property or assets of the Company or any Restricted Subsidiary acquired in the
ordinary course of business; provided that such Liens are only secured by such
property or assets so acquired or improved (including, in the case of the
acquisition of Capital Stock of a Person who becomes a Restricted Subsidiary,
Liens on the assets of the Person whose Capital Stock was so acquired); (xvi)
Liens securing Indebtedness under Hedging Obligations; provided that such
Liens are only secured by property or assets that secure the Indebtedness
subject to the Hedging Obligation; (xvii) Liens to secure Indebtedness
permitted by clause (xv) of the second paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock;" and (xviii)
Liens on the Equity Interests of Unrestricted Subsidiaries securing
obligations of Unrestricted Subsidiaries not otherwise prohibited by the
Senior Note Indenture.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable), plus accrued interest and premium, if any, on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Senior Exchange Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than
the final maturity date of, and is subordinated in right of payment to, the
Senior Exchange Notes on terms at least as favorable to the Holders of Senior
Exchange Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by
the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means those certain Senior Credit Facilities,
dated as of May 18, 1998, by and among the Company, the Senior Note
Guarantors, Lehman Commercial Paper Inc., as Arranger, Syndication Agent and
the Administrative Agent and the other lenders party thereto, including any
related notes, guarantees, collateral documents, letters of credit,
instruments and agreements executed in connection therewith (and any
appendices, exhibits or schedules to any of the foregoing), and in each case
as amended, modified, supplemented, restated, renewed, refunded, replaced,
restructured, repaid or refinanced from time to time (whether with the
original agents and lenders or other agents and lenders or otherwise, and
whether provided under the original credit agreement or other credit
agreements or otherwise).
"Senior Subordinated Note Indenture" means the indenture dated May 18, 1998,
governing the Senior Subordinated Notes.
163
<PAGE>
"Senior Subordinated Exchange Notes" mean the 9 5/8% Series B Senior
Subordinated Exchange Notes of the Company due 2008.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subordinated Subsidiary Guarantees" mean the guarantees endorsed on the
Senior Subordinated Exchange Notes by the Subordinated Note Guarantors.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or Senior Note Trustees thereof is at the time owned or controlled, directly
or indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Total Assets" means the total assets of the Company and its Restricted
Subsidiaries on a consolidated basis determined in accordance with GAAP, as
shown on the most recently available consolidated balance sheet of the Company
and its Restricted Subsidiaries.
"Transaction Documents" means the documents related to (i) the Acquisition
(including, without limitation, the purchase agreement, the participation
agreement and the escrow agreement), (ii) the Senior Credit Facilities and
(iii) the offering of the Old Senior Notes and the Old Senior Subordinated
Notes.
"Treasury Rate" means the yield to maturity at the time of the computation
of the United States Treasury securities with a constant maturity (as compiled
by and published in the most recent Federal Reserve Statistical Release
H.15(519), which has become publicly available at least two Business Days
prior to the date fixed for redemption (or if such Statistical Release is no
longer published, any publicly available source of similar market data)) most
nearly equal to the then remaining average life to May 15, 2003; provided,
however, that if the average life of such Senior Exchange Note is not equal to
the constant maturity of the United States Treasury security for which weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such
yields are given, except that if the average life of such Senior Exchange Note
is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall
be used.
"Unrestricted Subsidiary" means (i) Citizens Power, any direct or indirect
Subsidiary of Citizens Power on the date of the Senior Note Indenture and (ii)
any Subsidiary that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a Board Resolution; but only to the extent that such
Person: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party
to any agreement, contract, arrangement or understanding with the Company or
any Restricted Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries
has any obligation (x) to subscribe for additional Equity Interests in
Unrestricted Subsidiaries or (y) to maintain or preserve such Person's net
worth (except with respect to Permitted Investments); and (d) has not
guaranteed or otherwise
164
<PAGE>
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; provided, however, that the
Company and its Restricted Subsidiaries may guarantee the performance of
Unrestricted Subsidiaries in the ordinary course of business except for
guarantees of Obligations in respect of borrowed money. Any such designation
by the Board of Directors shall be evidenced to the Senior Note Trustee by
filing with the Senior Note Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "Certain Covenants--Restricted
Payments."
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Warkworth Associates Joint Venture" means Warkworth Coal Sales Ltd.,
Warkworth Pastoral Co. Pty, Limited and Warkworth Mining Limited, which are
the joint venture companies related to the Warkworth mine in New South Wales,
Australia.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
165
<PAGE>
DESCRIPTION OF THE SENIOR SUBORDINATED EXCHANGE NOTES
The following is a summary of the material terms of the Senior Subordinated
Exchange Notes and is qualified in its entirety by reference to the Indenture
(the "Senior Subordinated Notes Indenture") between the Company and State
Street Bank and Trust Company, as trustee (the "Senior Subordinated Note
Trustee").
GENERAL
The Senior Subordinated Notes were issued and the Senior Subordinated
Exchange Notes will be issued pursuant to the Senior Subordinated Note
Indenture. The terms of the Senior Subordinated Exchange Notes include those
stated in the Senior Subordinated Note Indenture and those made part of the
Senior Subordinated Note Indenture by reference to the Trust Indenture Act.
The Senior Subordinated Exchange Notes are subject to all such terms, and
Holders of Senior Subordinated Exchange Notes are referred to the Senior
Subordinated Note Indenture and the Trust Indenture Act for a statement
thereof. The following summary of the material provisions of the Senior
Subordinated Note Indenture does not purport to be complete and is qualified
in its entirety by reference to the Senior Subordinated Note Indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of Senior Subordinated Note Indenture and Senior Subordinated
Registration Rights Agreement are available as set forth below under
"Available Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to P&L Coal Holdings
Corporation and not to any of its Subsidiaries.
On May 18, 1998, the Company issued $500.0 million aggregate principal
amount of Old Senior Subordinated Notes under the Senior Subordinated Note
Indenture. The terms of the Senior Subordinated Exchange Notes are identical
in all material respects to the Old Senior Subordinated Notes, except for
certain transfer restrictions and registration and other rights relating to
the exchange of the Old Senior Subordinated Notes for Senior Subordinated
Exchange Notes. The Senior Subordinated Note Trustee will authenticate and
deliver Senior Subordinated Exchange Notes for original issue only in exchange
for a like principal amount of Old Senior Subordinated Notes. Any Old Senior
Subordinated Notes that remain outstanding after the consummation of the
Senior Subordinated Exchange Offer, together with the Senior Subordinated
Exchange Notes, will be treated as a single class of securities under the
Senior Subordinated Note Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Senior
Subordinated Exchange Notes shall be deemed to mean, at any time after the
Senior Subordinated Exchange Offer is consummated, such percentage in
aggregate principal amount of the Old Senior Subordinated Notes and Senior
Subordinated Exchange Notes then outstanding.
The Senior Subordinated Exchange Notes will be general unsecured obligations
of the Company and will be subordinated in right of payment to all current and
future Senior Debt. As of June 30, 1998, the Company had Senior Debt of
$1,320.0 million and $480.0 million of available borrowing capacity under the
Senior Credit Facilities, including letters of credit. The Senior Subordinated
Note Indenture permits the incurrence of additional Senior Debt in the future.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Senior Subordinated
Exchange Notes. The Senior Subordinated Exchange Notes will be effectively
subordinated to all Indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the Senior Subordinated Exchange Notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. As of June 30, 1998, the Company's Subsidiaries had approximately
$5,665.4 million of Indebtedness (including trade payables, land reclamation
and environmental liabilities, workers' compensation liabilities and retiree
health care liabilities). See "Risk Factors--Risks Relating to the Notes--
Holding Company Structure; Effective Subordination."
166
<PAGE>
All of the Company's Subsidiaries other than Citizens Power and its
Subsidiaries were Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants set forth in the Senior
Subordinated Note Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes are limited in aggregate principal amount to
$650.0 million, of which $500.0 million was issued in the Offering, and will
mature on May 15, 2008. Interest on the Senior Subordinated Exchange Notes
will accrue at the rate of 9 5/8% per annum and will be payable semi-annually
in arrears on May 15 and November 15, commencing on November 15, 1998, to
Holders of record on the immediately preceding May 1 and November 1.
Additional Senior Subordinated Notes may be issued from time to time after the
Offering, subject to the provisions of the Senior Subordinated Note Indenture
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." Interest on the Senior
Subordinated Exchange Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from May 18, 1998.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest and Liquidated
Damages, if any, on the Senior Subordinated Exchange Notes will be payable at
the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
Holders of the Senior Subordinated Exchange Notes at their respective
addresses set forth in the register of Holders of Senior Subordinated Exchange
Notes; provided that all payments of principal, premium, interest and
Liquidated Damages, if any, with respect to Senior Subordinated Exchange Notes
the Holders of which have given wire transfer instructions to the Company will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Senior Subordinated Note Trustee maintained for such purpose. The Senior
Subordinated Exchange Notes will be issued in denominations of $1,000 and
integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Senior
Subordinated Exchange Notes will be subordinated in right of payment, as set
forth in the Senior Subordinated Note Indenture, to the prior payment in full
in cash of all Senior Debt, whether outstanding on the date of the Senior
Subordinated Note Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt, whether or not an allowable claim in
any such proceeding) before the Holders of Senior Subordinated Exchange Notes
will be entitled to receive any payment with respect to the Senior
Subordinated Exchange Notes, and until all Obligations with respect to Senior
Debt are paid in full, any distribution to which the Holders of Senior
Subordinated Exchange Notes would be entitled shall be made to the holders of
Senior Debt (except that, in each case, Holders of Senior Subordinated
Exchange Notes may receive and retain Permitted Junior Securities and payments
made from the trust described under "--Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the Senior
Subordinated Exchange Notes (except in Permitted Junior Securities or from the
trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of, premium, if any, or interest on
Designated Senior Debt occurs and is continuing or (ii) any other default
occurs and is continuing with respect to Designated Senior Debt that permits
holders of the Designated Senior Debt as to which such default relates to
accelerate its maturity
167
<PAGE>
(or that would permit such holders to accelerate with the giving of notice or
the passage of time or both) and the Senior Subordinated Note Trustee receives
a notice of such default (a "Payment Blockage Notice") from the Company or the
holders of any Designated Senior Debt. Payments on the Senior Subordinated
Exchange Notes may and shall be resumed (a) in the case of a payment default,
upon the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default
is cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior Debt
has been accelerated. No new period of payment blockage may be commenced with
respect to any particular Designated Senior Debt unless and until (i) 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any, and
interest and Liquidated Damages, if any, on the Senior Subordinated Exchange
Notes that have come due have been paid in full in cash. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Senior Subordinated Note Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
waived for a period of not less than 90 days.
The Senior Subordinated Note Indenture will further require that the Company
promptly notify holders of Senior Debt if payment of the Senior Subordinated
Exchange Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Senior Subordinated Exchange Notes may
recover less ratably than creditors of the Company who are holders of Senior
Debt. On a pro forma basis, after giving effect to the Transactions, the
principal amount of Senior Debt outstanding at March 31, 1998, would have been
approximately $1,318.8 million. The Senior Subordinated Note Indenture will
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Subsidiaries can
incur. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock."
"Designated Senior Debt" means (i) any Indebtedness of the Company or any of
its Restricted Subsidiaries outstanding under Credit Facilities, (ii) any
Indebtedness outstanding under the Senior Note Indenture and (iii) any other
Senior Debt permitted under the Senior Subordinated Note Indenture the
principal amount of which is $25.0 million or more and that has been
designated by the Company as "Designated Senior Debt."
"Permitted Junior Securities" means Equity Interests in the Company or any
Senior Subordinated Note Guarantor or debt securities that are subordinated to
all Senior Debt (and any debt securities issued in exchange for Senior Debt)
to substantially the same extent as, or to a greater extent than, the Senior
Subordinated Exchange Notes and the Subordinated Subsidiary Guarantees are
subordinated to Senior Debt pursuant to Article 10 of the Senior Subordinated
Note Indenture.
"Senior Debt" means (i) all Indebtedness of the Company or any of its
Restricted Subsidiaries outstanding under Credit Facilities and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness permitted to be
incurred by the Company or any of its Restricted Subsidiaries under the terms
of the Senior Subordinated Note Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the Senior Subordinated Exchange Notes
or any Guarantee of the Senior Subordinated Exchange Notes and (iii) all
Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (w) any liability for
federal, state, local or other taxes owed or owing by the Company or any
Subsidiary, (x) any Indebtedness of the Company or any Subsidiary to any
Subsidiaries of the Company or to the Company, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Senior Subordinated Note
Indenture.
SUBORDINATED SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Subordinated Exchange
Notes will be fully and unconditionally, and jointly and severally, guaranteed
(the "Subordinated Subsidiary Guarantees") by the Senior Subordinated Note
Guarantors. The Subordinated Subsidiary Guarantee of each Senior Subordinated
Note
168
<PAGE>
Guarantor will be subordinated to the prior payment in full of all Senior Debt
of the Senior Subordinated Note Guarantors and the amounts for which the
Senior Subordinated Note Guarantors will be liable under the guarantees issued
from time to time with respect to Senior Debt. The obligations of each Senior
Subordinated Note Guarantor under its Subordinated Subsidiary Guarantee will
be limited to the maximum amount that would not constitute a fraudulent
conveyance under applicable law. See "Risk Factors--Risks Relating to the
Notes--Fraudulent Conveyance Matters." Notwithstanding the foregoing, no
Subsidiary of the Company will be required to endorse a Subordinated
Subsidiary Guarantee unless such Subsidiary is required to, and does,
simultaneously execute a Guarantee of the Senior Credit Facilities.
As of October 6, 1998, the current Senior Subordinated Subsidiary Guarantors
were: Affinity Mining Company, Arid Operations Inc., Big Sky Coal Company,
Blackrock First Capital Corporation, Bluegrass Coal Company, Caballo Coal
Company, Charles Coal Company, Coal Properties Corp., Colony Bay Coal Company,
Cook Mountain Coal Company, Cottonwood Land Company, Darius Gold Mine, Inc.,
EACC Camps, Inc., Eastern Associated Coal Corp., Eastern Royalty Corp., Gold
Fields Chile, S.A., Gold Fields Mining Corporation, Gold Fields Operating
Co.--Oritz, Grand Eagle Mining, Inc., Hayden Gulch Terminal, Inc.,
Independence Material Handling Company, Interior Holdings Corp., James River
Coal Terminal Company, Juniper Coal Company, Kayenta Mobile Home Park, Inc.,
Martinka Coal Company, Midco Supply and Equipment Corporation, Mountain View
Coal Company, North Page Coal Corp., Ohio County Coal Company, Patriot Coal
Company L.P., Peabody America, Inc., Peabody COALSALES Company, Peabody
COALTRADE, Inc., Peabody Coal Company, Peabody Development Company, Peabody
Energy Solutions, Inc., Peabody Holding Company, Inc., Peabody Natural
Resources Company, Peabody Terminals, Inc., Peabody Venezuela Coal Corp.,
Peabody Western Coal Company, Pine Ridge Coal Company, Power River Coal
Company, Rio Escondido Coal Corp., Seneca Coal Company, Sentry Mining Company,
Snowberry Land Company, Sterling Smokeless Coal Company, and Thoroughbred,
L.L.C.
The Senior Subordinated Exchange Notes will not be guaranteed by certain of
the Company's Domestic Subsidiaries or by any Foreign Subsidiaries of the
Company. For the fiscal year ended March 31, 1998, after giving effect to the
Transactions, the Non-Guarantor Subsidiaries accounted for 11% and 20% of pro
forma revenues and EBITDA, respectively, and, as of June 30, 1998, the Non-
Guarantor Subsidiaries accounted for 27% of pro forma assets. The claims of
creditors (including trade creditors) of any Non-Guarantor Subsidiary will
generally have priority as to the assets of such Subsidiaries over the claims
of the holders of the Senior Subordinated Exchange Notes. As of June 30, 1998,
the amount of liabilities of such Non-Guarantor Subsidiaries would have been
approximately $1,724.1 million.
The Senior Subordinated Note Indenture provides that no Senior Subordinated
Note Guarantor may 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 the provisions of the
following paragraph, the Person formed by or surviving any such consolidation
or merger (if other than such Senior Subordinated Note Guarantor) assumes all
the obligations of such Senior Subordinated Note Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Senior Subordinated Note Trustee, under the Senior Subordinated Exchange
Notes, the Senior Subordinated Note Indenture and the Senior Subordinated
Registration Rights Agreement; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company
would be permitted by virtue of the Company's pro forma Fixed Charge Coverage
Ratio, immediately after giving effect to such transaction, to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the covenant described below under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock."
The Senior Subordinated Note Indenture provides that in the event of (a) a
sale or other disposition of all of the assets of any Senior Subordinated Note
Guarantor, by way of merger, consolidation or otherwise, (b) a sale or other
disposition of all of the capital stock of any Senior Subordinated Note
Guarantor or (c) the designation of a Senior Subordinated Note Guarantor as an
Unrestricted Subsidiary in accordance with the terms of the Senior
Subordinated Note Indenture, then such Senior Subordinated Note Guarantor (in
the event of a sale or
169
<PAGE>
other disposition, by way of such a 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 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 any such sale or other
disposition are applied in accordance with the applicable provisions of the
Senior Subordinated Note Indenture and any such designation of a Senior
Subordinated Note Guarantor as an Unrestricted Subsidiary complies with all
applicable covenants. See "Repurchase at the Option of Holders--Asset Sales."
"Senior Subordinated Note Guarantors" means each of (i) the Company's
Domestic Subsidiaries at the date of the closing of the Acquisition, other
than Citizens Power and the Subsidiaries of Citizens Power at the date of the
Senior Subordinated Note Indenture and (ii) any other subsidiary that executes
a Subordinated Subsidiary Guarantee in accordance with the provisions of the
Senior Subordinated Note Indenture, and their respective successors and
assigns.
OPTIONAL REDEMPTION
The Senior Subordinated Exchange Notes will be subject to redemption at any
time at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days' notice.
Prior to May 15, 2003, the Senior Subordinated Exchange Notes will be
redeemable at a redemption price equal to 100% of the principal amount thereof
plus the applicable Senior Subordinated Notes Make Whole Premium, plus, to the
extent not included in the Senior Subordinated Notes Make Whole Premium,
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption. For purposes of the foregoing, "Senior Subordinated Notes Make
Whole Premium" means, with respect to a Senior Subordinated Exchange Note, an
amount equal to the greater of (a) 104.813% of the outstanding principal
amount of such Senior Subordinated Exchange Note and (b) the excess of (1) the
present value of the remaining interest, premium, if any, and principal
payments due on such Senior Subordinated Exchange Note as if such Senior
Subordinated Exchange Note were redeemed on May 15, 2003, computed using a
discount rate equal to the Treasury Rate plus 50 basis points, over (2) the
outstanding principal amount of such Senior Subordinated Exchange Note.
On or after May 15, 2003, the Senior Subordinated Exchange Notes are
redeemable at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on May 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.......................................................... 104.813%
2004.......................................................... 103.208%
2005.......................................................... 101.604%
2006 and thereafter........................................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
the closing of the Acquisition, the Company may on any one or more occasions
redeem up to 35% of the aggregate principal amount of Senior Subordinated
Exchange Notes issued under the Senior Subordinated Note Indenture at a
redemption price of 109.625% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the redemption
date, with the net cash proceeds of one or more Equity Offerings; provided
that at least 65% of the aggregate principal amount of Senior Subordinated
Exchange Notes issued remain outstanding immediately after the occurrence of
such redemption (excluding Senior Subordinated Exchange Notes held by the
Company and its Subsidiaries); and provided, further, that such redemption
shall occur within 120 days of the date of the closing of such Equity
Offering.
SELECTION AND NOTICE
If less than all of the Senior Subordinated Exchange Notes are to be
redeemed or purchased in an offer to purchase at any time, selection of Senior
Subordinated Exchange Notes for redemption or purchase will be made
170
<PAGE>
by the Senior Subordinated Note Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Senior
Subordinated Exchange Notes are listed, or, if the Senior Subordinated
Exchange Notes are not so listed, on a pro rata basis, by lot or by such
method as the Senior Subordinated Note Trustee shall deem fair and
appropriate; provided that no Senior Subordinated Exchange Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Senior Subordinated Exchange Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any
Senior Subordinated Exchange Note is to be redeemed in part only, the notice
of redemption that relates to such Senior Subordinated Exchange Note shall
state the portion of the principal amount thereof to be redeemed. A new Senior
Subordinated Exchange Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Senior Subordinated Exchange Note. Senior Subordinated Exchange
Notes called for redemption become due on the date fixed for redemption. On
and after the redemption date, interest ceases to accrue on Senior
Subordinated Exchange Notes or portions of them called for redemption.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Senior
Subordinated Exchange Notes will have the right to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of such Holder's Senior Subordinated Exchange Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company will mail a notice to each Holder describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase Senior Subordinated Exchange Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Senior Subordinated
Note Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Senior Subordinated
Exchange Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Subordinated Exchange Notes or
portions thereof properly tendered pursuant to the Change of Control Offer,
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Senior Subordinated Exchange Notes or portions
thereof so tendered and (3) deliver or cause to be delivered to the Senior
Subordinated Exchange Note Trustee the Senior Subordinated Exchange Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of Senior Subordinated Exchange Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to each
Holder of Senior Subordinated Exchange Notes so tendered the Change of Control
Payment for such Senior Subordinated Exchange Notes, and the Senior
Subordinated Note Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Senior Subordinated Exchange
Note equal in principal amount to any unpurchased portion of the Senior
Subordinated Exchange Notes surrendered, if any; provided that each such new
Senior Subordinated Exchange Note will be in a principal amount of $1,000 or
an integral multiple thereof. The Senior Subordinated Note Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will
either repay all outstanding Senior Debt other than the Senior Exchange Notes
or obtain the requisite consents, if any, under all agreements governing
outstanding Senior Debt other than the Senior Exchange Notes to permit the
repurchase of Senior Subordinated Exchange Notes required by this covenant.
With respect to the Senior Subordinated Exchange Notes, the Company may effect
a Change of Control hereunder pursuant to the terms of the Senior Subordinated
Note Indenture; provided that the Company complies with the provisions of the
Senior Note Indenture under the covenant described under "Description of the
Senior Exchange Notes--Repurchase at the Option of Holders--Change of
Control." The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
171
<PAGE>
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Senior Subordinated Note Indenture are
applicable. Except as described above with respect to a Change of Control, the
Senior Subordinated Note Indenture does not contain provisions that permit the
Holders of the Senior Subordinated Exchange Notes to require that the Company
repurchase or redeem the Senior Subordinated Exchange Notes in the event of a
takeover, recapitalization or similar transaction.
The Company's other senior indebtedness contains prohibitions on certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of Senior Subordinated Exchange Notes of their right to require
the Company to repurchase the Senior Subordinated Exchange Notes could cause a
default under such other senior indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchases on the
Company. Finally, the Company's ability to pay cash to the Holders of Senior
Subordinated Exchange Notes upon a repurchase may be limited by the Company's
then existing financial resources. See "Risk Factors--Risks Relating to the
Notes--Limitation on Change of Control Offer."
The Senior Credit Facilities currently prohibit the Company from purchasing
any Senior Exchange Notes or Senior Subordinated Exchange Notes, and also
provide that certain change of control events with respect to the Company
would constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Senior
Subordinated Exchange Notes, the Company could seek the consent of its lenders
to the purchase of Senior Subordinated Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Senior Subordinated Exchange Notes. In such case,
the Company's failure to purchase tendered Senior Subordinated Exchange Notes
would constitute an Event of Default under the Senior Subordinated Note
Indenture which would, in turn, constitute a default under the Senior Credit
Facilities. In such circumstances, the subordination provisions in the Senior
Subordinated Note Indenture would likely restrict payments to the Holders of
Senior Subordinated Exchange Notes. See "--Subordination."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Senior Subordinated Note Indenture applicable to a Change of
Control Offer made by the Company and purchases all Senior Subordinated
Exchange Notes validly tendered and not withdrawn under such Change of Control
Offer or if the Company exercises its option to purchase the Senior
Subordinated Exchange Notes.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than a Principal or a Related Party of a
Principal (as defined below), (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of
the Company (measured by voting power rather than number of shares) or (iv)
the first day on which a majority of the members of the Board of Directors of
the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Senior
172
<PAGE>
Subordinated Exchange Notes to require the Company to repurchase such Senior
Subordinated Exchange Notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the closing of the Acquisition or (ii) was nominated
for election or elected to such Board of Directors with the approval of a
majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
"Principals" means Lehman Brothers Merchant Banking Partners II L.P., any of
its respective Affiliates and executive officers of the Company as of the date
of the closing of the Acquisition.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
ASSET SALES
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, consummate an Asset
Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value as determined in good faith by the Company (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Senior Subordinated Note Trustee with respect to any Asset
Sale determined to have a value greater that $25.0 million) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Company or such Subsidiary is in
the form of cash, Cash Equivalents or Marketable Securities; provided that the
following amounts shall be deemed to be cash: (w) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet), of
the Company or any Restricted Subsidiary (other than contingent liabilities
and liabilities that are by their terms subordinated to the Senior
Subordinated Exchange Notes or any guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from further liability, (x)
any securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company
or such Restricted Subsidiary into cash within 180 days following the closing
of such Asset Sale (to the extent of the cash received), (y) any Designated
Noncash Consideration received by the Company or any of its Restricted
Subsidiaries in such Asset Sale; provided that the aggregate fair market value
(as determined above) of such Designated Noncash Consideration, taken together
with the fair market value at the time of receipt of all other Designated
Noncash Consideration received pursuant to this clause (y) less the amount of
Net Proceeds previously realized in cash from prior Designated Noncash
Consideration is less than 5% of Total Assets at the time of the receipt of
such Designated Noncash Consideration (with the fair market value of each item
of Designated Noncash Consideration being measured at the time received and
without giving effect to subsequent changes in value) and (z) Additional
Assets received in an exchange of assets transaction.
Within 360 days after the receipt of any cash Net Proceeds from an Asset
Sale, the Company or such Restricted Subsidiary, at its option, may apply such
cash Net Proceeds, at its option, (a) to repay Senior Debt of the Company or
any Restricted Subsidiary including, without limitation, Indebtedness under a
Credit Facility and the Senior Exchange Notes, (b) to the acquisition of a
majority of the assets of, or a majority of the Voting Stock of, another
Permitted Business, the making of a capital expenditure or the acquisition of
other assets or Investments that are used or useful in a Permitted Business or
(c) to apply the cash Net Proceeds from such Asset Sale to an Investment in
Additional Assets. Any cash Net Proceeds from Asset Sales that are not applied
or invested as provided in the first sentence of this paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $15.0 million, the Company will be required to make
173
<PAGE>
an offer to all Holders of Senior Subordinated Exchange Notes and all holders
of other Indebtedness that is not Senior Debt containing provisions similar to
those set forth in the Senior Subordinated Note Indenture with respect to
offers to purchase or redeem with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of Senior Subordinated
Exchange Notes and such other Indebtedness that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Senior Subordinated Note Indenture and such other
Indebtedness. To the extent that any Excess Proceeds remain after consummation
of an Asset Sale Offer, the Company may use such Excess Proceeds for any
purpose not otherwise prohibited by the Senior Subordinated Note Indenture. If
the aggregate principal amount of Senior Subordinated Exchange Notes and such
other Indebtedness tendered into such Asset Sale Offer surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Senior Subordinated Note
Trustee shall select the Senior Subordinated Exchange Notes and such other
Indebtedness to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company or any of
its Restricted Subsidiaries) or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company); (ii) purchase,
redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company; (iii) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to the Senior Subordinated Exchange Notes or any Subordinated
Subsidiary Guarantee, except a payment of interest or principal at Stated
Maturity or Indebtedness permitted under clause (viii) of the covenant
described under "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the closing of the Acquisition (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v), and (ix) of the next
succeeding paragraph), is less than the sum, without duplication, of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the closing of the Acquisition to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds or
the fair market value of property other than cash received by the Company
since the date of the closing of the Acquisition as a contribution to its
common equity capital or from the
174
<PAGE>
issue or sale of Equity Interests of the Company (other than Disqualified
Stock) or from the issue or sale of Disqualified Stock or debt securities
of the Company that have been converted into such Equity Interests (other
than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of the Company), plus (iii) to the extent
that either any Existing Citizens Power Investment or any Restricted
Investment that reduced the amount available for Restricted Payments under
this clause (c) is sold for cash or otherwise liquidated or repaid for cash
or any dividend or payment is received by the Company or a Restricted
Subsidiary after the date of the closing of the Acquisition in respect of
such Investment, 100% of the amount of Net Proceeds or dividends or
payments (including the fair market value of property) received in
connection therewith, up to the amount of the Existing Citizens Power
Investment on the date of the closing of the Acquisition or the Restricted
Investment that reduced this clause (c), as the case may be, and thereafter
50% of the amount of Net Proceeds or dividends or payments (including the
fair market value of property) received in connection therewith (except
that the amount of dividends or payments received in respect of payments of
Obligations in respect of such Investments, such as taxes, shall not
increase the amounts under this clause (c)), plus (iv) to the extent that
any Unrestricted Subsidiary of the Company is redesignated as a Restricted
Subsidiary after the date of the closing of the Acquisition, 100% of the
fair market value of the Company's Investment in such Subsidiary as of the
date of such redesignation up to the amount of the Restricted Investments
made in such Subsidiary that reduced this clause (c) and 50% of the excess
of the fair market value of the Company's Investment in such Subsidiary as
of the date of such redesignation over (1) the amount of the Restricted
Investment that reduced this clause (c) and (2) any amounts that increased
the amount available as a Permitted Investment; provided, further, that if
Citizens Power or any of its Subsidiaries is designated as a Restricted
Subsidiary, the amount of the fair market value of the Investment therein
on the date of the Senior Subordinated Note Indenture shall also be
credited to this clause (c); provided, further, that any amounts that
increase this clause (c) shall not duplicatively increase amounts available
as Permitted Investments.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Senior Subordinated Note Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (c)(ii) of
the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(iv) dividends or distributions by a Restricted Subsidiary of the Company
so long as, in the case of any dividend or distribution payable on or in
respect of any class or series of securities issued by a Restricted
Subsidiary, the Company or a Restricted Subsidiary receives at least its
pro rata share of such dividend or distribution in accordance with its
Equity Interests in such class or series of securities;
(v) Investments in Unrestricted Subsidiaries having an aggregate fair
market value not to exceed the amount, at the time of such Investment,
substantially concurrently contributed in cash or Cash Equivalents to the
common equity capital of the Company after the date of the closing of the
Acquisition; provided that any such amount contributed shall be excluded
from the calculation made pursuant to clause (c) above;
(vi) the payment of dividends on the Company's Common Stock, following
the first public offering of the Company's Common Stock after the date of
the closing of the Acquisition, of up to 6% per annum of the net proceeds
received by the Company in such public offering, other than public
offerings with respect to the Company's Common Stock registered on Form S-
8;
175
<PAGE>
(vii) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any present or former employee or director of the
Company (or any of its Restricted Subsidiaries) pursuant to any management
equity subscription agreement or stock option agreement or any other
management or employee benefit plan in effect as of the date of the closing
of the Acquisition; provided that (A) the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $2.0 million in any twelve-month period (with unused amounts in any
calendar year being carried over to succeeding calendar years subject to a
maximum (without giving effect to the following proviso) of $5.0 million in
any calendar year); provided further that such amount in any calendar year
may be increased by an amount not to exceed (x) the cash proceeds from the
sale of Equity Interests of the Company or a Restricted Subsidiary to
members of management and directors of the Company and its Subsidiaries
that occurs after the date of the closing of the Acquisition, plus (y) the
cash proceeds of key-man life insurance policies received by the Company
and its Restricted Subsidiaries after the date of the closing of the
Acquisition, less (z) the amount of any Restricted Payments previously made
pursuant to clauses (x) and (y) of this subparagraph (vii); and, provided
further, that cancellation of Indebtedness owing to the Company from
members of management of the Company or any of its Restricted Subsidiaries
in connection with a repurchase of Equity Interests of the Company or a
Restricted Subsidiary will not be deemed to constitute a Restricted Payment
for purposes of this covenant or any other provision of the Senior
Subordinated Note Indenture and (B) no Default or Event of Default shall
have occurred and be continuing immediately after such transaction;
(viii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options; and
(ix) other Restricted Payments not otherwise prohibited by this covenant
in an aggregate amount not to exceed $25.0 million under this clause (ix).
All of the Company's Subsidiaries other than Citizens Power and its
Subsidiaries are Restricted Subsidiaries. The Board of Directors may designate
any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default. For purposes of making such determination, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash) in the Subsidiary so designated will be deemed
to be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements in the definition of "Unrestricted Subsidiary" as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Senior Subordinated Note Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant). The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any
176
<PAGE>
noncash Restricted Payment or any adjustment made pursuant to paragraph (c) of
this covenant shall be determined by the Board of Directors whose resolution
with respect thereto shall be delivered to the Senior Subordinated Note
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if
such fair market value exceeds $25.0 million. Not later than the date of
making any Restricted Payment, the Company shall deliver to the Senior
Subordinated Note Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
If any Restricted Investment is sold or otherwise liquidated or repaid or
any dividend or payment is received by the Company or a Restricted Subsidiary
and such amounts may be credited to clause (c) above, then such amounts will
be credited only to the extent of amounts not otherwise included in
Consolidated Net Income and that do not otherwise increase the amount
available as a Permitted Investment.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and that the Company will
not issue any Disqualified Stock and will not permit any of its Subsidiaries
to issue any shares of preferred stock; provided, however, that the Company
may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock and the Company's Restricted Subsidiaries may incur
Indebtedness or issue Disqualified Stock or preferred stock if the Fixed
Charge Coverage Ratio for the Company's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock or preferred stock is issued would have been at least 2.0
to 1.0, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock or preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of term Indebtedness under Credit
Facilities (and the Guarantee thereof by the Senior Subordinated Note
Guarantors); provided that the aggregate principal amount of all term
Indebtedness outstanding under this clause (i) after giving effect to such
incurrence does not exceed an amount equal to $920.0 million;
(ii) the incurrence by the Company of revolving credit Indebtedness and
letters of credit (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company and its
Restricted Subsidiaries thereunder) under Credit Facilities (and the
Guarantee thereof by the Senior Subordinated Note Guarantors); provided
that the aggregate principal amount of all revolving credit Indebtedness
outstanding under this clause (ii) after giving effect to such incurrence
does not exceed an amount equal to $480.0 million;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company, the Senior Subordinated Note
Guarantors and the Senior Note Guarantors of Indebtedness represented by
the Senior Exchange Notes, the Senior Subordinated Exchange Notes, the
Senior Subsidiary Guarantees and the Subordinated Subsidiary Guarantees
limited in aggregate principal amount, without duplication, to amounts
outstanding under the Senior Note Indenture and the Senior Subordinated
Note Indenture as of their respective dates;
(v) (A) the guarantee by the Company or any of the Senior Subordinated
Note Guarantors of Indebtedness of the Company or a Restricted Subsidiary
of the Company or (B) the incurrence of Indebtedness of a Restricted
Subsidiary to the extent that such Indebtedness is supported by a letter of
credit, in each case that was permitted to be incurred by another provision
of this covenant;
177
<PAGE>
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (including Capital Lease Obligations) to finance the
acquisition (including by direct purchase, by lease or indirectly by the
acquisition of the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of such acquisition) or improvement of property
(real or personal) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding
pursuant to this clause (vi) and including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (vi), does not exceed an amount equal to
5% of Total Assets at the time of such incurrence;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Senior Subordinated
Note Indenture to be incurred under the first paragraph hereof or clauses
(iii), (iv) or (vii) of this paragraph;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Senior Subordinated Exchange Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary thereof and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary thereof shall be deemed, in each case, to constitute
an incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(viii);
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred in the ordinary course of business
for the purpose of risk management and not for the purpose of speculation;
(x) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (x), and
the issuance of preferred stock by Unrestricted Subsidiaries;
(xi) the incurrence of Indebtedness solely in respect of performance,
surety and similar bonds or completion or performance guarantees
(including, without limitation, performance guarantees pursuant to coal
supply agreements or equipment leases), to the extent that such incurrence
does not result in the incurrence of any obligation for the payment of
borrowed money to others;
(xii) the incurrence of Indebtedness arising from agreements of the
Company or a Restricted Subsidiary providing for indemnification,
adjustment of purchase price or similar obligations, in each case, incurred
or assumed in connection with the disposition of any business, assets or a
Subsidiary; provided, however that (i) such Indebtedness is not reflected
on the balance sheet of the Company or any Restricted Subsidiary
(contingent obligations referred to in a footnote to financial statements
and not otherwise reflected on the balance sheet will not be deemed to be
reflected on such balance sheet for purposes of this clause (i)) and (ii)
the maximum assumable liability in respect of all such Indebtedness shall
at no time exceed the gross proceeds including noncash proceeds (the fair
market value of such noncash proceeds being measured at the time received
and without giving effect to any subsequent changes in value) actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition;
(xiii) the guarantee by the Company or any of the Senior Subordinated
Note Guarantors of additional Indebtedness relating to Black Beauty Coal
Company not to exceed $50.0 million in aggregate principal amount
outstanding at any one time under this clause (xiii);
(xiv) the incurrence of Indebtedness relating to the Bengalla Joint
Venture or the Warkworth Associates Joint Venture in an aggregate amount
not to exceed $100.0 million in aggregate principal amount outstanding at
any one time under this clause (xiv); and
178
<PAGE>
(xv) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (xv), not to exceed $250.0
million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xv) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed
to be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; provided, in each such case, that the amount
thereof is included in Fixed Charges of the Company as accrued.
