UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-33466
PATRIOT COAL
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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20-5622045
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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12312 Olive Boulevard, Suite 400
St. Louis, Missouri
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63141
(Zip Code)
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(Address of principal executive
offices)
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(314) 275-3600
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
Preferred Share Purchase Rights
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New York Stock Exchange
New York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act Yes
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No
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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
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No
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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 registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act)
Yes
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No
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Aggregate market value of the voting stock held by
non-affiliates (shareholders who are not directors or executive
officers) of the Registrant, calculated using the closing price
on October 31, 2007: Common Stock, par value $0.01 per
share, $993.7 million.
Number of shares outstanding of each of the Registrants
classes of Common Stock, as of February 29, 2008: Common
Stock, par value $0.01 per share, 26,759,285 shares
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement to be filed with
the Securities and Exchange Commission in connection with the
Companys Annual Meeting of Stockholders to be held on
May 12, 2008 (the Companys 2008 Proxy
Statement) are incorporated by reference into
Part III hereof. Other documents incorporated by reference
in this report are listed in the Exhibit Index of this
Form 10-K.
TABLE OF CONTENTS
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report and other materials filed or to be filed by Patriot
Coal Corporation include statements of our expectations,
intentions, plans and beliefs that constitute
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are
intended to come within the safe harbor protection provided by
those sections. You can identify these forward-looking
statements by the use of forward-looking words such as
outlook, believes, expects,
potential, continues, may,
will, should, seeks,
approximately, predicts,
intends, plans, estimates,
anticipates, foresees or the negative
version of those words or other comparable words and phrases.
Any forward-looking statements contained in this report are
based upon our historical performance and on current plans,
estimates and expectations. The inclusion of this
forward-looking information should not be regarded as a
representation by us or any other person that the future plans,
estimates or expectations contemplated by us will be achieved.
Without limiting the foregoing, all statements relating to our
future outlook, anticipated capital expenditures, future cash
flows and borrowings, and sources of funding are forward-looking
statements. These forward-looking statements are based on
numerous assumptions that we believe are reasonable, but are
subject to a wide range of uncertainties and business risks and
actual risks may differ materially from those discussed in the
statements. Among the factors that could cause actual results to
differ materially are:
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difficulty in implementing our business strategy;
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geologic, equipment and operational risks associated with mining;
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the outcome of commercial negotiations involving sales contracts
or other transactions;
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customer performance and credit risks;
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supplier and contract miner performance, and the availability
and cost of key equipment and commodities;
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availability and costs of transportation;
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our ability to replace proven and probable coal reserves;
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labor availability and relations;
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our ability to respond to changing customer preferences;
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availability and costs of credit, surety bonds and letters of
credit;
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our dependence on Peabody Energy for a substantial portion of
our revenues;
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price volatility and demand, particularly in higher margin
products;
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reductions of purchases by major customers;
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failure to comply with debt covenants;
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the effects of mergers, acquisitions and divestitures;
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regulatory and court decisions including, but not limited to,
those impacting permits issued pursuant to the Clean Water Act;
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environmental laws and regulations including those affecting our
operations and those affecting our customers coal usage;
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developments in greenhouse gas emission regulation and
treatment, including any development of commercially successful
carbon capture and storage techniques;
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coal mining laws and regulations;
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the outcome of pending or future litigation;
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coal and power market conditions;
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weather patterns affecting energy demand;
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competition in our industry;
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changes in postretirement benefit obligations;
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changes to contribution requirements to multi-employer benefit
funds;
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availability and costs of competing energy resources;
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worldwide economic and political conditions;
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interest rate fluctuation;
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inflationary trends, including those impacting materials used in
our business;
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economic strength and political stability of countries in which
we serve customers;
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downturns in consumer and company spending;
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wars and acts of terrorism or sabotage;
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impact of pandemic illness; and
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other factors, including those discussed in Legal Proceedings,
set forth in Item 3 of this report.
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These factors should not be construed as exhaustive and should
be read in conjunction with the other cautionary statements that
are included in Item 1A. Risk Factors of this report. If
one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we
projected. Consequently, actual events and results may vary
significantly from those included in or contemplated or implied
by our forward-looking statements. We do not undertake any
obligation to update the forward-looking statements, except as
required by federal securities laws.
3
PART I
Unless the context indicates otherwise, all references in
this report to Patriot, the Company, us, we, or our include
Patriot Coal Corporation and its subsidiaries (Patriot).
Effective October 31, 2007, Patriot was spun-off from
Peabody Energy Corporation (Peabody) and became a separate,
publicly-traded company. This transaction is referred to in this
Form 10-K
as the distribution or the spin-off.
Prior to the spin-off, Patriot Coal Corporation and its
subsidiaries were wholly-owned subsidiaries of Peabody and our
operations were a part of Peabodys operations.
Overview
We are a leading producer of coal in the eastern United States,
with operations and coal reserves in Appalachia and the Illinois
Basin. We are also a leading U.S. producer of metallurgical
quality coal. We and our predecessor companies have operated in
these regions for more than 50 years. Our operations
consist of ten company-operated mines and numerous
contractor-operated mines serviced by eight coal preparation
facilities, with one in northern West Virginia, four in southern
West Virginia and three in western Kentucky. We ship coal to
electric utilities, industrial users and metallurgical coal
customers via third-party loading facilities and multiple rail
and river transportation routes.
In 2007, we sold 22.1 million tons of coal, of which 77%
was sold to domestic electric utilities and 23% was sold to
domestic and global steel producers. We control approximately
1.3 billion tons of proven and probable coal reserves. Our
proven and probable coal reserves include premium coking coal
and medium and
high-Btu
steam coal, with low, medium and high sulfur content. We believe
we are well-positioned to meet customers increasing demand
for various products, given the diverse coal qualities available
in our proven and probable coal reserves.
Prior to the spin-off, we were subsidiaries of Peabody. Peabody
was founded in 1883 as a retail coal supplier, entering the
mining business in 1888 with the opening of its first coal mine
in Illinois. Many of our subsidiaries were acquired during the
1980s and 1990s, when Peabody grew through expansion and
acquisition, completing the acquisitions of the West Virginia
coal properties of ARMCO Steel and Eastern Associated Coal
Corp., which included seven operating mines and substantial
low-sulfur coal reserves in West Virginia.
On October 31, 2007, Patriot was spun-off from Peabody,
including coal assets and operations in Appalachia and the
Illinois Basin. The spin-off was accomplished through a dividend
of all outstanding shares of Patriot, and we are now an
independent, public company traded on the New York Stock
Exchange (symbol PCX). Distribution of the Patriot stock to
Peabodys stockholders occurred on October 31, 2007,
at a ratio of one share of Patriot stock for every
10 shares of Peabody stock.
Mining
Operations
Our mining operations and coal reserves are as follows:
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Appalachia.
In southern West Virginia, we have
five company-operated mines and numerous contractor-operated
mines, serviced by four coal preparation plants. These
operations and related infrastructure are located in Boone and
Kanawha counties. In northern West Virginia, we have one
company-operated mine, serviced by a preparation plant and
related infrastructure. These operations are located in
Monongalia County. We sold 14.4 million tons of coal in the
year ended December 31, 2007. As of December 31, 2007,
we controlled 586 million tons of proven and probable coal
reserves in Appalachia, of which 283 million tons were
assigned to current operations.
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Illinois Basin.
In the Illinois Basin, we have
four company-operated mines, serviced by three preparation
plants. These operations and related infrastructure are located
in Union and Henderson counties in western Kentucky. We sold
7.7 million tons of coal in the year ended
December 31, 2007. As of December 31, 2007, we
controlled 676 million tons of proven and probable coal
reserves in the Illinois Basin, of which 131 million tons
were assigned to current operations.
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4
The following table provides the location and summary
information of our active operations as of December 31,
2007.
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Prep Plant Statistics
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Mining
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2007 Tons
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Plant
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Coal
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Location
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Operation
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Mine(s)
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Method(1)
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Met/Steam
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Sold(2)
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Employees
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Capacity(3)
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Recovery(4)
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(Tons in thousands)
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Appalachia
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Big Mountain
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Big Mountain No. 16, Contract
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CM
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Steam
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1,650
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223
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900
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47%
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Rocklick
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Harris No. 1, Contract
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LW, CM
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Met/Steam
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3,298
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435
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2,000
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30% met
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65% steam
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Wells
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Rivers Edge, Contract
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CM
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Met
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3,109
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145
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1,350
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50%
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Kanawha Eagle
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Eagle, Coalburg
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CM
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Met/Steam
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2,109
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N/A
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700
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45%
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Federal
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Federal No. 2
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LW, CM
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Steam
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4,100
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466
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1,300
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79%
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Purchased coal
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N/A
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N/A
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N/A
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165
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N/A
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Subtotal
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14,431
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1,269
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Illinois Basin
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Highland
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Highland No. 9
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CM
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Steam
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4,071
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432
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2,000
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60%
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Bluegrass
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Patriot, Freedom
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TS, CM
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Steam
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2,554
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258
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400
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79%
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Dodge Hill
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Dodge Hill
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CM
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Steam
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1,072
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154
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300
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48%
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Big Run(5)
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Big Run
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CM
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Steam
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15
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N/A
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N/A
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N/A
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Subtotal
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7,712
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844
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Other
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N/A
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N/A
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N/A
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N/A
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181
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N/A
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N/A
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Total
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22,143
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2,294
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(1)
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LW = Longwall, CM = Continuous Miner, TS =
Truck-and-Shovel.
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(2)
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Tons sold for each plant were the same as actual annual plant
production in 2007, subject to stockpile variations.
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(3)
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Tons per hour; plant capacity is raw, or run of mine, feed rate
into the plant.
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(4)
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Coal recovery is the saleable product coming out of the plant
divided by the raw product coming into the plant.
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(5)
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Big Run was sold in the first half of 2007.
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Appalachia
Big
Mountain
The Big Mountain preparation plant is located in southern West
Virginia and is sourced by one company-operated mine, Big
Mountain No. 16, and multiple contractor-operated mines.
Coal is produced utilizing continuous mining methods. The coal
is sold on the steam market and is transported via the CSX
railroad. All hourly employees at the company-owned and operated
facilities are represented by the United Mine Workers of America
(UMWA). Coal is produced from the Coalburg seam, with average
thickness of eight feet.
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Rocklick
The Rocklick preparation plant is located in southern West
Virginia and is sourced by one company-operated mine, Harris
No. 1, and multiple contractor-operated mines. Coal at
Harris is produced utilizing longwall and continuous mining
methods, while our contractor-operated mines utilize continuous
mining methods. All Harris coal is sold on the metallurgical
market and most of the contractor processed coal is sold on the
steam market. Rocklick has the capability to transport coal on
both the CSX and the Norfolk Southern railroads. All hourly
employees at the company-owned and operated facilities are
represented by the UMWA. Metallurgical coal is produced from the
Eagle seam, with average thickness of three feet if only the
lower split is mined, or 5 feet if both seam splits are
mined. Steam coal is produced from the Winifrede seam, with
average thickness of four feet, or surface mined from the
Kittanning, Stockton, Clarion and Coalburg seams, with an
18-to-1 average overburden to coal ratio. In 2006, Harris
transitioned to the James Creek reserves, allowing it to access
additional metallurgical coal. We are developing the new Black
Oak mine as we near the end of the James Creek reserves.
Wells
The Wells preparation plant is located in southern West Virginia
and is sourced by one company-operated mine, Rivers Edge, and
multiple contractor-operated mines. Coal is produced utilizing
continuous mining methods. All coal is currently sold on the
metallurgical market and is transported by the CSX railroad.
Steam coal can also be produced and processed at this operation.
All hourly employees at the company-owned and operated
facilities are represented by the UMWA. Rivers Edge mine
produces coal from the Powellton seam, with average thickness of
three feet. Coal is produced from the newly developed Black
Stallion contract mine in the Eagle seam, with average thickness
of five feet. Contract mines produce coal from the No. 2
Gas and Dorothy seams, both with average thickness of four feet.
Kanawha
Eagle
The Kanawha Eagle operation is located in southern West
Virginia. The Kanawha Eagle preparation plant is sourced by two
company-owned mines utilizing continuous mining methods.
Processed coal is sold on both metallurgical and steam markets
and is transported via the CSX railroad and via barge on the
Kanawha River. Coal is produced from the Coalburg seam, with
average thickness of six feet, and the Eagle seam, with average
thickness of four feet. The labor force is contracted through a
third party and is not represented by a union.
Federal
The Federal preparation plant is located in northern West
Virginia and is sourced by one company-operated mine, Federal
No. 2, utilizing longwall and continuous mining methods.
All coal is sold on the
high-Btu
steam market and is transported via the CSX and Norfolk Southern
railroads. All hourly employees are represented by the UMWA.
Coal is produced from the Pittsburgh seam, with average
thickness of seven feet.
Illinois
Basin
Highland
The Highland preparation plant is located in western Kentucky
and is sourced by one company-operated mine, Highland
No. 9, utilizing continuous mining methods. All coal is
sold on the steam market and is transported via barge on the
Ohio River. All hourly employees are represented by the UMWA.
Coal is produced from the Kentucky No. 9 seam, with average
thickness of five feet.
Bluegrass
The Bluegrass preparation plant is located in western Kentucky
and is sourced by two company-operated mines, Freedom and
Patriot. Coal at Freedom is produced utilizing underground
continuous mining methods, while coal at Patriot is produced
utilizing the
truck-and-shovel
surface mining method. All coal is sold on the steam market and
is transported via truck and barge on the Green River. None of
the employees are represented by a union.
6
Coal is produced from the Kentucky No. 9 seam, with average
thickness of four feet when mined using the underground mining
method, with a 15-to-1 overburden to coal ratio when mined by
the surface mining method.
Dodge
Hill
The Dodge Hill preparation plant is located in western Kentucky
and is sourced by one company-operated mine, utilizing
continuous mining methods. All coal is sold on the steam market
and transported via barge on the Ohio River. None of the
employees are represented by a union. Coal is produced from the
Kentucky No. 6 seam, with average thickness of four feet.
Customers
and Backlog
Prior to the spin-off, coal produced by our operations was
primarily sold to various Peabody subsidiaries pursuant to
intercompany agreements. These Peabody subsidiaries then
marketed and sold the coal to utilities and other customers
pursuant to their own coal supply agreements.
Since the spin-off, our own sales and marketing team enters into
coal supply agreements with current and future customers. We
continue to supply coal to Peabodys subsidiaries under
contracts that existed at the date of the spin-off and certain
of these contracts have terms into 2012.
As of February 29, 2008, we had a sales backlog of
59.4 million tons of coal, including backlog subject to
price reopener
and/or
extension provisions, and our coal supply agreements have
remaining terms up to 5 years and an average
volume-weighted remaining term of approximately 2.2 years.
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Commitments as of February 29, 2008
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2011 and
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Fiscal Year:
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2008
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2009
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2010
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Later
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Total
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Tons (millions):
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23.5
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16.7
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9.0
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10.2
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59.4
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These commitments represent approximately 94%, 67% and 36% of
our estimated production for 2008, 2009 and 2010, respectively.
In 2007, approximately 83% of our coal sales were under
long-term (one year or greater) contracts. Also in 2007, our
coal was sold to over 70 electricity generating and industrial
plants in eight countries, including the United States. Our
primary customer base is in the United States.
We expect to continue selling a significant portion of our coal
under supply agreements with terms of one year or longer. Our
approach is to selectively renew, or enter into new, coal supply
contracts when we can do so at prices we believe are favorable.
Through the pre-existing customer relationships held by various
Peabody subsidiaries, as of December 31, 2007,
approximately 66% and 36% of our projected 2008 and 2009 total
production, respectively, was committed under contracts, and we
had approximately 40% and 10% of our projected metallurgical
coal production in 2008 and 2009, respectively, committed under
contracts with Peabody.
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 the mines
needed to supply these contracts. The terms of coal supply
agreements result from competitive bidding and extensive
negotiations with customers. Consequently, the terms of these
contracts vary significantly in many respects, including price
adjustment features, price reopener terms, coal quality
requirements, quantity parameters, permitted sources of supply,
treatment of environmental constraints, extension options, force
majeure, and termination and assignment provisions.
Each contract sets a base price. Some contracts provide for a
predetermined adjustment to base price at times specified in the
agreement. Base prices may also be adjusted quarterly, annually
or at other periodic intervals for changes in production costs
and/or
changes due to inflation or deflation. Changes in production
costs may be measured by defined formulas that may include
actual cost experience at the mine as part of the formula. The
inflation/deflation adjustments are measured by public indices,
the most common of which is the implicit price deflator for the
gross domestic product as published by the U.S. Department
of Commerce. In most cases, the
7
components of the base price represented by taxes, fees and
royalties which are based on a percentage of the selling price
are also adjusted for any changes in the base price and passed
through to the customer.
Most contracts contain provisions to adjust the base price due
to new statutes, ordinances or regulations that impact our cost
of performance of the agreement. Additionally, some contracts
contain provisions that allow for the recovery of costs impacted
by modifications or changes in the interpretation or application
of existing statutes or regulations. Some agreements provide
that if the parties fail to agree on a price adjustment caused
by cost increases due to changes in applicable laws and
regulations, either party may terminate the agreement.
Price reopener provisions are present in some of our multi-year
coal contracts. These provisions may allow either party to
commence a renegotiation of the contract price at various
intervals. In a limited number of agreements, if the parties do
not agree on a new price, the purchaser or seller has an option
to terminate the contract. Under some contracts, we have the
right to match lower prices offered to our customers by other
suppliers.
Quality and volumes for the coal are stipulated in coal supply
agreements, and in some limited instances buyers have the option
to vary annual or monthly volumes if necessary. Variations to
the quality and volumes of coal may lead to adjustments in the
contract price. Most coal supply agreements contain provisions
requiring us to deliver coal within certain ranges for specific
coal characteristics such as heat content (Btu), sulfur and ash
content, grindability and ash fusion temperature. Failure to
meet these specifications can result in economic penalties,
suspension or cancellation of shipments or termination of the
contracts. Coal supply agreements typically stipulate procedures
for quality control, sampling and weighing.
Contract provisions in some cases set out mechanisms for
temporary reductions or delays in coal volumes in the event of a
force majeure, including events such 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. Buyers often negotiate 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,
although most termination provisions provide the opportunity to
cure defaults.
In some of our contracts, we have a right of substitution,
allowing us to provide coal from different mines, including
third-party production, as long as the replacement coal meets
the contracted quality specifications and will be sold at the
same delivered cost.
Sales and
Marketing
We sell coal produced by our operations and third-party
producers. Our sales and marketing group includes personnel
dedicated to performing sales functions, market research,
contract administration, credit/risk management activities and
transportation and distribution functions.
Transportation
Coal consumed domestically is typically sold at the mine, and
transportation costs are borne by the purchaser. Export coal is
usually sold at the loading port, with purchasers paying ocean
freight. Producers usually pay shipping costs from the mine to
the port, including any vessel demurrage costs associated with
delayed loadings.
In 2007, Patriot shipped approximately 61% of its
22.1 million tons sold by rail, 35% by barge and 4% by
truck. Our transportation staff manages the loading of coal via
these transportation modes.
Suppliers
The main types of goods we purchase are mining equipment and
replacement parts, steel-related (including roof control)
products, belting products and lubricants. Although we have many
long, well-established relationships with our key suppliers, we
do not believe that we are dependent on any of our individual
suppliers other than for purchases of certain underground mining
equipment. The supplier base providing mining materials has been
relatively consistent in recent years, although there has been
some consolidation. Purchases of certain underground
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mining equipment are concentrated with one principle supplier;
however, supplier competition continues to develop.
Technical
Innovation
We continue to place great emphasis on the application of
technical innovation to improve new and existing equipment
performance, which leads to enhanced productivity, safety
improvements and cost control measures. This research and
development effort is typically undertaken and funded by
equipment manufacturers using our input and expertise. Our
engineering, maintenance and purchasing personnel work together
with manufacturers to design and produce equipment that we
believe will add value to our operations.
We have successfully implemented this strategy in the past
through a number of key initiatives. For example, we were the
first company to introduce underground diesel equipment in West
Virginia. We also were instrumental in developing
state-of-the-art continuous coal haulage equipment, now in use
at one of our western Kentucky mines. We operate two longwall
systems which efficiently mine certain of our larger, contiguous
reserves. In addition, we operate coal preparation plants
capable of producing a wide range of products to meet specific
customer demands.
World-class maintenance standards based on condition-based
maintenance practices are being implemented at all operations.
Using these techniques allows us to increase equipment
utilization and reduce capital spending by extending the
equipment life, while minimizing the risk of premature failures.
Benefits from sophisticated lubrication analysis and
quality-control include lower lubrication consumption, optimum
equipment performance and extended component life.
We use advanced coal quality analyzers to allow continuous
analysis of certain coal quality parameters, such as sulfur
content. Their use helps ensure consistent product quality and
helps customers meet stringent air emission requirements.
Competition
The United States coal industry is highly competitive, both
within each region and on a national basis. Coal production in
Appalachia and the Illinois Basin totaled 472 million tons
in 2007, with the largest five producers (Consol Energy, Massey
Energy, Peabody (excluding our operations), Alpha Natural
Resources and Alliance Resource Partners) accounting for 40% of
production. In addition, coal from the western United States and
imported coal is used by utility customers in the eastern United
States.
A number of factors beyond our control affect the markets in
which we sell our coal. Continued demand for our coal and the
prices obtained by us depend primarily on the coal consumption
patterns of the electricity and steel industries in the United
States and elsewhere around the world; the availability,
location, cost of transportation and price of competing coal;
and other 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. The most important factors on which
we compete are delivered price (i.e., including transportation
costs, which are paid by our utility customers), coal quality
characteristics and reliability of supply.
Employees &
Labor Relations
Relations with our employees and, where applicable, organized
labor, are important to our success. As of December 31,
2007, we had approximately 2,300 employees. Approximately
61% of our employees at our company operations were represented
by the UMWA, and these operations generated approximately 49% of
our 2007 sales volume. Most of our represented employees are
employed under a five-year labor agreement expiring
December 31, 2011. This contract mirrors the 2007 NBCWA.
The approximately 350 represented workers at our Highland Mine
operate under a contract that will also expire on
December 31, 2011. The contract, which was effective
October 1, 2007, mirrors the wage increase component of the
2007 NBCWA.
We operate a training center in Appalachia. Due to increasing
coal demand, the labor market for skilled miners and other
operations and management personnel is tight. Our training
center educates our workforce, particularly our most recent
hires, in our rigorous safety standards, the latest in mining
techniques and equipment, and serves as
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a center for dissemination of mining best practices across all
of our operations. Our training efforts are designed with the
intent of developing and retaining a world-class workforce.
Certain
Liabilities
We have significant long-term liabilities for reclamation (also
called asset retirement obligations), work-related injuries and
illnesses, pensions and retiree healthcare. In addition, labor
contracts with the UMWA and voluntary arrangements with
non-union employees include long-term benefits, notably
healthcare coverage for retired employees and future retirees
and their dependents.
Asset
Retirement Obligations
Asset retirement obligations primarily represent the present
value of future anticipated costs to restore surface lands to
levels equal to or greater than pre-mining conditions, as
required by the Surface Mining Control and Reclamation Act of
1977 (SMCRA). Expense (which includes liability accretion and
asset amortization) for the years ended December 31, 2007,
2006 and 2005 was $20.1 million, $24.3 million, and
$15.6 million, respectively. As of December 31, 2007,
our asset retirement obligations of $134.4 million included
$102.7 million related to locations with active mining
operations and $31.7 million related to locations that are
closed or inactive.
Workers
Compensation
These liabilities represent the estimates for compensable,
work-related injuries (traumatic claims) and occupational
disease, primarily black lung disease (pneumoconiosis) based
primarily on actuarial valuations. The Federal Black Lung
Benefits Act requires employers to pay black lung awards to
former employees who filed claims after June 1973. These
liabilities were $216.5 million as of December 31,
2007, $23.8 million of which was a current liability.
Expense for the years ended December 31, 2007, 2006 and
2005 was $28.0 million, $32.4 million and
$46.8 million, respectively.
Retiree
Healthcare
Consistent with Statement of Financial Accounting Standard
(SFAS) No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions
(SFAS No. 106), we record a liability representing the
estimated cost of providing retiree healthcare benefits to
current retirees and active employees who will retire in the
future. Provisions for active employees represent the amount
recognized to date, based on their service to date; additional
amounts are accrued periodically so that the total estimated
liability is accrued when the employee retires.
Our retiree healthcare liabilities were $554.7 million as
of December 31, 2007, of which $27.4 million was a
current liability. Expense for the years ended December 31,
2007, 2006 and 2005 was $99.9 million, $87.3 million
and $83.4 million, respectively.
In connection with the spin-off, a subsidiary of Peabody assumed
certain of our pre-spin-off obligations associated with the Coal
Act, 2007 NBCWA and certain salaried employee retiree healthcare
benefits, assuming a liability totaling $603.4 million at
December 31, 2007. We will continue to administer these
benefits and certain Patriot subsidiaries will remain jointly
and severally liable for the Coal Act obligations, and remain
secondarily liable for the 2007 NBCWA obligations and the
salaried employee obligations.
The Coal Act provides for the funding of health benefits for
certain UMWA retirees. The Coal Act established the Combined
Fund into which signatory operators and
related persons are obligated to pay annual premiums
for beneficiaries. This multi-employer fund provides healthcare
benefits to a closed group of our retired former employees who
last worked prior to 1976, as well as orphaned beneficiaries of
bankrupt companies who were receiving benefits as orphans prior
to the 1992 law. No new retirees will be added to this group.
The liability is subject to increases or decreases in per capita
healthcare costs, offset by the mortality curve in this aging
population of beneficiaries. The Coal Act also created a second
benefit fund, the 1992 Benefit Plan, for miners who retired
between July 21, 1992, and September 30, 1994, and
whose former employers are no longer in business. Beneficiaries
continue to be added to this fund as employers default in
providing their former employees with retiree medical benefits,
but the overall exposure for new beneficiaries into this fund is
limited to retirees covered
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under their employers plan who retired prior to
October 1, 1994. A third fund, the 1993 Benefit Plan, was
established through collective bargaining and provides benefits
to qualifying former employees (who retired after
September 30, 1994) of certain signatory companies who
have gone out of business and have defaulted in providing their
former employees with retiree medical benefits. Beneficiaries
continue to be added to this fund as employers go out of
business. The collective bargaining agreement with the UMWA,
which specifies the payments to be made to the 1993 Benefit
Plan, expires on December 31, 2011.
On December 20, 2006, President Bush signed the Surface
Mining Control and Reclamation Act Amendments of 2006 (2006
Act). Prior to the enactment of this new law, federal statutes
required certain of our subsidiaries to make contributions to
the United Mine Workers of America Combined Fund (Combined Fund)
and the 1992 Benefit Plan for costs of orphans who
are retirees and their dependents of bankrupt companies that
defaulted in providing their healthcare benefits. Under the 2006
Act, these orphan benefits will be the responsibility of the
federal government on a phased-in basis. The legislation
authorizes $490 million per year in general fund revenues
to pay for these and other benefits under the bill. In addition,
future interest from the federal Abandoned Mine Land (AML) trust
fund and previous unused interest from the AML trust fund will
be available to offset orphan retiree healthcare costs. Under
current projections from the health funds, these available
resources are sufficient to cover all anticipated costs of
orphan retirees. These amounts are also in addition to any
amounts that may be appropriated by Congress at its discretion.
The legislation also reduces AML fees currently paid by us on
coal production. Beginning in October 2007, those fees will be
reduced by ten percent from current levels for five years, and
then 20% from current levels for ten years, at which point the
authority to collect fees will expire.
The 2006 Act specifically amended the federal laws establishing
the Combined Fund, the 1992 Benefit Plan and the 1993 Benefit
Plan. The 2006 Act provides new and additional funding to all
three programs, subject to the limitations described below. The
2006 Act guarantees full funding of all beneficiaries in the
Combined Fund by supplementing the annual transfers of interest
earned on the AML trust fund. The 2006 Act further provides
funding for the annual orphan health costs under the 1992
Benefit Plan on a phased-in basis: 25%, 50% and 75% in the years
2008, 2009 and 2010, respectively. Thereafter, federal funding
will pay for 100% of the orphan health costs. The coal producers
that signed the 1988 labor agreement, including some of our
subsidiaries, remain responsible for the costs of the 1992
Benefit Plan in 2007. The 2006 Act also included the 1993
Benefit Plan as one of the statutory funds and authorizes the
trustees of the 1993 Benefit Plan to determine the contribution
rates through 2010 for pre-2007 beneficiaries. During calendar
years 2008 through 2010, federal funding will pay a portion of
the 1993 Benefit Plans annual health costs on a phased-in
basis: 25%, 50% and 75% in the years 2008, 2009 and 2010,
respectively. The 1993 Benefit Plan trustees have set a $1.77
per hour statutory contribution rate for 2008. Under the 2006
Act, these new and additional federal expenditures to the
Combined Fund, 1992 Benefit Plan, 1993 Benefit Plan and certain
Abandoned Mine Land payments to the states and Indian tribes are
collectively limited by an aggregate annual cap of
$490 million as described above. To the extent that
(i) the annual funding of the programs exceeds this amount
(plus the amount of interest from the AML trust fund paid with
respect to the Combined Benefit Fund), and (ii) Congress
does not allocate additional funds to cover the shortfall,
contributing employers and affiliates, including some of our
subsidiaries, would be responsible for the additional costs.
Those of our subsidiaries that have agreed to the 2007 NBCWA
will pay $0.50 per hour worked to the 1993 Benefit Plan to
provide benefits for post 2006 beneficiaries. To the extent the
$0.50 per hour payment exceeds the amount needed for this
purpose, the difference will be credited against the $1.77 per
hour statutory payment.
Obligations to the Combined Fund were $36.3 million as of
December 31, 2007, $5.2 million of which was a current
liability. Expenses for the years ended December 31, 2007,
2006 and 2005 were $2.9 million, $2.5 million and
$0.9 million, respectively. Cash payments to the Combined
Fund were $5.5 million, $8.3 million and
$4.0 million for 2007, 2006 and 2005, respectively. The
1992 Benefit Fund and the 1993 Benefit Fund are expensed as
payments are made and no liability was recorded other than
amounts due and unpaid. Expense related to these funds was
$15.9 million, $6.9 million and $4.8 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
Regulatory
Matters
Federal and state authorities regulate the U.S. coal mining
industry with respect to matters such as employee health and
safety, permitting and licensing requirements, the protection of
the environment, plants and wildlife, the
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reclamation and restoration of mining properties after mining
has been completed, 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. We have in the past, and will in the
future, be required to incur significant costs to comply with
these laws and regulations.
Future legislation and regulations are expected to become
increasingly restrictive, and there may be more rigorous
enforcement of existing and future laws and regulations.
Depending on the development of future laws and regulations, we
may experience substantial increases in equipment and operating
costs and may experience delays, interruptions or termination of
operations.
Failure to comply with these laws and regulations may result in
the assessment of administrative, civil and criminal fines or
penalties, the acceleration of cleanup and site restoration
costs, the issuance of injunctions to limit or cease operations
and the suspension or revocation of permits and other
enforcement measures that could have the effect of limiting
production from our operations.
Mine
Safety and Health
Our goal is to achieve excellent safety and health performance.
We measure our progress in this area primarily through the use
of accident frequency rates. We believe that it is our
responsibility to our employees to provide a superior safety and
health environment. 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 the establishment of safety
standards; and recording, reporting and investigating all
accidents, incidents and losses to avoid reoccurrence. We
utilize best practices in emergency preparedness, which includes
maintaining multiple mine rescue teams. A portion of the annual
performance incentives for our mining personnel is tied to their
safety record.
Our approach to safety has resulted in a steady decline in
incidence numbers and their severity rates, with 2007 being the
safest year in the history of these operations. We received two
Mountaineer Guardian Awards for safety in 2007. Our training
center educates our employees in safety best practices and
reinforces our company-wide belief that productivity and
profitability follow when safety is a cornerstone of all of our
operations.
Stringent health and safety standards have been in effect since
Congress enacted the Coal Mine Health and Safety Act of 1969.
The Federal Mine Safety and Health Act of 1977 (MSHA)
significantly expanded the enforcement of safety and health
standards and imposed safety and health standards on all aspects
of mining operations. Congress enacted The Mine Improvement and
New Emergency Response Act of 2006 (The Miner Act) as a result
of an increase in fatal accidents primarily at
U.S. underground mines in 2006. Among the new requirements,
each miner must have at least two,
one-hour
Self Contained Self Rescue (SCSR) devices for their use in the
event of an emergency (each miner had at least one SCSR device
prior to The Miner Act) and additional caches of rescuers in the
escape routes leading to the surface. Our evacuation training
programs have been expanded to include more comprehensive
training with the SCSR devices and frequent escape drills, as
well as mine-wide simulated disaster training. The Miner Act
also requires installation of two-way communications systems
that allow communication between rescue workers and trapped
miners following an accident as mine operators must have the
ability to locate each miners last known position
immediately before and after a disaster occurs. Our underground
mines currently track and communicate with miners via existing
mine communications telephone systems. We are in the process of
ordering new wireless tracking and communication devices and
providing two mine rescue teams located within one hour of each
mine by ground. Rescue chambers have been ordered for all of our
underground mines and the manufacturers are beginning to ship
them. Compliance with the new regulation will result in
additional expense. Furthermore, Congress is currently
considering legislation known as the S-MINER Act which, if
passed, may have an adverse effect on our operating costs. This
legislation may require certain additional safety measures,
including changes in mine seals, ventilation systems and
conveyer belts, and may also increase the maximum assessed
penalty amounts currently authorized and penalty payment
obligations.
