<PAGE>
<PAGE>
=======================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- --------------------
Commission File Number 333-59073
-------------------------------------------------
P&L COAL HOLDINGS CORPORATION
- -----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-4004153
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 MARKET STREET, ST. LOUIS, MISSOURI 63101
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 342-3400
- -----------------------------------------------------------------------
Registrant's telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in any amendment to
this Form 10-K. [X]
=======================================================================
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS.
OVERVIEW
We are among the world's largest providers of low cost fuel for the
generation of electricity and are also engaged in power trading and
power and coal contract restructuring services. During this decade, we
have transformed from a largely high sulfur, high-cost coal producer to
a more broadly based energy company providing predominantly low sulfur,
low-cost coal from operations in the United States and Australia, as
well as a number of fuel/power products to the electricity market.
In fiscal 1999, we sold 176.0 million tons of coal worldwide. These
products were used to generate more than 9 percent of the electricity
produced in the United States and nearly 2.5 percent of the world's
electricity. Through our Citizens Power unit, we ranked among the top
ten United States power marketers in calendar 1998 and were the leader
in restructuring electricity contracts with independent power producers.
Our share of the United States coal market was approximately 16.0
percent in calendar 1998. We have approximately 10.3 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.
We currently own interests in more than 35 active mines in the United
States and Australia, and also sell coal produced by third-party
contractors and suppliers. In fiscal 1999, we produced approximately 71
percent of our coal in the Western United States, 25 percent from the
eastern half of the United States and 4 percent from Australia.
Peabody's coal production in the Western United States has grown from 37
million tons in 1990 to 119 million tons in fiscal 1999. Our highly
productive western operations produce very low sulfur coal, which is
attractive to utilities for purposes of complying with more stringent
standards resulting from the Clean Air Act.
Our large and diverse customer base includes more than 150 electricity
generating plants in the United States as well as steam and
metallurgical customers in 15 other countries. In fiscal 1999, we
supplied 93 percent of our United States production to United States
electric utilities, 4 percent to the export market and 3 percent to the
United States industrial sector.
COMPANY HISTORY
Peabody, Daniels and Co. was founded in 1883 as a retail coal supplier,
entering the mining business in 1888 as Peabody & Co. with our first
mine in Illinois. In 1926, Peabody Coal Company was listed on the
Chicago Stock Exchange and, beginning in 1949, on the New York Stock
Exchange. In 1955, Peabody Coal Company, primarily an underground mine
operator, merged with Sinclair Coal Company, a major surface mining
company. In 1968, Peabody Coal Company was acquired by Kennecott Copper
Company, and in 1977, it was sold to Peabody Holding Company, a holding
company formed by a consortium consisting of Newmont Mining Corporation,
The Williams Companies, Bechtel Investments, Inc., The Boeing Company,
Fluor Corporation and The Equitable Life Assurance Society of the United
States.
In July 1990, Hanson acquired Peabody Holding Company. In February 1997,
Hanson spun off its energy-related businesses including Eastern Group
and Peabody Holding Company into The Energy Group. The Energy Group was
a publicly traded company in the United Kingdom. On May 19, 1997, The
Energy Group, through Peabody, purchased Citizens Power, initiating its
entry into the rapidly growing United States power marketing industry.
On May 19, 1998, Lehman Merchant Banking Partners II, an affiliate of
Lehman Brothers, purchased Peabody Holding Company and its affiliates,
Peabody Resources Limited ("Peabody Resources") and Citizens Power, now
collectively called Peabody Group, in a transaction coinciding with the
purchase by Texas Utilities of the remainder of The Energy Group.
ACQUISITIONS AND EXPANSION
During the 1980's, we grew through expansion and acquisition, opening
the North Antelope Mine in Wyoming's coal-rich Powder River Basin in
1983 and the Rochelle Mine in 1985. In 1986, we acquired the West
Virginia coal properties of ARMCO Steel and the following year purchased
Coal Properties Corp. and Eastern Associated Coal Corp., which included
seven operating mines and substantial low sulfur coal reserves, also in
West Virginia.
2
<PAGE>
<PAGE>
From 1993 to 1999, we made twelve major acquisitions. In 1993, a major
coal operation, including interests in three mines in New South Wales,
Australia, was acquired from Costain Group in anticipation of the
growing Pacific Rim market for coal. The properties included 100 percent
ownership of the Ravensworth Mine, a 50 percent interest in the Narama
Mine and a 37.5 percent interest in the Warkworth Mine, subsequently
raised to 43.75 percent. We also subsequently developed a fourth mine,
Bengalla, which began shipments in early 1999. Our stake in the Bengalla
joint venture was raised to 37 percent in 1998.
In 1993, the Lee Ranch Mine in New Mexico was acquired. The following
year, a one-third ownership in Black Beauty Coal Company ("Black
Beauty"), Indiana's largest coal producer, was purchased. Our interest
in Black Beauty was increased to 43.3 percent in February 1998 and to
81.7 percent in January 1999.
In 1994, we acquired the Caballo and Rawhide mines in Wyoming's Powder
River Basin from Exxon Coal USA Inc. This acquisition, along with the
expansion of the North Antelope and Rochelle Mines, positioned Peabody
as the leading producer in the Powder River Basin, the nation's largest
and fastest growing coal region. Our sales volume from the Basin
increased from 31 million tons in 1993 to 98 million tons in fiscal
1999.
Since 1990, our coal sales volumes have grown from 93 million annual
tons to 176 million annual tons, an increase of 89 percent. During this
period, we transformed ourselves from a largely high sulfur, high cost
coal producer to a more broadly based energy company providing
predominantly low sulfur fuels and other products and services to the
electricity industry.
OUR BUSINESSES
Through our interests in Peabody Resources in Australia, and Black
Beauty, now operating in Indiana and Illinois, we have interests in
joint ventures that expand the scope of our operations. Also, our
ownership of Citizens Power and the development of coal and sulfur
dioxide emission allowance trading have transformed us into a leading
provider of low cost coal products and services, including power contract
restructuring services, to the electricity industry.
Today, we are engaged in coal mining, marketing and transportation,
electricity and coal contract restructuring, and coal, power and sulfur
dioxide emission allowance trading. We also offer innovative fuel/power
products and services to an electricity market that is in the process of
being deregulated.
POWER MARKETING AND ELECTRICITY CONTRACT RESTRUCTURING
Our subsidiary, Citizens Power, headquartered in Boston, Massachusetts,
is engaged in electricity contract restructuring and electricity, gas
and oil trading. For purposes of our financing, Citizens Power and its
subsidiaries are unrestricted subsidiaries.
Citizens Power obtained the first power trading license issued by the
Federal Energy Regulatory Commission in 1989, and in calendar 1998,
Citizens Power was among the top ten United States power marketing
companies. Citizens Power is also a leader in electricity contract
restructuring. During fiscal 1999, three such contract restructurings
were completed. Typically, Citizens Power acts, through subsidiary
companies, as a third party facilitator to obtain non-recourse
financing, the proceeds of which are used to purchase, and then obtain
lower cost replacement power, for long-term electricity supply contracts
between independent power producers and electric utility companies.
3
<PAGE>
<PAGE>
MINING OPERATIONS
The following provides a description of the operating characteristics of
the principal mines and reserves of each of our United States and
Australian mining units.
U. S. OPERATIONS
[MAP]
UNITED STATES
Within the United States, operations are divided into five operating
regions: Powder River Basin; Southwest; Midwest; Southern Appalachia and
Northern Appalachia. Our sales of coal in and from the United States are
managed by our sales and marketing subsidiary, Peabody COALSALES, as
well as Peabody COALTRADE. Together, United States coal sales totaled
168.6 million tons in fiscal 1999.
POWDER RIVER BASIN OPERATIONS
We own and manage three low sulfur, non-union surface mining complexes
in Wyoming that sold approximately 97.5 million tons of coal in
fiscal 1999, or approximately 55 percent of our total coal sales.
The North Antelope/Rochelle and Caballo mines are serviced by the
Burlington Northern/Santa Fe and Union Pacific railroads, while the
Rawhide Mine is served by the Burlington Northern/Santa Fe. We control
approximately 3.6 billion tons of coal reserves in the southern Powder
River Basin, which enables us to increase or decrease production among
our mines in that region to respond to market conditions. We recently
suspended operations at the Rawhide Mine, shifting production under
certain coal supply agreements to the Caballo Mine and the newly
combined North Antelope/Rochelle Mine.
Our Wyoming Powder River Basin reserves are classified as surface
mineable, subbituminous coal with seam thickness varying from 70 to 105
feet. The sulfur content of the coal in current production ranges from
0.2 percent to 0.4 percent and the heat value ranges from 8,250 to 8,850
Btus per pound.
4
<PAGE>
<PAGE>
We also operate the Big Sky Mine in Montana in the northern Powder River
Basin. Coal from this mine is shipped to customers in the upper Midwest
and served by the Burlington Northern/Santa Fe railroad. Hourly workers
at the Big Sky Mine are members of the United Mine Workers of America.
North Antelope/Rochelle
The North Antelope/Rochelle Mine is located 65 miles south of Gillette,
Wyoming. Two mines were combined into a single mining complex in fiscal
1999 to achieve operational and administrative synergies. As separate
mines, Rochelle and North Antelope were consistently ranked among the
most productive in the United States. The combined North Antelope/Rochelle
Mine now ranks as the largest coal mining operation in the United States,
shipping 66.8 million tons during fiscal 1999.
The North Antelope/Rochelle Mine produces premium quality coal with a
sulfur content averaging 0.22 percent and a heat value ranging from
8,500 to 8,800 Btus per pound. It produces the lowest sulfur coal in the
United States. The mine uses a dragline along with five truck and shovel
fleets to mine coal.
Caballo
The Caballo Mine is located 20 miles south of Gillette, Wyoming. In
fiscal 1999, it sold approximately 27.3 million tons of coal. Caballo is
a truck and shovel operation with a coal handling system that includes
two 12,000-ton silos and two 11,000-ton silos. Dual loop tracks are in
place connecting with the Burlington Northern/Santa Fe and Union Pacific
railroads.
Rawhide
The Rawhide Mine is located ten miles north of Gillette, Wyoming and
uses truck and shovel mining methods. In fiscal 1999, it sold
approximately 3.4 million tons of low sulfur coal. Rawhide has four
11,000-ton silos and two 12,000-ton silos. Operations at the Rawhide
Mine were suspended in 1999, pending improved market conditions for its
lower-Btu coal.
Big Sky
The Big Sky Mine is located in the northern end of the Powder River
Basin near Colstrip, Montana and uses dragline mining equipment. The
mine sold 3.3 million tons of low sulfur coal in fiscal 1999. The coal
is shipped by rail to several major electric utility customers in the
upper Midwestern United States. This mine is near the exhaustion of its
economically recoverable reserves and may be closed in the next several
years, depending upon market and mining conditions.
SOUTHWESTERN OPERATIONS
We own and manage two mines in Arizona and one each in Colorado and
New Mexico. Each supply low sulfur coal under long-term coal supply
agreements to electricity generating stations in the region. Together,
these mines sold 18.4 million tons of coal in fiscal 1999.
Black Mesa
The Black Mesa Mine, which uses two draglines and is located on the
Navajo and Hopi Indian reservations in Arizona, sold 4.5 million tons of
steam coal in fiscal 1999. 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. The
Mohave coal supply agreement extends until 2005. Hourly workers at this
mine are members of the United Mine Workers of America.
5
<PAGE>
<PAGE>
Kayenta
The Kayenta Mine is adjacent to the Black Mesa Mine and uses three
draglines in three mining areas. It sold approximately 7.5 million tons
of steam coal in fiscal 1999. 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. The Navajo coal supply agreement
extends until 2011. Hourly workers at this mine are members of the
United Mine Workers of America.
Seneca
The Seneca Mine near Hayden, Colorado shipped 1.5 million tons of low
sulfur steam coal in fiscal 1999, operating with two draglines in two
separate mining areas. The Seneca Mine's coal is hauled by truck to
the nearby Hayden Generating Station, operated by Public Service of
Colorado, under a coal supply agreement that extends until 2011. Hourly
workers at this mine are members of the United Mine Workers of America.
Lee Ranch Coal Company
The Lee Ranch Mine, located near Grants, New Mexico, sold approximately
4.9 million tons of low sulfur coal in fiscal 1999. Lee Ranch shipped
its coal to two customers in Arizona and New Mexico under coal supply
agreements extending until 2010 and 2014, respectively. Lee Ranch is a
non-union surface mine that uses a combination of dragline and truck-
and-shovel mining techniques.
SOUTHERN APPALACHIA OPERATIONS
We own and manage three operating units and related facilities in
southern West Virginia. In fiscal 1999, these operations sold
approximately 13.3 million tons of low sulfur steam and metallurgical
coal to customers in the United States and abroad. Hourly workers at
these operations are members of the United Mine Workers of America.
Big Mountain/Robin Hood Operating Unit
The Big Mountain/Robin Hood Operating Unit is based near Prenter, West
Virginia. In fiscal 1999, the Big Mountain No. 16 and Robin Hood No. 9
mines sold approximately 1.8 million tons of steam coal. Both are
underground mines using continuous mining equipment. Processed coal is
loaded on the CSX railroad.
Pond Fork Operating Unit and Contract Mines
The Pond Fork Operating Unit consists of the Harris No. 1 Mine and the
Rocklick preparation plant. Together, these units sold approximately 7.6
million tons of low sulfur steam and metallurgical coal in fiscal 1999.
The Harris No. 1 Mine, near Bald Knob, West Virginia, sold approximately
3.6 million tons of low sulfur steam coal in fiscal 1999. This mine uses
both longwall and continuous mining equipment. The Rocklick preparation
plant, located near Wharton, West Virginia, processed coal produced by
the Harris Mine and contract mining companies from coal reserves we own.
This preparation plant shipped approximately 4.0 million tons of steam
and metallurgical coal in fiscal 1999. Processed coal is loaded at the
plant site on the CSX railroad or transferred via conveyor to the
Kopperston loadout facility on the Norfolk Southern railroad.
Wells Operating Unit
The Wells Operating Unit, in Boone County, West Virginia, sold
approximately 3.9 million tons of metallurgical and steam coal during
fiscal 1999. The unit consists of the Lightfoot No. 1 and No. 2 mines
and the Wells preparation plant, all located near Wharton, West
Virginia. The mines use continuous miners to produce coal from reserves
we own. The Lightfoot No. 1 mine closed on February 11, 1999 after
depleting its mineable reserves. Processed coal is loaded on the CSX
railroad.
6
<PAGE>
<PAGE>
NORTHERN APPALACHIA OPERATIONS
Federal No. 2 Mine
The Federal No. 2 Mine near Fairview, West Virginia, uses longwall-
mining equipment and shipped approximately 4.7 million tons of steam
coal in fiscal 1999. Coal shipped 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 some other high sulfur coals. The mine
is served jointly by the CSX and Norfolk Southern railroads, through
which processed coal is sold to a variety of United States and Canadian
utilities. Hourly workers at these operations are members of the United
Mine Workers of America.
MIDWEST OPERATIONS
We own and operate eight mines in the Midwestern United States, which
collectively sold 19.7 million tons of coal in fiscal 1999. Included are
five underground and three surface mines, along with five preparation
plants and four barge loading facilities, located in western Kentucky,
southern Illinois and southwestern Indiana. Coal from these mines is
primarily shipped to electric utilities in the Midwest, while some coal
is sold to industrial customers that generate their own power.
Approximately 51 percent of the high sulfur coal sold from these mining
operations is shipped to electric generating stations equipped with
desulfurization units. Most hourly workers are members of the United
Mine Workers of America; Patriot Coal Company operates union-free.
We operate an additional 12 mines in the Midwestern United States
through our 81.7 percent joint venture interest in Black Beauty.
Camp Operating Unit
The Camp Operating Unit, located near Morganfield, Kentucky, operates
two underground mines and a large preparation and barge loading
facility. Together, these operations sold 6.2 million tons of coal in
fiscal 1999. The Camp No. 1 Mine uses continuous mining equipment with
both continuous haulage systems and shuttle car haulage. The Camp No. 11
Mine uses both longwall and continuous mining equipment. Most of the
production is sold to the Tennessee Valley Authority under a contract
that expires in March 2000. Discussions for a follow-on contract are
currently underway.
Hawthorn Operating Unit
The Hawthorn Operating Unit near Carlisle, Indiana uses three draglines
and sold 3.0 million tons of steam coal in fiscal 1999. Processed coal
is shipped to local utilities via the CSX railroad. Future production at
this mine may be affected by the implementation of Phase II of the Clean
Air Act Amendments since most of the coal is being sold to power plants
that have not been retrofitted with scrubbers. We are examining the
possibility of shipping coal to the Hawthorn Mine's principal customer
from other facilities we own which are better able to meet the
customer's future coal quality requirements.
Lynnville Operating Unit
The Lynnville Operating Unit, near Lynnville, Indiana, sold
approximately 3.1 million tons of coal in fiscal 1999. The Lynnville
Operating Unit uses three draglines and an electric shovel. Coal is
processed at the Lynnville preparation plant and shipped via rail or
barge to customers in Indiana and Kentucky.
Marissa Operating Unit
The Marissa Operating Unit, located near Marissa, Illinois, consists of
the Marissa underground mine, the Randolph preparation plant and
associated transportation facilities. The Marissa Operating Unit shipped
4.4 million tons of coal and uses six continuous miners. Most of the
production is currently being shipped to Illinois Power Company, who
announced its intention to begin using Powder River Basin coal in late
1999. This mine will close in fiscal 2000 unless we obtain new
customers.
7
<PAGE>
<PAGE>
Midwest Operating Unit
The Midwest Operating Unit near Graham, Kentucky, sold 1.2 million tons
of coal in fiscal 1999. The unit includes the Martwick underground mine,
which uses continuous mining equipment, and several small surface mining
operations. The unit is also responsible for closed or suspended mining
operations throughout Peabody's North American operations. These
properties are managed from bond release until final reclamation
requirements are met. Future production may be affected by
implementation of Phase II of the Clean Air Act Amendments.
Patriot Coal Company
Patriot Coal Company operates one surface mine and one underground mine
in Henderson County, Kentucky, and sold approximately 1.8 million tons
of coal in fiscal 1999. The underground mine uses continuous mining
equipment, and the surface mine uses truck and shovel equipment.
Patriot Coal Company also operates a preparation plant and a dock.
The Big Run surface mine in Ohio County, Kentucky, closed in fiscal
1999 due to exhaustion of reserves.
BLACK BEAUTY COAL COMPANY
Peabody also owns 81.7 percent of Black Beauty, which operates nine
mines in Indiana and also has interests in three mines in southern
Illinois. Together these operations sold 17.0 million tons of low,
medium and high sulfur steam coal in fiscal 1999. We purchased a one-
third interest in Black Beauty in 1994, and added another 10 percent in
1998 and a 38.3 percent interest in early 1999. Black Beauty Resources,
Inc., owned by certain members of Black Beauty's executive management
team, owns the remaining interest.
Black Beauty's principal operating units include Air Quality No. 1 Mine,
a low sulfur underground coal mine located near Monroe City, Indiana. In
calendar 1998, Air Quality No. 1 Mine shipped 1.4 million tons of low
sulfur coal. Among other mines in Indiana, Black Beauty also operates
the Farmersburg Mine, a surface mine that produced 2.2 million tons of
medium sulfur coal in calendar 1998, the Francisco Mine, a 2.1 million
tons per year surface mine, and the Somerville Mine, a 1.3 million tons
per year surface mine.
Black Beauty owns a 50 percent interest in Arclar Coal Company, which
operates two underground mines in southern Illinois, and a 75 percent
equity interest in Sugar Camp Coal, LLC, a 2 million tons per year
surface mine also located in southern Illinois.
Black Beauty controls approximately 230 million tons of coal reserves,
including the largest coal reserve in Indiana that will meet the Phase
II Clean Air Act restrictions of 1.2 lbs. sulfur dioxide per million
Btus required beginning after 1999.
AUSTRALIA
Peabody, through our subsidiary Peabody Resources which is headquartered
in Sydney, Australia, own interests in coal mining operations and a
mining services company in Australia. Peabody Resources manages and owns
or holds joint venture interests in four operating surface coal mines in
the Hunter Valley, New South Wales. All of these mines use draglines to
uncover the coal seams. The mines sold 11.5 million short tons during
fiscal 1999, of which Peabody Resources' entitlement was approximately
7.4 million tons. Approximately 70 percent of the coal is sold
domestically via long-term contracts, and 30 percent is exported to
Asia-Pacific markets.
8
<PAGE>
<PAGE>
AUSTRALIAN MINING OPERATIONS
[MAP]
Ravensworth Mine
Located 12 miles northwest of Singleton, New South Wales, the
Ravensworth Mine is 100 percent owned and managed by Peabody Resources
under a long-term contract that runs to the year 2001 and requires the
production of approximately 4.4 million tons per year from coal reserves
owned by Macquarie Generation. The coal is trucked from the pit to a
crushing plant and transported by overland conveyor to nearby Bayswater
and Liddell power stations.
Narama Mine
The Narama Mine opened in January 1993 and is operated by Peabody
Resources 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 percent, holds a 20 year
contract extending through 2012 to supply approximately 2.3 million tons
annually to Macquarie Generation.
Warkworth Mine
Located seven miles southwest of Singleton, the Warkworth Mine opened in
1981 and produces about 5.0 million tons per year of thermal and semi-
soft coking coal each year, primarily for export. Peabody Resources
manages the mine and owns 43.75 percent of the Warkworth Associates
joint venture. The coal is processed at Warkworth Mine's preparation
plant and blended to customer specifications before being transported by
overland conveyor to the Mount Thorley rail loop and then by rail to the
Port of Newcastle. Warkworth owns 13.9 percent of the Mount Thorley
facility and 4.2 percent of the Port of Newcastle Coal Loading Terminal.
Bengalla Mine
The Bengalla Mine is located near Muswellbrook, New South Wales and is
owned by the Bengalla joint venture, in which Peabody Resources holds a
37 percent interest. Construction of the first stage of a 6.1 million
ton per year surface mine and facility is nearing completion, and
production commenced in April 1999. The joint venture includes Taiwanese
and Korean power utilities and a major trading house in Japan. Coal is
removed by a system of loaders and conveyors and delivered to a modern
coal preparation plant, then transported via rail to the Port of
Newcastle for export.
9
<PAGE>
<PAGE>
Mining Services Division
Peabody Resource's Mining Services division is based in Brisbane,
Queensland, and provides specialized tunneling and underground contract
mining services to the mining and civil engineering industries. The
Mining Services division has been involved in underground development
work for a number of Australian mining companies and civil works
projects, including BHP Minerals at Cannington, Western Mining
Corporation at Olympic Dam, Placer Pacific at Osborne, and Plutonic
Resources Limited at Darlot.
LONG-TERM COAL SUPPLY AGREEMENTS
United States
We have a large portfolio of coal supply agreements. For the year ended
March 31, 1999, 87 percent of our sales volume was sold under coal
supply agreements. We currently have coal supply agreements totaling
approximately one billion tons of coal with terms ranging from one to
15 years and with an average volume-weighted remaining term of more
than 4 years. This contract tonnage total does not include coal supply
agreements of Black Beauty, which total approximately 120 million tons.
In fiscal 1999, we sold coal to approximately 150 power plants in the
United States and Canada and exported to 14 countries aboard.
Contract Terms
Typically, customers enter into coal supply agreements to secure
reliable sources of coal at predictable prices, while we seek stable
sources of revenue to support the investments required to open, expand
and maintain or improve productivity at mines needed to supply such
contracts. The terms of coal supply agreements 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, extension
options and force majeure, termination and assignment provisions.
Price reopeners are present in most of the recently negotiated contracts
greater than three years in duration and usually occur midway through a
contract or every two to three years, depending upon the length of the
contract. Price reopeners allow the contract price to be renegotiated in
order to correspond with the market price prevailing at the time. If the
parties do not agree on a new price, the purchaser or seller often has
an option to terminate the contract.
Base prices are set at the start of a contract and are oftentimes
adjusted at quarterly or annual intervals for changes due to inflation
and/or changes in actual costs such as taxes, fees 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 United States Department of Commerce.
Quality and volumes for the coal are stipulated in coal supply
agreements, although buyers normally have the option to vary annual or
monthly volumes by up to 10 percent, if necessary. Variations to the
quality and volumes of coal may lead to adjustments in the contract
price. Coal supply agreements typically stipulate procedures for quality
control, sampling and weighing. Most coal supply agreements contain
provisions requiring us to deliver coal within certain ranges for
specific coal characteristics such as heat content (Btus), sulfur, ash,
grindability and ash fusion temperature. Failure to meet these
specifications can result in economic penalties or termination of the
contracts.
Contract provisions in some cases set out how coal volumes will be
temporarily reduced or delayed in the event of a force majeure,
including such events as strikes, adverse mining conditions or serious
transportation problems that affect the seller or unanticipated plant
outages that may affect the buyer. 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. We often negotiate the right to supply coal that
complies with a new environmental requirement to avoid contract
termination. Coal supply agreements typically contain termination
clauses if either party fails to comply with the terms and conditions
of the contract.
10
<PAGE>
<PAGE>
In certain contracts, we have a right of substitution, allowing us to
provide coal from different mines as long as the replacement coal is
within a certain specified quality and will be sold at the same
delivered cost. Contracts usually contain specified sampling locations:
in the Eastern United States, approximately 50 percent of customers
require that the coal is sampled and weighed at the destination, whereas
in the Western United States samples are usually taken at the shipping
source.
Contract Expirations
Our coal supply agreements have an average volume-weighted remaining
term of more than 4 years. As our coal supply agreements expire, we
intend to negotiate new contracts in order to maintain our high
percentage of volume sold through coal supply agreements and low
percentage of volume sold into the spot market. When contracts expire, a
coal producer is exposed to the risk of selling coal into the spot
market, which may be subject to lower and more volatile prices, or to
closing the mine if follow-on business cannot be obtained.
The total sales commitments corresponding to the coal supply agreements
currently total approximately one billion tons of coal, assuming all the
contracts run through to their expiration date. Contracts for coal from
the mines in the Powder River Basin comprise approximately 65 percent of
this total commitment.
Australia
In fiscal 1999, approximately 70 percent of Peabody Resources' 7.4
million ton share of coal produced by Australian mines was sold under
coal supply agreements 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 2001 and 2012, respectively.
The contracts contain price adjustment provisions based on the qualities
of coal delivered and changes in indices of mining costs.
All coal from the Warkworth mine is exported. Approximately 75 percent
is sold under contracts, including contracts with the other joint
venture partners in Warkworth, and the remaining 25 percent is sold on
the spot market. Peabody Resources' export contracts normally provide
for annual price renegotiations.
The new Bengalla Mine began selling coal in early 1999 under annual
contracts and in the spot market. Some of Bengalla's sales will be
directed to the mine's joint venture partners, including Taiwan Power
and Korea Electric.
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 cost of freight is absorbed by the customer, transportation cost is
still important to coal mining companies because the customer may choose
a supplier largely based on the cost of transportation. According to RDI
Coaldat, in 1998 transportation costs represented 56 percent, 25 percent
and 23 percent of the overall cost of coal produced in the Western,
Eastern and Midwestern United States, respectively.
According to RDI Coaldat, in 1998 approximately 83 percent of all
United States 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, although some domestic coal is
shipped over the Great Lakes. Railroads move more coal than any other
commodity, and in 1997 coal accounted for 22 percent of total United
States rail freight revenue and 44 percent 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
Burlington Northern/Santa Fe and the Union Pacific. Rail competition
in this major coal producing
11
<PAGE>
<PAGE>
region is important, since rail costs constitute up to 75 percent 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.
SALES AND MARKETING
Our subsidiaries, Peabody COALSALES and Peabody COALTRADE, undertake
the sales and marketing functions for our United States operating
subsidiaries, including exports from the United States. Peabody
COALSALES acts as an agent in the sale and marketing of the coal
produced by each mining subsidiary, and it generates profits through its
brokering and agency activities. Peabody COALTRADE buys and resells coal
produced by a number of third parties, and trades coal options and
sulfur dioxide emission allowances in the developing over-the-counter
markets. As of March 31, 1999, they had 43 employees located at five
sites. They annually prepare 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 sell the mines' production through
different sales and marketing initiatives.
COMPETITION
The markets in which we sell our coal are highly competitive. The top
ten coal producers in the United States produce approximately 61 percent
of total domestic coal, although there are approximately 900 coal
producers in the United States. Our principal competitors in coal
operations are other large coal producers. Our largest competitors are
Arch Coal, Inc., Kennecott Energy Co., Cyprus Amax Coal Company (which
is being sold to a United States unit of RAG AG), CONSOL Energy Inc.,
AEI Resources, Inc. and A.T. Massey Coal Company, which collectively
produced approximately 46 percent of total United States coal production
in 1998.
The markets in which we sell our coal are affected by a number of
factors beyond our control. Continued demand for our coal and the prices
obtained by us 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) and 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 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. We
compete on the basis of coal quality, delivered price, customer service
and support and reliability.
SUPPLIERS
The main types of goods we purchase are mining equipment and replacement
parts, explosives, fuel, tires and lubricants. We also purchase coal
from third parties to satisfy some of our customer contracts. Purchases
of capital goods, materials and services are approximately $550 million
per annum, which is approximately 25 percent of our annual revenue. The
supplier base providing these goods has been relatively consistent in
recent years as we have many long established relationships with our key
suppliers.
Between 25 percent and 30 percent of goods and services are supplied by
the top ten suppliers, and some 70 percent of goods and services are
provided by the top 100 suppliers. We do not have any supply arrangements
with related parties, and all transactions are carried out on an arm's
length basis. We consider all suppliers of a particular category of
supplies to be interchangeable and do not believe we are vulnerable to
over-dependence on any one supplier.
REGULATORY MATTERS
Our operations are subject to extensive regulation in the United States
and Australia regarding production, sale, distribution, health and
safety and environmental matters.
12
<PAGE>
<PAGE>
United States
The United States 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.
We believe that all permits currently required to conduct our present
mining operations have been obtained. We 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 commencing or continuing exploration or
production operations. Future legislation and administrative regulations
may emphasize the protection of the environment and, as a consequence,
our activities 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 us and delays, interruptions or a
termination of operations, the extent of which cannot be predicted.
We endeavor to conduct our 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 us have been material.
Mine Health and Safety
Stringent health and safety standards have been in effect since the Coal
Mine Health and Safety Act of 1969 was adopted by Congress. 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 we operate 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 United States
industry. While regulation has a significant effect on our operating
costs, our United States competitors are subject to the same degree of
regulation.
Our goal is to achieve excellent health and safety performance. We
measure our success in this area primarily through the use of accident
frequency rates. We believe that this goal is inherently tied to
achieving our productivity and financial goals. We seek 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 reoccurrence.
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 percent
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
percent of the sales price. This tax is passed on to the purchaser under
many of our coal supply agreements.
13
<PAGE>
<PAGE>
Legislation on black lung reform has been introduced in this session of
Congress. The legislation 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.
The United States 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.
Coal Industry Retiree Health Benefit Act of 1992
The Coal Industry Retiree Health Benefit Act of 1992, also known as the
Coal Act, was enacted to provide for the funding of health benefits for
certain United Mine Workers of America 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 for miners who retired between July 21,
1992 and September 30, 1994 and whose former employers are no longer in
business. Companies that are liable under the Coal Act must pay premiums
to the Combined Fund. Annual payments made by certain of our subsidiaries
under the Coal Act totaled $9.2 million in fiscal 1999.
In October 1998, the Combined Fund sent a premium notice to all assigned
operators subject to the fund which included retroactive death benefit
and health benefit premiums dating back to February 1, 1993. On November
13, 1998, ten employers (including two of our subsidiaries, Peabody Coal
Company and Eastern Associated Coal Corp.) challenged the fund's
retroactive rebilling in a lawsuit filed in the Northern District Court
of Alabama. The ten employers have recently filed an amended complaint
which adds another plaintiff and the United States Department of the
Interior as a defendant. The case is still pending. Our subsidiaries'
retroactive premium amounts to approximately $1.3 million.
Environmental Laws
We are 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 our mines and
other facilities to ensure compliance.
Surface Mining Control and Reclamation Act
The Surface Mining Control and Reclamation Act, which is administered by
the Office of Surface Mining Reclamation and Enforcement, establishes
mining and reclamation standards for all aspects of surface mining as
well as many aspects of deep mining. The Surface Mining Control and
Reclamation Act 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 the Surface Mining Control and Reclamation Act,
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.
The Surface Mining Control and Reclamation Act also requires that
comprehensive environmental protection and reclamation standards be met
during the course of, and upon completion of, mining activities. For
example, it requires us to restore a surface mine to the approximate
original contour as contemporaneously as practicable with surface coal
mining operations. A mine operator must submit a bond or otherwise
secure the performance of these reclamation obligations. Mine operators
must receive permits and permit renewals for surface mining operations
from the Office of Surface Mining Reclamation and Enforcement or, where
state regulatory agencies have adopted
14
<PAGE>
<PAGE>
federally approved state programs under the act, the appropriate state
regulatory authority. We accrue 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 our financial statements, is adjusted annually.
All states in which our active mining operations are located have
achieved primary control of enforcement through approved state programs.
Although we do not anticipate significant permit issuance or renewal
problems, we cannot assure you that our permits will be renewed or
granted in the future or that permit issues will not adversely affect
operations. Under previous regulations of the act, our responsibility
for any coal operator currently in violation of the act 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 ownership and control
regulations, the scope and potential impact of the "ownership and
control" requirements on us are unclear. The Office of Surface Mining
Reclamation and Enforcement 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 could
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, such as fugitive dust, including future
regulation of fine particulate matter measuring 2.5 micrometers in
diameter or smaller. In July 1997, the Environmental Protection Agency
adopted new, more stringent National Ambient Air Quality Standards 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 air quality standards. Because coal mining
operations emit particulate matter, our mining operations and utility
customers are likely to be directly affected when the revisions to the
air quality standards are implemented by the states. State and federal
regulations relating to implementation of the new air quality standards
may restrict our ability to develop new mines or could require us to
modify our existing operations. The extent of the potential direct
impact of the new air quality standards 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 our financial condition and results of
operations. The Court of Appeals for the District of Columbia ruled in
May 1999 that the 10 micrometer particulate and eight hour standards
were invalid. The Court also ordered a new briefing on the validity of
the fine particulate standard. The effect of this decision on us and our
customers is unknown at this time.
The Clean Air Act indirectly affects coal mining operations by
extensively regulating the air emissions of sulfur dioxide and other
compounds, including nitrogen oxides, emitted by coal-fueled utility
power plants. Title IV of the Clean Air Act Amendments places limits on
sulfur dioxide 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 sulfur dioxide emission allowances.
Specific emission sources will receive these sulfur dioxide emission
allowances, which utilities and industrial concerns can trade or sell to
allow other units to emit higher levels of sulfur dioxide. The effect of
these provisions of the Clean Air Act Amendments on us cannot be
completely ascertained at this time. We believe 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.
15
<PAGE>
<PAGE>
The Clean Air Act Amendments also require utilities that currently
are major sources of nitrogen oxides in moderate or higher ozone
nonattainment areas install reasonably available control technology
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 the Environmental Protection
Agency by 2003. The Ozone Transport Assessment Group, formed to make
recommendations to the Environmental Protection Agency for addressing
ozone problems in the Eastern United States, submitted its final
recommendations to the Environmental Protection Agency in June 1997.
Based on their recommendations, the Environmental Protection Agency
recently announced the final rules that would require 22 Eastern states
to make substantial reductions in nitrogen oxide emissions. Under this
rule, the Environmental Protection Agency expects that states will
achieve these reductions by requiring power plants to make substantial
reductions in their nitrogen oxide emissions. Installation of reasonably
available control technology and additional control measures required
under the final rules 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 a
decision on May 1999, the Court of Appeals for the District of Columbia
enjoined enforcement of the final rules pending a final court decision
in a related lawsuit.
In accordance with Section 126 of the Clean Air Act, eight Northeastern
states filed petitions requesting the Environmental Protection Agency to
make findings and require decreases in nitrogen oxide emissions from
certain sources in certain upwind states that might contribute to ozone
nonattainment in the petitioning states. The Environmental Protection
Agency has proposed to grant the petitions of certain states that
certain sources are contributing to ozone nonattainment in certain of
the petitioning states and the Environmental Protection Agency has
proposed levels of nitrogen oxide control for the named sources. Our
customers are among the named sources and, if the petitions are granted,
the requirement to install control equipment could impact the amount of
coal supplied to those customers if they decide to switch to other
sources of fuel which would result in lower emission of nitrogen oxides.
The Clean Air Act Amendments set a national goal for the prevention of
any future and the remedying of any existing impairment of visibility in
156 national parks and wildlife areas across the country. Visibility in
these areas is to be returned to natural conditions by 2064 through
plans that must be developed by the states. The state plans may require
the application of "Best Available Retrofit Technology" after 2010 on
sources found to be contributing to visibility impairment of regional
haze in these areas. The control technology requirements could cause our
customers to install equipment to control sulfur dioxide and nitrogen
oxide emissions. The requirement to install control equipment could
impact the amount of coal supplied to those customers if they decide to
switch to other sources of fuel which use would result in lower emission
of sulfur oxides and nitrogen oxides.
In addition, the Clean Air Act Amendments require a study of utility
power plant emissions of certain toxic substances, including mercury,
and direct the Environmental Protection Agency to regulate these
substances, if warranted. In a recent report, the Environmental
Protection Agency 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, 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 the Surface Mining Control and Reclamation Act
permits are exempted from regulation under the Resource Conservation and
Recovery Act by statute; however we cannot predict whether this
exclusion will continue.
16
<PAGE>
<PAGE>
Federal and State Superfund Statutes
The Comprehensive Environmental Response Compensation and Liability Act,
or Superfund, 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 Superfund, joint and several
liability may be imposed on waste generators, site owners and operators
and others regardless of fault.