LIENS
The Senior Subordinated Note Indenture provides that the Company will not
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien of any kind securing Indebtedness or trade payables
(other than Permitted Liens) upon any of their property or assets, now owned
or hereafter acquired, unless all payments due under the Senior Subordinated
Note Indenture and the Senior Subordinated Exchange Notes are secured on an
equal and ratable basis with the obligations so secured until such time as
such obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary
that is not a Senior Subordinated Note Guarantor to (i)(a) pay dividends or
make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other
interest or participation in, or measured by, its profits, or (b) pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the closing of the Acquisition, (b)
the Senior Credit Facilities as in effect as of the date of the closing of the
Acquisition, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other payment
restrictions than those contained in the Senior Credit Facilities as in effect
on the date of the closing of the Acquisition, (c) the Senior Note Indenture,
the Senior Subordinated Note Indenture, the Senior Exchange Notes and the
Senior Subordinated Exchange Notes, (d) applicable law or any applicable rule,
regulation or order, (e) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the
extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
Senior Subordinated Note Indenture to be incurred, (f) customary non-
assignment provisions in leases and other agreements entered into in the
ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) any agreement for the sale of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary pending
its sale, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements
179
<PAGE>
governing such Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements governing the
Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted to
be incurred pursuant to the provisions of the covenant described above under
the caption "--Liens" that limits the right of the debtor to dispose of the
assets securing such Indebtedness, (k) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business,
(l) restrictions on cash or other deposits or net worth imposed by customers
or lessors under contracts or leases entered into in the ordinary course of
business and (m) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (a) through (l) above, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the Company's
Board of Directors, not materially more restrictive in the aggregate with
respect to such dividend and other payment restrictions than those (considered
as a whole) contained in the dividend or other payment restrictions prior to
such amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Senior Subordinated Note Indenture provides that the Company may not
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Senior Subordinated
Registration Rights Agreement, the Senior Subordinated Exchange Notes and the
Senior Subordinated Note Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Senior Subordinated Note Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, immediately after giving pro forma
effect to such transaction, as if such transaction had occurred at the
beginning of the applicable four-quarter period, (A) the entity surviving such
consolidation or merger would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock" or (B) the
Fixed Charge Coverage Ratio for the Company or the entity or Person formed by
or surviving any such consolidation or merger (if other than the Company), or
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made would, immediately after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, not be less than such Fixed Charge Coverage
Ratio for the Company and its Restricted Subsidiaries immediately prior to
such transaction. The Senior Subordinated Note Indenture also provides that
the Company may not, directly or indirectly, lease all or substantially all of
its properties or assets, in one or more related transactions, to any other
Person. The provisions of this covenant will not be applicable to a sale,
assignment, transfer, conveyance or other disposition of assets between or
among the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing clause (iv), (i) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (ii) the Company may merge with an Affiliate that
has no significant assets or liabilities and was formed solely for the purpose
of changing the jurisdiction of organization of the Company in another State
of the United States or the form of organization of the Company so long as the
amount of Indebtedness of the Company and its Restricted Subsidiaries is not
increased thereby and provided that the successor assumes all the obligations
of the Company under the Senior Subordinated Registration Rights Agreement,
the Senior Subordinated Exchange Notes and the Senior
180
<PAGE>
Subordinated Note Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Senior Subordinated Note Trustee.
TRANSACTIONS WITH AFFILIATES
The Senior Subordinated Note Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, make any payment
to, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction") involving aggregate payments or consideration in
excess of $5.0 million, unless (i) such Affiliate Transaction is on terms that
are materially no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Senior Subordinated Note Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $25.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions: (i) any employment agreement or other compensation
plan or arrangement for employees entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
the past practice of the Company or such Restricted Subsidiary; (ii)
transactions between or among the Company and/or its Restricted Subsidiaries;
(iii) payment of reasonable fees to officers, directors, employees or
consultants of the Company; (iv) Restricted Payments that are permitted by,
and Investments that are not prohibited by, the provisions of the Senior
Subordinated Note Indenture described above under the caption "--Restricted
Payments;" (v) indemnification payments made to officers, directors and
employees of the Company or any Restricted Subsidiary pursuant to charter,
bylaw, statutory or contractual provisions; (vi) the payment of customary
annual management, consulting and advisory fees and related expenses to Lehman
Merchant Bank and its Affiliates; (vii) payments by the Company or any of its
Restricted Subsidiaries to Lehman Merchant Bank and its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without limitation,
in connection with acquisitions or divestitures which payments are approved by
a majority of the Board of Directors of the Company in good faith; (viii) the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of its obligations under the terms of, any stockholders'
agreement (including any registration rights agreement or purchase agreement
related thereto) to which it is a party as of the date of the closing of the
Acquisition and any similar agreements which it may enter into thereafter;
provided, however, that the existence of, or the performance by the Company or
any of its Restricted Subsidiaries of obligations under any future amendment
to any such existing agreement or under any similar agreement entered into
after the date of the closing of the Acquisition shall only be permitted by
this clause (viii) to the extent that the terms of any such amendment or new
agreement are not otherwise disadvantageous to the Holders in any material
respect; (ix) transactions pursuant to the terms of the Transaction Documents
in effect on the date of the closing of the Acquisition; (x) transactions with
Unrestricted Subsidiaries, customers, clients, suppliers, joint venture
partners or purchasers or sellers of goods or services, in each case in the
ordinary course of business (including, without limitation, pursuant to joint
venture agreements) and otherwise in compliance with the terms of the Senior
Subordinated Note Indenture which are, in the aggregate (taking into account
all the costs and benefits associated with such transactions), materially no
less favorable to the Company or its Restricted Subsidiaries than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person, in the reasonable
determination of the Board of Directors of the Company or the senior
management thereof, or are on terms at least as favorable as might reasonably
have been obtained at such time from an unaffiliated party; (xi) guarantees of
performance by the Company and its Restricted Subsidiaries of Unrestricted
Subsidiaries in the ordinary course of business,
181
<PAGE>
except for guarantees of Obligations in respect of borrowed money; and (xii)
pledges of Equity Interests of Unrestricted Subsidiaries for the benefit of
lenders of Unrestricted Subsidiaries.
ADDITIONAL SUBORDINATED SUBSIDIARY GUARANTEES
The Senior Subordinated Note Indenture provides that if the Company or any
of its Domestic Subsidiaries shall acquire or create another Domestic
Subsidiary after the date of the Senior Subordinated Note Indenture and such
Domestic Subsidiary provides a guarantee of the Senior Credit Facilities, then
such newly acquired or created Domestic Subsidiary shall execute a
supplemental indenture in form and substance satisfactory to the Senior
Subordinated Note Trustee providing that such Domestic Subsidiary shall become
a Senior Subordinated Note Guarantor under the Senior Subordinated Note
Indenture, provided, however, this covenant shall not apply to any Domestic
Subsidiary that has been properly designated as an Unrestricted Subsidiary in
accordance with the Senior Subordinated Note Indenture for so long as it
continues to constitute an Unrestricted Subsidiary.
NO SENIOR SUBORDINATED DEBT
The Senior Subordinated Note Indenture provides that (i) the Company will
not incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Senior Subordinated
Exchange Notes, and (ii) no Senior Subordinated Note Guarantor will incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to the Senior
Subsidiary Guarantees and senior in any respect in right of payment to the
Subordinated Subsidiary Guarantees.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken
as a whole.
PAYMENTS FOR CONSENT
The Senior Subordinated Note Indenture provides that neither the Company nor
any of its Restricted Subsidiaries will, directly or indirectly, pay or cause
to be paid any consideration, whether by way of interest, fee or otherwise, to
any Holder of any Senior Subordinated Exchange Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Senior Subordinated Note Indenture or the Senior Subordinated Exchange Notes
unless such consideration is offered to be paid or is paid to all Holders of
the Senior Subordinated Exchange Notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
REPORTS
The Senior Subordinated Note Indenture provides that, whether or not
required by the rules and regulations of the Commission, so long as any Senior
Subordinated Exchange Notes are outstanding, the Company will furnish to the
Holders of Senior Subordinated Exchange Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of the Company and its consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial statements
or in the footnotes thereto and in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the financial condition and
results of operations of the Company and its Restricted Subsidiaries separate
from the financial condition and results of operations of the Unrestricted
Subsidiaries of the Company) and, with respect to the annual information only,
a report thereon by the Company's certified independent accountants and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports, in each case
within the time periods specified in the
182
<PAGE>
Commission's rules and regulations. In addition, following the consummation of
the exchange offer contemplated by the Senior Subordinated Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified
in the Commission's rules and regulations (unless the Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the Senior Subordinated Note Guarantors have agreed that, for so long as any
Senior Subordinated Exchange Notes remain outstanding, they will furnish to
the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Senior Subordinated Note Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when
due of interest on, or Liquidated Damages, if any, with respect to, the Senior
Subordinated Exchange Notes (whether or not prohibited by the subordination
provisions of the Senior Subordinated Note Indenture); (ii) default in payment
when due of the principal of or premium, if any, on the Senior Subordinated
Exchange Notes (whether or not prohibited by the subordination provisions of
the Senior Subordinated Note Indenture); (iii) failure by the Company or any
of its Subsidiaries to make the offer required or to purchase any of the
Senior Subordinated Exchange Notes as required under the provisions described
under the captions "--Change of Control," or "--Asset Sales;" (iv) failure by
the Company or any of its Subsidiaries for 30 days after notice to comply with
the provisions of the covenants entitled "--Restricted Payments" or "--
Incurrence of Indebtedness and Issuance of Preferred Stock;" or failure by the
Company or any of its Subsidiaries for 60 days after notice to comply with any
of its other agreements in the Senior Subordinated Note Indenture or the
Senior Subordinated Exchange Notes; (v) default under any mortgage, indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Senior Subordinated Note
Indenture, which default results in the acceleration of such Indebtedness
prior to its express maturity and the principal amount of any such
Indebtedness aggregates $50.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries or any group of Restricted Subsidiaries
that, taken as a whole, would be a Significant Subsidiary to pay final
judgments aggregating in excess of $50.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) except as permitted
by the Senior Subordinated Note Indenture, any Subordinated Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Senior Subordinated Note Guarantor, or any Person acting on behalf of any
Senior Subordinated Note Guarantor, shall deny or disaffirm its obligations
under its Subordinated Subsidiary Guarantee; (viii) certain events of
bankruptcy or insolvency with respect to the Company, any of its Significant
Subsidiaries that are Restricted Subsidiaries or any group of Restricted
Subsidiaries that, taken as a whole, would be a Significant Subsidiary; and
(ix) any failure of the Company to deposit the required amounts into the
Escrow Account pursuant to the Escrow Letter or any failure of the proceeds of
the Escrow Account to be applied as required under the Escrow Letter.
If any Event of Default occurs and is continuing, the Senior Subordinated
Note Trustee or the Holders of at least 25% in principal amount of the then
outstanding Senior Subordinated Exchange Notes may declare all the Senior
Subordinated Exchange Notes to be due and payable immediately; provided, that
so long as any Indebtedness permitted to be incurred pursuant to the Senior
Credit Facilities shall be outstanding, such acceleration shall not be
effective until the earlier of (i) an acceleration of any such Indebtedness
under the Senior Credit Facilities or (ii) five business days after receipt by
the Company of written notice of such acceleration of the Senior Subordinated
Exchange Notes. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, with respect
to the Company, any Significant Subsidiary that is a Restricted Subsidiary or
any group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Senior Subordinated Exchange Notes
will become due and payable
183
<PAGE>
without further action or notice. Holders of the Senior Subordinated Exchange
Notes may not enforce the Senior Subordinated Note Indenture or the Senior
Subordinated Exchange Notes except as provided in the Senior Subordinated Note
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Senior Subordinated Exchange Notes may direct
the Senior Subordinated Note Trustee in its exercise of any trust or power.
The Senior Subordinated Note Trustee may withhold from Holders of the Senior
Subordinated Exchange Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Senior Subordinated
Exchange Notes pursuant to the optional redemption provisions of the Senior
Subordinated Note Indenture, an equivalent premium shall also become and be
immediately due and payable to the extent permitted by law upon the
acceleration of the Senior Subordinated Exchange Notes. If an Event of Default
occurs prior to May 15, 2003 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding paying the premium upon redemption of the Senior Subordinated
Exchange Notes prior to May 15, 2003, then the premium specified in the Senior
Subordinated Note Indenture shall also become immediately due and payable to
the extent permitted by law upon the acceleration of the Senior Subordinated
Exchange Notes.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Exchange Notes then outstanding by notice to the Senior
Subordinated Note Trustee may on behalf of the Holders of all of the Senior
Subordinated Exchange Notes waive any existing Default or Event of Default and
its consequences under the Senior Subordinated Note Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
principal of, the Senior Subordinated Exchange Notes.
The Company is required to deliver to the Senior Subordinated Note Trustee
annually a statement regarding compliance with the Senior Subordinated Note
Indenture, and the Company is required upon becoming aware of any Default or
Event of Default, to deliver to the Senior Subordinated Note Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Person controlling such Person, as such, shall have any liability for
any obligations of the Company under the Senior Subordinated Exchange Notes,
the Subordinated Subsidiary Guarantees, the 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 Senior Subordinated Exchange Notes by accepting
a Senior Subordinated Exchange Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the
Senior Subordinated Exchange 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.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Subordinated
Exchange Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Senior Subordinated Exchange Notes to receive payments in respect
of the principal of, premium, if any, and interest and Liquidated Damages, if
any, on such Senior Subordinated Exchange Notes when such payments are due
from the trust referred to below, (ii) the Company's obligations with respect
to the Senior Subordinated Exchange Notes concerning issuing temporary Senior
Subordinated Exchange Notes, registration of Senior Subordinated Exchange
Notes, mutilated, destroyed, lost or stolen Senior Subordinated Exchange Notes
and the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Senior Subordinated Note Trustee, and the
184
<PAGE>
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Senior Subordinated Note Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Senior Subordinated Note Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Senior Subordinated Exchange Notes. In
the event Covenant Defeasance occurs, certain events (not including non-
payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Senior Subordinated Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Senior Subordinated Note Trustee, in
trust, for the benefit of the Holders of the Senior Subordinated Exchange
Notes, cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest and Liquidated Damages, if any, on
the outstanding Senior Subordinated Exchange Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company must
specify whether the Senior Subordinated Exchange Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Senior Subordinated Note
Trustee an opinion of counsel in the United States reasonably acceptable to
the Senior Subordinated Note Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Senior Subordinated Note Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Senior Subordinated Exchange Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Senior Subordinated Note
Trustee an opinion of counsel in the United States reasonably acceptable to
the Senior Subordinated Note Trustee confirming that the Holders of the
outstanding Senior Subordinated Exchange Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than
a Default or Event of Default resulting from the borrowing of funds to be
applied to such deposit) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
effective date of the defeasance; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a
default under any material agreement or instrument (other than the Senior
Subordinated Note Indenture) to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound; (vi)
the Company must have delivered to the Senior Subordinated Note Trustee, at or
prior to the effective date of such defeasance, an opinion of counsel to the
effect that at the effective date of such defeasance, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
the Company must deliver to the Senior Subordinated Note Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Senior Subordinated Exchange Notes over
the other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and (viii) the
Company must deliver to the Senior Subordinated Note Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Subordinated Exchange Notes in
accordance with the Senior Subordinated Note Indenture. The Registrar and the
Senior Subordinated Note Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require
185
<PAGE>
a Holder to pay any taxes and fees required by law or permitted by the Senior
Subordinated Note Indenture. The Company is not required to transfer or
exchange any Senior Subordinated Exchange Note selected for redemption. Also,
the Company is not required to transfer or exchange any Senior Subordinated
Exchange Note for a period of 15 days before a selection of Senior
Subordinated Exchange Notes to be redeemed.
The registered Holder of a Senior Subordinated Exchange Note will be treated
as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Senior
Subordinated Note Indenture or the Senior Subordinated Exchange Notes may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the Senior Subordinated Exchange Notes then outstanding
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Senior Subordinated
Exchange Notes), and any existing default or compliance with any provision of
the Senior Subordinated Note Indenture or the Senior Subordinated Exchange
Notes may be waived with the consent of the Holders of a majority in principal
amount of the then outstanding Senior Subordinated Exchange Notes (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Senior Subordinated Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Subordinated Exchange Notes held by a non-
consenting Holder): (i) reduce the principal amount of Senior Subordinated
Exchange Notes whose Holders must consent to an amendment, supplement or
waiver, (ii) reduce the principal of or change the fixed maturity of any
Senior Subordinated Exchange Note or alter the provisions with respect to the
redemption of the Senior Subordinated Exchange Notes (other than provisions
relating to the covenants described above under the caption "--Repurchase at
the Option of Holders"), (iii) reduce the rate of or change the time for
payment of interest on any Senior Subordinated Exchange Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Senior Subordinated Exchange Notes (except a rescission of
acceleration of the Senior Subordinated Exchange Notes by the Holders of at
least a majority in aggregate principal amount of the Senior Subordinated
Exchange Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Senior Subordinated Exchange Note payable in money
other than that stated in the Senior Subordinated Exchange Notes, (vi) make
any change in the provisions of the Senior Subordinated Note Indenture
relating to waivers of past Defaults or the rights of Holders of Senior
Subordinated Exchange Notes to receive payments of principal of or premium, if
any, or interest on the Senior Subordinated Exchange Notes, (vii) waive a
redemption payment with respect to any Senior Subordinated Exchange Note
(other than a payment required by one of the covenants described above under
the caption "--Repurchase at the Option of Holders"), (viii) make any change
in the foregoing amendment and waiver provisions or (iv) release any Senior
Subordinated Note Guarantor from any of its obligations under its Subordinated
Subsidiary Guarantee or this Senior Subordinated Note Indenture, except in
accordance with the terms of this Senior Subordinated Note Indenture. In
addition, any amendment to the provisions of Article 10 of the Senior
Subordinated Note Indenture (which relate to subordination) will require the
consent of the Holders of at least 75% in aggregate principal amount of the
Senior Subordinated Exchange Notes then outstanding if such amendment would
adversely affect the rights of Holders of Senior Subordinated Exchange Notes.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Subordinated Exchange Notes, the Company and the Senior Subordinated Note
Trustee may amend or supplement the Senior Subordinated Note Indenture or the
Senior Subordinated Exchange Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Subordinated Exchange
Notes in addition to or in place of certificated Senior Subordinated Exchange
Notes, to provide for the assumption of the Company's obligations to Holders
of Senior Subordinated Exchange Notes in the case of a merger or consolidation
or sale of all or substantially all of the Company's assets, to make any
change that would provide any additional rights or benefits to the Holders of
Senior Subordinated Exchange Notes or that does not adversely affect the legal
rights under the Senior Subordinated Note Indenture of any such Holder, to
comply with requirements of the Commission in order to
186
<PAGE>
effect or maintain the qualification of the Senior Subordinated Note Indenture
under the Trust Indenture Act, to provide for the issuance of additional
Senior Subordinated Exchange Notes in accordance with the limitations set
forth in this Senior Subordinated Note Indenture as of the date hereof or to
allow any Senior Subordinated Note Guarantor to execute a supplemental Senior
Subordinated Note Indenture and/or a Subordinated Subsidiary Guarantee with
respect to the Senior Subordinated Exchange Notes.
CONCERNING THE SENIOR SUBORDINATED NOTE TRUSTEE
The Senior Subordinated Note Indenture contains certain limitations on the
rights of the Senior Subordinated Note Trustee, should it become a creditor of
the Company, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The Senior Subordinated Note Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Subordinated Exchange Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Senior Subordinated Note Trustee, subject to certain exceptions. The Senior
Subordinated Note Indenture provides that in case an Event of Default shall
occur (which shall not be cured), the Senior Subordinated Note Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Senior
Subordinated Note Trustee will be under no obligation to exercise any of its
rights or powers under the Senior Subordinated Note Indenture at the request
of any Holder of Senior Subordinated Exchange Notes, unless such Holder shall
have offered to the Senior Subordinated Note Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Senior Subordinated Exchange Notes will be
issued in fully registered form. Except as described in the next paragraph,
the Senior Subordinated Exchange Notes initially will be represented by
permanent global Senior Subordinated Exchange Notes, in definitive, fully
registered form without interest coupons (the "Global Senior Subordinated
Exchange Notes") and will be deposited with the Senior Subordinated Note
Trustee as custodian for DTC and registered in the name of a nominee of DTC.
Except as set forth below, the Global Senior Subordinated Exchange Notes may
be transferred, in whole and not in part, only to another nominee of DTC or to
a successor of DTC or its nominee. Beneficial interests in the Global Senior
Subordinated Exchange Notes may not be exchanged for Senior Subordinated
Exchange Notes in certificated form except in the limited circumstances
described below. See "--Exchange of Book-Entry Senior Subordinated Exchange
Notes for Certificated Senior Subordinated Exchange Notes." Except in the
limited circumstances described below, owners of beneficial interests in the
Global Senior Subordinated Exchange Notes will not be entitled to receive
physical delivery of Certificated Senior Subordinated Exchange Notes (as
defined below).
The Senior Subordinated Note Trustee will act as Paying Agent and Registrar.
The Senior Subordinated Exchange Notes may be presented for registration of
transfer and exchange at the offices of the Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of the respective settlement systems and are
subject to changes by them from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for the Participants and to facilitate the
clearance and settlement of transactions in those securities between
187
<PAGE>
Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers
(including the Initial Purchaser, banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Senior Subordinated Exchange Notes, DTC
will credit the accounts of Participants designated by the Initial Purchaser
with portions of the principal amount of the Global Senior Subordinated
Exchange Notes and (ii) ownership of such interests in the Global Senior
Subordinated Exchange Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the Participants) or by the Participants and the Indirect Participants
(with respect to other owners of beneficial interest in the Global Senior
Subordinated Exchange Notes).
Investors in the Global Senior Subordinated Exchange Notes may hold their
interests therein directly through DTC, if they are Participants in such
system, or indirectly through organizations which are Participants in such
system. All interests in a Global Senior Subordinated Exchange Note may be
subject to the procedures and requirements of DTC. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Senior Subordinated Exchange Note to such persons will
be limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Senior
Subordinated Exchange Note to pledge such interests to persons or entities
that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL SENIOR
SUBORDINATED EXCHANGE NOTE WILL NOT HAVE SENIOR SUBORDINATED EXCHANGE NOTES
REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF SENIOR
SUBORDINATED EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED
THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE SENIOR SUBORDINATED NOTE
INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Senior Subordinated Exchange Note
registered in the name of DTC or its nominee will be payable to DTC in its
capacity as the registered Holder under the Senior Subordinated Note
Indenture. Under the terms of the Senior Subordinated Note Indenture, the
Company and the Senior Subordinated Note Trustee will treat the persons in
whose names the Senior Subordinated Exchange Notes, including the Global
Senior Subordinated Exchange Notes, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Senior Subordinated Note
Trustee nor any agent of the Company or the Senior Subordinated Note Trustee
has or will have any responsibility or liability for (i) any aspect of DTC's
records or any Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global
Senior Subordinated Exchange Notes, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Senior
Subordinated Exchange Notes or (ii) any other matter relating to the actions
and practices of DTC or any of its Participants or Indirect Participants. DTC
has advised the Company that its current practice, upon receipt of any payment
in respect of securities such as the Senior Subordinated Exchange Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Subordinated Exchange Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect
188
<PAGE>
Participants and will not be the responsibility of DTC, the Senior
Subordinated Note Trustee or the Company. Neither the Company nor the Senior
Subordinated Note Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Senior Subordinated
Exchange Notes, and the Company and the Senior Subordinated Note Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Interests in the Global Senior Subordinated Exchange Notes are expected to
be eligible to trade in DTC's Same-Day Funds Settlement System and secondary
market trading activity in such interests will, therefore, settle in
immediately available funds, subject in all cases to the rules and procedures
of DTC and its Participants. See "--Same Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Senior Subordinated Exchange Notes only at the direction
of one or more Participants to whose account DTC has credited the interests in
the Global Senior Subordinated Exchange Notes and only in respect of such
portion of the aggregate principal amount of the Senior Subordinated Exchange
Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the Senior
Subordinated Exchange Notes, DTC reserves the right to exchange the Global
Senior Subordinated Exchange Notes for legended Senior Subordinated Exchange
Notes in certificated form, and to distribute such Senior Subordinated
Exchange Notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Senior Subordinated Exchange Notes among
Participants in DTC, it is under no obligation to perform or to continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Senior Subordinated Note Trustee nor any of their
respective agents will have any responsibility for the performance by DTC, or
its participants or indirect participants of its obligations under the rules
and procedures governing its operations.
EXCHANGE OF BOOK-ENTRY SENIOR SUBORDINATED EXCHANGE NOTES FOR CERTIFICATED
SENIOR SUBORDINATED EXCHANGE NOTES
A Global Senior Subordinated Exchange Note is exchangeable for definitive
Senior Subordinated Exchange Notes in registered certificated form
("Certificated Senior Subordinated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Senior
Subordinated Exchange Notes and the Company thereupon fails to appoint a
successor depositary or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the Senior
Subordinated Note Trustee in writing that it elects to cause the issuance of
the Certificated Senior Subordinated Exchange Notes or (iii) there shall have
occurred and be continuing a Default or Event of Default with respect to the
Senior Subordinated Exchange Notes. In addition, beneficial interests in a
Global Senior Subordinated Exchange Note may be exchanged for Certificated
Senior Subordinated Exchange Notes upon request but only upon prior written
notice given to the Senior Subordinated Note Trustee by or on behalf of DTC in
accordance with the Senior Subordinated Note Indenture. In all cases,
Certificated Senior Subordinated Exchange Notes delivered in exchange for any
Global Senior Subordinated Exchange Note or beneficial interests therein will
be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless the Company determines otherwise in compliance
with applicable law.
EXCHANGE OF CERTIFICATED SENIOR SUBORDINATED EXCHANGE NOTES FOR BOOK-ENTRY
SENIOR SUBORDINATED EXCHANGE NOTES
Senior Subordinated Exchange Notes issued in certificated form may be
exchanged for beneficial interests in any Global Senior Subordinated Exchange
Note upon request.
189
<PAGE>
SAME DAY SETTLEMENT AND PAYMENT
The Senior Subordinated Note Indenture requires that payments in respect of
the Senior Subordinated Exchange Notes represented by the Global Senior
Subordinated Exchange Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Senior Subordinated
Exchange Note Holder. With respect to Senior Subordinated Exchange Notes in
certificated form, the Company will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address. The Senior Subordinated Exchange Notes represented by the
Global Senior Subordinated Exchange Notes are expected to trade in DTC's Same-
Day Funds Settlement System, and any permitted secondary market trading
activity in such Senior Subordinated Exchange Notes will, therefore, be
required by DTC to be settled in immediately available funds. The Company
expects that secondary trading in any certificated Senior Subordinated
Exchange Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Subordinated
Note Indenture. Reference is made to the Senior Subordinated Note Indenture
for a full disclosure of all such terms, as well as any other capitalized
terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Acquisition" means the acquisition by the Company of: (i) all of the common
stock of Peabody Holding Company, (ii) all of the common stock of Gold Fields
Mining Corp., (iii) all of the membership interests of Citizens Power, (iv)
the 1% interests in CL Hartford, L.L.C., a Delaware limited liability company,
and Citizens Power Sales, a Delaware general partnership, both subsidiaries of
Citizens Power, (v) all of the shares of Darex Capital Inc., a company
incorporated in the Republic of Panama, and (vi) all of the ordinary shares of
Peabody Australia Ltd., which together with Darex Capital, Inc. owns Peabody
Resources.
"Additional Assets" means (i) any property or assets (other than Capital
Stock, Indebtedness or rights to receive payments over a period greater than
180 days, other than with respect to coal supply contract restructurings) that
is usable by the Company or a Restricted Subsidiary in a Permitted Business or
(ii) the Capital Stock of a Person that is at the time, or becomes, a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Senior Subordinated Note Indenture described above under the
caption "--Change of Control" and/or the provisions described above under the
caption "--Merger, Consolidation or Sale of Assets"
190
<PAGE>
and not by the provisions of the Asset Sale covenant), and (ii) the issue or
sale by the Company or any of its Restricted Subsidiaries of Equity Interests
of any of the Company's Restricted Subsidiaries, in the case of either clause
(i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $5.0 million or
(b) for Net Proceeds in excess of $5.0 million. Notwithstanding the foregoing,
the following items shall not be deemed to be Asset Sales: (i) a transfer of
assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary
to the Company or to another Restricted Subsidiary, (ii) an issuance of Equity
Interests by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (iii) a Restricted Payment that is permitted by, or an Investment
that is not prohibited by, the covenant described above under the caption "--
Restricted Payments," (iv) a disposition of Cash Equivalents or obsolete
equipment, (v) foreclosures on assets, (vi) the sale or discount, in each case
without recourse, of accounts receivable arising in the ordinary course of
business, but only in connection with the compromise or collection thereof and
(vii) the factoring of accounts receivable arising in the ordinary course of
business pursuant to arrangements customary in the industry.
"Bengalla Joint Venture" means Bengalla Mining Co. Pty Limited, Bengalla
Agricultural Co. Pty Limited and Bengalla Coal Sales Co. Pty Ltd. which are
the joint venture companies related to the Bengalla mine in New South Wales,
Australia.
"Black Beauty Coal Company" means the Indiana general partnership among
Thoroughbred, L.L.C., Black Beauty Resources, Inc. and Pittsburg and Midway
Coal Mining Co., and any Person collectively owned by those three partners
including, but not limited to, Eagle Coal Company and Falcon Coal Company.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed or insured by the U.S.
Government or any agency thereof, (b) certificates of deposit and time
deposits with maturities of one year or less from the date of acquisition and
overnight bank deposits of any lender under the Senior Credit Facilities or of
any commercial bank having capital and surplus in excess of $500.0 million,
(c) repurchase obligations of any lender under the Senior Credit Facilities or
of any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than 90 days with respect to securities
issued or fully guaranteed or insured by the United States Government, (d)
commercial paper of a domestic issuer rated at least A-2 by S&P or P-2 by
Moody's, or carrying an equivalent rating by a nationally recognized rating
agency if both of S&P and Moody's cease publishing ratings of investments, (e)
securities with maturities of one year or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States, by any political subdivision or taxing authority of any such
state, commonwealth or territory or by any foreign government, the securities
of which state, commonwealth, territory, political subdivision, taxing
authority or foreign government (as the case may be) are rated at least A by
S&P or A by Moody's, (f) securities with maturities of one year or less from
the date of acquisition backed by standby letters of credit issued by any
lender under the Senior Credit Facilities or any commercial bank satisfying
the requirements of clause (b) of this definition or (g) shares of money
market mutual or similar funds which invest exclusively in assets satisfying
the requirements of clauses (a) through (f) of this definition.
"Citizens Power" means Citizens Power LLC, a Delaware limited liability
company and its direct and indirect Subsidiaries.
191
<PAGE>
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) provision
for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (ii) consolidated
interest expense of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs, deferred financing
fees and original issue discount, noncash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iii) an amount equal to any extraordinary
loss plus any net loss realized in connection with an Asset Sale (to the
extent such losses were deducted in computing such Consolidated Net Income),
plus (iv) depreciation, depletion, amortization (including amortization of
goodwill and other intangibles) and other noncash expenses (including, without
limitation, writedowns and impairment of property, plant and equipment and
intangibles and other long-lived assets) (excluding any such noncash expense
to the extent that it represents an accrual of or reserve for cash expenses in
any future period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such period
to the extent that such depreciation, depletion, amortization and other
noncash expenses were deducted in computing such Consolidated Net Income,
minus (v) noncash items increasing such Consolidated Net Income for such
period (other than accruals in accordance with GAAP), plus (vi) without
duplication for amounts otherwise included in Consolidated Cash Flow, the
amount of the Company's and its Restricted Subsidiaries' proportionate share
of the Consolidated Cash Flow of Black Beauty Coal Company and its
Subsidiaries for such period (calculated in proportion to the Company's and
its Restricted Subsidiaries common equity ownership), in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation, depletion and amortization and other noncash expenses of, a
Restricted Subsidiary that is not a Senior Subordinated Note Guarantor shall
be added to Consolidated Net Income to compute Consolidated Cash Flow only to
the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income of any Person that is not a Subsidiary or that is
accounted for by the equity method of accounting shall be included only to the
extent of the amount of dividends or distributions paid in cash to the
referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any
Restricted Subsidiary that is not a Senior Subordinated Note Guarantor shall
be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded, and (v) the Net Income (or loss) of
any Unrestricted Subsidiary shall be excluded, whether or not distributed to
the Company or one of its Restricted Subsidiaries.
"Credit Facilities" means, with respect to the Company or any of its
Restricted Subsidiaries, one or more debt facilities (including, without
limitation, the Senior Credit Facilities) or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow from such
lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed,
192
<PAGE>
refunded, replaced or refinanced in whole or in part from time to time.
Indebtedness under Credit Facilities outstanding on the date on which Senior
Subordinated Exchange Notes are first issued and authenticated under the
Senior Subordinated Note Indenture shall be deemed to have been incurred on
such date in reliance on the exception provided by clause (i) of the
definition of Permitted Indebtedness.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Senior Subordinated Exchange Notes mature; provided, however, that
any Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such
Capital Stock upon the occurrence of a Change of Control or an Asset Sale
shall not constitute Disqualified Stock if the terms of such Capital Stock
provide that the Company may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "--Certain Covenants--
Restricted Payments."
"Domestic Subsidiary" means a Subsidiary that is (i) formed under the laws
of the United States of America or a state or territory thereof or (ii) as of
the date of determination, treated as a domestic entity or a partnership or a
division of a domestic entity for United States federal income tax purposes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company, other than any private sales to
an Affiliate of the Company.
"Escrow Account" means the escrow account maintained pursuant to the Escrow
Letter.
"Escrow Letter" means that certain escrow letter dated March 2, 1998, by and
among Lazard Brothers & Co., Limited, The Energy Group PLC, Peabody
Investments Inc. and P&L Coal Holdings Corporation.