The states in which we operate have state programs for mine
safety and health regulation and enforcement. Collectively,
federal and state safety and health regulation in the coal
mining industry is perhaps the most comprehensive and pervasive
system for protection of employee health and safety affecting
any segment of U.S. industry. As a result of a recent
increase in U.S. fatal accidents primarily at underground
mines, several states
12
including West Virginia and Kentucky have adopted new safety
regulations. In addition, regulatory authorities under the MSHA
have passed numerous emergency regulations including emergency
notification and response plans, increased fines for violations
and added mine rescue coverage requirements. While these changes
have had a significant effect on our operating costs, our
U.S. competitors with underground mines are subject to the
same degree of regulation.
Black
Lung
In the United States, under the Black Lung Benefits Revenue Act
of 1977 and the Black Lung Benefits Reform Act of 1977, as
amended in 1981, each U.S. coal mine operator must pay
federal black lung benefits and medical expenses to claimants
who are current and former employees and last worked for the
operator after July 1, 1973. Coal mine operators must also
make payments 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. Historically, less than 7%
of the miners currently seeking federal black lung benefits are
awarded these benefits. The trust fund is funded by an excise
tax on U.S. production of up to $1.10 per ton for coal from
underground mines and up to $0.55 per ton for surface-mined
coal, neither amount to exceed 4.4% of the gross sales price.
Environmental
Laws
We are subject to various federal and state environmental laws
and regulations that impose significant requirements on our
operations. The cost of complying with current and future
environmental laws and regulations and our liabilities arising
from past or future releases of, or exposure to, hazardous
substances, may adversely affect our business, results of
operations or financial condition. In addition, environmental
laws and regulations particularly relating to air emissions can
reduce the demand for coal. Significant public opposition has
been raised with respect to the proposed construction of certain
new coal-fired electricity generating plants due to the
potential air emissions that would result. Such regulation and
opposition could reduce the demand for coal.
Numerous federal and state governmental permits and approvals
are required for mining operations. When we apply for these
permits or approvals, we may be required to prepare and present
to federal or state authorities data pertaining to the effect or
impact that a proposed exploration for or production or
processing of coal may have on the environment. Compliance with
these requirements could prove costly and time-consuming and
could delay commencing or continuing exploration or production
operations. A failure to obtain or comply with permits could
result in significant fines and penalties and could adversely
effect the issuance of other permits for which we or a related
entity may apply.
Certain key environmental issues, laws and regulations facing us
are described further below.
Surface
Mining Control and Reclamation Act
The Surface Mining Control and Reclamation Act (SMCRA), which is
administered by the Office of Surface Mining Reclamation and
Enforcement (OSM), establishes mining, environmental protection
and reclamation standards for all aspects of U.S. surface
mining as well as many aspects of underground mining. Mine
operators must obtain SMCRA permits and permit renewals for
mining operations from the OSM. Where state regulatory agencies
have adopted federal mining programs under the act, the state
becomes the regulatory authority. States in which we have active
mining operations have achieved primary control of enforcement
through federal authorization.
SMCRA permit provisions include requirements for coal
prospecting; mine plan development; topsoil removal, storage and
replacement; selective handling of overburden materials; mine
pit backfilling and grading; protection of the hydrologic
balance; subsidence control for underground mines; surface
drainage control; mine drainage and mine discharge control and
treatment; and revegetation.
The U.S. mining permit application process is initiated by
collecting baseline data to adequately characterize the
pre-mining environmental condition of the permit area. We
develop mine and reclamation plans by utilizing this geologic
data and incorporating elements of the environmental data. The
mine and reclamation plan incorporates the provisions of SMCRA,
the state programs and the complementary environmental programs
that impact coal mining. Also included in the permit application
are documents defining ownership and agreements pertaining to
coal, minerals,
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oil and gas, water rights, rights of way and surface land and
documents required of the OSMs Applicant Violator System,
including the mining and compliance history of officers,
directors and principal stockholders of the applicant.
Once a permit application is prepared and submitted to the
regulatory agency, it goes through a completeness and technical
review. Public notice of the proposed permit is given for a
comment period before a permit can be issued. Some SMCRA mine
permits take over a year to prepare, depending on the size and
complexity of the mine and often take six months to two years to
be issued. Regulatory authorities have considerable discretion
in the timing of the permit issuance and the public has the
right to comment on and otherwise engage in the permitting
process, including public hearings and through intervention in
the courts.
SMCRA stipulates compliance with many other major environmental
programs. These programs include the Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act (RCRA),
the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) and employee right-to-know provisions.
Besides OSM, other Federal regulatory agencies are involved in
monitoring or permitting specific aspects of mining operations.
The U.S. Environment Protection Agency (EPA) is the lead
agency for states with no authorized programs under the Clean
Water Act, RCRA and CERCLA. The U.S. Army Corps of
Engineers regulates activities affecting navigable waters and
the U.S. Bureau of Alcohol, Tobacco and Firearms regulates
the use of explosive blasting.
We do not believe there are currently any substantial matters
that pose a serious risk to maintaining our existing mining
permits or that significantly hinder our ability to acquire
future mining permits. However, we cannot be sure that we will
not experience delays or other difficulties in obtaining mining
permits in the future.
Mine
Closure Costs
Various federal and state laws and regulations, including SMCRA,
require us to obtain surety bonds or other forms of financial
security to secure payment of certain long-term obligations,
including mine closure or reclamation costs, federal and state
workers compensation costs and other miscellaneous
obligations. Many of these bonds are renewable on a yearly
basis. Surety bond costs have increased in recent years. As of
December 31, 2007, we had outstanding surety bonds and
letters of credit aggregating $362.6 million, of which
$146.0 million was for post-mining reclamation,
$183.8 million related to workers compensation
obligations, $16.9 million was for coal lease obligations
and $15.9 million was for other obligations (including
collateral for surety companies and bank guarantees, road
maintenance and performance guarantees). Changes in these laws
and regulations could require us to obtain additional surety
bonds or other forms of financial assurance.
The AML Fund, which is part of SMCRA, requires a fee on all coal
produced in the U.S. The proceeds are used to rehabilitate
lands mined and left unreclaimed prior to August 3, 1977
and to pay healthcare benefit costs of orphan beneficiaries of
the Combined Fund. The fee was $0.35 per ton for surface-mined
coal and $0.15 per ton for underground-mined coal through
September 30, 2007. Pursuant to the 2006 Act, from
October 1, 2007 through September 30, 2012, the fee is
$0.315 per ton for surface-mined coal and $0.135 per ton for
underground-mined coal. From October 1, 2012 through
September 30, 2021, the fee will be $0.28 per ton for
surface-mined coal and $0.12 per ton for underground-mined coal.
Clean
Air Act
The Clean Air Act and the corresponding state laws that regulate
the emissions of materials into the air affect U.S. 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
emission control requirements relating to particulate matter.
The Clean Air Act indirectly affects the coal industry by
extensively regulating the air emissions of sulfur dioxide,
nitrogen oxide, mercury and other compounds emitted by
coal-based electricity generating plants, and state or federal
regulation is likely to be imposed in the future on the emission
of carbon dioxide and possibly other greenhouse gasses. In
recent years Congress has also considered legislation that would
require increased reductions in emissions of sulfur dioxide,
nitrogen oxide and mercury. Existing and new legislation may
lead to some electricity generating customers switching to other
sources of fuel whose use would result in lower levels of
regulated emissions.
14
Clean Air Act requirements that may directly or indirectly
affect our operations include the following:
Acid
Rain
Title IV of the Clean Air Act regulates sulfur dioxide
emissions by all coal-fired power plants generating greater than
25 Megawatts. The affected electricity generators have sought to
meet these requirements by, among other compliance methods,
switching to lower sulfur fuels, installing pollution control
devices, reducing electricity generating levels or purchasing
sulfur dioxide emission allowances. Title IV also requires
that certain categories of electric generating stations install
certain types of nitrogen oxide controls. Major changes in
Title IV were recently promulgated in the Clean Air
Interstate Rule (CAIR). We cannot predict the effect of these
provisions of the Clean Air Act on us in future years.
Clean Air
Interstate Rule (CAIR)
The EPA promulgated CAIR in March 2005. CAIR requires reduction
of sulfur dioxide and nitrogen oxide emissions from electricity
generating plants in 28 states and the District of
Columbia. Substantial reductions in such emissions were already
made in 1995 and 2000 under requirements of Title IV of the
Clean Air Act. Once fully implemented over two rounds in
2009-2010
and 2015, CAIR is projected to reduce sulfur dioxide emissions
from power plants by approximately 73% and nitrogen oxide
emissions by approximately 61% from 2003 levels. The stringency
of the emissions cap may require many coal-fired power sources
to install additional pollution control equipment, such as wet
scrubbers, to comply. The increased capability of such equipment
to remove sulfur dioxide emissions could cause customers to
substitute high sulfur coal for low sulfur coal. This rule is
subject to legal challenges, making its impact difficult to
assess.
Clean Air
Mercury Rule (CAMR)
The EPA also promulgated CAMR in March 2005. CAMR permanently
caps and reduces nationwide mercury emissions from coal-fired
power plants. The rule established standards limiting mercury
emissions from new and existing coal-fired power plants and
created a model, market-based
cap-and-trade
program to reduce nationwide utility emissions of mercury in two
distinct phases. CAMR was vacated on February 8, 2008 by
the US Court of Appeals for the D.C. Circuit, thereby requiring
the EPA to promulgate a new mercury emissions rule which
presumably will not include a cap-and-trade program. It is
unclear whether certain states will continue to enforce their
former CAMR standards in the interim before a more stringent
federal rule is promulgated. Stricter limitations on mercury
emissions from power plants may adversely affect the demand for
coal.
National
Ambient Air Quality Standards
The Clean Air Act requires the EPA to set National Ambient Air
Quality Standards (NAAQS) for pollutants considered harmful to
public health and the environment. Areas not in attainment of
these standards must take steps to reduce emission levels. In
September 2006, the EPA revised and updated the particulate
matter standards. The EPA also recently proposed a range of
reductions to the existing ozone NAAQS. As a result some states
will likely be required to change their existing state
implementation plans (SIPs) to attain and maintain compliance
with the updated NAAQS. Our mining operations and electricity
generating customers are likely to be directly affected when the
revisions to the air quality standards are implemented by the
states. Such implementation could also restrict our ability to
develop new mines or require us to modify our existing
operations. In addition to the SIP process, the Clean Air Act
allows states to assert claims against sources in other
upwind states alleging that emission sources,
including coal-fired power plants in the upwind states, are
preventing the downwind states from attaining a
NAAQS. All these actions could result in additional control
requirements for coal-fired power plants and we are unable to
predict the effect on coal production.
New
Source Review Regulations
Several years ago, the EPA commenced an investigation of the
fossil fuel-fired electric power generation industry to
determine compliance with environmental requirements under the
Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to facilities over
the years. Following this investigation,
15
the Justice Department, on behalf of the EPA, filed a number of
lawsuits alleging that certain electricity generators violated
the new source review (NSR) provisions of the Clean Air Act.
Some electricity generators announced settlements with the
Justice Department requiring the installation of additional
control equipment on selected generating units. If the remaining
electricity generators that are parties to this litigation are
found to be in violation of the NSR provisions, they could be
subject to civil penalties and could be required to install the
required control equipment or cease operations. In April 2007,
the U.S. Supreme Court ruled, in
Environmental
Defense v. Duke Energy Corp.
, against a generator in an
enforcement proceeding, reversing the decision of the appellate
court. This decision could potentially expose numerous
electricity generators to government or citizen actions based on
failure to obtain NSR permits for changes to emissions sources
and effectively increase the costs to them of continuing to use
coal. Our customers are among the electricity generators subject
to enforcement actions and, if found not to be in compliance,
our customers could be required to install additional control
equipment at the affected plants or they could decide to close
some or all of those plants. If our customers decide to install
additional pollution control equipment at the affected plants,
we believe we will have the ability to supply coal from either
of the regions in which we operate to meet any new coal
requirements.
Regional
Haze
The EPA published the final regional haze rule on July 1,
1999. This rule established planning and emissions reduction
timelines for states to use to improve visibility in national
parks throughout the United States. On June 22, 2001, the
EPA signed a proposed rule to guide states in implementing the
1999 rule and in controlling power plant emissions that cause
regional haze problems. The proposed rule set guidelines for
states in setting Best Alternative Retrofit Technology (BART) at
older power plants. On May 5, 2004, the EPA published a
proposed rule with new BART provisions and re-proposed the BART
guidelines. On June 15, 2005, the EPA finalized amendments
to the July 1999 regional haze rule. The EPA determined that
states which adopt the CAIR cap and trade program for sulfur
dioxide and nitrogen oxide will be allowed to apply CAIR
controls as a substitute for those required by BART.
Carbon
Dioxide Emissions
The U.S. Supreme Courts April 2007 ruling in
Massachusetts v. EPA
, clarified that the EPA does
have the authority to regulate carbon dioxide emissions as a
pollutant under the Clean Air Act insofar as motor
vehicles are concerned. In addition, the Court remanded the
issue to the EPA to justify its action or inaction. As a result
of this decision, the EPA may conclude that it must regulate
carbon dioxide from motor vehicles as well as from stationary
sources. Any such new regulation could adversely affect our
customers and as a result could adversely affect our results of
operations.
State
Laws
Several states have recently proposed or adopted legislation or
regulations further limiting emissions of sulfur dioxide,
nitrogen oxide, mercury and carbon dioxide. Limitations imposed
by states on emissions of any of these substances could cause
our customers to switch to other fuels to the extent it becomes
economically preferable for them to do so.
Global
Climate Change
Global climate change continues to attract considerable public
and scientific attention. Widely publicized scientific reports
in 2007, such as the Fourth Assessment Report of the
Intergovernmental Panel on Climate Change, have also engendered
widespread concern about the impacts of human activity,
especially fossil fuel combustion, on global climate change. In
turn, considerable and increasing government attention in the
United States is being paid to global climate change and to
reducing greenhouse gas emissions, particularly from coal
combustion by power plants. In addition to the potential for the
EPA to impose regulations on greenhouse gas emissions as
described above, federal and state law-making bodies are
considering regulating greenhouse gas emissions. Such
legislation is currently pending in Congress, and a growing
number of states in the United States have taken or are
considering taking steps to regulate greenhouse gas emissions,
including by requiring reductions on carbon dioxide emissions
from power plants. These legislative efforts, if enacted, would
likely have an adverse impact on our business. For example,
enactment of laws
and/or
the
passage of regulations regarding greenhouse gas emissions, or
other actions to limit carbon dioxide emissions, could result in
electric generators switching from coal to other fuel sources
and
16
thereby reduce the demand for coal. Given the diverse and
various approaches of the legislation that has been proposed to
date, the extent of this impact is impossible to quantify at
this time.
Clean
Water Act
National
Pollutant Discharge Elimination System (NPDES)
The Clean Water Act (CWA) requires effluent limitations and
treatment standards for wastewater discharge through the NPDES
program. NPDES permits govern the discharge of pollutants into
water and require regular monitoring and reporting and
performance standards. States are empowered to develop and
enforce in stream water quality standards. These
standards are subject to change and must be approved by the EPA.
Discharges must either meet state water quality standards or be
authorized through available regulatory processes such as
alternate standards or variances. In stream
standards vary from state to state. Additionally, through the
Clean Water Act Section 401 certification program, states
have approval authority over federal permits or licenses that
might result in a discharge to their waters. States consider
whether the activity will comply with its water quality
standards and other applicable requirements in deciding whether
or not to certify the activity.
Total Maximum Daily Load (TMDL) regulations established a
process by which states designate stream segments as impaired
(not meeting present water quality standards). Industrial
dischargers, including coal mining operations, may be required
to meet new TMDL effluent standards for these stream segments.
States must also conduct an anti-degradation review before
approving permits for the discharge of pollutants to waters that
have been designated as high quality. A states
anti-degradation regulations would prohibit the diminution of
water quality in these streams. Several environmental groups and
individuals recently challenged, in part successfully, West
Virginias anti-degradation policy. As a result, in
general, waters discharged from coal mines to high quality
streams in West Virginia will be required to meet or exceed new
high quality standards. This could cause increases
in the costs, time and difficulty associated with obtaining and
complying with NPDES permits, and could adversely affect our
coal production.
Section 404
Section 404 of the Clean Water Act requires mining
companies to obtain U.S. Army Corps of Engineers (ACOE)
permits to place material in streams for the purpose of creating
slurry ponds, water impoundments, refuse areas, valley fills or
other mining activities. ACOE issues two types of permits
pursuant to Section 404 of the CWA: general (or
nationwide) and individual permits.
Nationwide permits are issued to streamline the permitting
process for dredging and filling activities that have minimal
adverse environmental impacts. An individual permit typically
requires a more comprehensive application process, including
public notice and comment, but an individual permit can be
issued for ten years (and may be extended thereafter upon
application).
Nationwide Permit 21, in particular, has been the subject of
many recent court cases, the results of which may increase our
permitting and operating costs, result in permitting delays,
suspend current operations or prevent the opening of new mines.
In particular, a July 2004 decision by the Southern District of
West Virginia enjoined the Huntington District of the ACOE from
issuing further permits pursuant to Nationwide Permit 21. While
the decision was vacated by the Fourth Circuit Court of Appeals
in November 2005, a similar lawsuit has been filed in federal
district court in Kentucky. To date, the judge in this case has
not rendered any rulings on the merits. Additionally, individual
permits issued pursuant to the Clean Water Act are also subject
to court challenge. The Ohio Valley Environmental Coalition
(OVEC) and other environmental groups sued the ACOE in the
U.S. District Court for the Southern District of West
Virginia, asserting that the ACOE unlawfully issued individual
permits to construct mining fills to certain subsidiaries of
another coal company. In March 2007, the trial judge revoked the
permits issued to each of the companies because the ACOE failed
to comply with the requirements of both Section 404 of the
Clean Water Act and the National Environmental Policy Act,
including preparing environmental impact statements for
individual permits. This ruling has been appealed. In the event
these or similar lawsuits prove to be successful, obtaining the
required mining permits could become more difficult and
expensive, which could in turn have an adverse effect on our
revenues and operations even though we have minimal surface
operations.
17
Resource
Conservation and Recovery Act
RCRA established comprehensive requirements for the treatment,
storage and disposal of hazardous wastes. Coal mine wastes, such
as overburden and coal cleaning wastes, are not considered
hazardous waste materials under RCRA. Subtitle C of RCRA
exempted fossil fuel combustion wastes from hazardous waste
regulation until the EPA completed a report to Congress and made
a determination on whether the wastes should be regulated as
hazardous. In a 1993 regulatory determination, the EPA addressed
some high volume-low toxicity coal combustion materials
generated at electric utility and independent power producing
facilities. In May 2000, the EPA concluded that coal combustion
materials do not warrant regulation as hazardous under RCRA. The
EPA is retaining the hazardous waste exemption for these
materials. The EPA is evaluating national non-hazardous waste
guidelines for coal combustion materials placed at a mine.
National guidelines for mine-fills may affect the cost of ash
placement at mines.
Federal
and State Superfund Statutes
CERCLA and similar state laws impose liability for investigation
and
clean-up
of contaminated properties and for damages to natural resources.
Under CERCLA or similar state laws, strict, joint and several
liability may be imposed on waste generators, site owners or
operators and others regardless of fault. Thus, coal mines or
other sites that we currently own or have previously owned or
operated and sites to which we have sent waste material may be
subject to liability under CERCLA and similar state laws.
Toxic
Release Reporting
Under the EPAs Toxic Release Inventory process, companies
are required to annually report the use, manufacture or
processing of listed toxic materials that exceed defined
thresholds, including chemicals used in equipment maintenance,
reclamation, water treatment and ash received for mine placement
from power generation customers.
Additional
Information
We file annual, quarterly and current reports, and our
amendments to those reports, proxy statements and other
information with the Securities and Exchange Commission (SEC).
You may access and read our SEC filings free of charge through
our website, at www.patriotcoal.com, or the SECs website,
at www.sec.gov. You may read and copy any document we file at
the SECs public reference room located at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the public reference room.
You may also request copies of our filings, free of charge, by
telephone at
(314) 275-3680
or by mail at: Patriot Coal Corporation, 12312 Olive Boulevard,
St. Louis, Missouri 63141, attention: Investor Relations.
RISK
FACTORS
You should carefully consider the risks described below,
together with all of the other information included in this
report, in evaluating our company and our common stock. If any
of the risks described below actually occurs, our business,
financial results, financial condition and stock price could be
materially adversely affected.
Risk
Factors Relating to the Spin-Off
Our
historical and pro forma financial information may not be
indicative of our future results as an independent
company.
The historical and pro forma financial information we have
included in this report may not reflect what our results of
operations, financial position and cash flows would have been
had we been an independent company during the periods presented
or be indicative of what our results of operations, financial
position and cash flows may be in the future. We have made
adjustments based upon available information and assumptions
that we believe are reasonable to reflect these factors, among
others, in our pro forma financial information included in this
report. Our
18
assumptions may not prove to be accurate and, accordingly, our
pro forma information may not be indicative of what our results
of operations, cash flows or financial condition actually would
have been as a stand-alone public company nor be a reliable
indicator of what our results of operations, cash flows and
financial condition actually may be in the future.
For additional information about the past financial performance
of our business and the basis of the presentation of the
historical consolidated financial statements, see Item 6.
Selected Consolidated Financial Data, Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations and the historical financial
statements and the accompanying notes included elsewhere in this
report.
Peabody
shareholders who received Patriot shares at the time of the
spin-off and Peabody could be subject to material amounts of
taxes if the spin-off is determined to be a taxable
transaction.
On September 26, 2007, Peabody received a ruling from the
IRS to the effect that the spin-off will qualify as a tax-free
transaction under Section 355 of the Code. The IRS did not
rule on whether the spin-off satisfies certain requirements
necessary to obtain tax-free treatment under Section 355 of
the Code. Therefore, in addition to obtaining the ruling from
the IRS, Peabody received a favorable opinion from
Ernst & Young LLP as to the satisfaction of these
required qualifying conditions for the application of
Section 355 to the spin-off. Ernst & Young
LLPs tax opinion is not binding on the IRS or the courts.
The letter ruling and the Ernst & Young LLP opinion
relied on certain representations, assumptions and undertakings,
including those relating to the past and future conduct of our
business, and neither the letter ruling nor the
Ernst & Young LLP opinion would be valid if such
representations, assumptions and undertakings were incorrect.
Moreover, the letter ruling does not address all of the issues
that are relevant to determining whether the distribution will
qualify for tax-free treatment. Notwithstanding the letter
ruling and the Ernst & Young LLP opinion, the IRS
could determine that the distribution should be treated as a
taxable transaction if it determines that any of the
representations, assumptions or undertakings that were included
in the request for the letter ruling are false or have been
violated or if it disagrees with the conclusions in the
Ernst & Young LLP opinion that are not covered by the
letter ruling. If, notwithstanding the letter ruling and
opinion, the spin-off is determined to be a taxable transaction,
Peabody shareholders who received Patriot shares at the time of
the spin-off and Peabody could be subject to material amounts of
taxes.
Patriot
could be liable to Peabody for adverse tax consequences
resulting from certain change in control transactions and
therefore could be prevented from engaging in strategic or
capital raising transactions.
Peabody could recognize taxable gain if the spin-off is
determined to be part of a plan or series of related
transactions pursuant to which one or more persons acquire,
directly or indirectly, stock representing a 50% or greater
interest in either Peabody or Patriot. Under the Code, any
acquisitions of Peabody or Patriot within the four-year period
beginning two years before the date of the spin-off are presumed
to be part of such a plan unless they are covered by at least
one of several mitigating rules established by IRS regulations.
Nonetheless, a merger, recapitalization or acquisition, or
issuance or redemption of Patriot common stock after the
spin-off could, in some circumstances, be counted toward the 50%
change of ownership threshold. The tax separation agreement
precludes Patriot from engaging in some of these transactions
unless Patriot first obtains a tax opinion acceptable to Peabody
or an IRS ruling to the effect that such transactions will not
result in additional taxes. The tax separation agreement further
requires Patriot to indemnify Peabody for any resulting taxes
regardless of whether Patriot first obtains such opinion or
ruling. As a result, Patriot may be unable to engage in
strategic or capital raising transactions that stockholders
might consider favorable, or to structure potential transactions
in the manner most favorable to Patriot.
The
agreements that we have entered into with Peabody involve
conflicts of interest.
Because the spin-off involved the separation of certain of
Peabodys existing businesses into two independent
companies, we entered into certain agreements with Peabody to
provide a framework for our relationship with Peabody following
the spin-off. The terms of the spin-off, including the financial
terms of the arrangements
19
between Peabody and us that continue after the spin-off, were
determined by persons who were at the time employees, officers
or directors of Peabody or its subsidiaries and, accordingly,
had a conflict of interest.
We did
not operate as an independent company prior to the spin-off, and
we may experience increased costs which could decrease our
overall profitability.
Our business was operated as a part of Peabodys eastern
business segment, and Peabody performed a number of corporate
functions for our operations. We have and will continue to incur
capital and other costs associated with developing and
implementing our own support functions in these areas. We are
operating independently in most functions, however, Peabody
continues to provide support to us, including services related
to information technology, certain accounting services,
engineering, geology, land management and environmental
services. We need to replicate such services as soon as
practical, but in no event later than October 31, 2008. In
addition, there may be an operational impact on our business as
a result of the time of our management and other employees and
internal resources that will need to be dedicated to building
these capabilities that otherwise would be available for other
business initiatives and opportunities. Additionally, if we have
not developed adequate systems and business functions of our
own, or have not obtained them from other providers, we may not
be able to operate our company effectively and our profitability
may decline.
Risk
Factors Relating to Our Business
A
decline in coal prices could reduce our revenues and the value
of our coal reserves.
Our results of operations are dependent upon the prices we
charge for our coal as well as our ability to maximize
productivity and control costs. Declines in the prices we
receive for our coal could adversely affect our operating
results and our ability to generate the cash flows we require to
fund our existing operations and obligations, improve our
productivity and reinvest in our business. The prices we receive
for coal depend upon numerous factors beyond our control,
including coal and power market conditions, weather patterns
affecting energy demand, competition in our industry,
availability and costs of competing energy resources, worldwide
economic and political conditions, economic strength and
political stability in the U.S. and countries in which we serve
customers, the outcome of commercial negotiations involving
sales contracts or other transactions, customer performance and
credit risk, availability and costs of transportation, our
ability to respond to changing customer preferences and
reductions of purchases by major customers and legislative and
regulatory developments, including new environmental regulations
affecting the use of coal, including mercury and carbon
dioxide-related limitations. Any material decrease in demand
would cause coal prices to decline and require us to decrease
costs in order to maintain our margins.
As our
coal supply agreements expire, our revenues and operating
profits could suffer if we are unable to renew our agreements or
find alternate buyers willing to purchase our coal on comparable
terms to those in our contracts.
Following the spin-off, we continue to supply coal to Peabody
subsidiaries on a contract basis, so they can meet their
commitments under pre-existing customer agreements sourced from
our operations. As these coal supply agreements continue to
expire, we may compete with Peabody and other coal suppliers to
obtain the business of the customers who were previously
obtaining their coal from Peabody affiliates. If we cannot renew
these coal supply agreements directly with customers or find
alternate customers willing to purchase our coal on comparable
terms to those in the expired contracts, our revenues and
operating profits could suffer.
In a limited number of contracts, failure of the parties to
agree on price adjustments may allow either party to terminate
the contract. Coal supply agreements typically contain force
majeure provisions allowing temporary suspension of performance
by us or the customer during the duration of specified events
beyond the control of the affected party. Most coal supply
agreements contain provisions requiring us to deliver coal
meeting quality thresholds for certain characteristics such as
Btu, sulfur content, ash content, grindability and ash fusion
temperature in the case of steam coal. Failure to meet these
specifications could result in economic penalties, including
price adjustments, the rejection of deliveries or termination of
the contracts. In addition, some of these contracts
20
allow our customers to terminate their contracts in the event of
changes in regulations affecting our industry that increase the
price of coal beyond specified limits.
We
derive a substantial portion of our revenues from Peabody
subsidiaries, and any material failure by these subsidiaries to
make payments for coal sales or receive payments from their
ultimate customers for coal supplied by us would adversely
affect our revenues.
Currently, we derive most of our revenues from the sale of coal
to certain Peabody subsidiaries, who then sell the coal to the
ultimate customers. Furthermore, sales to Peabody are expected
to constitute the majority of our revenues through 2008, before
a majority of our current coal supply agreements expire. Any
material failure or significant delay by Peabody subsidiaries to
make payments for coal sales, or certain material defaults under
the respective coal supply agreements such ultimate customers
have with Peabodys subsidiaries, or certain repudiations
or terminations thereof in a material respect, would adversely
affect our revenues and cash flows. See Item 7A.
Quantitative and Qualitative Disclosures about Market
Risk Credit Risk.
The
loss of, or significant reduction in, purchases by parties to
existing coal supply agreements sourced from our operations
could adversely affect our revenues.
For the year ended December 31, 2007, we derived 46% of our
total coal revenues from sales through Peabody to our five
largest ultimate customers pursuant to coal supply agreements
expiring at various times through 2012. Although these customers
currently have contracts with Peabody to purchase coal sourced
from our operations, we will attempt to renew these agreements
directly with the end customers when they expire. Our
negotiations may not be successful and those customers may not
continue to purchase coal from us. If a number of these
customers significantly reduce their purchases of coal from us,
or if we are unable to sell coal to them on terms as favorable
to us as the terms under our current agreements, our results of
operations, cash flows and financial condition could suffer
materially.
Any
change in coal consumption patterns by steel producers or North
American electric power generators resulting in a decrease in
the use of coal by those consumers could result in lower prices
for our coal, which would reduce our revenues and adversely
impact our earnings and the value of our coal
reserves.
Steam coal accounted for approximately 77%, 77% and 78% of our
coal sales volume during 2007, 2006 and 2005, respectively.
Substantially all of our sales of steam coal were to
U.S. electric power generators. The amount of coal consumed
for U.S. electric power generation is affected primarily by
the overall demand for electricity; the location, availability,
quality and price of competing fuels for power such as natural
gas, nuclear, fuel oil and alternative energy sources such as
wind and hydroelectric power; technological developments; and
environmental and other governmental regulations. In addition,
the increasingly stringent requirements of the Clean Air Act may
result in more electric power generators shifting from
coal-fueled generation, and building more non-coal power
electrical generating sources in the future. Weather patterns
can greatly affect electricity generation. Overall economic
activity and the associated demands for power by industrial
users also can have significant effects on overall electricity
demand. In the past, economic slowdowns have significantly
reduced the growth of electrical demand and, in some locations,
resulted in contraction of demand. Any downward pressure on coal
prices, whether due to increased use of alternative energy
sources, changes in weather patterns, decreases in overall
demand or otherwise, would likely cause our profitability to
decline.
Metallurgical coal accounted for approximately 23%, 23% and 22%
of our coal sales volume during 2007, 2006 and 2005,
respectively. Any deterioration in global steel demand or in the
steel industry would reduce the demand for our metallurgical
coal and could impact the collectability of our accounts
receivable from steel industry customers. In addition, the steel
industry increasingly relies on electric arc furnaces or
pulverized coal processes to make steel. These processes do not
use furnace coke, an intermediate product produced from
metallurgical coal. Therefore, all growth in future steel
production may not represent increased demand for metallurgical
coal. If the demand or pricing for metallurgical coal decreases
in the future, the amount of metallurgical coal we sell and
prices that we receive for it could decrease, thereby reducing
our revenues and adversely impacting our earnings and the value
of our coal reserves.
21
A
decrease in the price of metallurgical coal or our production of
metallurgical coal could decrease our anticipated
profitability.
We have annual capacity to produce approximately six to eight
million tons of metallurgical coal. Our margins from these sales
have increased significantly since 2004 and represent a large
percentage of our overall revenues and profits. To the extent we
experience either production or transportation difficulties that
impair our ability to ship metallurgical coal at anticipated
levels, our profitability will be reduced.
The majority of our metallurgical coal production is priced
annually. As a result, a decrease in near term metallurgical
coal prices could decrease our profitability.
Failures
of contractor-operated sources to fulfill the delivery terms of
their contracts with us could reduce our
profitability.
Within our normal mining operations, we utilize third party
sources for some coal production, including contract miners, to
fulfill deliveries under our coal supply agreements.