Global Climate Change
The United States, Australia and over 160 other nations are signatories
to the 1992 Framework Convention on Global Climate Change 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. Although the specific emission targets vary from country to
country, the United States would be required to reduce emissions to 93
percent of 1990 levels over a five-year budget period from 2008 through
2012. Although the United States has not ratified the emission targets
and no comprehensive regulations focusing on greenhouse gas emissions
are in place, such restrictions, whether through ratification of the
emission targets or other efforts to stabilize or reduce greenhouse gas
emissions, could adversely impact the price and demand for coal.
According to the Energy Information Administration's Annual Energy
Outlook for 1998, coal accounts for 36 percent 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 directly 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: (1)
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 (2) pollution control
approvals (which authorize the installation of pollution control
equipment and devices). In the first regulatory phase, an application to
a regulatory authority is filed. The relevant authority will either
grant a conditional consent, an
17
<PAGE>
<PAGE>
unconditional consent, or deny the application based on the details of
the application and on any submissions or objections 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 the atmosphere; emissions in waters; noise
impacts, including impacts from blasting; dust impacts; the generation,
handling, storage and transportation of waste; and requirements for
rehabilitation and 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 as 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, mining
activities involve 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 to allow a mine to be developed 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. Mining 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 of
negligence can be established.
18
<PAGE>
<PAGE>
DEREGULATION OF THE ELECTRIC UTILITY INDUSTRY
In October 1992, the Energy Policy Act of 1992 was enacted. To stimulate
competition in the electricity market, the Act gave wholesale suppliers
access to the transmission lines of United States electric utility
companies. In April 1996, the Federal Energy Regulatory Commission
issued the first of a series of orders establishing rules providing for
open access to electricity transmission systems. While the Federal
Energy Regulatory Commission proceeds to open access to wholesale
electric markets, individual states are proceeding with the opening of
retail access.
The pace of change differs significantly from state to state. To date,
10 states have enacted programs leading to the 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
individual electric utilities.
When ultimately implemented, full-scale deregulation of the power
industry 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. 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. In 1998, for example, the average
cost of generating electricity in coal-based generating units was less
than one half the average cost of generating electricity in gas-fired
units, and coal-based generation accounted for 56.3 percent of all
electricity produced in the United States last year. Because of our cost
advantage and because some coal-based generating facilities are
underutilized in the current regulated electricity market, we estimate
that additional coal demand could arise if the electricity market were
rationalized and the most efficient coal-fired power plants were used to
their full capacity. Estimates of this additional demand for coal vary
between 100 and more than 200 million tons annually for the coal
industry as a whole.
In the early 1990's, the Australian Federal Government commenced
deregulation of the electricity market as part of Australia's ongoing
micro-economic reform.
The commencement of the National Electricity Market in 1998 was to
introduce competition in the wholesale supply and purchase of
electricity combined with an open access regime for the use of
electricity networks across the Eastern states of Australia.
Introduction of competition was to be achieved by: restructuring the
supply industry into the separate elements of generation, transmission
and distribution, and retail supply; privatization of generation and
retail supply; and enhancement and extension of the Eastern states
interconnection of power systems.
Some states, in particular Victoria, have privatized power generation,
transmission and distribution, and retail supply as part of the ongoing
deregulation of the industry. In New South Wales the market is dominated
by incorporated government utilities.
CITIZENS POWER
Industry Overview
Electricity is the most prevalent commodity sold in the United States
economy, with retail volume in 1998 exceeding $218 billion, according to
the Energy Information Administration. While the independent power
marketing industry is in a developmental stage, the volume of megawatt
hours traded grows substantially year to year.
19
<PAGE>
<PAGE>
The United States electricity market is highly fragmented, with more than
3,500 entities selling power on a wholesale and retail basis, including
more than 240 investor-owned utilities, and nearly 3,000 federal, state
and municipal power entities and rural co-operatives. Historically,
these entities have been highly regulated, but with the onset of
deregulation, we expect the role of power marketing companies to
continue to grow. We believe 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. According to industry
rankings, for the year ended December 31, 1998, Citizens Power was among
the top ten of more than 400 Federal Energy Regulatory Commission-
authorized power marketers as measured by the number of megawatt hours
bought and sold as reported by Power Markets Week. Citizens Power also
structures and trades electricity, and provides services related to the
restructuring of long-term power contracts.
Citizens Power obtained the first power marketing authorization from the
Federal Energy Regulatory Commission in 1989. Since that time, Citizens
Power has continued to solidify our position as an innovator in the
United States power marketing industry. At present, Citizens Power is an
integrated energy company with business activities in three main areas:
(1) power/energy sales and trading, (2) transaction/asset restructuring
and (3) fuel/power integration.
Power/Energy Sales and Trading
Citizens Power executes short-term, intermediate-term and long-term
trades of both physically and financially settled electricity and
natural gas contracts. Citizens Power's extensive network of contracts
provide the ability to purchase and sell electricity and obtain access
to transmission throughout the United States, maximizing access to
counterparties and increasing liquidity. Citizens Power uses their
trading activities as a platform to develop higher margin structured
products and to support prior contract restructurings. Citizens Power
manages trading exposure with a value-at-risk measurement, limiting the
exposure to certain defined limits.
Power Contract Restructuring
Power contract restructuring creates value by correcting inefficiencies
in ownership, operation, dispatching, pricing, risk allocation and
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 are approximately 35,000 megawatts of capacity operated by non-
utility generators in the United States. This capacity is purchased
through long-term contracts, some of which are priced significantly
above the current market rates. Citizens Power uses their expertise to
restructure these contracts, 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.
Fuel/Power Integration
Citizens Power combines its power trading, financing and structured
products expertise with the significant strength and market position of
Peabody, the world's largest producer of coal, under the Peabody Energy
Solutions trademark to add value through the integration of fuel and
power. Through the Peabody Energy Solutions initiative, Citizens Power
offers a variety of innovative and customized fuel, transportation and
power products and services to the evolving North American energy
markets.
20
<PAGE>
<PAGE>
Information Technology
Citizens Power has made significant investments in an integrated
information technology infrastructure. The Energy Trading System links
the trading, scheduling and accounting functions providing for
integrated market, credit and operational price risk management. The
Energy Trading System was developed using the latest client-server
technology, allowing for flexible in-house customization and expansion.
EMPLOYEES
As of March 31, 1999, we and our joint ventures had approximately 7,800
employees. Of these employees, approximately 6,900 worked in the United
States and 900 worked in foreign countries.
Approximately 48 percent of our United States coal employees are
affiliated with organized labor unions, which accounts for approximately
31 percent of our fiscal 1999 mining revenues in the United States.
Relations with organized labor are important to our success. Hourly
workers at our mines in Arizona, Colorado and Montana are represented
by the United Mine Workers of America 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 United
Mine Workers of America but is subject to the National Bituminous Coal
Wage Agreement. On December 16, 1997, this five-year labor agreement
effective from January 1, 1998 to December 31, 2002, was ratified by the
United Mine Workers of America.
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. The miners at Warkworth Mine signed a three
year labor agreement which expires in September 1999. Renegotiation of
the agreement for a minimum two additional years is nearing completion,
with no major issues outstanding. The miners at Ravensworth and Narama
Mines have signed a further enterprise labor agreement for two years
commencing May 1999.
The Australian Federal Government, as part of micro-economic reform, has
a Workplace Relations Strategy that seeks structural reform to encourage
enterprise focus and to facilitate enterprise agreements. Under the
legislation Bengalla has commenced the employment of its workforce under
individual workplace agreements with each employee. These agreements do
not require ratification by a coal union.
ADDITIONAL INFORMATION
We file annual reports on Form 10-K, quarterly reports on Form 10-Q and
other information with the Securities and Exchange Commission. You may
request copies of the filings, at no cost, by telephone at (314) 342-
3400 or by mail at: P&L Coal Holdings Corporation, 701 Market Street,
Suite 700, St. Louis, Missouri 63101, attention: Public Relations.
ITEM 2. PROPERTIES.
COAL RESERVES
We had an estimated 10.3 billion tons of proven and probable reserves as
of April 1, 1999, of which approximately 52 percent were low sulfur
coal. We own approximately 43 percent of these reserves and lease the
remaining 57 percent.
21
<PAGE>
<PAGE>
Below is a table summarizing the locations and reserves of our major
operating units.
<TABLE>
<CAPTION>
PROVEN AND PROBABLE
RESERVES AS OF APRIL 1, 1999<F1>
(TONS IN MILLIONS)
--------------------------------
OWNED LEASED TOTAL
OPERATING REGIONS LOCATIONS TONS TONS TONS
- ------------------- -------------------------------- ----- ------ ------
<S> <C> <C> <C> <C>
Powder River Basin Wyoming and Montana 244 3,325 3,569
Southwestern Arizona, Colorado and New Mexico 728 598 1,326
Southern Appalachia West Virginia 258 640 898
Northern Appalachia West Virginia 62 - 62
Midwest Illinois, Indiana and Kentucky 3,028 991 4,019
Australia New South Wales 120 311 431
----- ------ ------
Total 4,440 5,865 10,305
===== ====== ======
<FN>
<F1> Reserves have been adjusted to take into account losses involved
in producing a saleable product. The amounts include our share of
reserves in joint ventures.
</TABLE>
Reserve estimates are based on geological data assembled and analyzed by
our staff, which includes various geologists and engineers. The reserve
estimates are periodically updated to reflect production of coal from
the reserves and new drilling or other data received. 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 our coal reserve and
land holdings, is maintained through a computerized land management
system that we developed.
Our reserve estimates are predicated on information obtained from our
extensive drilling program, which totals nearly 500,000 individual drill
holes. Data from individual drill holes are compiled into a computerized
drill hole system from which the depth, thickness and, where core
drilling is used, the quality of the coal are determined. The density of
the drill pattern determines whether the reserves will be classified as
proven or probable. The drill hole data are 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, we
periodically engage independent mining and geological consultants to
review estimates of our coal reserves. The most recent of these reviews,
which was completed on October 1, 1996, includes a review of the procedures
used by us to prepare our internal reserve estimates, verifying the
accuracy of selected property reserve estimates and retabulating reserve
groups according to standard classifications of reliability.
We have numerous federal coal leases that are administered by the United
States Department of the Interior pursuant to the Federal Coal Leasing
Amendments Act of 1976. These leases cover our principal reserves in
Wyoming and other reserves in Montana and Colorado. Each of these leases
continues indefinitely provided 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 our federal coal leases are now set at $3.08 per
acre. Production royalties on federal leases are set by statute at 12.5
percent of the gross proceeds of coal mined and sold for surface mined
coal and 8 percent 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. We also lease coal from various state governments.
22
<PAGE>
<PAGE>
Private coal leases normally have terms of between 10 and 20 years, and
usually give us the right to renew the lease for a stated period or to
maintain the lease in force until the exhaustion of mineable 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.
The terms of private leases are normally extended by active production
on or near the end of the lease term. Leases containing undeveloped
reserves may expire or such leases may be renewed periodically. With a
portfolio of approximately 10.3 billion tons, we believe that we have
sufficient reserves to replace capacity from depleting mines for the
foreseeable future and that our reserve base is one of our strengths. We
believe that the current level of production at our major mines is
sustainable.
Consistent with industry practice, we conduct only limited investigation
of title to our coal properties prior to leasing. Title to lands and
reserves of the lessors or grantors and the boundaries of our leased
properties are not completely verified until such time as we prepare to
mine such reserves.
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 directly from landowners and, in the absence of
agreement, there is an arbitration provision in the mining law.
Peabody Resources holds or has rights to coal mining leases at
Warkworth, Bengalla, Narama and Ravensworth East. Ravensworth is mined
under contract from coal reserves owned by Macquarie Generation.
Warkworth's mining lease has been renewed until 2023 with Bengalla and
Narama leases valid until 2017 and 2012, respectively. Ravensworth
East's lease expires in 1999 and an application for renewal for a 21
year period has been made. Peabody Resources also holds an exploration
license for Ravensworth West and has applied for a mining lease.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are involved in legal proceedings arising in the
ordinary course of business. We believe we are adequately reserved for
these liabilities and that there is no individual case pending that
could have a material adverse effect on our financial condition or
results of operations. Our 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 United States
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. 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 Industry
Retirees Health Benefit Act of 1992, or the Coal Act. Eastern
Enterprises claimed that the amount of its Coal Act liabilities was
approximately $100 million.
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 United States
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
United Mine Workers of America beneficiaries that were assigned to
Eastern Enterprises will continue to receive retiree health care
benefits from the Combined Fund without cost to us.
23
<PAGE>
<PAGE>
Eastern Enterprises advised Peabody Holding Company that it was
unwilling to dismiss the third-party complaint and intended to seek
reimbursement for its attorneys fees and prejudgment interest. We
settled the third party claim for an immaterial amount.
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, or 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, and costs relating to life insurance and retiree health
care benefits are not recoverable by our subsidiary, Peabody Western
Coal Company, under the terms of a coal supply agreement 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 denied. Peabody Western and Salt River
will arbitrate the mine decommissioning costs issue and will litigate
the retiree health care costs issue.
If Salt River is successful in the arbitration and litigation, our
financial condition and results of operations may be adversely affected.
However, based on our preliminary evaluation of the issues and the
potential impact on us, and while the outcome of litigation and
arbitration is subject to uncertainties, we believe that the matter will
be resolved without a material adverse affect on our financial condition
or results of operations.
Southern California Edison Company
In response to a demand for arbitration by one of our subsidiaries,
Peabody Western Coal Company ("Peabody Western"), Southern California
Edison Company and the other owners of the Mohave Generating Station, or
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 coal supply
agreement 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. Edison appealed the order to the
Arizona Supreme Court which remanded the case to the Arizona Court of
Appeals and ordered the appellate court to determine whether the trial
court was correct in determining that Peabody Western's claims are
arbitrable. The parties have agreed to a stay of the arbitration pending
the resolution of the arbitrability of these issues under the coal
supply agreement.
If Edison is successful in the matter, our financial condition and
results of operations may be adversely affected. However, based on a
preliminary evaluation of the issues and the potential impact on us, we
believe that the matter will be resolved without a material adverse
affect on our financial condition or results of operations.
Public Service Company of Colorado
In August 1996, Seneca Coal Company, a subsidiary of Peabody Western
Coal Company, filed a demand for arbitration in accordance with the
terms of an Amended Revised Coal Supply Agreement dated December 1, 1971
between Seneca and three electric utilities, Public Service Company of
Colorado, Salt River Project Agricultural Improvement District and
PacifiCorp, or 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.
24
<PAGE>
<PAGE>
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 Coal Company including a determination that the contract
expires in approximately 2005.
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 Coal Company 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.
The arbitration hearing was held in March 1999. In June 1999, the
arbitrators issued their Findings of Fact in favor of the interests of
Seneca Coal Company. The Denver District Court must now apply legal
principles to the Findings of the arbitrators. We continue to believe
that the dispute will be resolved without a material adverse effect on
our financial condition or results of operations.
Macquarie Generation
In September 1997, our subsidiary, 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 coal
supply agreements 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 coal supply agreements, 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 coal supply agreement and has
sought damages from Peabody Resources for alleged breaches of both
contracts. Even though we continued to deliver coal, Macquarie
Generation unilaterally reduced the price that it is paying for coal
deliveries under the Narama contract. 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.
The Supreme Court of New South Wales issued a decision on November 19,
1998 rejecting Macquarie Generation's claims to terminate the coal
supply agreement for the Narama mine. The Court also rejected Macquarie
Generation's claim for damages. The Court ordered Macquarie Generation
to pay Peabody Resources the portion of the price that it had
unilaterally withheld, with interest. Macquarie Generation has made that
payment to Peabody Resources and is paying Peabody Resources for
deliveries of coal at the contract prices. Macquarie Generation has
filed an appeal of the decision. We continue to believe that the matter
will be resolved without a material adverse effect on our financial
condition or results of operations.
Minerals Management Service
The Minerals Management Service issued a preliminary administrative
decision in August 1992, determining that our subsidiary, Powder River
Coal Company, had underpaid royalties owed to the federal government. If
the preliminary decision is ultimately determined to be correct, the
total alleged royalty deficiency amounts to approximately $7.5 million
without interest. Since that time, no further action has been taken by
the agency to issue a final, appealable decision. Pending such decision,
we plan 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 us. If such
claims are made and a case is successfully argued against us, our
financial condition and results of operations may be adversely affected.
However, based on our preliminary evaluation of the issues and the
potential impact on us, and while the outcome of any potential
litigation is subject to uncertainties, we believe that the matter will
be resolved without a material adverse affect on our financial condition
or results of operations.
25
<PAGE>
<PAGE>
Saline Valley Conservancy District
Saline Valley Conservancy District filed a lawsuit against our
subsidiary, Peabody Coal Company, on April 5, 1999 in the Circuit Court
of Saline County, Illinois. Saline Valley alleges that Peabody Coal
Company's coal refuse pits at the closed Eagle No. 2 mine in Saline
County, Illinois constitute a public and private nuisance and a
trespass, and that Peabody Coal Company engaged in various negligent
acts at the coal refuse pits. Saline Valley is seeking up to $124
million of compensatory damages, $125 million of punitive damages and
injunctive relief. Peabody Coal Company has removed the case to the
United States District Court for the Southern District of Illinois. At a
settlement meeting held in April 1999, the parties agreed to tentatively
settle the matter. The parties are now negotiating the definitive
settlement agreement. We do not believe this settlement will have a
material adverse effect on our financial condition or results of
operations.
In addition, the state of Illinois has filed an administrative complaint
against Peabody Coal Company alleging that our coal refuse pits have
violated state water pollution control laws and regulations. The state
is seeking daily fines from Peabody Coal Company for these alleged
violations. We believe this matter will be resolved without a material
adverse effect on our 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 that legislation
and many state Superfund statutes, joint and several liability may be
imposed on waste generators, site owners and operators and others
regardless of fault.
Our subsidiary, 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. We have 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 us. Gold Fields is currently involved in environmental
investigation or remediation at seven sites and is a defendant in
litigation with private parties involving one site. Gold Fields settled
in February 1999 a lawsuit filed by Asarco Incorporated involving sites
at Columbus, Ohio and Hillsboro, Illinois. Under the settlement, Gold
Fields paid $3.25 million in fiscal 1999 and agreed to pay $3.25 million
in fiscal 2000 for past costs at the Columbus, Ohio and Hillsboro,
Illinois sites. The settlement also resolved the apportionment of
liability for future costs at both sites.
These 10 sites were formerly owned or operated by Gold Fields. The
Environmental Protection Agency has placed three of these sites on the
National Priorities List, promulgated pursuant to that legislation, and
one of the sites is on a similar state priority list. There are a number
of further sites in the United States that were previously owned or
operated by such companies that could give rise to environmental
proceedings in which Gold Fields could incur liabilities.
Where such sites were identified, independent environmental consultants
were employed in 1997 in order to assess the estimated total amount of
the liability per site and the proportion of those liabilities that 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. We have provisions of $61.8 million as of March
31, 1999 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 where they are pursued,
the amount of the eventual costs and liabilities, which could be greater
or less than this provision. We believe 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 that
legislation, 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
us, and sites to which we have sent waste materials, may be subject to
liability under that legislation and similar state laws.
26
<PAGE>
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
27
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA.
P&L Coal Holdings Corporation purchased its operating subsidiaries on
May 19, 1998, and prior to such date had no substantial operations. The
period ended March 31, 1999 is therefore a full fiscal year, but
includes results of operations only from May 20, 1998 forward. The prior
years' results of operations of the operating subsidiaries acquired are
defined as the "Predecessor Company" and are included for comparative
purposes. The results of operations include the consolidated results of
Black Beauty Coal Company, effective January 1, 1999. Prior to that
date, our investment in Black Beauty Coal Company was accounted for
under the equity method.
<TABLE>
<CAPTION>
(Tons sold in millions, dollars in thousands) PREDECESSOR COMPANY
----------------------------------------------------------------------------
Period From
Period From April 1, Six Months Fiscal Years Ended
May 20, 1998 1998 to Year Ended Ended September 30,
Total Fiscal to March 31, May 19, March 31, March 31, -----------------------------------
1999<F1> 1999 1998 1998 1997 1996 1995 1994
------------ ------------ ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF
- ----------
OPERATIONS DATA:
----------------
Tons Sold 176.0 154.3 21.7 167.5 81.4 163.0 151.0 101.6
=========== =========== ========== ========== ========== ========== ========== ==========
Revenues:
Sales $ 2,249,887 $ 1,970,957 $ 278,930 $2,048,694 $1,000,419 $2,075,142 $2,087,656 $1,763,371
Other Revenues 136,747 123,269 13,478 195,768 63,674 118,444 88,180 80,984
----------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Total Revenues 2,386,634 2,094,226 292,408 2,244,462 1,064,093 2,193,586 2,175,836 1,844,355
Operating Costs and
Expenses 2,200,541 1,915,505 285,036 1,975,275 961,998 2,844,882 1,930,224 1,698,791
----------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Profit (Loss) $ 186,093 $ 178,721 $ 7,372 $ 269,187 $ 102,095 $ (651,296) $ 245,612 $ 145,564
=========== =========== ========== ========== ========== ========== ========== ==========
Net Income (Loss) $ 10,685 $ 10,209 $ 476 $ 160,336 $ 58,432 $ (446,282) $ 100,387 $ 79,356
=========== =========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA:
- -------------------
Working Capital $ 486,953 $ 486,953 $ 374,492 $ 535,971 $ 167,076 $ (129,465) $ (104,310) $ 280,499
Total Assets 7,023,931 7,023,931 6,403,151 6,343,009 5,025,812 4,916,693 5,676,923 5,560,114
Recourse Debt 2,208,512 2,208,512 339,640 308,354 321,723 456,867 316,847 294,387
Non-Recourse Debt 333,867 333,867 293,922 293,922 - - - -
Stockholders' Equity /
Invested Capital 495,230 495,230 1,497,374 1,687,842 1,676,786 1,383,655 1,650,975 1,656,560
OTHER DATA:
- -----------
EBITDA<F2> $ 396,502 $ 362,912 $ 33,590 $ 471,827 $ 203,825 $ (453,443) $ 435,942 $ 315,776
Net Cash Provided by
(Used in):
Operating Activities 240,054 270,513 (30,459) 181,678 62,829 211,535 272,543 153,057
Investing Activities (2,257,075) (2,237,827) (19,248) (129,859) (56,170) (105,640) (462,113) (108,477)
Financing Activities 2,184,818 2,161,281 23,537 (235,389) 94,178 15,987 178,993 (3,962)
Depreciation, Depletion
and Amortization 210,409 184,191 26,218 202,640 101,730 197,853 190,330 170,212
Capital Expenditures 195,822 174,872 20,950 166,336 76,460 152,106 188,006 135,743
<FN>
<F1> For comparative purposes, the total fiscal 1999 column has been
derived from adding the period ended March 31, 1999 with the Predecessor
Company results for the period ended May 19, 1998. The effects of
purchase accounting have not been reflected in the results of the
Predecessor Company.
<F2> EBITDA is defined as income before deducting net interest expense,
income taxes and depreciation, depletion and amortization. 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
our ability to meet debt service and capital expenditure requirements.
Because EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies. The amounts presented include EBITDA for
Citizens Power of $17.5 million, ($1.3 million) and $10.8 million for
the period ended March 31, 1999, the period from April 1 to May 19, 1998
and the year ended March 31, 1998, respectively.
</TABLE>
28
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
For purposes of comparisons to the prior year operating results in the
discussion below, the results of operations and cash flows for the
period ended March 31, 1999 reflect our results from April 1, 1998 to
March 31, 1999 and the results of our Predecessor Company for April 1 to
May 19, 1998. P&L Coal Holdings Corporation acquired the Predecessor
Company on May 19, 1998 and prior to such date had no separate
operations. In addition, the results of operations and cash flows for
the period ended March 31, 1999 may not be directly comparable to prior
periods as a result of the effects of restatement of assets and
liabilities to their estimated fair market value in accordance with the
application of purchase accounting pursuant to Accounting Principles
Board Opinion No. 16.
TOTAL FISCAL 1999 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1998
Sales. For fiscal 1999, sales increased 9.8 percent, or $201.2 million,
over the prior twelve-month period. Excluding Black Beauty's results,
sales increased $120.5 million, or 5.9 percent. We experienced an
increase of $114.4 million in broker transactions, and had sales
improvements in the following United States mining operating regions -
Powder River ($19.1 million), Southern Appalachia ($20.4 million) and
the Southwest region ($8.2 million).
The increase in brokered coal activity relates primarily to higher
export volumes, an increased emphasis on broker transactions, newly
added capacity for brokered shipments and the realization of a full year
of sales from agreements entered into late in fiscal 1998.
With respect to the United States mining operations, Powder River
experienced a 5.0 percent increase in sales volume from continued growth
in demand for coal from this region, while Southern Appalachia sales
volumes improved 13.0 percent, primarily due to longwall productivity
increases as a result of capital improvements. Sales increases in the
Southwest region are due mainly to improved pricing. Finally, the
Midwest region declined $21.9 million due to the depletion and closing
of a surface mine late in the prior fiscal year, lower shipments in the
current year caused by customer unit outages for maintenance, and higher
prior year sales due to a customer settlement.
Sales in Australia declined $28.3 million versus the prior year, due to
weaker demand, lower pricing and the effects of foreign currency
translation.
Other Revenues. Other revenues declined $59.0 million to $136.7 million
for fiscal 1999, due mainly to $44.0 million in lower revenues from coal
contract restructurings and $29.1 million in lower mining services
revenues from Australia, partially offset by an increase of $12.5
million in revenues from Citizens Power, due to a higher volume of power
contract restructurings and improved trading revenues. We cannot assure
you we will be able to realize similar gains from future coal contract
restructurings.
Operating Profit. For fiscal 1999, operating profit declined $83.1
million to $186.1 million. Operating profit from the United States
mining operations improved by $59.9 million during the period, mainly as
a result of improved results at the Powder River, Southern Appalachia
and Southwest operating regions discussed above, and the inclusion of
Black Beauty as a consolidated entity beginning with the fourth quarter
of fiscal 1999. However, operating profit from Australia declined $9.2
million due to lower demand and prices for coal, lower mining services
revenues and the effect of foreign currency translation.
Additionally, the prior year results included $44.0 million of actuarial
gains associated with certain employee-related liabilities that are non-
recurring, $44.0 million in higher gains from coal supply contract
restructurings mentioned above and $21.5 million in higher gains on the
sale of property, plant and equipment. Current year results of operations
include: $8.5 million of additional depletion and amortization
associated with purchase accounting adjustments to write-up our net
assets to fair value; $3.9 million of compensation expense associated
with the grant of 554,125 shares of Class B common stock to certain
members of management in conjunction with the May 19, 1998 acquisition
of Peabody; $3.7 million in additional profit as a result of the
successful resolution of billing disputes with a customer in Australia;
changes in United States employee benefits that resulted in accrual
reductions of $10.2 million; a reduction in cost from a multiemployer
benefit plan refund of $2.6 million; a reduction in reclamation accruals
of $2.7 million due to improved equipment efficiencies; and $3.9 million
in additional income due to the monetization of a royalty stream in
October 1998.
29
<PAGE>
<PAGE>
Interest Expense. Interest expense increased $146.7 million for fiscal
1999. This increase is the result of the borrowings necessary to fund
the acquisition on May 19, 1998, and higher borrowings in Australia to
fund the construction of the Bengalla Mine.
Income Taxes. Our effective book income tax rate for fiscal 1999 was
51.6 percent. The effective tax rate is primarily impacted by two
factors - the percentage depletion tax deduction utilized by us and our
United States subsidiaries that creates an alternative minimum tax
situation, and the level of contribution by the Australian business to
the consolidated results of operations, which is taxed at a higher rate
than in the United States. The effective tax rate for fiscal 1999
reflects tax expense in Australia not completely offset by tax benefits
in the United States.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED WITH TWELVE MONTHS ENDED MARCH
31, 1997 (NOT PRESENTED HEREIN)
For the year ended March 31, 1998, we 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 Statement of Financial
Accounting Standards ("SFAS") No. 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.
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 percent of total sales volume for the fiscal
year ended March 31, 1998 and sales under coal supply agreements of one
year or more represented 92 percent of sales volume for the same period.
Management estimates we had a United States market share of
approximately 14.4 percent during the period. Our 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 contract at our 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. We also realized $11.6 million in gains from a coal
supply agreement restructuring for the twelve months ended March 31,
1997. The Tucson Electric Power contract restructuring consisted of up-
front payments in exchange for terminating the existing coal supply
agreement and the subsequent agreement to a new long-term contract. We
were able to realize a gain on the restructuring of this coal supply
agreement 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. We
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 No. 121 charge. The improved earnings were primarily due to
recognizing a $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 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. Our 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 percent over the prior year. This had
the effect of increasing gross profit margins, excluding Citizens Power,
to 14.5 percent of revenues for the fiscal year ended March 31, 1998 as
compared to 13.3 percent for the prior year. Selling and administrative
expenses were 3.7 percent of revenues in 1998 compared to 3.6 percent in
the prior year. The net gain on property and equipment disposals was
$15.8 million favorable to the prior year
30
<PAGE>
<PAGE>
primarily due to a $14.7 million gain on a sale of property. Our
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, we purchased an additional 10 percent interest
in Black Beauty for $37.7 million in cash and as a result, increased our
ownership in the partnership to 43.3 percent.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED WITH SIX MONTHS ENDED MARCH 31,
1996 (NOT PRESENTED HEREIN)
For the six months ended March 31, 1997, we 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 percent 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 increased over 10 percent due to improved
customer demand and the installation of a crusher conveyor system. Our
mines in Australia had coal sales of 3.5 million tons for the six months
ended March 31, 1997, an increase of 19 percent from the previous
period, resulting from favorable customer demand. Low sulfur coal sales
represented 81 percent of total sales volume for the six months ended
March 31, 1997 and sales under coal supply agreements represented 89
percent 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 percent growth in sales volume was more than
offset by a decline in 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. We also realized
gains from coal supply agreement restructurings of $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. Our 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 percent, with our United States operating companies
averaging 93 tons per employee per manshift for the six month period
which represented a Peabody record. Our Australian productivity also
showed significant improvement increasing more than 17 percent from the
equivalent period in the previous year. This had the impact of improving
gross profit margins to 13.1 percent of revenues for the six months
ended March 31, 1997, as compared to 12.8 percent of revenues for the
six months ended March 31, 1996. Selling and administrative expenses
remained substantially stable at 3.9 percent and 3.7 percent of revenues
for 1997 and 1996, respectively. Our 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, we 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 No. 121,
principally related to the impairment of certain inactive and
undeveloped coal reserves, primarily high sulfur coal reserves, affected
by the Clean Air Act Amendments. 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 percent from 151.0 million tons in the fiscal year
ended September 30, 1995. The higher volume was primarily attributable
to an 18.5 percent increase in our Powder River Basin production volume
including a full year's contribution from the Caballo and
31
<PAGE>
<PAGE>
Rawhide mines acquired in November 1994. Our 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. Our overall production reflected
the impact of our continued investment aimed at improving productivity,
in particular at Powder River. Low sulfur coal sales represented 82
percent of total sales volume in the year ended September 30, 1996, up
from 80 percent in 1995. Sales under long-term contracts represented 88
percent of sales volume in 1996 and management estimates Peabody's
market share in the United States rose from 14 percent in the fiscal
year ended September 30, 1995 to 15 percent 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
Peabody Coal Company (estimated at $25 to $30 million) as price per ton
was 10 percent lower than the prior year. Revenues were also adversely
affected by reduced demand at our western operations, as customers
purchased lower priced hydroelectric 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. We also realized
gains from coal supply agreement 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 No. 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 our western
operations, the re-pricing of certain high sulfur coal contracts, which
management estimates accounted for a decrease in profit of $25 to $30
million, and operational difficulties at Peabody Coal Company 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 our cost reduction initiatives
was evidenced by an improvement in productivity, as tons per manshift
improved 17 percent in absolute terms over 1995 and 3 percent 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
our liability for the United Mine Workers of America Combined Fund
established under the Coal Industry Retiree Health Benefit Act of 1992.
This reversal resulted from our successful appeal of United States
government beneficiary assignments and our 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 percent in 1996 from
14.4 percent of revenues for 1995. Selling and administrative costs were
$5.6 million lower than in 1995 as we continued to streamline and
consolidate support functions. As a percentage of revenues, selling and
administrative expenses were 3.5 percent in 1996 and 3.7 percent in
1995.
Our 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $240.1 million, which is
comprised mainly of a $135.9 million royalty prepayment that occurred
during the second quarter of fiscal 1999 and cash from current
operations, partially offset by working capital changes.
Net cash used in investing activities was $2,257.1 million, primarily
consisting of $2,076.9 million for the acquisition of our Predecessor
Company and a controlling interest in Black Beauty and $195.8 million of
capital expenditures. We expect to spend approximately $200 million for
fiscal 2000 capital expenditures. We had $139.4 million of committed
capital expenditures (primarily related to coal reserves and mining
machinery) at March 31, 1999. It is anticipated these capital
expenditures will be funded through available cash and credit
facilities.
32
<PAGE>
<PAGE>
Net cash provided by financing activities was $2,184.8 million,
reflecting a $480 million capital contribution and $1,817.4 million in
borrowings to fund the acquisition of our Predecessor Company. In
addition, we have borrowed approximately $160 million to fund domestic
capital expenditures, the construction of a new mine in Australia and
working capital requirements. We repaid $100 million of long-term debt
during the period, including $75 million in prepayments and $5 million
in scheduled payments on acquisition debt.
As of March 31, 1999, we had total indebtedness of $2,542.4 million,
consisting of the following:
(In millions)
Term loans under senior credit facilities $ 840.0
8.875% Senior Notes due 2008 398.9
9.625% Senior Subordinated Notes due 2008 498.6
5.000% Subordinated Note 190.6
Non-Recourse Debt 333.9
Other 280.4
--------
$2,542.4
========
The senior credit facilities include a revolving credit facility that
provides for aggregate borrowings of up to $150 million and letters of
credit of up to $330 million. As of March 31, 1999, we had no borrowings
outstanding under the revolving credit facility. Interest rates on the
revolving loans under the revolving credit facility are based on the
Base Rate (as defined in the senior credit facilities), or LIBOR (as
defined in the senior credit facilities) at our option. On October 1,
1998, we entered into two interest rate swaps to fix the interest cost
on $500 million of long-term debt outstanding under the term loan
facility. We will pay a fixed rate of approximately 7.0 percent on $300
million of such long-term debt for a period of three years, and on $200
million of such long-term debt for two years. The revolving credit
facility commitment matures in fiscal 2005.
During fiscal 1999, we made optional prepayments of $75 million on the
senior credit facilities, which we applied against mandatory Term Loan A
and B payments in order of maturity, and mandatory payments of $5
million on Term Loan A. The following table sets forth the amortization
schedule for the senior credit facilities after giving effect to the
payments:
(In millions)
Term Loan A Term Loan B
----------- -----------
Fiscal Year:
1999 $ - $ -
2000 - -
2001 10.00 -
2002 42.50 -
2003 68.75 -
2004 93.75 -
2005 25.00 64.00
2006 - 408.25
2007 - 127.75
------- -------
$240.00 $600.00
======= =======
The indentures governing the senior notes and senior subordinated notes
permit us and our Restricted Subsidiaries (which include all of our
subsidiaries except Citizens Power and its subsidiaries) to incur
additional indebtedness, including secured indebtedness, subject to
certain limitations. In addition, among other customary restrictive
covenants, the indentures prohibit us and our 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 us or any of our
Restricted Subsidiaries (subject to certain exceptions).
33
<PAGE>
<PAGE>
The revolving credit facility and related term loan facility also
contain certain restrictions and limitations including but not limited
to financial covenants that will require us to maintain and achieve
certain levels of financial performance and limit the payment of cash
dividends and similar restricted payments. In addition, the senior
credit facilities prohibit us from allowing our 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. We were in compliance with all of the
restrictive covenants of our loan agreements as of March 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued 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. Based upon a
recent decision by the Financial Accounting Standards Board, SFAS No.
133 is now effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 (effective April 1, 2001 for Peabody). We are
evaluating the requirements of this Statement and have not yet
determined the impact of adoption on the financial statements.
IMPACT OF YEAR 2000 ISSUE
We are preparing for the impact of the arrival of the Year 2000 on our
business, as well as on the businesses of our customers, suppliers and
business partners. The "Year 2000 Issue" is a term used to describe the
problems created by computer systems that are unable to accurately
interpret dates after December 31, 1999. These problems are derived
predominantly from the fact that many software programs have
historically categorized the "year" in a two-digit format. The Year 2000
Issue creates potential risks in the Information Technology ("IT") and
non-IT systems that we use in our business operations. We may also be
exposed to risks from third parties with which we interact that fail to
adequately address their own Year 2000 issues.
Our State of Readiness - In 1998, we organized a company-wide Year
- ----------------------
2000 compliance project, staffed with a diverse team of personnel
representing all levels of the organization. We also retained an outside
consulting firm to assist in the Year 2000 risk assessment and to help
ensure an effective project structure to address the Year 2000 Issue. In
addition, we assessed our software and identified portions that will
have to be modified or replaced so that our computer systems will
function properly with respect to dates in the Year 2000 and thereafter.
With respect to IT systems, an assessment was completed and we are now
in the remediation, testing and implementation phases of the project
whereby it is updating or replacing existing impacted applications.
These phases of the project began in calendar 1998 and will continue in
calendar 1999.
Additionally, we are also assessing our non-IT technology which consists
primarily of embedded technology at our mining facilities (e.g.,
security systems, mine monitoring systems, plant operating systems, coal
loading and scale facilities, equipment, etc.). We are in the assessment
and remediation phases and plan to have all of our sites Year 2000
compliant by October 1999.