"Existing Citizens Power Investment" means the Investments in Citizens Power
by the Company and its Restricted Subsidiaries as of the date of the closing
of the Acquisition.
"Existing Indebtedness" means up to $292.5 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the Senior Credit Facilities, the Senior Exchange
Notes, the Senior Subordinated Exchange Notes and related Guarantees) in
existence on the date of the closing of the Acquisition, until such amounts
are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount,
noncash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letters of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations, but
193
<PAGE>
excluding amortization of debt issuance costs) and (ii) the consolidated
interest of such Person and its Restricted Subsidiaries that was capitalized
during such period, and (iii) any interest expense on the portion of
Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one
of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the Company, times (b)
a fraction, the numerator of which is one and the denominator of which is one
minus the effective combined federal, state and local tax rate of such Person
for such period, expressed as a decimal, in each case, for the Company and its
Restricted Subsidiaries on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash
Flow of such Person and its Restricted Subsidiaries for such period to the
Fixed Charges of such Person and its Restricted Subsidiaries for such period.
In the event that the referrent Person or any of its Restricted Subsidiaries
incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions and including pro forma cost savings permitted by Article 11 of
Regulation S-X, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be given pro
forma effect as if they had occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, and (iii) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"Foreign Subsidiaries" means Subsidiaries of the Company that are not
Domestic Subsidiaries.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Senior Subordinated Note
Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange, interest rate or commodity swap
agreements, currency exchange, interest rate or commodity cap agreements and
currency exchange, interest rate or commodity collar agreements and (ii) other
agreements or arrangements designed to protect such Person against
fluctuations in currency exchange, interest rates or commodity prices, in each
case for the purpose of risk management and not for speculation.
194
<PAGE>
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations, if
and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person, but excluding from the definition of "Indebtedness," any of the
foregoing that constitutes (1) an accrued expense, (2) trade payables and (3)
Obligations in respect of reclamation, workers' compensation, including black
lung, pensions and retiree health care, in each case to the extent not overdue
for more than 90 days. The amount of any Indebtedness outstanding as of any
date shall be (i) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount, and (ii) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees, other than performance guarantees
provided for the benefit of Citizens Power of any portion of Indebtedness or
other obligations), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Restricted
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are (i) traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; and (ii)
issued by a corporation having a total equity market capitalization of not
less than $250.0 million; provided that the excess of (A) the aggregate amount
of securities of any one such corporation held by the Company and any
Restricted Subsidiary over (B) ten times the average daily trading volume of
such securities during the 20 immediately preceding trading days shall be
deemed not to be Marketable Securities; as determined on the date of the
contract relating to such Asset Sale.
"Net Income" means, with respect to any Person, the net income or loss of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
or loss, together with any related provision for taxes on such extraordinary
or nonrecurring gain or loss.
195
<PAGE>
"Net Proceeds" means the aggregate proceeds (cash or property) received by
the Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any noncash consideration received in any Asset Sale) or the
sale or disposition of any Investment, net of the direct costs relating to
such Asset Sale, sale or disposition, (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Guarantor Subsidiaries" means (i) Citizens Power and its direct and
indirect Subsidiaries, (ii) the Company's future Unrestricted Subsidiaries and
(iii) the Company's current and future Foreign Subsidiaries.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness) other than a pledge of the Equity Interests of any Unrestricted
Subsidiaries, (b) is directly or indirectly liable (as a guarantor or
otherwise) other than by virtue of a pledge of the Equity Interests of any
Unrestricted Subsidiaries, or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than the Senior Subordinated Exchange Notes being offered hereby) of
the Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity.
"Obligations" means any principal, premium (if any), interest, penalties,
fees, charges, expenses, indemnifications, reimbursement obligations, damages,
Guarantees and other liabilities and amounts payable under the documentation
governing any Indebtedness or in respect thereto.
"Permitted Business" means coal production, coal mining, coal brokering,
coal transportation, mine development, power marketing, electricity
generation, power/energy sales and trading, energy transactions/asset
restructurings, risk management products associated with energy, fuel/power
integration and other energy related businesses, ash disposal, environmental
remediation, coal, natural gas, petroleum or other fossil fuel exploration,
production, marketing, transportation and distribution and other related
businesses, and activities of the Company and its Subsidiaries as of the date
of the closing of the Acquisition and any business or activity that is
reasonably similar thereto or a reasonable extension, development or expansion
thereof or ancillary thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person, in one transaction
or a series of related transactions, is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the Company; (d)
any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of the Company; (e) any Investment
existing on the date of the closing of the Acquisition (an "Existing
Investment") and any Investment that replaces, refinances or refunds an
Existing Investment, provided that the new Investment is in an amount that
does not exceed the amount replaced, refinanced or refunded and is made in the
same Person as the Investment replaced, refinanced or refunded, (f) advances
to employees not in excess of $10.0 million outstanding at any one time; (g)
Hedging Obligations permitted under clause (ix) of the "--Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant; (h) loans and advances
to officers, directors and employees for business-related travel expenses,
moving expenses and other similar expenses, in each case incurred in the
ordinary course of business; (i) any Investment in a Permitted Business
(whether or not an Investment in an Unrestricted Subsidiary) having an
aggregate fair market value, when taken together with all other Investments
made pursuant to this clause (i), does not exceed in aggregate amount the sum
of (1) 10% of Total Assets at the time of such Investment (with the fair
market value of each Investment being measured at the time made and without
giving effect to
196
<PAGE>
subsequent changes in value) plus (2) 100% of the Net Proceeds from the sale
or disposition of any Investment previously made pursuant to this clause (i)
or 100% of the amount of any dividend, distribution or payment from any such
Investment, net of income taxes paid or payable in respect thereof, in each
case up to the amount of the Investment that was made pursuant to this clause
(i) and 50% of the amount of such Net Proceeds or 50% of such dividends,
distributions or payments, in each case received in excess of the amount of
the Investments made pursuant to this clause (i); (j) guarantees (including
Guarantees) of Indebtedness permitted under the covenant "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" (k) any Investment acquired by
the Company or any of its Restricted Subsidiaries (A) in exchange for any
other Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a bankruptcy,
workout, reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (B) as a result of the transfer of title
with respect to any secured Investment in default as a result of a foreclosure
by the Company or any of its Restricted Subsidiaries with respect to such
secured Investment; (l) any Investment in Black Beauty Coal Company having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (l), that are at the time outstanding not to exceed
$50.0 million (with any write-down or write-off of any such Investment deemed
to remain outstanding); (m) Investments in Citizens Power having an aggregate
fair market value, taken together with all other Investments made pursuant to
this clause (m), that are at that time outstanding not to exceed $50.0 million
at the time of such Investment (with the fair market value of each Investment
being measured at the time made and without giving effect to subsequent
changes in value); (n) any Investment in the Bengalla Joint Venture and the
Warkworth Associates Joint Venture having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (n),
that are at the time outstanding, not to exceed $25.0 million (with any write-
down or write-off of any such Investment deemed to remain outstanding); (o)
that portion of any Investment by the Company or a Restricted Subsidiary in a
Permitted Business to the extent that the Company or such Restricted
Subsidiary will receive in a substantially concurrent transaction an amount in
cash equal to the amount of such Investment (or the fair market value of such
Investment), net of any obligation to pay taxes or other amounts in respect of
the receipt of such cash; provided that the receipt of such cash does not
carry any obligation by the Company or such Restricted Subsidiary to repay or
return such cash; and (p) the forgiveness or cancellation of any payable due
from Citizens Power and its direct and indirect Subsidiaries outstanding on
the date of the closing of the Acquisition; provided, however, that with
respect to any Investment, the Company may, in its sole discretion, allocate
all or any portion of any Investment to one or more of the above clauses so
that the entire Investment would be a Permitted Investment.
"Permitted Liens" means (i) Liens securing Indebtedness under Credit
Facilities that were permitted by the terms of the Senior Subordinated Note
Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of
the Person merged into or consolidated with the Company; (iv) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance or
other kinds of social security; (vii) Liens existing on the date of the
closing of the Acquisition; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(ix) Liens on assets of Senior Subordinated Note Guarantors to secure Senior
Debt of such Senior Subordinated Note Guarantors that was permitted by the
Senior Subordinated Note Indenture to be incurred; (x) Liens incurred in the
ordinary course of business of the Company or any Restricted Subsidiary of the
Company with respect to obligations that (a) are not incurred in connection
with the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (b) do not in the
aggregate materially detract from the value of the property or materially
impair the use thereof in the
197
<PAGE>
operation of business by the Company or such Restricted Subsidiary; (xi) Liens
on assets of Foreign Subsidiaries to secure Indebtedness that was permitted by
the Senior Subordinated Note Indenture to be incurred; (xii) statutory liens
of landlords, mechanics, suppliers, vendors, warehousemen, carriers or other
like Liens arising in the ordinary course of business; (xiii) judgment Liens
not giving rise to an Event of Default so long as any appropriate legal
proceeding that may have been duly initiated for the review of such judgment
shall not have been finally terminated or the period within which such legal
proceeding may be initiated shall not have expired; (xiv) easements, rights-
of-way, zoning and similar restrictions and other similar encumbrances or
title defects incurred or imposed, as applicable, in the ordinary course of
business and consistent with industry practices which, in the aggregate, are
not substantial in amount, and which do not in any case materially detract
from the value of the property subject thereto (as such property is used by
the Company or its Subsidiaries) or interfere with the ordinary conduct of the
business of the Company or such Subsidiaries; provided, however, that any such
Liens are not incurred in connection with any borrowing of money or any
commitment to loan any money or to extend any credit; (xv) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (vi) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" and other purchase money Liens to finance
property or assets of the Company or any Restricted Subsidiary acquired in the
ordinary course of business; provided that such Liens are only secured by such
property or assets so acquired or improved (including, in the case of the
acquisition of Capital Stock of a Person who becomes a Restricted Subsidiary,
Liens on the assets of the Person whose Capital Stock was so acquired); (xvi)
Liens securing Indebtedness under Hedging Obligations; provided that such
Liens are only secured by property or assets that secure the Indebtedness
subject to the Hedging Obligation; (xvii) Liens to secure Indebtedness
permitted by clause (xv) of the second paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock;" and (xviii)
Liens on the Equity Interests of Unrestricted Subsidiaries securing
obligations of Unrestricted Subsidiaries not otherwise prohibited by the
Senior Subordinated Notes Indenture.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable), plus accrued interest and premium, if any, on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Senior Subordinated
Exchange Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Senior Subordinated Exchange Notes on terms at least as
favorable to the Holders of Senior Subordinated Exchange Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means those certain Senior Credit Facilities,
dated as of May 18, 1998, by and among the Company, the Senior Note
Guarantors, Lehman Commercial Paper Inc., as Arranger, Syndication Agent and
the Administrative Agent and the other lenders party thereto, including any
related notes, guarantees, collateral documents, letters of credit,
instruments and agreements executed in connection therewith (and any
appendices, exhibits or schedules to any of the foregoing), and in each case
as amended, modified, supplemented,
198
<PAGE>
restated, renewed, refunded, replaced, restructured, repaid or refinanced from
time to time (whether with the original agents and lenders or other agents and
lenders or otherwise, and whether provided under the original credit agreement
or other credit agreements or otherwise).
"Senior Note Indenture" means the indenture dated May 18, 1998, governing
the Senior Notes.
"Senior Exchange Notes" mean the 8 7/8% Series B Senior Notes of the Company
due 2008.
"Senior Subsidiary Guarantees" mean the guarantees endorsed on the Senior
Subordinated Exchange Notes by the Senior Subordinated Note Guarantors.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or Senior Subordinated Note Trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).
"Total Assets" means the total assets of the Company and its Restricted
Subsidiaries on a consolidated basis determined in accordance with GAAP, as
shown on the most recently available consolidated balance sheet of the Company
and its Restricted Subsidiaries.
"Transaction Documents" means the documents related to (i) the Acquisition
(including, without limitation, the purchase agreement, the participation
agreement and the escrow agreement), (ii) the Senior Credit Facilities and
(iii) the offering of the Old Senior Notes and the Old Senior Subordinated
Notes.
"Treasury Rate" means the yield to maturity at the time of the computation
of the United States Treasury securities with a constant maturity (as compiled
by and published in the most recent Federal Reserve Statistical Release
H.15(519), which has become publicly available at least two Business Days
prior to the date fixed for redemption (or if such Statistical Release is no
longer published, any publicly available source of similar market data)) most
nearly equal to the then remaining average life to May 15, 2003; provided,
however, that if the average life of such Senior Subordinated Exchange Note is
not equal to the constant maturity of the United States Treasury security for
which weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from
the weekly average yields of United States Treasury securities for which such
yields are given, except that if the average life of such Senior Subordinated
Exchange Note is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of
one year shall be used.
"Unrestricted Subsidiary" means (i) Citizens Power, any direct or indirect
Subsidiary of Citizens Power on the date of the Senior Subordinated Note
Indenture and (ii) any Subsidiary that is designated by the Board of Directors
as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the
extent that such Person: (a) has no Indebtedness other than Non-Recourse Debt;
(b) is not party to any agreement, contract, arrangement or understanding with
the Company or any Restricted Subsidiary of the Company unless the terms of
any such agreement, contract, arrangement or understanding are no less
favorable to the Company or such Restricted
199
<PAGE>
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company; (c) is a Person with respect to which neither
the Company nor any of its Restricted Subsidiaries has any obligation (x) to
subscribe for additional Equity Interests in Unrestricted Subsidiaries (except
with respect to Permitted Investments) or (y) to maintain or preserve such
Person's net worth; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any
of its Restricted Subsidiaries; provided, however, that the Company and its
Restricted Subsidiaries may guarantee the performance of Unrestricted
Subsidiaries in the ordinary course of business except for guarantees of
Obligations in respect of borrowed money. Any such designation by the Board of
Directors shall be evidenced to the Senior Subordinated Note Trustee by filing
with the Senior Subordinated Note Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and
was permitted by the covenant described above under the caption "Certain
Covenants--Restricted Payments."
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Warkworth Associates Joint Venture" means Warkworth Coal Sales Ltd.,
Warkworth Pastoral Co. Pty, Limited and Warkworth Mining Limited, which are
the joint venture companies related to the Warkworth mine in New South Wales,
Australia.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
200
<PAGE>
MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
The discussion below addresses the material tax consequences of the Exchange
Offers and is based upon the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and the regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed,
revoked or modified so as to result in federal income tax consequences
different from those discussed below.
The exchange of Old Notes for Exchange Notes will not constitute a taxable
transaction to Holders for federal income tax purposes. Consequently, no gain
or loss will be recognized by Holders upon receipt of the Exchange Notes, the
holding period of the Exchange Notes will include the holding period of the
Old Notes and the basis of the Exchange Notes will be the same as the basis of
the Old Notes immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISERS CONCERNING THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS
WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
201
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offers must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Old
Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. To the extent any such broker-dealer
participates in the Exchange Offers and so notifies the Company, or causes the
Company to be so notified in writing, the Company has agreed that a period of
180 days after the date of this Prospectus, it will make this Prospectus, as
amended or supplemented, available to such broker-dealer for use in connection
with any such resale, and will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any broker-
dealer that requests such documents in the Letters of Transmittal.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offers may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at prevailing market prices at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offers and any broker or dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act, and any profit on
any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letters of Transmittal state that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offers
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old
Notes against certain liabilities, including certain liabilities that may
arise under the Securities Act.
By its acceptance of the Exchange Offers, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offers hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer
of Exchange Notes, and acknowledges and agrees that, upon receipt of notice
from the Company of the happening of any event which makes any statement in
the Prospectus untrue in any material respect or which requires the making of
any changes in the Prospectus in order to make the statements therein not
misleading or which may impose upon the Company disclosure obligations that
may have a material adverse effect on the Company (which notice the Company
agrees to deliver promptly to such broker-dealer), such broker-dealer will
suspend use of the Prospectus until the Company has notified such broker-
dealer that delivery of the Prospectus may resume and has furnished copies of
any amendment or supplement to the Prospectus to such broker-dealer.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson Thacher
& Bartlett, New York, New York.
202
<PAGE>
EXPERTS
The reserve reports and estimates of the Company's proven and probable coal
reserves included herein have, to the extent described herein, been prepared
by the Company and reviewed by Boyd.
The Combined Financial Statements and Schedule of P&L Coal Group as of and
for the periods ended March 31, 1998 and 1997 and September 30, 1996 and 1995
and the Balance Sheet of P&L Coal Holdings Corporation as of March 31, 1998
audited by Ernst & Young LLP have been included in reliance on their reports
given or their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission a Registration
Statement on Form S-4 (together with all amendments, exhibits, schedules and
supplements thereto, the "Registration Statement") under the Securities Act
with respect to the Exchange Notes being offered hereby. This Prospectus,
which forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Exchange Notes, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and,
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified by the provisions in such exhibit,
to which reference is hereby made. The Company and the Guarantors are not
currently subject to the informational requirements of the Exchange Act. As a
result of the offering of the Exchange Notes, the Company and the Guarantors
will become subject to the informational requirements of the Exchange Act,
and, in accordance therewith, will file reports and other information with the
Commission. The Registration Statement, such reports and other information can
be inspected and copied at the Public Reference Section of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549 and at regional public reference facilities maintained by the Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material, including copies of all or any portion of the
Registration Statement, can be obtained from the Public Reference Section of
the Commission at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet
(http://www.sec.gov).
So long as the Company and the Guarantors are subject to the periodic
reporting requirements of the Exchange Act, they are required to furnish the
information required to be filed with the Commission to the Trustee and the
holders of the Old Notes and the Exchange Notes. The Company and the
Guarantors have agreed that, even if they are not required under the Exchange
Act to furnish such information to the Commission, they will nonetheless
continue to furnish information that would be required to be furnished by the
Company and the Guarantors by Section 13 of the Exchange Act, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants to the Trustee and the
holders of the Old Notes or Exchange Notes as if they were subject to such
periodic reporting requirements.
203
<PAGE>
GLOSSARY OF SELECTED TERMS
Anthracite. The highest rank of economically usable coal with moisture
content less than 15% by weight and heating value as high as 15,000 Btus per
pound. It is jet black with a high luster. It is mined primarily in
Pennsylvania.
Appalachian Region. Coal producing states of Alabama, Georgia, eastern
Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia
and West Virginia.
Ash. Impurities consisting of iron, alumina and other incombustible matter
that are contained in coal. Since ash increases the weight of coal, it adds to
the cost of handling and can affect the burning characteristics of coal.
Bituminous Coal. The most common type of coal with moisture content less
than 20% by weight and heating value of 10,500 to 14,000 Btus per pound. It is
dense and black and often has well-defined bands of bright and dull material.
British Thermal Unit ("Btu"). A measure of the energy required to raise the
temperature of one pound of water one degree Fahrenheit.
Clean Air Act Amendments of 1990. A comprehensive set of amendments to the
federal law governing the nation's air quality. The Clean Air Act was
originally passed in 1970 to address significant air pollution problems in our
cities. The 1990 amendments broadened and strengthened the original law to
address specific problems such as acid deposition, urban smog, hazardous air
pollutants and stratospheric ozone depletion.
Coal Seam. Coal deposits occur in layers. Each such layer is called a
"seam."
Coke. A hard, dry carbon substance produced by heating coal to a very high
temperature in the absence of air. Coke is used in the manufacture of iron and
steel. Its production results in a number of useful byproducts.
Coking Coal. Coal used to make coke and interchangeably referred to as
metallurgical coal.
Continuous Mining. A form of underground room-and-pillar mining which uses a
continuous mining machine to cut coal from the seam and load it onto conveyors
or into shuttle cars in a continuous operation.
Deep Mine. An underground coal mine.
Draglines. A large excavating machine used in the surface mining process to
remove overburden.
Dragline Mining. A form of mining where large capacity electric-powered
draglines remove overburden to expose the coal seam. Smaller shovels load coal
in haul trucks for transportation to the preparation plant and then to the
rail loadout.
Federal Energy Regulatory Commission ("FERC"). A regulatory agency within
the Department of Energy that has jurisdiction over interstate electricity
sales, wholesale electric rates, hydro-electric licensing, natural gas
pricing, oil pipeline rates and gas pipeline certification.
Fossil Fuel. Fuel such as coal, petroleum or natural gas formed from the
fossil remains of organic material.
Greenfield. Undeveloped coal reserves.
Hard Rock Mine. A mine for hard rock minerals, which include copper, lead,
zinc, magnesium, nickel and gold. Coal mines are not considered hard rock
mines.
Illinois Basin. Coal producing area in Illinois, western Indiana and western
Kentucky.
Interior Region. Coal producing states of Arkansas, Illinois, Indiana, Iowa,
Kansas, Michigan, western Kentucky, Louisiana, Missouri, Oklahoma and Texas.
Lignite. The lowest rank of coal with a high moisture content of up to 45%
by weight and heating value of 6,500 to 8,300 Btus per pound. It is brownish
black and tends to oxidize and disintegrate when exposed to air.
204
<PAGE>
Longwall Mining. A form of underground mining in which a panel or block of
coal, generally 700 feet wide and often over one mile long, is completely
extracted. The working area is protected by a moveable, powered roof support
system.
Metallurgical Coal. The various grades of coal suitable for carbonization to
make coke for steel manufacture. Also known as "met" coal, it possesses four
important qualities: volatility, which affects coke yield; the level of
impurities, which affects coke quality; composition, which affects coke
strength; and basic characteristics, which affect coke oven safety. Met coal
has a particularly high Btu, but low ash content.
Nitrogen Oxide (NO/2/). A gas formed in high temperature environments such
as coal combustion. It is a harmful pollutant that contributes to acid rain.
NUG. Non-utility generator that sells power to a regulated utility under a
long term contract.
Organization for Economic Cooperation and Development (OECD). Members of the
OECD include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands,
New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States and its territories (Guam, Puerto Rico and the
U.S. Virgin Islands).
Overburden. Layers of earth and rock covering a coal seam. In surface mining
operations, overburden is removed prior to coal extraction.
Overburden Ratio/Stripping Ratio. The amount of overburden that must be
removed to excavate a given quantity of coal. It is commonly expressed in
cubic yards per ton of coal or as a ratio comparing the thickness of the
overburden with the thickness of the coal bed.
Pillar. An area of coal left to support the overlying strata in a mine;
sometimes left permanently to support surface structures.
Powder River Basin. Coal producing area in northeastern Wyoming and
southeastern Montana. This is the largest known source of coal reserves and
the largest producing region in the United States.
Preparation Plant. Usually located on a mine site, although one plant may
serve several mines. A preparation plant is a facility for crushing, sizing
and washing coal to prepare it for use by a particular customer. The washing
process has the added benefit of removing some of the coal's sulfur content.
Probable Reserves. In relation to coal, means reserves for which there is a
moderate degree of geological assurance. Coal tonnages are computed by
projection data from available seam measurements for a distance beyond coal
classed as measured or proven. The assurance, although lower than for proven
coal, is high enough to assume continuity between points of measurement. The
maximum acceptable distance for projection of indicated probable tonnage is
one-half to three-quarters mile from points of observation. Further
exploration is necessary to place these reserves in a proven category.
Proven Reserves. In relation to coal, means reserves for which there is the
highest degree of geological assurance. The sites for measurement are so
closely spaced and the geological character so well defined that the
thickness, real extent, size, shape and depth of coal are well established.
The maximum acceptable distance for projections from seam data points varies
with the geological nature of the coal seam being studied, but generally, a
radius of one-quarter mile is recognized as the standard. Proven reserves may
also be referred to as measured.
Reclamation. The process of restoring land and the environment to their
original state following mining activities. The process commonly includes
"recontouring" or reshaping the land to its approximate original appearance,
restoring topsoil and planting native grass and ground covers. Reclamation
operations are usually underway before the mining of a particular site is
completed. Reclamation is closely regulated by both state and federal law.
205
<PAGE>
Recoverable Reserves. The amount of coal that can be recovered from the
reserve base. The average recovery factor for underground mines and surface
mines is about 57% and 80%, respectively. Using these percentages, there are
about 300 billion tons of recoverable reserves in the United States, enough to
last more than 300 years at current consumption levels.
Roof. The stratum of rock or other mineral above a coal seam; the overhead
surface of a coal working place. Same as "back" or "top."
Roof Bolt. A long steel bolt driven into the roof of underground excavations
to support the roof, preventing and limiting the extent of roof falls. The
unit consists of the bolt (up to four feet long), steel plate, expansion
shell, and pal nut. The use of roof bolts eliminates the need for timbering by
fastening together, or "laminating," several weaker layers of roof strata to
build a "beam."
Roof Support. Posts, jacks, roof bolts and beams used to support the rock
overlying a coal seam in an underground mine. A good roof support plan is part
of mine safety and coal extraction.
Room and Pillar Mining. The most common method of underground mining in
which the mine roof is supported mainly by coal pillars left at regular
intervals. Rooms are placed where the coal is mined; pillars are areas of coal
left between the rooms. Room-and-pillar mining is done either by conventional
or continuous mining.
Scrubber (flue gas desulfurization unit). Any of several forms of
chemical/physical devices which operate to neutralize sulfur compounds formed
during coal combustion. These devices combine the sulfur in gaseous emissions
with other chemicals to form inert compounds, such as gypsum, which must then
be removed for disposal. Although effective in substantially reducing sulfur
from combustion gases, scrubbers require about six to seven percent of a power
plant's electrical output and thousands of gallons of water to operate.
Steam Coal. Coal used by power plants and industrial steam boilers to
produce electricity or process steam. It generally is lower in Btu heat
content and higher in volatile matter than metallurgical coal.
Subbituminous Coal. Dull, black coal that ranks between lignite and
bituminous coal. Its moisture content is between 20% and 30% by weight, and
its heat content ranges from 7,800 to 9,500 Btus per pound of coal.
Sulfur. One of the elements present in varying quantities in coal that
contributes to environmental degradation when coal is burned. Sulfur dioxide
(SO/2/) is produced as a gaseous by-product of coal combustion.
Sulfur Content. Coal is commonly described by its sulfur content due to the
importance of sulfur in environmental regulations. "Low sulfur" coal has a
variety of definitions but typically is used to describe coal consisting of
1.0% or less sulfur. A majority of the Company's Appalachian and Powder River
Basin reserves are of low sulfur grades.
Surface Mine. A mine in which the coal lies near the surface and can be
extracted by removing the covering layer of soil (see "Overburden"). About 60%
of total U.S. coal production comes from surface mines.
Tons. A "short" or net ton is equal to 2,000 pounds. A "long" or British ton
is 2,240 pounds; a "metric" ton is approximately 2,205 pounds. The short ton
is the unit of measure referred to in this document.
Truck and Shovel Mining. A form of mining where large shovels are used to
remove overburden, which is used to backfill pits after the coal is removed.
Smaller shovels load coal in haul trucks for transportation to the preparation
plant or rail loadout.
Underground Mine. Also known as a "deep" mine. Usually located several
hundred feet below the earth's surface, an underground mine's coal is removed
mechanically and transferred by shuttle car or conveyor to the surface. Most
underground mines are located east of the Mississippi River and account for
about 40% of annual U.S. coal production.
Unit Train. A train of 100 or more cars carrying only coal. A typical unit
train can carry at least 10,000 tons of coal in a single shipment.
Western Bituminous Coal Regions. Coal producing area including, the Hanna
Basin in Wyoming, the Uinta Basin of northwestern Colorado and Utah, the Four
Corners Region in New Mexico and Arizona and the Raton Basin in southern
Colorado.
206
<PAGE>
[ORGANIZATIONAL CHART]
O-1
<PAGE>
[ORGANIZATIONAL CHART]
O-2
<PAGE>
[ORGANIZATIONAL CHART]
O-3
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERMS PAGE NUMBER
- ------------- -------------
<S> <C>
1971 Agreement.................................................... 87
1992 Fund......................................................... 90
5% Subordinated Note.............................................. 108
Acquired Companies................................................ 2
Acquired Debt..................................................... 155, 190
Acquired Group.................................................... 101
Acquisition....................................................... 2, 155, 190
Additional Assets................................................. 155, 190
AMT............................................................... 35
Asset Sale........................................................ 155, 190, 191
Asset Sale Offer.................................................. 139
Bengalla Joint Venture............................................ 156, 191
Black Beauty...................................................... 1
Black Beauty Coal Company......................................... 156, 191
Boyd.............................................................. 1
Capital Lease Obligation.......................................... 156, 191
Capital Stock..................................................... 156, 191
Cash Equivalents.................................................. 156, 191
Cautionary Statements............................................. 16
CEO............................................................... 99
CERCLA............................................................ 25
Certificated Senior Exchange Notes................................ 154
Certificated Senior Subordinated Notes............................ 189
Chaco............................................................. 3
Change of Control Offer........................................... 136, 169, 171
Change of Control Payment......................................... 136, 171
Change of Control Payment Date.................................... 136, 171
Citizens Power.................................................... 1, 156, 191
Class A Common Stock.............................................. 102
Class B Common Stock.............................................. 102
Class B Shares.................................................... 100
Clean Air Act..................................................... 1
Closing........................................................... 103
Coal Act.......................................................... 45
Code.............................................................. 201
Commission........................................................ Cover
Common Stock...................................................... 102
Company........................................................... Cover, 166
Consolidated Cash Flow............................................ 156, 192
Consolidated Net Income........................................... 157, 192
Covenant Defeasance............................................... 185
Convention........................................................ 24
CP Sales.......................................................... 103
Credit Facilities................................................. 157, 192
CSAs.............................................................. 1
Default........................................................... 157, 193
Depositor......................................................... 115
Designated Noncash Consideration.................................. 158, 193
Designated Senior Debt............................................ 168
Disqualified Stock................................................ 193
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
DEFINED TERMS NUMBER
- ------------- --------
<S> <C>
Domestic Subsidiary.................................................... 193
DTC.................................................................... 152
Eastern Association.................................................... 28
Edison................................................................. 86
EIA.................................................................... 54
Eligible Institution................................................... 113, 124
Employment Agreements.................................................. 99
Energy Group........................................................... 2
EPA.................................................................... 23
Equity Interests....................................................... 158, 193
Equity Offering........................................................ 158, 193
Escrow Account......................................................... 158, 193
Escrow Letter.......................................................... 158, 193
Exchange Date.......................................................... Cover
Exchange Notes......................................................... Cover, 6
Exchange Offers........................................................ Cover
Existing Citizens Power Investment..................................... 158, 193
Existing Indebtedness.................................................. 158, 193
FIRB................................................................... 103
Fixed Charge Coverage Ratio............................................ 159, 194
Fixed Charges.......................................................... 158, 193
Foreign Subsidiaries................................................... 159, 194
GAAP................................................................... 159, 194
Global Senior Exchange Notes........................................... 152
Global Senior Subordinated Exchange Notes.............................. 187
Gold Fields............................................................ 25
Guarantee.............................................................. 159, 194
Guarantors............................................................. Cover
Guaranty Facility...................................................... 105
Hanson................................................................. 14
Hayden Participants.................................................... 87
Hedging Obligations.................................................... 159, 194
HNRC................................................................... 46
Holders................................................................ Cover
IEA.................................................................... 60
Incur.................................................................. 142, 177
Indebtedness........................................................... 159, 195
Indirect Participants.................................................. 153, 188
Initial Purchaser...................................................... Cover, 5
Investments............................................................ 160, 195
IT..................................................................... 51
Kyoto Protocol......................................................... 24
LBHI................................................................... 105
LCPI................................................................... 2
Lee Ranch.............................................................. 38
Legal Defeasance....................................................... 150, 184
Lehman Brothers........................................................ Cover
Lehman Merchant Banking................................................ 2
Lien................................................................... 160
Marketable Securities.................................................. 160, 195
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
DEFINED TERMS NUMBER
- ------------- ------------
<S> <C>
Millennium......................................................... 46
Mine Decommissioning Costs......................................... 86
Moody's............................................................ 156
MWh................................................................ 56
NAAQS.............................................................. 23
Named Executive Officers........................................... 98
NAV................................................................ 105
NBCWA.............................................................. 85
Net Income......................................................... 160, 195
Net Proceeds....................................................... 160
Non-Guarantor Subsidiaries......................................... 11, 161, 196
Non-Recourse Debt.................................................. 161, 196
Notes.............................................................. Cover
Obligations........................................................ 161
OECD............................................................... 60
Offerings.......................................................... 2
Old Notes.......................................................... Cover, 6
Old Senior Notes................................................... 4
Old Senior Subordinated Notes...................................... Cover, 6
Options............................................................ 100
OSM................................................................ 91
OTAG............................................................... 92
P&L Coal Group..................................................... 40
Participants....................................................... 152
Participation Agreement............................................ 103
Patriot Coal....................................................... 38
Payment Blockage Notice............................................ 168
PBGC............................................................... 47
PCC................................................................ 28, 74
Peabody............................................................ Cover
Peabody Holding Company............................................ 2
Peabody Investments................................................ 45
Peabody Resources Debt............................................. 109
Peabody Western.................................................... 28
Pension Plan....................................................... 98
Performance Bonds.................................................. 109
Permitted Business................................................. 161
Permitted Debt..................................................... 143, 177
Permitted Investments.............................................. 161, 166
Permitted Junior Securities........................................ 168
Permitted Liens.................................................... 162, 197
Permitted Refinancing Indebtedness................................. 163, 198
PG II.............................................................. 104
PII Group.......................................................... 104
PNRC............................................................... 3
PORTAL............................................................. Cover, 20
Post-mine Closure Costs............................................ 87
Powder River....................................................... 38
Preferred Stock.................................................... 102
Prepayment Agreement............................................... 3
Principals......................................................... 173
PTS................................................................ 85
Purchase Price..................................................... 103
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
DEFINED TERMS NUMBER
- ------------- ----------------
<S> <C>
Purchase Conditions............................................ 103
Purchase Agreement............................................. 2
RACT........................................................... 24
RCRA........................................................... 92
Registration Default........................................... 110, 121
Related Party.................................................. 173
Restricted Investment.......................................... 163, 198
Restricted Subsidiary.......................................... 163, 198
Retiree Health Care Costs...................................... 86
Revolving Credit Facility...................................... 2
S & P.......................................................... 156
SIP Call....................................................... 24
Salt River..................................................... 86
Securities Act................................................. Cover
Selling Shareholders........................................... 103
Seneca......................................................... 87
Senior Credit Facilities....................................... 2, 163
Senior Debt.................................................... 168
Senior Exchange Agent.......................................... 6
Senior Exchange Date........................................... 4
Senior Exchange Notes.......................................... Cover, 4, 6, 199
Senior Letter of Transmittal................................... 4
Senior Note Trustee............................................ 133, 196
Senior Notes................................................... Cover, 4, 7
Senior Notes Indenture......................................... 133
Senior Notice of Guaranteed Delivery........................... 113
Senior Registration Rights Agreement........................... 5
Senior Subordinated Exchange Agent............................. 9
Senior Subordinated Exchange Date.............................. 7
Senior Subordinated Exchange Notes............................. Cover, 6, 164
Senior Subordinated Letter of Transmittal...................... 7
Senior Subordinated Note Guarantors............................ 170
Senior Subordinated Note Indenture............................. 166
Senior Subordinated Note Trustee............................... 166
Senior Subordinated Notes...................................... Cover, 6
Senior Subordinated Registration Rights Agreement.............. 8
Senior Subsidiary Guarantees................................... Cover, 134
SFAS........................................................... 15
SFAS 106....................................................... 26
SFAS 121....................................................... 15
SFAS 131....................................................... 52
SFAS 133....................................................... 52
SIP Call....................................................... 24
SMCRA.......................................................... 23
Stated Maturity................................................ 164, 199
Subordinated Subsidiary Guarantees............................. Cover, 164, 168
Subsidiary..................................................... 164, 199
Subsidiary Guarantees.......................................... Cover
Superfund...................................................... 25
Superperformance Options....................................... 100
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
PAGE
DEFINED TERMS NUMBER
- ------------- --------
<S> <C>
Surety Bonds........................................................... 27
Swingline Loans........................................................ 107
Term Loan Facility..................................................... 2
Total Assets........................................................... 164, 199
Transaction Documents.................................................. 164, 199
Transferor............................................................. 114, 126
Treasury Rate.......................................................... 164, 199
Trust Indenture Act.................................................... 133
TSA.................................................................... 46
TU..................................................................... 2
TU Offer............................................................... 103
UMWA................................................................... 15
Unaudited Pro Forma Condensed Financial Statements..................... 31
Unaudited Pro Forma Condensed Statements of Operations................. 31
Unrestricted Subsidiary................................................ 164, 199
Voting Stock........................................................... 165, 200
Warkworth Associates Joint Venture..................................... 165, 200
Weighted Average Life To Maturity...................................... 165, 200
Wholly Owned Subsidiary................................................ 200
Wholly Owned Restricted Subsidiary..................................... 200
Year 2000 Issue........................................................ 29
</TABLE>
I-5
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
P&L COAL HOLDINGS CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ............................................ F-2
Balance Sheet.............................................................. F-3
Note to Balance Sheet ..................................................... F-4
</TABLE>
P&L COAL GROUP
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors ............................................ F-5
Combined Financial Statements:
Statements of Combined Operations........................................ F-6
Combined Balance Sheets.................................................. F-7
Statements of Combined Changes in Invested Capital....................... F-8
Statements of Combined Cash Flows........................................ F-9
Notes to Combined Financial Statements................................... F-10
UNAUDITED FINANCIAL STATEMENTS
P&L COAL HOLDINGS CORPORATION
JUNE 30, 1998
Condensed Consolidated Financial Statements:
Unaudited Statement of Condensed Consolidated Operations................. F-41
Unaudited Condensed Consolidated Balance Sheets.......................... F-42
Unaudited Statement of Condensed Consolidated Cash Flows................. F-43
Notes to Unaudited Condensed Consolidated Financial Statements........... F-44
P&L COAL GROUP
MAY 19, 1998
Condensed Combined Financial Statements:
Unaudited Statements of Condensed Combined Operations.................... F-51
Unaudited Condensed Combined Balance Sheets.............................. F-52
Unaudited Statements of Condensed Combined Cash Flows.................... F-53
Notes to Unaudited Condensed Combined Financial Statements............... F-54
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
P&L Coal Holdings Corporation
We have audited the accompanying balance sheet of P&L Coal Holdings
Corporation as of March 31, 1998. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of P&L Coal Holdings Corporation at
March 31, 1998, in confirmity with generally accepted accounting principles.