Approximately 25% of our total sales volume for 2007 was
attributable to contractor-operated mines. Certain of our
contractor-operated mines have experienced adverse geologic
conditions, escalated operating costs
and/or
financial difficulties that have made their delivery of coal to
us at the contracted price difficult or uncertain. Our
profitability or exposure to loss on transactions or
relationships such as these is dependent upon a variety of
factors, including the availability and reliability of the
third-party supply; the price and financial viability of the
third-party supply; our obligation to supply coal to customers
in the event that adverse geologic conditions restrict
deliveries from our suppliers; our willingness to participate in
temporary cost increases experienced by third-party coal
suppliers; our ability to pass on temporary cost increases to
customers; and our ability to substitute, when economical,
third-party coal sources with internal production or coal
purchased in the market, and other factors.
Inaccuracies
in our estimates of economically recoverable coal reserves could
result in lower than expected revenues, higher than expected
costs or decreased profitability.
We base our proven and probable coal reserve information on
engineering, economic and geological data previously assembled
and analyzed by Peabodys staff, which includes various
engineers and geologists, and which is periodically reviewed by
an outside firm. The reserve estimates as to both quantity and
quality are annually updated to reflect production of coal from
the reserves and new drilling or other data received. There are
numerous uncertainties inherent in estimating quantities and
qualities of and costs to mine recoverable reserves, including
many factors beyond our control. Estimates of economically
recoverable coal reserves and net cash flows necessarily depend
upon a number of variable factors and assumptions relating to
geological and mining conditions, relevant historical production
statistics, the assumed effects of regulation and taxes, future
coal prices, operating costs, mining technology improvements,
severance and excise taxes, development costs and reclamation
costs.
For these reasons, estimates of the economically recoverable
quantities and qualities attributable to any particular group of
properties, classifications of coal reserves based on risk of
recovery and estimates of net cash flows expected from
particular reserves prepared by different engineers or by the
same engineers at different times may vary substantially. Actual
coal tonnage recovered from identified reserve areas or
properties and revenues and expenditures with respect to our
proven and probable coal reserves may vary materially from
estimates. These estimates, thus, may not accurately reflect our
actual coal reserves. Any inaccuracy in our estimates related to
our proven and probable coal reserves could result in lower than
expected revenues, higher than expected costs or decreased
profitability.
If the
coal industry experiences overcapacity in the future, our
profitability could be impaired.
During the mid-1970s and early 1980s, a growing coal market and
increased demand for coal attracted new investors to the coal
industry, spurred the development of new mines and resulted in
production capacity in excess of market demand throughout the
industry. Similarly, increases in future coal prices could
encourage the development of expanded capacity by new or
existing coal producers. Coal with lower delivered production
costs shipped east from western coal mines and from offshore
sources can result in increased competition for coal sales in
regions
22
historically sourced from Appalachian producers. We could
experience decreased profitability if future coal production is
consistently greater than coal demand.
We
could be negatively affected if we fail to maintain satisfactory
labor relations.
As of December 31, 2007, we had approximately
2,300 employees. Approximately 61% of our employees as of
December 31, 2007 at company operations were represented by
the UMWA, and these operations generated approximately 49% of
our 2007 sales volume. Relations with our employees and, where
applicable, organized labor are important to our success. The
current labor contract for most of our represented employees
became effective January 1, 2007 and will expire on
December 31, 2011. We operate a mine in western Kentucky
with a separate UMWA contract covering approximately
350 employees. A labor contract covering these employees
will expire on December 31, 2011.
Due to the higher labor costs and the increased risk of strikes
and other work-related stoppages that may be associated with
union operations in the coal industry, our competitors who
operate without union labor may have a competitive advantage in
areas where they compete with our unionized operations. If some
or all of our current non-union operations or those of third
party contract miners were to become organized, we could incur
an increased risk of work stoppages, reduced productivity and
higher labor costs.
A
shortage of skilled labor and qualified managers in our
operating regions could pose a risk to achieving improved labor
productivity and competitive costs and could adversely affect
our profitability.
Efficient coal mining using modern techniques and equipment
requires skilled laborers with mining experience and proficiency
as well as qualified managers and supervisors. In recent years,
a shortage of experienced coal miners and managers in Appalachia
and the Illinois Basin has at times negatively impacted our
production levels and increased our costs. If the shortage of
experienced labor continues or worsens, it could have an adverse
impact on our productivity and costs and our ability to expand
production in the event there is an increase in the demand for
our coal, which could adversely affect our profitability.
A
decrease in the availability or increase in costs of key
supplies, capital equipment or commodities could decrease our
anticipated profitability.
Our purchases of some items of underground mining equipment are
concentrated with one principal supplier. Further, our mining
operations require a reliable supply of steel-related products
(including roof control), replacement parts, belting products,
and lubricants. If the cost of any of these inputs increased
significantly, or if a source for such mining equipment or
supplies were unavailable to meet our replacement demands, our
profitability could be reduced from our current expectations.
Industry-wide demand growth has exceeded supply growth for
certain underground mining equipment, surface and other capital
equipment. As a result, lead times for some items have increased
significantly.
Our
coal mining production and delivery are subject to conditions
and events beyond our control, which could result in higher
operating expenses and/or decreased production and sales and
adversely affect our operating results.
Our coal mining operations are conducted, in large part, in
underground mines and, to a lesser extent, at surface mines. The
level of our production at these mines is subject to operating
conditions and events beyond our control that could disrupt
operations, affect production and the cost of mining at
particular mines for varying lengths of time and have a
significant impact on our operating results. Adverse operating
conditions and events that coal producers have experienced in
the past include changes or variations in geologic conditions,
such as the thickness of the coal deposits and the amount of
rock embedded in or overlying the coal deposit, mining and
processing equipment failures and unexpected maintenance
problems, adverse weather and natural disasters, such as
snowstorms, heavy rains and flooding, accidental mine water
inflows and unexpected mine safety accidents, including fires
and explosions from methane and other sources.
If any of these conditions or events occur in the future at any
of our mines or affect deliveries of our coal to customers, they
may increase our cost of mining and delay or halt production at
particular mines or sales to our
23
customers either permanently or for varying lengths of time,
which could adversely affect our results of operations, cash
flows and financial condition. We cannot assure you that these
risks would be fully covered by our insurance policies.
In addition, the geological characteristics of underground coal
reserves in Appalachia and the Illinois Basin, such as rock
intrusions, overmining, undermining and coal seam thickness,
make them complex and costly to mine. As mines become depleted,
replacement reserves may not be mineable at costs comparable to
those characteristic of the depleting mines. In addition, coal
companies with larger mines that utilize the longwall mining
method typically have lower mine operating costs than certain of
our mines that do not use the longwall mining method. These
factors could materially adversely affect the mining operations
and the cost structures of, and customers willingness to
purchase coal produced by, our mines in Appalachia and the
Illinois Basin.
Defects
in title of any leasehold interests in our properties could
limit our ability to mine these properties or result in
significant unanticipated costs.
We conduct a significant part of our mining operations on
properties that we lease. Title to most of our leased properties
and mineral rights is not thoroughly verified until a permit to
mine the property is obtained. Our right to mine some of our
proven and probable coal reserves may be materially adversely
affected by defects in title or boundaries. In order to obtain
leases or mining contracts to conduct our mining operations on
property where these defects exist, we may in the future have to
incur unanticipated costs, which could adversely affect our
profitability.
Our
future success depends upon our ability to develop our existing
coal reserves and to acquire additional reserves that are
economically recoverable.
Our recoverable reserves decline as we produce coal. We have not
yet applied for the permits required or developed the mines
necessary to use all of our proven and probable coal reserves
that are economically recoverable. Furthermore, we may not be
able to mine all of our proven and probable coal reserves as
profitably as we do at our current operations. Our future
success depends upon our conducting successful exploration and
development activities and acquiring properties containing
economically recoverable proven and probable coal reserves. Our
current strategy includes increasing our proven and probable
coal reserves through acquisitions of leases and producing
properties and continuing to use our existing properties.
Our planned mine development projects and acquisition activities
may not result in significant additional proven and probable
coal reserves and we may not have continuing success developing
additional mines. A substantial portion of our proven and
probable coal reserves is not located adjacent to current
operations and will require significant capital expenditures to
develop. In order to develop our proven and probable coal
reserves, we must receive various governmental permits. We
cannot assure you that we will be able to receive the
governmental permits that we would need to continue developing
our proven and probable coal reserves.
Most of our mining operations are conducted on properties owned
or leased by us. We may not be able to negotiate new leases from
private parties or obtain mining contracts for properties
containing additional proven and probable coal reserves or
maintain our leasehold interest in properties on which mining
operations are not commenced during the term of the lease.
If
transportation for our coal becomes unavailable or uneconomic
for our customers, our ability to sell coal could
suffer.
Coal producers depend upon rail, barge, trucking, overland
conveyor, ocean-going vessels and port facilities to deliver
coal to markets. While our coal customers typically arrange and
pay for transportation of coal from the mine or port to the
point of use, disruption of these transportation services
because of weather-related problems, infrastructure damage,
strikes, lock-outs, lack of fuel or maintenance items,
transportation delays, lack of port capacity or other events
could temporarily impair our ability to supply coal to customers
and thus could adversely affect our results of operations, cash
flows and financial condition.
Transportation costs represent a significant portion of the
total cost of coal for our customers and the cost of
transportation is an important factor in a customers
purchasing decision. Increases in transportation costs,
24
including demurrage, could adversely impact our sales. One of
our coal supply agreements, covering approximately
3.5 million tons per year, permits the customer to
terminate such agreement if the barge transportation rates
applicable to our shipments increase by more than a specified
amount and we do not agree to reduce our selling price by the
excess over such amount.
Our
operations may depend on the availability of additional
financing and access to funds under our credit
facility.
We expect to have sufficient liquidity to support the
development of our business. In the future, however, we may
require additional financing for liquidity, capital requirements
and growth initiatives. We are dependent on our ability to
generate cash flows from operations and to borrow funds and
issue securities in the capital markets to maintain and expand
our business. We may need to incur debt on terms and at interest
rates that may not be as favorable as those historically enjoyed
by Peabody. In addition, future events may prevent us from
borrowing funds under our revolving credit facility. Any
inability by us to obtain financing in the future on favorable
terms could have a negative effect on our results of operations,
cash flows and financial condition.
Failure
to obtain or renew surety bonds in a timely manner and on
acceptable terms could affect our ability to secure reclamation
and employee-related obligations, which could adversely affect
our ability to mine coal.
U.S. federal and state laws require us to secure certain of
our obligations to reclaim lands used for mining, to pay federal
and state workers compensation, and to satisfy other
miscellaneous obligations. The primary method for us to meet
those obligations is to provide a third-party surety bond or
letters of credit. As of December 31, 2007, we had
outstanding surety bonds and letters of credit aggregating
$362.6 million, of which $146.0 million was for
post-mining reclamation, $183.8 million related to
workers compensation obligations, $16.9 million was
for coal lease obligations and $15.9 million was for other
obligations (including collateral for surety companies and bank
guarantees, road maintenance and performance guarantees). These
bonds are typically renewable on a yearly basis. Surety bond
issuers and holders may not continue to renew the bonds or may
demand additional collateral upon those renewals.
Additionally, as of December 31, 2007, Peabody continued to
guarantee certain bonds (self bonding) related to Patriot
liabilities that have not yet been replaced by our surety bonds.
As of December 31, 2007, Peabody self bonding related to
Patriot liabilities aggregated $22.8 million, of which
$19.9 million was for post-mining reclamation and
$2.9 million was for other obligations. We expect to
replace these Peabody self bonds in 2008.
Our failure to maintain, or inability to acquire, surety bonds
or to provide a suitable alternative would have a material
adverse effect on us. That failure could result from a variety
of factors including lack of availability, higher expense or
unfavorable market terms of new surety bonds, restrictions on
the availability of collateral for current and future
third-party surety bond issuers under the terms of our credit
facility and the exercise by third-party surety bond issuers of
their right to refuse to renew the surety.
If our
business does not generate sufficient cash for operations, we
may not be able to repay borrowings under our credit facility or
fund other liquidity needs.
Our ability to pay principal and interest on and to refinance
our debt will depend upon the operating performance of our
subsidiaries. Our business may not generate sufficient cash
flows from operations and future borrowings may not be available
to us under our credit facility or otherwise in an amount
sufficient to enable us to repay any borrowings under our credit
facility or to fund our other liquidity needs. We may not be
able to refinance the revolver under our credit facility on
commercially reasonable terms, on terms acceptable to us or at
all.
The
covenants in our credit facility impose restrictions that could
limit our operational and financial flexibility.
The credit facility contains certain customary covenants,
including financial covenants limiting our total indebtedness
(maximum leverage ratio of 2.75) and requiring minimum EBITDA
coverage of interest expense (minimum interest coverage ratio of
4.0), as well as certain limitations on, among other things,
additional debt,
25
liens, investments, acquisitions, capital expenditures, future
dividends and asset sales. Compliance with debt covenants may
limit our ability to draw on our credit facility.
Our
ability to operate our company effectively could be impaired if
we lose key personnel or fail to attract qualified
personnel.
We manage our business with a number of key personnel, the loss
of a number of whom 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 be certain 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 do not have
key person life insurance to cover our executive
officers. Failure to retain or attract key personnel could have
a material adverse effect on us.
Terrorist
attacks and threats, escalation of military activity in response
to such attacks or acts of war may negatively affect our
business, financial condition and results of
operations.
Terrorist attacks against U.S. targets, rumors or threats
of war, actual conflicts involving the United States or its
allies, or military or trade disruptions affecting our customers
or the economy as a whole may materially adversely affect our
operations or those of our customers. As a result, there could
be delays or losses in transportation and deliveries of coal to
our customers, decreased sales of our coal and extension of time
for payment of accounts receivable from our customers. Strategic
targets such as energy-related assets may be at greater risk of
future terrorist attacks than other targets in the United
States. In addition, disruption or significant increases in
energy prices could result in government-imposed price controls.
Any of these occurrences, or a combination of them, could have a
material adverse effect on our business, financial condition and
results of operations.
Risks
Related to Environmental and Other Regulation
Our
mining operations are extensively regulated, which imposes
significant costs on us, and future regulations and developments
could increase those costs or limit our ability to produce
coal.
Federal and state authorities regulate the coal mining industry
with respect to matters such as employee health and safety,
permitting and licensing requirements, the protection of the
environment, plants and wildlife, reclamation and restoration of
mining properties after mining is completed, surface subsidence
from underground mining and the effects that mining has on
groundwater quality and availability. Numerous governmental
permits and approvals are required for mining operations. We are
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. In addition, significant legislation mandating
specified benefits for retired coal miners affects our industry.
The costs, liabilities and requirements associated with these
regulations may be costly and time-consuming and may delay
commencement or continuation of exploration or production. New
or revised legislation or administrative regulations (or
judicial or administrative interpretations of existing laws and
regulations), including proposals related to the protection of
the environment or employee health and safety that would further
regulate and tax the coal industry, may also require us or our
customers to change operations significantly or incur increased
costs, which may materially adversely affect our mining
operations and our cost structure. The majority of our coal
supply agreements contain provisions that allow a purchaser to
terminate its contract if legislation is passed that either
restricts the use or type of coal permissible at the
purchasers plant or results in specified increases in the
cost of coal or its use. These factors could have a material
adverse effect on our results of operations, cash flows and
financial condition.
Furthermore, in the event of certain violations of safety rules,
the Mine Safety and Health Administration may order the
temporary closure of mines. In addition, our customers may
challenge our issuance of force majeure notices in connection
with such closures. If these challenges are successful, we could
be obligated to make up lost shipments, to reimburse customers
for the additional costs to purchase replacement coal, or, in
some cases, to terminate certain sales contracts.
26
Our
expenditures for postretirement benefit obligations could be
materially higher than we have predicted if our actual
experience differs from the underlying
assumptions.
We provide postretirement health and life insurance benefits to
eligible union and non-union employees. We calculated the total
accumulated postretirement benefit obligation according to the
guidance provided by SFAS No. 106. We estimated the
present value of the obligation to be $554.7 million as of
December 31, 2007. We have estimated these unfunded
obligations based on assumptions described in the notes to our
consolidated financial statements. If our assumptions do not
materialize as expected, cash expenditures and costs that we
incur could be materially higher.
We
could be liable for certain retiree healthcare obligations to be
assumed by Peabody in connection with the
spin-off.
In connection with the spin-off, a Peabody subsidiary assumed
certain retiree healthcare obligations of Patriot and its
subsidiaries having a present value of $603.4 million as of
December 31, 2007. These obligations arise under the Coal
Act, the 2007 NBCWA and predecessor agreements and a
subsidiarys salaried retiree healthcare plan.
Although the Peabody subsidiary will be obligated to pay such
obligations, certain Patriot subsidiaries will also remain
jointly and severally liable for the Coal Act obligations, and
secondarily liable for the assumed 2007 NBCWA obligations and
retiree healthcare obligations for certain participants under a
subsidiarys retiree healthcare plan. As a consequence,
Patriots recorded retiree healthcare obligations and
related cash costs could increase substantially if the Peabody
subsidiary fails to perform its obligations under the liability
assumption agreements. These additional liabilities and costs,
if incurred, could have a material adverse effect on our results
of operations, cash flows and financial condition.
Due to
our participation in multi-employer pension plans, we may have
exposure that extends beyond what our obligations would be with
respect to our employees.
Certain of our subsidiaries participate in two defined benefit
multi-employer pension funds that were established as a result
of collective bargaining with the UMWA pursuant to the 2007
NBCWA as periodically negotiated. These plans provide pension
and disability pension benefits to qualifying represented
employees retiring from a participating employer where the
employee last worked prior to January 1, 1976, in the case
of the UMWA 1950 Pension Plan, or after December 31, 1975,
in the case of the UMWA 1974 Pension Plan. In December 2006, the
2007 NBCWA was signed, which required funding of the 1974
Pension Plan through 2011 under a phased funding schedule. The
funding is based on an hourly rate for active UMWA workers.
Under the labor contract, the per hour funding rate increased
from zero to $2.00 in 2007 and will increase each year
thereafter until reaching $5.50 in 2011. Our subsidiaries with
UMWA-represented employees are required to contribute to the
1974 Pension Plan at the new hourly rates.
Contributions to these funds could increase as a result of
future collective bargaining with the UMWA, a shrinking
contribution base as a result of the insolvency of other coal
companies who currently contribute to these funds, lower than
expected returns on pension fund assets or other funding
deficiencies.
Our
exposure to statutory retiree healthcare costs could be
significantly higher than we have estimated.
The 2006 Act authorized $490 million in general fund
revenues to pay for certain benefits, including the healthcare
costs under the Combined Fund, 1992 Benefit Plan and 1993
Benefit Plan (each as described above under Item 1.
Business Certain Liabilities Retiree
Healthcare) for orphans who are retirees and their
dependents. Under the 2006 Act, these orphan benefits will be
the responsibility of the federal government on a phased-in
basis through 2012. If Congress were to amend or repeal the 2006
Act or if the $490 million authorization were insufficient
to pay for these healthcare costs, certain of our subsidiaries,
along with other contributing employers and their affiliates,
would be responsible for the excess costs. Our aggregate cash
payments to the Combined Fund, 1992 Benefit Plan and 1993
Benefit Plan were $21.4 million and $15.2 million
during 2007 and 2006, respectively.
27
Concerns
about the environmental impacts of coal combustion, such as
impacts on global climate change, are resulting in increased
regulation of coal combustion and could significantly affect
demand for our products.
Widely publicized scientific reports in 2007, such as the Fourth
Assessment Report of the Intergovernmental Panel on Climate
Change, have engendered widespread concern about the impacts of
human activity, especially fossil fuel combustion, on global
climate change. As a result, considerable and increasing
government attention in the United States is being paid to
reducing greenhouse gas emissions, particularly from coal
combustion by power plants. As a result of the U.S. Supreme
Courts recent decision in
Massachusetts v.
Environmental Protection Agency
, the EPA is considering
regulating greenhouse gas emissions. Legislation is also
currently pending in Congress, and a growing number of states in
the United States have taken or are considering taking steps to
reduce greenhouse gas emissions, including by requiring
reductions on carbon dioxide emissions from coal-fired power
plants. These legislative efforts may have an adverse impact on
our business. For example, enactment of laws
and/or
the
passage of regulations regarding greenhouse gas emissions by the
United States or some of its states, or other actions to limit
carbon dioxide emissions, could result in electric generators
switching from coal to other fuel sources.
The EPA is also considering more stringent regulations to reduce
emissions of sulfur dioxide, nitrogen oxide and mercury. Certain
states have independently established requirements that are more
stringent than the current EPA proposals. Further developments
in connection with legislation, regulations or other limits on
greenhouse gas emissions and other environmental impacts from
coal combustion, both in the United States and in other
countries where we sell coal, could have a material adverse
effect on our results of operations, cash flows and financial
condition.
We may
be unable to obtain and renew permits necessary for our
operations, which would reduce our production, cash flows and
profitability.
Mining companies must obtain numerous permits and approvals that
impose strict regulations relating to environmental and safety
matters. These include permits issued by various federal and
state agencies and regulatory bodies. The permitting rules are
complex, change frequently and have tended to become more
stringent over time, making our ability to comply with the
applicable requirements more difficult or even unachievable,
thereby precluding continuing or future mining operations.
Private individuals and the public have certain rights to
comment upon, submit objections to, and otherwise engage in the
permitting process, including through court intervention. Some
permits, such as the authorizations issued under Nationwide
Permit 21 and Section 404 of the Clean Water Act, have been
subject to legal challenge. Section 404 of the Clean Water
Act requires mining companies to obtain U.S. Army Corps of
Engineers permits to place material in streams for the purpose
of creating slurry ponds, water impoundments, refuse areas,
valley fills or other mining activities. These permits have been
the subject of multiple recent court cases, the results of which
have increased permitting costs and increased the amount of time
needed to obtain permits. The permits we need may not be issued,
maintained or renewed, may be subject to public challenge, may
impose burdensome conditions, or may not be issued or renewed in
a timely fashion. An inability to conduct our mining operations
pursuant to applicable permits and approvals could adversely
affect our production, results of operations, cash flows and
financial condition.
Our
operations may impact the environment or cause exposure to
hazardous substances, and our properties may have environmental
contamination, which could result in material liabilities to
us.
Certain of our current and historical coal mining operations
have used hazardous materials and, to the extent that such
materials are not recycled, they could become hazardous waste.
We may be subject to claims under federal and state statutes
and/or
common law doctrines for toxic torts and other damages, as well
as for natural resource damages and the investigation and clean
up of soil, surface water, groundwater, and other media under
laws such as CERCLA, commonly known as Superfund. Such claims
may arise, for example, out of current or former conditions at
sites that we own or operate currently, as well as at sites that
we and companies we acquired owned or operated in the past, and
at contaminated sites that have always been owned or operated by
third parties. Liability may be without regard to fault and may
be strict, joint and several, so that we may be held responsible
for more than our share of the contamination or other damages,
or even for the entire share.
We maintain coal slurry impoundments at a number of our mines.
Such impoundments are subject to extensive regulation.
Structural failure of an impoundment can result in extensive
damage to the environment and natural
28
resources, such as streams or bodies of water and wildlife, as
well as related personal injuries and property damages which in
turn can give rise to extensive liability. Some of our
impoundments overlie areas where some mining has occurred, which
can pose a heightened risk of failure and of damages arising out
of failure. If one of our impoundments were to fail, we could be
subject to substantial claims for the resulting environmental
contamination and associated liability, as well as for fines and
penalties.
These and other similar unforeseen impacts that our operations
may have on the environment, as well as exposures to hazardous
substances or wastes associated with our operations, could
result in costs and liabilities that could materially and
adversely affect us.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Coal
Reserves
We had an estimated 1.3 billion tons of proven and probable
coal reserves as of December 31, 2007 located in Appalachia
and the Illinois Basin. Nine percent of our proven and probable
coal reserves, or just over 110 million tons, are
compliance coal and 91% are non-compliance coal. We own
approximately 51% of these reserves and lease property
containing the remaining 49%. Compliance coal is defined by
Phase II of the Clean Air Act as coal having sulfur dioxide
content of 1.2 pounds or less per million Btu. Electricity
generators are able to use coal that exceeds these
specifications by using emissions reduction technology, using
emission allowance credits or blending higher sulfur coal with
lower sulfur coal.
Below is a table summarizing the locations and reserves of our
major operating regions.
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Proven and Probable Reserves as of
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December 31,
2007
(1)
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Owned
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Leased
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Total
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Geographic Region
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Tons
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Tons
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Tons
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(Tons in millions)
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Appalachia
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228
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358
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586
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Illinois Basin
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410
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266
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676
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Total proven and probable coal reserves
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638
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|
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624
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1,262
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(1)
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Reserves have been adjusted to take into account recoverability
factors in producing a saleable product.
|
Reserves are defined by SEC Industry Guide 7 as that part of a
mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.
Proven and probable coal reserves are defined by SEC Industry
Guide 7 as follows:
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Proven (Measured) Reserves are reserves for which
(a) quantity is computed from dimensions defined by
outcrops, trenches, workings or drill holes; grade
and/or
quality are computed from the results of detailed sampling and
(b) the sites for inspection, sampling and measurement are
spaced so close and the geographic character is so well defined
that size, shape, depth and mineral content of coal reserves are
well-established.
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Probable (Indicated) Reserves are reserves for which quantity
and grade
and/or
quality are computed from information similar to that used for
proven (measured) reserves, but the sites for inspection,
sampling and measurement are farther apart or are otherwise less
adequately spaced. The degree of assurance, although lower than
that for proven (measured) reserves, is high enough to assume
continuity between points of observation.
|
Our estimates of proven and probable coal reserves are
established within these guidelines. Patriot does not include
sub-economic coal within these proven and probable reserve
estimates. Proven reserves require the coal to lie within
one-quarter mile of a valid point of measure or point of
observation, such as exploratory drill holes or
29
previously mined areas. Estimates of probable reserves may lay
more than one-quarter mile, but less than three-quarters of a
mile, from a point of thickness measurement. Estimates within
the proven category have the highest degree of assurance, while
estimates within the probable category have only a moderate
degree of geologic assurance. Further exploration is necessary
to place probable reserves into the proven reserve category. Our
active properties generally have a much higher degree of
reliability because of increased drilling density.
Reserve estimates as of December 31, 2007 were prepared by
Patriots Director of Geology, a certified Geologist, by
updating the December 31, 2006 estimates provided by
Peabody and an outside consultant. Select reserve areas were
subsequently evaluated by an outside engineering consultant and
updated to reflect increased ownership and additional available
drilling information.
Estimates of our coal reserves are periodically reviewed by
independent mining and geological consultants. The most recent
of these reviews, which was completed in January 2007, included
a review of the procedures used to prepare our internal
estimates, verification of the accuracy of selected property
reserve estimates and retabulation of reserve groups according
to standard classifications of reliability. The study and
subsequent work that was performed confirmed that Patriot had
approximately 1.3 billion tons of proven and probable
reserves as of December 31, 2007.
Our reserve estimates are predicated on information obtained
from an ongoing drilling program, which totals more than 11,000
individual drill holes. We compile data from individual drill
holes in a computerized drill-hole database 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 reserve estimates are then input into a
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 our proven and
probable coal reserves in a given area. The land management
system contains reserve information, including the quantity and
quality (where available) of coal reserves as well as production
rates, surface ownership, lease payments and other information
relating to our coal reserves and land holdings. We periodically
update our reserve estimates to reflect production of coal from
the reserves and new drilling or other data received.
Accordingly, reserve estimates will change from time to time to
reflect mining activities, analysis of new engineering and
geological data, changes in reserve holdings, modification of
mining methods and other factors.
Our estimate of the economic recoverability of our proven and
probable coal reserves is based upon a comparison of unassigned
reserves to assigned reserves currently in production in the
same geologic setting to determine an estimated mining cost.
These estimated mining costs are compared to existing market
prices for the quality of coal expected to be mined, taking into
consideration typical contractual sales agreements for the
region and product. Where possible, we also review production by
competitors in similar mining areas. Only coal reserves expected
to be mined economically are included in our reserve estimates.
Finally, our coal reserve estimates include reductions for
recoverability factors to estimate a saleable product.
With respect to the accuracy of our reserve estimates,
historical experience is that recovered reserves are within plus
or minus 10% of our proven and probable estimates, on average.
Our probable estimates are generally within the same statistical
degree of accuracy when the necessary drilling is completed to
move reserves from the probable to the proven classification.
The expected degree of variance from reserve estimate to tons
produced is lower in the Illinois Basin due to the continuity of
the coal seams as confirmed by the mining history. Appalachia
has a higher degree of risk due to the mountainous nature of the
topography which makes exploration drilling more difficult. Our
recovered reserves in Appalachia are less predictable and may
vary by an additional one to two percent above the threshold
discussed above.
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 our private leases are normally extended by active
production on or near the end of the lease term. Leases
containing undeveloped reserves may expire or these leases may
be renewed periodically. With a portfolio of
30
approximately 1.3 billion tons, we believe that we have
sufficient reserves to replace capacity from depleting mines for
an extensive period of time and that our significant base of
proven and probable coal reserves is one of our strengths. We
believe that the current level of production at our major mines
is sustainable for the foreseeable future.
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 we prepare to mine those reserves.
The following chart provides a summary, by geographic region and
mining complex, of production for the years ended
December 31, 2007, 2006 and 2005, tonnage of coal reserves
that is assigned to our operating mines, property interest in
those reserves and other characteristics of the facilities.
PRODUCTION
AND ASSIGNED
RESERVES
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur Content
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>1.2 to 2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
|
|
|
≤1.2 lbs.
|
|
|
lbs.
|
|
|
>2.5 lbs.
|
|
|
|
|
|
As of December 31,
2007
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Sulfur
|
|
|
Sulfur
|
|
|
Sulfur
|
|
|
As
|
|
|
Assigned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Dioxide
|
|
|
Dioxide
|
|
|
Dioxide
|
|
|
Received
|
|
|
Proven and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region/
|
|
Dec 31,
|
|
|
Dec 31,
|
|
|
Dec 31,
|
|
|
Type of
|
|
|
per
|
|
|
per
|
|
|
per
|
|
|
Btu per
|
|
|
Probable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining Complex
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Coal
|
|
|
Million Btu
|
|
|
Million Btu
|
|
|
Million Btu
|
|
|
Pound
(3)
|
|
|
Reserves
|
|
|
Owned
|
|
|
Leased
|
|
|
Surface
|
|
|
Underground
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Tons in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4.0
|
|
|
|
4.6
|
|
|
|
4.1
|
|
|
|
Steam
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
13,400
|
|
|
|
59
|
|
|
|
39
|
|
|
|
20
|
|
|
|
|
|
|
|
59
|
|
Big Mountain
|
|
|
1.6
|
|
|
|
2.0
|
|
|
|
1.9
|
|
|
|
Steam
|
|
|
|
4
|
|
|
|
33
|
|
|
|
|
|
|
|
12,300
|
|
|
|
37
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
37
|
|
Kanawha Eagle
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
|
|
|
|
Met/Steam
|
|
|
|
43
|
|
|
|
27
|
|
|
|
27
|
|
|
|
13,100
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
Rocklick
|
|
|
3.1
|
|
|
|
3.8
|
|
|
|
4.6
|
|
|
|
Met/Steam
|
|
|
|
5
|
|
|
|
32
|
|
|
|
3
|
|
|
|
12,900
|
|
|
|
39
|
|
|
|
|
|
|
|
39
|
|
|
|
9
|
|
|
|
30
|
|
Wells
|
|
|
3.2
|
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
Met/Steam
|
|
|
|
16
|
|
|
|
34
|
|
|
|
|
|
|
|
13,500
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14.0
|
|
|
|
14.6
|
|
|
|
13.2
|
|
|
|
|
|
|
|
68
|
|
|
|
126
|
|
|
|
89
|
|
|
|
|
|
|
|
283
|
|
|
|
39
|
|
|
|
244
|
|
|
|
9
|
|
|
|
274
|
|
Illinois Basin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highland
|
|
|
3.9
|
|
|
|
3.7
|
|
|
|
3.8
|
|
|
|
Steam
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
11,400
|
|
|
|
80
|
|
|
|
29
|
|
|
|
51
|
|
|
|
|
|
|
|
80
|
|
Dodge Hill
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
Steam
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
12,600
|
|
|
|
15
|
|
|
|
1
|
|
|
|
14
|
|
|
|
|
|
|
|
15
|
|
Bluegrass
(4)
|
|
|
2.5
|
|
|
|
3.9
|
|
|
|
4.2
|
|
|
|
Steam
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
10,900
|
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
|
|
2
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7.5
|
|
|
|
8.7
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
131
|
|
|
|
30
|
|
|
|
101
|
|
|
|
2
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21.5
|
|
|
|
23.3
|
|
|
|
22.4
|
|
|
|
|
|
|
|
68
|
|
|
|
126
|
|
|
|
220
|
|
|
|
|
|
|
|
414
|
|
|
|
69
|
|
|
|
345
|
|
|
|
11
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The following chart provides a summary of the amount of our
proven and probable coal reserves in each U.S. state, the
predominant type of coal mined in the applicable location, our
property interest in the reserves and other characteristics of
the facilities.