Software modifications are estimated to be 82 percent complete, a
measurement primarily based upon overall labor hours. The goal of
management is to have all systems and equipment Year 2000 ready by
October 1999. We believe that with modifications to existing software
and conversion to new software, the Year 2000 Issue will not present
significant operational problems for our computer systems.
Finally, we are assessing our Year 2000 exposures related to our
suppliers. We have identified our key suppliers and have sent a request
for information on their Year 2000 compliance status. We have 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.
34
<PAGE>
<PAGE>
The Costs to Address Our Year 2000 Issues - The total cost of the
- -----------------------------------------
project associated with the Year 2000 Issue is estimated at
approximately $9.1 million, which includes $3.0 million for the purchase
of new software and hardware that will be capitalized and $6.1 million
that will be expensed as incurred. To date, we have incurred
approximately $2.8 million primarily for assessment of the Year 2000
Issue, development of a modification plan, and updating noncompliant
programs. We believe that the total costs associated with modifying our
current systems will not have a material adverse effect on our financial
position, results of operations or liquidity.
The Risks of Our Year 2000 Issues - We cannot assure you that we will
- ---------------------------------
be completely successful in our efforts to address Year 2000 issues. If
some of our systems are not Year 2000 compliant, we could suffer a
disruption of operations (including delivery of coal pursuant to sales
contracts) or other negative consequences, including, but not limited
to, diversion of resources, damage to our reputation and increased
litigation, any of which could materially adversely affect our financial
position, results of operations or liquidity.
We are also dependent on third parties such as our customers, suppliers,
service providers and other business partners. If these or other third
parties with which we conduct business fail to adequately address Year
2000 issues, we could experience a negative impact on our financial
position, results of operations or liquidity. For example, the failure
of transportation providers, power generators and/or telecommunications
companies to have Year 2000 compliant internal systems could impact our
production and/or shipment of coal.
Contingency Plans - We are in the process of developing a
- -----------------
comprehensive contingency plan to address situations that may result if
we or any of the third parties upon which we are dependent is unable to
achieve Year 2000 readiness. This effort is ongoing and will continue to
be evaluated as new information becomes available.
Year 2000 Cautionary Statement - Year 2000 issues are widespread and
- ------------------------------
complex. The costs of the project and the date on which we believe we
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, we cannot
assure you that these estimates will be achieved.
FORWARD LOOKING STATEMENTS
This document, the annual report and certain press releases and
statements we make from time to time include statements of our and
management's expectations, intentions, plans and beliefs that constitute
"forward looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act and are
intended to come within the safe harbor protection provided by those
sections. Forward looking statements involve risks and uncertainties,
and a variety of factors could cause actual results to differ materially
from our current expectations, including but not limited to: coal and
power market conditions and fluctuations in the demand for coal as an
energy source; weather conditions; the continued availability of long-
term coal supply contracts; railroad performance; foreign currency
translation; changes in the government regulation of the mining and
power generation industries; risks inherent to mining; changes in our
leverage position; the ability to successfully implement operating
strategies; and the impact of Year 2000 compliance by us or those
entities with which we do business.
RISK FACTORS
POSSIBILITY OF TERMINATION OF LONG-TERM COAL SUPPLY AGREEMENTS
A substantial portion of our sales are made pursuant to coal supply
agreements, which are important to the stability and profitability of
our operations. The execution of a satisfactory coal supply agreement is
frequently the basis on which we undertake the development of coal
reserves required to be supplied under the contract. Peabody has a large
portfolio of coal supply agreements. In fiscal 1999, 87 percent of our
sales volume was sold under coal supply agreements. At March 31, 1999,
our coal supply agreements had terms ranging from one to 15 years and
had an average volume-weighted remaining term of more than 4 years.
35
<PAGE>
<PAGE>
Many of our coal supply agreements contain price reopener provisions
that 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 our coal supply agreements 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
coal supply agreements also typically contain force majeure provisions
allowing temporary suspension of performance by us or the customer
during the duration of certain events beyond the control of the affected
party. Most coal supply agreements contain provisions requiring us 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.
We restructure coal supply agreements in the normal course of business.
In connection with such restructurings, we recognized a gain of $5.3
million in fiscal 1999 and $49.3 million in fiscal 1998. We cannot
assure you that we will be able to realize such gains in connection with
future coal supply agreement restructurings.
The operating profit margins realized by Peabody under coal supply
agreements 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 our coal supply agreements were
modified or terminated, we could be materially adversely affected to the
extent that we are unable to find alternate buyers for our coal at the
same level of profitability. Because the price of coal has declined in
recent years, many of our coal supply agreements are for prices above
current spot market prices. We cannot assure you that we will be able to
replace these contracts at the same prices or with similar profit
margins when they expire. In addition, certain coal supply agreements
are the subject of ongoing litigation and arbitration.
DEPENDENCE ON MAJOR CUSTOMERS
In fiscal 1999, we derived 31 percent of our total coal revenues from
sales to our 5 largest customers, under 14 coal supply agreements that
expire in various years from 1999 to 2014. We are currently engaged in
discussions with several customers to either extend or enter into new
long-term agreements upon expiration of existing agreements. We cannot
assure you these customers either will extend or enter into new long-
term agreements or, in the absence of long-term agreements, that they
will continue to purchase the same amount of coal as they have in the
past or on terms, including pricing terms, as favorable to us as under
existing agreements. The concurrent loss of several coal supply
agreements, reductions in the amounts of coal that all five of these
customers purchase under those agreements, or the terms under which they
buy could have a material adverse effect on our financial condition and
results of operations.
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 our ability to supply coal to our customers and thus
could adversely affect our results of operations. For example, the high
volume of coal shipped from all southern Powder River Basin mines
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
our operations less competitive than other sources of coal. Such
increases could have a material adverse effect on our ability to compete
and on our financial condition and results of operations.
36
<PAGE>
<PAGE>
In Australia, we transport 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 and
Bengalla mines.
RISKS INHERENT TO MINING
Our mining operations are subject to conditions beyond our 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, including Peabody Resources, have also attempted
to employ non-union labor under individual contracts of employment.
While to date these changes have been accomplished without major
industrial disruption, we cannot assure you that this state of affairs
will continue or that further restructuring will not cause major work
stoppages in the future.
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. We 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 our mining operations, our cost
structure and/or our 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 us or
our customers to change their operations significantly or incur
increased costs. Such factors and legislation, if enacted, could have a
material adverse effect on our financial condition and results of
operations.
Reclamation and Mine Closure Accruals. The Federal Surface Mining
Control and Reclamation Act of 1977 and similar state statutes require
that mine property be restored in accordance with specified standards
and an approved reclamation plan and require that we obtain and
periodically renew permits for mining operations. We accrue for the
costs of final mine closure over the estimated useful mining life of the
property and expense 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, we review our entire
environmental liability under the Surface Mining Control and Reclamation
Act of 1977 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. Although we believe
we are 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.
37
<PAGE>
<PAGE>
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, such as fugitive dust, including future regulation
of fine particulate matter measuring 2.5 micrometers in diameter or
smaller. In July 1997, the United States Environmental Protection Agency
adopted new, more stringent National Ambient Air Quality Standards 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 air quality standards. Because coal mining
operations emit particulate matter, our mining operations are likely to
be affected directly when the revisions to the air quality standards are
implemented by the states. State and federal regulations relating to
implementation of the new air quality standards may restrict our ability
to develop new mines or could require us to modify our existing
operations. The extent of the potential direct impact of the new air
quality standards 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 our
financial condition and results of operations.
The Clean Air Act indirectly affects coal mining operations by
extensively regulating the air emissions of sulfur dioxide and other
compounds including nitrogen oxides emitted by coal-fueled utility power
plants. Title IV of the Clean Air Act Amendments places limits on sulfur
dioxide 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: (1) Phase I began in 1995 and applies only to certain
identified facilities; and (2) 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 sulfur dioxide emission allowances from
other facilities. The effect of these provisions of the Clean Air Act
Amendments on us cannot be fully determined at this time. We believe
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 sulfur dioxide
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 us will depend upon a number of
factors, including our ability to secure coal supply agreements for our
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 for nitrogen oxides,
which are precursors of ozone. In addition, the recently issued,
stricter ozone air quality standards, as discussed above, are expected
to be implemented by the Environmental Protection Agency by 2003. On
September 24, 1998, the Environmental Protection Agency announced the
final rules governing nitrogen oxide emissions intended to reduce ozone
concentrations in Northeastern cities. The new rules require additional
nitrogen oxide reductions in 22 states, including reductions in nitrogen
oxide 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 reasonably available control technology and
additional control measures required under the final rules 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, the Environmental
Protection Agency issued a new rule governing nitrogen oxide emissions
from new sources. The rule, which is likely to face legal challenge,
would limit nitrogen oxide emissions from new, significantly modified or
reconstructed boilers to amounts per megawatt-hour of gross electric
output. The new rule would require expensive nitrogen oxide 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 our 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 us in particular
cannot be predicted with certainty. We cannot assure you that the
implementation of the Clean Air Act Amendments, the new air quality
standards or any other future regulatory provisions will not materially
adversely affect us.
38
<PAGE>
<PAGE>
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 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. Although the specific limits vary from
country to country, the United States would be required to reduce
emissions to 93 percent of 1990 levels over a five-year budget period
from 2008 through 2012. Although the United States has not ratified the
emission targets and no comprehensive regulations focusing on greenhouse
gas emissions are in place, 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 our operations. There is no
guarantee, however, that such restrictions, if established through
regulation or legislation, will not have a material adverse effect on
our 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, 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 the Comprehensive Environmental Response,
Compensation and Liability Act and many state Superfund statutes, joint
and several liability may be imposed on waste generators, site owners
and operators and others regardless of fault.
We assumed environmental obligations associated with certain former non-
coal mining operations of our subsidiary, Gold Fields, and our 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. We have 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 Peabody. Gold Fields is currently involved in
environmental investigation or remediation at seven sites and is a
defendant in litigation with private parties involving one other site.
These sites were formerly owned or operated by Gold Fields. The
Environmental Protection Agency has placed three of these sites on the
National Priorities List, promulgated pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, 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, independent environmental consultants
were employed in 1997 in order to assess the estimated total amount of
the liability per site and the proportion of those liabilities that 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. We have provisions of $61.8 million as of March
31, 1999 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 where they are pursued,
the amount of the eventual costs and liabilities, which could be greater
or less than this provision. We believe 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 the
Comprehensive Environmental Response, Compensation and Liability Act,
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 us, and sites to
which we sent waste materials, may be subject to liability under the
Comprehensive Environmental Response, Compensation and Liability Act and
similar state laws. In addition to the Gold Fields liabilities
associated with the Comprehensive Environmental Response, Compensation
and Liability Act and similar state laws, our 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.
39
<PAGE>
<PAGE>
While we believe that we have identified costs likely to be incurred for
these environmental matters, and that those costs are not likely to have
a material adverse effect upon our financial condition or results of
operations, we cannot assure you 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, we cannot assure you that material liabilities or costs related
to environmental matters will not be incurred in the future or that our
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 percent 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 percent of the per ton
sales price. This tax is passed on to the purchaser under many of our
coal supply agreements.
Legislation on black lung reform has been introduced in this session of
Congress. The legislation 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. We
cannot assure you that such legislation or other proposed changes in
black lung legislation will not have an adverse effect on us.
The United States 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 us, the extent of which
cannot be accurately predicted.
REPLACEMENT AND RECOVERABILITY OF RESERVES
Our future success depends upon our ability to find, develop or acquire
additional coal reserves that are economically recoverable. Our
recoverable reserves will generally decline as reserves are depleted,
except to the extent that we conduct successful exploration and
development activities or acquire properties containing recoverable
reserves. To increase reserves and production, we must continue our
development, exploration and acquisition activities or undertake other
replacement activities. Our current strategy includes increasing our
reserve base through acquisitions of government leases and other leases
and producing properties and continuing to exploit our 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, we acquired an additional 532 million tons
of low sulfur coal reserves in a lease auction in the Powder River Basin
adjacent to our Rochelle Mine. We cannot assure you that we will be able
to continue successfully leasing additional reserves from the
government. Additionally, we cannot assure you that our planned
development and exploration projects and acquisition activities will
result in significant additional reserves or that we will have
continuing success developing additional mines. Most of our mining
operations are conducted on properties owned or leased by us. Because
title to most of our leased properties and mineral rights are not
thoroughly verified until a permit to mine the property is obtained, our
right to mine certain of our reserves may be materially adversely
affected if defects in title or boundaries exist. In addition, we cannot
assure you that we can successfully negotiate new leases from the
government or private parties or mining contracts for properties
containing additional reserves or maintain our leasehold interest in
properties on which mining operations are not commenced during the term
of the lease.
40
<PAGE>
<PAGE>
PRICE FLUCTUATIONS AND MARKETS
Our results of operations are highly dependent upon the prices received
for our coal. Although in fiscal 1999, 87 percent of our sales were made
pursuant to coal supply agreements, many of our coal supply agreements
contain price reopener provisions which provide for the contract price
to be adjusted upward or downward at specified times. Any significant
decline in prices for coal could have a material adverse effect on our
financial condition and results of operations, and quantities of
reserves recoverable on an economic basis. Should the industry
experience significant price declines from current levels or other
adverse market conditions, we may not be able to generate sufficient
cash flow from operations to meet our obligations and make planned
capital expenditures.
The availability of a ready market for our coal production also depends
on a number of factors, including the demand and supply of low sulfur
coal and the availability of sulfur dioxide emission allowances.
COMPETITION
The coal industry is highly competitive, with numerous producers in all
coal producing regions. We compete with other large producers and
hundreds of small producers in the United States and abroad. Many of our
customers are also customers of our competitors. The markets in which we
sell our coal are highly competitive and affected by factors beyond our
control. Continued demand for our coal and the prices that we 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. 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
overcapacity, 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 48 percent of Peabody's and our joint venture's United
States coal employees, who accounted for 31 percent of Peabody's United
States coal sales in fiscal 1999, are represented by the United Mine
Workers of America. The Australian coal mining industry is highly
unionized and the majority of workers employed at Peabody Resources are
members of trade unions. Certain of our 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, our non-unionized competitors may
have a competitive advantage in areas where they compete with our
unionized operations. If some or all of the Company's current non-union
operations were to become unionized, we could incur an increased risk of
work stoppages, reduced productivity and higher labor costs. The ten
month long United Mine Workers of America strike in 1993 had a material
adverse effect on us. Our subsidiaries, Peabody Coal Company and Eastern
Associated Coal Corp., operate under a union contract which is in effect
through December 31, 2002 and our Peabody Western Coal Company
subsidiary operates under a union contract which is in effect through
August 31, 2000. Peabody Resources' Warkworth Mine operates under a
labor agreement that expires in September 1999. Peabody Resources,'
Ravensworth and Narama mines entered into two-year labor agreements in
May 1999. We cannot assure you that our unionized labor will not go on
strike upon expiration of existing contracts.
SURETY BONDS
Federal and state laws require bonds to secure our obligations to
reclaim lands disturbed for mining, to pay federal and state workers'
compensation and to satisfy other miscellaneous obligations. As of March
31, 1999, we had outstanding surety bonds with third parties for post-
mining reclamation totaling $534.9 million, with an additional $240.5
million in self-bonding obligations. Furthermore, surety bonds valued at
an additional $80.5 million are in
41
<PAGE>
<PAGE>
place for federal and state workers' compensation obligations and other
miscellaneous obligations. These bonds are typically renewable on a
yearly basis. We cannot assure you 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
acquisition financings, we are highly leveraged, making it questionable
whether we will be able to continue our self-bonding program and thus
requiring us 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 us. Such failure could result from a variety of factors including the
following: (1) lack of availability, higher expense or unreasonable
terms of new surety bonds; (2) 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 (3) the exercise
by third-party surety bond holders of their right to refuse to renew the
surety.
SUBSTANTIAL LEVERAGE
We are highly leveraged and, at March 31, 1999, had total indebtedness
of $2,542.4 million, including $333.9 million of Citizens Power non-
recourse debt, of which (1) $840.0 million consisted of indebtedness
under the senior credit facilities, (2) $398.8 million consisted of the
senior notes, (3) $498.6 million consisted of the senior subordinated
notes and (4) the balance primarily consisted of the 5 percent
subordinated note. In addition, we had available borrowings of up to
$150.0 million under the revolving credit facility. Peabody and our
Restricted Subsidiaries are permitted to incur additional indebtedness
in the future.
Our ability to pay principal and interest on each series of the notes
and to satisfy our other debt service obligations will depend upon the
future operating performance of our subsidiaries, which will be affected
by prevailing economic conditions in the markets they serve 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 our future
liquidity needs for at least the next several years. We cannot assure
you that our 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 us to service our
indebtedness, including each series of the notes, or to fund our other
liquidity needs. We may need to refinance all or a portion of the
principal of each series of the notes on or prior to maturity. We cannot
assure you that we will be able to effect any such refinancing on
commercially reasonable terms or at all.
The degree to which we are leveraged could have important consequences
to holders of each series of the notes, including, but not limited to:
(1) making it more difficult for us to satisfy our obligations with
respect to each series of the notes; (2) increasing our vulnerability to
general adverse economic and industry conditions; (3) limiting our
ability to obtain additional financing to fund future working capital,
capital expenditures, research and development or other general
corporate requirements; (4) requiring the dedication of a substantial
portion of our cash flow from operations to the payment of principal of,
and interest on, our indebtedness, thereby reducing the availability of
such cash flow to fund working capital, capital expenditures, research
and development or other general corporate purposes; (5) limiting our
flexibility in planning for, or reacting to, changes in our business and
the industries in which we compete; and (6) placing us at a competitive
disadvantage compared to less leveraged competitors. In addition, the
indentures and the senior credit facilities contain financial and other
restrictive covenants that limit our ability to, among other things,
borrow additional funds. Failure by us 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 us. In addition, the degree to which
we are leveraged could prevent us from repurchasing all of the notes
tendered to us upon the occurrence of a change of control.
DEPENDENCE ON KEY PERSONNEL
Our business is managed by a number of key personnel, the loss of which
could have a material adverse effect on us. In addition, as our business
develops and expands, we believe that our future success will depend
greatly on our continued ability to attract and retain highly skilled
and qualified personnel. We cannot assure you that key personnel will
continue to be employed by us or that we will be able to attract and
retain qualified personnel in the future. We currently have not obtained
key person life insurance to cover our executive officers. Failure by us
to retain or attract such key personnel could have a material adverse
effect on us.
42
<PAGE>
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
TRADING ACTIVITIES
We market and trade electric power and energy-related commodities and
provide services to the electric power industry through our subsidiary,
Citizens Power. These activities give rise to market risk, which
represents the potential loss that can be caused by a change in the
market value of a particular commitment. Market risks are actively
measured, monitored and controlled to ensure compliance with management
policies. Polices are in place that limit the amount of total exposure
we may enter into at any point in time. In addition, we have implemented
procedures that allow us to measure, monitor and control all commitments
and positions, with daily reporting to management.
These activities are accounted for using the fair value method, whereby
financial instruments with third parties (such as forwards, futures,
options and swaps) are reflected at market value in the consolidated
financial statements.
NON-TRADING
Commodity price risk
We manage our commodity price risk for non-trading purposes through the
use of long-term coal supply agreements, rather than through the use of
derivative instruments. Approximately 87 percent of our sales volume was
sold under long-term coal supply agreements in fiscal 1999.
Certain products used in our mining activities are subject to price
volatility. We use forward contracts to manage the volatility related to
this exposure. Commodity price risk associated with these products used
in our mining activities is not material to our consolidated financial
position, results of operations or liquidity.
Interest rate risk
We have exposure to changes in interest rates due to our existing level
of indebtedness. As of March 31, 1999, we had $2.2 billion of fixed-rate
borrowings and approximately $397 million of variable-rate borrowings
outstanding. To minimize our exposure to changes in interest rates, we
entered into two interest rate swaps during fiscal 1999 with a total
notional amount of $500 million for a 2-3 year term.
Foreign currency risk
Our Australian subsidiary, Peabody Resources, utilizes the Australian
dollar as its functional currency. Peabody Resources exports coal to the
Asian market under United States dollar-denominated supply agreements,
creating exposure to fluctuations in exchange rates upon subsequent
translation of such export sales to United States dollars in the
consolidated financial statements. Peabody Resources utilizes a
combination of forward currency and option contracts to hedge the impact
of these exchange rate fluctuations.
Sensitivity analysis of market risks:
- ------------------------------------
Foreign currency risk
The net amount of our derivative financial instruments and foreign
currency transaction exposure of approximately $200 million, after
considering $217 million of existing foreign exchange contracts, has
been subjected to an assumed 10 percent appreciation and 10 percent
depreciation in the value of the Australian dollar versus the United
States dollar over a period not exceeding the average expected maturity
of the related foreign exchange contract.
43
<PAGE>
<PAGE>
Assuming the United States dollar appreciates 10 percent against the
Australian dollar, the resulting foreign exchange gain would be
approximately $24 million. If the United States dollar were to decline
10 percent against the Australia dollar, the resulting foreign exchange
loss would be approximately $24 million.
Interest rate risk
After taking into account the interest rate swap transactions discussed
above, a one percentage point increase in interest rates would result in
an annualized increase to interest expense of approximately $4 million
on our variable-rate borrowings. With respect to our fixed-rate
borrowings, a one percentage point increase in interest rates would
result in a $55 million decrease in the fair value of such borrowings.
44
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
Index to Financial Statements and Supplementary Data
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 46
Audited Financial Statements:
Statements of Operations - Periods ended March 31, 1999 and
May 19, 1998, Year ended March 31, 1998, Six Months ended
March 31, 1997 and Year ended September 30, 1996 47
Balance Sheets - March 31, 1999 and 1998 48
Statements of Cash Flows - Periods ended March 31, 1999 and
May 19, 1998, Year ended March 31, 1998, Six Months ended
March 31, 1997 and Year ended September 30, 1996 49
Statements of Changes in Stockholders' Equity / Invested Capital -
Periods ended March 31, 1999 and May 19, 1998 50
Notes to Financial Statements 51
</TABLE>
45
<PAGE>
<PAGE>
Report of Independent Auditors
Board of Directors
P&L Coal Holdings Corporation
We have audited the accompanying consolidated balance sheet of P&L Coal
Holdings Corporation (the Company) as of March 31, 1999 and the related
consolidated statements of operations, changes in stockholders' equity
and cash flows of the Company for the period then ended. We have also
audited the accompanying combined balance sheet of P&L Coal Group (the
Predecessor Company) as of March 31, 1998, and the related combined
statements of operations, changes in invested capital and cash flows of
the Predecessor Company for the period ended May 19, 1998, the year
ended March 31, 1998, the six months ended March 31, 1997 and the year
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 consolidated financial position of
P&L Coal Holdings Corporation at March 31, 1999, the combined financial
position of P&L Coal Group at March 31, 1998, the consolidated results
of operations and cash flows of the Company for the period ended March
31 1999, and the combined results of operations and cash flows of the
Predecessor Company for the period ended May 19, 1998, the year ended
March 31, 1998, the six months ended March 31, 1997 and the year ended
September 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1996 the
Predecessor 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
April 30, 1999
St. Louis, Missouri
46
<PAGE>
<PAGE>
<TABLE>
P&L COAL HOLDINGS CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in thousands)
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------
Period Period Six Months
Ended Ended Year Ended Ended Year Ended
March 31, May 19, March 31, March 31, September 30,
1999 1998 1998 1997 1996
---------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales $1,970,957 $278,930 $2,048,694 $1,000,419 $2,075,142
Other revenues 123,269 13,478 195,768 63,674 118,444
---------- -------- ---------- ---------- ----------
Total revenues 2,094,226 292,408 2,244,462 1,064,093 2,193,586
OPERATING COSTS AND EXPENSES
Operating costs and expenses 1,663,626 247,129 1,710,801 822,938 1,693,543
Depreciation, depletion
and amortization 184,191 26,218 202,640 101,730 197,853
Selling and administrative
expenses 67,688 12,017 83,640 41,421 75,699
Impairment of long-lived assets - - - - 890,829
Net gain on property and
equipment disposals - (328) (21,806) (4,091) (13,042)
---------- -------- ---------- ---------- ----------
OPERATING PROFIT (LOSS) 178,721 7,372 269,187 102,095 (651,296)
Interest expense (176,105) (4,222) (33,635) (24,700) (62,526)
Interest income 18,527 1,667 14,977 8,590 11,355
---------- -------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 21,143 4,817 250,529 85,985 (702,467)
Income tax provision (benefit) 9,047 4,341 90,193 27,553 (256,185)
Minority interest 1,887 - - - -
---------- -------- ---------- ---------- ----------
NET INCOME (LOSS) $ 10,209 $ 476 $ 160,336 $ 58,432 $ (446,282)
========== ======== ========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
47
<PAGE>
<PAGE>
<TABLE>
P&L COAL HOLDINGS CORPORATION
BALANCE SHEETS
AS OF MARCH 31,
(Dollars in thousands)
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 194,078 $ 96,821
Accounts receivable, less allowance of $177 and $9,100,
respectively 312,748 326,540
Receivables from affiliates, net - 112,763
Materials and supplies 53,978 67,343
Coal inventory 195,919 197,480
Assets from power trading activities 1,037,300 1,295,169
Deferred income taxes 8,496 -
Other current assets 29,942 30,036
---------- -----------
Total current assets 1,832,461 2,126,152
Property, plant, equipment and mine development
Land and coal interests 3,988,742 3,075,916
Building and improvements 316,163 721,883
Machinery and equipment 651,728 1,441,140
Less accumulated depreciation, depletion and amortization (193,492) (1,565,397)
---------- -----------
Property, plant, equipment and mine development, net 4,763,141 3,673,542
Investments and other assets 428,329 543,315
---------- -----------
Total assets $7,023,931 $ 6,343,009
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY / INVESTED CAPITAL
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 72,404 $ 46,616
Income taxes payable 7,308 2,388
Deferred income taxes - 6,036
Liabilities from power trading activities 638,062 947,467
Accounts payable and accrued expenses 627,734 587,674
---------- -----------
Total current liabilities 1,345,508 1,590,181
Long-term debt, less current maturities 2,469,975 555,660
Deferred income taxes 780,175 661,572
Accrued reclamation and other environmental liabilities 498,032 416,361
Workers' compensation obligations 207,544 248,670
Accrued postretirement benefit costs 956,714 876,244
Obligation to industry fund 63,107 97,045
Other noncurrent liabilities 183,736 209,434
---------- -----------
Total liabilities 6,504,791 4,655,167
Minority interest 23,910 -
Stockholders' equity / invested capital:
Preferred Stock -- $0.01 per share par value; March 31, 1999 --
10,000,000 shares authorized, 5,000,000 shares issued and
outstanding 50 -
Common stock -- Class A, $0.01 per share par value;
March 31, 1999 -- 30,000,000 shares authorized, 19,000,000
shares issued and outstanding 190 -
Common stock -- Class B, $0.01 per share par value;
March 31, 1999 -- 3,000,000 shares authorized, 708,767
shares issued and outstanding 7 -
Additional paid-in capital 484,772 -
Employee stock loans (2,331) -
Accumulated other comprehensive income (loss) 2,333 (42,184)
Retained earnings 10,209 -
Invested capital - 1,730,026
---------- -----------
Total stockholders' equity / invested capital 495,230 1,687,842
---------- -----------
Total liabilities and stockholders' equity / invested
capital $7,023,931 $ 6,343,009
========== ===========
See accompanying notes to financial statements.
</TABLE>
48
<PAGE>
<PAGE>
<TABLE>
P&L COAL HOLDINGS CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------------
Period Period Six Months
Ended Ended Year Ended Ended Year Ended
March 31, May 19, March 31, March 31, September
1999 1998 1998 1997 30, 1996
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 10,209 $ 476 $ 160,336 $ 58,432 $ (446,282)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation, depletion and amortization 184,191 26,218 202,640 101,730 197,853
Deferred income taxes (679) 2,835 65,508 17,529 (281,651)
Amortization of debt discount and debt issuance costs 16,120 1,379 11,205 5,767 10,378
Net gain on property and equipment disposals - (328) (21,806) (4,091) (13,042)
Gain on contract restructurings (5,300) - (49,270) (11,624) (22,000)
Impairment of long-lived assets - - - - 890,829
Stock compensation 3,924 - - - -
Minority interest 1,887 - - - -
Changes in current assets and liabilities, excluding
effects of acquisitions:
Accounts receivable 173,793 (132,065) (70,326) (17,718) 45,908
Materials and supplies 3,620 881 (438) (2,526) 8,482
Coal inventory 5,781 (2,807) (16,160) (25,930) (3,373)
Other current assets 7,218 (10,701) (3,385) 6,550 (9,736)
Accounts payable and accrued expenses (216,987) 87,814 61,707 (25,496) (68,525)
Income taxes payable 173 1,234 (12,447) (10,964) (31,079)
Net assets from power trading activities (54,155) 5,289 (107,102) - -
Accrued reclamation and related liabilities (4,468) (1,622) (18,509) (15,385) (28,678)
Workers' compensation obligations (10,449) (2,156) (23,106) (7,618) (38,036)
Accrued postretirement benefit costs 6,094 6,092 15,292 7,324 12,165
Obligation to industry fund (3,619) (2,379) (26,771) (13,867) (32,532)
Royalty prepayment 135,903 - - - -
Other, net 17,257 (10,619) 14,310 716 20,854
----------- --------- --------- --------- ----------
Net cash provided by (used in) operating activities 270,513 (30,459) 181,678 62,829 211,535
----------- --------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment
and mine development (174,872) (20,950) (166,336) (76,460) (152,106)
Acquisitions, net of $77,351 cash acquired during period
ended March 31, 1999 (2,076,920) - (58,715) - -
Proceeds from contract restructurings 2,515 328 57,460 15,466 29,211
Proceeds from property and equipment disposals 11,450 1,374 37,732 4,824 17,255
----------- --------- --------- --------- ----------
Net cash used in investing activities (2,237,827) (19,248) (129,859) (56,170) (105,640)
----------- --------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of short-term borrowings and long-term debt (235,504) (19,423) (363,566) (503,138) (862,113)
Proceeds from short-term borrowings and long-term debt 1,923,512 53,597 359,391 367,093 1,037,716
Capital contribution 480,000 - - 269,168 284,156
Dividends paid to minority interests (3,080) - - - -
Dividends paid - (173,330) (65,109) - (72,830)
Transactions with affiliates
Repayment of affiliated loan and interest - - - - (302,104)
Loan to affiliate - - (141,000) - -
Proceeds from affiliated loan - 141,000 - - -
Advances from affiliates - 21,693 16,882 - -
Repayments to affiliates (3,647) - - (7,275) (22,724)
Invested capital transactions with affiliates - - (41,987) (31,670) (46,114)
----------- --------- --------- --------- ----------
Net cash provided by (used in) financing activities 2,161,281 23,537 (235,389) 94,178 15,987
Effect of exchange rate changes on cash and cash equivalents 111 (292) (718) (1,261) 5,886
----------- --------- --------- --------- ----------
Net increase (decrease) in cash and cash equivalents 194,078 (26,462) (184,288) 99,576 127,768
Cash and cash equivalents at beginning of period - 96,821 281,109 181,533 53,765
----------- --------- --------- --------- ----------
Cash and cash equivalents at end of period $ 194,078 $ 70,359 $ 96,821 $ 281,109 $ 181,533
=========== ========= ========= ========= ==========
See accompanying notes to financial statements.
</TABLE>
49
<PAGE>
<PAGE>
<TABLE>
P&L COAL HOLDINGS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY / INVESTED CAPITAL
(Dollars in thousands)
<CAPTION> Accumulated
Other Total
Compre- Stockholders'
Additional Employee hensive Equity /
Preferred Common Paid-in Stock Income Retained Invested Invested
Stock Stock Capital Loans (Loss) Earnings Capital Capital
--------- ------ ---------- -------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
May 20, 1998 $- $ - $ - $ - $ - $ - $ - $ -
Capital contribution 50 190 479,760 - - - - 480,000
Comprehensive
income:
Net income - - - - - 10,209 - 10,209
Foreign currency
translation
adjustments - - - - 4,128 - - 4,128
Minimum pension
liability (net of
$1,248 tax) - - - - (1,795) - - (1,795)
---------
Comprehensive
income 12,542
Stock grants
to employees - 5 3,919 (1,236) - - - 2,688
Stock purchases
by employees - 2 1,093 (1,095) - - - -
--- ---- -------- ------- -------- ------- ---------- ----------
March 31, 1999 $50 $197 $484,772 $(2,331) $ 2,333 $10,209 $ - $ 495,230
=== ==== ======== ======= ======== ======= ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY
- -------------------
March 31, 1997 $- $ - $ - $ - $ - $ - $1,676,786 $1,676,786
Comprehensive
income:
Net income - - - - - - 160,336 160,336
Foreign currency
translation
adjustments - - - - (42,184) - - (42,184)
----------
Comprehensive
income 118,152
Dividend paid - - - - - - (65,109) (65,109)
Net transactions
with affiliates - - - - - - (41,987) (41,987)
--- ---- -------- ------- -------- ------- ---------- ----------
March 31, 1998 $- $ - $ - $ - $(42,184) $ - $1,730,026 $1,687,842
Comprehensive
income:
Net income - - - - - - 476 476
Foreign currency
translation
adjustments - - - - (17,974) - - (17,974)
----------
Comprehensive loss (17,498)
Dividend paid - - - - - - (173,330) (173,330)
Net transactions
with affiliates - - - - - - 360 360
--- ---- -------- ------- -------- ------- ---------- ----------
May 19, 1998 $- $ - $ - $ - $(60,158) $ - $1,557,532 $1,497,374
=== ==== ======== ======= ======== ======= ========== ==========
See accompanying notes to financial statements.
</TABLE>
50
<PAGE>
<PAGE>
P&L COAL HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE NOTED AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the consolidated
results of operations and balance sheet of P&L Coal Holdings
Corporation (the "Company"), also known as Peabody Group. These
financial statements include the subsidiaries of Peabody Holding
Company, Inc. ("Peabody Holding Company"), Gold Fields Mining
Corporation ("Gold Fields") which owns Lee Ranch Coal Company
("Lee Ranch"), Citizens Power LLC ("Citizens Power") and Peabody
Resources Limited ("Peabody Resources"), an Australian company
(collectively, the "Predecessor Company"). The combined financial
statements include the combined results of operations of the
Predecessor Company from April 1, 1998 to May 19, 1998, the fiscal
year ended March 31, 1998, the six months ended March 31, 1997 and
the fiscal year ended September 30, 1996.
Until May 19, 1998, the Predecessor Company was a wholly owned
indirect subsidiary of The Energy Group, PLC ("The Energy Group").
Effective May 20, 1998, the Predecessor Company was acquired by
the Company, which at the time was wholly owned by Lehman Merchant
Banking Partners II and its affiliates ("Lehman Merchant
Banking"), an investment fund affiliated with Lehman Brothers Inc.
The transaction was part of the sale of The Energy Group to Texas
Utilities Company. P&L Coal Holdings Corporation, 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
Predecessor Company and had no significant activity until the
acquisition.
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 businesses 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.
DESCRIPTION OF BUSINESS
The Company is principally engaged in the mining of coal for sale
primarily to electric utilities. The Company also markets and
trades electric power and energy-related commodity price risk
management products.
NEW PRONOUNCEMENTS
Effective April 1, 1998, the Company adopted Statement of
Financial Accounting Standards (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 "accumulated other
comprehensive income."
The Company also adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement
Benefits" effective April 1, 1998. SFAS No. 131 and SFAS No. 132
address the disclosures required for the Company's operating
segments and employee benefit obligations, respectively.
The adoption of SFAS Nos. 130, 131 and 132 had no effect on the
Company's results of operations.
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. All significant
intercompany transactions have been eliminated in consolidation.
51
<PAGE>
<PAGE>
NOTES (continued)
The financial statements include the following asset and operating
amounts for Australian entities utilizing pro rata consolidation:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Total revenue $72,057 $10,996 $76,406 $41,058 $78,388
Operating income 18,767 3,695 17,731 8,386 20,632
<CAPTION>
PREDECESSOR COMPANY
-------------------
Period Ended Year Ended
March 31, 1999 March 31, 1998
-------------- -------------------
<S> <C> <C>
Total assets $189,363 $139,200
</TABLE>
ACCOUNTING FOR POWER TRADING
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's 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 power trading activities" in the 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 "Other revenues" in the period of change.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to hedge the
impact of exchange rate fluctuations on anticipated future sales
as well as to hedge the impact of interest rate movements on
floating rate debt. The Company 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 a 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. The Company
recognizes revenue from coal sales when title passes to the
customer.
OTHER REVENUES
Other revenues include royalties related to coal lease agreements,
earnings in joint ventures, management fees, farm income, contract
restructuring payments, trading activities and revenues from
contract mining services. 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. 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.
52
<PAGE>
<PAGE>
NOTES (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 $3.0 million
and $0.2 million for the periods ended March 31, 1999 and May 19,
1998, respectively, $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 plant and equipment (excluding life of
mine assets) is computed using the straight-line method over the
estimated useful lives as follows:
Years
-----
Building and improvements 10 to 20
Machinery and equipment 2 to 30
Leasehold improvements Life of Lease
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, 1999, the Company had $534.9 million in surety bonds
outstanding related to reclamation. The amount of reclamation
self-bonding in certain states in which the Company qualifies
approximated $240.5 million at March 31, 1999.
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 "Capitalization of Costs to Treat
Environmental Contamination" are met (see note 17).
53
<PAGE>
<PAGE>
NOTES (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, 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's power 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
price risk management policies of the Company. Policies are in
place that 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.
A portion of the Company's long-term indebtedness bears interest
at rates that fluctuate based upon certain indices. The Company
utilizes financial instruments such as interest rate swap
agreements to mitigate the impact of changes in interest rates on
its floating rate debt.