Ernst & Young LLP
St. Louis, MO
July 9, 1998
F-2
<PAGE>
P&L COAL HOLDINGS CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents........................................... $ 1
----
Total current assets.............................................. 1
Noncurrent assets..................................................... --
----
Total assets...................................................... $ 1
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Total liabilities................................................. $--
----
Stockholder's equity.................................................. 1
----
Total liabilities and stockholder's equity........................ $ 1
====
</TABLE>
See accompanying note to balance sheet.
F-3
<PAGE>
P&L COAL HOLDINGS CORPORATION
NOTE TO BALANCE SHEET
(1) BASIS OF PRESENTATION
Description of Business
P&L Coal Holdings Corporation (the "Company") was incorporated February 27,
1998 for the purpose of acquiring the coal business and the U.S. energy
trading business held by The Energy Group PLC. P&L Coal Holdings Corporation
is a holding company with no direct operations and nominal assets separate
from its investment in its subsidiaries.
Details of Stockholder's Equity
Stockholder's equity as of March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
COMMON PAID-IN CAPITAL IN RETAINED TOTAL
STOCK EXCESS OF PAR VALUE EARNINGS STOCKHOLDER'S EQUITY
------ ------------------- -------- --------------------
<S> <C> <C> <C>
$0.01 $0.99 $0.00 $1.00
</TABLE>
P&L Coal Holdings Corporation common stock has a par value of $.01 per
share; 1,000 shares are authorized and 1 share is outstanding at March 31,
1998. Effective May 15, 1998, the Company amended and restated its certificate
of incorporation in connection with its acquisition of the businesses
discussed above, such acquisition was completed May 19, 1998. The amended
capital structure provides for 35 million of authorized shares, comprised of
25 million common shares at $.01 par value per share, and 10 million non-
convertible, exchangeable preferred shares at $.01 par value per share.
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Peabody Holding Company, Inc. and Subsidiaries
We have audited the accompanying combined balance sheets of P&L Coal Group
as of March 31, 1998 and 1997 and September 30, 1996, and the related
statements of combined operations, combined changes in invested capital, and
combined cash flows for the year ended March 31, 1998, for the six months
ended March 31, 1997, and for each of the two years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of P&L Coal Group at
March 31, 1998 and 1997 and September 30, 1996, and the combined results of
its operations and its cash flows for the year ended March 31, 1998, the six
months ended March 31, 1997, and each of the two years in the period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the combined financial statements, in 1996 the
Company changed its method of accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of.
Ernst & Young LLP
St. Louis, MO
April 24, 1998
F-5
<PAGE>
P&L COAL GROUP
STATEMENTS OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Sales................. $2,075,134 $1,000,419 $2,075,142 $2,087,656
Other revenues........ 169,328 63,674 118,444 88,180
---------- ---------- ---------- ----------
Total revenues...... 2,244,462 1,064,093 2,193,586 2,175,836
OPERATING COSTS AND
EXPENSES
Operating costs and
expenses............. 1,710,801 822,938 1,693,543 1,671,433
Depreciation,
depletion and
amortization......... 202,640 101,730 197,853 190,330
Selling and
administrative
expenses............. 83,640 41,421 75,699 81,389
Impairment of long-
lived assets......... -- -- 890,829 --
Net gain on property
and equipment
disposals............ (21,806) (4,091) (13,042) (12,928)
---------- ---------- ---------- ----------
OPERATING PROFIT
(LOSS)................. 269,187 102,095 (651,296) 245,612
Interest expense...... (33,635) (24,700) (62,526) (58,355)
Interest income....... 14,977 8,590 11,355 5,482
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES........... 250,529 85,985 (702,467) 192,739
Income tax provision
(benefit)............ 90,193 27,553 (256,185) 92,352
---------- ---------- ---------- ----------
NET INCOME (LOSS)....... $ 160,336 $ 58,432 $ (446,282) $ 100,387
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
P&L COAL GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............ $ 96,821 $ 281,109 $ 181,533
Accounts receivable, less allowance
of $9,100 in 1998,
$5,525 in 1997 and $5,072 in 1996... 326,540 220,956 203,493
Receivables from affiliates, net..... 112,763 5,882 1,615
Materials and supplies............... 67,343 67,730 65,264
Coal inventory....................... 197,480 187,381 161,822
Assets from trading and price risk
management activities............... 1,295,169 -- --
Deferred income taxes................ -- 133 5,135
Other current assets................. 30,036 27,673 34,311
----------- ----------- -----------
Total current assets............... 2,126,152 790,864 653,173
Property, plant, equipment and mine
development
Land and coal interests.............. 3,075,916 3,116,394 3,123,488
Building and improvements............ 721,883 713,979 690,239
Machinery and equipment.............. 1,441,140 1,466,113 1,469,492
Less accumulated depreciation,
depletion and amortization.......... (1,565,397) (1,507,695) (1,467,857)
----------- ----------- -----------
Property, plant, equipment and mine
development, net...................... 3,673,542 3,788,791 3,815,362
Investments and other assets........... 555,540 446,157 448,158
----------- ----------- -----------
Total assets....................... $ 6,355,234 $ 5,025,812 $ 4,916,693
=========== =========== ===========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current
maturities of long-term debt........ $ 46,616 $ 121,532 $ 243,273
Income taxes payable................. 2,388 16,088 27,173
Deferred income taxes................ 6,036 -- --
Liabilities from trading and price
risk management activities.......... 947,467 -- --
Accounts payable and accrued
expenses............................ 587,674 486,168 512,192
----------- ----------- -----------
Total current liabilities.......... 1,590,181 623,788 782,638
Long-term debt, less current
maturities............................ 555,660 200,191 213,594
Deferred income taxes.................. 661,572 589,280 588,952
Accrued reclamation and other
environmental liabilities............. 416,361 436,152 451,611
Workers' compensation obligations...... 260,895 284,001 291,619
Accrued postretirement benefit costs... 876,244 860,952 853,625
Obligation to industry fund............ 97,045 123,816 137,683
Other noncurrent liabilities........... 209,434 230,846 213,316
----------- ----------- -----------
Total liabilities.................. 4,667,392 3,349,026 3,533,038
Invested capital....................... 1,687,842 1,676,786 1,383,655
----------- ----------- -----------
Total liabilities and invested
capital........................... $ 6,355,234 $ 5,025,812 $ 4,916,693
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
P & L COAL GROUP
STATEMENTS OF COMBINED CHANGES IN INVESTED CAPITAL
<TABLE>
<CAPTION>
INVESTED
CAPITAL
--------------
(IN THOUSANDS)
<S> <C>
SEPTEMBER 30, 1994............................................... $1,656,560
Capital contribution........................................... 206,420
Dividend paid.................................................. (274,600)
Transactions with affiliates................................... (43,730)
Foreign currency translation adjustments....................... 5,938
Net income..................................................... 100,387
----------
SEPTEMBER 30, 1995............................................... $1,650,975
Capital contribution........................................... 284,156
Dividend paid.................................................. (72,830)
Transactions with affiliates................................... (46,114)
Foreign currency translation adjustments....................... 13,750
Net loss....................................................... (446,282)
----------
SEPTEMBER 30, 1996............................................... $1,383,655
Capital contribution........................................... 269,168
Transactions with affiliates................................... (31,670)
Foreign currency translation adjustments....................... (2,799)
Net income..................................................... 58,432
----------
MARCH 31, 1997................................................... $1,676,786
Transactions with affiliates................................... (41,987)
Dividend paid.................................................. (65,109)
Foreign currency translation adjustments....................... (42,184)
Net income..................................................... 160,336
----------
MARCH 31, 1998................................................... $1,687,842
==========
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE>
P & L COAL GROUP
STATEMENTS OF COMBINED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- ---------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss)....... $ 160,336 $ 58,432 $ (446,282) $ 100,387
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation,
depletion and
amortization.......... 202,640 101,730 197,853 190,330
Deferred income
taxes................. 65,508 17,529 (281,651) 62,776
Amortization of debt
discount.............. 11,205 5,767 10,378 9,792
Net gain on property
and equipment
disposals............. (21,806) (4,091) (13,042) (12,928)
Gain on contract
restructuring......... (49,270) (11,624) (22,000) (23,861)
Impairment of long-
lived assets.......... -- -- 890,829 --
Gain on sale of
investments........... (2,199) -- -- --
Change in current
assets and
liabilities,
excluding effects of
acquisitions:
(Increase) decrease
in accounts
receivable.......... (70,326) (17,718) 45,908 (5,267)
(Increase) decrease
in materials and
supplies............ (438) (2,526) 8,482 (1,770)
Increase in coal
inventory........... (16,160) (25,930) (3,373) (21,510)
(Increase) decrease
in other current
assets.............. (3,385) 6,550 (9,736) 14,958
Increase (decrease)
in accounts payable
and accrued
expenses............ 61,707 (25,496) (68,525) 22,342
Increase (decrease)
in income taxes
payable............. (12,447) (10,964) (31,079) 28,826
Net assets from
trading and price
risk management
activities............ (107,102) -- -- --
Accrued reclamation
and related
liabilities........... (18,509) (15,385) (28,678) (52,395)
Workers' compensation
obligations........... (23,106) (7,618) (38,036) (56,318)
Accrued postretirement
benefit costs......... 15,292 7,324 12,165 13,539
Obligation to industry
fund.................. (26,771) (13,867) (32,532) 1,696
Other, net............. 16,509 716 20,854 1,946
--------- --------- ---------- ---------
Net cash provided by
operating
activities.......... 181,678 62,829 211,535 272,543
--------- --------- ---------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES
Additions to property,
plant, equipment and
mine development....... (166,336) (76,460) (152,106) (188,006)
Acquisitions and equity
investments............ (58,715) -- -- (359,557)
Proceeds from sale of
business unit.......... -- -- -- 27,500
Proceeds from contract
restructurings......... 57,460 15,466 29,211 32,125
Proceeds from property
and equipment
disposals.............. 37,732 4,824 17,255 25,825
--------- --------- ---------- ---------
Net cash used in
investing
activities.......... (129,859) (56,170) (105,640) (462,113)
--------- --------- ---------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayments of short-term
borrowings and long-
term debt.............. (363,566) (503,138) (862,113) (485,253)
Proceeds from short-term
borrowings and long-
term debt.............. 359,391 367,093 1,037,716 425,833
Capital contribution.... -- 269,168 284,156 206,420
Dividend paid........... (65,109) -- (72,830) (274,600)
Transactions with
affiliates
Repayment of
affiliated loan and
interest.............. -- -- (302,104) (24,140)
Loan to affiliate...... (141,000) -- -- --
Settlement of due to
affiliate............. -- -- -- 356,157
Advances from
affiliates............ 16,882 -- -- 18,306
Repayments to
affiliates............ -- (7,275) (22,724) --
Invested capital
transactions with
affiliates............ (41,987) (31,670) (46,114) (43,730)
--------- --------- ---------- ---------
Net cash provided by
(used in) financing
activities.......... (235,389) 94,178 15,987 178,993
Effect of exchange rate
changes on cash and
equivalents............ (718) (1,261) 5,886 998
--------- --------- ---------- ---------
Net increase (decrease)
in cash and cash
equivalents............ (184,288) 99,576 127,768 (9,579)
Cash and cash
equivalents at
beginning of period.... 281,109 181,533 53,765 63,344
--------- --------- ---------- ---------
Cash and cash
equivalents at end of
period................. $ 96,821 $ 281,109 $ 181,533 $ 53,765
========= ========= ========== =========
</TABLE>
See accompanying notes to combined financial statements
F-9
<PAGE>
P & L COAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements include the combined
operations and balance sheets of the coal mining business and the U.S. energy
trading business held by The Energy Group PLC ("The Energy Group") prior to
their acquisition by P&L Coal Holdings Corporation on May 19, 1998 (see note
19). These financial statements include the accounts of Peabody Holding
Company, Inc. ("Peabody Holding Company"), Gold Fields Mining Corporation
("Gold Fields") which owns Lee Ranch mine ("Lee Ranch"), Citizens Power LLC
("Citizens Power"), Peabody Resources Holdings Pty Ltd. ("Peabody Resources"),
an Australian company, which is held by Darex Capital, Inc. and Peabody
Australia Ltd. and their majority owned subsidiaries, and certain other
accounts of The Energy Group subsidiaries (collectively, the "Company"). Darex
Capital, Inc. and Peabody Australia Ltd. assets and operations relate solely
to their holdings of Peabody Resources.
Prior to March 7, 1997, the Company was a wholly owned indirect subsidiary
of Hanson PLC (collectively referred to as "Hanson"). During 1996 and 1997,
Hanson demerged its operations into four separate companies. As part of this
tax-free distribution plan ("spin-off"), on February 24, 1997 Hanson demerged
The Energy Group to hold the energy business of Hanson. In addition, on March
7, 1997, a subsidiary of Hanson sold the outstanding common stock of Peabody
Holding Company to a subsidiary of The Energy Group and combined it with other
Hanson energy companies to form The Energy Group.
JOINT VENTURES
Joint ventures are accounted for using the equity method except for
undivided interests in Australia, which are reported using pro rata
consolidation whereby the Company reports its proportionate share of assets,
liabilities, income and expenses. The joint ventures in Australia include
Bengalla (35%), Narama (50%) and Warkworth (43.75%). Investments in 20% to
50%-owned U.S. partnerships and affiliates are accounted for on the equity
method. At March 31, 1998, the Company had equity interests in Black Beauty
Coal Company (43.3%), Black Beauty Equipment Company (43.3%), Falcon Coal
Company (33.3%), Eagle Coal Company (33.3%), Dominion Terminal Associates
(30%), Yankeetown Dock Corporation (40%), Squaw Creek Coal Company (40%) and
Tecumseh Coal Corporation (50%). All significant intercompany transactions
have been eliminated.
The difference between the carrying amounts of the Company's investments in
joint ventures and the Company's respective share of the underlying equity of
such joint ventures is $25.8 million at March 31, 1998, and relates to a
single joint venture. The difference is attributed to the coal reserves of the
applicable joint venture, and is being amortized as the reserves are depleted.
The financial statements include the following asset and operating amounts
for Australian entities utilizing pro rata consolidation (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenue............ $ 76,406 $ 41,058 $ 78,388 $80,520
Operating income......... 17,731 8,386 20,632 18,088
<CAPTION>
MARCH 31, MARCH 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Total assets............. $139,200 $118,154 $109,169 $84,070
</TABLE>
Effective with the date of the spin-off, the Company changed its fiscal
year-end from September 30 to March 31. Accordingly, the 1997 results
represent only six months of activity.
F-10
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DESCRIPTION OF BUSINESS
The Company is engaged principally in the mining of coal for sale primarily
to electric utilities in the United States. In addition, during 1998, the
Company began marketing and trading electric power and energy-related
commodity risk management products through its recently acquired subsidiary,
Citizens Power. Citizens Power also provides services and price risk
management capabilities to the electric power industry. Price risk management
activities include the restructuring of power sales and power supply
agreements. Citizens Power balances sales and purchase commitments to mitigate
market risk and secure cash flow streams.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES
The Company engages in price risk management activities for both trading and
non-trading purposes. Activities for trading purposes, generally consisting of
services provided to the power sector through Citizens Power operations, are
accounted for using the fair value method. Under such method, the derivative
commodity instruments (forwards, futures, options and swaps) with third
parties are reflected at market value and are included in "Assets and
liabilities from trading and price risk management activities" in the
consolidated and combined balance sheets. In the absence of quoted value,
financial commodity instruments are valued at fair value, considering the net
present value of the underlying sales and purchase obligations, volatility of
the underlying commodity, appropriate reserves for market and credit risks and
other factors, as determined by the Company's management. Subsequent changes
in market value are recognized as gains or losses in "Sales" in the period of
change.
Activities for non-trading purposes consist of derivative financial
instruments entered into by P&L Coal's Australian subsidiary to hedge the
impact of exchange rate fluctuations on anticipated future sales. Peabody
Resources uses forward currency contracts to manage its exposure against
foreign currency fluctuations on sales denominated in U.S. dollars. These
financial instruments are accounted for using hedge accounting. Changes in the
market value of these transactions are deferred until the gain or loss on the
hedged item is recognized. If the future sale is no longer anticipated, the
changes in market value of the forward currency contracts would be recognized
as gain or loss in the period of change.
SALES
The Company incurs certain "add-on" taxes and fees on coal sales. Coal sales
are reported including taxes and fees charged by various federal and state
governmental bodies.
Also included are revenues from trading electric power and related commodity
risk management products utilizing the fair value method of accounting.
Revenues from trading activities are recognized for the differences between
contract and market prices. Revenues from price risk management activities are
recognized by discounting the estimated net cash flows from the underlying
long-term sales and purchase agreements after providing for appropriate
reserves for credit, market risk and other future costs.
OTHER REVENUES
Other revenues include royalties related to coal lease agreements, earnings
in joint ventures, management fees, farm income and contract restructuring
payments (see note 14). Royalty income generally results from the lease or
sub-lease of mineral rights to third parties. These agreements generally
provide for payments based upon a percentage of the selling price or an amount
per ton of coal produced. Certain agreements require minimum annual lease
payments regardless of the extent to which minerals are produced from the
leasehold. The terms of these agreements generally range from specified
periods of 5 to 20 years or can be for an unspecified period until all
reserves are depleted.
F-11
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost, which approximates fair value.
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less.
INVENTORIES
Materials and supplies and coal inventory are valued at the lower of average
cost or market. Coal inventory costs include labor, supplies, equipment costs,
operating overhead and other related costs.
PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT
Property, plant, equipment and mine development are recorded at cost.
Interest costs applicable to major asset additions are capitalized during the
construction period including $1.5 million for the year ended March 31, 1998
and $0.1 million for the six months ended March 31, 1997. No interest was
capitalized for the year ended September 30, 1996.
Expenditures which extend the useful lives of existing plant and equipment
are capitalized. Maintenance and repairs are charged to operating costs and
expenses as incurred. Costs incurred to develop coal mines or to expand the
capacity of operating mines are capitalized. Development costs incurred to
maintain current production capacity at a mine and exploration expenditures
are charged to expense as incurred. Certain costs to acquire computer hardware
and the development and/or purchase of software for internal use are
capitalized and depreciated over the estimated useful lives.
Depletion of coal lands is computed using the units-of-production method
utilizing only proven and probable reserves in the depletion base. Mine
development costs are principally amortized over the estimated lives of the
mines using the straight line method. Depreciation of plants and equipment
(excluding life of mine assets) is computed using the straight-line method
over the estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-------------
<S> <C>
Buildings and improvements............... 10 to 20
Machinery and equipment.................. 3 to 30
Leasehold improvements................... Life of Lease
</TABLE>
In addition, certain plant and equipment assets associated with mining are
depreciated using the straight-line method over the estimated life of the
mine, which varies from 3 to 49 years.
ACCRUED RECLAMATION AND OTHER ENVIRONMENTAL LIABILITIES
The Company records a liability for the estimated costs to reclaim land as
the acreage is disturbed during the ongoing surface mining process. The
estimated costs to reclaim support acreage and to perform other related
functions at both surface and underground mines are recorded ratably over the
lives of the mines. As of March 31, 1998, the Company had $372.4 million in
surety bonds outstanding and $13.9 million in letters of credit to secure
reclamation. The amount of reclamation self-bonding in certain states in which
the Company qualifies approximated $277.3 million at March 31, 1998.
Accruals for other environmental matters are recorded in operating expenses
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. Accrued liabilities are exclusive of
claims against third parties and are not discounted. In general, costs related
to environmental remediation are charged to expense. Environmental costs are
capitalized only to the extent the capitalization criteria of Emerging Issues
Task Force 90-8 are met (see note 17).
F-12
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Income taxes are accounted for using a balance sheet approach known as the
liability method. The liability method accounts for deferred income taxes by
applying statutory tax rates in effect at the date of the balance sheet to
differences between the book and tax basis of assets and liabilities.
POSTEMPLOYMENT BENEFITS
The Company provides postemployment benefits to qualifying employees, former
employees and dependents under the provisions of various benefit plans or as
required by state or federal or Australian law. The Company accounts for
workers' compensation obligations and other Company provided postemployment
benefits on the accrual basis of accounting.
CONCENTRATION OF CREDIT RISK AND MARKET RISK
The Company mines bituminous and subbituminous coal, which is burned to
produce steam and generate electricity. Some of the Company's West Virginia
mines also produce metallurgical grade bituminous coal, which is used as a raw
material in the production of coke for steel manufacturers and foundries. U.S.
electric utilities accounted for 88 percent of the Company's sales tonnages
for the year ended March 31, 1998, 88 percent for the six months ended March
31, 1997, 87 percent for the year ended September 30, 1996 and 85 percent for
the year ended September 30, 1995.
Certain U.S. subsidiaries of the Company are party to two separate labor
agreements with the United Mine Workers of America ("UMWA") and certain
Australian subsidiaries of the Company are party to a separate labor agreement
with the United Mineworkers Federation of Australia. Sales of coal by these
subsidiaries were 36 percent of the Company's tons sold for the year ended
March 31, 1998, 37 percent for the six months ended March 31, 1997, 38 percent
for the year ended September 30, 1996 and 41 percent for the year ended
September 30, 1995.
The Company's trading and price risk management activities give rise to
market risk, which represents the potential loss caused by a change in the
market value of a particular commitment. Market risks are actively monitored
to ensure compliance with risk management policies of the Company. Policies
are in place which limit the amount of total net exposure the Company may
enter into at any point in time. Procedures exist which allow for monitoring
of all commitments and positions with daily reporting to senior management.
The Company's concentration of credit risk is substantially with electricity
producers and marketers, and electric utilities. The Company's policy is to
independently evaluate each customer's creditworthiness prior to entering into
transactions and to constantly monitor the credit extended. In the event that
the Company engages in a transaction with a counterparty that does not meet
its credit standards, the Company will protect its position by requiring the
counterparty to provide appropriate credit enhancement.
As a writer of options, the Company receives a premium at the outset and
then bears the risk of unfavorable changes in the price of the financial
instruments underlying the option. Forwards, swaps and over-the-counter
options are traded in unregulated markets.
Futures and exchange-traded options are typically liquidated by entering
into offsetting contracts. Over-the-counter forwards, options and swaps are
either liquidated with the same counterparty or held to settlement date. For
the financial instruments, except for price risk management contracts, the
unrealized gain or loss, rather than the contract amounts, represent the
approximate future cash requirements.
F-13
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1996, the Company elected early adoption of the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". SFAS 121 requires impairment losses to be recognized on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated under various
assumptions by those assets are less than the assets' carrying amount.
Impairment losses under SFAS 121 are measured by comparing the estimated fair
value of the assets to their carrying amount.
In fiscal year 1996, a noncash charge of $890.8 million ($525.7 million
after income taxes) was recorded as a result of adopting the evaluation
methodology of SFAS 121, principally related to the impairment of certain
inactive and undeveloped coal reserves.
Prior to the adoption of this pronouncement, asset impairment was evaluated
at an operating company level based on the contribution of operating profits
and undiscounted cash flows being generated from those operations. Under the
Company's previous policy, assets used in operations, which consisted of
multiple operating companies, were evaluated for impairment based on gross
margins and cash flows generated by each separate operating company in a given
business cycle.
SFAS 121 requires the impairment review to be performed at the lowest level
of asset grouping for which there are identifiable cash flows, a change from
the higher level at which the Company's previous accounting policy measured
impairment. The Company's economic grouping of assets was based on the markets
in which the operations compete and consisted of both active and inactive
mines, as well as undeveloped properties. Evaluation of assets at the lower
grouping level indicated an impairment of certain of those assets. A
significant factor contributing to the estimated impairment was a decline in
certain coal markets caused by weak demand and lower prices. Coal market
conditions have also been adversely impacted by the effects of the Clean Air
Act Amendments of 1990.
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of foreign affiliates are generally translated at
current exchange rates, and related translation adjustments are reported as a
component of invested capital. Income statement accounts are translated at the
average rates during the period.
RECLASSIFICATIONS
Certain amounts for 1997, 1996 and 1995 have been reclassified to conform
with 1998 report classifications with no effect on previously reported net
income or invested capital.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" was issued which establishes new rules for
the reporting and display of comprehensive income and its components. The
Company intends to adopt this statement for its 1999 fiscal year.
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Also in June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" was issued which establishes standards for
disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." The new standard becomes
effective for the Company's 1999 fiscal year and requires comparative
information from earlier years be restated to conform to requirements of this
standard. The Company is evaluating the requirements of SFAS No. 131 and the
effects, if any, on the Company's current reporting and disclosures.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" was issued which improves and standardizes
disclosures by eliminating certain existing reporting requirements and adding
new disclosures. The statement addresses disclosure issues only and does not
change the measurement or recognition provisions specified in previous
statements. The statement supercedes SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of
Defined Benefit Pensions Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
Company intends to adopt this statement for its 1999 fiscal year.
(2) BUSINESS COMBINATIONS
In May 1997, the Company acquired all of the ownership interests in Citizens
Lehman Power L.L.C. ("Citizens Power") and its subsidiaries. Citizens Power,
located in Boston, Massachusetts, markets and trades electric power and
energy-related commodity risk management products. Citizens Power also
provides services and price risk management capabilities to the electric power
industry (see note 1).
The purchase consideration is $20.0 million in cash, plus up to a maximum of
$100.0 million of additional consideration based upon specific calculations
related to increases in net asset value calculated at various dates over a
five-year period ending March 31, 2002. The contingent payments are reflected
in the financial statements as additional goodwill when the contingency is
determined and the additional consideration becomes payable.
Of the $100.0 million additional contingent consideration, $65.0 million has
been determined owed as of March 31, 1998. Based upon Citizens Power's
calculations as of June 1997, the Company issued a $30.0 million note to the
sellers. The note is due March 31, 2000. Interest, which is payable quarterly,
accrues at the London Interbank Offered Rate ("LIBOR") plus 18 basis points.
In addition, the first amendment to the purchase agreement, dated July 1997,
provided a total $35.0 million minimum on the total remaining net asset value
contingency calculations, with a $70.0 million maximum. In the event of a
change of ownership control, the agreement provides potential changes to the
net asset value contingency calculations; however, the $120.0 million purchase
price maximum remains.
The acquisition was accounted for as a purchase and accordingly, the
operating results of Citizens Power have been included in the Company's
combined financial statements since the date of acquisition. The excess of the
aggregate purchase price over the fair market value of net assets acquired
(which will increase for any future contingent cash payments) of approximately
$78.4 million as of March 31, 1998 is being amortized on a straight-line basis
over 20 years. The Company's management determined the fair value of the net
assets acquired as follows: The financial instruments with third parties
included in the "Assets or liabilities from trading and price risk management
activities" were reflected at market value. In the absence of quoted value,
financial instruments were valued at fair value, considering the net present
value of the underlying sales and purchase obligations, the volatility of the
underlying commodity, appropriated reserves for market and credit risks and
other factors, as determined by the Company's management. The carrying amounts
of cash and cash equivalents, accounts payable, notes receivable and accrued
liabilities approximate fair values due to the short maturity of the
F-15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
instruments. The carrying amounts of the notes payable approximated their fair
value given current rates and approximated interest rates of the notes.
The following unaudited pro forma results of operations for the year ended
March 31, 1998, the six months ended March 31, 1997 and the years ended
September 30, 1996 and 1995, respectively, assumes the acquisition had
occurred at the beginning of each fiscal year. The pro forma results of
Citizens Power would be as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues............... $28,395 $18,174 $11,980 $ (147)
Net income (loss)*..... 8,562 $15,772 938 (3,698)
</TABLE>
- --------
* No taxes applicable to limited liability company
The unaudited pro forma results of P & L Coal Group would be as follows
(dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $2,246,417 $1,082,267 $2,205,566 $2,175,689
Income (loss) before income
taxes..................... 250,507 101,757 (701,529) 189,041
Net income (loss).......... 160,314 74,204 (445,344) 96,689
</TABLE>
The pro forma results include amortization of the purchase goodwill since
the acquisition date. The pro forma results are not necessarily indicative of
what actually would have occurred if the acquisition had been completed as of
the beginning of each of the fiscal periods presented, nor are they
necessarily indicative of future combined results.
Effective January 1, 1998, Thoroughbred L.L.C. ("Thoroughbred"), a
subsidiary of Peabody Holding Company, purchased an additional 10 percent
interest in Black Beauty Coal Company for $37.7 million in cash and as a
result, increased its ownership in the partnership to 43.3 percent.
Thoroughbred also obtained an option to purchase an additional 5 percent
interest in the partnership on or before January 15, 1999. As described in
Note 1, the Company accounts for its ownership interest in Black Beauty Coal
Company using the equity method.
On July 17, 1995, Peabody Bengalla Investments Pty. Limited, a subsidiary of
the Company, acquired an additional 10 percent in Bengalla's Joint Venture for
$1.9 million.
On November 1, 1994, Caballo Coal Company, a subsidiary of the Company,
completed the purchase of Exxon Coal USA, Inc.'s Carter Mining Company for
$356.2 million in cash. The purchase included Rawhide and Caballo coal mines,
located in the Powder River Basin of Wyoming, and associated coal supply
agreements. Caballo Coal Company's revenues and results of operations for the
eleven month period that it was owned by Peabody Holding Company during fiscal
1995 of $129.0 million and $31.3 million, respectively, would not have been
materially different if the acquisition had occurred at the beginning of the
year.
In 1995, the Company acquired controlling interest in an equity investment
for $1.5 million in cash and a note payable valued at $1.6 million.
F-16
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) COAL INVENTORY
Coal inventory consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Saleable coal................................. $51,443 $ 52,821 $ 40,474
Raw coal...................................... 25,422 22,551 13,520
Work in process............................... 120,615 112,009 107,828
-------- -------- --------
$197,480 $187,381 $161,822
======== ======== ========
</TABLE>
Raw coal represents coal stockpiles that in some cases may be sold in
current condition or may be further processed prior to shipment to a customer.
Work in process consists of the average cost to remove overburden above an
unmined coal seam as a part of the surface mining process.
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Notes receivable............................. $173,639 $180,218 $188,414
Peabody Holding Company--intangible assets... 97,783 106,193 110,296
Citizens Power--Goodwill..................... 76,198 -- --
Equity investments and other................. 207,920 159,746 149,448
-------- -------- --------
$555,540 $446,157 $448,158
======== ======== ========
</TABLE>
Notes Receivable
The rights of the lease between Hospah Coal Company, a wholly-owned
subsidiary of Santa Fe Pacific Corporation ("SFPC") and Chaco Energy Company
("Chaco"), a subsidiary of Texas Utilities Company, were transferred to Hanson
Natural Resources Company ("HNRC") with the acquisition of Lee Ranch in June
1993. On February 28, 1990, SFPC and Texas Utilities settled litigation
related to the original lease which included an amended coal lease whereby
Chaco agreed to make certain non-recoupable advance royalty payments to SFPC
including annual payments of approximately $16.0 million for the period 1991
through 2017. At March 31, 1998, the present value of the non-recoupable
advance royalty payments of $169.9 million is included in both "Other current
assets" ($7.2 million) and "Investments and other assets" ($162.7 million) in
the Combined Balance Sheets. At March 31, 1997, the present value of the non-
recoupable advance royalty payments of $174.0 million is included in both
"Other current assets" ($7.0 million) and "Investments and other assets"
($167.0 million) in the Combined Balance Sheets. At September 30, 1996, the
present value of the non-recoupable advance royalty payments of $184.0 million
is included in both "Other current assets" ($12.9 million) and "Investments
and other assets" ($171.1 million) in the Combined Balance Sheets.
As a result of amendments signed with American Electric Power Service
Corporation ("AEP") and R&F Coal Company ("R&F") on December 21, 1990, the
Simco AEP Conesville coal supply agreement was terminated effective April 20,
1991. As compensation, R&F agreed to pay a subsidiary of the Company $760,000
per month for 96 months with the first payment commencing in January 1991. The
present value of $52.9 million was recorded as total consideration received on
the Simco contract buyout. The March 31, 1997 and September 30, 1996 balances
of $6.6 million and $10.8 million, respectively, represent the noncurrent
portion of this note. At March 31, 1998 and 1997 and September 30, 1996 the
current amounts of $6.6 million, $8.2 million and $7.8 million, respectively,
are reflected in "Accounts receivable" in the Combined Balance Sheets.
F-17
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Peabody Holding Company--Intangible Assets
Intangible assets, primarily purchased contract rights which are amortized
essentially on a per ton shipped basis, were $138.9 million at March 31, 1998
and 1997 and $141.8 million at September 30, 1996. Accumulated amortization at
March 31, 1998 and 1997 and September 30, 1996 was $41.1 million, $32.7
million and $31.5 million, respectively. The charge against earnings for
amortization of intangible assets was $8.4 million for the year ended March
31, 1998, $4.1 million for the six months ended March 31, 1997 and $8.9
million and $9.5 million for the years ended September 30, 1996 and 1995,
respectively.
Citizens Power--Goodwill
Goodwill in the amount of $78.4 million at March 31, 1998 is amortized on a
straight-line basis over 20 years and is recorded net of accumulated
amortization of $2.2 million for 1998. Goodwill represents the excess of the
cost over the net tangible and identifiable intangible assets of the
acquisition of Citizens Power (see note 2), and is stated at cost. The Company
assesses the recoverability of goodwill based upon several factors, including
management's intention with respect to the operations to which the goodwill
relates and those operations' projected future income and undiscounted cash
flows. Write-downs of goodwill are recognized when it is determined that the
value of such asset has been impaired. Amortization expense for the year ended
March 31, 1998 was $2.2 million.