ASSIGNED
AND UNASSIGNED PROVEN AND PROBABLE COAL
RESERVES
(1)
AS
OF DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur Content
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤1.2
|
|
|
>1.2 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lbs.
|
|
|
2.5 lbs.
|
|
|
>2.5 lbs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur
|
|
|
Sulfur
|
|
|
Sulfur
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven
|
|
|
|
|
|
|
|
|
|
|
|
Dioxide
|
|
|
Dioxide
|
|
|
Dioxide
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
per
|
|
|
per
|
|
|
per
|
|
|
Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tons
|
|
|
Probable
|
|
|
|
|
|
|
|
|
Type of
|
|
|
Million
|
|
|
Million
|
|
|
Million
|
|
|
Btu per
|
|
|
Reserve Control
|
|
|
Mining Method
|
|
Coal Seam Location
|
|
Assigned
|
|
|
Unassigned
|
|
|
Reserves
|
|
|
Proven
|
|
|
Probable
|
|
|
Coal
|
|
|
Btu
|
|
|
Btu
|
|
|
Btu
|
|
|
Pound
(3)
|
|
|
Owned
|
|
|
Leased
|
|
|
Surface
|
|
|
Underground
|
|
|
|
(Tons in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
|
26
|
|
|
|
26
|
|
|
|
19
|
|
|
|
7
|
|
|
|
Steam
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
11,300
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Virginia
|
|
|
283
|
|
|
|
277
|
|
|
|
560
|
|
|
|
346
|
|
|
|
214
|
|
|
|
Met/Steam
|
|
|
|
107
|
|
|
|
234
|
|
|
|
219
|
|
|
|
13,000
|
|
|
|
202
|
|
|
|
358
|
|
|
|
13
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
283
|
|
|
|
303
|
|
|
|
586
|
|
|
|
365
|
|
|
|
221
|
|
|
|
|
|
|
|
107
|
|
|
|
234
|
|
|
|
245
|
|
|
|
|
|
|
|
228
|
|
|
|
358
|
|
|
|
13
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois Basin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois
|
|
|
|
|
|
|
265
|
|
|
|
265
|
|
|
|
112
|
|
|
|
153
|
|
|
|
Steam
|
|
|
|
3
|
|
|
|
14
|
|
|
|
248
|
|
|
|
11,100
|
|
|
|
263
|
|
|
|
2
|
|
|
|
1
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
131
|
|
|
|
280
|
|
|
|
411
|
|
|
|
214
|
|
|
|
197
|
|
|
|
Steam
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
11,200
|
|
|
|
147
|
|
|
|
264
|
|
|
|
32
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
131
|
|
|
|
545
|
|
|
|
676
|
|
|
|
326
|
|
|
|
350
|
|
|
|
|
|
|
|
3
|
|
|
|
14
|
|
|
|
659
|
|
|
|
|
|
|
|
410
|
|
|
|
266
|
|
|
|
33
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total proven and probable
|
|
|
414
|
|
|
|
848
|
|
|
|
1,262
|
|
|
|
691
|
|
|
|
571
|
|
|
|
|
|
|
|
110
|
|
|
|
248
|
|
|
|
904
|
|
|
|
|
|
|
|
638
|
|
|
|
624
|
|
|
|
46
|
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assigned reserves represent recoverable coal reserves that we
have committed to mine at locations operating as of
December 31, 2007. Unassigned reserves represent coal at
suspended locations and coal that has not been committed. These
reserves would require new mine development, mining equipment or
plant facilities before operations could begin on the property.
|
|
(2)
|
|
Compliance coal is defined by Phase II of the Clean Air Act
as coal having sulfur dioxide content of 1.2 pounds or less per
million Btu. Non-compliance coal is defined as coal having
sulfur dioxide content in excess of this standard. Electricity
generators are able to use coal that exceeds these
specifications by using emissions reduction technology, using
emissions allowance credits or blending higher sulfur coal with
lower sulfur coal.
|
|
(3)
|
|
As-received Btu per pound includes the weight of moisture in the
coal on an as sold basis. The average moisture content used in
the determination of as received Btu in Appalachia was 7%. The
moisture content used in the determination of as received Btu in
Illinois Basin ranged from 9% to 14%.
|
|
(4)
|
|
Includes Big Run, which was sold in the first half of 2007.
|
|
|
Item 3.
|
Legal
Proceedings.
|
From time to time, Patriot and its subsidiaries are involved in
legal proceedings, arbitration proceedings and administrative
procedures arising in the ordinary course of business. We
believe we have recorded adequate reserves for these liabilities
and that there is no individual case pending, including the
environmental matter described below, that is reasonably likely
to have a material adverse effect on our financial condition,
results of operations or cash flows.
Environmental
Claims and Litigation
We are subject to applicable federal, state and local
environmental laws and regulations where we conduct operations.
Current and past mining operations are primarily covered by
SMCRA, the Clean Water Act and the Clean Air Act but also
include Superfund, the Superfund Amendments and Reauthorization
Act of 1986 and the Resource Conservation and Recovery Act of
1976. Superfund 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. These regulations could require us to do
some or all of the following: (i) remove or mitigate the
effects on the environment at various sites from the disposal
32
or release of certain substances; (ii) perform remediation
work at such sites; and (iii) pay damages for loss of use
and non-use values.
Our policy is to accrue environmental cleanup-related costs of a
non-capital 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 the nature and extent of contamination, the timing,
extent and method of the remedial action, 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. We also assess the financial capability and
proportional share of costs of other PRPs and, where allegations
are based on tentative findings, the reasonableness of our
apportionment. We have not anticipated any recoveries from
insurance carriers in the estimation of liabilities recorded in
our consolidated balance sheets.
Although waste substances generated by coal mining and
processing are generally not regarded as hazardous substances
for the purposes of Superfund and similar legislation and are
generally covered by SMCRA, some products used by coal companies
in operations, such as chemicals, and the disposal of these
products are governed by the Superfund 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 Superfund and similar state laws.
One of our subsidiaries operated the Eagle No. 2 Mine
located near Shawneetown, IL from 1969 until closure of the mine
in July of 1993. In 1999, the State of Illinois brought a
proceeding before the Illinois Pollution Control Board against
our subsidiary alleging that groundwater contamination due to
leaching from a coal waste pile at the mine site violated state
standards. Our subsidiary has developed a remediation plan with
the State of Illinois and is negotiating with the Illinois
Attorney Generals office with respect to their claim for a
civil penalty of $1.3 million.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2007.
Executive
Officers
Set forth below are the names, ages as of February 29, 2008
and current positions of our executive officers. Executive
officers are appointed by, and hold office at, the discretion of
our Board of Directors.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions
|
|
Richard M. Whiting
|
|
|
53
|
|
|
|
President, Chief Executive Officer & Director
|
|
Irl F. Engelhardt.
|
|
|
61
|
|
|
|
Chairman of the Board of Directors, Executive Advisor and
Director
|
|
Mark N. Schroeder
|
|
|
51
|
|
|
|
Senior Vice President & Chief Financial Officer
|
|
Jiri Nemec
|
|
|
51
|
|
|
|
Senior Vice President & Chief Operating Officer
|
|
Charles A. Ebetino, Jr.
|
|
|
55
|
|
|
|
Senior Vice President Corporate Development
|
|
Joseph W. Bean
|
|
|
45
|
|
|
|
Senior Vice President, General Counsel & Corporate Secretary
|
|
Michael V. Altrudo
|
|
|
60
|
|
|
|
Senior Vice President & Chief Marketing Officer
|
|
Sara E. Wade
|
|
|
38
|
|
|
|
Senior Vice President Human Resources
|
|
Richard
M. Whiting
President,
Chief Executive Officer and Director
Richard M. Whiting, age 53, serves as President &
Chief Executive Officer and as a director. Whiting joined
Peabodys predecessor company in 1976 and has held a number
of operations, sales and engineering positions both at the
corporate offices and at field locations. Prior to the spin-off,
Mr. Whiting was Peabodys Executive Vice
President & Chief Marketing Officer from May 2006 to
2007, with responsibility for all marketing, sales and coal
trading operations, as well as Peabodys joint venture
relationships. He previously served as President &
Chief Operating Officer and as a
33
director of Peabody from 1998 to 2002. He also served as
Executive Vice President Sales,
Marketing & Trading from 2002 to 2006, and as
President of Peabody COALSALES Company from 1992 to 1998.
Whiting is the former Chairman of National Mining
Associations Safety and Health Committee, the former
Chairman of the Bituminous Coal Operators Association, and
a past board member of the National Coal Council. He is
currently a director of the Society of Mining Engineers
Foundation. Whiting holds a Bachelor of Science degree in mining
engineering from West Virginia University.
Irl F.
Engelhardt
Chairman
of the Board of Directors, Executive Advisor and
Director
Irl F. Engelhardt, age 61, serves as Chairman of the Board
of Directors and Executive Advisor. Prior to the spin-off,
Mr. Engelhardt served as Chairman and as a director of
Peabody Energy Corporation from 1998 until October 2007.
Mr. Engelhardt also served as Chief Executive Officer of
Peabody from 1998 to 2005 and as Chief Executive Officer of a
predecessor of Peabody from 1990 to 1998. He also served as
Chairman of a predecessor of Peabody from 1993 to 1998 and as
President from 1990 to 1995. After joining a predecessor of
Peabody in 1979, he held various officer level positions in the
executive, sales, business development and administrative areas,
including Chairman of Peabody Resources Ltd. (Australia) and
Chairman of Citizens Power LLC. Mr. Engelhardt also served
as Co-Chief Executive Officer and 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. He also previously served as Chairman of the National
Mining Association (NMA), the Coal Industry Advisory Board of
the International Energy Agency, the Center for Energy and
Economic Development and the Coal Utilization Research Council,
as well as Co-Chairman of the Coal Based Generation Stakeholders
Group. He serves on the Boards of Directors of Valero Energy
Corporation and The Williams Companies, Inc., and is Chair of
The Federal Reserve Bank of St. Louis.
Mark N.
Schroeder
Senior
Vice President & Chief Financial Officer
Mark N. Schroeder, age 51, serves as Senior Vice
President & Chief Financial Officer. Prior to the
spin-off, Schroeder held several key management positions in his
career at Peabody which began in 2000. These positions include
President of Peabody China (2006 to 2007), Vice President of
Materials Management (2004 to 2006), Vice President of Business
Development (2002 to 2004) and Vice President and
Controller (2000 to 2002). He has more than 27 years of
business experience, including as Chief Financial Officer of
Behlmann Automotive Group (1997 to 1998), Chief Financial
Officer of Franklin Equity Leasing Company (from 1998 to
2000) and financial management positions with McDonnell
Douglas Corporation and Ernst & Young, LLP.
Schroeder is a certified public accountant and holds a Bachelor
of Science degree in business administration from Southern
Illinois University Edwardsville.
Jiri
Nemec
Senior
Vice President & Chief Operating Officer
Jiri Nemec, age 51, serves as Senior Vice
President & Chief Operating Officer. Nemec, a
20-year
Peabody veteran, has extensive experience with Peabodys
eastern U.S. operations. Prior to the spin-off, Nemec was
Group Vice President for Peabodys U.S. Eastern
Operations from 2005 to 2007. Nemec also served as Group
Executive for Appalachian Operations from 2001 to 2005 and Group
Executive for Midwest Operations from 1999 to 2001.
Other previous positions with Peabody include Group Executive
for Northern Appalachian Operations and Operations Manager for
the Federal No. 2 Operating Unit. Nemec holds a Bachelor of
Science degree in mining engineering from Pennsylvania State
University and a Master of Business Administration degree from
Washington University in St. Louis. He also holds
professional engineering certifications in West Virginia and
Pennsylvania.
34
Charles
A. Ebetino, Jr.
Senior
Vice President Corporate Development
Charles A. Ebetino, Jr., age 55, serves as Senior Vice
President Corporate Development. Prior to the
spin-off, Ebetino was Senior Vice President Business
and Resource Development for Peabody since May 2006. Ebetino
also served as Senior Vice President Market
Development for Peabodys sales and marketing subsidiary
from 2003 to 2006. Ebetino joined Peabody in 2003 after more
than two decades with American Electric Power Company, Inc.
(AEP) where he served in a number of management roles in the
fuel procurement and supply group, including Senior Vice
President of fuel supply and President & Chief
Operating Officer of AEPs coal mining and coal-related
subsidiaries from 1993 until 2002. In 2002, he formed Arlington
Consulting Group, Ltd., an energy industry consulting firm.
Ebetino is a past board member of NMA, former Chairman of the
NMA Environmental Committee, a former Chairman and Vice Chairman
of the Edison Electric Institutes Power Generation Subject
Area Committee, a former Chairman of the Inland Waterway Users
Board, and a past board member and president of the Western Coal
Transportation Association. Ebetino has a Bachelor of Science
degree in civil engineering from Rensselaer Polytechnic
Institute. He also attended the New York University School of
Business for graduate study in finance.
Joseph W.
Bean
Senior
Vice President, General Counsel & Corporate
Secretary
Joseph W. Bean, age 45, serves as Senior Vice President,
General Counsel & Corporate Secretary. Prior to the
spin-off, Bean served as Peabodys Vice
President & Associate General Counsel and Assistant
Secretary (2005 to 2007) and as Senior Counsel (2001 to
2005). During his tenure at Peabody, Bean directed the
companys legal and compliance activities related to
mergers and acquisitions, corporate governance, corporate
finance and securities matters.
Bean has 20 years of corporate law experience, including
16 years as in-house legal counsel. Bean was counsel and
assistant corporate secretary for The Quaker Oats Company prior
to its acquisition by PepsiCo in 2001 and assistant general
counsel for Pet Incorporated prior to its 1995 acquisition by
Pillsbury. Bean also served as a corporate law associate with
the law firms of Mayer, Brown & Platt in Chicago and
Thompson & Mitchell in St. Louis. Bean holds a
Bachelor of Arts degree from the University of Illinois and a
Juris Doctorate from Northwestern University School of Law.
Michael
V. Altrudo
Senior
Vice President & Chief Marketing Officer
Michael V. Altrudo, age 60, serves as Senior Vice
President & Chief Marketing Officer. Prior to the
spin-off, Altrudo served as marketing advisor to Peabodys
COALTRADE International subsidiary since 2005, with executive
advisory responsibilities for its international sales,
marketing, trading and brokerage activities. Altrudo previously
served as President of Peabody COALTRADE International (2004 to
2005), Senior Vice President, International Sales &
Trading, for Peabody COALSALES Company (2004) and Senior
Vice President of Sales & Marketing for Appalachia
(1999 to 2004). Mr. Altrudo has 27 years of coal
industry experience, including sales, marketing, trading and
brokerage in the Appalachian steam coal markets as well as sales
and purchases of Appalachian metallurgical coal. He has
extensive sales experience in both utility and industrial
markets. Prior to joining Peabody in 1999, Altrudo held
executive level sales and marketing positions with Zeigler Coal
Holding Company, Drummond Company, Nerco Coal Company and Derby
Coal Company. Altrudo holds a Bachelor of Science degree in
finance from Duquesne University.
Sara E.
Wade
Senior
Vice President Human Resources
Sara E. Wade, age 38, serves as Senior Vice
President Human Resources. Wade joined Peabody in
1995, where she served in a number of management roles,
including Vice President Compensation &
Employee
35
Services (2006 to 2007), Director of Compensation and Employee
Relations (2004 to 2006), Director of Compensation (2003 to
2004) and Manager of Compensation (2000 to 2003). Prior to
2000, Wade also served as Manager of Financial Reporting in
Peabodys finance and accounting area. During her tenure at
Peabody, Wade directed the development and implementation of the
companys compensation and incentive plans as well as the
execution of the recruiting strategies for the companys
workforce of the future. Prior to joining Peabody, Wade held
positions with KPMG Peat Marwick.
Wade holds a Bachelor of Science degree in accountancy from the
University of Illinois and a Master of Business Administration
degree from Washington University in St. Louis.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
On October 31, 2007, Peabody effected the spin-off of
Patriot and its subsidiaries. The spin-off was accomplished
through a dividend of all outstanding shares of Patriot Coal
Corporation. Our common stock is listed on the New York Stock
Exchange, under the symbol PCX. As of
February 29, 2008, there were 117 holders of record of our
common stock.
The high and low sales price for our common stock on the New
York Stock Exchange for the period from November 1, 2007 to
December 31, 2007 was $43.00 and $27.16.
Dividend
Policy
We do not anticipate that we will pay cash dividends on our
common stock in the near term. The declaration and amount of
future dividends, if any, will be determined by our Board of
Directors and will depend on our financial condition, earnings,
capital requirements, financial covenants, regulatory
constraints, industry practice and other factors our Board deems
relevant.
36
Stock
Performance Graph
The following performance graph compares the cumulative total
return on our common stock with the cumulative total return of
the following indices: (i) the
S&P
©
600 Stock Index and (ii) the Custom Composite Index
comprised of Alpha Natural Resources, Inc., Arch Coal, Inc.,
CONSOL Energy, Inc., Foundation Coal Holding Inc., International
Coal Group Inc., James River Coal Co., Massey Energy Company,
Peabody Energy Corp. and Westmoreland Coal Company. These
indices are included for comparative purposes only and do not
necessarily reflect managements opinion that such indices
are an appropriate measure of the relative performance of the
stock involved, and are not intended to forecast or be
indicative of possible future performance of the common stock.
CUMULATIVE
TOTAL RETURN
Based upon an initial investment of $100 on November 01,
2007
with dividends reinvested
SOURCE: GEORGESON INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Nov-07
|
|
|
30-Nov-07
|
|
|
31-Dec-07
|
Patriot Coal Corp.
|
|
|
$
|
100
|
|
|
|
$
|
90
|
|
|
|
$
|
111
|
|
S&P
©
600
|
|
|
$
|
100
|
|
|
|
$
|
97
|
|
|
|
$
|
96
|
|
Custom Composite Index (9 Stocks)
|
|
|
$
|
100
|
|
|
|
$
|
109
|
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SEC rules, the information contained in the
Stock Performance Graph above, shall not be deemed to be
soliciting material, or to be filed with
the SEC or subject to the SECs Regulation 14A or 14C,
other than as provided under Item 201(e) of
Regulation S-K,
or to the liabilities of Section 18 of the Securities
Exchange Act of 1934, as amended, except to the extent that the
Company specifically requests that the information be treated as
soliciting material or specifically incorporates it by reference
into a document filed under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
37
|
|
Item 6.
|
Selected
Consolidated Financial Data.
|
The following table presents selected financial and other data
about us for the most recent five fiscal years. The historical
financial and other data have been prepared on a consolidated
basis derived from Patriots consolidated financial
statements using the historical results of operations and bases
of the assets and liabilities of Patriots businesses and
give effect to allocations of expenses from Peabody. For periods
prior to the spin-off, the historical consolidated statement of
income data set forth below do not reflect changes that occurred
in the operations and funding of our company as a result of our
spin-off from Peabody. The historical consolidated balance sheet
data set forth below reflect the assets and liabilities that
existed as of the dates and the periods presented.
The selected consolidated financial data should be read in
conjunction with, and are qualified by reference to,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and the historical
financial statements and the accompanying notes thereto of us
and our consolidated subsidiaries included elsewhere in this
report. The consolidated statements of operations and cash flow
data for each of the three years in the period ended
December 31, 2007 and the consolidated balance sheet data
as of December 31, 2007 and 2006 are derived from our
audited consolidated financial statements included elsewhere in
this report, and should be read in conjunction with those
consolidated financial statements and the accompanying notes.
The consolidated balance sheet data as of December 31, 2005
and the consolidated statement of operations for the year ended
December 31, 2004 were derived from audited consolidated
financial statements that are not presented in this report. The
consolidated statement of operations for the year ended
December 31, 2003 and the consolidated balance sheet data
as of December 31, 2004 and December 31, 2003 were
derived from our unaudited financial statements. In
managements opinion, these unaudited consolidated
financial statements have been prepared on substantially the
same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial data for the
periods presented.
38
The financial information presented below may not reflect what
our results of operations, cash flows and financial position
would have been had we operated as a separate, stand-alone
entity during the periods presented or what our results of
operations, financial position and cash flows will be in the
future. In addition, the Risk Factors section of Item 1A of
this report includes a discussion of risk factors that could
impact our future results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,069,316
|
|
|
$
|
1,142,521
|
|
|
$
|
960,901
|
|
|
$
|
812,055
|
|
|
$
|
586,556
|
|
Other revenues
|
|
|
4,046
|
|
|
|
5,398
|
|
|
|
17,376
|
|
|
|
4,369
|
|
|
|
3,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,073,362
|
|
|
|
1,147,919
|
|
|
|
978,277
|
|
|
|
816,424
|
|
|
|
589,746
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
1,109,315
|
|
|
|
1,051,932
|
|
|
|
869,163
|
|
|
|
740,816
|
|
|
|
640,713
|
|
Depreciation, depletion and amortization
|
|
|
85,640
|
|
|
|
86,458
|
|
|
|
65,972
|
|
|
|
62,580
|
|
|
|
57,720
|
|
Asset retirement obligation expense
|
|
|
20,144
|
|
|
|
24,282
|
|
|
|
15,572
|
|
|
|
27,262
|
|
|
|
17,930
|
|
Selling and administrative expenses
|
|
|
45,137
|
|
|
|
47,909
|
|
|
|
57,123
|
|
|
|
58,491
|
|
|
|
41,118
|
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange of assets
|
|
|
(81,458
|
)
(1)
|
|
|
(78,631
|
)
(1)
|
|
|
(57,042
|
)
(1)
|
|
|
(5,764
|
)
|
|
|
(23,390
|
)
|
Income from equity affiliates
(2)
|
|
|
(63
|
)
|
|
|
(60
|
)
|
|
|
(15,578
|
)
|
|
|
(12,335
|
)
|
|
|
(3,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
(105,353
|
)
|
|
|
16,029
|
|
|
|
43,067
|
|
|
|
(54,626
|
)
|
|
|
(140,935
|
)
|
Interest expense
|
|
|
8,337
|
|
|
|
11,419
|
|
|
|
9,833
|
|
|
|
12,701
|
|
|
|
12,746
|
|
Interest income
|
|
|
(11,543
|
)
|
|
|
(1,417
|
)
|
|
|
(1,553
|
)
|
|
|
(918
|
)
|
|
|
(1,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
|
|
|
(102,147
|
)
|
|
|
6,027
|
|
|
|
34,787
|
|
|
|
(66,409
|
)
|
|
|
(151,721
|
)
|
Income tax provision
|
|
|
|
|
|
|
8,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
(2)
|
|
|
4,721
|
|
|
|
11,169
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before accounting changes
|
|
|
(106,868
|
)
|
|
|
(13,492
|
)
|
|
|
34,787
|
|
|
|
(66,684
|
)
|
|
|
(151,721
|
)
|
Cumulative effect of accounting changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,833
|
)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(106,868
|
)
|
|
|
(13,492
|
)
|
|
|
34,787
|
|
|
|
(66,684
|
)
|
|
|
(156,554
|
)
|
Effect of minority purchase arrangement
|
|
|
(15,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(122,535
|
)
|
|
$
|
(13,492
|
)
|
|
$
|
34,787
|
|
|
$
|
(66,684
|
)
|
|
$
|
(156,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted
|
|
$
|
(4.61
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted average shares outstanding basic and diluted
|
|
|
26,570,940
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Balance Sheet Data (at period end)
(2003-2004
unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,199,837
|
|
|
$
|
1,178,181
|
|
|
$
|
1,113,058
|
|
|
$
|
836,608
|
|
|
$
|
848,640
|
|
Total liabilities
|
|
|
1,117,521
|
|
|
|
1,851,855
|
(4)
|
|
|
1,511,810
|
|
|
|
2,036,892
|
|
|
|
1,989,225
|
|
Total long-term debt
|
|
|
11,438
|
|
|
|
20,722
|
|
|
|
11,459
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
|
|
|
|
16,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
82,316
|
|
|
|
(689,827
|
)
|
|
|
(398,752
|
)
|
|
|
(1,200,284
|
)
|
|
|
(1,140,585
|
)
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in millions and unaudited)
|
|
|
22.1
|
|
|
|
24.3
|
|
|
|
23.8
|
|
|
|
24.6
|
|
|
|
21.0
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(79,699
|
)
|
|
$
|
(20,741
|
)
|
|
$
|
17,823
|
|
|
$
|
(62,205
|
)
|
|
$
|
(176,544
|
)
|
Investing activities
|
|
|
54,721
|
|
|
|
1,993
|
|
|
|
(29,529
|
)
|
|
|
55,850
|
|
|
|
116,512
|
|
Financing activities
|
|
|
30,563
|
|
|
|
18,627
|
|
|
|
11,459
|
|
|
|
6,985
|
|
|
|
60,000
|
|
Adjusted EBITDA
(5)
(unaudited)
|
|
|
431
|
|
|
|
126,769
|
|
|
|
124,611
|
|
|
|
35,216
|
|
|
|
(65,285
|
)
|
Past mining obligation payments (unaudited)
|
|
|
144,811
|
|
|
|
150,672
|
|
|
|
154,479
|
|
|
|
179,299
|
|
|
|
175,597
|
|
Additions to property, plant, equipment and mine development
|
|
|
55,594
|
|
|
|
80,224
|
|
|
|
75,151
|
|
|
|
36,780
|
|
|
|
74,550
|
|
Acquisitions, net
|
|
|
47,733
|
|
|
|
44,538
|
|
|
|
|
|
|
|
2,490
|
|
|
|
|
|
|
|
|
(1)
|
|
Net gain on disposal or exchange of assets included a
$37.4 million gain from an exchange of coal reserves as
part of a dispute settlement with a third-party supplier in
2005, gains of $66.6 million from sales of coal reserves
and surface lands in 2006 and gains of $78.5 million from
the sales of coal reserves and surface land in 2007.
|
|
(2)
|
|
In March 2006, we increased our 49% interest in KE Ventures, LLC
to an effective 73.9% interest and began combining KE Ventures,
LLCs results with ours effective January 1, 2006. In
2007, we purchased the remaining interest. Prior to 2006,
KE Ventures, LLC was accounted for on an equity basis and
included in income from equity affiliates in our statement of
operations.
|
|
(3)
|
|
The charge to cumulative effect of accounting changes related to
the January 1, 2003 adoption of SFAS No. 143,
Accounting for Asset Retirement Obligations and the
change in method of amortizing actuarial gain and losses related
to net periodic postretirement benefit costs.
|
|
(4)
|
|
We adopted SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans on December 31, 2006, and as a result,
increased noncurrent liabilities and decreased total invested
capital (accumulated other comprehensive loss) by
$322.1 million.
|
|
(5)
|
|
Adjusted EBITDA is defined as net income (loss) before deducting
net interest expense, income taxes, minority interests, asset
retirement obligation expense, depreciation, depletion and
amortization and cumulative effect of accounting changes.
Adjusted EBITDA is used by management to measure operating
performance, and management also believes it is a useful
indicator of our ability to meet debt service and capital
expenditure requirements. The term Adjusted EBITDA does not
purport to be an alternative to operating income, net income or
cash flows from operating activities as determined in accordance
with GAAP as a measure of profitability or liquidity. Because
Adjusted EBITDA is not calculated identically by all companies,
our calculation may not be comparable to similarly titled
measures of other companies.
|
40
|
|
|
|
|
Adjusted EBITDA is calculated as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(106,868
|
)
|
|
$
|
(13,492
|
)
|
|
$
|
34,787
|
|
|
$
|
(66,684
|
)
|
|
$
|
(156,554
|
)
|
Cumulative effect of accounting changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,833
|
|
Income tax provision
|
|
|
|
|
|
|
8,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
85,640
|
|
|
|
86,458
|
|
|
|
65,972
|
|
|
|
62,580
|
|
|
|
57,720
|
|
Asset retirement obligation expense
|
|
|
20,144
|
|
|
|
24,282
|
|
|
|
15,572
|
|
|
|
27,262
|
|
|
|
17,930
|
|
Interest expense
|
|
|
8,337
|
|
|
|
11,419
|
|
|
|
9,833
|
|
|
|
12,701
|
|
|
|
12,746
|
|
Interest income
|
|
|
(11,543
|
)
|
|
|
(1,417
|
)
|
|
|
(1,553
|
)
|
|
|
(918
|
)
|
|
|
(1,960
|
)
|
Minority interests
|
|
|
4,721
|
|
|
|
11,169
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
431
|
|
|
$
|
126,769
|
|
|
$
|
124,611
|
|
|
$
|
35,216
|
|
|
$
|
(65,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Overview
Prior to October 31, 2007, we were a subsidiary of Peabody.
Effective October 31, 2007, Patriot spun-off from Peabody
through the distribution of all of our common stock to the
stockholders of Peabody as a dividend. We entered into a
Separation Agreement with Peabody containing the key provisions
relating to the separation of our business from Peabody. The
Separation Agreement identifies the assets transferred,
liabilities assumed and contracts to be assigned to us.
We are a leading producer of coal in the eastern United States,
with operations and coal reserves in Appalachia and the Illinois
Basin, our operating segments. We are also a leading
U.S. producer of metallurgical quality coal. Our principal
business is the mining, preparation and sale of steam coal, sold
primarily to electric utilities, as well as the mining of
metallurgical coal, sold to coke producers for use in the
steelmaking process. In 2007, we sold 22.1 million tons of
coal, of which 77% was sold to domestic electric utilities and
23% was sold to domestic and global steel producers. In 2006, we
sold 24.3 million tons of coal, of which 77% was sold to
domestic electric utilities and 23% was sold to domestic and
global steel producers. We typically sell coal to utility and
steel-making customers under contracts with terms of one year or
more. Approximately 83% and 85% of our sales were under such
contracts during 2007 and 2006, respectively.
Our operations consist of ten company-operated mines and
numerous contractor-operated mines, serviced by eight coal
preparation facilities, with one in northern West Virginia, four
in southern West Virginia and three in western Kentucky. The
Appalachia and Illinois Basin segments consist of our operations
in West Virginia and Kentucky, respectively. We ship coal to
electric utilities, industrial users and metallurgical coal
customers via third-party loading facilities and multiple rail
and river transportation routes.
Basis of
Preparation
The information discussed below primarily relates to our
historical results and may not necessarily reflect what our
financial position, results of operations and cash flows will be
in the future or would have been as a stand-alone company during
the periods presented. Our capital structure changed
significantly at the date of our spin-off from Peabody. On
October 31, 2007, Patriot received a net contribution from
Peabody of $781.3 million, which reflected the following:
|
|
|
|
|
retention by Peabody of certain retiree healthcare liabilities
of $615.8 million;
|
|
|
|
the forgiveness of the outstanding intercompany payables to
Peabody on October 31, 2007 of $81.5 million;
|
41
|
|
|
|
|
the retention by Patriot of trade accounts receivable at
October 31, 2007, previously recorded through intercompany
receivables, of $68.6 million;
|
|
|
|
a $30.0 million cash contribution;
|
|
|
|
the retention by Peabody of assets and asset retirement
obligations related to certain Midwest mining operations of a
net $8.1 million;
|
|
|
|
less the transfer of intangible assets of $22.7 million
related to purchased contract rights for a supply contract
retained by Peabody.
|
At spin-off, we entered into certain on-going operational
agreements with Peabody to increase the price paid to us under a
major existing coal sales agreement to be more reflective of the
then current market pricing for similar quality coal. We
encourage you to read our Unaudited Pro Forma Consolidated
Financial Data provided within this Managements Discussion
and Analysis of Financial Condition and Results of Operations to
better understand how our results have been impacted by the
separation from Peabody and the various separation agreements
that were effective with the spin-off transaction. The
consolidated financial statements presented below include
allocations of Peabody expenses, assets and liabilities through
the date of the spin-off, including the following items:
Selling
and Administrative Expenses
For the periods prior to spin-off, our historical selling and
administrative expenses were based on an allocation of Peabody
general corporate expenses to all of its mining operations, both
foreign and domestic, based on principal activity, headcount,
tons sold or revenues as appropriate. The allocated expenses
generally reflect service costs for marketing and sales, general
accounting, legal, finance and treasury, public relations, human
resources, environmental, engineering and internal audit. The
variance in our historical selling and administrative expenses
relates to fluctuations in Peabodys overall selling and
administrative expenses. These allocated expenses are not
necessarily indicative of the costs we would have incurred as a
stand-alone company.
Interest
Expense
For the periods prior to the spin-off, our historical interest
expense primarily related to fees for letters of credit and
surety bonds used to guarantee our reclamation, workers
compensation, retiree healthcare and lease obligations as well
as interest expense related to intercompany notes with Peabody.
Our capital structure changed following our spin-off from
Peabody, and effective October 31, 2007, we entered into a
four-year revolving credit facility. See Liquidity and Capital
Resources Credit Facility for information about our
new facility. The intercompany notes totaling $62.0 million
with Peabody were forgiven at spin-off.
Income
Tax Provision
Income taxes are accounted for using a balance sheet approach in
accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). We account 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. A valuation allowance
is established if it is more likely than not that
the related tax benefits will not be realized. In determining
the appropriate valuation allowance, we consider projected
realization of tax benefits based on expected levels of future
taxable income, available tax planning strategies and the
overall deferred tax position.