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.
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 SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 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 No. 121 are
measured by comparing the estimated fair value of the assets to
their carrying amount.
54
<PAGE>
<PAGE>
NOTES (continued)
In fiscal 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 No. 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 were evaluated for impairment based on gross
margins and cash flows generated by each separate operating
company in a given business cycle.
SFAS No. 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.
GOODWILL
Goodwill of $96.8 million and $78.4 million at March 31, 1999 and
1998, respectively, included in "Investments and other assets"
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 was $4.6 million for the
period ended March 31, 1999, $0.6 million for the period ended May
19, 1998 and $2.2 million for the year ended March 31, 1998.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign affiliates are generally
translated at current exchange rates, and related translation
adjustments are reported as a component of comprehensive income.
Income statement accounts are translated at the average rates
during the period.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform
with the report classifications of the period ended March 31,
1999, with no effect on previously reported net income,
stockholders' equity or invested capital.
(2) BUSINESS COMBINATIONS
Black Beauty Coal Company
Effective January 1, 1999, the Company purchased an additional
38.3 percent interest in Black Beauty Coal Company ("Black
Beauty"), raising its ownership percentage to 81.7 percent. Total
consideration paid for the additional interest was $150.7 million.
The acquisition was accounted for as a purchase and, accordingly,
the operating results of Black Beauty have been included in the
Company's financial statements since the effective date of
acquisition. Prior to the acquisition, the Company accounted for
its ownership using the equity method of accounting. The Company
has made a preliminary allocation of the cost of the acquisition
to the assets acquired and liabilities assumed based upon
estimated fair value. The preliminary fair values were determined
based upon management's estimates.
The Predecessor Company purchased an additional 10.0 percent
interest in Black Beauty for $37.7 million in cash, and as a
result, increased its ownership in the partnership to 43.3
percent, effective January 1, 1998.
55
<PAGE>
<PAGE>
NOTES (continued)
P&L Coal Group
The acquisition of P&L Coal Group by the Company was funded
through borrowings by the Company pursuant to a $920.0 million
Senior Secured Term Facility, the offerings of $400.0 million
aggregate principal amount of Senior Notes and $500.0 million
aggregate principal amount of Senior Subordinated Notes, an equity
contribution to the Company by Lehman Merchant Banking of $400.0
million, and an equity contribution of $80.0 million from other
parties, including Lehman Brothers Holdings Inc. Such amounts were
used to pay $2,003.6 million for the equity of the Company, repay
debt, increase cash balances and pay transaction fees and expenses
incurred with the acquisition. The Company also entered into a
$480.0 million senior revolving credit facility to provide for the
Company's working capital requirements following the acquisition.
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.
Below are the Company's historical balance sheet at May 19, 1998,
the purchase accounting adjustments and the 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
May 19, 1998 Adjustments May 19, 1998
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Total current assets $2,447,312 $(10,877) $2,436,435
Property, plant, equipment and mine development, net 3,642,551 746,961 4,389,512
Investments and other assets 687,977 32,334 720,311
---------- -------- ----------
Total assets $6,777,840 $768,418 $7,546,258
========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $1,931,924 $ 17,468 $1,949,392
Long-term debt, less current maturities 2,360,771 33,779 2,394,550
Deferred income taxes 662,064 93,940 756,004
Other noncurrent liabilities 1,849,244 117,068 1,966,312
---------- -------- ----------
Total liabilities 6,804,003 262,255 7,066,258
Total stockholders' equity (26,163) 506,163 480,000
---------- -------- ----------
Total liabilities and stockholders' equity $6,777,840 $768,418 $7,546,258
========== ======== ==========
</TABLE>
The Company finalized its purchase price allocation at March 31,
1999 based upon the receipt of all the information it had arranged
to obtain in order to complete its estimates. This included
independent appraisals on property, plant, equipment and mine
development (including land and coal interests) and actuarial
valuations supporting final adjustments to its employee-related
liabilities. In addition, agreement on the final purchase price
was reached with Texas Utilities Company.
Various assets and liabilities were adjusted to reflect their
estimated fair value. The purchase accounting adjustments resulted
in a net increase in total assets of $768.4 million. The majority
of the excess purchase price is reflected as adjustments to the
fair value assigned to various land and coal interests.
The purchase accounting adjustments include a $39.4 million
liability for estimated costs associated with a restructuring plan
resulting from the business combination. The estimate is comprised
of costs associated with exiting certain activities ("exit plan")
and consolidating and restructuring certain management and
administrative functions ("restructuring plan") and includes costs
resulting from a plan to involuntarily terminate or relocate
employees. As of
56
<PAGE>
<PAGE>
NOTES (continued)
March 31, 1999, the Company has finalized its involuntary
termination and employee relocation plan as well as its plans to
exit certain business activities. Costs associated with the
restructuring and exit plans are being charged against the
liability as incurred. The net cash outlays and non-cash costs
charged against the liability through March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Cash Outlays Non-cash Costs Total
------------ -------------- -------
<S> <C> <C> <C>
Restructuring plan $20,536 - $20,536
Exit plan 4,648 3,648 8,296
------- ------ -------
$25,184 $3,648 $28,832
======= ====== =======
</TABLE>
The liability was reduced by $0.6 million from the original $40.0
million estimate in conjunction with the finalization of the
purchase price allocation. This amount was recorded as an
adjustment of the cost of the acquisition. The Company expects to
utilize the majority of the $10.6 million remaining liability
($5.7 million related to the restructuring plan and $4.9 million
related to the exit plan) during the first half of fiscal 2000. If
the ultimate amount of cost expended is less than the amount
recorded as a liability, the excess will further reduce the cost
of the acquisition. Any amount of cost exceeding the amount
recorded as a liability 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 assumed
the acquisitions had occurred as of April 1, 1998:
Total revenues $2,642,251
Operating profit 196,753
Loss before income taxes 3,858
Net loss (6,343)
Guarantor Information
---------------------
In accordance with the indentures governing the Senior Notes and
Senior Subordinated Notes, certain wholly owned U.S. subsidiaries
of the Company have fully and unconditionally guaranteed the debt
associated with the purchase on a joint and several basis.
Separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented because management
believes that such information is not material to investors. The
following condensed historical financial statement information is
provided for such Guarantor/Non-guarantor Subsidiaries.
57
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Statements of Consolidated Operations
For the Period Ended March 31, 1999
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ - $1,829,438 $266,544 $(1,756) $2,094,226
Costs and expenses:
Operating costs and expenses - 1,494,487 170,895 (1,756) 1,663,626
Depreciation, depletion and
amortization - 150,584 33,607 - 184,191
Selling and administrative expenses 3,924 60,142 3,622 - 67,688
Interest expense 160,068 11,292 4,745 - 176,105
Interest income (5,716) (11,897) (914) - (18,527)
--------- ---------- -------- ------- ----------
Income (loss) before income taxes (158,276) 124,830 54,589 - 21,143
Income tax provision (benefit) (36,873) 31,213 14,707 - 9,047
Minority interest - - 1,887 - 1,887
--------- ---------- -------- ------- ----------
Net income (loss) $(121,403) $ 93,617 $ 37,995 $ - $ 10,209
========= ========== ======== ======= ==========
</TABLE>
Unaudited Supplemental Condensed Statements of Combined Operations
For the Period Ended May 19, 1998
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------
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 229,711 17,418 247,129
Depreciation, depletion and amortization 22,475 3,743 26,218
Selling and administrative expenses 11,523 494 12,017
Net gain on property and equipment disposals (308) (20) (328)
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>
58
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Statements of Combined Operations
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- ----------
<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) loss 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>
Unaudited Supplemental Condensed Statements of Combined Operations
For the Six Months Ended March 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- ----------
<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>
59
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Statements of Combined Operations
For the Year Ended September 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- ----------
<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>
60
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Consolidated Balance Sheets
As of March 31, 1999
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ - $ 130,861 $ 63,217 $ - $ 194,078
Accounts receivable - 220,287 107,770 (15,309) 312,748
Inventories - 202,749 47,148 - 249,897
Assets from power trading activities - - 1,037,300 - 1,037,300
Deferred income taxes - 8,496 - - 8,496
Other current assets - 15,797 14,145 - 29,942
---------- ---------- ---------- ----------- ----------
Total current assets - 578,190 1,269,580 (15,309) 1,832,461
Property, plant, equipment and mine
development - at cost - 4,298,203 658,430 - 4,956,633
Less accumulated depreciation,
depletion and amortization - (158,295) (35,197) - (193,492)
---------- ---------- ---------- ----------- ----------
- 4,139,908 623,233 - 4,763,141
Investments and other assets 2,461,362 1,464,147 171,693 (3,668,873) 428,329
---------- ---------- ---------- ----------- ----------
Total assets $2,461,362 $6,182,245 $2,064,506 $(3,684,182) $7,023,931
========== ========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
maturities of long-term debt $ 19,670 $ 21,666 $ 31,068 $ - $ 72,404
Payable to affiliates, net 152,364 (151,199) (1,165) - -
Income taxes payable - 229 7,079 - 7,308
Liabilities from power trading activities - - 638,062 - 638,062
Accounts payable and accrued expenses 56,562 440,331 146,150 (15,309) 627,734
---------- ---------- ---------- ----------- ----------
Total current liabilities 228,596 311,027 821,194 (15,309) 1,345,508
Long-term debt, less current maturities 1,737,536 173,364 559,075 - 2,469,975
Deferred income taxes - 711,932 68,243 - 780,175
Other noncurrent liabilities - 1,886,337 22,796 - 1,909,133
---------- ---------- ---------- ----------- ----------
Total liabilities 1,966,132 3,082,660 1,471,308 (15,309) 6,504,791
Minority interest - - - 23,910 23,910
Stockholders' equity 495,230 3,099,585 593,198 (3,692,783) 495,230
---------- ---------- ---------- ----------- ----------
Total liabilities and stockholders'
equity $2,461,362 $6,182,245 $2,064,506 $(3,684,182) $7,023,931
========== ========== ========== =========== ==========
</TABLE>
61
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Combined Balance Sheets
As of March 31, 1998
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------
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 power trading 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 463,500 79,815 543,315
----------- ---------- -----------
Total assets $ 4,432,758 $1,910,251 $ 6,343,009
=========== ========== ===========
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 power trading activities - 947,467 947,467
Accounts payable and accrued expenses 432,966 160,744 593,710
----------- ---------- -----------
Total current liabilities 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 1,827,191 20,563 1,847,754
Accumulated other comprehensive loss - (42,184) (42,184)
Invested capital 1,323,637 406,389 1,730,026
----------- ---------- -----------
Total liabilities and invested capital $ 4,432,758 $1,910,251 $ 6,343,009
=========== ========== ===========
</TABLE>
62
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Statements of Consolidated Cash Flows
Period Ended March 31, 1999
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Consolidated
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (140,674) $ 399,053 $ 12,134 $ 270,513
----------- --------- -------- -----------
Additions to property, plant, equipment
and mine development - (108,186) (66,686) (174,872)
Acquisitions, net (1,933,178) (143,742) - (2,076,920)
Proceeds from contract restructurings - 2,515 - 2,515
Proceeds from property and
equipment disposals - 10,494 956 11,450
----------- --------- -------- -----------
Net cash used in investing activities (1,933,178) (238,919) (65,730) (2,237,827)
Payments of short-term borrowings
and long-term debt (158,263) (21,470) (55,771) (235,504)
Proceeds from short-term borrowings
and long-term debt 1,817,390 - 106,122 1,923,512
Capital contribution 324,406 73,594 82,000 480,000
Dividends paid to minority interests - 9,096 (12,176) (3,080)
Transactions with affiliates 90,319 (90,493) (3,473) (3,647)
----------- --------- -------- -----------
Net cash provided by (used in)
financing activities 2,073,852 (29,273) 116,702 2,161,281
Effect of exchange rate changes
on cash and equivalents - - 111 111
----------- --------- -------- -----------
Net increase in cash and
cash equivalents - 130,861 63,217 194,078
Cash and cash equivalents at
beginning of period - - - -
----------- --------- -------- -----------
Cash and cash equivalents at
end of period $ - $ 130,861 $ 63,217 $ 194,078
=========== ========= ======== ===========
</TABLE>
63
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Statements of Combined Cash Flows
Period Ended May 19, 1998
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $ (43,766) $ 13,307 $ (30,459)
--------- -------- ---------
Additions to property, plant, equipment and mine development (13,582) (7,368) (20,950)
Proceeds from contract restructurings 308 20 328
Proceeds from property and equipment disposals 1,374 - 1,374
--------- -------- ---------
Net cash used in investing activities (11,900) (7,348) (19,248)
Payments of short-term borrowings and long-term debt (464) (18,959) (19,423)
Proceeds from short-term borrowings and long-term debt - 53,597 53,597
Dividends paid (141,000) (32,330) (173,330)
Transactions with affiliates 141,831 20,862 162,693
--------- -------- ---------
Net cash provided by financing activities 367 23,170 23,537
Effect of exchange rate changes on cash and 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>
Unaudited Supplemental Condensed Statements of Combined Cash Flows
Year Ended March 31, 1998
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- --------
<S> <C> <C> <C>
Net cash provided by (used in) 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 restructurings 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)
Payments 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 (184,529) 18,424 (166,105)
--------- --------- ----------
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 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>
64
<PAGE>
<PAGE>
NOTES (continued)
Unaudited Supplemental Condensed Statements of Combined Cash Flows
Six Months Ended March 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- --------
<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 restructurings 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)
Payments 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 (32,680) (6,265) (38,945)
-------- --------- ---------
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>
Unaudited Supplemental Condensed Statements of Combined Cash Flows
Year Ended September 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------
Guarantor Non-guarantor
Subsidiaries Subsidiaries Combined
------------ ------------- --------
<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 restructurings 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)
Payments 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 (375,473) 4,531 (370,942)
--------- ---------- ----------
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>
Citizens Power
In May 1997, the Company acquired all of the ownership interests
in Citizens Lehman Power L.L.C. ("Citizens Power") and its
subsidiaries for $120 million. Citizens Power, located in Boston,
Massachusetts, markets and trades electric power and energy-
related commodity price risk management products. Citizens Power
also provides services and price risk management capabilities to
the electric power industry (see note 1).
65
<PAGE>
<PAGE>
NOTES (continued)
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 $80.6
million is being amortized on a straight-line basis over 20 years.
(3) COAL INVENTORY
Coal inventory consisted of the following as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
-------- --------
<S> <C> <C>
Saleable coal $ 50,293 $ 51,443
Raw coal 23,299 25,422
Work in process 122,327 120,615
-------- --------
$195,919 $197,480
======== ========
</TABLE>
Raw coal represents coal stockpiles that 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 part of the surface
mining process.
(4) 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 $35.5 million and $5.6
million for the periods ended March 31, 1999 and May 19, 1998,
respectively, $40.6 million for the year ended March 31, 1998,
$17.1 million for the six months ended March 31, 1997 and $36.5
million for the year ended September 30, 1996. The cost of
property, plant, equipment and mine development assets acquired
under capital leases was $34.8 million and $56.0 million at March
31, 1999 and 1998, respectively. The related accumulated
amortization was $2.2 million and $27.1 million at March 31, 1999
and 1998, respectively. Amortization of capital leases is included
in "Depreciation, depletion and amortization" in the Statements of
Operations.
The Company also leases coal reserves under agreements that
require royalties to be paid as the coal is mined. Total royalty
expense was $123.2 million and $17.3 million for the periods ended
March 31, 1999 and May 19, 1998, respectively, $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 for the year ended
September 30, 1996. 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 which 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 percent of the original
amount of coal in the entire logical mining unit. Royalties are
payable monthly at a rate of 12.5 percent of the gross realization
from the sale of the coal mined using surface mining methods and
at the rate of 8.0 percent 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
66
<PAGE>
<PAGE>
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 royalty payments.
Future minimum lease and royalty payments as of March 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Capital Operating Coal
Fiscal Year Ending March 31, Leases Leases Reserves
----------------------------- ------- --------- --------
<S> <C> <C> <C>
2000 $ 3,914 $ 71,307 $ 39,050
2001 3,248 63,343 36,127
2002 3,017 58,768 33,373
2003 3,330 51,078 31,967
2004 4,011 37,948 9,607
2005 and thereafter 16,846 71,653 37,919
------- -------- --------
Total minimum lease payments 34,366 $354,097 $188,043
======== ========
Less interest 7,485
-------
Present value of minimum
capital lease payments $26,881
=======
</TABLE>
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following
as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
-------- --------
<S> <C> <C>
Trade accounts payable $211,993 $234,277
Accrued taxes other than income 77,839 75,791
Accrued payroll and related benefits 71,508 72,844
Accrued health care 63,422 58,649
Accrued interest 41,219 3,700
Workers' compensation obligations 38,542 39,927
Accrued royalties 22,425 16,401
Accrued lease payments 11,536 9,321
Other accrued expenses 89,250 76,764
-------- --------
Total accounts payable and accrued expenses $627,734 $587,674
======== ========
</TABLE>
67
<PAGE>
<PAGE>
NOTES (continued)
(6) INCOME TAXES
Pre-tax income (loss) consisted of:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Pretax income (loss):
United States $(10,465) $2,181 $207,884 $67,029 $(743,564)
Foreign 31,608 2,636 42,645 18,956 41,097
-------- ------ -------- ------- ---------
$ 21,143 $4,817 $250,529 $85,985 $(702,467)
======== ====== ======== ======= =========
</TABLE>
Total income tax provision (benefit) consisted of:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Current:
U.S. federal $ - $ - $ - $ 2,216 $ 8,752
Foreign 9,700 1,427 21,001 8,261 14,896
State 26 79 3,684 (453) 1,818
------- ------ ------- ------- ---------
Total current 9,726 1,506 24,685 10,024 25,466
------- ------ ------- ------- ---------
Deferred:
U.S. federal (2,705) 1,985 65,463 16,058 (239,014)
Foreign 2,026 - (5,457) (86) (2,786)
State - 850 5,502 1,557 (39,851)
------- ------ ------- ------- ---------
Total deferred (679) 2,835 65,508 17,529 (281,651)
------- ------ ------- ------- ---------
Total provision
(benefit) $ 9,047 $4,341 $90,193 $27,553 $(256,185)
======= ====== ======= ======= =========
</TABLE>
68
<PAGE>
<PAGE>
NOTES (continued)
The income tax rate on income (loss) differed from the U.S.
federal statutory rate as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0% 35.0% 35.0%
Changes in valuation
allowance 77.5 124.8 5.7 3.3 0.7
Foreign earnings 3.2 10.5 0.4 1.8 0.3
State income taxes,
net of U.S. federal
tax benefit (14.0) 54.2 2.8 0.7 5.5
Depletion (63.0) (45.3) (8.3) (8.8) 1.8
Effect of tax sharing
arrangement with
Hanson - - - - (6.8)
Other, net 4.1 (89.1) 0.4 - -
----- ----- ---- ---- ----
42.8% 90.1% 36.0% 32.0% 36.5%
===== ===== ==== ==== ====
</TABLE>
Beginning March 7, 1997, Peabody Investments, Inc. ("PII"), parent
of Gold Fields, 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, 1997 there were two separate U.S. federal consolidated groups,
Peabody Holding Company and PII.
For the year ended September 30, 1996, Peabody Holding Company was
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, a partnership, which
historically included the operations of Lee Ranch, Cavenham Timber
and Western Rock Quarries. For purposes of these statements, PII
determined its federal and state tax provision as if Lee Ranch was
the only operation included for the year ended September 30, 1996.
69
<PAGE>
<PAGE>
NOTES (continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
consisted of the following as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued long-term reclamation and mine closing liabilities $ 104,777 $ 57,773
Accrued long-term workers' compensation liabilities 99,776 114,280
Postretirement benefit obligations 401,994 358,137
Tax credits and loss carryforwards 84,862 105,100
Obligation to industry fund 39,389 51,410
Others 79,986 74,217
---------- ----------
Total gross deferred tax assets $ 810,784 $ 760,917
---------- ----------
Deferred tax liabilities:
Property, plant, equipment and mine development principally due to
differences in depreciation, depletion and asset writedowns 1,226,002 959,037
Long-term debt, principally due to amortization of debt discount 19,756 35,636
Others 267,787 341,668
---------- ----------
Total gross deferred tax liabilities 1,513,545 1,336,341
---------- ----------
Valuation allowance (68,918) (92,184)
---------- ----------
Net deferred tax liability $ (771,679) $ (667,608)
========== ==========
</TABLE>
Deferred taxes consisted of the following as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
----------
1999 1998
---------- ----------
<S> <C> <C>
Current deferred income taxes $ 8,496 $ (6,036)
Noncurrent deferred income taxes (780,175) (661,572)
--------- ---------
Net deferred tax liability $(771,679) $(667,608)
========= =========
</TABLE>
The Company's deferred tax assets include alternative minimum tax
("AMT") credits of $50.6 million and net operating loss ("NOL")
carryforwards of $34.3 million at March 31, 1999. The AMT credits
have no expiration date and the NOL carryforwards expire in the
year 2019. The AMT credits and NOL carryforwards are offset by a
valuation allowance of $68.9 million.
The Company made no U.S. federal tax payments for the periods
ended March 31, 1999 and May 19, 1998, and $0.1 million for the
year ended March 31, 1998. The Company paid state and local income
taxes totaling $0.7 million for the period ended March 31, 1999,
$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 for the year
ended September 30, 1996. No state or local income tax payments were
made for the period ended May 19, 1998.
70
<PAGE>
<PAGE>
NOTES (continued)
Foreign tax payments were $11.9 million and $0.3 million for the
periods ended March 31, 1999 and May 19, 1998, respectively, $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.
(7) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
------ -------
<S> <C> <C>
Commercial paper $ - $10,080
Short-term credit facility 9,521 342
------ -------
Short-term borrowings $9,521 $10,422
====== =======
</TABLE>
At March 31, 1999, Peabody Resources maintained four, 365-day
corporate debt facilities with several banks totaling $110.0
million Australian dollars (approximately $70.0 million U.S.
dollars). The interest rate is determined at the time of borrowing
based on the Bank Bill Swap Rate plus a margin. At March 31, 1999,
the effective annual interest rate was 5.9 percent.
The amount of interest paid was $1.4 million and $0.2 million for
the periods ended March 31, 1999 and May 19, 1998, respectively,
$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 for the year
ended September 30, 1996.
(8) LONG-TERM DEBT
Long-term debt consisted of the following as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
---------- --------
<S> <C> <C>
Term loans under Senior Credit Facilities $ 840,000 -
9.625% Senior Subordinated Notes
("Senior Subordinated Notes") due 2008 498,649 -
8.875% Senior Notes ("Senior Notes") due 2008 398,887 -
Non-Recourse Debt 333,867 293,922
5.000% Subordinated Note 190,567 192,627
Senior unsecured notes under various agreements 107,143 -
Project finance facility 66,588 14,632
Capital lease obligations 26,881 21,568
Other 70,276 69,105
---------- --------
Total long-term debt 2,532,858 591,854
Less current maturities (62,883) (36,194)
---------- --------
Long-term debt, less current maturities $2,469,975 $555,660
========== ========
</TABLE>
71
<PAGE>
<PAGE>
NOTES (continued)
The Senior Credit facilities, which are secured by a first
priority lien on certain assets of the Company and its domestic
subsidiaries, include a Revolving Credit Facility that provides
for aggregate borrowings of up to $150.0 million and letters of
credit of up to $330.0 million. During the period from May 20,
1998 to March 31, 1999, the Company had no borrowings outstanding
under the Revolving Credit Facility. Interest rates on the
revolving loans under the Revolving Credit Facility are based on
the Base Rate (as defined in the Senior Credit Facilities) or
LIBOR (as defined in the Senior Credit Facilities) at the
Company's option. The applicable rate was 9.0 percent at March 31,
1999. The Revolving Credit Facility commitment matures in fiscal
2005. During fiscal 1999, the Company made optional prepayments of
$75.0 million on the Senior Credit Facilities, which it applied
against mandatory Term Loan A and B payments in order of maturity,
and mandatory payments of $5.0 million on Term Loan A. Scheduled
payments resume in fiscal 2001 ($10.0 million); the majority of
the remaining payments occur in fiscal 2006 (48.6 percent) and
fiscal 2007 (15.2 percent).
The Senior Subordinated Notes are general unsecured obligations of
the Company and are subordinate in right of payment to all
existing and future senior debt (as defined), including borrowings
under the Senior Credit Facilities and the Senior Notes. The
Senior Notes are general unsecured obligations of the Company,
rank senior in right of payment to all subordinated indebtedness
(as defined) and rank equally in right of payment with all current
and future unsecured indebtedness of the Company.
On October 1, 1998, the Company entered into two interest rate
swap agreements to fix the interest cost on $500.0 million of
long-term debt outstanding under the Term Loan Facility. The
Company will pay a fixed rate of approximately 7.0 percent on
$300.0 million of such long-term debt for a period of three years,
and on $200.0 million of such long-term debt for two years.
The indentures governing the Senior Notes and Senior Subordinated
Notes permit the Company and its Restricted Subsidiaries (which
include all subsidiaries of the Company except Citizens Power and
its subsidiaries) to incur additional indebtedness, including
secured indebtedness, subject to certain limitations. In addition,
among other customary restrictive covenants, the indentures
prohibit the Company and its Restricted Subsidiaries from creating
or otherwise causing any encumbrance or restriction on the ability
of any Restricted Subsidiary that is not a Guarantor to pay
dividends or to make certain other upstream payments to the
Company or any of its Restricted Subsidiaries (subject to certain
exceptions). The Revolving Credit Facility and related term loans
also contain certain restrictions and limitations including but
not limited to financial covenants that will require the Company
to maintain and achieve certain levels of financial performance
and limit the payment of cash dividends and similar restricted
payments. In addition, the Senior Credit Facilities prohibit the
Company from allowing its Restricted Subsidiaries (which include
all Guarantors) to create or otherwise cause any encumbrance or
restriction on the ability of any such Restricted Subsidiary to
pay any dividends or make certain other upstream payments subject
to certain exceptions.
Non-recourse debt is payable in installments through fiscal 2017.
The weighted average interest rate is 7.6 percent.
The 5.0 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 12.0 percent.
Interest and principal are payable each March 1 and scheduled
principal payments of $20.0 million per year are due from 2000
through 2006 with any unpaid amounts due March 1, 2007. The 5.0
percent Subordinated Note is expressly subordinated in right of
payment to all prior indebtedness (as defined), including
borrowings under the Senior Credit Facility and the Senior Notes.
The senior unsecured notes represent obligations of Black Beauty
and include $47.1 million of senior notes and three series of
notes with an aggregate principal amount of $60.0 million. The
senior notes bear interest at 9.2 percent, payable quarterly, and
are prepayable in whole or in part at any time, subject to certain
make-whole provisions. The three series of notes include Series A,
B and C Notes, totaling $45.0 million, $5.0 million, and $10.0
million, respectively. The Series A Notes bear interest at an
annual rate of 7.5 percent and are due in fiscal 2008. The Series
B Notes bear interest at an annual rate of 7.4 percent and are due
in fiscal 2004. The Series C Notes bear interest at an annual rate
of 7.4 percent and are due in fiscal 2003.
<PAGE>
Peabody Resources entered into a project finance facility in 1998
to finance the construction of its 37.0 percent interest in the
Bengalla mine. The facility, which is denominated in U.S. dollars,
expires in 2010 and the maximum drawdown is $88.3 million. In
accordance with the facility agreement, the loan will be repaid
from the net proceeds derived from coal sales from the Bengalla
Mine. There were borrowings against the facility of $48.8 million
and $3.2 million for the periods ended March 31, 1999 and May 19,
1998, respectively, with an effective annual interest rate of
approximately
72
<PAGE>
<PAGE>
NOTES (continued)
6.75 percent for both periods. In fiscal 1998, there were
borrowings of $14.6 million against the facility with an effective
annual interest rate of approximately 7.0 percent.
Capital lease obligations are payable in installments through 2009
with a weighted average effective interest rate of 4.4 percent.
Other, principally notes payable, are due in installments through
2002 with a weighted average effective interest rate of 4.4
percent.
The aggregate amounts of long-term debt maturities subsequent to
March 31, 1999 are as follows:
2000 $ 62,883
2001 62,093
2002 141,304
2003 144,411
2004 210,413
2005 and thereafter 1,911,754
----------
$2,532,858
==========
The amount of interest paid was $138.8 million and $0.5 million
for the periods ended March 31, 1999 and May 19, 1998,
respectively, $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 for the year ended September 30, 1996.
(9) WORKERS' COMPENSATION OBLIGATIONS
The workers' compensation obligations consisted of the following
as of March 31:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
-------- --------
<S> <C> <C>
Occupational disease costs $154,311 $205,198
Traumatic injury claims 90,361 81,614
State assessment taxes 1,414 1,785
-------- --------
Total obligations 246,086 288,597
Less current portion (38,542) (39,927)
-------- --------
Noncurrent obligations $207,544 $248,670
======== ========
</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, 1999, the
Company had $22.2 million in letters of credit and $80.5 million
in surety bonds outstanding to secure workers' compensation
obligations.
In Australia, 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.
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 charge of $11.1 million for the period
ended March 31, 1999 and a benefit of $0.4 million for the period
ended May 19, 1998, a benefit of $9.4 million for the year ended
March 31,
73
<PAGE>
<PAGE>
NOTES (continued)
1998, a benefit of $3.8 million for the six months ended March 31,
1997 and a benefit of $10.3 million for the year ended September
30, 1996. The benefits recorded in prior years were primarily
attributable to favorable loss experience factors and changes 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, 1999 were based on
a 7.25 percent per annum interest discount rate and a 3.5 percent
estimate for the annual rate of inflation, and the projections at
March 31, 1998 were based on a 7.5 percent per annum interest
discount rate and a 4.0 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 7.25 and 7.5
percent per annum at March 31, 1999 and 1998, respectively.
(10) 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 United Mine Workers of America under the
Western Surface Agreement of 1996 (the "Western Plan"). Peabody
Holding Company and Gold Fields sponsor 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. Powder
River Coal Company, a wholly owned subsidiary, sponsored a defined
benefit pension plan for its salaried employees that was merged
into the Peabody Plan effective January 1, 1999. Pension benefits
were not affected by the merger. Lee Ranch sponsors two 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 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
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 Employee Retirement Income
Security Act of 1974 minimum funding standard. As a result of the
acquisition of the Predecessor Company, the Company entered into
an agreement with the Pension Benefit Guaranty Corporation which
requires the Company to maintain minimum funding requirements.
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.
74
<PAGE>
<PAGE>
Net periodic pension costs included the following components:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Service cost for benefits
earned $ 9,098 $ 2,323 $ 10,282 $ 5,361 $ 10,331
Interest cost on projected
benefit obligation 29,640 7,543 33,095 16,447 30,574
Expected return on
plan assets (48,546) (9,125) (50,755) (7,969) (29,335)
Other amortizations and
deferrals 12,083 - 16,135 (8,865) (1,437)
-------- ------- -------- ------- --------
Net periodic pension costs $ 2,275 $ 741 $ 8,757 $ 4,974 $ 10,133
======== ======= ======== ======= ========
</TABLE>
During the period ended March 31, 1999, the Company made an
amendment to phase out the Peabody Plan beginning January 1, 2000.
This plan amendment resulted in a curtailment gain of $7.1
million. During fiscal years 1998 and 1996, early retirement and
reduction in force programs were offered to certain employees as
part of company-wide restructuring and cost reduction efforts. As
a result of the special termination benefits offered, charges of
$0.6 million and $15.3 million were recognized during fiscal years
1998 and 1996, respectively, in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits."
75
<PAGE>
<PAGE>
NOTES (continued)
The following summarizes the change in benefit obligation, change
in plan assets and funded status of the Company's plans:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
-------- --------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $496,037 $460,426
Service cost 9,098 10,282
Interest cost 29,640 33,095
Plan amendments (5,803) -
Special termination benefits - 615
Benefits paid (23,235) (26,037)
Curtailments (20,701) -
Actuarial loss 7,831 (15,326)
-------- --------
Benefit obligation at end of year 492,867 463,055
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 473,922 414,760
Actual return on plan assets 18,296 74,457
Employer contributions 5,402 5,489
Benefits paid (23,235) (26,037)
-------- --------
Fair value of plan assets at end of year 474,385 468,669
-------- --------
Funded Status (18,482) 5,614
Unrecognized actuarial gain (loss) 12,262 (7,518)
Unrecognized prior service cost (5,683) (6,624)
-------- --------
Accrued pension expense $(11,903) $ (8,528)
======== ========
Amounts recognized in the balance sheets
Prepaid benefit cost $ 488 $ 1,052
Accrued benefit liability (15,434) (17,815)
Intangible asset - 4,892
Additional minimum pension liability 3,043 3,343
-------- --------
Net amount recognized $(11,903) $ (8,528)
======== ========
</TABLE>
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the pension plans with
accumulated benefit obligations in excess of plan assets were
$57.0 million, $56.9 million, and $43.1 million, respectively, as
of March 31, 1999 and $50.6 million, $48.6 million, and $31.1
million, respectively, as of March 31, 1998.
The provisions of SFAS No. 87, "Employers' Accounting for
Pensions," require the recognition of an additional minimum
liability and related intangible asset to the extent that
accumulated benefits exceed plan assets. At March 31, 1999 and
1998, the Company recorded adjustments of $3.0 million and $8.2
million, respectively, which were required to reflect the
Company's minimum liability.
76
<PAGE>
<PAGE>
NOTES (continued)
The assumptions used to determine the above projected benefit
obligation at the end of each fiscal period were as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Discount rate 7.125% 7.5%
Rate of compensation increase 3.75% 3.75%
Expected rate of return on plan assets 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 United Mine Workers of
America other than those covered by the Western Plan. Benefits
under the United Mine Workers of America 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 $1.1 million and $0.6 million for the periods ended March 31,
1999 and May 19, 1998, $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 for the year ended September 30, 1996.
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. Effective
January 1, 2001, the Company will increase the matching
contribution to a maximum of 6 percent of a participant's salary.
The expense for these plans was $4.1 million and $0.6 million for
the periods ended March 31, 1999 and May 19, 1998, respectively,
$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 for the year
ended September 30, 1996.
The amount contributed and expensed by Peabody Resources to
superannuation funds was $0.9 million and $0.4 million for the
periods ended March 31, 1999 and May 19, 1998, respectively, $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 for the year
ended September 30, 1996.
(11) 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.
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.
77
<PAGE>
<PAGE>
NOTES (continued)
Net periodic postretirement benefits costs for the period ended
March 31 included the following components:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Service cost for
benefits earned $ 4,750 $ 897 $ 6,569 $ 3,540 $ 12,094
Interest cost on
accumulated
postretirement
benefit obligation 60,519 10,075 69,614 34,068 63,806
Prior service cost
amortization (625) (242) (10,071) (9,625) (20,855)
------- ------- -------- ------- --------
Net periodic
postretirement
benefit costs $64,644 $10,730 $ 66,112 $27,983 $ 55,045
======= ======= ======== ======= ========
</TABLE>
The following table sets forth the plans' combined funded status
reconciled with the amounts shown in the balance sheets:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
----------- ---------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 995,265 $ 947,024
Service cost 4,750 6,569
Interest cost 60,519 69,614
Plan amendments (21,777) -
Benefits paid (49,088) (48,663)
Actuarial loss 19,033 5,277
----------- ---------
Benefit obligation at end of year $ 1,008,702 $ 979,821
----------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year - -
Employer contributions 49,088 48,663
Benefits paid (49,088) (48,663)
----------- ---------
Fair value of plan assets at end of year - -
----------- ---------
Funded Status $(1,008,702) $(979,821)
Unrecognized actuarial loss 19,076 70,704
Unrecognized prior service cost (21,777) (16,057)
----------- ---------
Accrued postretirement benefit obligation $(1,011,403) $(925,174)
=========== =========
</TABLE>
78
<PAGE>
<PAGE>
NOTES (continued)
The assumptions used to determine the accumulated postretirement
benefit obligation as of March 31 were as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
1999 1998
----------- -----------
<S> <C> <C>
Discount rate 7.125% 7.5%
Salary increase rate for life insurance benefit 3.75% 3.75%
Health care trend rate:
Pre-65 6.95% down to 7.6% down to
4.75% over 4 years 5.0% over 5 years
Post-65 6.13% down to 6.5% down to
4.75% over 4 years 5.0% over 5 years
Medicare 5.68% down to 5.9% down to
4.75% over 4 years 5.0% over 5 years
</TABLE>
Assumed health care cost trend rates have a significant effect on
the amounts reported for health care plans. A one-percentage-point
change in the assumed health care cost trend would have the following
effects:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
--------------- ---------------
<S> <C> <C>
Effect on total service and
interest cost components $11,211 ($10,980)
Effect on postretirement
benefit obligation $149,230 ($144,158)
</TABLE>
Retirees formerly employed by certain subsidiaries and their
predecessors, who were members of the United Mine Workers of
America, last worked before January 1, 1976 and were receiving
health benefits on July 20, 1992, 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
Federal Abandoned Mine Lands funds will be used to pay benefits
to orphaned retirees through 2004.
The Company has recorded an actuarially determined liability
representing the amounts anticipated to be due for the United
Mine Workers of America Combined Fund. The "Obligation to
industry fund" reflected in the balance sheets at March 31, 1999
and 1998 was $63.1 million and $97.0 million, respectively. The
current portion related to this obligation reflected in "Accounts
payable and accrued expenses" in the balance sheets at March 31,
1999 and 1998 was $9.2 million and $8.8 million, respectively.
Expense of $4.5 million was recognized for the period ended March
31, 1999 due to the interest discount accrual. A benefit of $0.9
million was recognized for the period ended May 19, 1998 which
included amortization of an actuarial gain of $1.7 million, net
of the interest discount accrual of $0.8 million. 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 the 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 the 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 the interest discount
accrual of $7.9 million.