(5) LEASES
The Company leases equipment and facilities under various noncancelable
lease agreements. Certain lease agreements require the maintenance of
specified ratios and contain restrictive covenants which limit indebtedness,
subsidiary dividends, investments, sales of assets and other actions of the
Company. Rental expense under operating leases was $40.6 million for the year
ended March 31, 1998, $17.1 million for the six months ended March 31, 1997,
$36.5 million for the year ended September 30, 1996 and $31.8 million for the
years ended September 30, 1995. The cost of property, plant, equipment and
mine development assets acquired under capital leases was $56.0 million and
$54.7 million at March 31, 1998 and 1997, respectively, and $49.6 million at
September 30, 1996. The related accumulated amortization was $27.1 million and
$24.4 million at March 31, 1998 and 1997, respectively, and $22.6 million at
September 30, 1996. Amortization of capital leases is included in
"Depreciation, depletion and amortization" in the Statements of Combined
Operations.
The Company also leases coal reserves under agreements that require
royalties to be paid as the coal is mined. Total royalty expense was $132.9
million for the year ended March 31, 1998, $64.2 million for the six months
ended March 31, 1997 and $136.2 million and $127.9 million for the years ended
September 30, 1996 and 1995, respectively. Certain agreements also require
minimum annual royalties to be paid regardless of the amount of coal mined
during the year.
A substantial amount of the coal mined by the Company is produced from
reserves leased from the owner of the coal. One of the major lessors is the
U.S. Government, from whom the Company leases substantially all of the coal
mined in Wyoming, Montana and Colorado under terms set by Congress and
administered by the U.S. Bureau of Land Management. The terms of these leases
are generally for an initial term of 10 years but may be extended by diligent
development and mining of the reserve until all economically recoverable
reserves are depleted. The Company has met the diligent development
requirements for substantially all of these federal leases either directly
through production or by including the lease as a part of a logical mining
unit with other leases upon which development had occurred. Annual production
on these federal leases must total at least 1% of the original amount of coal
in the entire logical mining unit. Royalties are payable monthly at a rate of
12.5% of the gross realization from the sale of the coal mined using surface
mining methods and at the rate of 8% of the gross realization for coal
produced using underground mining methods. The Company also leases the coal
production at its Arizona mines from The Navajo Nation and the Hopi Tribe
under leases that are administered by the U.S. Department of the Interior.
These leases expire once mining activities cease. The royalty rates are
F-18
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
also generally based upon a percentage of the gross realization from the sale
of coal. These rates are subject to redetermination every ten years under the
terms of the leases. The remainder of the leased coal is generally leased from
state governments, land holding companies and various individuals. The
duration of these leases varies greatly. Typically, the lease terms are
automatically extended as long as active mining continues. Royalty payments
are generally based upon a specified rate per ton or a percentage of the gross
realization from the sale of the coal. Many of these leases require the
Company to pay minimum annual rental payments.
Future minimum lease and royalty payments as of March 31, 1998 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING COAL
YEAR LEASES LEASES RESERVES
- ---- ------- --------- --------
<S> <C> <C> <C>
1999................................................ $ 2,841 $ 35,534 $ 13,433
2000................................................ 3,345 34,909 12,997
2001................................................ 2,630 28,594 10,987
2002................................................ 2,443 25,769 10,205
2003................................................ 2,841 21,820 9,114
2004 and thereafter................................. 12,945 65,904 45,695
------- -------- --------
Total minimum lease payments........................ 27,045 $212,530 $102,431
======== ========
Less interest....................................... 5,477
-------
Present value of minimum capital lease payments..... $21,568
=======
</TABLE>
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of (dollars in thousands):
<TABLE>
<CAPTION>
MARCH
MARCH 31, 31, SEPTEMBER 30,
1998 1997 1996
--------- -------- -------------
<S> <C> <C> <C>
Accounts payable.......... $234,277 $134,132 $123,721
Accrued payroll and
related benefits......... 80,743 83,272 85,250
Accrued taxes other than
income................... 75,791 77,501 85,173
Accrued health care....... 58,649 56,588 58,377
Workers' compensation
obligations.............. 39,927 38,145 40,835
Accrued royalties......... 16,401 21,095 18,353
Accrued pensions.......... 12,953 4,231 3,883
Accrued lease payments.... 9,321 9,611 25,182
Accrued interest.......... 3,700 4,547 11,823
Customer contribution
payable.................. -- 2,823 12,784
Other accrued expenses.... 55,912 54,223 46,811
-------- -------- --------
Total accounts payable
and accrued expenses... $587,674 $486,168 $512,192
======== ======== ========
</TABLE>
(7) INCOME TAXES
Pre-tax income (loss) is as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Pretax income (loss):
United States......... $207,884 $67,029 $(743,564) $156,875
Foreign............... 42,645 18,956 41,097 35,864
-------- ------- --------- --------
$250,529 $85,985 $(702,467) $192,739
======== ======= ========= ========
</TABLE>
F-19
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Total income tax provision (benefit) consisted of (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Current:
U.S. Federal.......... $ -- $ 2,216 $ 8,752 $10,940
Foreign............... 21,001 8,261 14,896 15,204
State................. 3,684 (453) 1,818 3,432
------- ------- --------- -------
Total current....... 24,685 10,024 25,466 29,576
------- ------- --------- -------
Deferred:
U.S. Federal.......... 65,463 16,058 (239,014) 53,970
Foreign............... (5,457) (86) (2,786) (697)
State................. 5,502 1,557 (39,851) 9,503
------- ------- --------- -------
Total deferred...... 65,508 17,529 (281,651) 62,776
------- ------- --------- -------
Total provision
(benefit).......... $90,193 $27,553 $(256,185) $92,352
======= ======= ========= =======
</TABLE>
The income tax rate on income (loss) differed from the U.S. federal
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal statutory rate.. 35.0% 35.0% 35.0% 35.0%
Changes in the asset
valuation allowance.... 5.7 3.3 0.7 (1.1)
Foreign earnings........ 0.4 1.8 0.3 1.0
State income taxes, net
of U.S. federal tax
benefit................ 2.8 0.7 5.5 6.7
Depletion............... (8.3) (8.8) 1.8 (13.8)
Effect of tax sharing
arrangement with
Hanson................. -- -- (6.8) 19.9
Other, net.............. 0.4 -- -- 0.2
---- ---- ---- -----
36.0% 32.0% 36.5% 47.9%
==== ==== ==== =====
</TABLE>
Beginning March 7, 1997, the Company filed a consolidated U.S. federal
income tax return with its subsidiaries. At March 31, 1997, U.S. federal and
state income taxes were determined on that basis. Prior to March 7, the
Company consisted of two separate U.S. federal consolidated groups, Peabody
Holding Company and Peabody Investments, Inc. ("PII"), parent of Gold Fields.
For the years ended September 30, 1996 and 1995, Peabody Holding Company and
its subsidiaries were included in a consolidated federal income tax return
with other Hanson affiliates. Peabody Holding Company had a tax sharing
arrangement with Hanson whereby federal income taxes were computed as part of
a consolidated group of companies. For purposes of these financial statements,
Peabody Holding Company determined its federal tax provision (benefit) based
on its expected allocated share of the consolidated group tax position. State
taxes were determined on a separate return basis. Under the tax sharing
arrangement, Hanson allocated the consolidated federal income tax liability to
the members of the consolidated group by applying a ratio of each member's
separate taxable income to the sum of the separate taxable incomes of all
members having taxable income for the years. If the consolidated group had
taxable income, a member having a taxable loss did not receive a benefit for
that loss. If the consolidated group had a taxable loss, only members having a
taxable loss received a benefit for that loss. PII was the common parent of a
separate consolidated tax group. The group included its interest in the
operations of HNRC. HNRC was a partnership which historically included the
operations of Lee Ranch, Cavenham Timber and Western Rock Quarries. For
purposes of these statements, PII
F-20
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
determined its federal and state tax provision as if Lee Ranch was the only
operation included for the years ended September 30, 1996, 1995 and 1994.
Pursuant to The Energy Group spin-off from Hanson in February 1997, The
Energy Group entered into Tax Sharing Agreements (each, a "TSA") with both
Hanson and Millennium Chemicals, Inc. ("Millennium"), a former Hanson company.
Hanson has agreed to indemnify The Energy Group for all Peabody Investments'
federal and state income tax liabilities arising prior to February 25, 1997,
with the exception of those liabilities arising from the operations of Lee
Ranch subsequent to its acquisition in June 1993.
The Millennium TSA requires Millennium to indemnify The Energy Group and its
subsidiaries for all federal income tax liabilities arising from tax years in
which Peabody Holding Company and its subsidiaries were members of Hanson's
Anglo-American affiliated group (July 3, 1990 through September 30, 1996).
With respect to state income taxes, the Millennium TSA indemnifies The Energy
Group for Arizona income taxes in the years in which Peabody Holding Company
and subsidiaries filed a consolidated return with the Anglo-American group
(fiscal years 1994 to 1996).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below
(dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
---------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued long-term reclamation and mine
closing liabilities................... $ 57,773 $ 76,976 $ 79,543
Accrued long-term workers' compensation
liabilities........................... 114,280 118,230 122,907
Postretirement benefit obligations..... 358,137 353,589 353,679
Tax credits and loss carryforwards..... 105,100 92,794 99,130
Obligation to industry fund............ 51,410 61,365 66,893
Others................................. 74,217 87,037 95,621
---------- ---------- ----------
Total gross deferred tax assets...... $ 760,917 $ 789,991 $ 817,773
========== ========== ==========
Deferred tax liabilities:
Property, plant, equipment and mine
development principally due to
differences in depreciation, depletion
and asset writedowns.................. 959,037 1,079,634 1,086,884
Long-term debt, principally due to
amortization of debt discount......... 35,636 40,096 42,623
Others................................. 341,668 156,338 161,740
---------- ---------- ----------
Total gross deferred tax
liabilities......................... 1,336,341 1,276,068 1,291,247
---------- ---------- ----------
Asset valuation allowance................ (92,184) (103,070) (110,343)
---------- ---------- ----------
Net deferred tax liability............... $ (667,608) $ (589,147) $ (583,817)
========== ========== ==========
</TABLE>
Deferred taxes are included in the Combined Balance Sheets as follows
(dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Current deferred income taxes............... $ (6,036) $ 133 $ 5,135
Noncurrent deferred income taxes............ (661,572) (589,280) (588,952)
--------- --------- ---------
Net deferred tax liability................ $(667,608) $(589,147) $(583,817)
========= ========= =========
</TABLE>
F-21
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company has alternative minimum tax ("AMT") credits of $59.6 million and
net operating loss ("NOL") carryforwards of $45.5 million at March 31, 1998.
The AMT credits have no expiration date and the NOL carryforwards expire in
the year 2011. The AMT credits and NOL carryforwards are fully offset by a
valuation allowance.
The Company made U.S. federal tax payments of $0.1 million for the year
ended March 31, 1998, $9.1 million for the six months ended March 31, 1997 and
$10.4 million and $2.8 million for the years ended September 30, 1996 and
1995, respectively. The Company paid state and local income taxes totaling
$0.8 million for the year ended March 31, 1998, $3.3 million for the six
months ended March 31, 1997 and $2.7 million and $2.5 million for the years
ended September 30, 1996 and 1995, respectively. Through September 30, 1996,
all required federal income tax payments were made by Hanson for Peabody
Holding Company.
Foreign tax payments were $18.3 million for the year ended March 31, 1998,
$13.4 million for the six months ended March 31, 1997 and $27.5 million for
the year ended September 30, 1996. No material foreign tax payments were made
for the year ended September 30, 1995.
(8) SHORT-TERM BORROWINGS
Short-term borrowings consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Commercial paper.............................. $10,080 $43,894 $225,653
The Energy Group credit facility.............. -- 50,000 --
Other......................................... 342 3,821 4,035
------- ------- --------
Short-term borrowings....................... $10,422 $97,715 $229,688
======= ======= ========
</TABLE>
At March 31, 1998 and 1997, Peabody Resources maintained a revolving
commercial paper facility denominated as $200.0 million Australian dollars
available through multiple banks. The interest rate is determined at the time
of borrowing based on the Bank Bill Swap Rate and at March 31, 1998, the
effective annual interest rate was 5.3 percent. At September 30, 1996, a
similar revolving commercial paper facility denominated as $400.0 million
Australian dollars (U.S. $316.7 million) was available.
Peabody Holding Company had borrowings against The Energy Group credit
facility which had an effective interest rate of 6.0 percent at March 31,
1997.
Peabody Holding Company maintained a line of credit amounting to $35.0
million with one bank at March 31, 1998 and Peabody Resources maintained lines
of credit amounting to $20.0 million Australian dollars (U.S. $13.4 million)
with several banks at March 31, 1998, to assure availability of funds at
prevailing market interest rates. There were no borrowings against the
Company's available lines of credit during fiscal year 1998.
The amount of interest paid was $1.8 million for the year ended March 31,
1998, $6.6 million for the six months ended March 31, 1997 and $12.8 million
and $4.3 million for the years ended September 30, 1996 and 1995,
respectively.
F-22
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(9) LONG-TERM DEBT
Long-term debt consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
5% Subordinated Note:
Principal................................... $280,000 $300,000 $ 310,000
Unamortized note discount................... (87,373) (98,368) (103,905)
-------- -------- ---------
192,627 201,632 206,095
Non-recourse Citizens Power debt.............. 293,922 -- --
Citizens Power obligations.................... 65,000 -- --
Capital lease obligations..................... 21,568 17,422 16,345
Project finance facility...................... 14,632 -- --
Other......................................... 4,105 4,954 4,739
-------- -------- ---------
Total long-term debt...................... 591,854 224,008 227,179
Less current maturities....................... (36,194) (23,817) (13,585)
-------- -------- ---------
Long-term debt, less current maturities... $555,660 $200,191 $213,594
======== ======== =========
</TABLE>
The 5 percent Subordinated Note, which had an original face value of $400.0
million is recorded net of discount at an effective annual interest rate of
approximately 13 percent and provides that:
(a) The stated interest is payable each March 1.
(b) The regularly scheduled payments are $20.0 million in 1998 through
2006. Any unpaid amounts are due in 2007.
Non-recourse Citizens Power debt is payable in installments through 2016.
The weighted average interest rate is 9 percent.
Citizens Power obligations' scheduled debt payments to the former owners of
Citizens Lehman Power are $51.0 million in 2000 and $7.0 million in 2001 and
2002. Interest is due quarterly at LIBOR plus 18 basis points on $30.0 million
of the debt. The remaining $35.0 million is non-interest bearing.
Capital lease obligations are payable in installments through 2009 with a
weighted average effective interest rate of 6 percent at March 31, 1998.
Peabody Resources entered into a project finance facility to finance the
construction of its interest in the Bengalla mine. The facility expires in
2010 and the maximum drawdown is $131.3 million Australian dollars (U.S. $88.2
million). In accordance with the facility agreement, the loan will be repaid
from the proceeds of sales from Bengalla. During 1998, there were borrowings
of $14.6 million against the facility with an effective annual interest rate
of approximately 7 percent. Other, principally notes payable, is due in
installments through 2018 with a weighted average effective interest rate of 7
percent.
Peabody Resources has a medium term note facility denominated as $200.0
million Australian dollars (U.S. $134.4 million) with an effective interest
rate of 6 percent. There were no borrowings against the facility during fiscal
year 1998.
Scheduled debt repayments for the next five fiscal years ending on March 31
are $36.6 million in 1999, $86.0 million in 2000, $44.1 million in 2001, $45.8
million in 2002 and $41.2 million in 2003.
The amount of interest paid was $44.6 million for the year ended March 31,
1998, $18.0 million for the six months ended March 31, 1997 and $20.8 million
and $21.0 million for the years ended September 30, 1996 and 1995,
respectively.
F-23
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(10) WORKERS' COMPENSATION OBLIGATIONS
The workers' compensation obligations consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Occupational disease costs.................. $214,091 $234,081 $243,438
Traumatic injury claims..................... 84,946 78,729 78,510
State assessment taxes...................... 1,785 9,336 10,506
-------- -------- --------
Total obligations......................... 300,822 322,146 332,454
Less current portion........................ (39,927) (38,145) (40,835)
-------- -------- --------
Noncurrent obligations.................... $260,895 $284,001 $291,619
======== ======== ========
</TABLE>
Workers' compensation obligations consist of amounts accrued for loss
sensitive insurance premiums, uninsured claims, and related taxes and
assessments under traumatic injury and occupational disease workers'
compensation programs. As of March 31, 1998, the Company had outstanding $57.5
million in letters of credit and $74.3 million in surety bonds to secure
workers' compensation obligations.
Certain subsidiaries of the Company are subject to the Federal Coal Mine
Health & Safety Act of 1969, and the related workers' compensation laws in the
states in which they operate. These laws require the subsidiaries to pay
benefits for occupational disease resulting from coal workers' pneumoconiosis
("CWP"). The provision for CWP claims (including projected claims costs and
interest discount accruals) was a benefit of $9.4 million for the year ended
March 31, 1998, $3.8 million for the six months ended March 31, 1997 and $10.3
million and $24.9 million for the years ended September 30, 1996 and 1995,
respectively. The benefit is primarily attributable to favorable loss
experience factors and a change in certain actuarial assumptions.
The liability for occupational disease claims represents the present value
of known claims and an actuarially-determined estimate of future claims that
will be awarded to current and former employees. The projections at March 31,
1998 and 1997 and September 30, 1996 were based on a 7.5 percent per annum
interest discount rate and a 4 percent estimate for the annual rate of
inflation. Traumatic injury workers' compensation obligations are estimated
from both case reserves and actuarial determinations of historical trends,
discounted at approximately 7.5 percent per annum at March 31, 1998 and 1997
and September 30, 1996.
For Peabody Resources, workers' compensation funds are either separately
administered industry funds or externally insured. Premiums are paid as a
percentage of salary and labor costs. The administration of claims and the
liability for payment of workers' compensation is the responsibility of the
industry fund or the insurance company.
(11) PENSION AND SAVINGS PLANS
Peabody Holding Company sponsors a defined benefit pension plan covering
substantially all salaried U.S. employees (the "Peabody Plan"). A Peabody
Holding Company subsidiary also has a defined benefit pension plan covering
eligible employees who are represented by the UMWA under the Western Surface
Agreement of 1996 (the "Western Plan"). Powder River sponsors a defined
benefit pension plan for its salaried employees (the "Powder River Plan"). Lee
Ranch sponsors defined benefit pension plans, one which covers substantially
all Lee Ranch hourly employees (the "Lee Ranch Hourly Plan") and one which
covers substantially all Lee Ranch salaried employees (the "Lee Ranch Salaried
Plan"). Peabody Resources participates in a number of superannuation funds and
contributes on various percentages of employee compensation. Members of the
funds may voluntarily contribute additional amounts to their accounts. Fund
members are variously entitled to benefits on retirement, withdrawal,
disability or death.
Benefits under the Peabody Plan, the Powder River Plan and the Lee Ranch
Salaried Plan are computed based on the number of years of service and
compensation during certain years. Benefits under the Western Plan
F-24
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
are computed based on the number of years of service with the subsidiary or
other specified employers. Benefits under the Lee Ranch Hourly Plan are
computed based on job classification and years of service.
Annual contributions to the plans are made as determined by consulting
actuaries based upon the Employment Retirement Income Security Act of 1974
minimum funding standard. Assets of the plans are primarily invested in
various marketable securities, including U.S. Government bonds, corporate
obligations and listed stocks. The funds are part of a master trust
arrangement managed by the Company.
Net periodic pension costs recognized as expense for the Peabody Plan, the
Powder River Plan, the Western Plan and the Lee Ranch Salaried and Hourly
Plans was $7.7 million for the year ended March 31, 1998, $4.4 million for the
six months ended March 31, 1997 and $8.6 million and $9.2 million for the
years ended September 30, 1996 and 1995, respectively. Net periodic pension
costs included the following components (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Service cost for
benefits earned........ $ 10,077 $ 5,163 $ 9,978 $ 9,533
Interest cost on
projected benefit
obligation............. 32,417 16,190 29,908 28,707
Actual return on plan
assets................. (51,350) (7,969) (29,335) (43,862)
Other amortizations and
deferrals.............. 16,589 (8,948) (1,950) 14,796
-------- ------- -------- --------
Net periodic pension
costs................ $ 7,733 $ 4,436 $ 8,601 $ 9,174
======== ======= ======== ========
</TABLE>
During 1998 and 1996, an early retirement and reduction in force program was
offered to certain employees as part of a company-wide restructuring and cost
reduction effort. As a result of the special termination benefits offered, a
charge of $0.6 million and $15.3 million, respectively, was recognized in
accordance with Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."
The following table sets forth the actuarial present value of benefit
obligations and the funded status of the Peabody Plan, the Powder River Plan,
the Western Plan and the Lee Ranch Salaried and Hourly Plans and amounts
recognized in the Combined Balance Sheets (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997 SEPTEMBER 30, 1996
------------------- ------------------- -------------------
ASSETS ABO ASSETS ABO ASSETS ABO
EXCEED EXCEED EXCEED EXCEED EXCEED EXCEED
ABO ASSETS ABO ASSETS ABO ASSETS
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Vested benefits......... $ 345,976 $ 55,623 $ 341,067 $ 47,795 $ 335,313 $ 44,757
Nonvested benefits...... 4,846 11,827 14,264 11,019 14,177 10,177
--------- -------- --------- -------- --------- --------
$ 350,822 $ 67,450 $ 355,331 $ 58,814 $ 349,490 $ 54,934
========= ======== ========= ======== ========= ========
Projected benefit
obligation for service
rendered to date....... $ 372,255 $ 78,205 $ 379,168 $ 69,317 $ 376,766 $ 66,391
Plan assets at fair
value.................. (408,027) (60,642) (366,837) (47,922) (358,812) (44,497)
--------- -------- --------- -------- --------- --------
Plan assets (in excess
of) less than projected
benefit obligation..... (35,772) 17,563 12,331 21,395 17,954 21,894
Unrecognized net gain
(loss)................. 13,891 (1,426) (22,454) (6,957) (29,131) (8,738)
Unrecognized prior
service cost........... 13,056 (6,654) 829 (7,243) 894 (7,537)
Adjustment required to
recognize additional
minimum liability...... -- 5,812 -- 7,575 -- 8,629
--------- -------- --------- -------- --------- --------
Accrued (prepaid)
pension liability
(asset)................ $ (8,825) $ 15,295 $ (9,294) $ 14,770 $ (10,283) $ 14,248
========= ======== ========= ======== ========= ========
</TABLE>
F-25
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," requires the recognition of an
additional minimum liability and related intangible asset to the extent that
accumulated benefits exceed plan assets. At March 31, 1998 and 1997 and
September 30, 1996, the Company recorded adjustments of $5.8 million, $7.6
million and $8.6 million, respectively, which were required to reflect the
Company's minimum liability. An intangible asset was recorded in the same
amount.
Peabody Holding Company and Gold Fields sponsor three separate unfunded
supplemental retirement plans to provide senior management with benefits in
excess of limits under the federal tax law and increased benefits to reflect a
service adjustment factor. The following table sets forth the projected
benefit obligation and the recorded liability (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Projected benefit obligation.................. $13,390 $13,162 $11,275
Recorded liability............................ 12,411 10,369 8,314
</TABLE>
The recorded liability at March 31, 1998 and 1997 and September 30, 1996
includes the recognition of $3.4 million, $2.5 million and $0.7 million,
respectively, in additional minimum liability. Pension expense for these plans
was $1.4 million for the year ended March 31, 1998, $0.6 million for the six
months ended March 31, 1997 and $1.5 million and $0.8 million for the years
ended September 30, 1996 and 1995, respectively.
The assumptions used to determine the above projected benefit obligation at
the end of each fiscal period were as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Discount rate................................ 7.5% 7.5% 7.5%
Rate of compensation increase................ 3.75% 3.75% 4.25%
Expected rate of return on plan assets....... 9.0% 9.0% 9.0%
</TABLE>
Certain subsidiaries make contributions to multiemployer pension plans which
provide defined benefits to substantially all hourly coal production workers
represented by the UMWA other than those covered by the Western Plan. Benefits
under the UMWA plans are computed based on service with the subsidiaries or
other signatory employers. The amounts contributed to the plans and included
in operating costs were $4.9 million for the year ended March 31, 1998, $2.4
million for the six months ended March 31, 1997 and $5.0 million and $5.5
million for the years ended September 30, 1996 and 1995, respectively.
The Company sponsors savings and long-term investment plans for eligible
salaried U.S. employees. The Company matches 50 percent of voluntary
contributions up to a maximum matching contribution between 3 and 4 percent of
a participant's salary. The expense of these plans was $4.2 million for the
year ended March 31, 1998, $2.1 million for the six months ended March 31,
1997 and $4.7 million and $4.8 million for the years ended September 30, 1996
and 1995, respectively.
The amount contributed and expensed by Peabody Resources to superannuation
funds was $2.9 million for the year ended March 31, 1998, $1.5 million for the
six months ended March 31, 1997 and $2.8 million and $1.8 million for the
years ended September 30, 1996 and 1995, respectively.
(12) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company currently provides health care and life insurance benefits to
qualifying salaried and hourly retirees and their dependents from defined
benefit plans established by the Company. Employees of Gold Fields are only
eligible for life insurance benefits as provided by the Company. Plan coverage
for the health and life insurance benefits is provided to future hourly
retirees in accordance with the applicable labor agreement. The Company
accounts for postretirement benefits using the accrual method.
F-26
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Retirees of Peabody Resources are provided similar benefits by plans
sponsored by the Australian government. As a result, no liability is recorded
for this plan.
Net periodic postretirement benefits costs included the following components
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Service cost for benefits
earned.................. $ 6,569 $ 3,540 $ 12,094 $10,605
Interest cost on
accumulated
postretirement benefit
obligation.............. 69,614 34,068 63,806 63,847
Prior service cost
amortization............ (10,071) (9,625) (20,855) (9,138)
-------- ------- -------- -------
Net periodic
postretirement benefit
costs................. $ 66,112 $27,983 $ 55,045 $65,314
======== ======= ======== =======
</TABLE>
The following table sets forth the plans' combined funded status reconciled
with the amounts shown in the Combined Balance Sheets (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1997 1996
--------- --------- -------------
<S> <C> <C> <C>
Accumulated postretirement benefit
obligation ("APBO"):
Retirees................................ $569,531 $563,528 $518,956
Fully eligible active plan
participants........................... 299,969 275,571 99,096
Other active plan participants.......... 110,321 106,781 292,815
-------- -------- --------
979,821 945,880 910,867
Unrecognized net loss................... (70,704) (64,385) (47,659)
Unrecognized prior service cost......... 16,057 26,132 39,117
-------- -------- --------
Liability included on the balance
sheet................................ 925,174 907,627 902,325
Less current portion.................... (48,930) (46,675) (48,700)
-------- -------- --------
Noncurrent accrued postretirement
benefit costs........................ $876,244 $860,952 $853,625
======== ======== ========
</TABLE>
The assumptions used to determine the APBO at the end of each fiscal period
were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997 SEPTEMBER 30, 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Discount rate........... 7.5% 7.5% 7.5%
Salary increase rate for
life insurance
benefit................ 3.75% 3.75% 4.25%
Health care trend rate:
Pre-65................ 7.6% down to 8.0% down to 8.6% down to
5.0% over 5 years 5.0% over 6 years 5.0% over 7 years
Post-65............... 6.5% down to 6.7% down to 7.0% down to
5.0% over 5 years 5.0% over 6 years 5.0% over 7 years
Medicare.............. 5.9% down to 6.0% down to 6.25% down to
5.0% over 5 years 5.0% over 6 years 5.0% over 7 years
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. Increasing the assumed health care cost trend rates one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of March 31, 1998 by $124.6 million. The effect of this
change on the aggregate of the service cost and interest cost components of
net periodic postretirement benefit costs for the year ended March 31, 1998
would be an increase of $11.6 million.
Retirees formerly employed by certain subsidiaries and their predecessors,
who were members of the UMWA, last worked before January 1, 1976 and were
receiving health benefits on July 20, 1992 from a UMWA
F-27
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
multiemployer plan, receive health benefits provided by the Combined Fund, a
fund created by the "Coal Industry Retiree Health Benefit Act of 1992" (the
"Coal Act"). The Coal Act requires former employers (including certain
subsidiaries of the Company) and their affiliates to contribute to the
Combined Fund according to a formula. In addition, certain surplus UMWA
pension fund monies and Federal Abandoned Mine Lands program funds will be
used to pay benefits to orphaned retirees.
The Company has recorded an actuarially determined liability representing
the amounts anticipated to be due for the UMWA Combined Fund. The "Obligation
to Industry Fund" reflected in the Combined Balance Sheets at March 31, 1998
and 1997 and September 30, 1996 was $97.0 million, $123.8 million and $137.7
million, respectively. The current portion related to this obligation
reflected in "Accounts payable and accrued expenses" in the Combined Balance
Sheets at March 31, 1998 and 1997 and September 30, 1996 was $8.8 million,
$9.7 million and $8.9 million, respectively
A benefit of $15.9 million was recognized for the year ended March 31, 1998
which included amortization of an actuarial gain of $21.4 million, net of
interest discount accrual of $5.5 million. A benefit of $8.7 million was
recognized for the six months ended March 31, 1997 which included amortization
of an actuarial gain of $11.7 million, net of interest discount accrual of
$3.0 million. A benefit of $15.4 million was recognized for the year ended
September 30, 1996 which included amortization of an actuarial gain of $23.3
million, net of interest discount accrual of $7.9 million. A charge of $14.0
million was recognized for the year ended September 30, 1995 for the interest
discount accrual.
The Coal Act also established a multiemployer benefit plan ("1992 Plan")
which will provide medical and death benefits to persons who are not eligible
for the Combined Fund, whose employer and any affiliates are no longer in
business and who retired prior to October 1, 1994. A prior labor agreement
established the 1993 UMWA Benefit Trust ("1993 Plan") to provide defined
contribution health benefits for retired miners not covered by the Coal Act
and whose employer is no longer in business. The 1992 Plan and the 1993 Plan
qualify under Statement of Financial Accounting Standards No. 106 as
multiemployer benefit plans which allows the Company to continue to recognize
expense as the contributions are made. The amounts expensed related to these
funds were $4.5 million for the year ended March 31, 1998, $3.7 million for
the six months ended March 31, 1997 and $1.5 million and $2.2 million for the
years ended September 30, 1996 and 1995, respectively.
Pursuant to the provisions of the Coal Act and the 1992 Plan, the Company is
required to provide security in an amount equal to three times the cost of
providing health care benefits for one year for all individuals receiving
benefits from the 1992 Plan who are attributable to the Company, plus all
individuals receiving benefits from an individual employer plan maintained by
the Company who are entitled to receive such benefits. In accordance with the
Coal Act and the 1992 Plan, the Company has outstanding letters of credit at
March 31, 1998 and 1997 and September 30, 1996 of $91.2 million, $94.1 million
and $94.1 million, respectively. The letters of credit represent security for
a portion of the postretirement liability included on the balance sheet.
(13) RELATED PARTY TRANSACTIONS
In August 1990, the Company borrowed $284.0 million from Hanson. The funds
were used to prepay certain senior indebtedness. The note payable to Hanson
carried interest at the rate of 10 percent per annum through September 1994
and 8.5 percent per annum through September 2000. This intercompany note was
contributed by Hanson to capital during 1996. The amount of interest paid on
the note was $18.1 million and $24.1 million for the years ended September 30,
1996 and 1995, respectively.
The "Receivables from affiliates, net" reflected in the Combined Balance
Sheets represents amounts due to/from The Energy Group and other affiliates.
No interest is earned by the Company on the balance with The Energy Group.
F-28
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A subsidiary of the Company has purchased coal from Black Beauty Coal
Company, a 43.3 percent owned partnership. The subsidiary purchased 126,601
tons of coal at a cost of $3.0 million for the year ended March 31, 1998,
37,645 tons of coal at a cost of $1.0 million for the six months ended March
31, 1997, 55,707 tons of coal at a cost of $1.5 million for the year ended
September 30, 1996 and 238,000 tons of coal at a cost of $4.9 million for the
year ended September 30, 1995.
In 1998, the Company paid a $65.1 million dividend and provided a $141.0
million loan to Peabody Investments, Inc. with a five year term at a 5 percent
interest rate.
During the six months ended March 31, 1997, the Company received a capital
contribution of $269.2 million from The Energy Group. In 1995, the Company
received a capital contribution of $206.4 million from Hanson and paid a
capital dividend of $274.6 million to Hanson.
(14) CONTRACT RESTRUCTURINGS
During 1998, a subsidiary of the Company agreed to terminate a long-term
coal supply agreement ("CSA") in exchange for payments from a customer
totaling $49.3 million, which resulted in a gain of $49.3 million.
During 1997, a subsidiary of the Company sold a CSA to an unrelated third
party in exchange for an initial $11.6 million payment, and nominal future
consideration, which resulted in a gain of $11.6 million.
During 1996, a subsidiary of the Company agreed to terminate a CSA in
exchange for a $22.0 million payment from a customer which resulted in a gain
of $22.0 million.
During 1995, a subsidiary of the Company agreed to terminate a CSA in
exchange for a $25.5 million payment from a customer. This transaction
resulted in a gain of $23.9 million after deducting the cost of terminating a
related coal purchase agreement as well as certain other costs related to the
transaction.
These gains are included in "Other revenue" in the Statements of Combined
Operations.
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company owns a 30 percent interest in a partnership that leases a coal
export terminal from the Peninsula Ports Authority of Virginia under a 30-year
lease that permits the partnership to purchase the terminal at the end of the
lease term for a nominal amount. The partners have severally (but not jointly)
agreed to make payments which in the aggregate provide the partnership with
sufficient funds to pay rents and to cover the principal and interest payments
on the floating-rate industrial revenue bonds issued by the Peninsula Ports
Authority. The Company has provided letters of credit totaling $42.7 million
as security that it will make such payments. The total face value of the bonds
outstanding is $106.2 million. The Company guarantees 63.2 percent of the
Series (A-D) bonds which have a total face value of $63.1 million. The
effective interest rate was 2.4 percent as of March 31, 1998. The weighted
average interest rate was 3.6 percent for the year ended March 31, 1998, 3.4
percent for the six months ended March 31, 1997 and 3.4 and 3.7 percent for
the years ended September 30, 1996 and 1995, respectively.
As of March 31, 1998, the Company was contingently liable in the form of a
guarantee of indebtedness owed by partnership investments. The Company's
portion of the liability, should the other parties fail to perform, is $105.6
million. The Company believes it is remote that it will be required to satisfy
this guarantee.
Peabody Resources uses forward currency contracts to manage its exposure
against foreign currency fluctuations on sales denominated in U.S. dollars.
Realized gains and losses on these contracts are recognized in
the same period as the hedged transactions. The Company had unrealized gains
and (losses) recorded of ($17.3 million) for the year ended March 31, 1998,
$11.7 million for the six months ended March 31, 1997 and $14.2
F-29
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
million and $2.7 million for the years ended September 30, 1996 and 1995,
respectively, related to the forward currency contracts. The Company had
forward currency contracts outstanding at March 31, 1998, March 31, 1997, and
September 30, 1996 of $244.0 million, $110.0 million and $123.0 million,
respectively.
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk, such as bank letters of credit,
performance bonds and other guarantees, which are not reflected in the
accompanying balance sheets. Such financial instruments are to be valued based
on the amount of exposure under the instrument and the likelihood of
performance being required. In the Company's past experience, virtually no
claims have been made against these financial instruments. Management does not
expect any material losses to result from these off-balance-sheet instruments
and, therefore, is of the opinion that the fair value of these instruments is
zero.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, Accounts receivable, Receivables from
affiliates, and Accounts payable and accrued expenses have a carrying value
which approximate fair value due to the short maturity or the financial
nature of these instruments.