SFAS No. 109 specifies that the amount of current and
deferred tax expense for an income tax return group are to be
allocated among the members of that group when those members
issue separate financial statements. For purposes of the
consolidated financial statements, our income tax expense has
been recorded as if we filed a consolidated tax return separate
from Peabody, notwithstanding that a majority of the operations
were historically included in the U.S. consolidated income
tax return filed by Peabody. Our valuation allowance was also
determined on the separate tax return basis. Additionally, our
tax attributes (i.e. net operating losses and Alternative
Minimum Tax credits) have been determined based on
U.S. consolidated tax rules describing the apportionment of
these items upon departure (i.e. spin-off) from the Peabody
consolidated group.
42
Peabody was managing its tax position for the benefit of its
entire portfolio of businesses. Peabodys tax strategies
are not necessarily reflective of the tax strategies that we
would have followed or will follow as a stand-alone company, nor
were they necessarily strategies that optimized our stand-alone
position. As a result, our effective tax rate as a stand-alone
entity may differ significantly from those prevailing in
historical periods.
Results
of Operations
Segment
Adjusted EBITDA
The discussion of our results of operations below includes
references to and analysis of our Appalachia and Illinois Basin
Segments Adjusted EBITDA results. Adjusted EBITDA is
defined as net income (loss) before deducting net interest
expense, income taxes, minority interests, asset retirement
obligation expense and depreciation, depletion and amortization.
Segment Adjusted EBITDA is used by management primarily as a
measure of our segments operating performance. Because
Segment Adjusted EBITDA is not calculated identically by all
companies, our calculation may not be comparable to similarly
titled measures of other companies. Segment Adjusted EBITDA is
reconciled to its most comparable measure under generally
accepted accounting principles in Item 6. Selected
Consolidated Financial Data. Segment Adjusted EBITDA excludes
selling, general and administrative expenses, past mining
obligation expense and gain on disposal of assets and is
reconciled to its most comparable measure below under Net Income
(Loss).
Geologic
Conditions
Our results are impacted by geologic conditions as they relate
to coal mining, and these conditions refer to the physical
nature of the coal seam and surrounding strata and its effect on
the mining process. Geologic conditions that can have an adverse
effect on underground mining include thinning coal seam
thickness, rock partings within a coal seam, weak roof or floor
rock, sandstone channel intrusions, groundwater and increased
stresses within the surrounding rock mass due to over mining,
under mining and overburden changes. The term adverse
geologic conditions is used in general to refer to these
and similar situations where the geologic setting can negatively
affect the normal mining process. Adverse geological conditions
would be markedly different from those that would be considered
typical geological conditions for a given mine. Since over 90%
of our production is sourced from underground operations,
geologic conditions are a major factor in our results of
operations.
Year
ended December 31, 2007 compared to year ended
December 31, 2006
Summary
Revenues were $1,073.4 million and Segment Adjusted EBITDA
was $101.7 million for the year ended December 31,
2007, both lower than the prior year primarily driven by lower
sales volumes due to production shortfalls. Production
shortfalls resulted from a delayed longwall move at one of our
mines and increased levels of adverse geologic conditions
including excessive groundwater from heavy spring rains, roof
falls and roof partings. Net loss was $106.9 million in
2007 compared to $13.5 million in the prior year. The
increased net loss was mainly driven by the lower sales volumes
and higher operating costs.
43
Tons
Sold and Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
Tons/$
|
|
|
%
|
|
|
|
(Dollars and tons in thousands, except per ton amounts)
|
|
|
Appalachia
|
|
|
14,432
|
|
|
|
15,292
|
|
|
|
(860
|
)
|
|
|
(5.6
|
)%
|
Illinois Basin
|
|
|
7,711
|
|
|
|
8,998
|
|
|
|
(1,287
|
)
|
|
|
(14.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tons Sold
|
|
|
22,143
|
|
|
|
24,290
|
|
|
|
(2,147
|
)
|
|
|
(8.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia
|
|
$
|
821,116
|
|
|
$
|
890,198
|
|
|
$
|
(69,082
|
)
|
|
|
(7.8
|
)%
|
Illinois Basin
|
|
|
252,246
|
|
|
|
257,721
|
|
|
|
(5,475
|
)
|
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,073,362
|
|
|
$
|
1,147,919
|
|
|
$
|
(74,557
|
)
|
|
|
(6.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per ton sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia
|
|
$
|
56.89
|
|
|
$
|
58.21
|
|
|
$
|
(1.32
|
)
|
|
|
(2.3
|
)%
|
Illinois Basin
|
|
|
32.71
|
|
|
|
28.64
|
|
|
|
4.07
|
|
|
|
14.2
|
%
|
The decrease in the Appalachia revenue for the year ended
December 31, 2007 compared to the prior year reflected
lower sales volumes driven by adverse geologic conditions, a
delayed longwall move at one of our mines, and the loss of a
coal supplier in late 2006, partially offset by additional
volumes from the Black Stallion contract mine, which began
production in the third quarter of 2006. Adverse geologic
conditions included roof falls and partings that reduced
saleable coal yields.
The decrease in the Illinois Basin revenue for the year ended
December 31, 2007 compared to the prior year reflected
reduced sales volumes associated mainly with the closure of the
Big Run mine, partially offset by higher pricing principally
resulting from a price increase on a long-term contract under
the market price adjustment provision of the contract.
Segment
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Appalachia
|
|
$
|
89,850
|
|
|
$
|
204,827
|
|
|
$
|
(114,977
|
)
|
|
|
(56.1
|
)%
|
Illinois Basin
|
|
|
11,862
|
|
|
|
(1,900
|
)
|
|
|
13,762
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
101,712
|
|
|
$
|
202,927
|
|
|
$
|
(101,215
|
)
|
|
|
(49.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA for Appalachia decreased in 2007 from
the prior year primarily due to lower sales volume as described
above and higher operating costs primarily due to additional
materials and supplies required for the delayed longwall move at
one of our mines, roof control, equipment repair and
maintenance, as well as higher labor expenses related to a labor
agreement that became effective on January 1, 2007,
partially offset by lower revenue-based taxes and royalties.
Segment Adjusted EBITDA for the Illinois Basin increased in 2007
from the prior year primarily due to the higher average sales
price as discussed above. Operating costs decreased in 2007
compared to the prior year primarily due to the closure of the
Big Run mine, partially offset by higher costs related to
preparation plant maintenance and additional equipment
requirements at one of our mines associated with roof falls and
excessive water.
44
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Increase (Decrease)
|
|
|
|
December 31,
|
|
|
to Income
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
101,712
|
|
|
$
|
202,927
|
|
|
$
|
(101,215
|
)
|
|
|
(49.9
|
)%
|
Corporate and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past mining obligation expense
|
|
|
(137,602
|
)
|
|
|
(106,880
|
)
|
|
|
(30,722
|
)
|
|
|
(28.7
|
)%
|
Net gain on disposal of assets
|
|
|
81,458
|
|
|
|
78,631
|
|
|
|
2,827
|
|
|
|
3.6
|
%
|
Selling and administrative expenses
|
|
|
(45,137
|
)
|
|
|
(47,909
|
)
|
|
|
2,772
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate and other
|
|
|
(101,281
|
)
|
|
|
(76,158
|
)
|
|
|
(25,123
|
)
|
|
|
(33.0
|
)%
|
Depreciation, depletion and amortization
|
|
|
(85,640
|
)
|
|
|
(86,458
|
)
|
|
|
818
|
|
|
|
0.9
|
%
|
Asset retirement obligation expense
|
|
|
(20,144
|
)
|
|
|
(24,282
|
)
|
|
|
4,138
|
|
|
|
17.0
|
%
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peabody
|
|
|
(4,969
|
)
|
|
|
(5,778
|
)
|
|
|
809
|
|
|
|
14.0
|
%
|
Third-Party
|
|
|
(3,368
|
)
|
|
|
(5,641
|
)
|
|
|
2,273
|
|
|
|
40.3
|
%
|
Interest income
|
|
|
11,543
|
|
|
|
1,417
|
|
|
|
10,126
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
(102,147
|
)
|
|
|
6,027
|
|
|
|
(108,174
|
)
|
|
|
n/a
|
|
Income tax provision
|
|
|
|
|
|
|
(8,350
|
)
|
|
|
8,350
|
|
|
|
n/a
|
|
Minority interests
|
|
|
(4,721
|
)
|
|
|
(11,169
|
)
|
|
|
6,448
|
|
|
|
57.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(106,868
|
)
|
|
|
(13,492
|
)
|
|
|
(93,376
|
)
|
|
|
n/a
|
|
Effect of minority purchase arrangement
|
|
|
(15,667
|
)
|
|
|
|
|
|
|
(15,667
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(122,535
|
)
|
|
$
|
(13,492
|
)
|
|
$
|
(109,043
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
Mining Obligation Expense
Past mining obligation expenses were higher in 2007 than the
prior year primarily due to higher retiree healthcare costs
resulting from higher amortization of actuarial loss and
increased funding for multi-employer healthcare and pension
plans in accordance with provisions of 2006 legislation and the
2007 National Bituminous Coal Wage agreement (effective
January 1, 2007). Our 2007 and 2006 operating costs
included approximately $51.9 million and
$46.1 million, respectively, for certain retiree healthcare
obligation expenses that would have been assumed by Peabody had
the proposed spin-off occurred at the beginning of each period.
Net
Gain on Disposal of Assets
Net gain on disposal of assets was $2.8 million higher for
2007. The net gain for the 2007 period was attributable
principally to the sale of 88 million tons of coal
reserves, and surface land in Kentucky and the Big Run Mine for
$26.5 million in cash and $69.4 million in notes
receivable which resulted in a gain of $78.5 million. The
net gain for the 2006 period was primarily attributable to the
sale of coal reserves and surface land located in Kentucky and
West Virginia for proceeds of $84.9 million, including cash
of $31.8 million and notes receivable of $53.1 million
which resulted in a gain of $66.6 million. Property sales
in 2007 and 2006 are not indicative of the level we would expect
on an ongoing basis.
Selling
and Administrative Expenses
For the period prior to the spin-off, our historical selling and
administrative expenses are based on an allocation of Peabody
general corporate expenses to all of its mining operations, both
foreign and domestic. The decrease of $2.8 million in 2007
compared to 2006 reflected changes in Peabodys allocable
selling and administrative
45
expenses as well as changes to the allocation base. These
allocated expenses are not necessarily indicative of the costs
we would incur as a stand-alone company.
Depreciation,
Depletion and Amortization
Depreciation, depletion and amortization for 2007 decreased
slightly compared to 2006 primarily due to the closure of the
Big Run mine.
Asset
Retirement Obligation Expense
Asset retirement obligation expense decreased in 2007 compared
to the prior year primarily due to accelerated reclamation work
at closed mines in 2006 with less activity in 2007.
Interest
Expense (Income)
Third party interest expense decreased in 2007 as KE Ventures,
LLC repaid $23.8 million in bank loans in the second half
of 2006 and replaced the bank debt with a Peabody note which was
subsequently forgiven at spin-off.
Interest income increased in 2007 compared to the prior year due
to additional interest income on notes receivable that resulted
from the sale of Kentucky coal reserves in the second half of
2006 and the first half of 2007.
Income
Tax Provision
In 2006, we incurred $8.4 million of tax obligation for
federal taxes from the disposal of assets and the preference
limitation on percentage depletion. Patriot was included in
Peabodys consolidated group during 2006 and the
consolidated group had sufficient net operating losses available
to offset the taxable income of Patriot, so this tax obligation
did not require Patriot to make cash payments.
Minority
Interests
We acquired an effective controlling interest in KE Ventures,
LLC during the first quarter of 2006, and began consolidating KE
Ventures, LLC in our results in 2006. The portion of earnings
that represents the interests of the minority owners is deducted
from our income (loss) before income taxes and minority
interests to determine net income (loss). The minority interest
recorded in 2007 and 2006 represented the share of KE Ventures,
LLC earnings in which the minority holders were entitled to
participate. We acquired the remaining minority interest in KE
Ventures, LLC in 2007.
Effect
of Minority Purchase Arrangement
Upon the spin-off from Peabody, the minority interest holders of
KE Ventures, LLC held an option that could require Patriot to
purchase the remaining 18.5% of KE Ventures, LLC upon a change
in control. The minority owners of KE Ventures, LLC exercised
this option in 2007, and the Company acquired the remaining
minority interest in KE Ventures, LLC on November 30, 2007
for $33.0 million. Because the option requiring Patriot to
purchase KE Ventures, LLC is considered a mandatorily redeemable
instrument outside of the Companys control, amounts paid
to the minority interest holders in excess of carrying value of
the minority interests in KE Ventures, LLC, or
$15.7 million, is reflected as an increase in net loss
attributable to common stockholders. Because this obligation was
fully redeemed as of December 31, 2007, adjustments to net
income attributable to common stockholders will not be required
in future periods.
Unaudited
Pro Forma Consolidated Financial Data
The unaudited pro forma consolidated statement of operations
presented below has been derived from our audited historical
consolidated financial statements for the year ended
December 31, 2007. This unaudited pro forma consolidated
financial information should be read in conjunction with Results
of Operations and the consolidated financial statements and
notes related to those consolidated financial statements
included elsewhere in this report.
46
The unaudited pro forma consolidated statement of operations for
the year ended December 31, 2007 reflects adjustments to
our historical financial statements to present our results as if
the spin-off occurred on January 1, 2007. These adjustments
include, among other things, an increase to revenue (and related
royalties and taxes) from repricing of a coal supply agreement
and a reduction to our costs associated with the assumption by
Peabody of certain of our retiree healthcare liabilities
estimated at a present value of $603.4 million as of
December 31, 2007.
The pro forma adjustments are based on assumptions that
management believes are reasonable. The unaudited pro forma
consolidated financial information is for illustrative and
informational purposes only and is not intended to represent or
be indicative of what our results of operations or financial
position would have been had the separation and distribution and
the related transactions occurred on the dates indicated. The
unaudited pro forma consolidated financial information also
should not be considered representative of our future results of
operations or financial position.
Unaudited
Pro Forma Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2007
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,069,316
|
|
|
$
|
22,850
|
(a)
|
|
$
|
1,092,166
|
|
Other revenues
|
|
|
4,046
|
|
|
|
|
|
|
|
4,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,073,362
|
|
|
|
22,850
|
|
|
|
1,096,212
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
1,109,315
|
|
|
|
(51,875
|
)
(b)
|
|
|
1,058,600
|
|
|
|
|
|
|
|
|
(1,125
|
)
(c)
|
|
|
|
|
|
|
|
|
|
|
|
2,285
|
(a)
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
85,640
|
|
|
|
(1,717
|
)
(d)
|
|
|
83,923
|
|
Asset retirement obligation expense
|
|
|
20,144
|
|
|
|
|
|
|
|
20,144
|
|
Selling and administrative expenses
|
|
|
45,137
|
|
|
|
(13,237
|
)
(e)
|
|
|
31,900
|
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal of assets
|
|
|
(81,458
|
)
|
|
|
|
|
|
|
(81,458
|
)
|
Income from equity affiliates
|
|
|
(63
|
)
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
(105,353
|
)
|
|
|
88,519
|
|
|
|
(16,834
|
)
|
Interest expense
|
|
|
3,368
|
|
|
|
5,267
|
(f)
|
|
|
8,635
|
|
Interest expense related to former Parent
|
|
|
4,969
|
|
|
|
(4,969
|
)
(g)
|
|
|
|
|
Interest income
|
|
|
(11,543
|
)
|
|
|
|
|
|
|
(11,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
|
|
|
(102,147
|
)
|
|
|
88,221
|
|
|
|
(13,926
|
)
|
Income tax provision
|
|
|
|
|
|
|
5,967
|
(h)
|
|
|
5,967
|
|
Minority interests
|
|
|
4,721
|
|
|
|
|
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(106,868
|
)
|
|
|
82,254
|
|
|
|
(24,614
|
)
|
Effect of minority purchase arrangement
|
|
|
(15,667
|
)
|
|
|
|
|
|
|
(15,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(122,535
|
)
|
|
$
|
82,254
|
|
|
$
|
(40,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to
Unaudited Pro Forma Consolidated Statement of
Operations
|
|
|
(a)
|
|
Reflects an increase to revenues (and related royalties and
taxes) related to the repricing of a coal supply agreement to
increase the price paid to Patriot to be more reflective of the
then current market pricing for similar quality coal at the time
of the spin-off.
|
47
|
|
|
(b)
|
|
Reflects a decrease to operating costs and expenses for the
impact of Peabodys agreement to assume certain of
Patriots retiree healthcare liabilities in the aggregate
amount of $603.4 million as of December 31, 2007.
|
|
(c)
|
|
Reflects reversal of historical expense related to pension
benefit obligations that were not assumed by Patriot.
|
|
(d)
|
|
Reflects the non-cash transfer to Peabody of an intangible asset
related to a purchased contract right recorded on Patriots
historical financial statements in Investments and Other Assets
and historically sourced from Patriot mining operations. As part
of the spin-off, Peabody retained the coal supply contract with
the ultimate customer.
|
|
(e)
|
|
Reflects adjustment for estimated selling and administrative
costs for Patriots stand-alone management and
administrative structure and functions. Prior to the spin-off,
these services were provided by Peabody under various agreements
between Peabody and its subsidiaries, and the historical amount
was the result of an allocation of Peabodys overall
selling and administrative costs. The allocation of these
Peabody costs was not deemed reasonable for Patriot on a
stand-alone basis and a pro forma amount was estimated based on
a detailed
build-up
of
expected support costs by function for the Patriot operations as
a stand alone business. The costs allocated to Patriot by
Peabody were higher than Patriots pro forma estimate
because the Peabody allocation reflected higher costs compared
to Patriots stand-alone estimate for areas such as
government relations, information systems development, office
space, executive incentive compensation and support departments
such as accounting, law, engineering and human resources. In
addition, the Peabody allocation included costs for major
strategy and growth initiatives, most of which did not directly
impact the Patriot operations.
|
|
(f)
|
|
Reflects higher costs for surety bonds and letters of credit
based on anticipated rates for these instruments and on
Patriots requirements to secure financial obligations for
reclamation, workers compensation and post retirement
benefits. The historical financial statements reflect an
allocation of Peabodys fees related to these guarantees.
|
|
(g)
|
|
Reflects the reversal of the interest expense related to the
intercompany note payable to Peabody.
|
|
(h)
|
|
Reflects tax impact of pro forma adjustments based on the
statutory rate adjusted for tax accounting as follows:
|
|
|
|
|
|
Expected tax statutory
|
|
$
|
30,877
|
|
State income tax
|
|
|
2,719
|
|
Percentage depletion
|
|
|
(11,845
|
)
|
Valuation allowance
|
|
|
(15,784
|
)
|
|
|
|
|
|
Pro forma tax impact
|
|
$
|
5,967
|
|
|
|
|
|
|
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Summary
Our revenues increased in 2006 compared to the prior year
primarily driven by increases to average per ton sales prices.
In 2005 and early 2006, strong demand for coal was driven by the
growing economy, low customer stockpiles, capacity constraints
of nuclear generation and high costs for competing fuels used
for electricity generation. Additionally, metallurgical coal was
sold at a significant premium to steam coal due to global steel
production growth during these periods. Later in 2006, steam and
metallurgical coal prices decreased from these highs but still
remained above historic levels.
While revenues grew in 2006, our Segment Adjusted EBITDA was
unfavorably impacted by higher costs from adverse geologic
conditions and equipment failures at our mines as well as higher
contract miner costs.
The decrease of $25.8 million in Segment Adjusted EBITDA in
2006 compared to 2005 was the result of cost increases due to
higher sales-related production taxes and royalties and higher
production costs associated with adverse geologic conditions at
two mines, partially offset by higher sales prices and volumes.
48
Tons
Sold and Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Year Ended December 31,
|
|
|
2006 from 2005
|
|
|
|
2006
|
|
|
2005
|
|
|
Tons/$
|
|
|
%
|
|
|
|
(Dollars and tons in thousands,
|
|
|
|
except per ton amounts)
|
|
|
Appalachia
|
|
|
15,292
|
|
|
|
14,066
|
|
|
|
1,226
|
|
|
|
8.7
|
%
|
Illinois Basin
|
|
|
8,998
|
|
|
|
9,719
|
|
|
|
(721
|
)
|
|
|
(7.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tons Sold
|
|
|
24,290
|
|
|
|
23,785
|
|
|
|
505
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia
|
|
$
|
890,198
|
|
|
$
|
742,753
|
|
|
$
|
147,445
|
|
|
|
19.9
|
%
|
Illinois Basin
|
|
|
257,721
|
|
|
|
235,524
|
|
|
|
22,197
|
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,147,919
|
|
|
$
|
978,277
|
|
|
$
|
169,642
|
|
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per ton sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia
|
|
$
|
58.21
|
|
|
$
|
52.80
|
|
|
$
|
5.41
|
|
|
|
10.2
|
%
|
Illinois Basin
|
|
|
28.64
|
|
|
|
24.23
|
|
|
|
4.41
|
|
|
|
18.2
|
%
|
In 2006, the increase in total revenues over 2005 resulted
primarily from demand-driven increases in sales prices for
metallurgical and steam coal and an increase in sales volumes.
In 2006, sales in Appalachia increased over the prior year as
average per ton sales prices increased $5.41, driven by
increases in demand and improved sulfur premiums for our
produced coal. Sales volumes increased due to the addition of KE
Ventures, LLC activity, which was combined in 2006 due to the
increase in our ownership interest. Sales of KE Ventures, LLC
added $135.4 million of revenues in 2006. Partially
offsetting this increase was lower production at one of our
metallurgical coal mines and at contract miner operations, as
both experienced adverse geologic conditions and equipment
failures. Sales in the Illinois Basin increased
$22.2 million in 2006 compared to 2005 primarily from the
demand-driven increases in sales prices, partially offset by
lower volumes due to production shortfalls caused by equipment
maintenance downtime and lack of barge availability towards the
end of 2006. Other revenues not related to coal sales, primarily
including coal royalty income, in Appalachia decreased
$12.0 million compared to 2005, primarily due to a gain
from a customer contract buyout in 2005.
Segment
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) to
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
|
|
Year Ended December 31,
|
|
|
2006 from 2005
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
Appalachia
|
|
$
|
204,827
|
|
|
$
|
227,100
|
|
|
$
|
(22,273
|
)
|
|
|
(9.8
|
)%
|
Illinois Basin
|
|
|
(1,900
|
)
|
|
|
1,645
|
|
|
|
(3,545
|
)
|
|
|
(215.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
202,927
|
|
|
$
|
228,745
|
|
|
$
|
(25,818
|
)
|
|
|
(11.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, Segment Adjusted EBITDA decreased $22.3 million in
the Appalachia segment and $3.5 million in the Illinois
Basin segment compared to the prior year. In the Appalachia
segment, the increase in sales discussed above was offset by an
increase of $169.7 million in net operating costs. This
increase for 2006 compared to 2005 included $98.3 million
from the consolidation of KE Ventures, LLC, which was not
consolidated in our 2005 results. In 2005, we owned a 49%
interest in KE Ventures, LLC and reported our $16.9 million
interest in the joint ventures net income in Income
from equity affiliates.
We pay various taxes and royalties that are indexed to our
sales. The increase in sales during 2006 discussed above
resulted in an increase in sales-related taxes and royalties of
$35.0 million. Operating costs increased $28.5 million
in 2006 due to production issues at one of our metallurgical
coal mines as discussed previously. In the Illinois Basin,
operating costs increased $25.7 million in 2006 compared to
2005, primarily due to higher labor costs from increased
workforce headcount and wage rates. Both segments were
negatively impacted by higher roof control costs in 2006 due to
an increase in the use and cost of roof bolts.
49
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase(Decrease)
|
|
|
|
|
|
|
to Net Income (Loss)
|
|
|
|
Year Ended December 31,
|
|
|
2006 from 2005
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
Segment Adjusted EBITDA
|
|
$
|
202,927
|
|
|
$
|
228,745
|
|
|
$
|
(25,818
|
)
|
|
|
(11.3
|
)%
|
Corporate and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past mining obligation expense
|
|
|
(106,880
|
)
|
|
|
(104,053
|
)
|
|
|
(2,827
|
)
|
|
|
(2.7
|
)%
|
Net gain on disposal or exchange of assets
|
|
|
78,631
|
|
|
|
57,042
|
|
|
|
21,589
|
|
|
|
37.8
|
%
|
Selling and administrative expenses
|
|
|
(47,909
|
)
|
|
|
(57,123
|
)
|
|
|
9,214
|
|
|
|
16.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate and Other
|
|
|
(76,158
|
)
|
|
|
(104,134
|
)
|
|
|
27,976
|
|
|
|
26.9
|
%
|
Depreciation, depletion and amortization
|
|
|
(86,458
|
)
|
|
|
(65,972
|
)
|
|
|
(20,486
|
)
|
|
|
(31.1
|
)%
|
Asset retirement obligation expense
|
|
|
(24,282
|
)
|
|
|
(15,572
|
)
|
|
|
(8,710
|
)
|
|
|
(55.9
|
)%
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peabody
|
|
|
(5,778
|
)
|
|
|
(4,960
|
)
|
|
|
(818
|
)
|
|
|
(16.5
|
)%
|
Third-Party
|
|
|
(5,641
|
)
|
|
|
(4,873
|
)
|
|
|
(768
|
)
|
|
|
(15.8
|
)%
|
Interest income
|
|
|
1,417
|
|
|
|
1,553
|
|
|
|
(136
|
)
|
|
|
(8.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
6,027
|
|
|
|
34,787
|
|
|
|
(28,760
|
)
|
|
|
n/a
|
|
Income tax provision
|
|
|
(8,350
|
)
|
|
|
|
|
|
|
(8,350
|
)
|
|
|
n/a
|
|
Minority interests
|
|
|
(11,169
|
)
|
|
|
|
|
|
|
(11,169
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,492
|
)
|
|
$
|
34,787
|
|
|
$
|
(48,279
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, our net loss was $13.5 million, a decrease of
$48.3 million compared to net income of $34.8 million
in 2005. The decrease in net income in 2006 exceeded the
decrease in Segment Adjusted EBITDA due to higher depreciation,
depletion and amortization expense reflecting the acquisition of
an additional interest in KE Ventures, LLC during the first
quarter of 2006.
Past
Mining Obligation Expense
Our 2006 operating costs included approximately $46 million
for certain retiree healthcare obligations that would have been
assumed by Peabody had the proposed spin-off structure been in
place at the beginning of 2006.
Net
Gain on Disposal or Exchange of Assets
In 2006, net gain on disposal of assets included sales of coal
reserves and surface land located in Kentucky and West Virginia
with a combined gain of $66.6 million. In 2005, net gain on
disposal or exchange of assets included a $37.4 million net
gain from an exchange of coal reserves as part of a dispute
settlement with a third-party supplier and a $6.2 million
net gain on an asset exchange from which we received Illinois
Basin coal reserves.
Selling
and Administrative Expenses
Our historical selling and administrative expenses are based on
an allocation of Peabody general corporate expenses to all of
its mining operations, both foreign and domestic, based on
activity-based analysis, headcount, tons sold or revenues, as
appropriate. In 2006, the decrease of $9.2 million compared
to 2005 primarily related to the expansion of Peabodys
allocation base as other mining operations within Peabody grew,
thus reducing our proportional share of the general corporate
expenses. These allocated expenses are not necessarily
indicative of the costs we would incur as a stand-alone company.
Depreciation,
Depletion and Amortization
The increase in 2006 of $20.5 million compared to 2005 was
primarily due to the consolidation of KE Ventures, LLC in 2006
and higher amortization of royalty rights.
50
Asset
Retirement Obligation Expense
The increase of $8.7 million in 2006 compared to 2005
related to accelerated reclamation work at closed mines and
reclamation plan revisions for certain operating mines.
Interest
Expense
Third-party interest expense primarily consists of fees related
to providing surety bonds or letters of credit to guarantee
workers compensation, reclamation, post-employment benefit
and lease obligations. Our capital structure changed following
our spin-off from Peabody.
Income
Tax Provision
In 2006, the Company incurred $8.4 million of tax
obligation for federal taxes from the disposal of assets and the
preference limitation on percentage depletion. Patriot was
included in Peabodys consolidated group during 2006 and
the consolidated group had sufficient net operating losses
available to offset the taxable income of Patriot, so this tax
obligation did not require Patriot to make cash payments.
Minority
Interests
We acquired an effective controlling interest in KE Ventures,
LLC during the first quarter of 2006, and began consolidating KE
Ventures, LLC in our results in 2006. The portion of earnings
that represent the interests of the minority owners is deducted
from our income (loss) before income taxes and minority
interests to determine net income (loss). The minority interest
recorded in 2006 represents the share of KE Ventures, LLC
earnings in which the minority holders were entitled to
participate. Our proportional share of KE Ventures, LLC earnings
was included in income from equity affiliates during 2005,
therefore no minority interest was recorded for KE Ventures, LLC.
Outlook
As discussed more fully under Item 1A. Risk Factors, our
results of operations in the near-term could be negatively
impacted by poor weather conditions, by unforeseen adverse
geologic conditions or equipment problems at mining locations,
by the unavailability of transportation for coal shipments and
by the inability of contract miners to fulfill delivery terms of
their contracts. On a long-term basis, our results of operations
could be impacted by our ability to secure or acquire
high-quality coal reserves; find replacement buyers for coal
under contracts with comparable terms to existing contracts; and
the passage of new or expanded regulations that could limit our
ability to mine, increase our mining costs, or limit our
customers ability to utilize coal as fuel for electricity
generation. If upward pressure on costs exceeds our ability to
realize sales increases, or if we experience unanticipated
operating or transportation difficulties, our operating margins
would be negatively impacted. We are experiencing increases in
operating costs related to steel-related products (including
roof control), replacement parts, belting products, contract
mining and healthcare, and have taken measures to attempt to
mitigate the increases in these costs. Management plans to
aggressively control costs and operating performance to mitigate
external cost pressures and geologic conditions.
Our fourth quarter 2007 results were negatively impacted by the
delayed longwall move at our Federal mine. The longwall began
operations in late 2007, but has experienced two roof falls
during the first quarter of 2008. It is our best estimate that
longwall production will be curtailed at Federal during March as
we take a conservative approach to remedying the situation and
ensuring the safety of our employees. We believe the condition
is temporary and that Federal will resume its normal production
rate in the second quarter. The lower production at the Federal
mine will impact first quarter 2008 earnings.
Our operating results are also impacted by market conditions.
Global coal markets continue to grow, driven by increased demand
from the growing economies of China and India where coal is
either the primary domestic source of fuel or the lowest-cost
imported fuel for electricity generation. We do not currently
sell coal into China, but Chinese demand is important in
determining worldwide coal prices. The Chinese government
announced the closure of small mines that account for
100 million tons of production and these mine closures are
expected to result in increased net coal imports for China.
Railcar shortages, production problems and severe weather in
Russia
51
reduced exports by approximately 5 million tons in 2007.
South Africa is cutting electricity supplies to the export
mining industry as a result of low domestic coal inventories. On
a nearer term basis, extreme flooding in Queensland in early
2008 is expected to significantly reduce Australias coal
export shipments. Metallurgical coal continues to sell at a
significant premium to steam coal and we expect to participate
in the strong global market for metallurgical coal through
production and sales of metallurgical coal from our operations.
Overall production in Appalachia in 2007 declined 3.5% compared
to 2006. We expect prices for our products, predominantly sold
in the U.S., to improve as worldwide demand for coal continues
to grow.
Central Appalachia spot prices for metallurgical coal and traded
thermal coal prices have increased $60 per ton and $30 per ton,
respectively, since the beginning of 2008. We believe strong
coal markets will continue worldwide, as long as growth
continues in the U.S., Asia and other industrialized economies
that are increasing coal demand for electricity generation and
steelmaking. The Energy Information Administration of the
Department of Energy projects new U.S. coal-fueled
generation to increase 147 million tons over the next ten
years and over 400 million tons through 2030. Global coal
use was up 1.6 billion tons, or 30%, in the last five years
and is projected to increase another 1.1 billion tons over
the next ten years.
We are targeting 2008 sales volume of 23 to 25 million
tons, including 6.5 to 7.5 million tons of metallurgical
coal. As of December 31, 2007, our total unpriced planned
production for 2008 was 0.5 to 1.0 million tons each of
expected met and thermal volumes, for 2009 was 5.5 to
6.5 million tons each of met and thermal volumes and for
2010 was 7.5 to 8.5 million tons of met and 9.0 to
10.0 million tons of thermal volumes. The guidance provided
under the caption Outlook should be read in conjunction with the
section entitled Cautionary Notice Regarding Forward Looking
Statements on page 2 and Item 1A. Risk Factors. Actual
events and results may vary significantly from those included in
or contemplated or implied by the forward-looking statements
under Outlook. For additional information regarding some of the
risks and uncertainties that affect our business, see
Item 1A. Risk Factors.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results
of operations, liquidity and capital resources is based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. Generally accepted accounting principles require
that we make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. We
evaluate our estimates on an on-going basis. We base our
estimates on historical experience and on various other
assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates.