79
<PAGE>
<PAGE>
NOTES (continued)
In January 1999, the Company adopted reductions to the salaried
employee medical coverage levels for employees retiring before
January 1, 2003. For employees retiring on or after January 1,
2003 the current medical plan is replaced with a medical premium
reimbursement plan. This plan change does not apply to Powder
River or Lee Ranch salaried employees. The change in the retiree
health care plan resulted in a $22.4 million reduction to the
salaried retiree health care liability. The Company is
recognizing the effect of the plan amendment over nine years
beginning January 1, 1999. Therefore, the effect for the three
months ended March 31, 1999 was $0.6 million.
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
United Mine Workers of America Benefit Trust ("1993 Plan") to
provide health benefits for retired miners not covered by the
Coal Act. The 1992 Plan and the 1993 Plan qualify under SFAS No.
106 as multiemployer benefit plans which allows the Company to
continue to recognize expense as contributions are made. The
amounts expensed related to these funds were $0.7 million and
$0.2 million for the periods ended March 31, 1999 and May 19,
1998, $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
for the year ended September 30, 1996.
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 surety bonds at March 31, 1999 of $77.4 million and
outstanding letters of credit at March 31, 1998 of $91.2 million.
The surety bonds represent security for a portion of the
postretirement liability included on the balance sheets.
(12) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 10,000,000 authorized shares of $0.01 par value
preferred stock. The Board of Directors is authorized to issue
any or all of the preferred stock. Shares of preferred stock are
exchangeable into shares of Class A common stock upon resolution
by the Board of Directors.
COMMON STOCK
The Company has 30,000,000 authorized shares of $0.01 par value
Class A common stock, and 3,000,000 authorized shares of $0.01
par value Class B common stock. Holders of the Class A and Class
B common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders.
Subject to the rights of the holders of the preferred stock,
holders of Class A and Class B common stock are entitled to
ratably receive such dividends as may be declared by the Board of
Directors. In the event of liquidation, dissolution or winding up
of the Company, holders of the Class A common stock are entitled
to share ratably in the distribution of all assets remaining
after payment of liabilities, subject to the rights of the
preferred stockholders. Holders of Class B common stock have a
junior liquidation right to the holders of Class A common stock.
STOCK OPTION PLAN
Effective May 19, 1998, the Company adopted the "1998 Stock
Purchase and Option Plan for Key Employees of P&L Coal Holdings
Corporation" (the "Plan"), making 4,027,800 shares of the
Company's common stock available for grant. The Board of
Directors may provide such grants in the form of either non-
qualified or incentive stock options.
During the period ended March 31, 1999, the Company granted
3,795,873 options to purchase Class A common stock, 931,885 of
which are incentive stock options that vest at a rate of 20
percent per year for five years, and 2,863,988 of non-qualified
stock options that vest in full or in part at a rate of 20
percent per year based upon the attainment of performance goals
determined by the Board of Directors.
80
<PAGE>
<PAGE>
NOTES (continued)
A summary of the outstanding options as of March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Weighted Average Fair Value of
Shares Exercise Price Options Granted
--------- ---------------- ----------------
<S> <C> <C> <C>
Beginning balance -
Granted 3,795,873 $20.00 $6.60
Exercised - -
Forfeited - -
--------- ------
Options outstanding at March 31, 1999 3,795,873 $20.00
========= ======
Options exercisable at March 31, 1999 - $ -
========= ======
</TABLE>
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for non-qualified or
incentive stock options granted under the Plan. Had compensation
cost been determined for the Company's non-qualified or incentive
stock options based on the fair value at the grant dates
consistent with the alternative method set forth under SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net
income would have decreased by approximately $3.3 million for the
period ended March 31, 1999.
(13) RELATED PARTY TRANSACTIONS
The "Receivables from affiliates, net" reflected in the balance
sheet at March 31, 1998 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.
In fiscal 1998, the Company paid a $65.1 million dividend and
provided a $141.0 million loan to a subsidiary of The Energy
Group with a five year term at a 5.0 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 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 10.0
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 for the year ended
September 30, 1996.
(14) CONTRACT RESTRUCTURINGS
The Company has periodically agreed to terminate coal supply
agreements in return for payments by the customer. The amounts
included in "Other revenues" were $5.3 million for the period
ended March 31, 1999, $49.3 million for the year ended March 31,
1998, $11.6 million for the six months ended March 31, 1997 and
$22.0 million for the year ended September 30, 1996. There were
no gains related to coal supply agreement terminations for the
period ended May 19, 1998.
(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 under various agreements 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, and which are supported by
letters of credit
81
<PAGE>
<PAGE>
NOTES (continued)
from a commercial bank. The Company's reimbursement obligation to
the commercial bank is in turn supported by a letter of credit
totaling $45.8 million.
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 $16.2 million and $33.6 million for the periods ended
March 31, 1999 and May 19, 1998, respectively, ($17.3 million)
for the year ended March 31, 1998, $11.7 million for the six
months ended March 31, 1997 and $14.2 million for the year ended
September 30, 1996, related to the forward currency contracts.
The Company had forward currency contracts outstanding at March
31, 1999 and 1998 of $217.1 million and $244.0 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
SFAS 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 carrying values 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 5.0 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.
82
<PAGE>
<PAGE>
NOTES (continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are summarized as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------
1999 1998
---------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Notes receivable $ 4,754 $ 4,754 $182,671 $200,923
Note receivable from affiliate - - 141,000 137,161
Interest rate swaps - 6,764 - -
Long-term debt 2,532,858 2,629,601 591,854 642,290
Deferred purchase obligation 30,331 30,039 33,443 35,309
</TABLE>
The fair value of the financial instruments related to power
trading activities as of March 31, 1999, which include energy
commodities, and average fair value of those instruments held are
set forth below:
<TABLE>
<CAPTION>
Fair Value
-----------------------------
Assets Liabilities
---------- -----------
<S> <C> <C>
Forward contracts $1,031,931 $632,696
Future contracts - 32
Option contracts 1,277 1,675
Swap agreements 2,093 1,660
---------- --------
Total $1,035,301 $636,063
========== ========
</TABLE>
The approximate gross contract or notional amounts of financial
instruments are as follows:
<TABLE>
<CAPTION>
Assets Liabilities
---------- -----------
<S> <C> <C>
Forward contracts $1,750,108 $1,049,779
Future contracts - 7,875
Option contracts 1,530 1,728
Swap agreements 5,330 -
</TABLE>
The net gain arising from trading and price risk management
activities was $36.9 million and $1.7 million for the periods
ended March 31, 1999 and May 19, 1998, respectively, and $26.4
million for the year ended March 31, 1998. The change in
unrealized gain from power trading activities for the period
ended March 31, 1999 was $10.1 million.
(17) COMMITMENTS AND CONTINGENCIES
Environmental claims have been asserted against a subsidiary of
the Company at 18 sites in the United States. Some of these
claims are based on the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, and on
similar state statutes. The majority of these sites are related
to activities of former subsidiaries of the Company.
83
<PAGE>
<PAGE>
NOTES (continued)
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 balance sheets. The undiscounted liabilities for
environmental cleanup-related costs recorded in the balance
sheets at March 31, 1999 and 1998 were $61.8 million and $68.6
million, respectively. This amount represents those costs that
the Company believes are probable and reasonably estimable.
In addition, the Company at times becomes a party to claims,
lawsuits, arbitration proceedings and administrative procedures
in the ordinary course of business. Management believes that the
ultimate resolution of pending or threatened proceedings will not
have a material effect on the financial position, results of
operations or liquidity of the Company.
At March 31, 1999, purchase commitments for capital expenditures
were approximately $139.4 million.
84
<PAGE>
<PAGE>
NOTES (continued)
(18) SEGMENT INFORMATION
The Company operates primarily in the coal industry. "Other" data
represents an aggregation of the remainder of the Company's
business including Citizens Power and the Company's other non-
mining entities. The Company's industry and geographic data for
continuing operations are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------------------------
Period Ended Period Ended Year Ended Six Months Ended Year Ended
March 31, 1999 May 19, 1998 March 31, 1998 March 31, 1997 September 30, 1996
-------------- ------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues:
U.S. Mining $1,903,214 $269,597 $1,987,719 $ 942,954 $1,964,278
Non U.S. Mining 145,687 20,882 224,053 120,539 227,415
Other 45,325 1,929 32,690 600 1,893
---------- -------- ---------- ---------- ----------
$2,094,226 $292,408 $2,244,462 $1,064,093 $2,193,586
========== ======== ========== ========== ==========
Operating profit (loss):
U.S. Mining $ 132,027 $ 6,929 $ 211,967 $ 80,482 $ (700,097)
Non U.S. Mining 32,676 2,950 44,812 22,314 48,539
Other 14,018 (2,507) 12,408 (701) 262
---------- -------- ---------- ---------- ----------
$ 178,721 $ 7,372 $ 269,187 $ 102,095 $ (651,296)
========== ======== ========== ========== ==========
Depreciation, depletion
and amortization:
U.S. Mining $ 155,220 $ 22,475 $ 169,623 $ 84,094 $ 165,256
Non U.S. Mining 23,962 3,041 30,546 17,636 32,597
Other 5,009 702 2,471 - -
---------- -------- ---------- ---------- ----------
$ 184,191 $ 26,218 $ 202,640 $ 101,730 $ 197,853
========== ======== ========== ========== ==========
Total assets:
U.S. Mining $5,141,661 $4,684,518
Non U.S. Mining 494,123 461,745
Other 1,388,147 1,196,746
---------- ----------
$7,023,931 $6,343,009
========== ==========
Revenues:
United States $1,948,539 $271,526 $2,020,409 $ 943,554 $1,966,171
Foreign 145,687 20,882 224,053 120,539 227,415
---------- -------- ---------- ---------- ----------
$2,094,226 $292,408 $2,244,462 $1,064,093 $2,193,586
========== ======== ========== ========== ==========
Operating profit (loss):
United States $ 146,045 $ 4,422 $ 224,375 $ 79,781 $ (699,835)
Foreign 32,676 2,950 44,812 22,314 48,539
---------- -------- ---------- ---------- ----------
$ 178,721 $ 7,372 $ 269,187 $ 102,095 $ (651,296)
========== ======== ========== ========== ==========
Total assets:
United States $6,529,808 $5,881,264
Foreign 494,123 461,745
---------- ----------
$7,023,931 $6,343,009
========== ==========
</TABLE>
85
<PAGE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names, ages as of March 31, 1999 and current
positions with us and our subsidiaries of our executive officers and
Directors. The terms of our Directors will expire upon the election and
qualification of successors at the annual meeting of stockholders.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Irl F. Engelhardt 52 Chairman, Chief Executive Officer and Director
Richard M. Whiting 44 President, Chief Operating Officer and Director
W. Howard Carson 48 Chief Commercial Officer
Roger B. Walcott, Jr. 43 Executive Vice President
Mark Maisto 43 Chief Executive Officer and President, Citizens Power
Christopher G. Farrand 58 Vice President, Corporate Affairs
Larry H. Fox 59 Vice President-Powder River Basin Operations
George J. Holway 49 Vice President, Chief Financial Officer
Robert D. Humphris 56 Managing Director-Australia
Jeffery L. Klinger 52 Vice President, Legal Services and Secretary
Richard A. Navarre 38 Vice President, Sales & Marketing and President of
Peabody COALSALES Company
Sharon K. Schergen 42 Vice President-Human Resources
Roger H. Goodspeed 48 Director
Henry E. Lentz 54 Director
Alan H. Washkowitz 58 Director
</TABLE>
Irl F. Engelhardt served as President and Chief Executive Officer of
Peabody from 1990 to 1995 and Chairman and Chief Executive Officer of
Peabody since 1993, and has been a Director of Peabody since June 1998.
Since joining Peabody in 1979, he has held various officer level
positions 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 Peabody in January 1998 and has been a Director of Peabody
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 Peabody 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 is
currently Chairman of the Bituminous Coal Operators' Association and
Chairman of the National Mining Association's Safety and Health
Committee.
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 Peabody in 1979 from Arthur Andersen and has held numerous
financial positions including Vice President of Accounting and Vice
President of Corporate Planning for Peabody. Mr. Carson holds an MBA
from Saint Louis University.
86
<PAGE>
<PAGE>
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.
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 Peabody 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 MBA
from New York University.
Christopher G. Farrand has been Vice President of Corporate Affairs of
Peabody 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 Peabody Coal
Company and Peabody Holding Company. Mr. Farrand joined Peabody as
Director of Corporate Planning for Peabody Coal Company in 1978. Prior
to working for Peabody, Mr. Farrand held several positions in the
United States 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.
Larry H. Fox was named Vice President-Powder River Basin Operations in
June 1998. Prior to that, he was President of Powder River Coal Company
since 1989. Mr. Fox previously served as Vice President of Powder River
Coal Company and General Manager of North Antelope Coal Company. Prior
to that he also held several mine operations positions within Peabody,
including Mine Superintendent at the Big Sky mine in Montana and
Director of Operations for the Rocky Mountain Division. He joined
Peabody 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 our mining business development and land functions. After first
joining Peabody in 1980, Mr. Holway served in several financial
positions at Peabody Holding Company including Vice President and
Controller from 1990 to 1992. In 1992, he left Peabody to become Chief
Financial Officer of Zeigler Coal Holding Company, a position he held
until he rejoined Peabody in November 1996. Prior to joining the
Peabody in 1980, Mr. Holway was employed by Arthur Andersen & Co. Mr.
Holway is a CPA and holds an MBA from Saint Louis University.
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 Chairman of the
New South Wales Minerals Council and past Chairman of the Australian
Coal Association and the Newcastle Coal Shippers. He is a member of the
Coal Industry Advisory Board of the International Energy Agency and the
State Minerals Advisory Council.
Jeffery L. Klinger was named 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 Peabody Coal Company and joined Peabody as Director
of Legal and Public Affairs, Indiana Division of Peabody Coal Company
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 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 Peabody. He
joined Peabody 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.
87
<PAGE>
<PAGE>
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 Peabody 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 Company. Ms. Schergen is a member of the
National Mining Association's Human Resource Committee.
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 percent 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 MBA from the University of California, Los
Angeles.
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 Sugar Company. Mr. Lentz holds an
MBA, with honors, from the Wharton School of the University of
Pennsylvania.
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' 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 MBA from Harvard University and a
JD from Columbia University.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation for our chief
executive officer and the four most highly compensated executive
officers (the "Named Executive Officers") other than the chief
executive officer for their services to Peabody during fiscal 1999 and
1998.
88
<PAGE>
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------- -------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Fiscal Salary Bonus Compensation Award(s) Options/SARs Payments Compensation
Name and Principal Position Year ($) ($) ($) (#)<F1> (#)<F2> ($)<F3> ($)<F4>
- --------------------------- ------ ------- ------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Irl F. Engelhardt 1999 681,264 700,000 ---- 154,639 499,855 441,240 23,998
Chairman, Chief 1998 550,000 412,500 ---- ---- ---- 42,644 15,754
Executive Officer and
Director
Richard M. Whiting 1999 385,834 400,000 ---- 51,546 179,828 168,051 12,238
President, Chief Operating 1998 244,851 182,501 ---- ---- ---- 12,326 7,058
Officer and Director
W. Howard Carson 1999 312,633 325,000 ---- 51,546 179,828 169,716 37,055
Chief Commercial Officer 1998 225,750 130,368 ---- ---- ---- 20,391 6,773
Roger B. Walcott, Jr. 1999 291,667 350,000 ---- ---- 179,828 ---- 8,374
Executive Vice President 1998 ---- ---- ---- ---- ---- ---- ----
Mark Maisto 1999 282,485 450,000 ---- ---- 179,828 ---- 10,650
President and Chief 1998 208,333 300,000 ---- ---- ---- ---- 9,167
Executive Officer,
Citizens Power LLC
<FN>
- ------------
<F1> Represents number of shares of our Class B common stock granted
to executives as of May 19, 1998.
<F2> Represents number of shares of our Class A common stock
underlying options issued as of May 19, 1998.
<F3> Represents certain long-term incentive payments earned during the
fiscal year that relate to Predecessor Company compensation
plans.
<F4> Annual matching contributions to qualified and non-qualified
savings and investment plans, group term life insurance and
relocation benefits for Mr. Carson in fiscal 1999.
</TABLE>
Pension Benefits
Our Salaried Employees Retirement Plan, or 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 percent 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 (1) 1.112 percent 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 (2) 1.5
percent 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.
We announced in February 1999 that the pension plan would be phased out
beginning January 1, 2001. Certain transition benefits were introduced
based on the age and/or service of the employee at December 31, 2000:
(1) employees age 50 or older will continue to accrue service at 100
percent; (2) employees between the ages of 45 and 49 or with 20 years
or more of service will accrue service at the rate of 50 percent for
each year of service worked after December 31, 2000; and (3) employees
under age 45 with less than 20 years of service will have their pension
benefit frozen. In all cases, final average earnings for retirement
plan purposes will be capped at December 31, 2000 levels.
89
<PAGE>
<PAGE>
We have three supplemental retirement plans, which provide pension
benefits to executives whose pay exceeds legislative limits for
qualified pension plans.
The estimated annual benefits payable upon retirement at age 62, the
normal retirement age, for the CEO and named executive officers are as
follows:
Irl F. Engelhardt $411,686
Richard M. Whiting 203,861
W. Howard Carson 172,113
Roger B. Walcott, Jr. 12,911
Mr. Maisto is not eligible for the pension plan.
Other Benefit Plans
In addition to the pension plan, we maintain various other benefit
plans covering employees and retirees. We announced in February 1999
that we were restructuring several of these plans over the next four
years. The benefits associated with the medical plan and savings and
long term investment plan will be most significantly impacted.
The changes to the medical plan include the following as of January 1,
2000: (1) a decrease in employee/retiree contributions; (2) an increase
in medical contributions for dependents; (3) a decrease in medical
coverage for certain expenses; (4) additional medical plan options; and
(5) changes to dependent eligibility rules for retirees. In addition,
the medical plan was restructured so that employees leaving Peabody on
or after January 1, 2003 (age 55 or older with ten years of service)
will be covered under a medical premium reimbursement plan instead of
the current medical plan.
Effective January 1, 2001, we will increase the company match for the
savings and long-term investment plan, and beginning with fiscal 2000,
we will also add a new performance contribution feature.
Management Incentive Compensation Plans
We have established an incentive compensation plan that provides a
bonus to selected employees based on the participant's base salary,
target level, and the attainment of certain organizational and
individual targets. The organizational targets are a ratio of net debt
(long-term debt minus cash) divided by earnings before interest, income
taxes and depreciation, depletion and amortization expense, or EBITDA.
Employment Agreements
We have entered into employment agreements with Mr. Engelhardt, the
Chairman and Chief Executive Officer, or CEO, and Messrs. Whiting,
Carson, Walcott, Maisto and eight other key executive officers. The
CEO's employment agreement provides for an initial term of three years
and the other executives' employment agreements provide for initial
terms of two years, each of which extend thereafter on a day-to-day
basis such that the CEO's employment agreement continually has a three
year term and the other executives, subsequent to their initial one
year of employment, continually have a one-year term. Upon a
termination without cause or resignation for good reason, the executive
is entitled to the following benefits during the continuation period,
described below: (1) base salary; (2) 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 percent of his
final base salary in each of the three years following such
termination; (3) 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 (4) continuation of
qualified and nonqualified pension, life insurance, medical,
hospitalization and other benefits; provided, however, that we 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" is three years for the CEO and for the other
executives, the balance of the initial two-year term if termination
occurs during the first year of the initial term, or for a period of
one year after. The employment agreements provide for confidentiality
during employment and at all times thereafter, and include a
noncompetition and nonsolicitation agreement that is effective during
the employment term and for one year thereafter.
90
<PAGE>
<PAGE>
Equity Agreements
The executives and 20 other employees acquired, in the aggregate,
approximately 3 percent of our initial fully-diluted equity, issued as
Class B common stock in connection with our acquisition on May 19,
1998. With respect to these Class B shares, we provided 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.
Stock Option Plan
We adopted the 1998 Stock Purchase and Option Plan for Key Employees,
under which we granted options to certain employees to purchase shares
of our common stock. We granted the executives who received Class B
common stock and other employees our options exercisable for common
stock to purchase an aggregate of 7 percent of our initial fully-
diluted equity; 50 percent of the options were granted as "time
options" in the form of Incentive Stock Options (as defined in Section
422 of the Internal Revenue Code), to the extent permitted, and 50
percent of the options were granted in the form of nonqualified stock
options as "performance options." Time options become exercisable with
respect to 20 percent 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 (1) death, (2)
disability (3) a change of control or (4) a recapitalization event.
Performance options 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 percent of the
shares subject to the performance options, on each of the first five
anniversaries of the date of May 19, 1998, 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 (1) a change of control, (2) a recapitalization event
or (3) an initial public offering. "Change of control," for the
purposes of this section, means an acquisition of all or substantially
all of our direct and indirect assets by merger, consolidation,
recapitalization event, stock or asset sale or otherwise, whereby
immediately following any such transaction (1) Lehman Merchant Banking
owns less than 8.1 million of our outstanding voting securities or (2)
any person individually owns more of our then outstanding voting
securities entitled to vote generally than Lehman Merchant Banking.
"Recapitalization event" means 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.
We granted these executives performance-based options exercisable for
common stock to purchase an aggregate of 7 percent of our initial
fully-diluted equity. Options vest upon the earlier of (1) 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 (2) nine and one-half years from the date
of grant. Vesting of options accelerate: (1) upon completion of an
initial public offering during our first 36 months following the
closing of our acquisition, at least 2.5 percent of these options shall
vest and the balance shall vest in accordance with the achievement of
certain financial performance targets; or (2) upon a change of control
or a recapitalization event during the first 36 months following the
closing of our acquisition, at least 5 percent of these options shall
vest.
The options have an exercise price of $20.00 per share of the Class A
common stock.
The options have a 10-year term; provided, however, that exercisable
non-performance based options expire earlier upon termination of
employment as follows: (1) upon termination for cause or a resignation
without good reason, immediately upon such termination; or (2) upon
termination without cause, resignation for good reason, death,
disability or retirement, one year after termination of employment.
Unexercisable options terminate upon termination of employment, unless
acceleration in connection with such termination is explicitly provided
for.
Upon a change of control, the Board of Directors may terminate the
options, so long as the executives are cashed out at the change of
control price or are permitted to exercise their options prior to the
change of control, except as otherwise provided.
91
<PAGE>
<PAGE>
Stock options granted to the CEO and the named executive officers
during 1999, and the number of exercisable and unexercisable stock
options as of March 31, 1999 are as follows:
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential realizable value at assumed
annual rates of stock price
Individual grants appreciation for option term
- ---------------------------------------------------------------------------------------- --------------------------------------
Number of Percent of total
securities options/SARs
underlying granted to Exercise or
options/SARs employees in fiscal base price Expiration 5% 10%
Name granted (#) year ($/Sh) date ($) ($)
- ---------------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Irl F. Engelhardt
Time 110,000 11.8% 20.00 5/19/08 1,383,569 3,506,228
Performance 110,000 11.6% 20.00 5/19/08 1,383,569 3,506,228
Superperformance I 160,000 11.8% 20.00 5/19/08 2,012,464 5,099,968
Superperformance II 119,855 21.6% 20.00 5/19/08 1,507,524 3,820,354
Richard M. Whiting
Time 39,962 4.3% 20.00 5/19/08 502,638 1,273,781
Performance 39,962 4.2% 20.00 5/19/08 502,638 1,273,781
Superperformance I 59,942 4.4% 20.00 5/19/08 753,944 1,910,639
Superperformance II 39,962 7.2% 20.00 5/19/08 502,638 1,273,781
W. Howard Carson
Time 39,962 4.3% 20.00 5/19/08 502,638 1,273,781
Performance 39,962 4.2% 20.00 5/19/08 502,638 1,273,781
Superperformance I 59,942 4.4% 20.00 5/19/08 753,944 1,910,639
Superperformance II 39,962 7.2% 20.00 5/19/08 502,638 1,273,781
Roger B. Walcott, Jr.
Time 39,962 4.3% 20.00 5/19/08 502,638 1,273,781
Performance 39,962 4.2% 20.00 5/19/08 502,638 1,273,781
Superperformance I 59,942 4.4% 20.00 5/19/08 753,944 1,910,639
Superperformance II 39,962 7.2% 20.00 5/19/08 502,638 1,273,781
Mark Maisto
Time 39,962 4.3% 20.00 5/19/08 502,638 1,273,781
Performance 39,962 4.2% 20.00 5/19/08 502,638 1,273,781
Superperformance I 59,942 4.4% 20.00 5/19/08 753,944 1,910,639
Superperformance II 39,962 7.2% 20.00 5/19/08 502,638 1,273,781
</TABLE>
92
<PAGE>
<PAGE>
<TABLE>
FY-END OPTION/SAR VALUES
<CAPTION>
Number of securities underlying
unexercised options/SARs at FY-end
------------------------------------
Name Exercisable Unexercisable
- --------------------- ----------- -------------
(#) (#)
<S> <C> <C>
Irl F. Engelhardt 44,000 455,855
Richard M. Whiting 15,985 163,843
W. Howard Carson 15,985 163,843
Roger B. Walcott, Jr. 15,985 163,843
Mark Maisto 15,985 163,843
</TABLE>
Stockholders Agreements
We have entered into stockholders agreements with the executives who
received our Class B common stock and will enter into shareholder
agreements with employees who have options to purchase shares of common
stock when such options have vested and are exercised. Such
stockholders agreements contain, among other things, puts/calls, drag-
along, tag-along, voting, corporate governance and registration rights
provisions.
93
<PAGE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information concerning ownership
of the capital stock as of March 31, 1999: (1) persons who beneficially
own more than 5 percent of the outstanding shares of capital stock; (2)
each person who is a director of Peabody; (3) each person who is a
Named Executive Officer; and (4) all directors and executive officers
as a group. Our capital stock consists of our Class A common stock, our
Class B common stock and our Non-Convertible, Exchangeable 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 million equity contribution made in connection with our
acquisition on May 19, 1998, $100 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: (1) upon the occurrence of any
merger, consolidation, sale of all or substantially all assets,
liquidation, dissolution or winding up of Peabody, 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); (2) we may,
at any time at our discretion, exchange all or part of the shares of
preferred stock for an equal number of shares of common stock; and (3)
we may, at our 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>
NUMBER OF SHARES BENEFICIALLY OWNED
-----------------------------------
<CAPTION>
CLASS A CLASS B PERCENTAGE
COMMON COMMON PREFERRED OF STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK <F1> STOCK STOCK OUTSTANDING
- -------------------------------------------------------- ---------- ------- --------- -----------
<S> <C> <C> <C> <C>
Lehman Brothers Merchant Banking Partners II L.P.,
LB I Group Inc. and their affiliated co-investors 16,000,000 5,000,000 83.7%
c/o Lehman Brothers Holdings Inc.
3 World Financial Center, 200 Versey Street
New York, NY 10285
Co-Investment Partners, L.P. 2,500,000 10.0%
c/o Lexington Partners Inc.
659 Madison Avenue, 23rd Floor
New York, NY 10021
Irl F. Engelhardt 44,000 154,639 0.8%
Richard M. Whiting 15,985 51,546 0.3%
W. Howard Carson 15,985 51,546 0.3%
Roger B. Walcott, Jr. 15,985 51,546 0.3%
Mark Maisto 15,985 51,546 0.3%
All executives and directors as a group (15 people) 171,878 567,008 2.9%
<FN>
<F1> Totals for named executive officers include options
exercisable effective May 19, 1999.
</TABLE>
94
<PAGE>
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Affiliates of Lehman Brothers Holdings Inc.
Lehman Brothers Merchant Banking Partners II L.P. and other affiliates
of Lehman Brothers Holdings Inc. (collectively, the "Lehman Merchant
Banking Fund") own a substantial majority of our outstanding shares of
capital stock. Messrs. Washkowitz, Lentz and Goodspeed, each directors
of Peabody, are investors in the Lehman Merchant Banking Fund and
employees of an affiliate of LBHI.
During fiscal year ended March 31, 1999, affiliates of Lehman Brothers
Holdings Inc. received approximately $90 million in cash for advising
on the acquisition of certain of our subsidiaries from The Energy Group
plc, including Citizens Power LLC, on May 19, 1998 and arranging the
financing for the acquisition. In addition, during the fiscal year
ended March 31, 1999, we have paid affiliates of Lehman Brothers
Holdings Inc. $0.1 million for other management, consulting and
financial services, as well as reimbursements for expenses. Affiliates
of Lehman Brothers Holdings Inc. also received customary fees from
Texas Utilities Company in connection with advising on and arranging
financing for the purchase of The Energy Group plc by Texas Utilities
Company.
On May 19, 1997, The Energy Group plc purchased Citizens Power through
Peabody from Lehman Brothers Holdings Inc. (which owned 50 percent of
Citizens Power), certain employees of Citizens Power (who owned 20
percent of Citizens Power) and certain other parties (collectively, the
"Selling Shareholders") for $120 million, which included (1) an up-
front cash payment of $20 million and (2) up to $100 million of future
cash payments (the "Citizens Power Obligation"). The Citizens Power
Obligation was comprised of (1) a payment based upon the net asset
value of Citizens Power as of the date of the sale to The Energy Group
plc (subject to certain adjustments based upon events occurring between
the date of sale and June 30, 1997) up to a maximum of $30 million and
(2) net asset value increase payments for the fiscal years ending on
March 31 or 2000, 2001 and 2002, which combined with the amount of the
initial net asset value payment would be no greater than $100 million.
The agreement for the purchase of Citizens Power included a provision
that protected the Selling Shareholders in the event of material
changes that would adversely affect the ability of Citizens Power to
attain expected net asset value increases, including a change of
control. Due to the change of control of Citizens Power in our
acquisition, we agreed to pay the Selling Shareholders $72.96 million
on May 19, 1998 and $20.0 million plus interest on April 3, 2000 in
full consideration for the Citizens Power Obligation. Lehman Brothers
Holdings Inc. has guaranteed payment of this obligation. Mr. Goodspeed,
who is a director of Peabody and an employee of an affiliate of Lehman
Brothers Holdings Inc. and Mr. Maisto, a named executive officer and an
employee of Citizens Power, received a portion of the proceeds received
by Lehman Brothers Holdings Inc.
In connection with our acquisition, Lehman Brothers Holdings Inc.
agreed to provide a guarantee facility to trading counterparties of
Citizens Power Sales, the trading subsidiary of Citizens Power LLC, for
trades initiated after the acquisition. The guaranty facility initially
was to be available for 364 days after the date of the acquisition. For
establishing the guaranty facility, Lehman Brothers Holdings Inc. was
paid a minimum fee of $0.5 million and reimbursed for the associated
legal and out-of-pocket costs. The guaranty facility was allowed to
terminate according to its terms in November 1998 with respect to all
subsequent transactions of Citizens Power Sales.
OTHER TRANSACTIONS WITH AFFILIATES
Peabody COALSALES, a subsidiary of ours, purchased 0.3 million tons of
coal from Black Beauty for $5.5 million during the fiscal year ended
March 31, 1999 and may continue to purchase coal from Black Beauty in
the ordinary course of business. The terms of these transactions are
comparable to those negotiated with independent third parties.
Executive officers of Peabody, which is a general partner of Black
Beauty, serve on the partnership committee of Black Beauty. The members
of the Black Beauty partnership committee do not receive a fee for
their services.
TRANSACTIONS WITH MANAGEMENT
During the fiscal year ended March 31, 1999, our executive officers,
were granted, or allowed to purchase shares of our capital stock
pursuant to the 1998 Stock Purchase and Option Plan for Key Employees.
In connection with these grants and sales, we, affiliates of Lehman
Brothers Holdings Inc. and the executives who received our Class B
common stock entered into a stockholders agreement providing for piggy-
back registration rights and drag-along and tag-along rights with
respect to certain sales of our capital stock by affiliates of Lehman
Brothers Holdings Inc.
95
<PAGE>
<PAGE>
In conjunction with the grant or sale of our capital stock, the
executive officers executed term notes as of December 31, 1998. The
term notes for executive officers receiving grants of capital stock are
generally due on March 31, 2003 and bear annual interest at an
applicable United States federal rate utilized by the Internal Revenue
Service for loans to employees. The term notes for executive officers
who purchased capital stock are payable in equal amounts on March 31 of
1999 through 2003 and have a 5 percent annual interest rate. Either
form of promissory note will accelerate upon the occurrence of certain
events.
The following table indicates the amounts due under the term notes for
our executive officers with aggregate indebtedness in excess of $60,000
during the fiscal year ended March 31, 1999:
<TABLE>
<CAPTION>
LARGEST AGGREGATE INDEBTEDNESS
DURING FISCAL OUTSTANDING INDEBTEDNESS
NAME YEAR ENDED MARCH 31, 1999 AT MARCH 31, 1999
- ---- ------------------------- ------------------------
<S> <C> <C>
Irl F. Engelhardt $371,415 $371,415
Richard M. Whiting 122,695 122,695
W. Howard Carson 120,104 120,104
Roger B. Walcott, Jr. 369,563 369,563
Mark Maisto 369,563 369,563
Christopher G. Farrand 61,255 61,255
Larry H. Fox 54,500 54,500
George J. Holway 92,021 92,021
Jeffery L. Klinger 61,902 61,902
Richard A. Navarre 91,466 91,466
Sharon K. Schergen 61,532 61,532
</TABLE>
96
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Documents filed as part of this Report
(1) Financial Statements.
The following financial statements of P&L Coal Holdings Corporation are
included in Item 8 at the page indicated:
Page
----
Report of Independent Auditors 46
Audited Financial Statements:
Statements of Operations - Periods ended March 31, 1999 and
May 19, 1998, Year ended March 31, 1998, Six Months ended
March 31, 1997 and Year ended September 30, 1996 47
Balance Sheets - March 31, 1999 and 1998 48
Statements of Cash Flows - Periods ended March 31, 1999 and
May 19, 1998, Year ended March 31, 1998, Six Months ended
March 31, 1997 and Year ended September 30, 1996 49
Statements of Changes in Stockholders' Equity / Invested Capital -
Periods ended March 31, 1999 and May 19, 1998 50
Notes to Financial Statements 51
(2) Financial Statement Schedule.
The following financial statement schedule of P&L Coal Holdings
Corporation is included in Item 14, along with the report of
independent auditors thereon, at the pages indicated:
Page
----
Report of Independent Auditors on Financial Statement Schedule F-1
Valuation and Qualifying Accounts F-2
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable
and, therefore, have been omitted.
(3) Exhibits.
The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
10.11 Employment Agreement between Irl F. Engelhardt and the Company dated May 19, 1998
10.12 Employment Agreement between Richard M. Whiting and the Company dated May 19, 1998
10.13 Employment Agreement between W. Howard Carson and the Company dated May 19, 1998
10.14 Employment Agreement between Roger B. Walcott, Jr. and the Company dated May 19, 1998
10.15 Employment Agreement between Mark Maisto and the Company dated May 19, 1998
21 List of Subsidiaries
24 Powers of Attorney
27 Financial Data Schedule (filed electronically with the SEC only)
</TABLE>
(b) Reports on Form 8-K.
No reports were filed on Form 8-K for the period ended March 31, 1999.
97
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
P&L COAL HOLDINGS CORPORATION
June 18, 1999 IRL F. ENGELHARDT
____________________________________
Irl F. Engelhardt
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
IRL F. ENGELHARDT
__________________________________
Irl F. Engelhardt Chairman, Chief Executive Officer and Director
(principal executive officer)
<F*>
__________________________________
Richard M. Whiting President, Chief Operating Officer and Director
GEORGE J. HOLWAY
__________________________________
George J. Holway Vice President and Chief Financial Officer
(principal financial and accounting officer)
<F*>
__________________________________
Henry E. Lentz Vice President, Assistant Secretary and Director
<F*>
__________________________________
Roger H. Goodspeed Director
<F*>
__________________________________
Alan H. Washkowitz Director
<F*>By: GEORGE J. HOLWAY
__________________________
George J. Holway
Attorney-In-Fact
</TABLE>
98
<PAGE>
<PAGE>
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Second Amended and Restated Certificate of Incorporation
of P&L Coal Holdings Corporation (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10-Q for
the third quarter ended December 31, 1998).
3.2 By-Laws of P&L Coal Holdings Corporation (Incorporated by
reference to Exhibit 3.2 of the Company's Form S-4
Registration Statement No. 333-59073).
3.3 Certificate of Incorporation of Affinity Mining Company
(Incorporated by reference to Exhibit 3.3 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.4 By-Laws of Affinity Mining Company (Incorporated by
reference to Exhibit 3.4 of the Company's Form S-4
Registration Statement No. 333-59073).
3.5 Certificate of Incorporation of Arid Operations Inc
(Incorporated by reference to Exhibit 3.5 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.6 By-Laws of Arid Operations Inc (Incorporated by reference
to Exhibit 3.6 of the Company's Form S-4 Registration
Statement No. 333-59073).
3.7 Certificate of Incorporation of Big Sky Coal Company
(Incorporated by reference to Exhibit 3.7 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.8 By-Laws of Big Sky Coal Company (Incorporated by
reference to Exhibit 3.8 of the Company's Form S-4
Registration Statement No. 333-59073).
3.9 Articles of Incorporation of Blackrock First Capital
Corporation (Incorporated by reference to Exhibit 3.9 of
the Company's Form S-4 Registration Statement No.
333-59073).
3.10 By-Laws of Blackrock First Capital Corporation
(Incorporated by reference to Exhibit 3.10 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.11 Certificate of Incorporation of Bluegrass Coal Company
(Incorporated by reference to Exhibit 3.11 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.12 By-Laws of Bluegrass Coal Company (Incorporated by
reference to Exhibit 3.12 of the Company's Form S-4
Registration Statement No. 333-59073).