Notes payable fair value estimates are based on estimated borrowing rates
to discount the cash flows to their present value. The 5 percent
Subordinated Note carrying amount is net of unamortized note discount.
Other noncurrent liabilities include a deferred purchase obligation
related to the prior purchase of a mine facility. The fair value estimate
is based on the same assumption as notes payable.
Investments and other assets include certain notes receivable with
customers at various interest rates. Notes receivable fair value estimates
are based on estimated borrowing rates to discount the cash flows to their
present values.
The carrying amounts and estimated fair values of the Company's financial
instruments are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997 SEPTEMBER 30, 1996
------------------- ------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-recourse Citizens
Power debt............. $293,922 $293,922 $ -- $ -- $ -- $ --
5% Subordinated Note.... 192,627 256,914 201,632 273,461 206,095 288,619
Notes receivable........ 182,671 200,923 195,414 198,245 209,212 214,914
Note receivable from
affiliate.............. 141,000 137,161 -- -- -- --
Citizens Power
obligations............ 65,000 53,937 -- -- -- --
Deferred purchase
obligation............. 33,443 35,309 36,322 38,451 37,678 40,050
Project finance
facility............... 14,632 11,615 -- -- -- --
Other notes payable..... 4,447 4,676 8,775 8,938 8,774 8,898
Commercial paper debt
facility............... 10,080 10,080 43,894 43,894 225,653 225,653
Revolving line of
credit................. -- -- 50,000 50,000 -- --
Customer contribution
payable................ -- -- 2,823 2,823 16,056 14,952
</TABLE>
F-30
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of the financial instruments related to trading and price
risk management activities as of March 31, 1998, which include energy
commodities and average fair value of those instruments held during the year
are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
FAIR VALUE AS OF AVERAGE FAIR VALUE FOR THE
MARCH 31, 1998 YEAR ENDED MARCH 31, 1998
---------------------- -----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Forward contracts.......... $1,288,045 $942,455 $ 886,894 $ 593,030
Future contracts........... 761 102 553 162
Option contracts........... 3,043 2,120 2,429 3,128
Swap agreements............ 530 -- 592 --
---------- -------- ------------- -------------
Total.................... $1,292,379 $944,677 $ 890,468 $ 596,320
========== ======== ============= =============
</TABLE>
See note 1, "Accounting for Price Risk Management Activities" regarding
method(s) used to estimate the fair value of financial instruments.
The approximate gross contract or notional amounts of financial instruments
as of March 31, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
ASSETS LIABILITIES
---------- -----------
<S> <C> <C>
Forward contracts........................................ $1,889,040 $1,265,840
Future contracts......................................... 6,541 1,056
Option contracts......................................... 3,607 3,448
Swap agreements.......................................... 5,330 --
</TABLE>
The net gains or losses arising from trading and price risk management
activities totaled $26.4 million for the period from May 19, 1997 to March 31,
1998 as follows:
<TABLE>
<S> <C>
Forward contracts........................... $24,862,000
Future contracts............................ (145,000)
Option contracts............................ 1,848,000
Swap agreements............................. (125,000)
</TABLE>
The change in unrealized gain from trading and price risk management
activities for the period May 19, 1997 to March 31, 1998 was $12.4 million.
(17) COMMITMENTS AND CONTINGENCIES
Environmental claims have been asserted against the Company at 17 sites in
the U.S. with one being settled in the current year. Some of these claims are
based on the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended, and under similar state statutes. The majority of
these sites are related to activities of a former subsidiary of the Company.
The Company's policy is to accrue environmental cleanup related costs of a
noncapital nature when those costs are believed to be probable and can be
reasonably estimated. The quantification of environmental exposures requires
an assessment of many factors, including changing laws and regulations,
advancements in environmental technologies, the quality of information
available related to specific sites, the assessment stage of each site
investigation, preliminary findings, and the length of time involved in
remediation or settlement. For certain sites, the Company also assesses the
financial capability of other potentially responsible parties and, where
allegations are based on tentative findings, the reasonableness of the
Company's apportionment. The Company has not anticipated any recoveries from
insurance carriers or other potentially responsible third parties in its
Combined Balance Sheets. The liabilities for environmental cleanup related
costs recorded in the Combined Balance Sheets at March 31, 1998 and 1997 and
September 30, 1996 were $68.6 million, $73.6 million and $74.9 million,
F-31
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
respectively. These amounts represent those costs which the Company believes
are probable and reasonably estimable. In the event that future remediation
expenditures are in excess of amounts accrued, management does not anticipate
that they will have a material adverse effect on the combined financial
position, results of operations or liquidity of the Company.
In addition, the Company at times becomes a party to claims, lawsuits,
arbitration proceedings and administrative procedures in the ordinary course
of business. Management believes that the ultimate resolution of pending or
threatened proceedings will not have a material effect on the financial
position, results of operations or liquidity of the Company.
In December 1994, a subsidiary of the Company renegotiated a CSA and agreed
to reimburse a customer for the construction of replacement equipment to allow
the customer to efficiently burn coal. Payments will not exceed $27.5 million
of which $2.8 million, $13.3 million, $9.8 million and $1.6 million was paid
during the year ended March 31, 1998, the six months ended March 31, 1997, and
during the years ended September 30, 1996 and 1995, respectively.
At March 31, 1998, purchase commitments for capital expenditures were
approximately $70.1 million.
(18) IMPACT OF YEAR 2000--UNAUDITED
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. In addition, the Company uses
equipment purchased from third parties which utilizes computer technology to
monitor or control certain operational procedures and other activities. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $6.5 million, which includes $1.4
million for the purchase of new software and hardware that will be capitalized
and $5.1 million that will be expensed as incurred. To date, the Company has
incurred and expensed approximately $0.4 million, primarily for assessment of
the Year 2000 issue and the development of a modification plan.
The project is estimated to be completed not later than June 30, 1999, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not present significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, however,
there can be no guarantee that these estimates will be achieved.
(19) SUBSEQUENT EVENTS--UNAUDITED
Dividend Declared and Paid
On April 27, 1998, Peabody Australia Ltd. and Darex Capital, Inc. declared
and paid dividends totaling $50.0 million Australian dollars (U.S. $32.3
million) to Energy Holdings (No.1) Limited, a subsidiary of The Energy Group.
On May 15, 1998, Peabody Holding Company declared a dividend totaling $141.0
million to Peabody Investments, Inc., liquidating a loan described in note 13.
F-32
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Energy Group Purchase
Effective May 19, 1998, the Company was acquired by P&L Coal Holdings
Corporation, which at the time was wholly owned by Lehman Merchant Banking
Partners II, an investment fund affiliated with Lehman Brothers Inc. The
transaction was part of the sale of The Energy Group to Texas Utilities
Company.
The Company may conduct certain asset sales in order to generate cash to
reduce debt associated with the purchase. In accordance with the purchase
agreement, certain wholly owned U.S. subsidiaries of the Company will fully
and unconditionally guarantee the debt associated with the purchase on a joint
and several basis.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management believes that such
information is not material to investors. The following condensed historical
financial statement information is provided for such Guarantor/Non-guarantor
Subsidiaries.
P & L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues.......................... $1,993,969 $250,493 $2,244,462
Costs and expenses:
Operating costs and expenses.......... 1,552,176 158,625 1,710,801
Depreciation, depletion and
amortization......................... 169,623 33,017 202,640
Selling and administrative expenses... 78,249 5,391 83,640
Net gain on property and equipment
disposals............................ (22,079) 273 (21,806)
Interest expense...................... 30,684 2,951 33,635
Interest income....................... (13,984) (993) (14,977)
---------- -------- ----------
Income before income taxes.............. 199,300 51,229 $ 250,529
Income tax provision.................. 74,649 15,544 90,193
---------- -------- ----------
Net income.............................. $ 124,651 $ 35,685 $ 160,336
========== ======== ==========
</TABLE>
P & L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues.......................... $943,554 $120,539 $1,064,093
Costs and expenses:
Operating costs and expenses.......... 744,079 78,859 822,938
Depreciation, depletion and
amortization......................... 84,094 17,636 101,730
Selling and administrative expenses... 39,623 1,798 41,421
Net gain on property and equipment
disposals............................ (4,023) (68) (4,091)
Interest expense...................... 17,699 7,001 24,700
Interest income....................... (4,947) (3,643) (8,590)
-------- -------- ----------
Income before income taxes.............. 67,029 18,956 85,985
Income tax provision.................. 19,379 8,174 27,553
-------- -------- ----------
Net income.............................. $ 47,650 $ 10,782 $ 58,432
======== ======== ==========
</TABLE>
F-33
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P & L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues.......................... $1,966,171 $227,415 $2,193,586
Costs and expenses:
Operating costs and expenses.......... 1,550,141 143,402 1,693,543
Depreciation, depletion and
amortization......................... 165,256 32,597 197,853
Selling and administrative expenses... 71,722 3,977 75,699
Impairment of long-lived assets....... 890,829 -- 890,829
Net gain on property and equipment
disposals............................ (11,942) (1,100) (13,042)
Interest expense...................... 48,587 13,939 62,526
Interest income....................... (4,858) (6,497) (11,355)
---------- -------- ----------
Income (loss) before income taxes....... (743,564) 41,097 (702,467)
Income tax provision (benefit)........ (268,295) 12,110 (256,185)
---------- -------- ----------
Net income (loss)....................... $ (475,269) $ 28,987 $ (446,282)
========== ======== ==========
</TABLE>
P & L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues.......................... $1,982,536 $193,300 $2,175,836
Costs and expenses:
Operating costs and expenses.......... 1,547,709 123,724 1,671,433
Depreciation, depletion and
amortization......................... 161,774 28,556 190,330
Selling and administrative expenses... 77,597 3,792 81,389
Net gain on property and equipment
disposals............................ (12,226) (702) (12,928)
Interest expense...................... 54,272 4,083 58,355
Interest income....................... (3,465) (2,017) (5,482)
---------- -------- ----------
Income before income taxes.............. 156,875 35,864 192,739
Income tax provision.................. 77,846 14,506 92,352
---------- -------- ----------
Net income.............................. $ 79,029 $ 21,358 $ 100,387
========== ======== ==========
</TABLE>
F-34
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P & L COAL GROUP
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............. $ 83,812 $ 13,009 $ 96,821
Accounts receivable, net.............. 211,383 115,157 326,540
Receivables from affiliates, net...... 142,961 (30,198) 112,763
Inventories........................... 219,598 45,225 264,823
Assets from trading and price risk
management activities................ -- 1,295,169 1,295,169
Prepaid expenses and deferred taxes... 21,483 8,553 30,036
----------- ----------- -----------
679,237 1,446,915 2,126,152
Property, plant, equipment and mine
development--at cost................... 4,649,463 589,476 5,238,939
Less accumulated depreciation, depletion
and amortization....................... (1,359,442) (205,955) (1,565,397)
----------- ----------- -----------
3,290,021 383,521 3,673,542
Investments and other assets............ 475,725 79,815 555,540
----------- ----------- -----------
Total assets............................ $ 4,444,983 $ 1,910,251 $ 6,355,234
=========== =========== ===========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current
maturities of long-term debt......... $ 21,844 $ 24,772 $ 46,616
Income taxes payable.................. (5,915) 8,303 2,388
Liabilities from trading and price
risk management activities........... -- 947,467 947,467
Accounts payable and accrued
expenses............................. 432,966 160,744 593,710
----------- ----------- -----------
448,895 1,141,286 1,590,181
Long-term debt, less current
maturities............................. 241,921 313,739 555,660
Deferred income taxes................... 591,114 70,458 661,572
Other noncurrent liabilities............ 1,839,416 20,563 1,859,979
Invested capital........................ 1,323,637 364,205 1,687,842
----------- ----------- -----------
Total liabilities and invested
capital............................ $ 4,444,983 $ 1,910,251 $ 6,355,234
=========== =========== ===========
</TABLE>
F-35
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............ $ 274,676 $ 6,433 $ 281,109
Accounts receivable, net............. 197,106 23,850 220,956
Receivables from affiliates, net..... 1,781 4,101 5,882
Inventories.......................... 210,062 45,049 255,111
Prepaid expenses and deferred taxes.. 21,809 5,997 27,806
----------- --------- -----------
705,434 85,430 790,864
Property, plant, equipment and mine
development--at cost.................. 4,661,365 635,121 5,296,486
Less accumulated depreciation,
depletion and amortization............ (1,293,549) (214,146) (1,507,695)
----------- --------- -----------
3,367,816 420,975 3,788,791
Investments and other assets........... 446,130 27 446,157
----------- --------- -----------
Total assets......................... $ 4,519,380 $ 506,432 $ 5,025,812
=========== ========= ===========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current
maturities of long-term debt........ $ 72,387 $ 49,145 $ 121,532
Income taxes payable................. 7,946 8,142 16,088
Accounts payable and accrued
expenses............................ 432,848 53,320 486,168
----------- --------- -----------
513,181 110,607 623,788
Long-term debt, less current
maturities............................ 187,593 12,598 200,191
Deferred income taxes.................. 501,148 88,132 589,280
Other noncurrent liabilities........... 1,923,992 11,775 1,935,767
Invested capital....................... 1,393,466 283,320 1,676,786
----------- --------- -----------
Total liabilities and invested
capital............................. $ 4,519,380 $ 506,432 $ 5,025,812
=========== ========= ===========
</TABLE>
F-36
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P & L COAL GROUP
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............ $ 2,338 $ 179,195 $ 181,533
Accounts receivable, net............. 177,425 26,068 203,493
Receivables from affiliates, net..... 762 853 1,615
Inventories.......................... 185,370 41,716 227,086
Prepaid expenses and deferred taxes.. 29,539 9,907 39,446
----------- --------- -----------
395,434 257,739 653,173
Property, plant, equipment and mine
development--at cost.................. 4,655,672 627,547 5,283,219
Less accumulated depreciation,
depletion and amortization............ (1,266,844) (201,013) (1,467,857)
----------- --------- -----------
3,388,828 426,534 3,815,362
Investments and other assets........... 448,139 19 448,158
----------- --------- -----------
Total assets......................... $ 4,232,401 $ 684,292 $ 4,916,693
=========== ========= ===========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current
maturities of long-term debt........ $ 12,583 $ 230,690 $ 243,273
Income taxes payable................. 13,437 13,736 27,173
Accounts payable and accrued
expenses............................ 459,887 52,305 512,192
----------- --------- -----------
485,907 296,731 782,638
Long-term debt, less current
maturities............................ 202,351 11,243 213,594
Deferred income taxes.................. 499,840 89,112 588,952
Other noncurrent liabilities........... 1,935,985 11,869 1,947,854
Invested capital....................... 1,108,318 275,337 1,383,655
----------- --------- -----------
Total liabilities and invested
capital............................. $ 4,232,401 $ 684,292 $ 4,916,693
=========== ========= ===========
</TABLE>
F-37
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating
activities............................. $ 266,174 $ (84,496) $ 181,678
--------- --------- ---------
Additions to property, plant, equipment
and mine development................... (112,383) (53,953) (166,336)
Acquisitions and equity investments..... (58,715) -- (58,715)
Proceeds from contract renegotiations... 57,460 -- 57,460
Proceeds from property and equipment
disposals.............................. 36,948 784 37,732
--------- --------- ---------
Net cash used in investing
activities........................... (76,690) (53,169) (129,859)
Repayments of short-term borrowings and
long-term debt......................... (162,420) (201,146) (363,566)
Proceeds from short-term borrowings and
long-term debt......................... 90,000 269,391 359,391
Capital contribution (distribution)..... (50,230) 50,230 --
Dividends paid.......................... (65,109) -- (65,109)
Transactions with affiliates:
Loan to affiliate...................... (141,000) -- (141,000)
Advances from (repayments to)
affiliates............................ (1,542) 18,424 16,882
Invested capital transactions with
affiliates............................ (41,987) -- (41,987)
--------- --------- ---------
Net cash provided by (used in)
financing activities................. (372,288) 136,899 (235,389)
Effect of exchange rate changes on cash
and equivalents........................ -- (718) (718)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ (182,804) (1,484) (184,288)
Cash and cash equivalents at beginning
of period.............................. 266,616 14,493 281,109
--------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 83,812 $ 13,009 $ 96,821
========= ========= =========
</TABLE>
P&L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating
activities............................. $ 36,460 $ 26,369 $ 62,829
-------- --------- ---------
Additions to property, plant, equipment
and mine development................... (59,531) (16,929) (76,460)
Proceeds from contract renegotiations... 15,466 -- 15,466
Proceeds from property and equipment
disposals.............................. 4,176 648 4,824
-------- --------- ---------
Net cash used in investing
activities........................... (39,889) (16,281) (56,170)
Repayments of short-term borrowings and
long-term debt......................... (15,741) (487,397) (503,138)
Proceeds from short-term borrowings and
long-term debt......................... 55,020 312,073 367,093
Capital contribution.................... 269,168 -- 269,168
Transactions with affiliates:
Repayments to affiliates............... (1,010) (6,265) (7,275)
Invested capital transactions with
affiliates............................ (31,670) -- (31,670)
-------- --------- ---------
Net cash provided by (used in)
financing activities................. 275,767 (181,589) 94,178
Effect of exchange rate changes on cash
and equivalents........................ -- (1,261) (1,261)
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ 272,338 (172,762) 99,576
Cash and cash equivalents at beginning
of period.............................. 2,338 179,195 181,533
-------- --------- ---------
Cash and cash equivalents at end of
period................................. $274,676 $ 6,433 $ 281,109
======== ========= =========
</TABLE>
F-38
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P & L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating
activities............................ $ 169,736 $ 41,799 $ 211,535
--------- ---------- ----------
Additions to property, plant, equipment
and mine development.................. (115,292) (36,814) (152,106)
Proceeds from contract renegotiations.. 29,211 -- 29,211
Proceeds from property and equipment
disposals............................. 15,258 1,997 17,255
--------- ---------- ----------
Net cash used in investing
activities.......................... (70,823) (34,817) (105,640)
Repayments of short-term borrowings and
long-term debt........................ (11,354) (850,759) (862,113)
Proceeds from short-term borrowings and
long-term debt........................ 2,534 1,035,182 1,037,716
Capital contribution................... 284,000 156 284,156
Dividends paid......................... -- (72,830) (72,830)
Transactions with affiliates:
Repayment of affiliated loan and
interest............................. (302,104) -- (302,104)
Advances from (repayments to)
affiliates........................... (27,255) 4,531 (22,724)
Invested capital transactions with
affiliates........................... (46,114) -- (46,114)
--------- ---------- ----------
Net cash provided by (used in)
financing activities................ (100,293) 116,280 15,987
Effect of exchange rate changes on cash
and equivalents....................... -- 5,886 5,886
--------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (1,380) 129,148 127,768
Cash and cash equivalents at beginning
of period............................. 3,718 50,047 53,765
--------- ---------- ----------
Cash and cash equivalents at end of
period................................ $ 2,338 $ 179,195 $ 181,533
========= ========== ==========
</TABLE>
P & L COAL GROUP
SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER, 1995
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating
activities............................. $ 212,405 $ 60,138 $ 272,543
--------- --------- ---------
Additions to property, plant, equipment
and mine development................... (163,306) (24,700) (188,006)
Acquisitions and equity investments..... (357,657) (1,900) (359,557)
Proceeds from sale of business unit..... 27,500 -- 27,500
Proceeds from contract renegotiations... 32,125 -- 32,125
Proceeds from property and equipment
disposals.............................. 23,783 2,042 25,825
--------- --------- ---------
Net cash used in investing
activities........................... (437,555) (24,558) (462,113)
Repayments of short-term borrowings and
long-term debt......................... (15,823) (469,430) (485,253)
Proceeds from short-term borrowings and
long-term debt......................... -- 425,833 425,833
Capital contribution.................... 206,420 -- 206,420
Dividends paid.......................... (274,600) -- (274,600)
Transactions with affiliates:
Repayment of affiliated loan and
interest.............................. (24,140) -- (24,140)
Settlement of due to affiliate......... 356,157 -- 356,157
Advances from affiliates............... 17,775 531 18,306
Invested capital transactions with
affiliates............................ (43,730) -- (43,730)
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 222,059 (43,066) 178,993
Effect of exchange rate changes on cash
and equivalents........................ -- 998 998
--------- --------- ---------
Net decrease in cash and cash
equivalents............................ (3,091) (6,488) (9,579)
Cash and cash equivalents at beginning
of period.............................. 6,809 56,535 63,344
--------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 3,718 $ 50,047 $ 53,765
========= ========= =========
</TABLE>
F-39
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(20) SEGMENT INFORMATION
The Company operates primarily in the coal industry. The Company's industry
and geographic data for continuing operations for the year ended March 31,
1998, the six months ended March 31, 1997 and the years ended September 30,
1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Coal.................. $ 2,211,772 $ 1,064,093 $ 2,193,586 $ 2,175,836
Other................. 32,690 -- -- --
----------- ----------- ----------- -----------
$ 2,244,462 $ 1,064,093 $ 2,193,586 $ 2,175,836
=========== =========== =========== ===========
Operating income (loss):
Coal.................. $ 256,779 $ 102,095 $ (651,296) $ 245,612
Other................. 12,408 -- -- --
----------- ----------- ----------- -----------
$ 269,187 $ 102,095 $ (651,296) $ 245,612
=========== =========== =========== ===========
Identifiable assets:
Coal.................. $ 5,158,488 $ 5,025,812 $ 4,916,693 $ 5,676,923
Other................. 1,196,746 -- -- --
----------- ----------- ----------- -----------
$ 6,355,234 $ 5,025,812 $ 4,916,693 $ 5,676,923
=========== =========== =========== ===========
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED YEAR ENDED
MARCH 31, ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
United States......... $ 2,020,409 $ 943,554 $ 1,966,171 $ 1,982,536
Australia............. 224,053 120,539 227,415 193,300
----------- ----------- ----------- -----------
$ 2,244,462 $ 1,064,093 $ 2,193,586 $ 2,175,836
=========== =========== =========== ===========
Operating income (loss):
United States......... $ 224,375 $ 79,781 $ (699,835) $ 207,682
Australia............. 44,812 22,314 48,539 37,930
----------- ----------- ----------- -----------
$ 269,187 $ 102,095 $ (651,296) $ 245,612
=========== =========== =========== ===========
Identifiable assets:
United States......... $ 5,893,489 $ 4,519,380 $ 4,232,401 $ 5,145,918
Australia............. 461,745 506,432 684,292 531,005
----------- ----------- ----------- -----------
$ 6,355,234 $ 5,025,812 $ 4,916,693 $ 5,676,923
=========== =========== =========== ===========
</TABLE>
F-40
<PAGE>
P&L COAL HOLDINGS CORPORATION
UNAUDITED STATEMENT OF CONDENSED CONSOLIDATED OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES
Sales.............................................................. $253,747
Other revenues..................................................... 8,920
--------
Total revenues................................................... 262,667
OPERATING COSTS AND EXPENSES
Operating costs and expenses....................................... 212,747
Depreciation, depletion and amortization........................... 25,691
Selling and administrative expenses................................ 8,958
--------
OPERATING PROFIT..................................................... 15,271
Interest expense................................................... (23,154)
Interest income.................................................... 1,027
--------
LOSS BEFORE INCOME TAXES............................................. (6,856)
Income tax benefit................................................. (1,569)
--------
NET LOSS............................................................. $ (5,287)
========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-41
<PAGE>
P&L COAL HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
-------------
JUNE 30, MARCH 31,
1998 1998
------------- -----------
(IN THOUSANDS) (IN DOLLARS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 211,562 $1.00
Accounts receivable.............................. 396,826 --
Materials and supplies........................... 65,518 --
Coal inventory................................... 193,207 --
Assets from trading and price risk management ac-
tivities........................................ 1,389,577 --
Other current assets............................. 41,288 --
---------- -----
Total current assets........................... 2,297,978 1.00
Property, plant, equipment and mine development
Land and coal interests.......................... 4,148,791 --
Building and improvements........................ 701,603 --
Machinery and equipment.......................... 1,389,408 --
Less accumulated depreciation, depletion and am-
ortization...................................... (1,586,175) --
---------- -----
Property, plant, equipment and mine development,
net............................................... 4,653,627 --
Investments and other assets....................... 692,018 --
---------- -----
Total assets................................... $7,643,623 $1.00
---------- -----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current maturities of
long-term debt.................................. $ 88,191 $ --
Income taxes payable............................. 3,322 --
Deferred income taxes............................ 3,153 --
Liabilities from trading and price risk manage-
ment activities................................. 1,041,153 --
Accounts payable and accrued expenses............ 789,656 --
---------- -----
Total current liabilities...................... 1,925,475 --
Long-term debt, less current maturities.......... 2,324,163 --
Deferred income taxes............................ 887,130 --
Accrued reclamation and other environmental lia-
bilities........................................ 458,650 --
Workers' compensation obligations................ 221,957 --
Accrued postretirement benefit costs............. 991,640 --
Obligation to industry fund...................... 63,624 --
Other noncurrent liabilities..................... 303,978 --
---------- -----
Total liabilities.............................. 7,176,617 --
Stockholders' equity:
Preferred Stock--$.01 per share par value; June
30, 1998--10,000,000 shares authorized,
5,000,000 shares issued and outstanding; March
31, 1998--zero shares authorized, issued or
outstanding..................................... 50 --
Common Stock--$.01 per share par value; June 30,
1998--25,000,000 shares authorized, 16,000,000
shares issued and outstanding; March 31, 1998--
1,000 shares authorized, 1 share issued and out-
standing;....................................... 160 0.01
Additional paid-in capital....................... 479,790 0.99
Accumulated other comprehensive loss............. (7,707) --
Accumulated deficit.............................. (5,287) --
---------- -----
Total stockholders' equity..................... 467,006 1.00
---------- -----
Total liabilities and stockholders' equity..... $7,643,623 $1.00
========== =====
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-42
<PAGE>
P&L COAL HOLDINGS CORPORATION
UNAUDITED STATEMENT OF CONDENSED CONSOLIDATED CASH FLOWS
FOR THE QUARTER ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................... $ (5,287)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization....................... 25,691
Deferred income taxes.......................................... (2,520)
Amortization of debt discount and debt issuance costs.......... 1,072
Net gain on property and equipment disposals................... (29)
Changes in current assets and liabilities, excluding effects of
acquisitions:
Accounts receivable.......................................... 59,519
Income taxes receivable...................................... 5,836
Materials and supplies....................................... 511
Coal inventory............................................... 2,862
Other current assets......................................... (1,507)
Accounts payable and accrued expense......................... (47,349)
Income taxes payable......................................... 842
Net assets from trading and price risk management activities..... (13,341)
Accrued reclamation and related liabilities...................... (10,085)
Workers' compensation obligations................................ 218
Accrued postretirement benefit costs............................. (1,696)
Obligation to industry fund...................................... (42)
Other, net....................................................... 4,578
-----------
Net cash provided by operating activities.................... 19,273
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment and mine development..... (39,543)
Acquisition of P&L Coal subsidiaries, net of $70,359 cash
acquired........................................................ (1,994,635)
Proceeds from contract restructurings............................ 1,084
Proceeds from property and equipment disposals................... 61
-----------
Net cash used in investing activities........................ (2,033,033)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt....................................... (76,193)
Proceeds from long-term debt..................................... 1,821,843
Net capital contribution......................................... 480,000
-----------
Net cash provided by financing activities.................... 2,225,650
Effect of exchange rate changes on cash and cash equivalents..... (328)
-----------
Net increase in cash and cash equivalents........................ 211,562
Cash and cash equivalents at beginning of period................. --
-----------
Cash and cash equivalents at end of period....................... $ 211,562
===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-43
<PAGE>
P&L COAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
consolidated operations and balance sheets of P&L Coal Holdings Corporation
("P&L Coal"). These financial statements include the subsidiaries of Peabody
Holding Company, Inc. ("Peabody Holding Company"), Gold Fields Mining
Corporation ("Gold Fields") which owns Lee Ranch Coal Company ("Lee Ranch"),
Citizens Power LLC ("Citizens Power"), Peabody Resources Holdings Pty Ltd.
("Peabody Resources"), an Australian company, which is held by Darex Capital,
Inc. and Peabody Australia Ltd. and their majority owned subsidiaries
(collectively, the "Company"). Darex Capital, Inc. and Peabody Australia Ltd.
assets and operations relate solely to their holdings of Peabody Resources.
Through May 19, 1998, the Company was a wholly owned indirect subsidiary of
The Energy Group, PLC ("The Energy Group"). Effective May 20, 1998, the
Company was acquired by P&L Coal, which at the time was wholly owned by Lehman
Merchant Banking Partners II and its affiliates ("Lehman Merchant Banking"),
an investment fund affiliated with Lehman Brothers Inc. (see note 4). The
transaction was part of the sale of The Energy Group to Texas Utilities
Company. P&L Coal, a holding company with no direct operations and nominal
assets other than its investment in its subsidiaries, was formed by Lehman
Merchant Banking on February 27, 1998 for the purpose of acquiring the Company
and had no significant activity until the acquisition.
The accompanying condensed consolidated financial statements at June 30,
1998 and for the quarter ended June 30, 1998, and the notes thereto, are
unaudited and do not include all of the disclosures required under generally
accepted accounting principles. However, in the opinion of management, these
financial statements reflect all adjustments necessary for a fair presentation
of the results of the period presented. The results of operations for the
period ended June 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
The financial statements should be read in connection with P&L Coal Group's
audited financial statements as of March 31, 1998. Prior to the acquisition,
P&L Coal Group represented the combined operations of the same subsidiaries
currently owned by P&L Coal.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the recognition of
all derivatives as assets or liabilities within the balance sheet, and
requires both the derivatives and the underlying exposure to be recorded at
fair value. Any gain or loss resulting from changes in fair value will be
recorded as part of the results of operations, or as a component of
comprehensive income or loss, depending upon the intended use of the
derivative. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is evaluating the requirements of
this Statement and has not yet determined the impact of adoption on the
financial statements.
Effective with the quarter ended June 30, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 requires that noncash
changes in stockholders' equity be combined with net income and reported in a
new financial statement category entitled "comprehensive income." Adoption
F-44
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of SFAS No. 130 had no impact on the results of the Company's operations. The
following table sets forth the components of comprehensive loss for the first
quarter of fiscal 1999 (in thousands):
<TABLE>
<S> <C>
Net loss.......................................... $ (5,287)
Foreign currency translation adjustment........... (7,707)
--------
Comprehensive loss................................ $(12,994)
========
</TABLE>
(2) COMMITMENTS AND CONTINGENCIES
Environmental claims have been asserted against P&L Coal at 17 sites in the
U.S. Some of these claims are based on the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, and under similar
state statutes. The majority of these sites are related to activities of
former subsidiaries of the Company.
P&L Coal'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, P&L Coal also assesses the
financial capability of other potentially responsible parties and, where
allegations are based on tentative findings, the reasonableness of P&L Coal's
apportionment. P&L Coal has not anticipated any recoveries from insurance
carriers or other potentially responsible third parities in its Consolidated
Balance Sheets. The liabilities for environmental cleanup related costs
recorded in the Consolidated Balance Sheet at June 30, 1998 were $68.0
million. This amount represents those costs which the Company believes are
probable and reasonably estimable. In the event that future remediation
expenditures are in excess of amounts accrued, management does not anticipate
that they will have a material adverse effect on the financial position,
results of operations or liquidity of P&L Coal.
In addition, P&L Coal 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 P&L Coal.
(3) BUSINESS COMBINATIONS
The acquisition by P&L Coal was funded through borrowings by P&L Coal
pursuant to a $920.0 million senior secured term facility, the offerings of
$400.0 million aggregate principal amount of Senior Notes and $500.0 million
aggregate principal amount of Senior Subordinated Notes and an equity
contribution to P&L Coal by Lehman Merchant Banking of $480.0 million. Such
amounts were used to pay $2,065.0 million for the equity of the Company, repay
debt, increase cash balances and pay transaction fees and expenses incurred
with the acquisition. P&L Coal also entered into a $480.0 million senior
revolving credit facility to provide for P&L Coal's working capital
requirements following the acquisition. The final purchase price is subject to
adjustment to the extent the total assets less current liabilities and long-
term debt as of March 31, 1998 differ from certain projected balances. This
adjustment is not expected to be material to the purchase price and is still
being negotiated.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, the cost to acquire the Company has been allocated to
the assets acquired and liabilities assumed according to their respective
estimated fair values. The preliminary estimated fair values were determined
based on management's estimates.
The final purchase price allocation is dependent upon certain valuations
that have not progressed to a stage where there is sufficient information to
make a final allocation. With respect to several valuations, the Company is
awaiting additional information that it has arranged to obtain in order to
finalize its estimates. The Company
F-45
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
intends to continue with its internal reviews regarding asset and liability
valuations and also plans to obtain independent appraisals and surveys, as
appropriate. In addition, the Company has requested actuarial valuations to
support the final adjustments to its employee-related liabilities.
The purchase accounting adjustments presented below are preliminary, subject
to finalization of the purchase price and final management review and fair
value determination. Adjustments to the preliminary allocation would likely
result in changes to amounts assigned to property, plant, equipment and mine
development (including land and coal interests) and, accordingly, could impact
depletion, depreciation and amortization charged to future periods. Although
not expected to be material, the full impact of the final allocation is not
known.
Below is the Company's historical balance sheet at May 19, 1998, the
preliminary purchase accounting adjustments and the preliminary opening
balance sheet. The historical balance sheet has been adjusted to include the
effects of the financing transactions described above.
<TABLE>
<CAPTION>
HISTORICAL
ADJUSTED FOR
EFFECTS OF PURCHASE
FINANCING ACCOUNTING PRELIMINARY
MAY 19, 1998 ADJUSTMENTS MAY 19, 1998
------------ ----------- ------------
(IN MILLIONS)
ASSETS
<S> <C> <C> <C>
Total current assets................... $2,243.6 $(10.0) $2,233.6
Property, plant, equipment and mine de-
velopment, net........................ 3,668.2 885.9 4,554.1
Investments and other assets........... 600.9 100.5 701.4
-------- ------ --------
Total assets......................... $6,512.7 $976.4 $7,489.1
======== ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities.............. $1,801.2 $ 20.0 $1,821.2
Long-term debt, less current maturi-
ties.................................. 2,287.8 34.9 2,322.7
Deferred income taxes.................. 662.1 229.8 891.9
Other noncurrent liabilities........... 1,849.2 124.1 1,973.3
-------- ------ --------
Total liabilities.................... 6,600.3 408.8 7,009.1
Total stockholders' equity............. (87.6) 567.6 480.0
-------- ------ --------
Total liabilities and stockholders'
equity.............................. $6,512.7 $976.4 $7,489.1
======== ====== ========
</TABLE>
The preliminary opening balance sheet reflects the acquisition at a purchase
price of $2,065.0 million. Preliminary purchase accounting adjustments
resulted in a net increase in total assets of $976.4 million. Various assets
and liabilities were adjusted to reflect their estimated fair value. The
majority of the excess purchase price is reflected as adjustments to the fair
value assigned to various land and coal interests and the Company does not
anticipate recording any goodwill as a result of the acquisition. The impact
of the preliminary adjustments results in an additional deferred income tax
liability of $229.8 million.
The preliminary purchase accounting adjustments include a $40.0 million
liability for estimated costs associated with a restructuring plan resulting
from the business purchase combination. The estimate is comprised of costs
associated with exiting certain activities and consolidating and restructuring
certain management and administrative functions and includes costs resulting
from a plan to involuntarily terminate or relocate employees. As of June 30,
1998, the Company has finalized its involuntary termination and relocation
plan and continues to evaluate the impact of exiting certain activities.