Employee-Related
Liabilities
We have significant long-term liabilities for our
employees postretirement benefit costs and workers
compensation obligations. Detailed information related to these
liabilities is included in Notes 14 and 16 to our
consolidated financial statements. Expense for the year ended
December 31, 2007 for these liabilities totaled
$127.9 million, while payments were $100.5 million.
Our postretirement benefit and certain components of our
workers compensation obligations are actuarially
determined, and we use various actuarial assumptions, including
the discount rate and future cost trends, to estimate the costs
and obligations for these items. Our discount rate is determined
by utilizing a hypothetical bond portfolio model which
approximates the future cash flows necessary to service our
liabilities. We make assumptions related to future trends for
medical care costs in the estimates of retiree healthcare and
work-related injuries and illness obligations. Our medical trend
assumption is developed by annually examining the historical
trend of our cost per claim data.
If our assumptions do not materialize as expected, actual cash
expenditures and costs that we incur could differ materially
from our current estimates. Moreover, regulatory changes could
increase our obligation to satisfy these or additional
obligations. Our most significant employee liability is
postretirement healthcare. Assumed discount rates and healthcare
cost trend rates have a significant effect on the expense and
liability amounts reported for
52
healthcare plans. Below we have provided two separate
sensitivity analyses, to demonstrate the significance of these
assumptions in relation to reported amounts.
Healthcare cost trend rate:
|
|
|
|
|
|
|
|
|
|
|
+1.0%
|
|
|
−1.0%
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total service and interest cost components
|
|
$
|
8,163
|
|
|
$
|
(7,494
|
)
|
Effect on (gain)/loss amortization component
|
|
|
15,102
|
|
|
|
(13,860
|
)
|
Effect on total postretirement benefit obligation
|
|
|
66,450
|
|
|
|
(60,983
|
)
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
+0.5%
|
|
|
−0.5%
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total service and interest cost components
|
|
$
|
1,583
|
|
|
$
|
(1,990
|
)
|
Effect on (gain)/loss amortization component
|
|
|
(6,656
|
)
|
|
|
7,025
|
|
Effect on total postretirement benefit obligation
|
|
|
(28,934
|
)
|
|
|
31,758
|
|
Asset
Retirement Obligations
Our asset retirement obligations primarily consist of spending
estimates for surface land reclamation and support facilities at
both underground and surface mines in accordance with federal
and state reclamation laws as defined by each mining permit.
Asset retirement obligations are determined for each mine using
various estimates and assumptions including, among other items,
estimates of disturbed acreage as determined from engineering
data, estimates of future costs to reclaim the disturbed
acreage, the timing of these cash flows, and a credit-adjusted,
risk-free rate. As changes in estimates occur (such as mine plan
revisions, changes in estimated costs, or changes in timing of
the reclamation activities), the obligation and asset are
revised to reflect the new estimate after applying the
appropriate credit-adjusted, risk-free rate. If our assumptions
do not materialize as expected, actual cash expenditures and
costs that we incur could be materially different than currently
estimated. Moreover, regulatory changes could increase our
obligation to perform reclamation and mine closing activities.
Asset retirement obligation expense for the year ended
December 31, 2007, was $20.1 million, and payments
totaled $15.9 million. See detailed information regarding
our asset retirement obligations in Note 13 to our
consolidated financial statements.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the
effect of temporary differences between the book and tax bases
of recorded assets and liabilities. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
In our annual evaluation of the need for a valuation allowance,
we take into account various factors, including the expected
level of future taxable income and available tax planning
strategies. If actual results differ from the assumptions made
in our annual evaluation of our valuation allowance, we may
record a change in valuation allowance through income tax
expense in the period this determination is made.
In June 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN No. 48). This
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We
adopted the provisions of FIN No. 48 on
January 1, 2007, with no impact to retained earnings. See
Newly Adopted Accounting Pronouncements for additional
information.
53
Revenue
Recognition
In general, we recognize revenues when they are realizable and
earned. We generated substantially all of our revenue in 2007
from the sale of coal to our customers. Revenue from coal sales
is realized and earned when risk of loss passes to the customer.
Coal sales are made to our customers under the terms of coal
supply agreements, most of which have a term of one year or
more. Under the typical terms of these coal supply agreements,
risk of loss transfers to the customer at the mine or port,
where coal is loaded to the rail, barge, ocean-going vessel,
truck or other transportation source that delivers coal to its
destination.
With respect to other revenues, other operating income, or gains
on asset sales recognized in situations unrelated to the
shipment of coal, we carefully review the facts and
circumstances of each transaction and apply the relevant
accounting literature as appropriate, and do not recognize
revenue until the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or
services have been rendered; the sellers price to the
buyer is fixed or determinable; and collectability is reasonably
assured.
Share-Based
Compensation
We have an equity incentive plan for employees and non-employee
directors that allows for the issuance of share-based
compensation in the form of restricted stock, incentive stock
options, nonqualified stock options, stock appreciation rights,
performance awards, restricted stock units and deferred stock
units. We recognize share-based compensation expense in
accordance with SFAS No. 123(R), Share-Based
Payment. We utilize the Black-Scholes option pricing model
to determine the fair value of stock options. Determining the
fair value of share-based awards requires judgment, including
estimating the expected term that stock options will be
outstanding prior to exercise, the associated volatility, and a
risk-free rate. Judgment is also required in estimating the
amount of share-based awards expected to be forfeited prior to
vesting. If actual forfeitures differ significantly from these
estimates, share-based compensation expense could be materially
impacted.
Impairment
of Long-Lived Assets
Impairment losses on long-lived assets used in operations are
recorded when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to
be generated by those assets under various assumptions are less
than the carrying amounts of those assets. Impairment losses are
measured by comparing the estimated fair value of the impaired
asset to its carrying amount. There were no impairment losses
recorded during the periods covered by the consolidated
financial statements.
Liquidity
and Capital Resources
Our primary sources of cash include sales of our coal production
to customers, sales of non-core assets and financing
transactions. Our primary uses of cash include our cash costs of
coal production, capital expenditures, interest costs and costs
related to past mining obligations as well as acquisitions. Our
ability to service our debt (interest and principal) and acquire
new productive assets or businesses is dependent upon our
ability to continue to generate cash from the primary sources
noted above in excess of the primary uses. We expect to fund our
capital expenditure requirements with cash generated from
operations or borrowed funds as necessary.
Net cash used in operating activities was $79.7 million for
the year ended December 31, 2007, an increase of
$59.0 million compared to the prior year. This increase in
net cash used primarily related to cash operating losses and
working capital changes. On a pro forma basis, our 2007 cash
flows from operating activities would have been approximately
$72 million higher due to Peabodys assumption of
certain retiree healthcare liabilities and higher revenues due
to Peabodys agreement to increase the price paid to us
under a major existing coal sales agreement to be more
reflective of the then current market pricing for similar
quality coal.
Net cash provided by investing activities was $54.7 million
for the year ended December 31, 2007, an increase of
$52.7 million compared to the prior year. The increase in
cash provided reflected lower capital expenditures of
$24.6 million, and an increase to net transactions with
Peabody of $47.9 million, partially offset by lower cash
proceeds from disposals of assets of $18.7 million.
Additionally, the $47.7 million cost to acquire the
remaining
54
26.1% ownership in KE Ventures, LLC was slightly higher than the
$44.5 million used to purchase a 24.9% interest in 2006.
Net cash provided by financing activities was $30.6 million
for the year ended December 31, 2007, an increase of
$11.9 million compared to the prior year. In 2007, we
repaid $8.4 million of KE Ventures, LLC debt in conjunction
with the acquisition of the remaining ownership described above.
Also in 2007, we paid $4.7 million in origination fees for
our credit facility, which will be amortized over the term of
the facility. In 2006, we repaid KE Ventures, LLCs
outstanding bank debt of $23.8 million.
Promissory
Notes
Our total historical indebtedness consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Promissory Notes
|
|
$
|
12,365
|
|
|
$
|
12,365
|
|
Notes Payable
|
|
|
|
|
|
|
8,357
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,365
|
|
|
$
|
20,722
|
|
|
|
|
|
|
|
|
|
|
The promissory notes were issued in conjunction with an exchange
transaction involving the acquisition of Illinois Basin coal
reserves. Annual installments of $1.7 million on the notes
for principal and interest are payable beginning in January 2008
and running through January 2017. At December 31, 2007, the
balance on the notes was $12.4 million, $0.9 million
of which was a current liability.
Credit
Facility
Effective October 31, 2007, we entered into a
$500 million, four-year revolving credit facility, which
includes a $50 million swingline sub-facility and a letter
of credit sub-facility. This facility is available for our
working capital requirements, capital expenditures and other
corporate purposes. Our credit facility was utilized to replace
certain Peabody letters of credit and surety bonds that were in
place with respect to Patriot obligations. Patriot issued
$253.5 million in letters of credit against the credit
facility in connection with the spin-off. As of
December 31, 2007 the balance of outstanding letters of
credit issued against the credit facility remained at
$253.5 million. At December 31, 2007, there was no
outstanding debt balance on the facility. Availability under the
credit facility as of December 31, 2007 was
$246.5 million.
The obligations under our credit facility are secured by a first
lien on substantially all of our assets, including but not
limited to certain of our mines and coal reserves and related
fixtures and accounts receivable. The credit facility contains
certain customary covenants, including financial covenants
limiting our total indebtedness (maximum leverage ratio of 2.75)
and requiring minimum EBITDA coverage of interest expense
(minimum interest coverage ratio of 4.0), as well as certain
limitations on, among other things, additional debt, liens,
investments, acquisitions and capital expenditures, future
dividends and asset sales. The credit facility calls for
quarterly reporting of compliance with financial covenants,
beginning with the period ended March 31, 2008. The rolling
four quarters compliance calculation contains a phase-in
provision for 2008. The terms of the credit facility also
contain certain customary events of default, which will give the
lender the right to accelerate payments of outstanding debt in
certain circumstances. Customary events of default include
breach of covenants, failure to maintain required ratios,
failure to make principal payments or to make interest or fee
payments within a grace period, and default, beyond any
applicable grace period, on any of our other indebtedness
exceeding a certain amount.
Other
We do not anticipate that we will pay cash dividends on our
common stock in the near term. The declaration and amount of
future dividends, if any, will be determined by our Board of
Directors and will be dependent upon covenant limitations in our
credit facility and other debt agreements, our financial
condition and future earnings, our capital, legal and regulatory
requirements, and other factors our Board deems relevant.
55
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year as of December 31, 2007
|
|
|
|
Within
|
|
|
2-3
|
|
|
4-5
|
|
|
After
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Long-term debt obligations (principal and interest)
|
|
$
|
1,700
|
|
|
$
|
3,400
|
|
|
$
|
3,400
|
|
|
$
|
8,500
|
|
Operating lease obligations
|
|
|
24,117
|
|
|
|
41,958
|
|
|
|
22,349
|
|
|
|
6,500
|
|
Unconditional purchase
obligations
(1)
|
|
|
6,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal reserve lease and royalty obligations
|
|
|
12,059
|
|
|
|
17,513
|
|
|
|
9,380
|
|
|
|
6,676
|
|
Other long-term liabilities
(2)
|
|
|
50,618
|
|
|
|
111,686
|
|
|
|
128,374
|
|
|
|
614,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
94,800
|
|
|
$
|
174,557
|
|
|
$
|
163,503
|
|
|
$
|
636,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We have purchase agreements with approved vendors for most types
of operating expenses. However, our specific open purchase
orders (which have not been recognized as a liability) under
these purchase agreements, combined with any other open purchase
orders, are not material. The commitments in the table above
relate to significant capital purchases.
|
|
(2)
|
|
Represents long-term liabilities relating to our postretirement
benefit plans, work-related injuries and illnesses and mine
reclamation and end-of-mine closure costs.
|
As of December 31, 2007, we had $6.3 million of
purchase obligations for capital expenditures. Total capital
expenditures for 2008 are expected to range from
$65 million to $80 million and relate to replacement,
improvement, or expansion of existing mines as well as the
development of the Black Oak metallurgical mine at the Rocklick
Complex. Approximately $18 million of the expenditures
relate to safety equipment that will be utilized to comply with
recently issued federal and state regulations.
Off-Balance
Sheet Arrangements
In the normal course of business, we are a party to certain
off-balance sheet arrangements. These arrangements include
guarantees, indemnifications, and financial instruments with
off-balance sheet risk, such as bank letters of credit and
performance or surety bonds. Liabilities related to these
arrangements are not reflected in our consolidated balance
sheets, and we do not expect any material adverse effect on our
financial condition, results of operations or cash flows to
result from these off-balance sheet arrangements.
Patriot has used a combination of surety bonds and letters of
credit to secure our financial obligations for reclamation,
workers compensation, postretirement benefits and lease
obligations as follows as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
|
|
|
|
|
|
|
|
|
|
Reclamation
|
|
|
Lease
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Surety bonds
|
|
$
|
84,109
|
|
|
$
|
|
|
|
$
|
12,961
|
|
|
$
|
12,030
|
|
|
$
|
109,100
|
|
Letters of credit
|
|
|
61,883
|
|
|
|
16,949
|
|
|
|
170,844
|
|
|
|
3,871
|
|
|
|
253,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,992
|
|
|
$
|
16,949
|
|
|
$
|
183,805
|
|
|
$
|
15,901
|
|
|
$
|
362,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes collateral for surety companies and bank guarantees,
road maintenance and performance guarantees.
|
Additionally, as of December 31, 2007, Peabody continued to
guarantee certain bonds (self bonding) related to Patriot
liabilities that have not yet been replaced by our surety bonds.
As of December 31, 2007, Peabody self bonding related to
Patriot liabilities aggregated $22.8 million, of which
$19.9 was for post-mining reclamation and $2.9 million was
for other obligations. We expect to replace these Peabody self
bonds in 2008.
Based on our estimate of the replacement of Peabody self bonds
and an overall increase to our fee structure as compared to
Peabody for these security instruments, we expect that annual
costs for our security requirements will
56
be higher than the amounts included in our historical financial
statements. We are initially estimating an increase in annual
costs of approximately $6 million over the amounts in our
historical financial statements.
In relation to an exchange transaction involving the acquisition
of the Illinois Basin coal reserves discussed in Note 4 to
our consolidated financial statements, we guaranteed bonding for
a partnership in which we formerly held an interest. The
aggregate amount that we guaranteed was $2.8 million and
the fair value of the guarantee recognized as a liability was
$0.4 million as of December 31, 2007. Our obligation
under the guarantee extends to September 2015.
Peabody assumed certain of the Companys retiree healthcare
liabilities in the aggregate amount of $603.4 million as of
December 31, 2007. These liabilities included certain
obligations under the Coal Act for which Peabody and Patriot are
jointly and severally liable, obligations under the 2007
National Bituminous Coal Wage Act for which the Company is
secondarily liable, and obligations for certain active, vested
employees of the Company.
Newly
Adopted Accounting Pronouncements
Financial
Interpretation No. 48
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN No. 48). This interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
We adopted the provisions of FIN No. 48 on
January 1, 2007, with no impact to retained earnings. At
adoption and at December 31, 2007, the unrecognized tax
benefits in our consolidated financial statements were
immaterial, and if recognized, would not currently affect the
Companys effective tax rate as any recognition would be
offset by valuation allowance. We do not expect any significant
increases or decreases to our unrecognized tax benefits within
12 months of December 31, 2007.
Due to the immaterial nature of our unrecognized tax benefits
and the existence of net operating loss carryforwards, we have
not currently accrued interest on any of our unrecognized tax
benefits. We have considered the application of penalties on our
unrecognized tax benefits and have determined, based on several
factors, including the existence of our net operating loss
carryforwards, that no accrual of penalties related to our
unrecognized tax benefits is required. If the accrual of
interest or penalties becomes appropriate, we will record an
accrual as part of our income tax provision.
As we have not yet filed any income tax returns as a stand alone
consolidated group, we have no income tax years currently
subject to audit by any tax jurisdiction. Patriot and our
subsidiaries were included in consolidated Peabody income tax
returns prior to November 1, 2007 and Peabody retained all
liability related to these returns.
|
|
Item 7A
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Commodity
Price Risk
The potential for changes in the market value of our coal
portfolio is referred to as market risk. Due to lack
of quoted market prices and the long term, illiquid nature of
the positions, we have not quantified market risk related to our
portfolio of coal supply agreements. We manage our commodity
price risk for our coal contracts through the use of long-term
coal supply agreements, rather than through the use of
derivative instruments. We sold 83% of our sales volume under
coal supply agreements with terms of one year or more during
2007. As of December 31, 2007 our total unpriced planned
production for 2008 was 1 to 2 million tons and for 2009
was 11 to 13 million tons.
In connection with the spin-off, we entered into long-term coal
contracts with marketing affiliates of Peabody. The
arrangements, except as described below under Credit
Risk, have substantially similar terms and conditions as
the pre-existing contractual obligations of Peabodys
marketing affiliate. These arrangements may be amended or
terminated only with the mutual agreement of Peabody and Patriot.
57
Credit
Risk
A major portion of our revenues is generated through sales to a
marketing affiliate of Peabody, and we will continue to supply
coal to Peabody on a contract basis as described above, so
Peabody can meet its commitments under pre-existing customer
agreements sourced from our operations. One of these
arrangements with Peabody provides for the adjustment of a major
existing coal sales agreement sourced from Patriots
operations to increase the price paid to us thereunder. The term
of the arrangement between Patriot and Peabody will expire on
December 12, 2012, and could be subject to extension in
certain circumstances. Our remaining sales are made directly to
electric utilities, industrial companies and steelmakers.
Therefore, our concentration of credit risk is primarily with
Peabody, as well as electric utilities and steelmakers. Our
policy is to independently evaluate each customers
creditworthiness prior to entering into transactions and to
constantly monitor the credit extended. In the event that we
engage in a transaction with a counterparty that does not meet
our credit standards, we will protect our position by requiring
the counterparty to provide appropriate credit enhancement. When
appropriate (as determined by our credit management function),
we have taken steps to reduce our credit exposure to customers
or counterparties whose credit has deteriorated and who may pose
a higher risk of failure to perform under their contractual
obligations. These steps include obtaining letters of credit or
cash collateral, requiring prepayments for shipments or the
creation of customer trust accounts held for our benefit to
serve as collateral in the event of a failure to pay.
Additionally, as of December 31, 2007, we had
$133.3 million in notes receivable outstanding from
counterparties not affiliated with us or Peabody arising out of
the sale of coal reserves and surface land discussed above. Of
this amount, 94% is from a single counterparty. Each of these
notes contain a cross-collaterization provision secured
primarily by the underlying coal reserves and surface land.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
See Part IV, Item 15 of this report for information
required by this Item.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
As of the end of the period covered by this Annual Report on
Form 10-K,
we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer have each concluded that our disclosure
controls and procedures were effective in timely alerting them
to material information relating to our Company and our
consolidated subsidiaries required to be included in our
periodic SEC filings. There were no changes in our internal
control over financial reporting identified during the last
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting. This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm due to a
transition period established by rules of the SEC for newly
public companies.
|
|
Item 9B.
|
Other
Information.
|
None.
58
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by Item 401 of
Regulation S-K
is included under the caption Election of Directors in our 2008
Proxy Statement and in Part I of this report under the
caption Executive Officers of the Company. Such information is
incorporated herein by reference. The information required by
Items 405, 406 and 407(c)(3),(d)(4) and (d)(5) of
Regulation S-K
is included under the captions Section 16(a) Beneficial
Ownership Reporting Compliance, Corporate Governance Matters and
Executive Compensation, respectively, in our 2008 Proxy
Statement and is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by Items 402 and 407 (e)(4) and
(e)(5) of
Regulation S-K
is included in our 2008 Proxy Statement under the caption
Executive Compensation and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by Item 403 of
Regulation S-K
is included under the caption Ownership of Company Securities in
our 2008 Proxy Statement and is incorporated herein by reference.
As required by Item 201(d) of
Regulation S-K,
the following table provides information regarding our equity
compensation plans as of December 31, 2007:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
1,351,302
|
|
|
$
|
37.50
|
|
|
|
1,248,698
|
|
Equity compensation plans not approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,351,302
|
|
|
$
|
37.50
|
|
|
|
1,248,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by Item 404 of
Regulation S-K
is included under the captions Certain Relationships and Related
Party Transactions, Director Independence and Policy for
Approval of Related Person Transactions in our 2008 Proxy
Statement and is incorporated herein by reference. The
information required by Item 407(a) of Regulation
S-K
is
included under the caption Executive Compensation in our 2008
Proxy Statement and is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by Item 9(e) of Schedule 14A
is included under the caption Fees Paid to Independent
Registered Public Accounting Firm in our 2008 Proxy Statement
and is incorporated herein by reference.
59
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) Documents Filed as Part of the Report
(1)
Financial Statements.
The following consolidated financial statements of Patriot Coal
Corporation are included herein on the pages indicated:
|
|
|
|
|
|
|
Page
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
F-1
|
|
Consolidated Statements of Operations Years Ended
December 31, 2007, 2006 and 2005
|
|
|
F-3
|
|
Consolidated Balance Sheets December 31, 2007
and December 31, 2006
|
|
|
F-4
|
|
Consolidated Statements of Cash Flows Years Ended
December 31, 2007, 2006 and 2005
|
|
|
F-5
|
|
Consolidated Statements of Changes in Stockholders Equity
(Deficit) Years Ended December 31, 2007, 2006
and 2005
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7
|
|
(2)
Financial Statement Schedule.
The following financial statement schedule of Patriot Coal
Corporation is at the page indicated:
|
|
|
|
|
|
|
Page
|
|
Valuation and Qualifying Accounts
|
|
|
F-36
|
|
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.
See Exhibit Index hereto.
60
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.
PATRIOT COAL CORPORATION
Richard M. Whiting
President, Chief Executive Officer and Director
Date: March 14, 2008
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
RICHARD
M. WHITING
Richard
M. Whiting
|
|
President, Chief Executive Officer and Director (principal
executive officer)
|
|
March 14, 2008
|
|
|
|
|
|
/s/
MARK
N. SCHROEDER
Mark
N. Schroeder
|
|
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)
|
|
March 14, 2008
|
|
|
|
|
|
/s/
IRL
F. ENGELHARDT
Irl
F. Engelhardt
|
|
Chairman and Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/
J.
JOE ADORJAN
J.
Joe Adorjan
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/
B.R.
BROWN
B.R.
Brown
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/
JOHN
E. LUSHEFSKI
John
E. Lushefski
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/
MICHAEL
M. SCHARF
Michael
M. Scharf
|
|
Director
|
|
March 14, 2008
|
|
|
|
|
|
/s/
ROBERT
O. VIETS
Robert
O. Viets
|
|
Director
|
|
March 14, 2008
|
61
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
2
|
.1
|
|
Separation Agreement, Plan of Reorganization and Distribution,
dated October 22, 2007, between Peabody Energy Corporation and
Patriot Coal Corporation (Incorporated by reference to Exhibit
2.1 of the Registrants Current Report on Form 8-K, filed
on October 25, 2007).
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (Incorporated
by reference to Exhibit 3.1 of the Registrants Current
Report on Form 8-K, filed on October 25, 2007).
|
|
3
|
.2
|
|
Amended and Restated By-Laws (Incorporated by reference to
Exhibit 3.2 of the Registrants Current Report on Form 8-K,
filed on October 25, 2007).
|
|
4
|
.1
|
|
Rights Agreement, dated October 22, 2007, between Patriot Coal
Corporation and American Stock Transfer & Trust Company
(Incorporated by reference to Exhibit 4.1 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
4
|
.2
|
|
Certificate of Designations of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 4.1 of the
Registrants Current Report on Form 8-K, filed on November
6, 2007).
|
|
10
|
.1
|
|
Transition Services Agreement, dated October 22, 2007, between
Peabody Energy Corporation and Patriot Coal Corporation
(Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on
Form 8-K,
filed on October 25, 2007).
|
|
10
|
.2
|
|
Tax Separation Agreement, dated October 22, 2007, between
Peabody Energy Corporation and Patriot Coal Corporation
(Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on
Form 8-K,
filed on October 25, 2007).
|
|
10
|
.3
|
|
Employee Matters Agreement, dated October 22, 2007, between
Peabody Energy Corporation and Patriot Coal Corporation
(Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on
Form 8-K,
filed on October 25, 2007).
|
|
10
|
.4
|
|
Coal Supply Agreement, dated October 22, 2007, between Patriot
Coal Sales LLC and COALSALES II, LLC (Incorporated by reference
to Exhibit 10.4 of the Registrants Current Report on Form
8-K, filed on October 25, 2007).
|
|
10
|
.5
|
|
Coal Supply Agreement, dated October 22, 2007, between Patriot
Coal Sales LLC and COALSALES LLC (Incorporated by reference to
Exhibit 10.5 of the Registrants Current Report on Form
8-K, filed on October 25, 2007).
|
|
10
|
.6
|
|
Master Coal Supply Agreement, dated October 22, 2007, between
Patriot Coal Sales LLC and COALSALES LLC (Incorporated by
reference to Exhibit 10.6 of the Registrants Current
Report on Form 8-K, filed on October 25, 2007).
|
|
10
|
.7
|
|
Master Coal Supply Agreement, dated October 22, 2007, between
Patriot Coal Sales LLC and COALSALES II LLC (Incorporated by
reference to Exhibit 10.7 of the Registrants Current
Report on Form 8-K, filed on October 25, 2007).
|
|
10
|
.8
|
|
Master Coal Supply Agreement, dated October 22, 2007, between
Patriot Coal Sales LLC and COALTRADE INTERNATIONAL, LLC
(Incorporated by reference to Exhibit 10.8 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
10
|
.9
|
|
Coal Act Liabilities Assumption Agreement, dated October 22,
2007, among Patriot Coal Corporation, Peabody Holding Company,
LLC and Peabody Energy Corporation (Incorporated by reference to
Exhibit 10.9 of the Registrants Current Report on Form
8-K, filed on October 25, 2007).
|
|
10
|
.10
|
|
NBCWA Liabilities Assumption Agreement, dated October 22, 2007,
among Patriot Coal Corporation, Peabody Holding Company, LLC,
Peabody Coal Company, LLC and Peabody Energy Corporation
(Incorporated by reference to Exhibit 10.10 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
10
|
.11
|
|
Salaried Employee Liabilities Assumption Agreement, dated
October 22, 2007, among Patriot Coal Corporation, Peabody
Holding Company, LLC, Peabody Coal Company, LLC and Peabody
Energy Corporation (Incorporated by reference to Exhibit 10.11
of the Registrants Current Report on Form 8-K, filed on
October 25, 2007).
|
|
10
|
.12
|
|
Administrative Services Agreement, dated October 22, 2007,
between Patriot Coal Corporation, Peabody Holding Company, LLC
and Peabody Energy Corporation (Incorporated by reference to
Exhibit 10.12 of the Registrants Current Report on Form
8-K, filed on October 25, 2007).
|
|
10
|
.13
|
|
Master Equipment Sublease Agreement, dated October 22, 2007,
between Patriot Leasing Company LLC and PEC Equipment Company,
LLC (Incorporated by reference to Exhibit 10.13 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.14
|
|
Software License Agreement, dated October 22, 2007, between
Patriot Coal Corporation and Peabody Energy Corporation
(Incorporated by reference to Exhibit 10.14 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
10
|
.15
|
|
Throughput and Storage Agreement, dated October 22, 2007, among
Peabody Terminals, LLC, James River Coal Terminal, LLC and
Patriot Coal Sales LLC (Incorporated by reference to Exhibit
10.15 of the Registrants Current Report on Form 8-K, filed
on October 25, 2007).
|
|
10
|
.16
|
|
Conveyance and Assumption Agreement, dated October 22, 2007,
among PEC Equipment Company, LLC, Central States Coal Reserves
of Indiana, LLC, Central States Coal Reserves of Illinois, LLC,
Cyprus Creek Land Company and Peabody Coal Company, LLC
(Incorporated by reference to Exhibit 10.16 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
10
|
.17
|
|
Patriot Coal Corporation 2007 Long-Term Equity Incentive Plan
(Incorporated by reference to Exhibit 10.17 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
10
|
.18
|
|
Patriot Coal Corporation Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.18 of the
Registrants Current Report on Form 8-K, filed on October
25, 2007).
|
|
10
|
.19
|
|
Patriot Coal Corporation Management Annual Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.19 of
the Registrants Current Report on Form 8-K, filed on
October 25, 2007).
|
|
10
|
.20
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and Richard M. Whiting (Incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.21
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and Irl F. Engelhardt (Incorporated by
reference to Exhibit 10.2 of the Registrants Current
Report on
Form 8-K,
filed on November 6, 2007).
|
|
10
|
.22
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and J. Joe Adorjan (Incorporated by
reference to Exhibit 10.3 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.23
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and B. R. Brown (Incorporated by
reference to Exhibit 10.4 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.24
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and John E. Lushefski (Incorporated by
reference to Exhibit 10.5 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.25
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and Michael M. Scharf (Incorporated by
reference to Exhibit 10.6 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.26
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and Robert O. Viets (Incorporated by
reference to Exhibit 10.7 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.27
|
|
Indemnification Agreement, dated November 1, 2007, between
Patriot Coal Corporation and Mark N. Schroeder (Incorporated by
reference to Exhibit 10.8 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.28
|
|
Employment Agreement, dated October 31, 2007, between Patriot
Coal Corporation and Richard M. Whiting (Incorporated by
reference to Exhibit 10.9 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.29
|
|
Employment Agreement, dated October 31, 2007, between Patriot
Coal Corporation and Mark N. Schroeder (Incorporated by
reference to Exhibit 10.10 of the Registrants Current
Report on
Form 8-K,
filed on November 6, 2007).
|
|
10
|
.30
|
|
Employment Agreement, dated October 31, 2007, between Patriot
Coal Corporation and Jiri Nemec (Incorporated by reference to
Exhibit 10.11 of the Registrants Current Report on Form
8-K, filed on November 6, 2007).
|
|
10
|
.31
|
|
Employment Agreement, dated October 31, 2007, between Patriot
Coal Corporation and Charles A. Ebetino, Jr. (Incorporated by
reference to Exhibit 10.12 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.32
|
|
Employment Agreement, dated October 31, 2007, between Patriot
Coal Corporation and Joseph W. Bean (Incorporated by reference
to Exhibit 10.13 of the Registrants Current Report on Form
8-K, filed on November 6, 2007).
|
|
10
|
.33
|
|
Employment Agreement, dated October 31, 2007, between Patriot
Coal Corporation and Irl F. Engelhardt (Incorporated by
reference to Exhibit 10.14 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.34
|
|
Form of Non-Qualified Stock Option Agreement under the Patriot
Coal Corporation 2007 Long-Term Equity Incentive Plan
(Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K, filed on October
29, 2007).
|
|
10
|
.35
|
|
Form of Restricted Stock Unit Agreement under the Patriot Coal
Corporation 2007 Long-Term Equity Incentive Plan (Incorporated
by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K, filed on October 29, 2007).
|
|
10
|
.36
|
|
Form of Restricted Stock Award Agreement under the Patriot Coal
Corporation 2007 Long-Term Equity Incentive Plan (Incorporated
by reference to Exhibit 10.3 of the Registrants Current
Report on Form 8-K, filed on October 29, 2007).
|
|
10
|
.37
|
|
Form of Deferred Stock Unit Award Agreement under the Patriot
Coal Corporation 2007 Long-Term Equity Incentive Plan
(Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K, filed on October
29, 2007).
|
|
10
|
.38
|
|
Patriot Coal Corporation 401(k) Retirement Plan (Incorporated by
reference to Exhibit 10.15 of the Registrants Current
Report on Form 8-K, filed on November 6, 2007).
|
|
10
|
.39
|
|
Patriot Coal Corporation Supplemental 401(k) Retirement Plan
(Incorporated by reference to Exhibit 10.16 of the
Registrants Current Report on Form 8-K, filed on November
6, 2007).
|
|
10
|
.40
|
|
Patriot Coal Corporation Credit Agreement, dated October 31,
2007, among Patriot Coal Corporation, Bank of America, N.A., as
administrative agent, L/C Issuer and Swing Line Lender and the
lenders from time to time party thereto (Incorporated by
reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K, filed on October 31, 2007).
|
|
10
|
.41
|
|
Patriot Coal Corporation Pledge and Security Agreement, dated
October 31, 2007, among Patriot Coal Corporation, certain
subsidiaries of Patriot Coal Corporation and Bank of America,
N.A. (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K, filed on October
31, 2007).
|
|
10
|
.42*
|
|
Amendment No. 1 to the Separation Agreement, Plan of
Reorganization and Distribution, dated November 1, 2007,
between Peabody Energy Corporation and Patriot Coal Corporation
|
|
10
|
.43*
|
|
Amendment 1 to Master Coal Supply Agreement between Patriot Coal
Sales LLC and COALSALES LLC, dated February 26, 2008.
|
|
10
|
.44*
|
|
Amendment 1 to Master Coal Supply Agreement between Patriot Coal
Sales LLC and COALSALES II LLC, dated February 26, 2008.
|
|
10
|
.45*
|
|
Amendment 1 to Master Coal Supply Agreement between Patriot Coal
Sales LLC and COALTRADE INTERNATIONAL LLC, dated
February 26, 2008.
|
|
21
|
.1*
|
|
List of Subsidiaries
|
|
23
|
.1*
|
|
Consent of Independent Registered Accounting Firm
|
|
23
|
.2*
|
|
Consent of Independent Registered Accounting Firm
|
|
31
|
.1*
|
|
Certification of periodic financial report by Patriot Coal
Corporations Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of periodic financial report by Patriot Coal
Corporations Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1*
|
|
Certification of periodic financial report pursuant to
18 U.S.C. Section 1350, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Patriot Coal
Corporations Chief Executive Officer.
|
|
32
|
.2*
|
|
Certification of periodic financial report pursuant to
18 U.S.C. Section 1350, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Patriot Coal
Corporations Chief Financial Officer.
|
* Filed herewith.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Patriot Coal Corporation
We have audited the accompanying consolidated balance sheets of
Patriot Coal Corporation (the Company) as of December 31,
2007 and 2006, and the related consolidated statements of
operations, changes in stockholders equity(deficit), and
cash flows for each of the three years in the period ended
December 31, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial
statements of KE Ventures (an LLC in which the Company had a
73.9% ownership interest for 2006 and 49% for 2005) for the
years ended December 31, 2006 and 2005. KE Ventures, LLC
was a consolidated entity as of December 31, 2006 and for
the year ended December 31, 2006. KE Ventures, LLCs
total assets were $85 million as of December 31, 2006,
and total revenues were $103.8 million for the year ended
December 31, 2006. KE Ventures, LLC was an investee for the
year ended December 31, 2005. In the consolidated financial
statements, the Companys equity in net income of KE
Ventures, LLC was stated at $16.9 million for the year
ended December 31, 2005. KE Ventures, LLCs statements
as of December 31, 2006, and for the two years in the
period ended December 31, 2006, were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for KE Ventures,
LLC, is based solely on the reports of other auditors.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other
auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Patriot Coal Corporation at
December 31, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Notes 14 and 16 to the consolidated
financial statements, on December 31, 2006, the Company
changed its method of accounting for post retirement and post
employment benefits.