3.13 Certificate of Incorporation of Caballo Coal Company
(Incorporated by reference to Exhibit 3.13 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.14 By-Laws of Caballo Coal Company (Incorporated by
reference to Exhibit 3.14 of the Company's Form S-4
Registration Statement No. 333-59073).
3.15 Certificate of Incorporation of Charles Coal Company
(Incorporated by reference to Exhibit 3.15 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.16 By-Laws of Charles Coal Company (Incorporated by
reference to Exhibit 3.16 of the Company's Form S-4
Registration Statement No. 333-59073).
3.17 Certificate of Incorporation of Coal Properties Corp
(Incorporated by reference to Exhibit 3.17 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.18 By-Laws of Coal Properties Corp (Incorporated by
reference to Exhibit 3.18 of the Company's Form S-4
Registration Statement No. 333-59073).
3.19 Exhibit Intentionally Omitted
3.20 Amended and Restated Venture Agreement of Colony Bay Coal
Company (Incorporated by reference to Exhibit 3.20 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.21 Certificate of Incorporation of Cook Mountain Coal
Company (Incorporated by reference to Exhibit 3.21 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.22 By-Laws of Cook Mountain Coal Company (Incorporated by
reference to Exhibit 3.22 of the Company's Form S-4
Registration Statement No. 333-59073).
3.23 Certificate of Incorporation of Cottonwood Land Company
(Incorporated by reference to Exhibit 3.23 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.24 By-Laws of Cottonwood Land Company (Incorporated by
reference to Exhibit 3.24 of the Company's Form S-4
Registration Statement No. 333-59073).
99
<PAGE>
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.25 Certificate of Incorporation of Orion Mines, Inc. (now
known as Darius Gold Mine Inc.) (Incorporated by
reference to Exhibit 3.25 of the Company's Form S-4
Registration Statement No. 333-59073).
3.26 By-Laws of Darius Gold Mine Inc. (Incorporated by
reference to Exhibit 3.26 of the Company's Form S-4
Registration Statement No. 333-59073).
3.27 Certificate of Incorporation of Koppers Recreation Camps
(now known as EACC Camps, Inc.) (Incorporated by
reference to Exhibit 3.27 of the Company's Form S-4
Registration Statement No. 333-59073).
3.28 By-Laws of Koppers Recreation Camps, Inc. (now known as
EACC Camps, Inc.) (Incorporated by reference to Exhibit
3.28 of the Company's Form S-4 Registration Statement No.
333-59073).
3.29 Certificate of Incorporation of Eastern Associated Coal
Corp. (Incorporated by reference to Exhibit 3.29 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.30 By-Laws of Eastern Associated Coal Corp. (Incorporated by
reference to Exhibit 3.30 of the Company's Form S-4
Registration Statement No. 333-59073).
3.31 Certificate of Incorporation of Eastern Royalty Corp.
(Incorporated by reference to Exhibit 3.31 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.32 By-Laws of Eastern Royalty Corp. (Incorporated by
reference to Exhibit 3.32 of the Company's Form S-4
Registration Statement No. 333-59073).
3.33 Certificate of Incorporation of Exploraciones y Minerales
Sierra Morena S.A. (now known as Gold Fields Chile, S.A.)
(Incorporated by reference to Exhibit 3.33 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.34 By-Laws of Exploraciones y Minerales Sierra Morena S.A.
(now known as Gold Fields Chile, S.A.) (Incorporated by
reference to Exhibit 3.34 of the Company's Form S-4
Registration Statement No. 333-59073).
3.35 Restated Certificate of Incorporation of Gold Fields
Mining Corporation (Incorporated by reference to Exhibit
3.35 of the Company's Form S-4 Registration Statement No.
333-59073).
3.36 By-Laws of Gold Fields Mining Corporation (Incorporated
by reference to Exhibit 3.36 of the Company's Form S-4
Registration Statement No. 333-59073).
3.37 Certificate of Incorporation of East Tennessee Coal
Company (now known as Gold Fields Operating Co.-Ortiz)
(Incorporated by reference to Exhibit 3.37 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.38 By-Laws of Gold Fields Operating Co.-Ortiz (Incorporated
by reference to Exhibit 3.38 of the Company's Form S-4
Registration Statement No. 333-59073).
3.39 Articles of Incorporation of Grand Eagle Mining, Inc.
(Incorporated by reference to Exhibit 3.39 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.40 By-Laws of Grand Eagle Mining, Inc. (Incorporated by
reference to Exhibit 3.40 of the Company's Form S-4
Registration Statement No. 333-59073).
3.41 Certificate of Incorporation of Hayden Gulch Terminal,
Inc. (Incorporated by reference to Exhibit 3.41 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.42 By-Laws of Hayden Gulch Terminal, Inc. (Incorporated by
reference to Exhibit 3.42 of the Company's Form S-4
Registration Statement No. 333-59073).
3.43 Certificate of Incorporation of Independence Material
Handling Company (Incorporated by reference to Exhibit
3.43 of the Company's Form S-4 Registration Statement No.
333-59073).
3.44 By-Laws of Independence Material Handling Company
(Incorporated by reference to Exhibit 3.44 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.45 Certificate of Incorporation of Interior Holdings Corp.
(Incorporated by reference to Exhibit 3.45 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.46 By-Laws of Interior Holdings Corp. (Incorporated by
reference to Exhibit 3.46 of the Company's Form S-4
Registration Statement No. 333-59073).
3.47 Certificate of Incorporation of A.T. Two, Inc. (now known
as James River Coal Terminal Company) (Incorporated by
reference to Exhibit 3.47 of the Company's Form S-4
Registration Statement No. 333-59073).
3.48 Restated By-Laws of James River Coal Terminal Company
(Incorporated by reference to Exhibit 3.48 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.49 Certificate of Incorporation of Juniper Coal Company
(Incorporated by reference to Exhibit 3.49 of the
Company's Form S-4 Registration Statement No. 333-59073).
100
<PAGE>
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.50 By-Laws of Juniper Coal Company (Incorporated by
reference to Exhibit 3.50 of the Company's Form S-4
Registration Statement No. 333-59073).
3.51 Certificate of Incorporation of Kayenta Mobile Home Park,
Inc. (Incorporated by reference to Exhibit 3.51 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.52 By-Laws of Kayenta Mobile Home Park, Inc. (Incorporated
by reference to Exhibit 3.52 of the Company's Form S-4
Registration Statement No. 333-59073).
3.53 Certificate of Incorporation of Martinka Coal Company
(Incorporated by reference to Exhibit 3.53 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.54 By-Laws of Martinka Coal Company (Incorporated by
reference to Exhibit 3.54 of the Company's Form S-4
Registration Statement No. 333-59073).
3.55 Articles of Incorporation of Midco Supply and Equipment
Corporation (Incorporated by reference to Exhibit 3.55 of
the Company's Form S-4 Registration Statement No.
333-59073).
3.56 By-Laws of Midco Supply and Equipment Corporation.
(Incorporated by reference to Exhibit 3.56 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.57 Exhibit Intentionally Omitted.
3.58 Exhibit Intentionally Omitted.
3.59 Certificate of Incorporation of Nueast Mining Corp. (now
known as Mountain View Coal Company) (Incorporated by
reference to Exhibit 3.59 of the Company's Form S-4
Registration Statement No. 333-59073).
3.60 By-Laws of Nueast Mining Corp. (now known as Mountain
View Coal Company) (Incorporated by reference to Exhibit
3.60 of the Company's Form S-4 Registration Statement No.
333-59073).
3.61 Articles of Incorporation of North Page Coal Corp.
(Incorporated by reference to Exhibit 3.61 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.62 By-Laws of North Page Coal Corp. (Incorporated by
reference to Exhibit 3.62 of the Company's Form S-4
Registration Statement No. 333-59073).
3.63 Articles of Incorporation of Ohio County Coal Company
(Incorporated by reference to Exhibit 3.63 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.64 By-Laws of Ohio County Coal Company (Incorporated by
reference to Exhibit 3.64 of the Company's Form S-4
Registration Statement No. 333-59073).
3.65 Certificate of Limited Partnership of Patriot Coal
Company, L.P. (Incorporated by reference to Exhibit 3.65
of the Company's Form S-4 Registration Statement No. 333-
59073).
3.66 Limited Partnership Agreement of Patriot Coal Company,
L.P. (Incorporated by reference to Exhibit 3.66 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.67 Certificate of Incorporation of Peabody America, Inc.
(Incorporated by reference to Exhibit 3.67 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.68 By-Laws of Peabody America, Inc. (Incorporated by
reference to Exhibit 3.68 of the Company's Form S-4
Registration Statement No. 333-59073).
3.69 Certificate of Incorporation of Peabody Coal Company
(Incorporated by reference to Exhibit 3.69 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.70 Restated By-Laws of Peabody Coal Company (Incorporated by
reference to Exhibit 3.70 of the Company's Form S-4
Registration Statement No. 333-59073).
3.71 Certificate of Incorporation of Peabody COALSALES Company
(Incorporated by reference to Exhibit 3.71 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.72 By-Laws of Peabody COALSALES Company (Incorporated by
reference to Exhibit 3.72 of the Company's Form S-4
Registration Statement No. 333-59073).
3.73 Certificate of Incorporation of COALTRADE Inc. (now known
as Peabody COALTRADE, Inc.) (Incorporated by reference to
Exhibit 3.73 of the Company's Form S-4 Registration
Statement No. 333-59073).
3.74 By-Laws of COALTRADE Inc. (now known as Peabody
COALTRADE, Inc.) (Incorporated by reference to Exhibit
3.74 of the Company's Form S-4 Registration Statement No.
333-59073).
101
<PAGE>
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.75 Certificate of Incorporation of Premier Coal Sales
Company, (now known as Peabody Development Company)
(Incorporated by reference to Exhibit 3.75 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.76 Restated By-Laws of Peabody Development Company
(Incorporated by reference to Exhibit 3.76 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.77 Certificate of Incorporation of Peabody Powertrade, Inc.
(now known as Peabody Energy Solutions, Inc.)
(Incorporated by reference to Exhibit 3.77 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.78 By-Laws of Peabody Powertrade, Inc. (now known as Peabody
Energy Solutions, Inc.) (Incorporated by reference to
Exhibit 3.78 of the Company's Form S-4 Registration
Statement No. 333-59073).
3.79 Restated Certificate of Incorporation of Peabody Holding
Company, Inc. (Incorporated by reference to Exhibit 3.79
of the Company's Form S-4 Registration Statement No.
333-59073).
3.80 Restated By-Laws of Peabody Holding Company, Inc.
(Incorporated by reference to Exhibit 3.80 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.81 Exhibit Intentionally Omitted
3.82 Second Amended and Restated Partnership Agreement re:
Peabody Natural Resources Company (Incorporated by
reference to Exhibit 3.82 of the Company's Form S-4
Registration Statement No. 333-59073).
3.83 Certificate of Incorporation of Armco Terminal Company
(now known as Peabody Terminals, Inc.) (Incorporated by
reference to Exhibit 3.83 of the Company's Form S-4
Registration Statement No. 333-59073).
3.84 By-Laws of Peabody Terminals, Inc. (Incorporated by
reference to Exhibit 3.84 of the Company's Form S-4
Registration Statement No. 333-59073).
3.85 Certificate of Incorporation of Peabody Venezuela Coal
Corp. (Incorporated by reference to Exhibit 3.85 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.86 By-Laws of Peabody Venezuela Coal Corp. (Incorporated by
reference to Exhibit 3.86 of the Company's Form S-4
Registration Statement No. 333-59073).
3.87 Certificate of Incorporation of Peabody Western Coal
Company (Incorporated by reference to Exhibit 3.87 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.88 By-Laws of Peabody Western Coal Company (Incorporated by
reference to Exhibit 3.88 of the Company's Form S-4
Registration Statement No. 333-59073).
3.89 Certificate of Incorporation of Pine Ridge Coal Company
(Incorporated by reference to Exhibit 3.89 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.90 By-Laws of Pine Ridge Coal Company (Incorporated by
reference to Exhibit 3.90 of the Company's Form S-4
Registration Statement No. 333-59073).
3.91 Certificate of Incorporation of Powder River Coal Company
(Incorporated by reference to Exhibit 3.91 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.92 Restated By-Laws of Powder River Coal Company
(Incorporated by reference to Exhibit 3.92 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.93 Certificate of Incorporation of Rio Escondido Coal Corp.
(Incorporated by reference to Exhibit 3.93 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.94 By-Laws of Rio Escondido Coal Corp. (Incorporated by
reference to Exhibit 3.94 of the Company's Form S-4
Registration Statement No. 333-59073).
3.95 Certificate of Incorporation of Seneca Coal Company
(Incorporated by reference to Exhibit 3.95 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.96 By-Laws of Seneca Coal Company (Incorporated by reference
to Exhibit 3.96 of the Company's Form S-4 Registration
Statement No. 333-59073).
3.97 Certificate of Incorporation of Sentry Mining Company
(Incorporated by reference to Exhibit 3.97 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.98 By-Laws of Sentry Mining Company (Incorporated by
reference to Exhibit 3.98 of the Company's Form S-4
Registration Statement No. 333-59073).
3.99 Certificate of Incorporation of Snowberry Land Company
(Incorporated by reference to Exhibit 3.99 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.100 By-Laws of Snowberry Land Company (Incorporated by
reference to Exhibit 3.100 of the Company's Form S-4
Registration Statement No. 333-59073).
102
<PAGE>
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.101 Agreement of Incorporation of Low Volatile Coals, Inc.
(now known as Sterling Smokeless Company) (Incorporated
by reference to Exhibit 3.101 of the Company's Form S-4
Registration Statement No. 333-59073).
3.102 By-Laws of Sterling Smokeless Company (Incorporated by
reference to Exhibit 3.102 of the Company's Form S-4
Registration Statement No. 333-59073).
3.103 Certificate of Formation of Thoroughbred, L.L.C.
(Incorporated by reference to Exhibit 3.103 of the
Company's Form S-4 Registration Statement No. 333-59073).
3.104 Operating Agreement of Thoroughbred, L.L.C. (Incorporated
by reference to Exhibit 3.104 of the Company's Form S-4
Registration Statement No. 333-59073).
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 (Incorporated by
reference to Exhibit 4.1 of the Company's Form S-4
Registration Statement No. 333-59073).
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 (Incorporated by reference to Exhibit 4.2 of
the Company's Form S-4 Registration Statement No.
333-59073).
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 (Incorporated by reference to Exhibit 4.3 of the
Company's Form S-4 Registration Statement No. 333-59073).
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 (Incorporated by
reference to Exhibit 4.4 of the Company's Form S-4
Registration Statement No. 333-59073).
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) (Incorporated by reference to
Exhibit 4.5 of the Company's Form S-4 Registration
Statement No. 333-59073).
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) (Incorporated by reference to Exhibit 4.6 of
the Company's Form S-4 Registration Statement No. 333-
59073).
4.7 Senior Note Registration Rights Agreement dated as of May
18, 1998 between P&L Coal Holdings Corporation and Lehman
Brothers Inc. (Incorporated by reference to Exhibit 4.7
of the Company's Form S-4 Registration Statement No. 333-
59073).
4.8 Senior Subordinated Note Registration Rights Agreement
dated as of May 18, 1998 between P&L Coal Holdings
Corporation and Lehman Brothers Inc. (Incorporated by
reference to Exhibit 4.8 of the Company's Form S-4
Registration Statement No. 333-59073).
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
(Incorporated by reference to Exhibit 10.1 of the
Company's Form S-4 Registration Statement No. 333-59073).
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 (Incorporated by
reference to Exhibit 10.2 of the Company's Form S-4
Registration Statement No. 333-59073).
10.3 Federal Coal Lease WYW0321779: North Antelope/Rochelle
Mine (Incorporated by reference to Exhibit 10.3 of the
Company's Form S-4 Registration Statement No. 333-59073).
10.4 Federal Coal Lease WYW119554: North Antelope/Rochelle
Mine (Incorporated by reference to Exhibit 10.4 of the
Company's Form S-4 Registration Statement No. 333-59073).
10.5 Federal Coal Lease WYW5036: Rawhide Mine (Incorporated by
reference to Exhibit 10.5 of the Company's Form S-4
Registration Statement No. 333-59073).
10.6 Federal Coal Lease WYW3397: Caballo Mine (Incorporated by
reference to Exhibit 10.6 of the Company's Form S-4
Registration Statement No. 333-59073).
10.7 Federal Coal Lease WYW83394: Caballo Mine (Incorporated
by reference to Exhibit 10.7 of the Company's Form S-4
Registration Statement No. 333-59073).
103
<PAGE>
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.8 Federal Coal Lease WYW136142 (Incorporated by reference
to Exhibit 10.7 of Amendment No. 1 of the Company's Form
S-4 Registration Statement No. 333-59073).
10.9 Royalty Prepayment Agreement by and among Peabody Natural
Resources Company, Gallo Finance Company and Chaco Energy
Company, dated September 30, 1998 (Incorporated by
reference to Exhibit 10.9 of the Company's Form 10-Q for
the second quarter ended September 30, 1998).
10.10<F*> 1998 Stock Purchase and Option Plan for Key Employees of
P&L Coal Holding Corporation (incorporated by reference
to Exhibit 10.10 of the Company's Form 10-Q for the third
quarter ended December 1998).
10.11<F*> Employment Agreement between Irl F. Engelhardt and the
Company dated May 19, 1998.
10.12<F*> Employment Agreement between Richard M. Whiting and the
Company dated May 19, 1998.
10.13<F*> Employment Agreement between W. Howard Carson and the
Company dated May 19, 1998.
10.14<F*> Employment Agreement between Roger B. Walcott, Jr. and
the Company dated May 19, 1998.
10.15<F*> Employment Agreement between Mark Maisto and the Company
dated May 19, 1998.
21 List of Subsidiaries.
24 Powers of Attorney.
27 Financial Data Schedule (filed electronically with the
SEC only).
[FN]
<F*> These exhibits constitute all management contracts,
compensatory plans and arrangements required to be filed
as an exhibit to this form pursuant to Item 14(c) of this
report.
104
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
P&L Coal Holdings Corporation
We have audited the consolidated financial statements of P&L Coal
Holdings Corporation (the Company) as of March 31, 1999 and for the
period ended March 31, 1999 and the combined financial statements of
P&L Coal Group (the Predecessor Company) as of March 31, 1998, and for
the period ended May 19, 1998, the year ended March 31, 1998, the six
months ended March 31, 1997 and the year ended September 30, 1996, and
have issued our report thereon dated April 30, 1999. Our audits also
included the financial statement schedule listed in Item 14(a). 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.
Ernst & Young LLP
April 30, 1999
St. Louis, Missouri
F-1
<PAGE>
<PAGE>
<TABLE>
P&L COAL HOLDINGS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
(In thousands) Balance at Charged to Balance at
Beginning Costs and End
Description of Period Expenses Deductions<F1> Other of Period
- ------------------------------------------ ---------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
PERIOD MAY 20, 1999 THROUGH MARCH 31, 1999
Reserves deducted from asset accounts:
Land and coal interests $51,455 $3,138 $ (316) $54,277
Reserve for materials and supplies 6,087 (1,037) 11,508 <F2> 16,558
Allowance for doubtful accounts 9,073 (8,980) 84 <F3> 177
==================================================================================================================================
(PREDECESSOR COMPANY)
PERIOD APRIL 1, 1998 THROUGH MAY 19, 1998
Reserves deducted from asset accounts:
Land and coal interests 67,884 124 (10) (16,543)<F4> 51,455
Reserve for materials and supplies 6,316 (229) 6,087
Allowance for doubtful accounts 9,100 (27) 9,073
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)<F5> 6,316
Allowance for doubtful accounts 5,525 (378) 3,953 <F4> 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 <F4> 61,276
Reserve for materials and supplies 10,383 (2,591) 1,641 <F4> 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 <F4> 10,383
Allowance for doubtful accounts 8,170 (3,098) 5,072
<FN>
<F1> Reserves utilized, unless otherwise indicated.
<F2> Balances changed as part of 5/19/98 purchase accounting.
<F3> Balances acquired in Black Beauty purchase.
<F4> Balances transferred from other accounts.
<F5> Balances disposed of in Western Associated sale.
</TABLE>
F-2
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
AGREEMENT, made as of May 19, 1998 by and between P&L Coal
Holdings Corporation, a Delaware corporation (the "Company") and Irl F.
Engelhardt (the "Executive").
RECITALS
In order to induce Executive to continue to serve as the Chief
Executive Officer (the "CEO") and Chairman of the Board of Directors (the
"Board") of the Company, the Company desires to provide Executive with
compensation and other benefits on the terms and conditions set forth in this
Agreement.
Executive is willing to accept such employment and perform
services for the Company, on the terms and conditions hereinafter set forth.
It is therefore hereby agreed by and between the parties as
follows:
1. Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term hereof as its CEO. In his
capacity as the CEO of the Company, Executive shall report to the Board, and
shall have the customary powers, responsibilities and authorities of CEOs of
corporations of the size, type and nature of the Company, as it exists from time
to time, and as are assigned by the Board.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment as the CEO of the Company commencing as of
the date hereof (the "Commencement Date") and agrees, subject to any period of
vacation and sick leave, to devote his full business time and efforts to the
performance of services, duties and responsibilities in connection therewith,
subject at all times to review and control of the Board. In addition, during the
term of employment under this Agreement (the "Term of Employment"), (i) the
Company agrees to nominate Executive for election to the Board and use its best
efforts to cause his election to the Board and Executive agrees to serve on the
Board of the Company and (ii) Executive also agrees to serve, if elected, as an
officer and/or director of any Subsidiary of the Company, without the payment of
any additional compensation therefor. Upon the termination of Executive's
employment for any reason, Executive shall resign as a member of the Board of
the Company or any Subsidiary of the Company.
1.3 Nothing in this Agreement shall preclude Executive from
engaging in charitable work and community affairs, from delivering lectures,
fulfilling speaking engagements or teaching at educational institutions, from
managing any investment made by him or his immediate family with respect to
which Executive or such family member is not substantially involved with the
management or operation of the entity in which Executive has invested (provided
that no such investment in publicly traded equity securities or other property
may exceed 5% of the equity of any entity, without the prior approval of the
Board) or from serving, subject to the prior approval of the Board, as a member
of boards of directors or as a trustee of any other corporation, association or
entity, to the extent that any of the above activities do not materially
interfere with the performance of his duties hereunder. For purposes of the
preceding sentence, any approval by the Board required therein shall not be
unreasonably withheld. The Company agrees that it has approved Executive serving
in the following capacities: director of Mercantile Bank of St. Louis, N.A.,
Chairman of the Center for Energy and Economic Development and Chairman of the
Coal Industry Advisory Board, and that these positions do not require any
additional approval of the Board.
2. Term of Employment. Executive's Term of Employment shall
commence on the Commencement Date and, subject to termination under the terms
hereunder, shall have a three-year term, which shall extend on a day-to-day
basis for an "evergreen" three-year term.
3. Compensation.
3.1 Salary. During the Term of Employment, the Company shall
pay Executive a base salary ("Base Salary") at an initial rate of $700,000 per
annum. Base Salary shall be payable in accordance with the ordinary payroll
practices of the Company. During the Term of Employment, the Board shall, in
good faith, review, at least annually, Executive's Base Salary in accordance
with the Company's customary procedures and practices regarding the salaries of
senior executives and may, if determined by the Board to be appropriate,
increase Executive's Base Salary following such review; provided, however, that
no such increase shall be made before the Company obtains ratings on its
unsecured debt from Standard & Poor's and Moody's of at least BBB- and Baa3,
respectively ("Investment-Grade Credit Rating"). "Base Salary" for all purposes
herein shall be deemed to be a reference to any such increased amount.
3.2 Annual Bonus. In addition to his Base Salary, Executive
shall, commencing with the 1999 fiscal year and continuing each fiscal year
thereafter, be eligible to receive an annual cash bonus (the "Bonus") during the
term of his employment hereunder to be developed by the Board, based on
achievement of performance targets established by the Board as soon as
practicable at the beginning of the fiscal year for which the performance target
relates. Executive's target Bonus for the 1999 fiscal year shall be equal to
150% of his Base Salary, and such target shall not be increased before the
Company obtains an Investment-Grade Credit Rating. A Bonus award shall be
payable to Executive at the time bonuses are paid to executive officers in
accordance with the Companies policies and practices as set by the Board in
consultation with Executive.
4. Employee Benefits.
4.1 Equity and Stock Options. Simultaneously with the
execution of this Agreement, the Company and Executive are entering into the
Common Stock Ownership Agreement, the Grant Agreement[s] and the Stockholders
Agreement in the forms attached hereto as Exhibits A, B and C, respectively
(together with any other agreement approved by the Board and designated by the
Board an "Ancillary Document" for purposes of this Agreement, the "Ancillary
Documents"). Executive shall not be eligible to receive any stock option or
other equity incentive other than as set forth in the Ancillary Documents.
4.2 Employee Benefit Programs, Plans and Practices. The
Company shall provide Executive while employed hereunder with coverage under
such employee benefits (commensurate with his position in the Company and to the
extent permitted under any employee benefit plan) in accordance with the terms
thereof, including the Continuation Benefits (as defined herein), D&O insurance,
which covers claims arising out of actions or inactions occurring during the
Term of Employment, in accordance with the D&O insurance policy, and other
employee benefits which the Company may make available to its senior executives
from time to time in its discretion. The Company shall also provide Executive
with perquisites which the Company may make available to its senior executives
from time to time in its discretion.
4.3 Vacation. Executive shall be entitled to that number of
business days paid vacation in each calendar year as determined in accordance
with the Company's applicable vacation policies, which shall be taken at such
times as are consistent with Executive's responsibilities hereunder.
5. Expenses. Subject to prevailing Company policy or such
guidelines as may be established by the Board, the Company will reimburse
Executive for all reasonable expenses incurred by Executive in carrying out his
duties.
6. Termination of Employment.
6.1 Termination Not for Cause or for Good Reason. (a) The
Company or Executive may terminate Executive's Term of employment at any time
for any reason by written notice at least thirty (30) days in advance. If
Executive's employment is terminated (i) by the Company other than for Cause (as
defined in Section 6.2(b) hereof), Disability (as defined in Section 6.3 hereof)
or death or (ii) by Executive for Good Reason (as defined in Section 6.1(b)
hereof) during the Term of Employment, the Company, as liquidated damages and in
lieu of an other damages therefor, shall (A) continue to pay Executive's Base
Salary for a period of three (3) years (the "Continuation Period") and (B) pay
to Executive a bonus replacement payment in an additional amount equal to 100%
of his Base Salary for each of the three years following such termination (the
"Severance Payments"). The Severance Payments shall be paid in a lump sum. For
the year of termination, Executive shall receive a prorated bonus (the "Prorated
Bonus"), payable when such bonuses are paid to other senior executives of the
Company, calculated as the Bonus Executive would have received in such year
based on the Company's actual performance multiplied by a fraction, the
numerator of which is the number of business days during the year of termination
that Executive was employed and the denominator of which is the total number of
business days during the year of termination. In addition, the Company shall
continue to provide Executive during the Continuation Period with medical,
dental and vision benefits, defined contribution plans (qualified and
non-qualified) benefits, defined benefit plans (qualified and non-qualified)
benefits, life insurance, AD&D insurance, health care reimbursement account and
day care reimbursement account (collectively, the "Continuation Benefits")
comparable to those provided to other senior executives; 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 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 benefits from any other employer during the Continuation Period.
Notwithstanding the foregoing, if Executive breaches any provision of Section 11
hereof, the remaining balance of the Prorated Bonus and any Continuation
Benefits shall be forfeited.
(b) For purposes of this Agreement, "Good Reason" shall mean
(i) a reduction by the Company in Executive's Base Salary (in which event
Severance Payments shall be made based upon Executive's Base Salary in effect
prior to any such reduction), (ii) a material reduction in the aggregate program
of employee benefits and perquisites to which Executive is entitled (other than
a reduction which affects all executives), (iii) relocation by more than 50
miles from Executive's workplace, (iv) any material diminution or material
adverse change in Executive's duties, responsibilities or reporting
relationships, or (v) a material decline in Executive's Bonus opportunity.
(c) Termination by Executive for Good Reason shall be made by
delivery to the Company by Executive of written notice, given at least 45 days
prior to such termination, which sets forth the conduct believed to constitute
Good Reason; provided, however, that the Company shall have the opportunity to
cure the Good Reason during the first 30 days of such notice period and if the
Good Reason is cured within such 30-day period, Executive's notice of
termination shall be deemed withdrawn. If no notice is given within 90 days of
the event giving rise to Good Reason, the Good Reason shall be deemed waived.
6.2 Voluntary Termination by Executive; Discharge for Cause.
(a) In the event that Executive's employment is terminated (i) by the Company
for Cause, as hereinafter defined, (ii) by Executive other than for Good Reason,
Disability or death or (iii) by Executive for retirement, Executive shall only
be entitled to receive (A) any Base Salary accrued but unpaid prior to such
termination and (B) any vacation accrued but unused prior to such termination
and any other benefits provided under the employee benefit programs, plans and
practices referred to in Section 4.2 hereof, in accordance with their terms.
After the termination of Executive's employment under this Section 6.2, the
obligations of the Company under this Agreement to make any further payments, or
provide any benefits specified herein, to Executive, except as provided in the
previous sentence, shall thereupon cease and terminate.
(b) As used herein, the term "Cause" shall be limited to (i)
any material and uncorrected breach by Executive of the terms of this Agreement,
including, but not limited to, engaging in action in violation of Section 11
hereof, (ii) any willful fraud or dishonesty of Executive involving the property
or business of the Company, (iii) a deliberate or willful refusal or failure of
Executive to comply with any major corporate policy of the Company which is
communicated to Executive in writing or (iv) Executive's conviction of, or plea
of nolo contendere to, any felony if such conviction shall result in his
imprisonment; provided that with respect to clauses (i), (ii) or (iii) above,
Executive shall have 10 days following written notice of the conduct which is
the basis for the potential termination for Cause within which to cure such
conduct in order to prevent termination for Cause by the Company.
6.3 Disability. In the event of the Disability (as defined
below) of Executive during the Term of Employment, the Company may terminate
Executive's Term of Employment upon written notice to Executive (or Executive's
personal representative, if applicable) effective upon the date of receipt
thereof (the "Disability Commencement Date"). The obligation of the Company to
make any further payments under this Agreement shall, except for earned but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus cease as of the Disability Commencement Date. The term
"Disability," for purposes of this Agreement, shall mean Executive's absence
from the full-time performance of Executive's duties pursuant to a reasonable
determination made in accordance with the Company's disability plan that
Executive is disabled as a result of incapacity due to physical or mental
illness that lasts, or is reasonably expected to last, for at least six months.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.4 Death. In the event of Executive's death during his Term
of Employment hereunder or at any time thereafter while payments are still owing
to Executive under the terms of this Agreement, all obligations of the Company
to make any further payments, other than the obligation to pay any accrued but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus or any remaining payments that were payable to Executive by
reason of his termination of employment under Section 6.1 to which Executive was
entitled at the time of his death, shall terminate upon Executive's death.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.5 No Further Notice or Compensation or Damages. Executive
understands and agrees that he shall not be entitled to any further notice,
compensation or damages upon Termination of Employment under this Agreement,
other than amounts specified in this Section 6 and the Ancillary Documents.
6.6 Executive's Duty to Provide Materials. Upon the
termination of the Term of Employment for any reason, Executive or his estate
shall surrender to the Company all correspondence, letters, files, contracts,
mailing lists, customer lists, advertising materials, ledgers, supplies,
equipment, checks, and all other materials and records of any kind that are the
property of the Company or any of its subsidiaries or affiliates, that may be in
Executive's possession or under his control, including all copies of any of the
foregoing.
7. Notices. All notices or communications hereunder shall be
in writing, addressed as follows:
To the Company:
P&L Coal Holdings Corporation
701 Market Street, Suite 700
St. Louis, Missouri 63101-1826
attn: Chief Legal Officer
with a copy to:
Alvin H. Brown, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
To Executive:
Irl F. Engelhardt
901 Kent Road
St. Louis, MO 63124
with a copy to:
David R. Shevitz, Esq.
Brian T. Gardner, Esq.
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, IL 60661-3693
Any such notice or communication shall be delivered by hand or by courier or
sent certified or registered mail, return receipt requested, postage prepaid,
addressed as above (or to such other address as such party may designate in a
notice duly delivered as described above), and the third business day after the
actual date of sending shall constitute the time at which notice was given.
8. Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
9. Assignment. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the heirs and representatives of Executive
and the assigns and successors of the Company, but neither this Agreement nor
any rights or obligations hereunder shall be assignable or otherwise subject to
hypothecation by Executive (except by will or by operation of the laws of
intestate succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company.
10. Amendment. This Agreement may only be amended by written
agreement of the parties hereto.
11. Nondisclosure of Confidential Information;
Non-Competition. (a) Executive, both during the term hereof and thereafter, will
not, directly or indirectly, use for himself or use for, or disclose to, any
party other than the Company, or any subsidiary of the Company (other than in
the ordinary course of Executive's duties for the benefit of the Company or any
subsidiary of the Company), any secret or confidential information regarding the
business or property of the Company or its subsidiaries or regarding any secret
or confidential apparatus, process, system, or other method at any time used,
developed, acquired, discovered or investigated by or for the Company or its
subsidiaries, whether or not developed, acquired, discovered or investigated by
Executive. At the termination of Executive's employment or at any other time the
Company or any of its subsidiaries may request, Executive shall promptly deliver
to the Company all memoranda, notes, records, plats, sketches, plans or other
documents made by, compiled by, delivered to, or otherwise acquired by Executive
concerning the business or properties of the Company or its subsidiaries or any
secret or confidential product, apparatus or process used developed, acquired or
investigated by the Company or its subsidiaries.
(b) In consideration of the Company's obligations under this
Agreement, Executive agrees that during the period of his employment hereunder
and for a period of twelve (12) months thereafter, without the prior written
consent of the Board, (i) he will not, directly or indirectly, either as
principal, manager, agent, consultant, officer, stockholder, partner, investor,
lender or employee or in any other capacity, carry on, be engaged in or have any
financial interest in, any entity which is in competition with the business of
the Company or its subsidiaries and (ii) he shall not, on his own behalf or on
behalf of any person, firm or company, directly or indirectly, solicit or offer
employment to any person who is or has been employed by the Company or its
subsidiaries at any time during the twelve (12) months immediately preceding
such solicitation.
(c) For purposes of this Section 11, an entity shall be deemed
to be in competition with the Company if it is principally involved in the
purchase, sale or other dealing in any property or the rendering of any service
purchased, sold, dealt in or rendered by the Company as a part of the business
of the Company within the same geographic area in which the Company effects such
sales or dealings or renders such services. Notwithstanding this subsection
11(c) or subsection 11(b), nothing herein shall be construed so as to preclude
Executive from investing in any publicly or privately held company, provided
Executive's beneficial ownership of any class of such company's securities does
not exceed 5% of the outstanding securities of such class.
(d) Executive agrees that this covenant not to compete is
reasonable under the circumstances and will not interfere with his ability to
earn a living or to otherwise meet his financial obligations. Executive and the
Company agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 11 would irreparably injure the Company.
Accordingly, Executive agrees that, in the event a court enjoins Executive from
any activity prohibited by this Section 11, the Company may, in addition to
pursuing any other remedies it may have in law or in equity, cease making any
payments otherwise required by this Agreement and obtain an injunction against
Executive from any court having jurisdiction over the matter restraining any
further violation of this Agreement by Executive.
12. Beneficiaries. Executive shall be entitled to select (and
change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death, and may change such election, in either case by giving the
Company written notice thereof. In the event of Executive's death or a judicial
determination of his incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to his beneficiary, estate or other
legal representative.
13. Dispute Resolution. Any dispute or controversy arising
under or in connection with this Agreement (other than an action to enforce the
covenants in Section 11 hereof) or the Ancillary Documents shall be resolved by
arbitration. Arbitrators shall be selected, and arbitration shall be conducted,
in accordance with the rules of the American Arbitration Association. The
Company shall pay any legal fees in connection with such arbitration in the
event that Executive prevails on a material element of his claim or defense.
14. Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
15. Effect on Prior Agreements. This Agreement and the
Ancillary Documents contain the entire understanding between the parties hereto
and supersedes in all respects any prior or other agreement or understanding,
both written and oral, between the Company, any affiliate of the Company or any
predecessor of the Company or affiliate of the Company and Executive.
16. Withholding. The Company shall be entitled to withhold
from payment any amount of withholding required by law.
17. Survival. Notwithstanding the expiration of the term of
this Agreement, the provisions of Section 11 hereunder shall remain in effect as
long as is reasonably necessary to give effect thereto in accordance with the
terms hereof.
18. Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an original.
P&L Coal Holdings Corporation
By /s/ H. E. Lentz
Name: Henry E. Lentz
Title:
/s/ Irl F. Engelhardt
Irl F. Engelhardt
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
AGREEMENT, as of the date set forth on the signature page
hereof, by and between P&L Coal Holdings Corporation, a Delaware corporation
(the "Company") and the undersigned executive (the "Executive").
RECITALS
In order to induce Executive to continue to serve in the
executive team position set forth on the signature page hereof, the Company
desires to provide Executive with compensation and other benefits on the terms
and conditions set forth in this Agreement.
Executive is willing to accept such employment and perform
services for the Company, on the terms and conditions hereinafter set forth.
It is therefore hereby agreed by and between the parties as
follows:
1. Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term hereof in the executive team
position set forth on the signature page hereof. In such capacity, Executive
shall report to the Chief Executive Officer of the Company (the "CEO") and shall
have the customary powers, responsibilities and authorities of executives
holding such positions in corporations of the size, type and nature of the
Company, as it exists from time to time, and as are assigned by the Board of
Directors of the Company (the "Board") and the CEO.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment in the executive team position set forth on
the signature page hereof commencing as of the date hereof (the "Commencement
Date") and agrees, subject to any period of vacation and sick leave, to devote
his full business time and efforts to the performance of services, duties and
responsibilities in connection therewith, subject at all times to review and
control of the Board or the CEO.