F-46
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs associated with the exit and restructuring plans are being charged
against the liability as incurred. The net cash outlays charged against the
liability through June 30, 1998 total approximately $5.9 million. If the
ultimate amount of cost expended is less than the amount recorded as a
liability, the excess will reduce the cost of the acquisition. Any amount of
cost exceeding the amount recorded as a liability will be recorded as an
additional element of the cost of the acquisition if determined within the
allocation period and, thereafter, will be included as a charge to earnings in
the period in which the adjustment is determined.
The following unaudited pro forma results of operations for the quarter
ended June 30, 1998 and 1997 assumes the acquisition had occurred at the
beginning of each fiscal year. The pro forma results of P&L Coal would be as
follows (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Total revenues......................................... $555,075 $587,540
Operating profit....................................... $ 16,111 $ 50,364
Income (loss) before income taxes...................... $(32,708) $ 764
Net income (loss)...................................... $(28,225) $ 571
</TABLE>
GUARANTOR INFORMATION
In accordance with the Purchase Agreement, certain wholly owned U.S.
subsidiaries of P&L Coal have fully and unconditionally guaranteed the debt
associated with the purchase on a joint and several basis.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management believes that such
information is not material to investors. The following condensed historical
financial statement information is provided for such Guarantor/Non-guarantor
Subsidiaries.
P&L COAL HOLDINGS CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ -- $234,733 $27,934 $-- $262,667
Costs and expenses:
Operating costs and
expenses............. -- 197,429 15,318 -- 212,747
Depreciation,
depletion and
amortization......... -- 22,049 3,642 -- 25,691
Selling and
administrative
expenses............. -- 8,713 245 -- 8,958
Interest expense...... 19,701 3,157 296 -- 23,154
Interest income....... (643) (374) (10) -- (1,027)
-------- -------- ------- --- --------
Income (loss) before
income taxes........... (19,058) 3,759 8,443 -- (6,856)
Income tax provision
(benefit).............. (5,010) 988 2,453 -- (1,569)
-------- -------- ------- --- --------
Net income (loss)....... $(14,048) $ 2,771 $ 5,990 $-- $ (5,287)
======== ======== ======= === ========
</TABLE>
F-47
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL HOLDINGS CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equiva-
lents................ $ 99,913 $ 55,564 $ 56,085 $ -- $ 211,562
Accounts receivable... 167 213,965 182,694 -- 396,826
Inventories........... -- 219,117 39,608 -- 258,725
Assets from trading
and price risk man-
agement activities... -- -- 1,389,577 -- 1,389,577
Other current assets.. -- 30,552 10,736 -- 41,288
---------- ---------- ---------- ------------ -----------
Total current as-
sets............... 100,080 519,198 1,678,700 -- 2,297,978
Property, plant, equip-
ment and mine
development--at cost... -- 5,706,850 542,264 -- 6,249,114
Less accumulated depre-
ciation, depletion and
amortization........... -- (1,405,563) (189,924) -- (1,595,487)
---------- ---------- ---------- ------------ -----------
-- 4,301,287 352,340 -- 4,653,627
Investments and other
assets................. 2,335,725 502,407 115,118 (2,261,232) 692,018
---------- ---------- ---------- ------------ -----------
Total assets........ $2,435,805 $5,322,892 $2,146,158 $(2,261,232) $ 7,643,623
========== ========== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings
and current maturi-
ties of long-term
debt................. $ 16,500 $ 21,674 $ 50,017 $ -- $ 88,191
Payable to affiliates,
net.................. 11,612 (10,358) (1,254) -- --
Income taxes payable.. 7,766 (13,930) 9,486 -- 3,322
Liabilities from trad-
ing and price risk
management activi-
ties................. -- -- 1,041,153 -- 1,041,153
Accounts payable and
accrued
expenses............. 105,144 460,132 227,533 -- 792,809
---------- ---------- ---------- ------------ -----------
Total current lia-
bilities........... 141,022 457,518 1,326,935 -- 1,925,475
Long-term debt, less
current
maturities........... 1,827,777 178,948 317,438 -- 2,324,163
Deferred income tax-
es................... -- 824,401 62,729 -- 887,130
Other noncurrent lia-
bilities............. -- 2,022,868 16,981 -- 2,039,849
---------- ---------- ---------- ------------ -----------
Total liabilities... 1,968,799 3,483,735 1,724,083 -- 7,176,617
Stockholders' equity.... 467,006 1,839,157 422,075 (2,261,232) 467,006
---------- ---------- ---------- ------------ -----------
Total liabilities
and
stockholders' equi-
ty................. $2,435,805 $5,322,892 $2,146,158 $(2,261,232) $ 7,643,623
========== ========== ========== ============ ===========
</TABLE>
F-48
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL HOLDINGS CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN DOLLARS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents.......... $1.00 $ -- $ -- $ -- $1.00
----- ----- ----- ----- -----
Total assets........ $1.00 $ -- $ -- $ -- $1.00
===== ===== ===== ===== =====
LIABILITIES AND STOCKHOLDER'S
EQUITY
Stockholder's equity.... 1.00 -- -- -- 1.00
----- ----- ----- ----- -----
Total liabilities
and stockholder's
equity............. $1.00 $ -- $ -- $ -- $1.00
===== ===== ===== ===== =====
</TABLE>
P&L COAL HOLDINGS CORPORATION
UNAUDITED SUPPLEMENTAL CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE QUARTER ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (18,777) $ 47,346 $ (9,296) $ -- $ 19,273
----------- -------- -------- ----- -----------
Additions to property,
plant, equipment and
mine development..... -- (31,819) (7,724) -- (39,543)
Acquisition of P&L
Coal Subsidiaries.... (1,994,635) -- -- -- (1,994,635)
Proceeds from contract
renegotiations....... -- 1,084 -- -- 1,084
Proceeds from property
and equipment
disposals............ -- -- 61 -- 61
----------- -------- -------- ----- -----------
Net cash used in
investing activities... (1,994,635) (30,735) (7,663) -- (2,033,033)
Repayments of long-
term debt............ -- (73,143) (3,050) -- (76,193)
Proceeds from long-
term debt............ 1,817,390 -- 4,453 -- 1,821,843
Net capital
contribution......... 398,000 -- 82,000 -- 480,000
Invested capital
transactions with
affiliates........... (31,706) 83,583 (51,877) -- --
----------- -------- -------- ----- -----------
Net cash provided by
financing activities... 2,183,684 10,440 31,526 -- 2,225,650
Effect of exchange
rate changes on cash
and equivalents...... -- -- (328) -- (328)
----------- -------- -------- ----- -----------
Net increase in cash and
cash equivalents....... 170,272 27,051 14,239 -- 211,562
Cash and cash
equivalents at
beginning of period.... -- -- -- -- --
----------- -------- -------- ----- -----------
Cash and cash
equivalents at end of
period................. $ 170,272 $ 27,051 $ 14,239 $ -- $ 211,562
=========== ======== ======== ===== ===========
</TABLE>
F-49
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) SUBSEQUENT EVENT
On September 30, 1998 the Company and Chaco Energy Company signed an
agreement pursuant to which Chaco, as lessee, agreed to prepay non-recoupable
advance royalty payments pursuant to certain leased coal reserves in New
Mexico. The amount of the prepayment was determined to be $163.4 million;
however, Chaco also agreed to convey to the Company its interest in the coal
reserve lease and other related mining and contract rights worth $27.5
million. Therefore, the net amount of cash received by the Company was $135.9
million. The Company recognized no gain or loss on the prepayment as the
present value of the non-recoupable advance royalty payments was capitalized
at the inception of the lease, discounted at 7.0%.
F-50
<PAGE>
P&L COAL GROUP
UNAUDITED STATEMENTS OF CONDENSED COMBINED OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD THREE MONTHS
APRIL 1, 1998 ENDED
THROUGH JUNE 30,
MAY 19, 1998 1997
-------------- ------------
<S> <C> <C>
REVENUES
Sales............................................. $280,680 $519,565
Other revenues.................................... 11,728 67,975
-------- --------
Total revenues.................................. 292,408 587,540
OPERATING COSTS AND EXPENSES
Operating costs and expenses...................... 246,801 444,589
Depreciation, depletion and amortization.......... 26,218 51,232
Selling and administrative expenses............... 12,017 24,264
-------- --------
OPERATING PROFIT.................................... 7,372 67,455
Interest expense.................................. (4,222) (9,174)
Interest income................................... 1,667 3,102
-------- --------
INCOME BEFORE INCOME TAXES.......................... 4,817 61,383
Income tax provision.............................. 4,341 14,074
-------- --------
NET INCOME.......................................... $ 476 $ 47,309
======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Combined Financial Statements.
F-51
<PAGE>
P&L COAL GROUP
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
----------
MAY 19 MARCH 31
1998 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................ $ 70,359 $ 96,821
Accounts receivable.................................. 457,130 326,540
Receivables from affiliates, net..................... -- 112,763
Materials and supplies............................... 66,137 67,343
Coal inventory....................................... 197,369 197,480
Assets from trading and price risk management
activities.......................................... 1,377,977 1,295,169
Other current assets................................. 40,108 30,036
---------- ----------
Total current assets............................... 2,209,080 2,126,152
Property, plant, equipment and mine development
Land and coal interests.............................. 3,118,863 3,075,916
Building and improvements............................ 702,032 721,883
Machinery and equipment.............................. 1,401,719 1,441,140
Less accumulated depreciation, depletion and
amortization........................................ (1,580,063) (1,565,397)
---------- ----------
Property, plant, equipment and mine development, net... 3,642,551 3,673,542
Investments and other assets........................... 551,520 555,540
---------- ----------
Total assets....................................... $6,403,151 $6,355,234
========== ==========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current maturities of long-
term debt........................................... $ 73,681 $ 46,616
Payable to affiliates, net........................... 49,899 --
Income taxes payable................................. 2,996 2,388
Deferred income taxes................................ 3,153 6,036
Liabilities from trading and price risk management
activities.......................................... 1,032,894 947,467
Accounts payable and accrued expenses................ 671,965 587,674
---------- ----------
Total current liabilities.......................... 1,834,588 1,590,181
Long-term debt, less current maturities.............. 559,881 555,660
Deferred income taxes................................ 662,064 661,572
Accrued reclamation and other environmental
liabilities......................................... 414,051 416,361
Workers' compensation obligations.................... 258,739 260,895
Accrued postretirement benefit costs................. 882,336 876,244
Obligation to industry fund.......................... 94,666 97,045
Other noncurrent liabilities......................... 199,452 209,434
---------- ----------
Total liabilities.................................. 4,905,777 4,667,392
Invested capital....................................... 1,497,374 1,687,842
---------- ----------
Total liabilities and invested capital............. $6,403,151 $6,355,234
========== ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Combined Financial Statements.
F-52
<PAGE>
P&L COAL GROUP
UNAUDITED STATEMENTS OF CONDENSED COMBINED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD THREE MONTHS
APRIL 1, 1998- ENDED
MAY 19, 1998 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 476 $ 47,309
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation, depletion and amortization........ 26,218 51,232
Deferred income taxes........................... 2,603 10,606
Amortization of debt discount................... 1,379 2,580
Net gain on property and equipment disposals.... (328) (1,774)
Gain on contract restructurings................. (300) (29,000)
Gain on sale of investments..................... -- (2,199)
Unrealized loss on risk management activities... 2,670 --
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts receivable........................... (132,065) (37,913)
Materials and supplies........................ 881 3,978
Coal inventory................................ (2,807) (4,051)
Other current assets.......................... (10,701) 577
Accounts payable and accrued expense.......... 87,814 (21,347)
Income taxes payable.......................... 1,234 85
Net assets from trading and price risk
management activities.......................... 2,619 (85,478)
Accrued reclamation and related liabilities..... (1,622) 6,793
Workers' compensation obligations............... (2,156) (4,668)
Accrued postretirement benefit costs............ 6,092 3,211
Obligation to industry fund..................... (2,379) (5,853)
Other, net...................................... (10,186) 20,077
-------- --------
Net cash used in operating activities......... (30,558) (45,835)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment and mine
development...................................... (20,950) (54,965)
Acquisitions and equity investments............... -- (20,000)
Proceeds from property and equipment disposals.... 328 4,575
Proceeds from contract restructurings............. 1,374 30,983
-------- --------
Net cash used in investing activities......... (19,248) (39,407)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt...................... (19,423) (120,517)
Proceeds from short-term borrowings............... 27,378 --
Proceeds from long-term debt...................... 26,219 152,163
Proceeds from notes receivable.................... 99 --
Dividends paid.................................... (173,330) --
Transactions with affiliates:
Proceeds from affiliated loan................... 141,000 --
Advances from affiliates........................ 21,693 13,662
Invested capital transactions with affiliates... -- (26,626)
-------- --------
Net cash provided by financing activities..... 23,636 18,682
Effect of exchange rate changes on cash and cash
equivalents...................................... (292) (332)
-------- --------
Net decrease in cash and cash equivalents......... (26,462) (66,892)
Cash and cash equivalents at beginning of period.. 96,821 281,109
-------- --------
Cash and cash equivalents at end of period........ $ 70,359 $214,217
======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Combined Financial Statements.
F-53
<PAGE>
P&L COAL GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed combined financial statements include the
combined operations and balance sheets of the coal mining business and the
U.S. energy trading business held by The Energy Group, PLC (collectively "P&L
Coal Group" or the "Company"). These financial statements include the accounts
of Peabody Holding Company, Inc. ("Peabody Holding Company"), Gold Fields
Mining Corporation ("Gold Fields") which owns Lee Ranch Coal Company ("Lee
Ranch"), Citizens Power LLC ("Citizens Power"), Peabody Resources Holdings Pty
Ltd. ("Peabody Resources"), an Australian company, which is held by Darex
Capital, Inc. and Peabody Australia Ltd. and their majority owned
subsidiaries, and certain other accounts of The Energy Group subsidiaries.
Darex Capital, Inc. and Peabody Australia Ltd. assets and operations relate
solely to their holdings of Peabody Resources.
Through May 19, 1998, the Company was a wholly owned indirect subsidiary of
The Energy Group, PLC. Effective May 20, 1998, the Company was acquired by P&L
Coal Holdings Corporation ("P&L Coal"), which at the time was wholly owned by
Lehman Merchant Banking Partners II and its affiliates ("Lehman Merchant
Banking"), an investment fund affiliated with Lehman Brothers Inc. (see note
6). The transaction was part of the sale of The Energy Group to Texas
Utilities Company.
The accompanying interim financial statements at May 19, 1998 and for the
periods ended May 19, 1998, and June 30, 1997, and the notes thereto, are
unaudited and do not include all of the disclosures required under generally
accepted accounting principles. However, in the opinion of management, these
financial statements reflect all adjustments necessary for a fair presentation
of the results of the period presented. The results of operations for the
period ended May 19, 1998 are not necessarily indicative of the results to be
expected for the full year.
The financial statements should be read in connection with the Company's
audited combined financial statements for the year ended March 31, 1998, the
six months ended March 31, 1997 and the years ended September 30, 1996 and
1995.
(2) BUSINESS COMBINATIONS
In May 1997, the Company acquired all of the ownership interests in Citizens
Lehman Power L.L.C. ("Citizens Power") and its subsidiaries. Citizens Power,
located in Boston, Massachusetts, markets and trades electric power and
energy-related commodity risk management products.
The purchase consideration was $20.0 million in cash, plus up to a maximum
of $100.0 million of additional consideration based upon specific calculations
related to increases in net asset value calculated at various dates over a
five-year period ending March 31, 2002. The contingent payments are reflected
in the financial statements as additional goodwill when the contingency is
determined and the additional consideration becomes payable.
As a result of the change of ownership control, the purchase consideration
was calculated as $100.0 million as of May 20, 1998 with a net present value
of $92.0 million. Subsequently, $72.0 million has been paid and $20.0 million
is payable on March 31, 2000. Interest, which is payable quarterly, accrues at
the London Interbank Offered Rate ("LIBOR") plus 18 basis points.
The acquisition was accounted for as a purchase and accordingly, the
operating results of Citizens Power have been included in the Company's
combined financial statements since the date of acquisition. The excess of the
aggregate purchase price over the fair market value of net assets acquired of
approximately $78.4 million as of May 19, 1998 is being amortized on a
straight-line basis over 20 years.
F-54
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) CONTRACT RESTRUCTURING
In June 1997, a subsidiary of the Company agreed to terminate a coal supply
agreement in exchange for a payment of $30.0 million from a customer which
resulted in a gain of $29.0 million. This gain is included in "Other revenue"
in the statement of Condensed Combined Operations.
(4) COMMITMENTS AND CONTINGENCIES
Environmental claims have been asserted against the Company at 17 sites in
the U.S. Some of these claims are based on the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, and under 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 parities in its
Combined Balance Sheets. The liabilities for environmental cleanup related
costs recorded in the Combined Balance Sheets at May 19, 1998 and March 31,
1998 were $68.2 million and $68.6 million, respectively.
These amounts represent those costs which the Company believes are probable
and reasonably estimable. In the event that future remediation expenditures
are in excess of amounts accrued, management does not anticipate that they
will have a material adverse effect on the combined financial position,
results of operations or liquidity of the Company.
In addition, the Company at times becomes a party to claims, lawsuits,
arbitration proceedings and administrative procedures in the ordinary course
of business. Management believes that the ultimate resolution of pending or
threatened proceedings will not have a material effect on the financial
position, results of operations or liquidity of the Company.
(5) INCOME TAX PROVISION
The income tax rate differs from the U.S. federal statutory rate primarily
due to statutory depletion in excess of book depletion and changes in
valuation allowances. In addition, the tax rate for the period ended May 19,
1998 was adversely impacted by cash payments to partially fund the Company's
employee benefit plans.
(6) SUBSEQUENT EVENTS
The acquisition of the Company by P&L Coal was funded through borrowings by
P&L Coal pursuant to a $920.0 million senior secured term facility, the
offerings of $400.0 million aggregate principal amount of Senior Notes and
$500.0 million aggregate principal amount of Senior Subordinated Notes and an
equity contribution to P&L Coal by Lehman Merchant Banking of $480.0 million.
Such amounts were used to pay $2,065.0 million for the equity of the Company,
repay debt, increase cash balances and pay transaction fees and expenses
incurred with the acquisition. P&L Coal also entered into a $480.0 million
senior revolving credit facility to provide for P&L Coal's working capital
requirements following the acquisition.
In accordance with the Purchase Agreement, certain wholly owned U.S.
subsidiaries of P&L Coal have fully and unconditionally guaranteed the debt
associated with the purchase on a joint and several basis.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined that such
information is not material to investors. The following condensed historical
financial statement information is provided for such Guarantor/Non-guarantor
Subsidiaries.
F-55
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
UNAUDITED SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED OPERATIONS
FOR THE PERIOD APRIL 1, 1998--MAY 19, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- --------
<S> <C> <C> <C>
Total revenues............................ $269,776 $22,632 $292,408
Costs and expenses:
Operating costs and expenses............ 229,403 17,398 246,801
Depreciation, depletion and amortiza-
tion................................... 22,475 3,743 26,218
Selling and administrative expenses..... 11,523 494 12,017
Interest expense........................ 3,856 366 4,222
Interest income......................... (1,615) (52) (1,667)
-------- ------- --------
Income before income taxes................ 4,134 683 4,817
Income tax provision.................... 3,185 1,156 4,341
-------- ------- --------
Net income (loss)......................... $ 949 $ (473) $ 476
======== ======= ========
</TABLE>
F-56
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
UNAUDITED SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- --------
<S> <C> <C> <C>
Total revenues............................ $519,723 $67,817 $587,540
Costs and expenses:
Operating costs and expenses............ 401,196 43,393 444,589
Depreciation, depletion and
amortization........................... 42,910 8,322 51,232
Selling and administrative expenses..... 23,409 855 24,264
Interest expense........................ 7,717 1,457 9,174
Interest income......................... (2,964) (138) (3,102)
-------- ------- --------
Income before income taxes................ 47,455 13,928 61,383
Income tax provision.................... 9,805 4,269 14,074
-------- ------- --------
Net income................................ $ 37,650 $ 9,659 $ 47,309
======== ======= ========
</TABLE>
F-57
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
UNAUDITED SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS
MAY 19, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............. $ 28,513 $ 41,846 $ 70,359
Accounts receivable................... 229,352 227,778 457,130
Inventories........................... 220,503 43,003 263,506
Assets from trading and price risk
management activities................ -- 1,377,977 1,377,977
Other current assets.................. 29,014 11,094 40,108
---------- ---------- ----------
Total current assets................ 507,382 1,701,698 2,209,080
Property, plant, equipment and mine
development--at cost................... 4,668,138 554,476 5,222,614
Less accumulated depreciation, depletion
and amortization....................... (1,385,879) (194,184) (1,580,063)
---------- ---------- ----------
3,282,259 360,292 3,642,551
Investments and other assets............ 472,662 78,858 551,520
---------- ---------- ----------
Total assets........................ $4,262,303 $2,140,848 $6,403,151
========== ========== ==========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current
maturities of long-term debt........... $ 21,749 $ 51,932 $ 73,681
Payable to affiliates, net............ (1,269) 51,168 49,899
Income taxes payable.................. (5,836) 8,832 2,996
Liabilities from trading and price
risk management activities........... -- 1,032,894 1,032,894
Accounts payable and accrued
expenses............................. 392,273 282,845 675,118
---------- ---------- ----------
Total current liabilities........... 406,917 1,427,671 1,834,588
Long-term debt, less current
maturities........................... 242,931 316,950 559,881
Deferred income taxes................. 596,834 65,230 662,064
Other noncurrent liabilities.......... 1,831,628 17,616 1,849,244
---------- ---------- ----------
Total liabilities................... 3,078,310 1,827,467 4,905,777
Invested capital...................... 1,183,993 313,381 1,497,374
---------- ---------- ----------
Total liabilities and invested
capital............................ $4,262,303 $2,140,848 $6,403,151
========== ========== ==========
</TABLE>
F-58
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
UNAUDITED SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............. $ 83,812 $ 13,009 $ 96,821
Accounts receivable................... 211,383 115,157 326,540
Receivables from affiliates, net...... 142,961 (30,198) 112,763
Inventories........................... 219,598 45,225 264,823
Assets from trading and price risk
management activities................ -- 1,295,169 1,295,169
Other current assets.................. 21,483 8,553 30,036
---------- ---------- ----------
Total current assets................ 679,237 1,446,915 2,126,152
Property, plant, equipment and mine
development--at cost................... 4,649,463 589,476 5,238,939
Less accumulated depreciation, depletion
and amortization....................... (1,359,442) (205,955) (1,565,397)
---------- ---------- ----------
3,290,021 383,521 3,673,542
Investments and other assets............ 475,725 79,815 555,540
---------- ---------- ----------
Total assets........................ $4,444,983 $1,910,251 $6,355,234
========== ========== ==========
LIABILITIES AND INVESTED CAPITAL
Current liabilities
Short-term borrowings and current ma-
turities of long-term debt........... $ 21,844 $ 24,772 $ 46,616
Income taxes payable.................. (5,915) 8,303 2,388
Deferred income taxes................. 6,036 -- 6,036
Liabilities from trading and price
risk management activities........... -- 947,467 947,467
Accounts payable and accrued ex-
penses............................... 426,930 160,744 587,674
---------- ---------- ----------
Total current liabilities........... 448,895 1,141,286 1,590,181
Long-term debt, less current maturi-
ties................................. 241,921 313,739 555,660
Deferred income taxes................. 591,114 70,458 661,572
Other noncurrent liabilities.......... 1,839,416 20,563 1,859,979
---------- ---------- ----------
Total liabilities................... 3,121,346 1,546,046 4,667,392
Invested capital........................ 1,323,637 364,205 1,687,842
---------- ---------- ----------
Total liabilities and invested capi-
tal................................ $4,444,983 $1,910,251 $6,355,234
========== ========== ==========
</TABLE>
F-59
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
UNAUDITED SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED CASH FLOWS
FOR THE PERIOD APRIL 1, 1998-MAY 19, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- ---------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities............................. $ (43,766) $ 13,208 $ (30,558)
--------- -------- ---------
Additions to property, plant, equipment
and mine development................... (13,582) (7,368) (20,950)
Proceeds from property and equipment
disposals.............................. 308 20 328
Proceeds from contract restructurings... 1,374 -- 1,374
--------- -------- ---------
Net cash used in investing
activities........................... (11,900) (7,348) (19,248)
Repayments of long-term debt............ (464) (18,959) (19,423)
Proceeds from short-term borrowings..... -- 27,378 27,378
Proceeds from long-term debt............ -- 26,219 26,219
Proceeds from notes receivable.......... -- 99 99
Dividends paid.......................... (141,000) (32,330) (173,330)
Transactions with affiliates:
Proceeds from affiliated loan.......... 141,000 -- 141,000
Advances from affiliates............... 831 20,862 21,693
--------- -------- ---------
Net cash provided by financing
activities........................... 367 23,269 23,636
Effect of exchange rate changes on cash
and cash equivalents................... -- (292) (292)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents............................ (55,299) 28,837 (26,462)
Cash and cash equivalents at beginning
of period.............................. 83,812 13,009 96,821
--------- -------- ---------
Cash and cash equivalents at end of
period................................. $ 28,513 $ 41,846 $ 70,359
========= ======== =========
</TABLE>
F-60
<PAGE>
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
P&L COAL GROUP
UNAUDITED SUPPLEMENTAL CONDENSED STATEMENTS OF COMBINED CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES COMBINED
------------ ------------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities.............................. $ 28,189 $ (74,024) $(45,835)
-------- --------- --------
Additions to property, plant, equipment
and mine development.................... (44,607) (10,358) (54,965)
Acquisitions and equity investments...... (20,000) -- (20,000)
Proceeds from property and equipment
disposals............................... 30,983 -- 30,983
Proceeds from contract restructurings.... 4,539 36 4,575
-------- --------- --------
Net cash used in investing activities.. (29,085) (10,322) (39,407)
Repayments of long-term debt............. (50,649) (69,868) (120,517)
Proceeds from long-term debt............. -- 152,163 152,163
Transactions with affiliates:
Advances from affiliates................ 13,662 -- 13,662
Invested capital transactions with af-
filiates............................... (33,165) 6,539 (26,626)
-------- --------- --------
Net cash provided by financing activi-
ties.................................. (70,152) 88,834 18,682
Effect of exchange rate changes on cash
and cash equivalents.................... -- (332) (332)
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents............................. (71,048) 4,156 (66,892)
Cash and cash equivalents at beginning of
period.................................. 266,616 14,493 281,109
-------- --------- --------
Cash and cash equivalents at end of
period.................................. $195,568 $ 18,649 $214,217
======== ========= ========
</TABLE>
F-61
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 16
Use of Proceeds.......................................................... 30
Capitalization........................................................... 30
Unaudited Pro Forma Condensed Financial Statements....................... 31
Selected Financial Data.................................................. 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
Coal Industry Overview................................................... 54
Business................................................................. 65
Regulatory Matters....................................................... 89
Management............................................................... 95
Ownership of Capital Stock............................................... 102
The Acquisition.......................................................... 103
Related Party Transactions............................................... 105
Description of Certain Indebtedness...................................... 107
The Senior Exchange Offer................................................ 110
The Senior Subordinated Exchange Offer................................... 121
Description of the Senior Exchange Notes................................. 133
Description of the Senior Subordinated Exchange Notes.................... 166
Material United States Federal Tax Considerations........................ 201
Plan of Distribution..................................................... 202
Legal Matters............................................................ 202
Experts.................................................................. 203
Available Information.................................................... 203
Glossary of Selected Terms............................................... 204
Organizational Charts.................................................... O-1
Index of Defined Terms................................................... I-1
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$900,000,000
LOGO PEABODY
P&L COAL HOLDINGS CORPORATION
OFFER TO EXCHANGE $400,000,000 OF ITS 8 7/8% SERIES B SENIOR NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR $400,000,000 OF ITS
OUTSTANDING 8 7/8% SENIOR NOTES DUE 2008 AND UP TO $500,000,000 OF ITS 9 5/8%
SERIES B SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT, FOR $500,000,000 OF ITS OUTSTANDING 9 5/8% SENIOR
SUBORDINATED NOTES DUE 2008
---------------------------
PRELIMINARY PROSPECTUS
---------------------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE COVER FOR MARKET-MAKER PROSPECTUS]
PROSPECTUS
[LOGO OMITTED]
P&L COAL HOLDINGS CORPORATION
8 7/8% SERIES B SENIOR NOTES DUE 2008
AND
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
-----------------
The 8 7/8% Series B Senior Notes due 2008 (the "Senior Exchange Notes") and
the 9 5/8% Series B Senior Subordinated Notes due 2008 (the "Senior
Subordinated Exchange Notes" and together with the Senior Exchange Notes, the
"Exchange Notes") of P&L Coal Holdings Corporation (the "Company" or
"Peabody") were issued in exchange for the 8 7/8% Senior Notes due 2008 (the
"Old Senior Notes") and for the 9 5/8% Senior Subordinated Notes ("Old Senior
Subordinated Notes") respectively (the "Old Senior Notes" together with the
"Old Senior Subordinated Notes", the "Old Notes", and together with the
Exchange Notes, the "Notes") by the Company.
Interest on the Exchange Notes is payable semi-annually on May 15 and
November 15 of each year, commencing November 15, 1998. Prior to May 15, 2003,
each series of the Exchange Notes is redeemable at a redemption price equal to
100% of the principal amount thereof plus either the Senior Notes Make Whole
Premium or the Senior Subordinated Notes Make Whole Premium, plus, to the
extent not included in either the Senior Notes Make Whole Premium or the
Senior Subordinated Notes Make Whole Premium, accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption. On or after May 15,
2003, each series of Exchange Notes is subject to redemption at the option of
the Company, in whole or in part, at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to
the date of redemption. In addition, at any time prior to May 15, 2001, the
Company may, at its option, redeem up to 35% of the aggregate principal amount
of each series of the Exchange Notes at a redemption price equal to (i)
108.875% of the principal amount of the Senior Exchange Notes and (ii)
109.675% of the principal amount of the Senior Subordinated Exchange Notes, in
each case plus accrued and unpaid interest and Liquidated Damage, if any,
thereon to the date of redemption, with the net proceeds of one or more Equity
Offerings (as defined); provided that, in each case, at least 65% of the
aggregate principal amount of Senior Exchange Notes and at least 65% of the
aggregate principal amount of Senior Subordinated Exchange Notes remain
outstanding immediately after the occurrence of each such redemption. See
"Description of the Senior Exchange Notes--Optional Redemption and Description
of the Senior Subordinated Exchange Notes--Optional Redemption."
Upon the occurrence of a Change of Control, the holders of each series of
the Exchange Notes (the "Holders") will have the right to require the Company
to repurchase such series of Exchange Notes, in whole or in part, at a price
equal to 101% of the respective principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
purchase. See "Description of the Senior Exchange Notes--Repurchase at the
Option of Holders--Change of Control" and "Description of the Senior
Subordinated Exchange Notes--Repurchase at the Option of Holders--Change of
Control."
The Senior Exchange Notes are general unsecured obligations of the Company,
rank senior in right of payment to all subordinated Indebtedness of the
Company and rank pari passu in right of payment with all current and future
unsecured senior Indebtedness of the Company. All borrowings under the Senior
Credit Facilities are secured by a first priority Lien on certain of the
assets of the Company and its Domestic Subsidiaries. Certain of the Company's
current and future Restricted Subsidiaries that are Domestic Subsidiaries (the
"Guarantors") fully and unconditionally, and jointly and severally, guarantee
the Senior Exchange Notes on a senior basis (the "Senior Subsidiary
Guarantees"). As of June 30, 1998, approximately $920.0 million was
outstanding under the Senior Credit Facilities. See "Capitalization,"
"Description of the Senior Exchange Notes," "Description of the Senior
Subordinated Exchange Notes" and "Description of Certain Indebtedness."
The Senior Subordinated Exchange Notes are general unsecured obligations of
the Company, subordinate in right of payment to all existing and future Senior
Debt of the Company, including all borrowings under the Senior Credit
Facilities. The Guarantors fully and unconditionally, and jointly and
severally, guarantee the Senior Subordinated Exchange Notes on a senior
subordinated basis (the "Subordinated Subsidiary Guarantees" and, together
with the Senior Subsidiary Guarantees, the "Subsidiary Guarantees"). As of
June 30, 1998, the Company had approximately $2,121.5 million of indebtedness
outstanding (excluding $290.9 million of non-recourse indebtedness of Citizens
Power), of which $1,318.8 million would have been Senior Debt (excluding
letters of credit). See "Capitalization" and "Description of the Senior
Subordinated Exchange Notes--Subordination."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE EXCHANGE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE
[ ].
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus has been prepared for and is to be used by Lehman Brothers
Inc. in connection with offers and sales in market-making transactions of the
Exchange Notes. The Company will not receive any of the proceeds of such
sales. Lehman Brothers Inc. may act as a principal or agent in such
transactions. The Exchange Notes may be offered in negotiated transactions or
otherwise.
-----------------
LEHMAN BROTHERS INC.
-----------------
The date of this Prospectus is , 1998
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
TRADING MARKET FOR THE EXCHANGE NOTES
There is no existing trading market for the Exchange Notes, and there can be
no assurance regarding the future development of a market for the Exchange
Notes or the ability of the Holders of the Exchange Notes to sell their
Exchange Notes or the price at which such Holders may be able to sell their
Exchange Notes. If such market were to develop, the Exchange Notes could trade
at prices that may be higher or lower than their initial offering price
depending on many factors, including prevailing interest rates, the Company's
operating results and the market for similar securities. Although it is not
obligated to do so, Lehman Brothers Inc. intends to make a market in the
Exchange Notes. Any such market-making activity may be discontinued at any
time, for any reason, without notice at the sole discretion of Lehman Brothers
Inc. No assurance can be given as to the liquidity of or the trading market
for the Exchange Notes.
Lehman Brothers Inc. may be deemed to be an affiliate of the Company and, as
such, may be required to deliver a prospectus in connection with its market-
making activities in the Exchange Notes. Pursuant to the Registration Rights
Agreements, the Company agreed to file and maintain a registration statement
that would allow Lehman Brothers Inc. to engage in market-making transactions
in the Exchange Notes. Subject to certain exceptions set forth in the
Registration Rights Agreements, the registration statement will remain
effective for as long as Lehman Brothers Inc. may be required to deliver a
prospectus in connection with market-making transactions in the Exchange
Notes. The Company has agreed to bear substantially all the costs and expenses
related to such registration statement.
1
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the Exchange
Notes by Lehman Brothers Inc. in market-making transactions. The Company will
not receive any of the proceeds from such transactions.
2
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This Prospectus is to be used by Lehman Brothers Inc. in connection with
offers and sales of the Exchange Notes in market-making transactions effected
from time to time. Lehman Brothers Inc. may act as a principal or agent in
such transactions, including as agent for the counterparty when acting as
principal or as agent for both counterparties, and may receive compensation in
the form of discounts and commissions, including from both counterparties when
it acts as agent for both. Such sales will be made at prevailing market prices
at the time of sale, at prices related thereto or at negotiated prices.
As of the date of this Prospectus, affiliates of Lehman Brothers Inc. owned
100% of the capital stock of the Company. See "Ownership of Capital Stock."
Because Lehman Brothers Inc. may purchase and sell Exchange Notes, and because
this Prospectus may be used by Lehman Brothers Inc. in connection with future
offers and sales of Exchange Notes in market-making transactions effected from
time to time, no estimate can be given as to the number and percentage of
Exchange Notes that will be held by Lehman Brothers Inc. upon termination of
any such sales. Lehman Brothers Inc. has informed the Company that it does not
intend to confirm sales of the Exchange Notes to any accounts over which it
exercises discretionary authority without the prior specific written approval
of such transactions by the customer.