St. Louis, Missouri
February 29, 2008
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Members of
KE Ventures, LLC
In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, of members capital
and of cash flows (not presented herein) present fairly, in all
material respects, the financial position of KE Ventures, LLC
(the Company) and its subsidiaries at
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years then ended
in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers
LLP
Charlotte, North Carolina
February 19, 2007
F-2
PATRIOT
COAL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except
|
|
|
|
share and per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,069,316
|
|
|
$
|
1,142,521
|
|
|
$
|
960,901
|
|
Other revenues
|
|
|
4,046
|
|
|
|
5,398
|
|
|
|
17,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,073,362
|
|
|
|
1,147,919
|
|
|
|
978,277
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
1,109,315
|
|
|
|
1,051,932
|
|
|
|
869,163
|
|
Depreciation, depletion and amortization
|
|
|
85,640
|
|
|
|
86,458
|
|
|
|
65,972
|
|
Asset retirement obligation expense
|
|
|
20,144
|
|
|
|
24,282
|
|
|
|
15,572
|
|
Selling and administrative expenses
|
|
|
45,137
|
|
|
|
47,909
|
|
|
|
57,123
|
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange of assets
|
|
|
(81,458
|
)
|
|
|
(78,631
|
)
|
|
|
(57,042
|
)
|
Income from equity affiliates
|
|
|
(63
|
)
|
|
|
(60
|
)
|
|
|
(15,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
(105,353
|
)
|
|
|
16,029
|
|
|
|
43,067
|
|
Interest expense
|
|
|
8,337
|
|
|
|
11,419
|
|
|
|
9,833
|
|
Interest income
|
|
|
(11,543
|
)
|
|
|
(1,417
|
)
|
|
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interests
|
|
|
(102,147
|
)
|
|
|
6,027
|
|
|
|
34,787
|
|
Income tax provision
|
|
|
|
|
|
|
8,350
|
|
|
|
|
|
Minority interests
|
|
|
4,721
|
|
|
|
11,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(106,868
|
)
|
|
|
(13,492
|
)
|
|
|
34,787
|
|
Effect of minority purchase arrangement
|
|
|
(15,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(122,535
|
)
|
|
$
|
(13,492
|
)
|
|
$
|
34,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
26,570,940
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Earnings per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4.02
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Effect of minority purchase arrangement
|
|
|
(0.59
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4.61
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
PATRIOT
COAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,983
|
|
|
$
|
398
|
|
Accounts receivable and other, net of allowance for doubtful
accounts of $251 and $252 as of December 31, 2007 and 2006,
respectively
|
|
|
125,985
|
|
|
|
31,583
|
|
Net receivable from former affiliates
|
|
|
|
|
|
|
141,021
|
|
Inventories
|
|
|
31,037
|
|
|
|
34,692
|
|
Prepaid expenses and other current assets
|
|
|
6,214
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
169,219
|
|
|
|
214,698
|
|
Property, plant, equipment and mine development
|
|
|
|
|
|
|
|
|
Land and coal interests
|
|
|
689,338
|
|
|
|
628,569
|
|
Buildings and improvements
|
|
|
282,703
|
|
|
|
270,990
|
|
Machinery and equipment
|
|
|
330,338
|
|
|
|
377,693
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(426,090
|
)
|
|
|
(434,565
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, equipment and mine development, net
|
|
|
876,289
|
|
|
|
842,687
|
|
Notes receivable
|
|
|
126,381
|
|
|
|
52,975
|
|
Investments and other assets
|
|
|
27,948
|
|
|
|
67,821
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,199,837
|
|
|
$
|
1,178,181
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
927
|
|
|
$
|
|
|
Trade accounts payable
|
|
|
66,811
|
|
|
|
53,573
|
|
Accrued expenses
|
|
|
116,781
|
|
|
|
162,871
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
184,519
|
|
|
|
216,444
|
|
Long-term debt
|
|
|
11,438
|
|
|
|
20,722
|
|
Note payable to former affiliate
|
|
|
|
|
|
|
62,000
|
|
Asset retirement obligations
|
|
|
134,364
|
|
|
|
139,703
|
|
Workers compensation obligations
|
|
|
192,730
|
|
|
|
207,860
|
|
Accrued postretirement benefit costs
|
|
|
527,315
|
|
|
|
1,139,017
|
|
Obligation to industry fund
|
|
|
31,064
|
|
|
|
25,626
|
|
Other noncurrent liabilities
|
|
|
36,091
|
|
|
|
40,483
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,117,521
|
|
|
|
1,851,855
|
|
Minority interests
|
|
|
|
|
|
|
16,153
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value; 100,000,000 shares
authorized; 26,758,768 shares issued and outstanding at
December 31, 2007)
|
|
|
268
|
|
|
|
|
|
Additional paid-in capital
|
|
|
189,451
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
(33,363
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(74,040
|
)
|
|
|
(322,121
|
)
|
Former Parents equity (deficit)
|
|
|
|
|
|
|
(367,706
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
82,316
|
|
|
|
(689,827
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
1,199,837
|
|
|
$
|
1,178,181
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
PATRIOT
COAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(106,868
|
)
|
|
$
|
(13,492
|
)
|
|
$
|
34,787
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
85,640
|
|
|
|
86,458
|
|
|
|
65,972
|
|
Net gain on disposal or exchange of assets
|
|
|
(81,458
|
)
|
|
|
(78,631
|
)
|
|
|
(57,042
|
)
|
Stock-based compensation expense
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates
|
|
|
(63
|
)
|
|
|
(60
|
)
|
|
|
(15,578
|
)
|
Dividends received from equity investments
|
|
|
|
|
|
|
9,935
|
|
|
|
7,552
|
|
Minority interest
|
|
|
4,721
|
|
|
|
11,169
|
|
|
|
|
|
Changes in current assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,058
|
)
|
|
|
2,043
|
|
|
|
4,844
|
|
Inventories
|
|
|
3,655
|
|
|
|
(7,998
|
)
|
|
|
(4,497
|
)
|
Other current assets
|
|
|
790
|
|
|
|
(3,769
|
)
|
|
|
1,247
|
|
Accounts payable and accrued expenses
|
|
|
10,828
|
|
|
|
(10,932
|
)
|
|
|
(6,596
|
)
|
Interest on notes receivable
|
|
|
(10,013
|
)
|
|
|
(876
|
)
|
|
|
|
|
Asset retirement obligations
|
|
|
4,473
|
|
|
|
3,006
|
|
|
|
(13,465
|
)
|
Workers compensation obligations
|
|
|
6,654
|
|
|
|
(3,163
|
)
|
|
|
3,011
|
|
Accrued postretirement benefit costs
|
|
|
22,264
|
|
|
|
4,677
|
|
|
|
11,273
|
|
Obligation to industry fund
|
|
|
7,286
|
|
|
|
(2,253
|
)
|
|
|
(3,033
|
)
|
Other, net
|
|
|
(9,849
|
)
|
|
|
(16,855
|
)
|
|
|
(10,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(79,699
|
)
|
|
|
(20,741
|
)
|
|
|
17,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant, equipment and mine development
|
|
|
(55,594
|
)
|
|
|
(80,224
|
)
|
|
|
(75,151
|
)
|
Acquisitions, net
|
|
|
(47,733
|
)
|
|
|
(44,538
|
)
|
|
|
|
|
Additions to advance mining royalties
|
|
|
(3,964
|
)
|
|
|
(6,065
|
)
|
|
|
(6,094
|
)
|
Proceeds from disposal of assets, net of notes receivable
|
|
|
29,426
|
|
|
|
48,168
|
|
|
|
13,496
|
|
Net change in receivables from/payables to former affiliates
|
|
|
132,586
|
|
|
|
84,652
|
|
|
|
38,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
54,721
|
|
|
|
1,993
|
|
|
|
(29,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from former Parent
|
|
|
43,647
|
|
|
|
44,538
|
|
|
|
|
|
Long-term debt payments
|
|
|
(8,358
|
)
|
|
|
(23,792
|
)
|
|
|
|
|
Issuance of notes payable
|
|
|
|
|
|
|
|
|
|
|
11,459
|
|
Credit facility origination fees
|
|
|
(4,726
|
)
|
|
|
|
|
|
|
|
|
Distribution to minority interests
|
|
|
|
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
30,563
|
|
|
|
18,627
|
|
|
|
11,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,585
|
|
|
|
(121
|
)
|
|
|
(247
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
398
|
|
|
|
519
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,983
|
|
|
$
|
398
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
PATRIOT
COAL CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
Former
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Parents
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
Equity
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2004
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,200,284
|
)
|
|
$
|
(1,200,284
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,787
|
|
|
|
34,787
|
|
Dividend from subsidiary of former Parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766,745
|
|
|
|
766,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(398,752
|
)
|
|
|
(398,752
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,492
|
)
|
|
|
(13,492
|
)
|
SFAS No. 158 adoption impact of postretirement plans and
workers compensation obligations (net of taxes of $0):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(318,614
|
)
|
|
|
|
|
|
|
(318,614
|
)
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,507
|
)
|
|
|
|
|
|
|
(3,507
|
)
|
Contribution from former Parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,538
|
|
|
|
44,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(322,121
|
)
|
|
|
(367,706
|
)
|
|
|
(689,827
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(33,363
|
)
|
|
|
|
|
|
|
(73,505
|
)
|
|
|
(106,868
|
)
|
Postretirement plans and workers compensation obligations
(net of taxes of $0):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in accumulated actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,278
|
|
|
|
|
|
|
|
70,278
|
|
Changes in prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,469
|
|
|
|
|
|
|
|
12,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,121
|
)
|
Contributions from former Parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,647
|
|
|
|
13,647
|
|
Consummation of spin-off transaction on October 31, 2007
|
|
|
266
|
|
|
|
188,152
|
|
|
|
|
|
|
|
165,334
|
|
|
|
427,564
|
|
|
|
781,316
|
|
Stock based compensation
|
|
|
|
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,299
|
|
Stock grants to employees
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
268
|
|
|
$
|
189,451
|
|
|
$
|
(33,363
|
)
|
|
$
|
(74,040
|
)
|
|
$
|
|
|
|
$
|
82,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-6
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
|
(1)
|
Consummation
of Spin-off Transaction and Basis of Presentation
|
Consummation
of Spin-off Transaction
On October 31, 2007, Patriot Coal Corporation (Patriot) was
spun-off from Peabody Energy Corporation (Peabody). Patriot
includes coal assets in Appalachia and the Illinois Basin and
operations in West Virginia and Kentucky. The spin-off was
accomplished through a dividend of all outstanding shares of
Patriot, resulting in Patriot becoming a separate, public-traded
company traded on the New York Stock Exchange (symbol PCX).
Distribution of the Patriot stock to Peabodys stockholders
occurred on October 31, 2007, at a ratio of one share of
Patriot stock for every 10 shares of Peabody stock. The
distribution on October 31, 2007 also included a net
contribution from Peabody of $781.3 million, which
reflected the following:
|
|
|
|
|
retention by Peabody of certain retiree healthcare liabilities
of $615.8 million;
|
|
|
|
the forgiveness of the outstanding intercompany payables to
Peabody on October 31, 2007 of $81.5 million;
|
|
|
|
the retention by Patriot of trade accounts receivable at
October 31, 2007, previously recorded through intercompany
receivables, of $68.6 million;
|
|
|
|
a $30.0 million cash contribution;
|
|
|
|
the retention by Peabody of assets and asset retirement
obligations related to certain Midwest mining operations of a
net $8.1 million;
|
|
|
|
less the transfer of intangible assets of $22.7 million
related to purchased contract rights for a supply contract
retained by Peabody.
|
Basis
of Presentation
Effective October 31, 2007, Patriot was spun-off from
Peabody and became a separate, publicly-traded company. All
significant transactions, profits and balances have been
eliminated between Patriot and its subsidiaries.
The information discussed below primarily relates to
Patriots historical results and may not necessarily
reflect what its financial position, results of operations and
cash flows will be in the future or would have been as a
stand-alone company. Upon the completion of the spin-off,
Patriots capital structure was changed significantly. At
the spin-off date Patriot entered into various operational
agreements with Peabody, including certain on-going agreements
that enhance both the financial position and cash flows of
Patriot. Such agreements include the assumption by Peabody of
certain retiree healthcare liabilities and the repricing of a
major coal supply agreement to be more reflective of the then
current market pricing for similar quality coal.
Patriot operates in two domestic coal segments; Appalachia and
the Illinois Basin (see Note 20).
|
|
(2)
|
Summary
of Significant Accounting Policies
|
Description
of Business
Patriot is engaged in the mining of thermal coal for sale
primarily to electric utilities and metallurgical coal for sale
to steel mills and independent coke producers. Patriots
mining operations are located in the eastern United States,
primarily in Appalachia and the Illinois Basin.
Sales
Patriots revenue from coal sales is realized and earned
when risk of loss passes to the customer. Coal sales are made to
customers under the terms of supply agreements, most of which
are long-term (greater than one year).
F-7
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the typical terms of these coal supply agreements, title
and risk of loss transfer to the customer at the mine, where
coal is loaded onto the rail, barge, truck or other
transportation source that delivers coal to its destination.
Shipping and transportation costs are generally borne by the
customer. In relation to export sales, Patriot holds inventories
at port facilities where title and risk of loss do not transfer
until the coal is loaded to an ocean-going vessel. 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.
Other
Revenues
Other revenues include royalties related to coal lease
agreements and farm income. Royalty income generally results
from the lease or sublease of mineral rights to third parties,
with 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, although revenue is
only recognized on these payments as the mineral is mined. The
terms of these agreements generally range from specified periods
of 5 to 15 years, or can be for an unspecified period until
all reserves are depleted.
Cash
and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates
fair value. Cash equivalents consist of highly liquid
investments with original maturities of three months or less.
Inventories
Materials and supplies and coal inventory are valued at the
lower of average cost or market. Saleable coal represents coal
stockpiles that will be sold in current condition. Raw coal
represents coal stockpiles that may be sold in current condition
or may be further processed prior to shipment to a customer.
Coal inventory costs include labor, supplies, equipment,
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
$0.5 million, $0.3 million and $0.1 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
Expenditures which extend the useful lives of existing plant and
equipment assets are capitalized. Maintenance and repairs are
charged to operating costs as incurred. Costs incurred to
develop coal mines or to expand the capacity of operating mines
are capitalized. Costs incurred to maintain current production
capacity at a mine and exploration expenditures are charged to
operating costs as incurred, including costs related to drilling
and study costs incurred to convert or upgrade mineral resources
to reserves. 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.
Coal reserves are recorded at cost, or at fair value in the case
of acquired businesses. Coal reserves are included in Land
and coal interests. As of December 31, 2007 and 2006,
the net book value of coal reserves totaled $545.5 and
$436.2 million, respectively. These amounts included $287.6
and $302.6 million at December 31, 2007 and 2006,
respectively, attributable to properties where the Company was
not currently engaged in mining operations or leasing to third
parties and, therefore, the coal reserves are not currently
being depleted. Included in the book value of coal reserves are
mineral rights for leased coal interests including advance
royalties, and the net book value of these mineral rights was
$380.1 million and $272.8 million at December 31,
2007 and 2006, respectively. The remaining net book value of the
coal reserves of $165.4 million and $163.4 million at
December 31, 2007 and 2006, respectively, relates to coal
reserves held by fee ownership.
F-8
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depletion of coal reserves and amortization of advance royalties
are computed using the units-of-production method utilizing only
proven and probable reserves (as adjusted for recoverability
factors) in the depletion base. Mine development costs are
principally amortized ratably over the estimated lives of the
mines.
Depreciation of plant and equipment (excluding life of mine
assets) is computed ratably over the estimated useful lives as
follows:
|
|
|
|
|
|
|
Years
|
|
|
Building and improvements
|
|
|
10 to 20
|
|
Machinery and equipment
|
|
|
1 to 30
|
|
Leasehold improvements
|
|
|
Shorter of life of asset, mine or lease
|
|
In addition, certain plant and equipment assets associated with
mining are depreciated ratably over the estimated life of the
mine. Remaining lives vary from 1 to 22 years. The charge
against earnings for depreciation of property, plant, equipment
and mine development was $60.3 million, $65.1 million
and $46.6 million for the years ended December 31,
2007, 2006 and 2005, respectively.
Intangible
Assets
On a gross basis, intangible assets consisting of royalty rights
totaled $21.2 million at December 31, 2007 and 2006,
with accumulated amortization at December 31, 2007 and 2006
of $4.1 million and $1.4 million, respectively. In
addition to these royalty rights, Patriot had gross purchased
contract rights of $58.9 million with accumulated
amortization of $34.5 million that were included in the
December 31, 2006 intangible assets balance. In connection
with the spin-off, all purchased contract rights remained with
Peabody except for $6.2 million gross purchased contract
rights, associated with the KE Ventures, LLC acquisition (see
Note 6), with accumulated amortization of
$2.0 million. The charge against earnings for amortization
of these intangibles was $6.5 million, $4.0 million
and $4.2 million for the years ended December 31,
2007, 2006 and 2005, respectively. These intangibles are
included in Investments and other assets and are
amortized on a per-ton basis. Intangibles are also subject to
evaluation for potential impairment if an event occurs or a
change in circumstances indicates the carrying amount may not be
recoverable.
Joint
Ventures
The Company applies the equity method to investments in joint
ventures when it has the ability to exercise significant
influence over the operating and financial policies of the joint
venture. Investments accounted for under the equity method are
initially recorded at cost, and any difference between the cost
of the Companys investment and the underlying equity in
the net assets of the joint venture at the investment date is
amortized over the lives of the related assets that gave rise to
the difference. The Companys pro rata share of earnings
from joint ventures and basis difference amortization are
reported in the consolidated statement of operations in
Income from equity affiliates. The book values of
the Companys equity method investments as of
December 31, 2007 and 2006 were $0.7 million and
$0.6 million, respectively, and are reported in
Investments and other assets in the consolidated
balance sheets. In 2005, the Companys investment in joint
ventures consisted primarily of one significant subsidiary, KE
Ventures, LLC. In 2006, KE Ventures, LLC became a consolidated
subsidiary.
Asset
Retirement Obligations
Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations
(SFAS No. 143) addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. The Companys asset retirement obligations (ARO)
primarily consist of spending estimates related to reclaiming
surface land and support facilities at both surface and
underground mines in accordance with federal and state
reclamation laws as defined by each mining permit.
F-9
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ARO liabilities for final reclamation and mine closure are
estimated based upon detailed engineering calculations of the
amount and timing of the future cash spending for a third-party
to perform the required work. Spending estimates are escalated
for inflation and then discounted at the credit-adjusted,
risk-free rate. Patriot records an ARO asset associated with the
discounted liability for final reclamation and mine closure. The
obligation and corresponding asset are recognized in the period
in which the liability is incurred. The ARO asset is amortized
on the units-of-production method over its expected life and the
ARO liability is accreted to the projected spending date. As
changes in estimates occur (such as mine plan revisions, changes
in estimated costs or changes in timing of the performance of
reclamation activities), the revisions to the obligation and
asset are recognized at the appropriate credit-adjusted,
risk-free rate. The Company also recognizes an obligation for
contemporaneous reclamation liabilities incurred as a result of
surface mining. Contemporaneous reclamation consists primarily
of grading, topsoil replacement and re-vegetation of backfilled
pit areas.
Environmental
Liabilities
Included in Other noncurrent liabilities are
accruals for other environmental matters that 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.
Income
Taxes
Income taxes are accounted for using a balance sheet approach in
accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). Deferred income
taxes are accounted for 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. A valuation
allowance is established if it is more likely than
not that the related tax benefits will not be realized. In
determining the appropriate valuation allowance, projected
realization of tax benefits is considered based on expected
levels of future taxable income, available tax planning
strategies and the overall deferred tax position.
SFAS No. 109 specifies that the amount of current and
deferred tax expense for an income tax return group shall be
allocated among the members of that group when those members
issue separate financial statements. For purposes of the
financial statements, Patriots income tax expense has been
recorded as if it filed a consolidated tax return separate from
Peabody, notwithstanding that a majority of the operations were
historically included in the U.S. consolidated income tax
return filed by Peabody. Patriots valuation allowance was
also determined on the separate tax return basis. Additionally,
Patriots tax attributes (i.e. net operating losses and AMT
credits) have been determined based on U.S. consolidated
tax rules describing the apportionment of these items upon
departure (i.e. spin-off) from the Peabody consolidated group.
Peabody was managing its tax position for the benefit of its
entire portfolio of businesses. Peabodys tax strategies
were not necessarily reflective of the tax strategies that
Patriot would have followed or will follow as a stand-alone
company, nor were they necessarily strategies that optimized the
Companys stand-alone position. As a result, Patriots
effective tax rate as a stand-alone entity may differ
significantly from those prevailing in historical periods.
Postretirement
Healthcare Benefits
Postretirement benefits other than pensions are accounted for in
accordance with SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions
(SFAS No. 106), which requires the costs of benefits
to be provided to be accrued over the employees period of
active service. These costs are determined on an actuarial
basis. As a result of the adoption of SFAS No. 158 on
December 31, 2006, the consolidated balance sheets as of
December 31, 2007 and 2006 fully reflect the funded status
of postretirement benefits.
F-10
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Multi-Employer
Benefit Plans
The Company has an obligation to contribute to two plans
established by the Coal Industry Retiree Health Benefits Act of
1992 (the Coal Act) the Combined Fund
and the 1992 Benefit Plan. A third fund, the 1993
Benefit Fund (the 1993 Benefit Plan), was established through
collective bargaining, but is now a statutory plan under
legislation passed in 2006. The Combined Fund obligations are
accounted for in accordance with Emerging Issues Task Force
No. 92-13,
Accounting for Estimated Payments in Connection with the
Coal Industry Retiree Health Benefit Act of 1992, as
determined on an actuarial basis. The 1992 Benefit Plan and the
1993 Benefit Plan qualify as multi-employer plans under
SFAS No. 106, and expense is recognized as
contributions are made.
Pension
Plans
Prior to the spin-off, Patriot participated in a
non-contributory defined benefit pension plan (the Pension Plan)
accounted for in accordance with SFAS No. 87,
Employers Accounting for Pensions
(SFAS No. 87), which requires that the cost to provide
the benefits be accrued over the employees period of
active service. The Pension Plan was sponsored by one of
Peabodys subsidiaries and covered certain
U.S. salaried employees and eligible hourly employees of
Peabody. In connection with the spin-off, Patriot employees no
longer participate in a defined benefit pension plan, and
Patriot did not retain any of the assets and liabilities for the
Pension Plan. Accordingly the assets and liabilities of the
Pension Plan are not allocated to Patriot and are not presented
in the accompanying balance sheets. However, annual
contributions to the Pension Plan were made as determined by
consulting actuaries based upon the Employee Retirement Income
Security Act of 1974 minimum funding standard. Patriot recorded
expense of $1.1 million, $3.7 million, and
$4.5 million for the years ended December 31, 2007,
2006 and 2005, respectively, as a result of its participation in
the Pension Plan, reflecting Patriots proportional share
of Peabodys expense based on the number of plan
participants.
Patriot also participates in two multi-employer pension plans,
the United Mine Workers of America 1950 Pension Plan (the 1950
Plan) and the United Mine Workers of America 1974 Pension Plan
(the 1974 Plan). These plans qualify as multi-employer plans
under SFAS No. 87, and expense is recognized as
contributions are made. See Note 15 for additional
information.
Postemployment
Benefits
Postemployment benefits are provided to qualifying employees,
former employees and dependents, and Patriot accounts for these
items on the accrual basis in accordance with
SFAS No. 112 Employers Accounting for
Postemployment Benefits. Postemployment benefits include
workers compensation occupational disease, which is
accounted for on the actuarial basis over the employees
periods of active service; workers compensation traumatic
injury claims, which are accounted for based on estimated loss
rates applied to payroll and claim reserves determined by
independent actuaries and claims administrators; disability
income benefits, which are accrued when a claim occurs; and
continuation of medical benefits, which are recognized when the
obligation occurs. As a result of the adoption of SFAS
No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
(SFAS No. 158) on December 31, 2006, the
Companys consolidated balance sheets as of
December 31, 2007 and December 31, 2006 fully reflect
the funded status of postemployment benefits.
Use of
Estimates in the Preparation of the Consolidated 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.
In particular, Patriot has significant long-term liabilities
relating to retiree healthcare and work-related injuries and
illnesses. Each of these liabilities is actuarially determined
and uses various actuarial assumptions, including
F-11
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the discount rate and future cost trends, to estimate the costs
and obligations for these items. In addition, the Company has
significant asset retirement obligations that involve
estimations of costs to remediate mining lands and the timing of
cash outlays for such costs. If these assumptions do not
materialize as expected, actual cash expenditures and costs
incurred could differ materially from current estimates.
Moreover, regulatory changes could increase the obligation to
satisfy these or additional obligations.
Finally, in evaluating the valuation allowance related to
deferred tax assets, various factors are taken into account,
including the expected level of future taxable income and
available tax planning strategies. If actual results differ from
the assumptions made in the evaluation of the valuation
allowance, a change in valuation allowance may be recorded
through income tax expense in the period such determination is
made.
Impairment
of Long-Lived Assets
Impairment losses on long-lived assets used in operations are
recorded when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to
be generated by those assets under various assumptions are less
than the carrying amounts of those assets. Impairment losses are
measured by comparing the estimated fair value of the impaired
asset to its carrying amount. There were no impairment losses
recorded during the periods covered by the consolidated
financial statements.
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 as of
December 31, 2007 and 2006:
|
|
|
|
|
Cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses have carrying values which approximate fair
value due to the short maturity or the financial nature of these
instruments.
|
|
|
|
The fair value of notes receivable approximates the carrying
value as of December 31, 2007 and 2006.
|
|
|
|
The fair value of net payables to former affiliates approximated
the carrying value as of December 31, 2006.
|
New
Accounting Pronouncements
FASB
Statement No. 157
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value
measures. SFAS No. 157 clarifies that fair value is a
market-based measurement that should be determined based on the
assumptions that market participants would use in pricing an
asset or liability. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The
provisions of SFAS No. 157 are to be applied on a
prospective basis, with the exception of certain financial
instruments for which retrospective application is required. The
Company is still determining the impact, if any, the adoption of
SFAS No. 157 will have on the results of operations,
financial position, and liquidity however, at this time, the
Company does not expect the impact to be material.
FASB
Statement No. 159
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
Entities electing the fair value option will be required to
recognize changes in fair value in earnings and to expense
upfront cost and fees associated with each item for which the
fair value option is elected. SFAS No. 159 is
effective for fiscal
F-12
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years beginning after November 15, 2007. The impact the
adoption of SFAS No. 159 will have on the results of
operations, financial position and liquidity, if any, is still
being determined; however, at this time, the Company does not
expect the impact to be material.
FASB
Statement No. 160
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 establishes
accounting and reporting standards for (1) noncontrolling
interests in partially owned consolidated subsidiaries and
(2) the loss of control of subsidiaries.
SFAS No. 160 requires noncontrolling interests
(minority interests) to be reported as a separate component of
equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net
income on the face of the income statement. In addition, this
statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss
will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date.
SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its
noncontrolling interest. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (January 1,
2009 for the Company). Early adoption is not allowed. The
Company is in the process of determining the effect, if any, the
adoption of SFAS No. 160 will have on the results of
operations, financial position and liquidity; however, at this
time, the Company does not expect the impact to be material.
FASB
Statement No. 141(R)
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, (SFAS No. 141(R))
which replaces SFAS No. 141. SFAS No. 141(R)
significantly changes the principles and requirements for how
the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree. This statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. This statement applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008
(January 1, 2009 for the Company). The adoption of
SFAS No. 141(R) will only impact the Companys
financial statements to the extent any acquisitions are made on
or subsequent to January 1, 2009.
|
|
(3)
|
Risk
Management and Financial Instruments
|
Patriot is exposed to various types of risk in the normal course
of business, including fluctuations in commodity prices and
interest rates. These risks are actively monitored to ensure
compliance with the Companys risk management policies. The
Company manages its commodity price risk related to the sale of
coal through the use of long-term, fixed-price contracts, rather
than financial instruments.
Credit
Risk
Patriots concentration of credit risk is substantially
with Peabody and utility customers. Patriot sells the majority
of its production through a marketing affiliate of Peabody at
prices paid by third-party customers (see Note 17 for
additional discussion of related party transactions). Allowance
for doubtful accounts was $0.3 million at December 31,
2007 and 2006. The Company also has $133.3 million in notes
receivable as of December 31, 2007 outstanding from
counterparties from the sale of coal reserves and surface lands
discussed in Note 4. Each of these notes contain a
cross-collaterization provision secured primarily by the
underlying coal reserves and surface lands.
The Companys policy is to independently evaluate each
customers creditworthiness prior to entering into
transactions and to constantly monitor the credit extended. In
the event that a transaction occurs with a counterparty
F-13
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that does not meet the Companys credit standards, the
Company may protect its position by requiring the counterparty
to provide appropriate credit enhancement. When appropriate,
steps have been taken to reduce credit exposure to customers or
counterparties whose credit has deteriorated and who may pose a
higher risk, as determined by the credit management function, of
failure to perform under their contractual obligations. These
steps include obtaining letters of credit or cash collateral,
requiring prepayments for shipments or the creation of customer
trust accounts held for the Companys benefit to serve as
collateral in the event of failure to pay.
Employees
As of December 31, 2007, Patriot had approximately
2,300 employees. As of December 31, 2007,
approximately 61% of the employees at company operations were
represented by an organized labor union and they generated
approximately 49% of the 2007 sales volume. Relations with its
employees and, where applicable, organized labor are important
to the Companys success. Union labor is represented by the
United Mine Workers of America (UMWA). The approximately 350
represented workers at the Illinois Basin Highland Mine operate
under a contract that expires on December 31, 2011 and this
mine generated approximately 19% of the 2007 coal production.
The remainder of the Companys represented workers are in
Appalachia and operate under a labor agreement also expiring
December 31, 2011.
|
|
(4)
|
Net Gain
on Disposal or Exchange of Assets and Other Commercial
Events
|
In 2007, Patriot sold approximately 88 million tons of coal
reserves and surface land located in Kentucky and the Big Run
Mine for cash of $26.5 million and notes receivable of
$69.4 million which resulted in a gain of
$78.5 million.
During 2006, Patriot sold coal reserves and surface land located
in Kentucky and West Virginia for proceeds of $84.9 million
including cash of $31.8 million and notes receivable of
$53.1 million which resulted in a gain of
$66.6 million. The gain from these transactions is included
in Net gain on disposal or exchange of assets in the
consolidated statements of operations.
In the third quarter of 2005, Peabody exchanged certain steam
coal reserves for steam and metallurgical coal reserves as part
of a contractual dispute settlement between Peabody and a
third-party. Under the settlement, Peabody received
$10.0 million in cash, a new coal supply agreement that
partially replaced the disputed coal supply agreement and
exchanged the Companys steam coal reserves. As a result of
the final settlement and based on the fair values of the items
exchanged in the overall settlement transaction (including cash
of $4.0 million), Patriot recognized a gain on assets
exchanged of $37.4 million in relation to this transaction.