1.3 Nothing in this Agreement shall preclude Executive from
engaging in charitable work and community affairs, from delivering lectures,
fulfilling speaking engagements or teaching at educational institutions, from
managing any investment made by him or his immediate family with respect to
which Executive or such family member is not substantially involved with the
management or operation of the entity in which Executive has invested (provided
that no such investment in publicly traded equity securities or other property
may exceed 5% of the equity of any entity, without the prior approval of the CEO
or the Board) or from serving, subject to the prior approval of the CEO or the
Board, as a member of boards of directors or as a trustee of any other
corporation, association or entity, to the extent that any of the above
activities do not materially interfere with the performance of his duties
hereunder. For purposes of the preceding sentence, any approval by the CEO or
the Board required therein shall not be unreasonably withheld.
2. Term of Employment. Executive's term of employment under
this Agreement (the "Term of Employment") shall commence on the Commencement
Date and, subject to termination by the terms hereunder, shall have an initial
term of two years (the "Initial Term"), which, beginning on the first
anniversary of the Commencement Date, shall extend thereafter on a day-to day
basis for an "evergreen" one-year term.
3. Compensation.
3.1 Salary. During the Term of Employment, the Company shall
pay Executive a base salary ("Base Salary") at an initial rate as set forth on
the signature page hereof. Base Salary shall be payable in accordance with the
ordinary payroll practices of the Company. During the Term of Employment, the
Board and the CEO shall, in good faith, review, at least annually, Executive's
Base Salary in accordance with the Company's customary procedures and practices
regarding the salaries of senior executives and may, if determined by the Board
to be appropriate, increase Executive's Base Salary following such review;
provided, however, that no such increase shall be made before the Company
obtains ratings on its unsecured debt from Standard & Poor's and Moody's of at
least BBB- and Baa3, respectively ("Investment-Grade Credit Rating"). "Base
Salary" for all purposes herein shall be deemed to be a reference to any such
increased amount.
3.2 Annual Bonus. In addition to his Base Salary, Executive
shall, commencing with the 1999 fiscal year and continuing each fiscal year
thereafter, be eligible to receive an annual cash bonus (the "Bonus") during the
term of his employment hereunder to be developed by the Board, based on
achievement of performance targets established by the Board in consultation with
the CEO as soon as practicable at the beginning of the fiscal year for which the
performance targets relate. Executive's target Bonus for the 1999 fiscal year is
set forth on the signature page hereof, and such target shall not be increased
before the Company obtains an Investment-Grade Credit Rating. A Bonus award
shall be payable to Executive at the time bonuses are paid to executive officers
in accordance with the Company's policies and practices as set by the Board in
consultation with the CEO.
4. Employee Benefits.
4.1 Equity and Stock Options. Simultaneously with the
execution of this Agreement, the Company and Executive are entering into the
Common Stock Ownership Agreement, the Option Grant Agreement[s] and the
Stockholders Agreement in the forms attached hereto as Exhibits A, B and C,
respectively (together with any other agreement approved by the Board and
designated by the Board an "Ancillary Document" for purposes of this Agreement,
the "Ancillary Documents"). Executive shall not be eligible to receive any stock
option or other equity incentive other than as set forth in the Ancillary
Documents.
4.2 Employee Benefit Programs, Plans and Practices;
Perquisites. The Company shall provide Executive while employed hereunder with
coverage under such employee benefits (commensurate with his position in the
Company and to the extent permitted under any employee benefit plan) in
accordance with the terms thereof, including the Continuation Benefits (as
defined herein), D&O insurance, which covers claims arising out of actions or
inactions occurring during the Term of Employment, in accordance with the D&O
insurance policy, and other employee benefits which the Company may make
available to its senior executives from time to time in its discretion. The
Company shall also provide Executive with perquisites which the Company may make
available to its senior executives from time to time in its discretion.
4.3 Vacation. Executive shall be entitled to the number of
business days paid vacation in each calendar year as determined in accordance
with the Company's applicable vacation policies, which shall be taken at such
times as are consistent with Executive's responsibilities hereunder.
5. Expenses. Subject to prevailing Company policy or such
guidelines as may be established by the Board, the Company will reimburse
Executive for all reasonable expenses incurred by Executive in carrying out his
duties.
6. Termination of Employment.
6.1 Termination Not for Cause or for Good Reason. (a) The
Company or Executive may terminate Executive's Term of Employment at any time
for any reason by written notice at least thirty (30) days in advance. If
Executive's employment is terminated (i) by the Company other than for Cause (as
defined in Section 6.2(b) hereof), Disability (as defined in Section 6.3 hereof)
or death or (ii) by Executive for Good Reason (as defined in Section 6.1(b)
hereof), the Company, as liquidated damages and in lieu of any other damages
therefor, shall (A) continue to pay to Executive Base Salary through the end of
the Initial Term if such termination occurs during the first year of the Initial
Term or for a period of one year for such termination thereafter (the
"Continuation Period"), with such payments to be made in accordance with the
terms of Section 3.1. and (B) pay to Executive an additional amount equal to the
Bonus actually paid in the year prior to such termination (the "Severance
Payments"). The Severance Payments shall be made in substantially equal
installments over the Continuation Period in accordance with Company payroll
practices, unless the CEO or the Board approves payment in a lump sum. In
addition, the Company shall pay to Executive a prorated bonus (the "Prorated
Bonus") for the year of termination, payable when such bonuses are paid to other
senior executives of the Company, calculated as the Bonus Executive would have
received in such year based on the Company's actual performance multiplied by a
fraction, the numerator of which is the number of business days during the year
of termination that Executive was employed and the denominator of which is the
total number of business days during the year of termination. The Company shall
also continue to provide Executive during the Continuation Period with qualified
and nonqualified defined benefit and defined contribution pension, life
insurance, medical and other benefits set forth on the signature page hereof
(collectively, the "Continuation 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 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
benefits from any other employer during the Continuation Period. Notwithstanding
the foregoing, if Executive breaches any provision of Section 11 hereof, the
remaining balance of the Severance Payments, the Prorated Bonus and any
Continuation Benefits shall be forfeited.
(b) For purposes of this Agreement, "Good Reason" shall mean
(i) a reduction by the Company in Executive's Base Salary (in which event
Severance Payments shall be made based upon Executive's Base Salary in effect
prior to any such reduction), (ii) a material reduction in the aggregate program
of employee benefits and perquisites to which Executive is entitled (other than
a reduction which affects all executives and is approved by the initial CEO;
provided, however; that if the initial CEO terminates without Good Reason,
voluntarily retires, dies or has a Disability or if such reduction is necessary
to maintain the financial viability or solvency of the Company, the reduction
does not require the approval of the initial CEO); or, without the approval of
the initial CEO: (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity; provided, however, that after a Change
of Control of the Company or an IPO (as those terms are defined in the 1998
Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings
Corporation), clauses (ii) through (v) above shall be replaced by the following:
(ii) a material reduction in the aggregate program of employee benefits and
perquisites to which Executive is entitled (other than a reduction which affects
all executives), (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity.
(c) Termination by Executive for Good Reason shall be made by
delivery to the Company by Executive of written notice, given at least 45 days
prior to such termination, which sets forth the conduct believed to constitute
Good Reason; provided, however, that the Company shall have the opportunity to
cure the Good Reason during the first 30 days of such notice period and if the
Good Reason is cured within such 30-day period, Executive's notice of
termination shall be deemed withdrawn. If no notice is given within 90 days of
the event giving rise to Good Reason, the Good Reason shall be deemed waived.
6.2 Voluntary Termination by Executive; Discharge for Cause.
(a) In the event that Executive's employment is terminated (i) by the Company
for Cause, as hereinafter defined, (ii) by Executive other than for Good Reason,
Disability or death or (iii) by Executive for retirement, Executive shall only
be entitled to receive (A) any Base Salary accrued but unpaid prior to such
termination and (B) any vacation accrued but unused prior to such termination
and any other benefits provided under the employee benefit programs, plans and
practices referred to in Section 4.2 hereof, in accordance with their terms.
After the termination of Executive's employment under this Section 6.2, the
obligations of the Company under this Agreement to make any further payments, or
provide any benefits specified herein, to Executive, except as provided in the
previous sentence, shall thereupon cease and terminate.
(b) As used herein, the term "Cause" shall be limited to (i)
any material and uncorrected breach by Executive of the terms of this Agreement,
including, but not limited to, engaging in action in violation of Section 11
hereof, (ii) any willful fraud or dishonesty of Executive involving the property
or business of the Company, (iii) a deliberate or willful refusal or failure of
Executive to comply with any major corporate policy of the Company which is
communicated to Executive in writing or (iv) Executive=s conviction of, or plea
of nolo contendere to, any felony if such conviction shall result in his
imprisonment; provided that with respect to clauses (i), (ii) or (iii) above,
Executive shall have 10 days following written notice of the conduct which is
the basis for the potential termination for Cause within which to cure such
conduct in order to prevent termination for Cause by the Company. In the event
that Executive is terminated for failure to meet performance goals, as
determined by the initial CEO, such termination shall be considered a
termination for Cause for all purposes relating to his equity (stock and
options), but it shall be considered a termination without Cause for purposes of
such Executive's right to receive Severance Payments, the Prorated Bonus and the
Continuation Benefits.
6.3 Disability. In the event of the Disability (as defined
below) of Executive during the Term of Employment, the Company may terminate
Executive's Term of Employment upon written notice to Executive (or Executive's
personal representative, if applicable) effective upon the date of receipt
thereof (the "Disability Commencement Date"). The obligation of the Company to
make any further payments under this Agreement shall, except for earned but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus cease as of the Disability Commencement Date. The term
"Disability," for purposes of this Agreement, shall mean Executive's absence
from the full-time performance of Executive's duties pursuant to a reasonable
determination made in accordance with the Company's disability plan that
Executive is disabled as a result of incapacity due to physical or mental
illness that lasts, or is reasonably expected to last, for at least six months.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.4 Death. In the event of Executive's death during his Term
of Employment hereunder or at any time thereafter while payments are still owing
to Executive under the terms of this Agreement, all obligations of the Company
to make any further payments, other than the obligation to pay any accrued but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus or any remaining payments that were payable to Executive by
reason of his termination of employment under Section 6.1 to which Executive was
entitled at the time of his death, shall terminate upon Executive's death.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.5 No Further Notice or Compensation or Damages. Executive
understands and agrees that he shall not be entitled to any further notice,
compensation or damages upon Termination of Employment under this Agreement,
other than amounts specified in this Section 6 and the Ancillary Documents.
6.6 Executive's Duty to Provide Materials. Upon the
termination of the Term of Employment for any reason, Executive or his estate
shall surrender to the Company all correspondence, letters, files, contracts,
mailing lists, customer lists, advertising materials, ledgers, supplies,
equipment, checks, and all other materials and records of any kind that are the
property of the Company or any of its subsidiaries or affiliates, that may be in
Executive's possession or under his control, including all copies of any of the
foregoing.
7. Notices. All notices or communications hereunder shall
be in writing, addressed as follows:
To the Company:
P&L Coal Holdings Corporation
701 Market Street, Suite 700
St. Louis, Missouri 63101-1826
attn: Chief Executive Officer
with a copy to:
Alvin H. Brown, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
To Executive at the address set forth on the signature page
hereof,
Any such notice or communication shall be delivered by hand or by courier or
sent certified or registered mail, return receipt requested, postage prepaid,
addressed as above (or to such other address as such party may designate in a
notice duly delivered as described above), and the third business day after the
actual date of sending shall constitute the time at which notice was given.
8. Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
9. Assignment. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the heirs and representatives of Executive
and the assigns and successors of the Company, but neither this Agreement nor
any rights or obligations hereunder shall be assignable or otherwise subject to
hypothecation by Executive (except by will or by operation of the laws of
intestate succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company.
10. Amendment. This Agreement may only be amended by
written agreement of the parties hereto.
11. Nondisclosure of Confidential Information;
Non-Competition. (a) Executive, both during the term hereof and thereafter, will
not, directly or indirectly, use for himself or use for, or disclose to, any
party other than the Company, or any subsidiary of the Company (other than in
the ordinary course of Executive=s duties for the benefit of the Company or any
subsidiary of the Company), any secret or confidential information regarding the
business or property of the Company or its subsidiaries or regarding any secret
or confidential apparatus, process, system, or other method at any time used,
developed, acquired, discovered or investigated by or for the Company or its
subsidiaries, whether or not developed, acquired, discovered or investigated by
Executive. At the termination of Executive=s employment or at any other time the
Company or any of its subsidiaries may request, Executive shall promptly deliver
to the Company all memoranda, notes, records, plats, sketches, plans or other
documents made by, compiled by, delivered to, or otherwise acquired by Executive
concerning the business or properties of the Company or its subsidiaries or any
secret or confidential product, apparatus or process used developed, acquired or
investigated by the Company or its subsidiaries.
(b) In consideration of the Company's obligations under this
Agreement, Executive agrees that during the period of his employment hereunder
and for a period of one year thereafter, without the prior written consent of
the Board, (i) he will not, directly or indirectly, either as principal,
manager, agent, consultant, officer, stockholder, partner, investor, lender or
employee or in any other capacity, carry on, be engaged in or have any financial
interest in, any entity which is in competition with the business of the Company
or its subsidiaries and (ii) he shall not, on his own behalf or on behalf of any
person, firm or company, directly or indirectly, solicit or offer employment to
any person who is or has been employed by the Company or its subsidiaries at any
time during the twelve (12) months immediately preceding such solicitation.
(c) For purposes of this Section 11, an entity shall be deemed
to be in competition with the Company if it is principally involved in the
purchase, sale or other dealing in any property or the rendering of any service
purchased, sold, dealt in or rendered by the Company as a part of the business
of the Company within the same geographic area in which the Company effects such
sales or dealings or renders such services. Notwithstanding this subsection
11(c) or subsection 11(b), nothing herein shall be construed so as to preclude
Executive from investing in any publicly or privately held company, provided
Executive's beneficial ownership of any class of such company's securities does
not exceed 5% of the outstanding securities of such class.
(d) Executive agrees that this covenant not to compete is
reasonable under the circumstances and will not interfere with his ability to
earn a living or to otherwise meet his financial obligations. Executive and the
Company agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 11 would irreparably injure the Company.
Accordingly, Executive agrees that, in the event that a court enjoins Executive
from any activity prohibited by this Section 11, the Company may, in addition to
pursuing any other remedies it may have in law or in equity, cease making any
payments otherwise required by this Agreement and obtain an injunction against
Executive from any court having jurisdiction over the matter restraining any
further violation of this Agreement by Executive.
12. Beneficiaries; References. Executive shall be entitled to
select (and change, to the extent permitted under any applicable law) a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following Executive's death, and may change such election, in either
case by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative. Any reference to the
masculine gender in this Agreement shall include, where appropriate, the
feminine.
13. Dispute Resolution. Any dispute or controversy arising
under or in connection with this Agreement (other than an action to enforce the
covenants in Section 11 hereof) or the Ancillary Documents shall be resolved by
arbitration. Arbitrators shall be selected, and arbitration shall be conducted,
in accordance with the rules of the American Arbitration Association. The
Company shall pay any legal fees in connection with such arbitration in the
event that Executive prevails on a material element of his claim or defense.
14. Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
15. Effect on Prior Agreements. This Agreement and the
Ancillary Documents contain the entire understanding between the parties hereto
and supersedes in all respects any prior or other agreement or understanding,
both written and oral, between the Company, any affiliate of the Company or any
predecessor of the Company or affiliate of the Company and Executive.
16. Withholding. The Company shall be entitled to withhold
from payment any amount of withholding required by law.
17. Survival. Notwithstanding the expiration of the term of
this Agreement, the provisions of Section 11 hereunder shall remain in effect as
long as is reasonably necessary to give effect thereto in accordance with the
terms hereof.
18. Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an original.
P&L Coal Holdings Corporation
By /s/ I. F. Engelhardt
Name: Irl F. Engelhardt
Title: Chairman and Chief Executive Officer
Signature of Executive: /s/ Richard M. Whiting
Date of Agreement: May 19, 1998
Name of Executive: Richard M. Whiting
Address of Executive: 333 Conway Hill Road
St. Louis, MO 63141
Executive Team Position: President and Chief Operating Officer
Base Salary: $400,000 per annum
Bonus Target: 150% of Base Salary
Continuation Benefits: 1. Medical, dental and vision benefits;
2. Defined contribution plans (qualified and non-
qualified);
3. Defined benefit plans (qualified and non-qualified);
4. Life insurance;
5. AD&D;
6. Health care reimbursement account; and
7. Day care reimbursement account.
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
AGREEMENT, as of the date set forth on the signature page
hereof, by and between P&L Coal Holdings Corporation, a Delaware corporation
(the "Company") and the undersigned executive (the "Executive").
RECITALS
In order to induce Executive to continue to serve in the
executive team position set forth on the signature page hereof, the Company
desires to provide Executive with compensation and other benefits on the terms
and conditions set forth in this Agreement.
Executive is willing to accept such employment and perform
services for the Company, on the terms and conditions hereinafter set forth.
It is therefore hereby agreed by and between the parties as
follows:
1. Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term hereof in the executive team
position set forth on the signature page hereof. In such capacity, Executive
shall report to the Chief Executive Officer of the Company (the "CEO") and shall
have the customary powers, responsibilities and authorities of executives
holding such positions in corporations of the size, type and nature of the
Company, as it exists from time to time, and as are assigned by the Board of
Directors of the Company (the "Board") and the CEO.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment in the executive team position set forth on
the signature page hereof commencing as of the date hereof (the "Commencement
Date") and agrees, subject to any period of vacation and sick leave, to devote
his full business time and efforts to the performance of services, duties and
responsibilities in connection therewith, subject at all times to review and
control of the Board or the CEO.
1.3 Nothing in this Agreement shall preclude Executive from
engaging in charitable work and community affairs, from delivering lectures,
fulfilling speaking engagements or teaching at educational institutions, from
managing any investment made by him or his immediate family with respect to
which Executive or such family member is not substantially involved with the
management or operation of the entity in which Executive has invested (provided
that no such investment in publicly traded equity securities or other property
may exceed 5% of the equity of any entity, without the prior approval of the CEO
or the Board) or from serving, subject to the prior approval of the CEO or the
Board, as a member of boards of directors or as a trustee of any other
corporation, association or entity, to the extent that any of the above
activities do not materially interfere with the performance of his duties
hereunder. For purposes of the preceding sentence, any approval by the CEO or
the Board required therein shall not be unreasonably withheld.
2. Term of Employment. Executive's term of employment under
this Agreement (the "Term of Employment") shall commence on the Commencement
Date and, subject to termination by the terms hereunder, shall have an initial
term of two years (the "Initial Term"), which, beginning on the first
anniversary of the Commencement Date, shall extend thereafter on a day-to day
basis for an "evergreen" one-year term.
3. Compensation.
3.1 Salary. During the Term of Employment, the Company shall
pay Executive a base salary ("Base Salary") at an initial rate as set forth on
the signature page hereof. Base Salary shall be payable in accordance with the
ordinary payroll practices of the Company. During the Term of Employment, the
Board and the CEO shall, in good faith, review, at least annually, Executive's
Base Salary in accordance with the Company's customary procedures and practices
regarding the salaries of senior executives and may, if determined by the Board
to be appropriate, increase Executive's Base Salary following such review;
provided, however, that no such increase shall be made before the Company
obtains ratings on its unsecured debt from Standard & Poor's and Moody's of at
least BBB- and Baa3, respectively ("Investment-Grade Credit Rating"). "Base
Salary" for all purposes herein shall be deemed to be a reference to any such
increased amount.
3.2 Annual Bonus. In addition to his Base Salary, Executive
shall, commencing with the 1999 fiscal year and continuing each fiscal year
thereafter, be eligible to receive an annual cash bonus (the "Bonus") during the
term of his employment hereunder to be developed by the Board, based on
achievement of performance targets established by the Board in consultation with
the CEO as soon as practicable at the beginning of the fiscal year for which the
performance targets relate. Executive's target Bonus for the 1999 fiscal year is
set forth on the signature page hereof, and such target shall not be increased
before the Company obtains an Investment-Grade Credit Rating. A Bonus award
shall be payable to Executive at the time bonuses are paid to executive officers
in accordance with the Company's policies and practices as set by the Board in
consultation with the CEO.
4. Employee Benefits.
4.1 Equity and Stock Options. Simultaneously with the
execution of this Agreement, the Company and Executive are entering into the
Common Stock Ownership Agreement, the Option Grant Agreement[s] and the
Stockholders Agreement in the forms attached hereto as Exhibits A, B and C,
respectively (together with any other agreement approved by the Board and
designated by the Board an "Ancillary Document" for purposes of this Agreement,
the "Ancillary Documents"). Executive shall not be eligible to receive any stock
option or other equity incentive other than as set forth in the Ancillary
Documents.
4.2 Employee Benefit Programs, Plans and Practices;
Perquisites. The Company shall provide Executive while employed hereunder with
coverage under such employee benefits (commensurate with his position in the
Company and to the extent permitted under any employee benefit plan) in
accordance with the terms thereof, including the Continuation Benefits (as
defined herein), D&O insurance, which covers claims arising out of actions or
inactions occurring during the Term of Employment, in accordance with the D&O
insurance policy, and other employee benefits which the Company may make
available to its senior executives from time to time in its discretion. The
Company shall also provide Executive with perquisites which the Company may make
available to its senior executives from time to time in its discretion.
4.3 Vacation. Executive shall be entitled to the number of
business days paid vacation in each calendar year as determined in accordance
with the Company's applicable vacation policies, which shall be taken at such
times as are consistent with Executive's responsibilities hereunder.
5. Expenses. Subject to prevailing Company policy or such
guidelines as may be established by the Board, the Company will reimburse
Executive for all reasonable expenses incurred by Executive in carrying out his
duties.
6. Termination of Employment.
6.1 Termination Not for Cause or for Good Reason. (a) The
Company or Executive may terminate Executive's Term of Employment at any time
for any reason by written notice at least thirty (30) days in advance. If
Executive's employment is terminated (i) by the Company other than for Cause (as
defined in Section 6.2(b) hereof), Disability (as defined in Section 6.3 hereof)
or death or (ii) by Executive for Good Reason (as defined in Section 6.1(b)
hereof), the Company, as liquidated damages and in lieu of any other damages
therefor, shall (A) continue to pay to Executive Base Salary through the end of
the Initial Term if such termination occurs during the first year of the Initial
Term or for a period of one year for such termination thereafter (the
"Continuation Period"), with such payments to be made in accordance with the
terms of Section 3.1. and (B) pay to Executive an additional amount equal to the
Bonus actually paid in the year prior to such termination (the "Severance
Payments"). The Severance Payments shall be made in substantially equal
installments over the Continuation Period in accordance with Company payroll
practices, unless the CEO or the Board approves payment in a lump sum. In
addition, the Company shall pay to Executive a prorated bonus (the "Prorated
Bonus") for the year of termination, payable when such bonuses are paid to other
senior executives of the Company, calculated as the Bonus Executive would have
received in such year based on the Company's actual performance multiplied by a
fraction, the numerator of which is the number of business days during the year
of termination that Executive was employed and the denominator of which is the
total number of business days during the year of termination. The Company shall
also continue to provide Executive during the Continuation Period with qualified
and nonqualified defined benefit and defined contribution pension, life
insurance, medical and other benefits set forth on the signature page hereof
(collectively, the "Continuation 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 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
benefits from any other employer during the Continuation Period. Notwithstanding
the foregoing, if Executive breaches any provision of Section 11 hereof, the
remaining balance of the Severance Payments, the Prorated Bonus and any
Continuation Benefits shall be forfeited.
(b) For purposes of this Agreement, "Good Reason" shall mean
(i) a reduction by the Company in Executive's Base Salary (in which event
Severance Payments shall be made based upon Executive's Base Salary in effect
prior to any such reduction), (ii) a material reduction in the aggregate program
of employee benefits and perquisites to which Executive is entitled (other than
a reduction which affects all executives and is approved by the initial CEO;
provided, however; that if the initial CEO terminates without Good Reason,
voluntarily retires, dies or has a Disability or if such reduction is necessary
to maintain the financial viability or solvency of the Company, the reduction
does not require the approval of the initial CEO); or, without the approval of
the initial CEO: (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity; provided, however, that after a Change
of Control of the Company or an IPO (as those terms are defined in the 1998
Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings
Corporation), clauses (ii) through (v) above shall be replaced by the following:
(ii) a material reduction in the aggregate program of employee benefits and
perquisites to which Executive is entitled (other than a reduction which affects
all executives), (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity.
(c) Termination by Executive for Good Reason shall be made by
delivery to the Company by Executive of written notice, given at least 45 days
prior to such termination, which sets forth the conduct believed to constitute
Good Reason; provided, however, that the Company shall have the opportunity to
cure the Good Reason during the first 30 days of such notice period and if the
Good Reason is cured within such 30-day period, Executive's notice of
termination shall be deemed withdrawn. If no notice is given within 90 days of
the event giving rise to Good Reason, the Good Reason shall be deemed waived.
6.2 Voluntary Termination by Executive; Discharge for Cause.
(a) In the event that Executive's employment is terminated (i) by the Company
for Cause, as hereinafter defined, (ii) by Executive other than for Good Reason,
Disability or death or (iii) by Executive for retirement, Executive shall only
be entitled to receive (A) any Base Salary accrued but unpaid prior to such
termination and (B) any vacation accrued but unused prior to such termination
and any other benefits provided under the employee benefit programs, plans and
practices referred to in Section 4.2 hereof, in accordance with their terms.
After the termination of Executive's employment under this Section 6.2, the
obligations of the Company under this Agreement to make any further payments, or
provide any benefits specified herein, to Executive, except as provided in the
previous sentence, shall thereupon cease and terminate.
(b) As used herein, the term "Cause" shall be limited to (i)
any material and uncorrected breach by Executive of the terms of this Agreement,
including, but not limited to, engaging in action in violation of Section 11
hereof, (ii) any willful fraud or dishonesty of Executive involving the property
or business of the Company, (iii) a deliberate or willful refusal or failure of
Executive to comply with any major corporate policy of the Company which is
communicated to Executive in writing or (iv) Executive=s conviction of, or plea
of nolo contendere to, any felony if such conviction shall result in his
imprisonment; provided that with respect to clauses (i), (ii) or (iii) above,
Executive shall have 10 days following written notice of the conduct which is
the basis for the potential termination for Cause within which to cure such
conduct in order to prevent termination for Cause by the Company. In the event
that Executive is terminated for failure to meet performance goals, as
determined by the initial CEO, such termination shall be considered a
termination for Cause for all purposes relating to his equity (stock and
options), but it shall be considered a termination without Cause for purposes of
such Executive's right to receive Severance Payments, the Prorated Bonus and the
Continuation Benefits.
6.3 Disability. In the event of the Disability (as defined
below) of Executive during the Term of Employment, the Company may terminate
Executive's Term of Employment upon written notice to Executive (or Executive's
personal representative, if applicable) effective upon the date of receipt
thereof (the "Disability Commencement Date"). The obligation of the Company to
make any further payments under this Agreement shall, except for earned but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus cease as of the Disability Commencement Date. The term
"Disability," for purposes of this Agreement, shall mean Executive's absence
from the full-time performance of Executive's duties pursuant to a reasonable
determination made in accordance with the Company's disability plan that
Executive is disabled as a result of incapacity due to physical or mental
illness that lasts, or is reasonably expected to last, for at least six months.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.4 Death. In the event of Executive's death during his Term
of Employment hereunder or at any time thereafter while payments are still owing
to Executive under the terms of this Agreement, all obligations of the Company
to make any further payments, other than the obligation to pay any accrued but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus or any remaining payments that were payable to Executive by
reason of his termination of employment under Section 6.1 to which Executive was
entitled at the time of his death, shall terminate upon Executive's death.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.5 No Further Notice or Compensation or Damages. Executive
understands and agrees that he shall not be entitled to any further notice,
compensation or damages upon Termination of Employment under this Agreement,
other than amounts specified in this Section 6 and the Ancillary Documents.
6.6 Executive's Duty to Provide Materials. Upon the
termination of the Term of Employment for any reason, Executive or his estate
shall surrender to the Company all correspondence, letters, files, contracts,
mailing lists, customer lists, advertising materials, ledgers, supplies,
equipment, checks, and all other materials and records of any kind that are the
property of the Company or any of its subsidiaries or affiliates, that may be in
Executive's possession or under his control, including all copies of any of the
foregoing.
7. Notices. All notices or communications hereunder shall
be in writing, addressed as follows:
To the Company:
P&L Coal Holdings Corporation
701 Market Street, Suite 700
St. Louis, Missouri 63101-1826
attn: Chief Executive Officer
with a copy to:
Alvin H. Brown, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
To Executive at the address set forth on the signature page
hereof,
Any such notice or communication shall be delivered by hand or by courier or
sent certified or registered mail, return receipt requested, postage prepaid,
addressed as above (or to such other address as such party may designate in a
notice duly delivered as described above), and the third business day after the
actual date of sending shall constitute the time at which notice was given.
8. Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
9. Assignment. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the heirs and representatives of Executive
and the assigns and successors of the Company, but neither this Agreement nor
any rights or obligations hereunder shall be assignable or otherwise subject to
hypothecation by Executive (except by will or by operation of the laws of
intestate succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company.
10. Amendment. This Agreement may only be amended by
written agreement of the parties hereto.
11. Nondisclosure of Confidential Information;
Non-Competition. (a) Executive, both during the term hereof and thereafter, will
not, directly or indirectly, use for himself or use for, or disclose to, any
party other than the Company, or any subsidiary of the Company (other than in
the ordinary course of Executive=s duties for the benefit of the Company or any
subsidiary of the Company), any secret or confidential information regarding the
business or property of the Company or its subsidiaries or regarding any secret
or confidential apparatus, process, system, or other method at any time used,
developed, acquired, discovered or investigated by or for the Company or its
subsidiaries, whether or not developed, acquired, discovered or investigated by
Executive. At the termination of Executive=s employment or at any other time the
Company or any of its subsidiaries may request, Executive shall promptly deliver
to the Company all memoranda, notes, records, plats, sketches, plans or other
documents made by, compiled by, delivered to, or otherwise acquired by Executive
concerning the business or properties of the Company or its subsidiaries or any
secret or confidential product, apparatus or process used developed, acquired or
investigated by the Company or its subsidiaries.
(b) In consideration of the Company's obligations under this
Agreement, Executive agrees that during the period of his employment hereunder
and for a period of one year thereafter, without the prior written consent of
the Board, (i) he will not, directly or indirectly, either as principal,
manager, agent, consultant, officer, stockholder, partner, investor, lender or
employee or in any other capacity, carry on, be engaged in or have any financial
interest in, any entity which is in competition with the business of the Company
or its subsidiaries and (ii) he shall not, on his own behalf or on behalf of any
person, firm or company, directly or indirectly, solicit or offer employment to
any person who is or has been employed by the Company or its subsidiaries at any
time during the twelve (12) months immediately preceding such solicitation.
(c) For purposes of this Section 11, an entity shall be deemed
to be in competition with the Company if it is principally involved in the
purchase, sale or other dealing in any property or the rendering of any service
purchased, sold, dealt in or rendered by the Company as a part of the business
of the Company within the same geographic area in which the Company effects such
sales or dealings or renders such services. Notwithstanding this subsection
11(c) or subsection 11(b), nothing herein shall be construed so as to preclude
Executive from investing in any publicly or privately held company, provided
Executive's beneficial ownership of any class of such company's securities does
not exceed 5% of the outstanding securities of such class.
(d) Executive agrees that this covenant not to compete is
reasonable under the circumstances and will not interfere with his ability to
earn a living or to otherwise meet his financial obligations. Executive and the
Company agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 11 would irreparably injure the Company.
Accordingly, Executive agrees that, in the event that a court enjoins Executive
from any activity prohibited by this Section 11, the Company may, in addition to
pursuing any other remedies it may have in law or in equity, cease making any
payments otherwise required by this Agreement and obtain an injunction against
Executive from any court having jurisdiction over the matter restraining any
further violation of this Agreement by Executive.
12. Beneficiaries; References. Executive shall be entitled to
select (and change, to the extent permitted under any applicable law) a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following Executive's death, and may change such election, in either
case by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative. Any reference to the
masculine gender in this Agreement shall include, where appropriate, the
feminine.
13. Dispute Resolution. Any dispute or controversy arising
under or in connection with this Agreement (other than an action to enforce the
covenants in Section 11 hereof) or the Ancillary Documents shall be resolved by
arbitration. Arbitrators shall be selected, and arbitration shall be conducted,
in accordance with the rules of the American Arbitration Association. The
Company shall pay any legal fees in connection with such arbitration in the
event that Executive prevails on a material element of his claim or defense.
14. Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
15. Effect on Prior Agreements. This Agreement and the
Ancillary Documents contain the entire understanding between the parties hereto
and supersedes in all respects any prior or other agreement or understanding,
both written and oral, between the Company, any affiliate of the Company or any
predecessor of the Company or affiliate of the Company and Executive.
16. Withholding. The Company shall be entitled to withhold
from payment any amount of withholding required by law.
17. Survival. Notwithstanding the expiration of the term of
this Agreement, the provisions of Section 11 hereunder shall remain in effect as
long as is reasonably necessary to give effect thereto in accordance with the
terms hereof.
18. Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an original.
P&L Coal Holdings Corporation
By /s/ I. F. Engelhardt
Name: Irl F. Engelhardt
Title: Chairman and Chief Executive Officer
Signature of Executive: /s/ W. Howard Carson
Date of Agreement: May 19, 1998
Name of Executive: W. Howard Carson, Jr.
Address of Executive: 425 Pine Bend Drive
Wildwood, MO 63005
Executive Team Position: Chief Commercial Officer
Base Salary: $325,000 per annum
Bonus Target: 150% of Base Salary
Continuation Benefits: 1. Medical, dental and vision benefits;
2. Defined contribution plans (qualified and non-
qualified);
3. Defined benefit plans (qualified and non-qualified);
4. Life insurance;
5. AD&D;
6. Health care reimbursement account; and
7. Day care reimbursement account.
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
AGREEMENT, as of the date set forth on the signature page
hereof, by and between P&L Coal Holdings Corporation, a Delaware corporation
(the "Company") and the undersigned executive (the "Executive").
RECITALS
In order to induce Executive to continue to serve in the
executive team position set forth on the signature page hereof, the Company
desires to provide Executive with compensation and other benefits on the terms
and conditions set forth in this Agreement.
Executive is willing to accept such employment and perform
services for the Company, on the terms and conditions hereinafter set forth.
It is therefore hereby agreed by and between the parties as
follows:
1. Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term hereof in the executive team
position set forth on the signature page hereof. In such capacity, Executive
shall report to the Chief Executive Officer of the Company (the "CEO") and shall
have the customary powers, responsibilities and authorities of executives
holding such positions in corporations of the size, type and nature of the
Company, as it exists from time to time, and as are assigned by the Board of
Directors of the Company (the "Board") and the CEO.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment in the executive team position set forth on
the signature page hereof commencing as of the date hereof (the "Commencement
Date") and agrees, subject to any period of vacation and sick leave, to devote
his full business time and efforts to the performance of services, duties and
responsibilities in connection therewith, subject at all times to review and
control of the Board or the CEO.
1.3 Nothing in this Agreement shall preclude Executive from
engaging in charitable work and community affairs, from delivering lectures,
fulfilling speaking engagements or teaching at educational institutions, from
managing any investment made by him or his immediate family with respect to
which Executive or such family member is not substantially involved with the
management or operation of the entity in which Executive has invested (provided
that no such investment in publicly traded equity securities or other property
may exceed 5% of the equity of any entity, without the prior approval of the CEO
or the Board) or from serving, subject to the prior approval of the CEO or the
Board, as a member of boards of directors or as a trustee of any other
corporation, association or entity, to the extent that any of the above
activities do not materially interfere with the performance of his duties
hereunder. For purposes of the preceding sentence, any approval by the CEO or
the Board required therein shall not be unreasonably withheld.
2. Term of Employment. Executive's term of employment under
this Agreement (the "Term of Employment") shall commence on the Commencement
Date and, subject to termination by the terms hereunder, shall have an initial
term of two years (the "Initial Term"), which, beginning on the first
anniversary of the Commencement Date, shall extend thereafter on a day-to day
basis for an "evergreen" one-year term.
3. Compensation.
3.1 Salary. During the Term of Employment, the Company shall
pay Executive a base salary ("Base Salary") at an initial rate as set forth on
the signature page hereof. Base Salary shall be payable in accordance with the
ordinary payroll practices of the Company. During the Term of Employment, the
Board and the CEO shall, in good faith, review, at least annually, Executive's
Base Salary in accordance with the Company's customary procedures and practices
regarding the salaries of senior executives and may, if determined by the Board
to be appropriate, increase Executive's Base Salary following such review;
provided, however, that no such increase shall be made before the Company
obtains ratings on its unsecured debt from Standard & Poor's and Moody's of at
least BBB- and Baa3, respectively ("Investment-Grade Credit Rating"). "Base
Salary" for all purposes herein shall be deemed to be a reference to any such
increased amount.
3.2 Annual Bonus. In addition to his Base Salary, Executive
shall, commencing with the 1999 fiscal year and continuing each fiscal year
thereafter, be eligible to receive an annual cash bonus (the "Bonus") during the
term of his employment hereunder to be developed by the Board, based on
achievement of performance targets established by the Board in consultation with
the CEO as soon as practicable at the beginning of the fiscal year for which the
performance targets relate. Executive's target Bonus for the 1999 fiscal year is
set forth on the signature page hereof, and such target shall not be increased
before the Company obtains an Investment-Grade Credit Rating. A Bonus award
shall be payable to Executive at the time bonuses are paid to executive officers
in accordance with the Company's policies and practices as set by the Board in
consultation with the CEO.