The Company has been advised by Lehman Brothers Inc. that, subject to
applicable laws and regulations, Lehman Brothers Inc. currently intends to
make a market in the Exchange Notes following completion of the Exchange
Offer. However, Lehman Brothers Inc. is not obligated to do so and any such
market-making may be interrupted or discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Act and the Exchange Act. There can be no assurance that an
active trading market will develop or be sustained. See "Risk Factors--Trading
Market for the Exchange Notes."
Lehman Brothers Inc. has provided investment banking services to the Company
in the past and may provide such services and financial advisory services to
the Company in the future. Lehman Brothers Inc. acted as purchaser in
connection with the initial sale of the Notes and received an underwriting
discount of $27.0 million in connection therewith. See "Related Party
Transactions."
Lehman Brothers Inc. and the Company have entered into a registration rights
agreement with respect to the use by Lehman Brothers Inc. of this Prospectus.
Pursuant to such agreement, the Company agreed to bear all registration
expenses incurred under such agreement, and the Company agreed to indemnify
Lehman Brothers Inc. against certain liabilities, including liabilities under
the Securities Act.
3
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 16
Use of Proceeds.......................................................... 30
Capitalization........................................................... 30
Unaudited Pro Forma Condensed Financial Statements....................... 31
Selected Financial Data.................................................. 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
Coal Industry Overview................................................... 54
Business................................................................. 65
Regulatory Matters....................................................... 89
Management............................................................... 95
Ownership of Capital Stock............................................... 102
The Acquisition.......................................................... 103
Related Party Transactions............................................... 105
Description of Certain Indebtedness...................................... 107
The Senior Exchange Offer................................................ 110
The Senior Subordinated Exchange Offer................................... 121
Description of the Senior Exchange Notes................................. 133
Description of the Senior Subordinated Exchange Notes.................... 166
Material United States Federal Tax Considerations........................ 201
Plan of Distribution..................................................... 202
Legal Matters............................................................ 202
Experts.................................................................. 203
Available Information.................................................... 203
Glossary of Selected Terms............................................... 204
Organizational Charts.................................................... O-1
Index of Defined Terms................................................... I-1
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
P&L COAL HOLDINGS CORPORATION
[LOGO OMITTED]
8 7/8% SERIES B SENIOR
NOTES DUE 2008 AND
9 5/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2008
-----------------
PROSPECTUS
-----------------
LEHMAN BROTHERS INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that, among other things, a corporation may indemnify directors and officers
as well as other employees and agents of the corporation against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
in connection with specified actions, suits or proceedings, whether civil,
criminal, administrative, or investigative (other than action by or in the
right of the corporation a "derivative action"), if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred
in connection with the defense or settlement of such actions, and the statute
requires court approval before there can be any indemnification where the
person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation's by-laws, disinterested director vote, stockholder
vote, agreement or otherwise.
Article IV of the Registrant's By-laws requires indemnification to the
fullest extent permitted by Delaware law. The Registrant has also obtained
officers' and directors' liability insurance which insures against liabilities
that officers and directors of the Registrant, in such capacities, may incur.
The Registrant's Amended and Restated Certificate of incorporation (the
"Certificate of Incorporation") requires the advancement of expenses incurred
by officers or directors in relation to any action, suit or proceeding.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL (certain
illegal distributions) or (iv) for any breach of a director's duty of loyalty
to the company or its stockholders. Article Seven of the Certificate of
Incorporation includes such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
**1 Purchase Agreement dated as of May 13, 1998, between P&L Coal Holdings
Corporation and Lehman Brothers Inc.
**2.1 Participation Agreement dated March 1, 1998 between Texas Utilities
Company and Lehman Brothers Merchant Banking Partners II L.P.
**2.2 Purchase Agreement between The Energy Group PLC and P&L Coal Holdings
Corporation as Purchaser.
**3.1 Amended and Restated Certificate of Incorporation of P&L Coal Holdings
Corporation.
**3.2 By-Laws of P&L Coal Holdings Corporation.
**3.3 Certificate of Incorporation of Affinity Mining Company.
**3.4 By-Laws of Affinity Mining Company.
**3.5 Certificate of Incorporation of Arid Operations Inc.
**3.6 By-Laws of Arid Operations Inc.
**3.7 Certificate of Incorporation of Big Sky Coal Company.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
**3.8 By-Laws of Big Sky Coal Company.
**3.9 Articles of Incorporation of Blackrock First Capital Corporation.
**3.10 By-Laws of Blackrock First Capital Corporation.
**3.11 Certificate of Incorporation of Bluegrass Coal Company.
**3.12 By-Laws of Bluegrass Coal Company.
**3.13 Certificate of Incorporation of Caballo Coal Company.
**3.14 By-Laws of Caballo Coal Company.
**3.15 Certificate of Incorporation of Charles Coal Company.
**3.16 By-Laws of Charles Coal Company.
**3.17 Certificate of Incorporation of Coal Properties Corp.
**3.18 By-Laws of Coal Properties Corp.
**3.19 Exhibit Intentionally Omitted
**3.20 Amended and Restated Venture Agreement of Colony Bay Coal Company.
**3.21 Certificate of Incorporation of Cook Mountain Coal Company.
**3.22 By-Laws of Cook Mountain Coal Company.
**3.23 Certificate of Incorporation of Cottonwood Land Company.
**3.24 By-Laws of Cottonwood Land Company.
**3.25 Certificate of Incorporation of Orion Mines, Inc. (now known as Darius
Gold Mine Inc.)
**3.26 By-Laws of Darius Gold Mine Inc.
**3.27 Certificate of Incorporation of Koppers Recreation Camps (now known as
EACC Camps, Inc.)
**3.28 By-Laws of Koppers Recreation Camps, Inc. (now known as EACC Camps,
Inc.)
**3.29 Certificate of Incorporation of Eastern Associated Coal Corp.
**3.30 By-Laws of Eastern Associated Coal Corp.
**3.31 Certificate of Incorporation of Eastern Royalty Corp.
**3.32 By-Laws of Eastern Royalty Corp.
**3.33 Certificate of Incorporation of Exploraciones y Minerales Sierra
Morena S.A. (now known as Gold Fields Chile, S.A.)
**3.34 By-Laws of Exploraciones y Minerales Sierra Morena S.A. (now known as
Gold Fields Chile, S.A.)
**3.35 Restated Certificate of Incorporation of Gold Fields Mining
Corporation.
**3.36 By-Laws of Gold Fields Mining Corporation.
**3.37 Certificate of Incorporation of East Tennessee Coal Company (now known
as Gold Fields Operating Co.--Ortiz).
**3.38 By-Laws of Gold Fields Operating Co.--Ortiz.
**3.39 Articles of Incorporation of Grand Eagle Mining, Inc.
**3.40 By-Laws of Grand Eagle Mining, Inc.
**3.41 Certificate of Incorporation of Hayden Gulch Terminal, Inc.
**3.42 By-Laws of Hayden Gulch Terminal, Inc.
**3.43 Certificate of Incorporation of Independence Material Handling Company
**3.44 By-Laws of Independence Material Handling Company
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
**3.45 Certificate of Incorporation of Interior Holdings Corp.
**3.46 By-Laws of Interior Holdings Corp.
**3.47 Certificate of Incorporation of A.T. Two, Inc. (now known as James
River Coal Terminal Company).
**3.48 Restated By-Laws of James River Coal Terminal Company.
**3.49 Certificate of Incorporation of Juniper Coal Company.
**3.50 By-Laws of Juniper Coal Company.
**3.51 Certificate of Incorporation of Kayenta Mobile Home Park, Inc.
**3.52 By-Laws of Kayenta Mobile Home Park, Inc.
**3.53 Certificate of Incorporation of Martinka Coal Company.
**3.54 By-Laws of Martinka Coal Company.
**3.55 Articles of Incorporation of Midco Supply and Equipment Corporation.
**3.56 By-Laws of Midco Supply and Equipment Corporation.
**3.59 Certificate of Incorporation of Nueast Mining Corp. (now known as
Mountain View Coal Company).
**3.60 By-Laws of Nueast Mining Corp. (now known as Mountain View Coal
Company).
**3.61 Articles of Incorporation of North Page Coal Corp.
**3.62 By-Laws of North Page Coal Corp.
**3.63 Articles of Incorporation of Ohio County Coal Company.
**3.64 By-Laws of Ohio County Coal Company.
**3.65 Certificate of Limited Partnership of Patriot Coal Company, L.P.
**3.66 Limited Partnership Agreement of Patriot Coal Company, L.P.
**3.67 Certificate of Incorporation of Peabody America, Inc.
**3.68 By-Laws of Peabody America, Inc.
**3.69 Certificate of Incorporation of Peabody Coal Company.
**3.70 Restated By-Laws of Peabody Coal Company.
**3.71 Certificate of Incorporation of Peabody COALSALES Company.
**3.72 By-Laws of Peabody COALSALES Company.
**3.73 Certificate of Incorporation of COALTRADE Inc. (now known as Peabody
COALTRADE, Inc.).
**3.74 By-Laws of COALTRADE Inc. (now known as Peabody COALTRADE, Inc.)
**3.75 Certificate of Incorporation of Premier Coal Sales Company, (now known
as Peabody Development Company).
**3.76 Restated By-Laws of Peabody Development Company.
**3.77 Certificate of Incorporation of Peabody Powertrade, Inc. (now known as
Peabody Energy Solutions, Inc.).
**3.78 By-Laws of Peabody Powertrade, Inc. (now known as Peabody Energy
Solutions, Inc.).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
**3.79 Restated Certificate of Incorporation of Peabody Holding Company, Inc.
**3.80 Restated By-Laws of Peabody Holding Company, Inc.
**3.81 Exhibit Intentionally Omitted
**3.82 Second Amended and Restated Partnership Agreement re: Peabody Natural
Resources Company.
**3.83 Certificate of Incorporation of Armco Terminal Company (now known as
Peabody Terminals, Inc.)
**3.84 By-Laws of Peabody Terminals, Inc.
**3.85 Certificate of Incorporation of Peabody Venezuela Coal Corp.
**3.86 By-Laws of Peabody Venezuela Coal Corp.
**3.87 Certificate of Incorporation of Peabody Western Coal Company.
**3.88 By-Laws of Peabody Western Coal Company.
**3.89 Certificate of Incorporation of Pine Ridge Coal Company.
**3.90 By-Laws of Pine Ridge Coal Company.
**3.91 Certificate of Incorporation of Powder River Coal Company.
**3.92 Restated By-Laws of Powder River Coal Company.
**3.93 Certificate of Incorporation of Rio Escondido Coal Corp.
**3.94 By-Laws of Rio Escondido Coal Corp.
**3.95 Certificate of Incorporation of Seneca Coal Company.
**3.96 By-Laws of Seneca Coal Company.
**3.97 Certificate of Incorporation of Sentry Mining Company.
**3.98 By-Laws of Sentry Mining Company.
**3.99 Certificate of Incorporation of Snowberry Land Company.
**3.100 By-Laws of Snowberry Land Company.
**3.101 Agreement of Incorporation of Low Volatile Coals, Inc. (now known as
Sterling Smokeless Company).
**3.102 By-Laws of Sterling Smokeless Company.
**3.103 Certificate of Formation of Thoroughbred, L.L.C.
**3.104 Operating Agreement of Thoroughbred, L.L.C.
**4.1 Senior Note Indenture dated as of May 18, 1998 between P&L Coal
Holdings Corporation and State Street Bank and Trust Company, as
Senior Note Trustee.
**4.2 Senior Subordinated Note Indenture dated as of May 18, 1998 between
P&L Coal Holdings Corporation and State Street Bank and Trust Company,
as Senior Subordinated Note Trustee.
**4.3 First Supplemental Senior Note Indenture dated as of May 19, 1998
among the Guaranteeing Subsidiary (as defined therein), P&L Coal
Holdings Corporation the other Senior Note Guarantors (as defined in
the Senior Note Indenture) and State Street Bank and Trust Company, as
Senior Note Trustee.
**4.4 First Supplemental Senior Subordinated Note Indenture dated as of May
19, 1998 among the Guaranteeing Subsidiary (as defined therein), P&L
Coal Holdings Corporation, the other Senior Subordinated Note
Guarantors (as defined in the Senior Subordinated Note Indenture) and
State Street Bank and Trust Company, as Senior Subordinated Note
Trustee.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
**4.5 Notation of Senior Subsidiary Guarantee dated as of May 19, 1998 among
the Senior Note Guarantors (as defined in the Senior Note Indenture).
**4.6 Notation of Subordinated Subsidiary Guarantee dated as of May 19, 1998
among the Senior Subordinated Note Guarantors (as defined in the
Senior Subordinated Note Indenture).
**4.7 Senior Note Registration Rights Agreement dated as of May 18, 1998
between P&L Coal Holdings Corporation and Lehman Brothers Inc.
**4.8 Senior Subordinated Note Registration Rights Agreement dated as of May
18, 1998 between P&L Coal Holdings Corporation and Lehman Brothers
Inc.
**5 Opinion of Simpson Thacher & Bartlett.
**10.1 Amended and Restated Credit Agreement dated as of June 9, 1998 among
P&L Coal Holdings Corporation, as Borrower, Lehman Brothers Inc., as
Arranger, Lehman Commercial Paper Inc., as Syndication Agent,
Documentation Agent, and Administrative Agent, and the lenders party
thereto.
**10.2 Guarantee and Collateral Agreement dated as of May 14, 1997 made by
the Guarantors, in favor of Lehman Commercial Paper, Inc., as
Administrative Agent for the banks and other financial institutions.
**10.3 Federal Coal Lease WYW0321779: North Antelope/Rochelle Mine.
**10.4 Federal Coal Lease WYW119554: North Antelope/Rochelle Mine.
**10.5 Federal Coal Lease WYW5036: Rawhide Mine.
**10.6 Federal Coal Lease WYW3397: Caballo Mine.
**10.7 Federal Coal Lease WYW83394: Caballo Mine.
**10.8 Federal Coal Lease WYW136142.
**12 Computation of Ratio of Earnings to Fixed Charges.
**21 List of Subsidiaries.
**23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion
filed as Exhibit 5 hereto).
*23.2 Consent of Ernst & Young LLP, independent certified public accountants
regarding P&L Coal Group.
*23.3 Consent of Ernst & Young LLP, independent certified public
accountants, regarding P&L Coal Holdings Corporation.
**23.4 Consent of John T. Boyd Company.
**24 Powers of Attorney (included on pages II-9 through II-64).
**25.1 Form T-1 Statement of Eligibility under Trust Indenture Act of 1939 of
State Street Bank and Trust Company, as Senior Notes Trustee.
**25.2 Form T-1 Statement of Eligibility under Trust Indenture Act of 1939 of
State Street Bank and Trust Company, as Senior Subordinated Notes
Trustee.
**27 Financial Data Schedule.
**99.1 Form of Senior Letter of Transmittal.
**99.2 Form of Senior Subordinated Letter of Transmittal.
**99.3 Form of Senior Notice of Guaranteed Delivery.
**99.4 Form of Senior Subordinated Notice of Guaranteed Delivery.
</TABLE>
- --------
* Filed herewith.
**Previously filed.
(b) Financial Statement Schedule
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Peabody Holding Company, Inc. and Affiliates
We have audited the combined financial statements of P&L Coal Group as of
March 31, 1998 and 1997, and September 30, 1996, and for the year ended March
31, 1998, the six months ended March 31, 1997, and each of the two years ended
September 30, 1996, and have issued our report thereon dated April 24, 1998
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
St. Louis, Missouri /Ernst & Young LLP/
April 24, 1998
II-6
<PAGE>
P & L COAL GROUP
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(/1/) OTHER OF PERIOD
----------- ---------- ---------- --------------- ----- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
1998
Reserves deducted from
asset accounts:
Land and coal
interests............ $61,276 $9,256 $(2,648) $67,884
Reserve for materials
and supplies......... 9,433 35 (2,908) (244)(/2/) 6,316
Allowance for doubtful
accounts............. 5,525 (378) 3,953 (/3/) 9,100
SIX MONTHS ENDED MARCH
31, 1997
Reserves deducted from
asset accounts:
Land and coal
interests............ 52,825 3,323 (3,424) 8,552 (/3/) 61,276
Reserve for materials
and supplies......... 10,383 (2,591) 1,641 (/3/) 9,433
Allowance for doubtful
accounts............. 5,072 453 5,525
YEAR ENDED SEPTEMBER 30,
1996
Reserves deducted from
asset accounts:
Land and coal
interests............ 64,815 4,600 (16,590) 52,825
Reserve for materials
and supplies......... 6,010 2,528 (406) 2,251 (/3/) 10,383
Allowance for doubtful
accounts............. 8,170 (3,098) 5,072
YEAR ENDED SEPTEMBER 30,
1995
Reserves deducted from
asset accounts:
Land and coal
interests............ 79,407 3,448 (18,040) 64,815
Reserve for materials
and supplies......... 5,206 1,092 (288) 6,010
Allowance for doubtful
accounts............. 8,398 (228) 8,170
</TABLE>
- --------
(1) Reserves utilized, unless otherwise indicated.
(2) Balances disposed of in Western Associated sale.
(3) Balances transferred from other accounts.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the
II-7
<PAGE>
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 present change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
P&L COAL HOLDINGS CORPORATION
By:
*
__________________________________
Irl F. Engelhardt
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* Chairman, Chief Executive Officer
____________________________________ and Director
Irl F. Engelhardt
* President, Chief Operating Officer
____________________________________ and Director
Richard M. Whiting
/s/ George J. Holway Vice President and Chief Financial
____________________________________ Officer
George J. Holway
* Vice President, Assistant Secretary
____________________________________ and Director
Henry E. Lentz
* Executive Vice President
____________________________________
R. B. Walcott Jr.
* Vice President
____________________________________
D. A. Beerbower
* Vice President
____________________________________
T. L. Bethel
* Vice President
____________________________________
W. E. Broshears
* Vice President
____________________________________
C. G. Farrand
* Vice President
____________________________________
L. H. Fox
</TABLE>
II-9
<PAGE>
<TABLE>
<S> <C>
SIGNATURE TITLE
* Vice President
____________________________________
D. C. Hegger
* Vice President and Secretary
____________________________________
J. L. Klinger
* Vice President
____________________________________
R. A. Navarre
* Vice President and Treasurer
____________________________________
S. F. Schaab
* Vice President
____________________________________
S. K. Schergen
* Vice President
____________________________________
G. P. Wickstra
* Director
____________________________________
Roger H. Goodspeed
* Director
____________________________________
Alan H. Washkowitz
</TABLE>
/s/ George J. Holway
*By: ________________________________
George J. Holway Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
AFFINITY MINING COMPANY
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President & Director
*
- -------------------------------------
J. A. Beck
Vice President and Treasurer
*
- -------------------------------------
T. L. Bethel
Vice President
*
- -------------------------------------
W. E. Broshears
Vice President
*
- -------------------------------------
T. E. Whitt
Director
*
- -------------------------------------
R. B. Walcott Jr.
Director
*
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
ARID OPERATIONS, INC.
By: *
----------------------------------
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. C. Hegger
* Vice President and Secretary
- -------------------------------------
C. C. Kennedy
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
P. S. Taylor
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
BIG SKY COAL COMPANY
*
By: ___________________________________
Curtis M. Belden
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President
- -------------------------------------
Curtis M. Belden
* Treasurer and Assistant Secretary
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
L. H. Fox
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
BLACKROCK FIRST CAPITAL CORPORATION
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No.2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
BLUEGRASS COAL COMPANY
By: *
----------------------------------
John C. Hill
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
John C. Hill
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
CABALLO COAL COMPANY
By: *
----------------------------------
L. H. Fox
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
L. H. Fox
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
Clifford A. Knesel
* Vice President
- -------------------------------------
Richard D. Robison
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
CHARLES COAL COMPANY
By: *
----------------------------------
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
* By: /s/ George J. Holway
----------------------------------
George J. Holway
Attorney-In-Fact
</TABLE>
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
COAL PROPERTIES CORP.
By: *
----------------------------------
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
* By: /s/ George J. Holway
----------------------------------
George J. Holway
Attorney-In-Fact
</TABLE>
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
COLONY BAY COAL COMPANY
By:Eastern Associated Coal Corp. Its
General Partner
By: *
----------------------------------
J. A. Beck
President of Eastern
Associated Coal Corp.
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
EASTERN ASSOCIATED COAL CORP.
A General Partner
By: * President and Director of Eastern
---------------------------------- Associated Coal Corp.
J. A. Beck
* Vice President and Treasurer of
---------------------------------- Eastern
T. L. Bethel Associated Coal Corp.
</TABLE>
II-19
<PAGE>
<TABLE>
<S> <C>
SIGNATURE TITLE
* Vice President of Eastern Associated
---------------------------------- Coal Corp.
W. E. Broshears
* Vice President of Eastern Associated
---------------------------------- Coal Corp.
T. E. Whitt
* Director of Eastern Associated Coal
---------------------------------- Corp.
R. B. Walcott Jr.
* Director of Eastern Associated Coal
---------------------------------- Corp.
R. M. Whiting
CHARLES COAL COMPANY
A General Partner
By: * President and Director of Charles
---------------------------------- Coal Company
J. A. Beck
* Vice President and Treasurer of
---------------------------------- Charles Coal Company
T. L. Bethel
* Vice President of Charles Coal
---------------------------------- Company
W. E. Broshears
* Vice President of Charles Coal
---------------------------------- Company
T. E. Whitt
* Director
----------------------------------
R. B. Walcott Jr.
* Director
----------------------------------
R. M. Whiting
* By: /s/ George J. Holway
----------------------------------
George J. Holway
Attorney-In-Fact
</TABLE>
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
COOK MOUNTAIN COAL COMPANY
By: *
----------------------------------
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
COTTONWOOD LAND COMPANY
By: *
----------------------------------
J. L. Lautenschlager
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. L. Lautenschlager
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
DARIUS GOLD MINE, INC.
By: *
-----------------------------------
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- ------------------------------------
D. C. Hegger
* Vice President and Secretary
- ------------------------------------
C. C. Kennedy
* Vice President and Treasurer
- ------------------------------------
S. F. Schaab
* Vice President
- ------------------------------------
P. S. Taylor
* Director
- ------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- ------------------------------------
G. J. Holway
/s/ George J. Holway
*By: _______________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
EACC CAMPS, INC.
*
By: __________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
EASTERN ASSOCIATED COAL CORP.
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
EASTERN ROYALTY CORP.
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
GOLD FIELDS CHILE, S.A.
By: *
----------------------------------
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. C. Hegger
* Vice President and Secretary
- -------------------------------------
C. C. Kennedy
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
P. S. Taylor
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
GOLD FIELDS MINING CORPORATION
By: *
----------------------------------
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. C. Hegger
* Vice President and Secretary
- -------------------------------------
C. C. Kennedy
* Vice President and Assistant Secretary
- -------------------------------------
J. L. Klinger
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
P. S. Taylor
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
GOLD FIELDS OPERATING CO.--ORTIZ
*
By: ___________________________________
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. C. Hegger
* Vice President and Secretary
- -------------------------------------
C. C. Kennedy
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
P. S. Taylor
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
GRAND EAGLE MINING, INC.
*
By: ___________________________________
John C. Hill
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
John C. Hill
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
HAYDEN GULCH TERMINAL, INC.
*
By: ___________________________________
D. A. Wagner
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. A. Wagner
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
INDEPENDENCE MATERIAL HANDLING COMPANY
*
By: _____________________________________
J. L. Lautenschlager
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- ------------------------------------
J. L. Lautenschlager
* Vice President and Treasurer
- ------------------------------------
S. F. Schaab
* Director
- ------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- ------------------------------------
G. J. Holway
/s/ George J. Holway
*By: _______________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
INTERIOR HOLDINGS CORP.
*
By: ___________________________________
I. F. Engelhardt
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
I. F. Engelhardt
/s/ G. J. Holway Vice President, Treasurer and
- ------------------------------------- Director
G. J. Holway
Director
*
- -------------------------------------
W. H. Carson
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
II-33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
JAMES RIVER COAL TERMINAL COMPANY
*
By: ___________________________________
R. A. Navarre
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
R. A. Navarre
Vice President and Treasurer
*
- -------------------------------------
S. F. Schaab
Vice President
*
- -------------------------------------
J. L. Lautenschlager
Director
*
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
JUNIPER COAL COMPANY
*
By: ___________________________________
J. L. Lautenschlager
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President
*
- -------------------------------------
J. L. Lautenschlager
Vice President and Treasurer
*
- -------------------------------------
S. F. Schaab
Director
*
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
KAYENTA MOBILE HOME PARK, INC.
*
By: ___________________________________
D. A. Wagner
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
D. A. Wagner
Vice President
*
- -------------------------------------
W. E. Broshears
Treasurer and Assistant Secretary
*
- -------------------------------------
T. L. Bethel
Director
*
- -------------------------------------
R. B. Walcott Jr.
Director
*
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
MARTINKA COAL COMPANY
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
J. A. Beck
Vice President and Treasurer
*
- -------------------------------------
T. L. Bethel
Vice President
*
- -------------------------------------
W. E. Broshears
Vice President
*
- -------------------------------------
T. E. Whitt
Director
*
- -------------------------------------
R. B. Walcott Jr.
Director
*
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
MIDCO SUPPLY AND EQUIPMENT CORPORATION
*
By: ___________________________________
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
D. C. Hegger
Vice President and Treasurer
*
- -------------------------------------
S. F. Schaab
Director
*
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
MOUNTAIN VIEW COAL COMPANY
By: *
----------------------------------
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
J. A. Beck
Vice President and Treasurer
*
- -------------------------------------
T. L. Bethel
Vice President
*
- -------------------------------------
W. E. Broshears
Vice President
*
- -------------------------------------
T. E. Whitt
Director
*
- -------------------------------------
R. B. Walcott Jr.
Director
*
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
NORTH PAGE COAL CORP.
By: *
----------------------------------
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
J. A. Beck
Vice President and Treasurer
*
- -------------------------------------
T. L. Bethel
Vice President
*
- -------------------------------------
W. E. Broshears
Vice President
*
- -------------------------------------
T. E. Whitt
Director
*
- -------------------------------------
R. B. Walcott Jr.
Director
*
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
OHIO COUNTY COAL COMPANY
*
By: ___________________________________
J. C. Hill
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- -------------------------------------
J. C. Hill
Vice President and Treasurer
*
- -------------------------------------
S. F. Schaab
Director
*
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PATRIOT COAL COMPANY, L.P.
By:Bluegrass Coal Company Its
Managing Partner
By: *
----------------------------------
John C. Hill
President of Bluegrass Coal
Company
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
BLUEGRASS COAL COMPANYIts Managing Partner
President and Director of Bluegrass
By: * Coal Company
----------------------------------
J. C. Hill
Vice President and Treasurer of
* Bluegrass Coal Company
----------------------------------
S. F. Schaab
Director of Bluegrass Coal Company
*
----------------------------------
W. H. Carson
/s/ G. J. Holway Director of Bluegrass Coal Company
----------------------------------
G. J. Holway
II-42
<PAGE>
<TABLE>
<S> <C>
</TABLE>
SENTRY MINING COMPANY A Partner
President and Director of Sentry
By:_____________ *_____________ Mining Company
---------------------------------
J. C. Hill
Vice President and Treasurer of
* Sentry Mining Company
---------------------------------
T. L. Bethel
Director of Sentry Mining Company
*
---------------------------------
W. H. Carson
/s/ G. J. Holway Director of Sentry Mining Company
---------------------------------
G. J. Holway
/s/ George J. Holway
*By: __________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY AMERICA, INC.
By: *
-----------------------------------
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE
President and Director
*
- ------------------------------------
D. C. Hegger
Vice President and Secretary
*
- ------------------------------------
C. C. Kennedy
Vice President and Assistant
* Secretary
- ------------------------------------
J. L. Klinger
Vice President and Treasurer
*
- ------------------------------------
S. F. Schaab
Director
*
- ------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- ------------------------------------
G. J. Holway
/s/ George J. Holway
*By: __________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-44
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY COALSALES COMPANY
*
By: ___________________________________
R. A. Navarre
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
R. A. Navarre
* Vice President
- -------------------------------------
James C. Campbell Jr.
* Vice President
- -------------------------------------
V. E. Mavers
* Vice President
- -------------------------------------
D. K. Tickner
* Vice President
- -------------------------------------
P. H. Vining
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-45
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY COALTRADE, INC.
*
By: ___________________________________
P. H. Vining
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President
- -------------------------------------
P. H. Vining
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
* Director
- -------------------------------------
R. A. Navarre
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY COAL COMPANY
By: *
----------------------------------
M. A. Haaga
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
M. A. Haaga
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
D. A. Wagner
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY DEVELOPMENT COMPANY
*
By: _____________________________________
J. L. Lautenschlager
President
Pursuant to the requirements of the Securities Act, this Amendment No.2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- ------------------------------------
J. L. Lautenschlager
* Vice President and Treasurer
- ------------------------------------
S. F. Schaab
* Director
- ------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- ------------------------------------
G. J. Holway
/s/ George J. Holway
*By: _______________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY ENERGY SOLUTIONS, INC.
*
By: ___________________________________
R. A. Navarre
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
R. A. Navarre
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY HOLDING COMPANY, INC.
*
By: _____________________________________
I. F. Engelhardt
Chairman & Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* Chairman, Chief Executive Officer
- ------------------------------------ and Director
I. F. Engelhardt
/s/ G. J. Holway Vice President, Chief Financial
- ------------------------------------ Officer and Director
G. J. Holway
* Vice President, Secretary and
- ------------------------------------ Director
J. L. Klinger
* Vice President
- ------------------------------------
D. A. Beerbower
* Vice President and Controller
- ------------------------------------
T. L. Bethel
* Vice President
- ------------------------------------
C. G. Farrand
</TABLE>
II-50
<PAGE>
<TABLE>
<S> <C>
SIGNATURE TITLE
* Vice President
- -------------------------------------
G. J. Hoffman
* Vice President
- -------------------------------------
C. J. Pilliod
* Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
S. K. Schergen
* Vice President
- -------------------------------------
G. P. Wickstra
* Vice President
- -------------------------------------
J. M. Wootten
* Vice President
- -------------------------------------
L. G. Yates
/s/ George J. Holway
*By: ________________________________
George J. Holway
Attorney-In-Fact
</TABLE>
II-51
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement or to be signed on
its behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY NATURAL RESOURCES COMPANY
By:Gold Fields Mining Corporation Its
General Partner
By: *
-----------------------------------
D. C. Hegger
President of Gold Fields Mining
Corporation
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
GOLD FIELDS MINING CORPORATION
A General Partner
By: * President and Director of Gold Fields
--------------------------------- Mining Corporation
D. C. Hegger
* Vice President and Secretary of Gold
--------------------------------- Fields Mining Corporation
C. C. Kennedy
* Vice President and Assistant
--------------------------------- Secretary of
J. L. Klinger Gold Fields Mining Corporation
* Vice President and Treasurer of
--------------------------------- Gold Fields Mining Corporation
S. F. Schaab
* Director of Gold Fields Mining
--------------------------------- Corporation
W. H. Carson
/s/ G. J. Holway Director of Gold Fields Mining
--------------------------------- Corporation
G. J. Holway
</TABLE>
II-52
<PAGE>
<TABLE>
<S> <C>
PEABODY AMERICA, INC.
A General Partner
* President and Director of Peabody
By: America, Inc.
---------------------------------
D. C. Hegger
* Vice President and Secretary of
--------------------------------- Peabody America, Inc.
C. C. Kennedy
* Vice President and Assistant
--------------------------------- Secretary of Peabody America, Inc.
J. L. Klinger
* Vice President and Treasurer of
--------------------------------- Peabody America, Inc.
S. F. Schaab
* Director of Peabody America, Inc.
---------------------------------
W. H. Carson
/s/ G. J. Holway Director of Peabody America, Inc.
---------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: __________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-53
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY TERMINALS, INC.
*
By: ___________________________________
R. A. Navarre
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
R. A. Navarre
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
P. H. Vining
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-54
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY VENEZUELA COAL CORP.
*
By: ___________________________________
D. C. Hegger
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. C. Hegger
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-55
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PEABODY WESTERN COAL COMPANY
*
By: _____________________________________
D. A. Wagner
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- ------------------------------------
D. A. Wagner
* Vice President
- ------------------------------------
W. E. Broshears
* Vice President
- ------------------------------------
T. E. Whitt
* Treasurer and Assistant Secretary
- ------------------------------------
T. L. Bethel
* Director
- ------------------------------------
R. B. Walcott Jr.
* Director
- ------------------------------------
R. M. Whiting
</TABLE>
/s/ George J. Holway
*By: __________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-56
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
PINE RIDGE COAL COMPANY
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
II-57
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
POWDER RIVER COAL COMPANY
*
By: ___________________________________
L. H. Fox
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
L. H. Fox
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Vice President
- -------------------------------------
Clifford A. Knesel
* Vice President
- -------------------------------------
Richard D. Robison
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
II-58
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
RIO ESCONDIDO COAL CORP.
*
By: ___________________________________
D. A. Wagner
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. A. Wagner
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
II-59
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6 1998.
SENECA COAL COMPANY
*
By: ___________________________________
D. A. Wagner
President
Pursuant to the requirements of the Securities Act, this Amendment No.2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
D. A. Wagner
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Treasurer and Assistant Secretary
- -------------------------------------
T. L. Bethel
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
II-60
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
SENTRY MINING COMPANY
*
By: ___________________________________
J. C. Hill
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. C. Hill
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-61
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
SNOWBERRY LAND COMPANY
*
By: ___________________________________
J. L. Lautenschlager
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. L. Lautenschlager
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
* Director
- -------------------------------------
W. H. Carson
/s/ G. J. Holway Director
- -------------------------------------
G. J. Holway
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-62
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
STERLING SMOKELESS COAL COMPANY
*
By: ___________________________________
J. A. Beck
President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* President and Director
- -------------------------------------
J. A. Beck
* Vice President and Treasurer
- -------------------------------------
T. L. Bethel
* Vice President
- -------------------------------------
W. E. Broshears
* Vice President
- -------------------------------------
T. E. Whitt
* Director
- -------------------------------------
R. B. Walcott Jr.
* Director
- -------------------------------------
R. M. Whiting
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-63
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 6, 1998.
THOROUGHBRED, L.L.C.
*
By: ___________________________________
I. F. Engelhardt
Chairman
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on the 6th day of October, 1998 by
the following persons in the capacities indicated:
<TABLE>
<S> <C>
SIGNATURE TITLE
* Chairman
- -------------------------------------
I. F. Engelhardt
* Vice President and Treasurer
- -------------------------------------
S. F. Schaab
</TABLE>
/s/ George J. Holway
*By: ___________________________
George J. Holway
Attorney-In-Fact
<TABLE>
<S> <C>
</TABLE>
II-64
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and the related Prospectus of P&L Coal
Holdings Corporation for the registration of 8 7/8% series B Senior Notes due
2008 and 9 5/8% series B Senior Subordinated Notes due 2008, and to the
inclusion of our reports dated April 24, 1998, with respect to the combined
financial statements and schedule of P&L Coal Group for the year ended March
31, 1998, the six months ended March 31, 1997, and each of the two years ended
September 30, 1996, filed with the Securities and Exchange Commission.
St. Louis, MO /s/ Ernst & Young LLP
September 30, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and the related Prospectus of P&L Coal
Holdings Corporation for the registration of 8 7/8% series B Senior Notes due
2008 and 9 5/8% series B Senior Subordinated Notes due 2008, and to the
inclusion of our report dated July 9, 1998, with respect to the balance sheet
of P&L Coal Holdings Corporation as of March 31, 1998, filed with the
Securities and Exchange Commission.
St. Louis, MO /s/ Ernst & Young LLP
September 30, 1998