4. Employee Benefits.
4.1 Equity and Stock Options. Simultaneously with the
execution of this Agreement, the Company and Executive are entering into the
Common Stock Ownership Agreement, the Option Grant Agreement[s] and the
Stockholders Agreement in the forms attached hereto as Exhibits A, B and C,
respectively (together with any other agreement approved by the Board and
designated by the Board an "Ancillary Document" for purposes of this Agreement,
the "Ancillary Documents"). Executive shall not be eligible to receive any stock
option or other equity incentive other than as set forth in the Ancillary
Documents.
4.2 Employee Benefit Programs, Plans and Practices;
Perquisites. The Company shall provide Executive while employed hereunder with
coverage under such employee benefits (commensurate with his position in the
Company and to the extent permitted under any employee benefit plan) in
accordance with the terms thereof, including the Continuation Benefits (as
defined herein), D&O insurance, which covers claims arising out of actions or
inactions occurring during the Term of Employment, in accordance with the D&O
insurance policy, and other employee benefits which the Company may make
available to its senior executives from time to time in its discretion. The
Company shall also provide Executive with perquisites which the Company may make
available to its senior executives from time to time in its discretion.
4.3 Vacation. Executive shall be entitled to the number of
business days paid vacation in each calendar year as determined in accordance
with the Company's applicable vacation policies, which shall be taken at such
times as are consistent with Executive's responsibilities hereunder.
5. Expenses. Subject to prevailing Company policy or such
guidelines as may be established by the Board, the Company will reimburse
Executive for all reasonable expenses incurred by Executive in carrying out his
duties.
6. Termination of Employment.
6.1 Termination Not for Cause or for Good Reason. (a) The
Company or Executive may terminate Executive's Term of Employment at any time
for any reason by written notice at least thirty (30) days in advance. If
Executive's employment is terminated (i) by the Company other than for Cause (as
defined in Section 6.2(b) hereof), Disability (as defined in Section 6.3 hereof)
or death or (ii) by Executive for Good Reason (as defined in Section 6.1(b)
hereof), the Company, as liquidated damages and in lieu of any other damages
therefor, shall (A) continue to pay to Executive Base Salary through the end of
the Initial Term if such termination occurs during the first year of the Initial
Term or for a period of one year for such termination thereafter (the
"Continuation Period"), with such payments to be made in accordance with the
terms of Section 3.1. and (B) pay to Executive an additional amount equal to the
Bonus actually paid in the year prior to such termination (the "Severance
Payments"). The Severance Payments shall be made in substantially equal
installments over the Continuation Period in accordance with Company payroll
practices, unless the CEO or the Board approves payment in a lump sum. In
addition, the Company shall pay to Executive a prorated bonus (the "Prorated
Bonus") for the year of termination, payable when such bonuses are paid to other
senior executives of the Company, calculated as the Bonus Executive would have
received in such year based on the Company's actual performance multiplied by a
fraction, the numerator of which is the number of business days during the year
of termination that Executive was employed and the denominator of which is the
total number of business days during the year of termination. The Company shall
also continue to provide Executive during the Continuation Period with qualified
and nonqualified defined benefit and defined contribution pension, life
insurance, medical and other benefits set forth on the signature page hereof
(collectively, the "Continuation 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 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
benefits from any other employer during the Continuation Period. Notwithstanding
the foregoing, if Executive breaches any provision of Section 11 hereof, the
remaining balance of the Severance Payments, the Prorated Bonus and any
Continuation Benefits shall be forfeited.
(b) For purposes of this Agreement, "Good Reason" shall mean
(i) a reduction by the Company in Executive's Base Salary (in which event
Severance Payments shall be made based upon Executive's Base Salary in effect
prior to any such reduction), (ii) a material reduction in the aggregate program
of employee benefits and perquisites to which Executive is entitled (other than
a reduction which affects all executives and is approved by the initial CEO;
provided, however; that if the initial CEO terminates without Good Reason,
voluntarily retires, dies or has a Disability or if such reduction is necessary
to maintain the financial viability or solvency of the Company, the reduction
does not require the approval of the initial CEO); or, without the approval of
the initial CEO: (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity; provided, however, that after a Change
of Control of the Company or an IPO (as those terms are defined in the 1998
Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings
Corporation), clauses (ii) through (v) above shall be replaced by the following:
(ii) a material reduction in the aggregate program of employee benefits and
perquisites to which Executive is entitled (other than a reduction which affects
all executives), (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity.
(c) Termination by Executive for Good Reason shall be made by
delivery to the Company by Executive of written notice, given at least 45 days
prior to such termination, which sets forth the conduct believed to constitute
Good Reason; provided, however, that the Company shall have the opportunity to
cure the Good Reason during the first 30 days of such notice period and if the
Good Reason is cured within such 30-day period, Executive's notice of
termination shall be deemed withdrawn. If no notice is given within 90 days of
the event giving rise to Good Reason, the Good Reason shall be deemed waived.
6.2 Voluntary Termination by Executive; Discharge for Cause.
(a) In the event that Executive's employment is terminated (i) by the Company
for Cause, as hereinafter defined, (ii) by Executive other than for Good Reason,
Disability or death or (iii) by Executive for retirement, Executive shall only
be entitled to receive (A) any Base Salary accrued but unpaid prior to such
termination and (B) any vacation accrued but unused prior to such termination
and any other benefits provided under the employee benefit programs, plans and
practices referred to in Section 4.2 hereof, in accordance with their terms.
After the termination of Executive's employment under this Section 6.2, the
obligations of the Company under this Agreement to make any further payments, or
provide any benefits specified herein, to Executive, except as provided in the
previous sentence, shall thereupon cease and terminate.
(b) As used herein, the term "Cause" shall be limited to (i)
any material and uncorrected breach by Executive of the terms of this Agreement,
including, but not limited to, engaging in action in violation of Section 11
hereof, (ii) any willful fraud or dishonesty of Executive involving the property
or business of the Company, (iii) a deliberate or willful refusal or failure of
Executive to comply with any major corporate policy of the Company which is
communicated to Executive in writing or (iv) Executive=s conviction of, or plea
of nolo contendere to, any felony if such conviction shall result in his
imprisonment; provided that with respect to clauses (i), (ii) or (iii) above,
Executive shall have 10 days following written notice of the conduct which is
the basis for the potential termination for Cause within which to cure such
conduct in order to prevent termination for Cause by the Company. In the event
that Executive is terminated for failure to meet performance goals, as
determined by the initial CEO, such termination shall be considered a
termination for Cause for all purposes relating to his equity (stock and
options), but it shall be considered a termination without Cause for purposes of
such Executive's right to receive Severance Payments, the Prorated Bonus and the
Continuation Benefits.
6.3 Disability. In the event of the Disability (as defined
below) of Executive during the Term of Employment, the Company may terminate
Executive's Term of Employment upon written notice to Executive (or Executive's
personal representative, if applicable) effective upon the date of receipt
thereof (the "Disability Commencement Date"). The obligation of the Company to
make any further payments under this Agreement shall, except for earned but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus cease as of the Disability Commencement Date. The term
"Disability," for purposes of this Agreement, shall mean Executive's absence
from the full-time performance of Executive's duties pursuant to a reasonable
determination made in accordance with the Company's disability plan that
Executive is disabled as a result of incapacity due to physical or mental
illness that lasts, or is reasonably expected to last, for at least six months.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.4 Death. In the event of Executive's death during his Term
of Employment hereunder or at any time thereafter while payments are still owing
to Executive under the terms of this Agreement, all obligations of the Company
to make any further payments, other than the obligation to pay any accrued but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus or any remaining payments that were payable to Executive by
reason of his termination of employment under Section 6.1 to which Executive was
entitled at the time of his death, shall terminate upon Executive's death.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.5 No Further Notice or Compensation or Damages. Executive
understands and agrees that he shall not be entitled to any further notice,
compensation or damages upon Termination of Employment under this Agreement,
other than amounts specified in this Section 6 and the Ancillary Documents.
6.6 Executive's Duty to Provide Materials. Upon the
termination of the Term of Employment for any reason, Executive or his estate
shall surrender to the Company all correspondence, letters, files, contracts,
mailing lists, customer lists, advertising materials, ledgers, supplies,
equipment, checks, and all other materials and records of any kind that are the
property of the Company or any of its subsidiaries or affiliates, that may be in
Executive's possession or under his control, including all copies of any of the
foregoing.
7. Notices. All notices or communications hereunder shall
be in writing, addressed as follows:
To the Company:
P&L Coal Holdings Corporation
701 Market Street, Suite 700
St. Louis, Missouri 63101-1826
attn: Chief Executive Officer
with a copy to:
Alvin H. Brown, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
To Executive at the address set forth on the signature page
hereof,
Any such notice or communication shall be delivered by hand or by courier or
sent certified or registered mail, return receipt requested, postage prepaid,
addressed as above (or to such other address as such party may designate in a
notice duly delivered as described above), and the third business day after the
actual date of sending shall constitute the time at which notice was given.
8. Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
9. Assignment. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the heirs and representatives of Executive
and the assigns and successors of the Company, but neither this Agreement nor
any rights or obligations hereunder shall be assignable or otherwise subject to
hypothecation by Executive (except by will or by operation of the laws of
intestate succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company.
10. Amendment. This Agreement may only be amended by
written agreement of the parties hereto.
11. Nondisclosure of Confidential Information;
Non-Competition. (a) Executive, both during the term hereof and thereafter, will
not, directly or indirectly, use for himself or use for, or disclose to, any
party other than the Company, or any subsidiary of the Company (other than in
the ordinary course of Executive=s duties for the benefit of the Company or any
subsidiary of the Company), any secret or confidential information regarding the
business or property of the Company or its subsidiaries or regarding any secret
or confidential apparatus, process, system, or other method at any time used,
developed, acquired, discovered or investigated by or for the Company or its
subsidiaries, whether or not developed, acquired, discovered or investigated by
Executive. At the termination of Executive=s employment or at any other time the
Company or any of its subsidiaries may request, Executive shall promptly deliver
to the Company all memoranda, notes, records, plats, sketches, plans or other
documents made by, compiled by, delivered to, or otherwise acquired by Executive
concerning the business or properties of the Company or its subsidiaries or any
secret or confidential product, apparatus or process used developed, acquired or
investigated by the Company or its subsidiaries.
(b) In consideration of the Company's obligations under this
Agreement, Executive agrees that during the period of his employment hereunder
and for a period of one year thereafter, without the prior written consent of
the Board, (i) he will not, directly or indirectly, either as principal,
manager, agent, consultant, officer, stockholder, partner, investor, lender or
employee or in any other capacity, carry on, be engaged in or have any financial
interest in, any entity which is in competition with the business of the Company
or its subsidiaries and (ii) he shall not, on his own behalf or on behalf of any
person, firm or company, directly or indirectly, solicit or offer employment to
any person who is or has been employed by the Company or its subsidiaries at any
time during the twelve (12) months immediately preceding such solicitation.
(c) For purposes of this Section 11, an entity shall be deemed
to be in competition with the Company if it is principally involved in the
purchase, sale or other dealing in any property or the rendering of any service
purchased, sold, dealt in or rendered by the Company as a part of the business
of the Company within the same geographic area in which the Company effects such
sales or dealings or renders such services. Notwithstanding this subsection
11(c) or subsection 11(b), nothing herein shall be construed so as to preclude
Executive from investing in any publicly or privately held company, provided
Executive's beneficial ownership of any class of such company's securities does
not exceed 5% of the outstanding securities of such class.
(d) Executive agrees that this covenant not to compete is
reasonable under the circumstances and will not interfere with his ability to
earn a living or to otherwise meet his financial obligations. Executive and the
Company agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 11 would irreparably injure the Company.
Accordingly, Executive agrees that, in the event that a court enjoins Executive
from any activity prohibited by this Section 11, the Company may, in addition to
pursuing any other remedies it may have in law or in equity, cease making any
payments otherwise required by this Agreement and obtain an injunction against
Executive from any court having jurisdiction over the matter restraining any
further violation of this Agreement by Executive.
12. Beneficiaries; References. Executive shall be entitled to
select (and change, to the extent permitted under any applicable law) a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following Executive's death, and may change such election, in either
case by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative. Any reference to the
masculine gender in this Agreement shall include, where appropriate, the
feminine.
13. Dispute Resolution. Any dispute or controversy arising
under or in connection with this Agreement (other than an action to enforce the
covenants in Section 11 hereof) or the Ancillary Documents shall be resolved by
arbitration. Arbitrators shall be selected, and arbitration shall be conducted,
in accordance with the rules of the American Arbitration Association. The
Company shall pay any legal fees in connection with such arbitration in the
event that Executive prevails on a material element of his claim or defense.
14. Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
15. Effect on Prior Agreements. This Agreement and the
Ancillary Documents contain the entire understanding between the parties hereto
and supersedes in all respects any prior or other agreement or understanding,
both written and oral, between the Company, any affiliate of the Company or any
predecessor of the Company or affiliate of the Company and Executive.
16. Withholding. The Company shall be entitled to withhold
from payment any amount of withholding required by law.
17. Survival. Notwithstanding the expiration of the term of
this Agreement, the provisions of Section 11 hereunder shall remain in effect as
long as is reasonably necessary to give effect thereto in accordance with the
terms hereof.
18. Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an original.
P&L Coal Holdings Corporation
By /s/ I. F. Engelhardt
Name: Irl F. Engelhardt
Title: Chairman and Chief Executive Officer
Signature of Executive: /s/ Roger B. Walcott, Jr.
Date of Agreement: May 19, 1998
Name of Executive: Roger B. Walcott, Jr.
Address of Executive: 1200 Lay Road
Ladue, MO 63124
Executive Team Position: Executive Vice President
Base Salary: $350,000 per annum
Bonus Target: 150% of Base Salary
Continuation Benefits: 1. Medical, dental and vision benefits;
2. Defined contribution plans (qualified and non-
qualified);
3. Defined benefit plans (qualified and non-qualified);
4. Life insurance;
5. AD&D;
6. Health care reimbursement account; and
7. Day care reimbursement account.
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
AGREEMENT, as of the date set forth on the signature page
hereof, by and between P&L Coal Holdings Corporation, a Delaware corporation
(the "Company") and the undersigned executive (the "Executive").
RECITALS
In order to induce Executive to continue to serve in the
executive team position set forth on the signature page hereof, the Company
desires to provide Executive with compensation and other benefits on the terms
and conditions set forth in this Agreement.
Executive is willing to accept such employment and perform
services for the Company, on the terms and conditions hereinafter set forth.
It is therefore hereby agreed by and between the parties as
follows:
1. Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term hereof in the executive team
position set forth on the signature page hereof. In such capacity, Executive
shall report to the Chief Executive Officer of the Company (the "CEO") and shall
have the customary powers, responsibilities and authorities of executives
holding such positions in corporations of the size, type and nature of the
Company, as it exists from time to time, and as are assigned by the Board of
Directors of the Company (the "Board") and the CEO.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment in the executive team position set forth on
the signature page hereof commencing as of the date hereof (the "Commencement
Date") and agrees, subject to any period of vacation and sick leave, to devote
his full business time and efforts to the performance of services, duties and
responsibilities in connection therewith, subject at all times to review and
control of the Board or the CEO.
1.3 Nothing in this Agreement shall preclude Executive from
engaging in charitable work and community affairs, from delivering lectures,
fulfilling speaking engagements or teaching at educational institutions, from
managing any investment made by him or his immediate family with respect to
which Executive or such family member is not substantially involved with the
management or operation of the entity in which Executive has invested (provided
that no such investment in publicly traded equity securities or other property
may exceed 5% of the equity of any entity, without the prior approval of the CEO
or the Board) or from serving, subject to the prior approval of the CEO or the
Board, as a member of boards of directors or as a trustee of any other
corporation, association or entity, to the extent that any of the above
activities do not materially interfere with the performance of his duties
hereunder. For purposes of the preceding sentence, any approval by the CEO or
the Board required therein shall not be unreasonably withheld.
2. Term of Employment. Executive's term of employment under
this Agreement (the "Term of Employment") shall commence on the Commencement
Date and, subject to termination by the terms hereunder, shall have an initial
term of two years (the "Initial Term"), which, beginning on the first
anniversary of the Commencement Date, shall extend thereafter on a day-to day
basis for an "evergreen" one-year term.
3. Compensation.
3.1 Salary. During the Term of Employment, the Company shall
pay Executive a base salary ("Base Salary") at an initial rate as set forth on
the signature page hereof. Base Salary shall be payable in accordance with the
ordinary payroll practices of the Company. During the Term of Employment, the
Board and the CEO shall, in good faith, review, at least annually, Executive's
Base Salary in accordance with the Company's customary procedures and practices
regarding the salaries of senior executives and may, if determined by the Board
to be appropriate, increase Executive's Base Salary following such review;
provided, however, that no such increase shall be made before the Company
obtains ratings on its unsecured debt from Standard & Poor's and Moody's of at
least BBB- and Baa3, respectively ("Investment-Grade Credit Rating"). "Base
Salary" for all purposes herein shall be deemed to be a reference to any such
increased amount.
3.2 Annual Bonus. In addition to his Base Salary, Executive
shall, commencing with the 1999 fiscal year and continuing each fiscal year
thereafter, be eligible to receive an annual cash bonus (the "Bonus") during the
term of his employment hereunder to be developed by the Board, based on
achievement of performance targets established by the Board in consultation with
the CEO as soon as practicable at the beginning of the fiscal year for which the
performance targets relate. Executive's target Bonus for the 1999 fiscal year is
set forth on the signature page hereof, and such target shall not be increased
before the Company obtains an Investment-Grade Credit Rating. A Bonus award
shall be payable to Executive at the time bonuses are paid to executive officers
in accordance with the Company's policies and practices as set by the Board in
consultation with the CEO.
4. Employee Benefits.
4.1 Equity and Stock Options. Simultaneously with the
execution of this Agreement, the Company and Executive are entering into the
Common Stock Ownership Agreement, the Option Grant Agreement[s] and the
Stockholders Agreement in the forms attached hereto as Exhibits A, B and C,
respectively (together with any other agreement approved by the Board and
designated by the Board an "Ancillary Document" for purposes of this Agreement,
the "Ancillary Documents"). Executive shall not be eligible to receive any stock
option or other equity incentive other than as set forth in the Ancillary
Documents.
4.2 Employee Benefit Programs, Plans and Practices;
Perquisites. The Company shall provide Executive while employed hereunder with
coverage under such employee benefits (commensurate with his position in the
Company and to the extent permitted under any employee benefit plan) in
accordance with the terms thereof, including the Continuation Benefits (as
defined herein), D&O insurance, which covers claims arising out of actions or
inactions occurring during the Term of Employment, in accordance with the D&O
insurance policy, and other employee benefits which the Company may make
available to its senior executives from time to time in its discretion. The
Company shall also provide Executive with perquisites which the Company may make
available to its senior executives from time to time in its discretion.
4.3 Vacation. Executive shall be entitled to the number of
business days paid vacation in each calendar year as determined in accordance
with the Company's applicable vacation policies, which shall be taken at such
times as are consistent with Executive's responsibilities hereunder.
5. Expenses. Subject to prevailing Company policy or such
guidelines as may be established by the Board, the Company will reimburse
Executive for all reasonable expenses incurred by Executive in carrying out his
duties.
6. Termination of Employment.
6.1 Termination Not for Cause or for Good Reason. (a) The
Company or Executive may terminate Executive's Term of Employment at any time
for any reason by written notice at least thirty (30) days in advance. If
Executive's employment is terminated (i) by the Company other than for Cause (as
defined in Section 6.2(b) hereof), Disability (as defined in Section 6.3 hereof)
or death or (ii) by Executive for Good Reason (as defined in Section 6.1(b)
hereof), the Company, as liquidated damages and in lieu of any other damages
therefor, shall (A) continue to pay to Executive Base Salary through the end of
the Initial Term if such termination occurs during the first year of the Initial
Term or for a period of one year for such termination thereafter (the
"Continuation Period"), with such payments to be made in accordance with the
terms of Section 3.1. and (B) pay to Executive an additional amount equal to the
Bonus actually paid in the year prior to such termination (the "Severance
Payments"). The Severance Payments shall be made in substantially equal
installments over the Continuation Period in accordance with Company payroll
practices, unless the CEO or the Board approves payment in a lump sum. In
addition, the Company shall pay to Executive a prorated bonus (the "Prorated
Bonus") for the year of termination, payable when such bonuses are paid to other
senior executives of the Company, calculated as the Bonus Executive would have
received in such year based on the Company's actual performance multiplied by a
fraction, the numerator of which is the number of business days during the year
of termination that Executive was employed and the denominator of which is the
total number of business days during the year of termination. The Company shall
also continue to provide Executive during the Continuation Period with qualified
and nonqualified defined benefit and defined contribution pension, life
insurance, medical and other benefits set forth on the signature page hereof
(collectively, the "Continuation 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 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
benefits from any other employer during the Continuation Period. Notwithstanding
the foregoing, if Executive breaches any provision of Section 11 hereof, the
remaining balance of the Severance Payments, the Prorated Bonus and any
Continuation Benefits shall be forfeited.
(b) For purposes of this Agreement, "Good Reason" shall mean
(i) a reduction by the Company in Executive's Base Salary (in which event
Severance Payments shall be made based upon Executive's Base Salary in effect
prior to any such reduction), (ii) a material reduction in the aggregate program
of employee benefits and perquisites to which Executive is entitled (other than
a reduction which affects all executives and is approved by the initial CEO;
provided, however; that if the initial CEO terminates without Good Reason,
voluntarily retires, dies or has a Disability or if such reduction is necessary
to maintain the financial viability or solvency of the Company, the reduction
does not require the approval of the initial CEO); or, without the approval of
the initial CEO: (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity; provided, however, that after a Change
of Control of the Company or an IPO (as those terms are defined in the 1998
Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings
Corporation), clauses (ii) through (v) above shall be replaced by the following:
(ii) a material reduction in the aggregate program of employee benefits and
perquisites to which Executive is entitled (other than a reduction which affects
all executives), (iii) relocation by more than 50 miles from Executive's
workplace, (iv) any material diminution or material adverse change in
Executive's duties, responsibilities or reporting relationships, which causes
Executive to fall below the level of the executive team, or (v) a material
decline in Executive's Bonus opportunity.
(c) Termination by Executive for Good Reason shall be made by
delivery to the Company by Executive of written notice, given at least 45 days
prior to such termination, which sets forth the conduct believed to constitute
Good Reason; provided, however, that the Company shall have the opportunity to
cure the Good Reason during the first 30 days of such notice period and if the
Good Reason is cured within such 30-day period, Executive's notice of
termination shall be deemed withdrawn. If no notice is given within 90 days of
the event giving rise to Good Reason, the Good Reason shall be deemed waived.
6.2 Voluntary Termination by Executive; Discharge for Cause.
(a) In the event that Executive's employment is terminated (i) by the Company
for Cause, as hereinafter defined, (ii) by Executive other than for Good Reason,
Disability or death or (iii) by Executive for retirement, Executive shall only
be entitled to receive (A) any Base Salary accrued but unpaid prior to such
termination and (B) any vacation accrued but unused prior to such termination
and any other benefits provided under the employee benefit programs, plans and
practices referred to in Section 4.2 hereof, in accordance with their terms.
After the termination of Executive's employment under this Section 6.2, the
obligations of the Company under this Agreement to make any further payments, or
provide any benefits specified herein, to Executive, except as provided in the
previous sentence, shall thereupon cease and terminate.
(b) As used herein, the term "Cause" shall be limited to (i)
any material and uncorrected breach by Executive of the terms of this Agreement,
including, but not limited to, engaging in action in violation of Section 11
hereof, (ii) any willful fraud or dishonesty of Executive involving the property
or business of the Company, (iii) a deliberate or willful refusal or failure of
Executive to comply with any major corporate policy of the Company which is
communicated to Executive in writing or (iv) Executive=s conviction of, or plea
of nolo contendere to, any felony if such conviction shall result in his
imprisonment; provided that with respect to clauses (i), (ii) or (iii) above,
Executive shall have 10 days following written notice of the conduct which is
the basis for the potential termination for Cause within which to cure such
conduct in order to prevent termination for Cause by the Company. In the event
that Executive is terminated for failure to meet performance goals, as
determined by the initial CEO, such termination shall be considered a
termination for Cause for all purposes relating to his equity (stock and
options), but it shall be considered a termination without Cause for purposes of
such Executive's right to receive Severance Payments, the Prorated Bonus and the
Continuation Benefits.
6.3 Disability. In the event of the Disability (as defined
below) of Executive during the Term of Employment, the Company may terminate
Executive's Term of Employment upon written notice to Executive (or Executive's
personal representative, if applicable) effective upon the date of receipt
thereof (the "Disability Commencement Date"). The obligation of the Company to
make any further payments under this Agreement shall, except for earned but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus cease as of the Disability Commencement Date. The term
"Disability," for purposes of this Agreement, shall mean Executive's absence
from the full-time performance of Executive's duties pursuant to a reasonable
determination made in accordance with the Company's disability plan that
Executive is disabled as a result of incapacity due to physical or mental
illness that lasts, or is reasonably expected to last, for at least six months.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.4 Death. In the event of Executive's death during his Term
of Employment hereunder or at any time thereafter while payments are still owing
to Executive under the terms of this Agreement, all obligations of the Company
to make any further payments, other than the obligation to pay any accrued but
unpaid Base Salary, amounts attributable to accrued but unused vacation days and
the Prorated Bonus or any remaining payments that were payable to Executive by
reason of his termination of employment under Section 6.1 to which Executive was
entitled at the time of his death, shall terminate upon Executive's death.
Benefits under all other employee benefit programs, plans and practices shall be
paid in accordance with their terms.
6.5 No Further Notice or Compensation or Damages. Executive
understands and agrees that he shall not be entitled to any further notice,
compensation or damages upon Termination of Employment under this Agreement,
other than amounts specified in this Section 6 and the Ancillary Documents.
6.6 Executive's Duty to Provide Materials. Upon the
termination of the Term of Employment for any reason, Executive or his estate
shall surrender to the Company all correspondence, letters, files, contracts,
mailing lists, customer lists, advertising materials, ledgers, supplies,
equipment, checks, and all other materials and records of any kind that are the
property of the Company or any of its subsidiaries or affiliates, that may be in
Executive's possession or under his control, including all copies of any of the
foregoing.
7. Notices. All notices or communications hereunder shall
be in writing, addressed as follows:
To the Company:
P&L Coal Holdings Corporation
701 Market Street, Suite 700
St. Louis, Missouri 63101-1826
attn: Chief Executive Officer
with a copy to:
Alvin H. Brown, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
To Executive at the address set forth on the signature page
hereof,
Any such notice or communication shall be delivered by hand or by courier or
sent certified or registered mail, return receipt requested, postage prepaid,
addressed as above (or to such other address as such party may designate in a
notice duly delivered as described above), and the third business day after the
actual date of sending shall constitute the time at which notice was given.
8. Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
9. Assignment. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the heirs and representatives of Executive
and the assigns and successors of the Company, but neither this Agreement nor
any rights or obligations hereunder shall be assignable or otherwise subject to
hypothecation by Executive (except by will or by operation of the laws of
intestate succession) or by the Company, except that the Company may assign this
Agreement to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the stock, assets or businesses of the Company.
10. Amendment. This Agreement may only be amended by
written agreement of the parties hereto.
11. Nondisclosure of Confidential Information;
Non-Competition. (a) Executive, both during the term hereof and thereafter, will
not, directly or indirectly, use for himself or use for, or disclose to, any
party other than the Company, or any subsidiary of the Company (other than in
the ordinary course of Executive=s duties for the benefit of the Company or any
subsidiary of the Company), any secret or confidential information regarding the
business or property of the Company or its subsidiaries or regarding any secret
or confidential apparatus, process, system, or other method at any time used,
developed, acquired, discovered or investigated by or for the Company or its
subsidiaries, whether or not developed, acquired, discovered or investigated by
Executive. At the termination of Executive=s employment or at any other time the
Company or any of its subsidiaries may request, Executive shall promptly deliver
to the Company all memoranda, notes, records, plats, sketches, plans or other
documents made by, compiled by, delivered to, or otherwise acquired by Executive
concerning the business or properties of the Company or its subsidiaries or any
secret or confidential product, apparatus or process used developed, acquired or
investigated by the Company or its subsidiaries.
(b) In consideration of the Company's obligations under this
Agreement, Executive agrees that during the period of his employment hereunder
and for a period of one year thereafter, without the prior written consent of
the Board, (i) he will not, directly or indirectly, either as principal,
manager, agent, consultant, officer, stockholder, partner, investor, lender or
employee or in any other capacity, carry on, be engaged in or have any financial
interest in, any entity which is in competition with the business of the Company
or its subsidiaries and (ii) he shall not, on his own behalf or on behalf of any
person, firm or company, directly or indirectly, solicit or offer employment to
any person who is or has been employed by the Company or its subsidiaries at any
time during the twelve (12) months immediately preceding such solicitation.
(c) For purposes of this Section 11, an entity shall be deemed
to be in competition with the Company if it is principally involved in the
purchase, sale or other dealing in any property or the rendering of any service
purchased, sold, dealt in or rendered by the Company as a part of the business
of the Company within the same geographic area in which the Company effects such
sales or dealings or renders such services. Notwithstanding this subsection
11(c) or subsection 11(b), nothing herein shall be construed so as to preclude
Executive from investing in any publicly or privately held company, provided
Executive's beneficial ownership of any class of such company's securities does
not exceed 5% of the outstanding securities of such class.
(d) Executive agrees that this covenant not to compete is
reasonable under the circumstances and will not interfere with his ability to
earn a living or to otherwise meet his financial obligations. Executive and the
Company agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 11 would irreparably injure the Company.
Accordingly, Executive agrees that, in the event that a court enjoins Executive
from any activity prohibited by this Section 11, the Company may, in addition to
pursuing any other remedies it may have in law or in equity, cease making any
payments otherwise required by this Agreement and obtain an injunction against
Executive from any court having jurisdiction over the matter restraining any
further violation of this Agreement by Executive.
12. Beneficiaries; References. Executive shall be entitled to
select (and change, to the extent permitted under any applicable law) a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following Executive's death, and may change such election, in either
case by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative. Any reference to the
masculine gender in this Agreement shall include, where appropriate, the
feminine.
13. Dispute Resolution. Any dispute or controversy arising
under or in connection with this Agreement (other than an action to enforce the
covenants in Section 11 hereof) or the Ancillary Documents shall be resolved by
arbitration. Arbitrators shall be selected, and arbitration shall be conducted,
in accordance with the rules of the American Arbitration Association. The
Company shall pay any legal fees in connection with such arbitration in the
event that Executive prevails on a material element of his claim or defense.
14. Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
15. Effect on Prior Agreements. This Agreement and the
Ancillary Documents contain the entire understanding between the parties hereto
and supersedes in all respects any prior or other agreement or understanding,
both written and oral, between the Company, any affiliate of the Company or any
predecessor of the Company or affiliate of the Company and Executive.
16. Withholding. The Company shall be entitled to withhold
from payment any amount of withholding required by law.
17. Survival. Notwithstanding the expiration of the term of
this Agreement, the provisions of Section 11 hereunder shall remain in effect as
long as is reasonably necessary to give effect thereto in accordance with the
terms hereof.
18. Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an original.
P&L Coal Holdings Corporation
By /s/ I. F. Engelhardt
Name: Irl F. Engelhardt
Title: Chairman and Chief Executive Officer
Signature of Executive: /s/ Mark Maisto
Date of Agreement: May 19, 1998
Name of Executive: Mark Maisto
Address of Executive: 187 Main Street
Hingham, MA 02043
Executive Team Position: President and CEO Citizens Power
Base Salary: $300,000 per annum
Bonus Target: 200% of Base Salary
Continuation Benefits: 1. Medical, dental and vision benefits;
2. Defined contribution plans (qualified and non-
qualified);
3. Defined benefit plans (qualified and non-qualified);
4. Life insurance;
5. AD&D;
6. Health care reimbursement account; and
7. Day care reimbursement account.
EXHIBIT 21
LIST OF SUBSIDIARIES OF P&L COAL HOLDINGS CORPORATION
AS OF MARCH 31, 1999
Carbones Peabody de Venezuela, C.A.
Darex Capital Inc.
Dolphin Properties Pty Limited
Peabody Australasia Pty Limited
Peabody Australia Limited
Peabody Bengalla Investments Pty Limited
Peabody Bengalla Pty Limited
Peabody Coal Limited
Peabody Finance Limited
Peabody Investments (Australia) Pty Limited
Peabody Minerals Pty. Limited
Peabody Mining Investments Pty Limited
Peabody Mining Services Pty Limited
Peabody Mount Arthur North Pty Limited
Peabody Resources Corporation (Malaysia) Sdn. Bdn.
Peabody Resources Limited
Peabody Resources Staff Retirement Fund Pty. Limited
Peabody Sub Holdings Pty Limited
Peabody Turkish Investments Limited
Ravensworth Coal Trust
Ravensworth Pastoral Co. Pty Limited
Rylandes Insurance Co. Pty Limited
Survga Pty Limited
The Energy Group Australia Pty Limited
CL Funding, L.L.C.
CL Hartford, L.L.C.
CL Power Sales One, L.L.C.
CL Power Sales Two, L.L.C.
CL Power Sales Three, L.L.C.
CL Power Sales Four, L.L.C.
CL Power Sales Five, L.L.C.
CL Power Sales Six, L.L.C.
CL Power Sales Seven, L.L.C.
CL Power Sales Eight, L.L.C.
CL Power Sales Nine, L.L.C.
CL Power Sales Ten, L.L.C.
CL Power Sales Eleven, L.L.C.
CL Power Sales Twelve, L.L.C.
CL Power Sales Thirteen, L.L.C.
CL Power Sales Fourteen, L.L.C.
CL Power Sales Fifteen, L.L.C.
CL Power Sales Sixteen, L.L.C.
CL Power Sales Seventeen, L.L.C.
CL Power Sales Eighteen, L.L.C.
CL Power Sales Nineteen, L.L.C.
CL Power Sales Twenty, L.L.C.
Citizens Power Holdings One, L.L.C.
Chateaugay Holdings, L.L.C.*
Citizens Power L.L.C.
Citizens Power Sales
Hartford Power Sales, L.L.C.
Arid Operations, Inc.
Darius Gold Mine, Inc.
Gold Fields Chile, S.A.
Gold Fields Mining Corporation
Gold Fields Operating Co. - Ortiz
Peabody America, Inc.
Peabody Holding Company, Inc.
Affinity Mining Company
Big Sky Coal Company
Black Beauty Coal Company
Blackrock First Capital Corporation
Bluegrass Coal Company
Caballo Coal Company
Charles Coal Company
Coal Properties Corp.
Cook Mountain Coal Company
Cottonwood Land Company
EACC Camps, Inc.
Eastern Associated Coal Corp.
Eastern Royalty Corp.
Gallo Finance Company
Grand Eagle Mining, Inc.
Hayden Gulch Terminal, Inc.
Independence Material Holding Company
Interior Holding 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 Company
Ohio County Coal Company
Patriot Coal Company L.P.
Peabody COALSALES Company
Peabody COALTRADE, Inc.
Peabody Coal Company
Peabody Development Company
Peabody Energy Solutions, Inc.
Peabody Natural Resources Company
Peabody Terminals, Inc.
Peabody Venezuela Coal Corp.
Peabody Western Coal Company
Pine Ridge Coal Company]Powder River Coal Company
Rio Escondido Coal Corp.
Seneca Coal Company
Sentry Mining Company
Snowberry Land Company
Sterling Smokeless Coal Company
Thoroughbred, L.L.C.
* subsequently sold to an unrelated party
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
The undersigned hereby constitute and appoint George J. Holway or Jeffery L.
Klinger, or either of them, are true and lawful attorneys and agents with full
power of substitution and resubstitution to sign in my name, place and stead the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999,
and documents and exhibits in connection therewith, and to file the same with
the Securities and Exchange Commission, with said attorneys to have full power
and authority to do and perform, in my name and on my behalf and on the name and
behalf of the Company every act whatsoever which said attorneys may deem
necessary, appropriate or desirable to be done in connection therewith as fully
and to all intents and purposes as I might or could do in person or the Company
might or could do by properly authorized agents.
Witness my hand this 17th day of June, 1999.
Signature Title
- ------------------------------------
Irl F. Engelhardt Chairman, Chief Executive Officer
and Director
/s/ Richard M. Whiting
- ------------------------------------
Richard M. Whiting President, Chief Operating Officer
and Director
/s/ Henry E. Lentz
- ------------------------------------
Henry E. Lentz Vice President, Assistant Secretary
and Director
/s/ Roger H. Goodspeed
- ------------------------------------
Roger H. Goodspeed Director
/s/ Alan H. Washkowitz
- ------------------------------------
Alan H. Washkowitz Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and statement of operations as of March 31, 1999 and for the period then
ended, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 194,078
<SECURITIES> 0
<RECEIVABLES> 312,925
<ALLOWANCES> 177
<INVENTORY> 249,897
<CURRENT-ASSETS> 1,832,461
<PP&E> 4,956,633
<DEPRECIATION> 193,492
<TOTAL-ASSETS> 7,023,931
<CURRENT-LIABILITIES> 1,345,508
<BONDS> 2,469,975
0
50
<COMMON> 197
<OTHER-SE> 494,983
<TOTAL-LIABILITY-AND-EQUITY> 7,023,931
<SALES> 1,970,957
<TOTAL-REVENUES> 2,094,226
<CGS> 1,847,817
<TOTAL-COSTS> 1,847,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176,105
<INCOME-PRETAX> 21,143
<INCOME-TAX> 9,047
<INCOME-CONTINUING> 12,096
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,209
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