The fair value of assets exchanged exceeded the book value of
assets relinquished by $33.4 million and this non-cash
addition is not included in Additions to property, plant,
equipment and mine development in the consolidated
statement of cash flows. The gain from this transaction is
included in Net gain on disposal or exchange of
assets in the consolidated statements of operations.
Also in the third quarter of 2005, Patriot recognized a
$6.2 million gain from an exchange transaction involving
the acquisition of Illinois Basin coal reserves in exchange for
coal reserves, cash, notes and the Companys 45% equity
interest in a partnership.
Basic earnings per share is computed by dividing net income by
the number of weighted average common shares outstanding during
the reporting period. Diluted earnings per share is calculated
to give effect to all potentially dilutive common shares that
were outstanding during the reporting period. Earnings (loss)
per share is not presented for periods prior to October 31,
2007, because Peabody and its affiliates were the sole owners
prior to the initial distribution.
F-14
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 2007, 32,929 shares
were excluded from the diluted earnings per share calculations
for the Companys common stock because they were
anti-dilutive.
KE
Ventures, LLC
As of December 31, 2005, the Company owned a 49% interest
in KE Ventures, LLC and accounted for the interest under the
equity method of accounting. In March 2006, Patriot increased
its ownership interest in the joint venture to an effective
73.9% and accordingly, fully consolidated KE Ventures, LLC
effective January 1, 2006. The purchase price for the
additional 24.9% interest was $44.5 million plus assumed
debt. The purchase price was allocated over the various assets
and liabilities in proportion to the additional ownership
percentage with an additional $52.8 million allocated to
coal reserves and plant and equipment included in
Property, plant, equipment and mine development and
customer contracts included in Investments and other
assets.
In September 2007, Patriot acquired an additional 7.6% interest
in KE Ventures, LLC for $13.6 million, increasing effective
ownership to 81.5%. The minority holders of KE Ventures, LLC
held an option which could require Patriot to purchase the
remaining 18.5% of KE Ventures, LLC upon a change in control.
This option became fully exercisable upon the spin-off from
Peabody. The minority owners of KE Ventures, LLC exercised this
option in 2007, and the Company acquired the remaining minority
interest in KE Ventures, LLC on November 30, 2007 for
$33.0 million. The additional purchase price of
$46.6 million was allocated to the proportional percentage
of assets and liabilities acquired in 2007. The purchase price
was primarily allocated to coal reserves as it was the most
significant asset acquired.
Because the option requiring Patriot to purchase KE Ventures,
LLC is considered a mandatorily redeemable instrument outside of
the Companys control, amounts paid to the minority
interest holders in excess of carrying value of the minority
interests in KE Ventures, LLC is reflected as an increase in net
loss attributable to common stockholders. This treatment is
consistent with the guidance in SEC ASR 268
Redeemable
Preferred Stock
and EITF Topic D-98
Classification and Measurement of Redeemable
Securities. Because this obligation is fully redeemed as
of December 31, 2007, adjustments to net income
attributable to common shareholders will not be required in
future periods.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Saleable coal
|
|
$
|
13,519
|
|
|
$
|
16,651
|
|
Materials and supplies
|
|
|
13,385
|
|
|
|
13,343
|
|
Raw coal
|
|
|
4,133
|
|
|
|
4,698
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,037
|
|
|
$
|
34,692
|
|
|
|
|
|
|
|
|
|
|
Materials and supplies and coal inventory are valued at the
lower of average cost or market. Saleable coal represents coal
stockpiles that will be sold in current condition. Raw coal
represents coal stockpiles that may be sold in current condition
or may be further processed prior to shipment to a customer.
Coal inventory costs include labor, supplies, equipment,
operating overhead and other related costs.
Patriot leases equipment and facilities, directly or through
Peabody, under various non-cancelable lease agreements. Certain
lease agreements require the maintenance of specified ratios and
contain restrictive covenants
F-15
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that limit indebtedness, subsidiary dividends, investments,
asset sales and other actions by both Peabody and Patriot.
Rental expense under operating leases was $30.9 million,
$28.4 million and $29.9 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
A substantial amount of the coal mined by Patriot is produced
from mineral reserves leased from third-party land owners.
Patriot leases these coal reserves under agreements that require
royalties to be paid as the coal is mined. Certain of these
lease agreements also require minimum annual royalties to be
paid regardless of the amount of coal mined during the year.
Total royalty expense was $43.2 million, $51.0 million
and $32.9 million for the years ended December 31,
2007, 2006 and 2005, respectively.
Future minimum lease and royalty payments as of
December 31, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Coal
|
|
|
|
Leases
|
|
|
Reserves
|
|
|
|
(Dollars in thousands)
|
|
|
2008
|
|
$
|
24,117
|
|
|
$
|
12,059
|
|
2009
|
|
|
21,589
|
|
|
|
10,400
|
|
2010
|
|
|
20,369
|
|
|
|
7,113
|
|
2011
|
|
|
15,070
|
|
|
|
4,914
|
|
2012
|
|
|
7,278
|
|
|
|
4,466
|
|
2013 and thereafter
|
|
|
6,500
|
|
|
|
6,676
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease and royalty payments
|
|
$
|
94,923
|
|
|
$
|
45,628
|
|
|
|
|
|
|
|
|
|
|
During 2002, Peabody entered into a transaction with Penn
Virginia Resource Partners, L.P. (PVR) whereby two Peabody
subsidiaries sold 120 million tons of coal reserves in
exchange for $72.5 million in cash and 2.76 million
units, or 15%, of the PVR master limited partnership. Patriot
participated in the transaction, selling approximately
40 million tons of coal reserves with a net book value of
$14.3 million in exchange for $40.0 million. Patriot
leased back the coal from PVR and pays royalties as the coal is
mined. A $25.7 million gain was deferred at the inception
of this transaction, and $3.2 million of the gain was
recognized in each of the years 2007, 2006 and 2005. The
remaining deferred gain of $6.4 million at
December 31, 2007 is intended to provide for potential
exposure to loss resulting from continuing involvement in the
properties and will be amortized to Operating costs and
expenses in the consolidated statement of operations over
the minimum remaining term of the lease, which is two years from
December 31, 2007.
As of December 31, 2007, certain of the Companys
lease obligations were secured by $16.9 million outstanding
letters of credit under Patriots Credit Facility.
F-16
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Accrued healthcare, including post-retirement
|
|
$
|
30,120
|
|
|
$
|
78,174
|
|
Workers compensation obligations
|
|
|
23,778
|
|
|
|
24,456
|
|
Accrued payroll and related benefits
|
|
|
21,565
|
|
|
|
20,803
|
|
Accrued taxes other than income
|
|
|
13,339
|
|
|
|
15,257
|
|
Other accrued benefits
|
|
|
9,487
|
|
|
|
8,272
|
|
Accrued royalties
|
|
|
5,281
|
|
|
|
4,381
|
|
Accrued lease payments
|
|
|
1,692
|
|
|
|
1,745
|
|
Other accrued expenses
|
|
|
11,519
|
|
|
|
9,783
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
116,781
|
|
|
$
|
162,871
|
|
|
|
|
|
|
|
|
|
|
The income (loss) before income taxes and minority interests was
a loss of $102.1 million, income of $6.0 million, and
income of $34.8 million for the years ended
December 31, 2007, 2006 and 2005, respectively, and
consisted entirely of domestic results.
The income tax rate differed from the U.S. federal
statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Federal statutory rate
|
|
$
|
(35,751
|
)
|
|
$
|
2,110
|
|
|
$
|
12,176
|
|
Depletion
|
|
|
(11,281
|
)
|
|
|
(15,006
|
)
|
|
|
(15,184
|
)
|
State income taxes, net of U.S. federal tax benefit
|
|
|
(6,911
|
)
|
|
|
(2,183
|
)
|
|
|
(10,180
|
)
|
Minority interest
|
|
|
(1,652
|
)
|
|
|
(3,909
|
)
|
|
|
|
|
Changes in valuation allowance
|
|
|
55,183
|
|
|
|
26,864
|
|
|
|
81,213
|
|
Changes in tax reserves
|
|
|
107
|
|
|
|
172
|
|
|
|
224
|
|
Deemed liquidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(68,397
|
)
|
Other, net
|
|
|
305
|
|
|
|
302
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
8,350
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Postretirement benefit obligations
|
|
$
|
233,881
|
|
|
$
|
486,847
|
|
Tax credits and loss carryforwards
|
|
|
20,346
|
|
|
|
6,032
|
|
Accrued workers compensation liabilities
|
|
|
91,925
|
|
|
|
92,610
|
|
Accrued reclamation and mine closing liabilities
|
|
|
53,483
|
|
|
|
54,855
|
|
Obligation to industry fund
|
|
|
12,672
|
|
|
|
10,251
|
|
Other
|
|
|
20,387
|
|
|
|
6,772
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
432,694
|
|
|
|
657,367
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant, equipment and mine development, leased coal
interests and advance royalties, principally due to differences
in depreciation, depletion and asset writedowns
|
|
|
162,092
|
|
|
|
159,284
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
162,092
|
|
|
|
159,284
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(270,602
|
)
|
|
|
(498,083
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes consisted of the following:
|
|
|
|
|
|
|
|
|
Current deferred income taxes
|
|
$
|
|
|
|
$
|
|
|
Noncurrent deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN No. 48). This interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Patriot adopted the provisions of FIN No. 48 on
January 1, 2007, with no impact to retained earnings. At
adoption and at December 31, 2007, the unrecognized tax
benefits in our consolidated financial statements were
immaterial, and if recognized, would not currently affect the
Companys effective tax rate as any recognition would be
offset by valuation allowances. The Company does not expect any
significant increases or decreases to our unrecognized tax
benefits within 12 months of this reporting date.
Due to the immaterial nature of its unrecognized tax benefits
and the existence of net operating loss carryforwards, the
Company has not currently accrued interest on any of its
unrecognized tax benefits. The Company has considered the
application of penalties on its unrecognized tax benefits and
has determined, based on several factors, including the
existence of its net operating loss carryforwards, that no
accrual of penalties related to its unrecognized tax benefits is
required. If the accrual of interest or penalties becomes
appropriate, the Company will record an accrual as part of its
income tax provision.
As the Company has not yet filed any income tax returns as a
stand alone consolidated group, we have no income tax years
currently subject to audit by any tax jurisdiction. Patriot and
our subsidiaries are included in
F-18
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated Peabody income tax returns prior to
November 1, 2007 and Peabody retains all liability related
to these returns.
The Companys deferred tax assets included net operating
losses (NOL) carryforwards and alternative minimum tax (AMT)
credits of $20.3 million and $6.0 million as of
December 31, 2007 and 2006, respectively. The NOLs
and AMT credits represent the amounts that are expected to be
apportioned to the Company in accordance with the Internal
Revenue Code and Treasury Regulations at the time of the
Companys spin-off from Peabody on October 31, 2007,
as well as the stand-alone taxable income from the
Companys operations for the last two months of calendar
year 2007. The NOL carryforwards begin to expire in 2019, and
the AMT credits have no expiration date.
Overall, the Companys net deferred tax assets are offset
by a valuation allowance of $270.6 million and
$498.1 million as of December 31, 2007 and 2006,
respectively. The valuation allowance decreased by
$227.5 million for the year ended December 31, 2007
primarily as a result of Peabody agreeing to pay certain retiree
healthcare obligations related to the business of Patriot. The
Company evaluated and assessed the expected near-term
utilization of net operating loss carryforwards, book and
taxable income trends, available tax strategies and the overall
deferred tax position to determine the valuation allowance
required as of December 31, 2007 and 2006.
Patriots total indebtedness consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Promissory Notes
|
|
$
|
12,365
|
|
|
$
|
12,365
|
|
Notes Payable
|
|
|
|
|
|
|
8,357
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,365
|
|
|
$
|
20,722
|
|
|
|
|
|
|
|
|
|
|
Promissory
Notes
In conjunction with the exchange transaction involving the
acquisition of Illinois Basin coal reserves in 2005 discussed in
Note 4, the Company entered into Promissory Notes (the
Notes). The Notes and related interest are payable in annual
installments of $1.7 million beginning January 2008. The
Notes mature in January 2017. At December 31, 2007, the
short-term portion of the Notes was $0.9 million.
Notes
Payable
Notes Payable represented long-term debt outstanding of KE
Ventures, LLC. The Notes Payable were obligations with the
partners of the joint venture. All outstanding debt owed by KE
Ventures, LLC to its members was paid upon close of the
acquisition of 100% interest by Patriot.
In connection with the spin-off, Patriot entered into a
$500 million, four-year revolving credit facility, which
includes a $50 million swingline sub-facility and a letter
of credit sub-facility. The proceeds from this facility are
available for use by Patriot for working capital requirements,
capital expenditures and other corporate purposes. In connection
with the spin-off on October 31, 2007, Patriots
credit facility was utilized to replace certain Peabody letters
of credit and surety bonds that were in place as of the spin-off
date with respect to Patriots obligations. Patriot issued
$253.5 million in letters of credit against the credit
facility in connection with the spin-off, which remained
outstanding at December 31, 2007. As of December 31,
2007, there was no outstanding debt balance on this credit
facility and availability under the credit facility was
$246.5 million.
F-19
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The obligations under the credit facility are secured by a first
lien on substantially all of Patriots assets, including
but not limited to certain of its mines and coal reserves and
related fixtures and accounts receivable. The credit facility
contains certain customary covenants, including financial
covenants limiting the Companys total indebtedness
(maximum leverage ratio of 2.75) and requiring minimum EBITDA
coverage of interest expense (minimum interest coverage ratio of
4.0), as well as contain certain limitations on, among other
things, additional debt, liens, investments, acquisitions and
capital expenditures, future dividends and asset sales. The
credit facility calls for quarterly reporting of compliance with
financial covenants, beginning with the period ended
March 31, 2008. The rolling four quarters compliance
calculation contains a phase-in provision for 2008. The terms of
the credit facility also contain certain customary events of
default, which give the lender the right to accelerate payments
of outstanding debt in certain circumstances. Customary events
of default include breach of covenants, failure to maintain
required ratios, failure to make principal payments or to make
interest or fee payments within a grace period, and default,
beyond any applicable grace period, on any of the Companys
other indebtedness exceeding a certain amount.
The Company paid a commitment fee of $4.7 million on
commencement of the credit facility, which will be amortized
utilizing a method which approximates the effective interest
method over the remaining term of the agreement.
|
|
(13)
|
Asset
Retirement Obligations
|
Reconciliations of Patriots liability for asset retirement
obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
139,703
|
|
|
$
|
134,447
|
|
Liabilities incurred
|
|
|
1,427
|
|
|
|
10,441
|
|
Liabilities settled or disposed
|
|
|
(17,249
|
)
|
|
|
(22,414
|
)
|
Accretion expense
|
|
|
14,237
|
|
|
|
15,917
|
|
Revisions to estimate
|
|
|
4,961
|
|
|
|
1,312
|
|
Liabilities conveyed to Peabody (upon spin-off)
|
|
|
(8,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
134,364
|
|
|
$
|
139,703
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, asset retirement obligations of
$134.4 million consisted of $102.7 million related to
locations with active mining operations and $31.7 million
related to locations that are closed or inactive. As of
December 31, 2006, asset retirement obligations of
$139.7 million consisted of $96.3 million related to
locations with active mining operations and $43.4 million
related to locations that are closed or inactive. The
credit-adjusted, risk-free interest rates were 6.60% and 6.16%
at January 1, 2007 and 2006, respectively.
For the years ended December 31, 2007 and 2006, the Company
recorded a $1.3 million and $1.2 million,
respectively, reduction in its asset retirement obligations and
expense associated with the disposal of non-strategic properties
and the assumption of the related reclamation liabilities by the
purchaser.
As of December 31, 2007 and 2006, Patriot had
$84.1 million and $85.5 million, respectively, in
surety bonds outstanding to secure the Companys
reclamation obligations or activities. In addition, Patriot had
$61.9 million of letters of credit outstanding as of
December 31, 2007 to secure reclamation and other surety
obligations. No letters of credit were outstanding as of
December 31, 2006 related to reclamation activities. As of
December 31, 2007, Peabody had $19.9 million of self
bonding outstanding that related to Patriots reclamation
obligations or activities. In 2008, these self bonds will be
replaced with Patriot surety bonds. As of December 31,
2006, the amount of reclamation self bonding in certain states
in which the Company qualified was $54.9 million.
F-20
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(14)
|
Workers
Compensation Obligations
|
Certain of Patriots operations are subject to the Federal
Coal Mine Health and Safety Act of 1969, and the related
workers compensation laws in the states in which the
Company operates. These laws require Patriots operations
to pay benefits for occupational disease resulting from coal
workers pneumoconiosis (occupational disease). Provisions
for occupational disease costs are based on determinations by
independent actuaries or claims administrators.
Patriot provides income replacement and medical treatment for
work related traumatic injury claims as required by applicable
state law. Provisions for estimated claims incurred are recorded
based on estimated loss rates applied to payroll and claim
reserves determined by independent actuaries or claims
administrators. Certain of the Companys operations are
required to contribute to state workers compensation funds
for second injury and other costs incurred by the state fund
based on a payroll-based assessment by the applicable state.
Provisions are recorded based on the payroll-based assessment
criteria.
The workers compensation provision consists of the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Service cost
|
|
$
|
2,971
|
|
|
$
|
2,807
|
|
|
$
|
4,137
|
|
Interest cost
|
|
|
9,124
|
|
|
|
9,568
|
|
|
|
10,244
|
|
Net amortization of actuarial gains
|
|
|
(1,607
|
)
|
|
|
(1,369
|
)
|
|
|
(1,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total occupational disease
|
|
|
10,488
|
|
|
|
11,006
|
|
|
|
13,029
|
|
Traumatic injury claims
|
|
|
13,160
|
|
|
|
10,984
|
|
|
|
17,505
|
|
State assessment taxes
|
|
|
4,373
|
|
|
|
10,388
|
|
|
|
16,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
28,021
|
|
|
$
|
32,378
|
|
|
$
|
46,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant decline in traumatic workers compensation
costs was primarily driven by the impact of changes in
workers compensation law in West Virginia. Administrative
fees have been reduced as a result of successfully
self-administering, at a lower cost, claims that were previously
administered by the state. In addition, the law changes have
reduced the frequency and magnitude of claims.
The weighted-average assumptions used to determine the
workers compensation provision were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
Inflation rate
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
Workers compensation obligations consist of amounts
accrued for loss sensitive insurance premiums, uninsured claims,
and related taxes and assessments under black lung and traumatic
injury workers compensation programs.
F-21
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The workers compensation obligations consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Occupational disease costs
|
|
$
|
155,829
|
|
|
$
|
173,924
|
|
Traumatic injury claims
|
|
|
60,679
|
|
|
|
58,392
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
|
216,508
|
|
|
|
232,316
|
|
Less current portion (included in Accrued expenses)
|
|
|
(23,778
|
)
|
|
|
(24,456
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations (included in Workers compensation
obligations)
|
|
$
|
192,730
|
|
|
$
|
207,860
|
|
|
|
|
|
|
|
|
|
|
As a result of the adoption of SFAS No. 158 on
December 31, 2006, the accrued workers compensation
liability recorded on the consolidated balance sheet at
December 31, 2007 and 2006 reflects the accumulated benefit
obligation less any portion that is currently funded. The
accumulated actuarial gain that had not yet been reflected in
net periodic postretirement benefit costs were included in
Accumulated other comprehensive gain as follows:
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Actuarial Gain
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2006 (Initial adoption of SFAS No. 158)
|
|
$
|
9,006
|
|
Net amortization
|
|
|
825
|
|
Change to actuarial gain arising during period
|
|
|
11,953
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
21,784
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, Patriot had
$183.8 million and $146.2 million, respectively, in
surety bonds and letters of credit outstanding to secure
workers compensation obligations.
The reconciliation of changes in the occupational disease
liability benefit obligation was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Beginning of year obligation
|
|
$
|
173,924
|
|
|
$
|
165,954
|
|
Service cost
|
|
|
2,971
|
|
|
|
2,807
|
|
Interest cost
|
|
|
9,124
|
|
|
|
9,568
|
|
Net change in actuarial loss (gain)
|
|
|
(21,653
|
)
|
|
|
4,311
|
|
Benefit and administrative payments
|
|
|
(8,537
|
)
|
|
|
(8,716
|
)
|
|
|
|
|
|
|
|
|
|
Net obligation at end of year
|
|
|
155,829
|
|
|
|
173,924
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
8,537
|
|
|
|
8,716
|
|
Benefits paid
|
|
|
(8,537
|
)
|
|
|
(8,716
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period
|
|
$
|
(155,829
|
)
|
|
$
|
(173,924
|
)
|
|
|
|
|
|
|
|
|
|
The liability for occupational disease claims represents the
actuarially-determined present value of known claims and an
estimate of future claims that will be awarded to current and
former employees. The liability for
F-22
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
occupational disease claims was based on a discount rate of 6.4%
and 6.0% at December 31, 2007 and 2006, respectively.
Traumatic injury workers compensation obligations are
estimated from both case reserves and actuarial determinations
of historical trends, discounted at 5.8% and 5.9% as of
December 31, 2007 and 2006, respectively.
Federal
Black Lung Excise Tax Refund Claims
In addition to the obligations discussed above, certain
subsidiaries of Patriot are required to pay black lung excise
taxes to the Federal Black Lung Trust Fund (the
Trust Fund). The Trust Fund pays occupational disease
benefits to entitled former miners who worked prior to
July 1, 1973. Excise taxes are based on the selling price
of coal, up to a maximum of $1.10 per ton for underground mines
and $0.55 per ton for surface mines. The Company had a
receivable for excise tax refunds of $19.4 million as of
December 31, 2006 related to a court ruling that excise
taxes paid in prior years on export coal was refundable to the
Company, which was included in Investments and other
assets in the consolidated balance sheet. In the fourth
quarter of 2007, Peabody monetized the receivable to Patriot as
part of the settlement at the time of spin-off.
|
|
(15)
|
Pension
and Savings Plans
|
Multi-Employer
Pension Plans
Certain subsidiaries participate in multi-employer pension plans
(the 1950 Plan and the 1974 Plan), which provide defined
benefits to substantially all hourly coal production workers
represented by the UMWA. Benefits under the UMWA plans are
computed based on service with the subsidiaries or other
signatory employers. The 1950 Benefit Plan and the 1974 Benefit
Plan qualify under SFAS No. 106 as multi-employer
benefit plans, which allows Patriot to recognize expense as
contributions are made. The expense related to these funds was
$6.9 million for the year ended December 31, 2007.
There were no contributions to the multi-employer pension plans
during the years ended December 31, 2006 or 2005. In
December 2006, the 2007 National Bituminous Coal Wage Agreement
was signed, which required funding of the 1974 Plan through 2011
under a phased funding schedule. The funding is based on an
hourly rate for certain UMWA workers. Under the labor contract,
the
per-hour
funding rate increased to $2.00 in 2007 and increases each year
thereafter until reaching $5.50 in 2011. The Company expects to
pay approximately $11.2 million related to these funds in
2008.
Defined
Contribution Plans
Patriot sponsors employee retirement accounts under a 401(k)
plan for eligible salaried U.S. employees of the Company
(the 401(k) Plan). Patriot matches voluntary contributions to
the 401(k) Plan up to specified levels. Peabody also sponsored a
similar 401(k) plan in which eligible Patriot employees could
participate prior to the spin-off. The Company recognized
expense for these plans of $3.4 million, $5.6 million
and $2.5 million for the years ended December 31,
2007, 2006 and 2005, respectively. A performance contribution
feature under both Patriots plan and Peabodys plan
allows for additional contributions based upon meeting specified
performance targets. The performance contributions made to
Patriot employees were $0.6 million, $2.7 million and
$2.7 million for the years ended December 31, 2007,
2006 and 2005, respectively.
|
|
(16)
|
Postretirement
Healthcare Benefits
|
The Company currently provides healthcare and life insurance
benefits to qualifying salaried and hourly retirees and their
dependents from defined benefit plans established by Peabody and
continued by Patriot after the spin-off. Plan coverage for
health and life insurance benefits is provided to certain hourly
retirees in accordance with the applicable labor agreement.
F-23
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic postretirement benefit costs included the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Service cost for benefits earned
|
|
$
|
981
|
|
|
$
|
599
|
|
|
$
|
538
|
|
Interest cost on accumulated postretirement benefit obligation
|
|
|
65,964
|
|
|
|
62,385
|
|
|
|
62,615
|
|
Amortization of prior service cost
|
|
|
(1,306
|
)
|
|
|
(2,545
|
)
|
|
|
(2,685
|
)
|
Amortization of actuarial losses
|
|
|
34,260
|
|
|
|
26,866
|
|
|
|
22,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit costs
|
|
$
|
99,899
|
|
|
$
|
87,305
|
|
|
$
|
83,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the plans combined funded
status reconciled with the amounts shown in the consolidated
balance sheets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation at beginning of
period
|
|
$
|
1,214,032
|
|
|
$
|
1,088,507
|
|
Service cost
|
|
|
981
|
|
|
|
599
|
|
Interest cost
|
|
|
65,964
|
|
|
|
62,385
|
|
Participant contributions
|
|
|
840
|
|
|
|
956
|
|
Plan amendments
|
|
|
11,687
|
|
|
|
10,166
|
|
Retention by Peabody of certain liabilities
|
|
|
(615,837
|
)
|
|
|
|
|
Benefits paid
|
|
|
(74,948
|
)
|
|
|
(81,984
|
)
|
Change in actuarial (gain) or loss
|
|
|
(47,971
|
)
|
|
|
133,403
|
|
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation at end of period
|
|
|
554,748
|
|
|
|
1,214,032
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
74,108
|
|
|
|
81,028
|
|
Participant contributions
|
|
|
840
|
|
|
|
956
|
|
Benefits paid and administrative fees (net of Medicare
Part D reimbursements)
|
|
|
(74,948
|
)
|
|
|
(81,984
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued postretirement benefit obligation
|
|
|
(554,748
|
)
|
|
|
(1,214,032
|
)
|
Less current portion (included in Accrued expenses)
|
|
|
27,433
|
|
|
|
75,015
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligation (included in Accrued postretirement
benefit costs)
|
|
$
|
(527,315
|
)
|
|
$
|
(1,139,017
|
)
|
|
|
|
|
|
|
|
|
|
Peabody assumed certain of the Companys retiree healthcare
liabilities in the aggregate amount of $603.4 million as of
December 31, 2007 which are not included above. These
liabilities included certain obligations under the Coal Act for
which Peabody and Patriot are jointly and severally liable,
obligations under the 2007 National Bituminous Coal Wage Act for
which the Company is secondarily liable, and obligations for
certain active, vested employees of the Company.
F-24
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company amortizes actuarial gains and losses using a 0%
corridor with an amortization period that covers the average
remaining service period of active employees (6.47 years
and 8.47 years at January 1, 2007 and 2006,
respectively). The estimated net actuarial loss and prior
service cost that will be amortized from accumulated other
comprehensive income (loss) into net periodic postretirement
benefit costs during the year ending December 31, 2008 are
amortization loss of $13.0 million and amortization gain of
$0.7 million, respectively.
As a result of the adoption of SFAS No. 158 on
December 31, 2006, the accrued postretirement benefit
liability recorded on the consolidated balance sheet at
December 31, 2007 and 2006 reflects the accumulated
postretirement benefit obligation less any portion that is
currently funded. The accumulated actuarial loss and prior
service costs that had not yet been reflected in net periodic
postretirement benefit costs were included in Accumulated
other comprehensive loss as follows:
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Prior
|
|
|
|
Actuarial Loss
|
|
|
Service Cost
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2006 (Initial adoption of SFAS No. 158)
|
|
$
|
(327,587
|
)
|
|
$
|
(3,507
|
)
|
Amortization
|
|
|
34,260
|
|
|
|
(1,306
|
)
|
Retention by Peabody of certain liabilities
|
|
|
165,334
|
|
|
|
|
|
Change to actuarial loss arising during period
|
|
|
44,024
|
|
|
|
(7,656
|
)
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
(83,969
|
)
|
|
$
|
(12,469
|
)
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used to determine the benefit
obligations as of the end of each year were as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
Discount rate
|
|
6.80%
|
|
6.00%
|
Rate of compensation increase
|
|
3.50%
|
|
3.50%
|
Measurement date
|
|
December 31, 2007
|
|
December 31, 2006
|
The weighted-average assumptions used to determine net periodic
benefit cost were as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
6.00%
|
|
5.90%
|
|
6.10%
|
Rate of compensation increase
|
|
3.50%
|
|
3.50%
|
|
3.50%
|
Measurement date
|
|
December 31, 2006
|
|
December 31, 2005
|
|
December 31, 2004
|
The following presents information about the assumed healthcare
cost trend rate:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
Rate to which the cost trend is assumed to decline (the ultimate
trend rate)
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
Year that the rate reaches that ultimate trend rate
|
|
|
2013
|
|
|
|
2012
|
|
F-25
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for healthcare plans. A one
percentage-point change in the assumed healthcare cost trend
would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
+1.0%
|
|
|
−1.0%
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total service and interest cost components for 2007
|
|
$
|
8,163
|
|
|
$
|
(7,494
|
)
|
Effect on year-end 2007 postretirement benefit obligation
|
|
|
66,450
|
|
|
|
(60,983
|
)
|
Plan
Assets
The Companys postretirement benefit plans are unfunded.
Estimated
Future Benefits Payments
The following benefit payments (net of retiree contributions),
which reflect expected future service, as appropriate, are
expected to be paid by Patriot:
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
|
(Dollars in thousands)
|
|
|
2008
|
|
$
|
27,433
|
|
2009
|
|
|
30,685
|
|
2010
|
|
|
34,275
|
|
2011
|
|
|
37,950
|
|
2012
|
|
|
43,721
|
|
Years
2013-2017
|
|
|
245,715
|
|
Medicare
and Other Plan Changes
Effective January 1, 2007, the Company entered into a new
labor relations agreement for our UMWA represented employees in
Appalachia. The provisions of the new agreement mirror the 2007
National Bituminous Coal Wage Agreement and resulted in an
actuarially determined projected increase in healthcare costs of
$11.7 million primarily in relation to the elimination of
certain deductibles.
Effective November 15, 2006, the medical premium
reimbursement plan was changed for salaried employees who
retired after December 31, 2004. The amendment resulted in
a $9.5 million increase to the retiree healthcare
liability. The Company began recognizing the effect of the plan
amendment over 10.25 years beginning November 15,
2006. The effect was $0.9 million and $0.1 million for
the years ended December 31, 2007 and 2006, respectively.
Multi-Employer
Benefit Plans
Retirees formerly employed by certain subsidiaries and their
predecessors, who were members of the UMWA, last worked before
January 1, 1976 and were receiving health benefits on
July 20, 1992, receive health benefits provided by the
Combined Fund, a fund created by the Coal Act. The Coal Act
requires former employers (including certain entities of the
Company) and their affiliates to contribute to the Combined Fund
according to a formula.
The Company has recorded an actuarially determined liability
representing the amounts anticipated to be due to the Combined
Fund. The noncurrent portion related to this obligation as
reflected in Obligation to industry fund in the
consolidated balance sheets as of December 31, 2007 and
2006, was $31.1 million and $25.6 million,
respectively. The current portion related to this obligation
reflected in Accrued expenses in the consolidated
balance sheets was $5.2 million as of December 31,
2007 and 2006.
F-26
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expense of $2.9 million was recognized related to the
Combined Fund for the year ended December 31, 2007, and
consisted of interest discount of $2.3 million and
amortization of actuarial loss of $0.6 million. Expense of
$2.5 million was recognized related to the Combined Fund
for the year ended December 31, 2006, and consisted of
interest discount of $2.4 million and amortization of
actuarial loss of $0.1 million. Expense of
$0.9 million was recognized related to the Combined Fund
for the year ended December 31, 2005, and consisted of
interest discount of $1.9 million and amortization of
actuarial gain of $1.0 million. The Company made payments
of $5.5 million, $8.3 million and $4.0 million to
the Combined Fund for the years ended December 31, 2007,
2006 and 2005, respectively.
As a result of the adoption of SFAS No. 158 on
December 31, 2006, the obligation to industry fund recorded
on the consolidated balance sheet at December 31, 2007 and
2006 reflects the obligation less any portion that is currently
funded. The accumulated actuarial gain that had not yet been
reflected in expense of $0.6 million was included in
Accumulated other comprehensive loss.
The Coal Act also established the 1992 Benefit Plan, which
provides medical and death benefits to persons who are not
eligible for the Combined Fund, who retired prior to
October 1, 1994 and whose employer and any affiliates are
no longer in business. A prior national labor agreement
established the 1993 Benefit Plan to provide health benefits for
retired miners not covered by the Coal Act. The 1993 Benefit
Plan provides benefits to qualifying retired former employees,
who retired after September 30, 1994, of certain signatory
companies which have gone out of business and defaulted in
providing their former employees with retiree medical benefits.
Beneficiaries continue to be added to this fund as employers go
out of business. The 1992 Benefit Plan and the 1993 Benefit Plan
qualify under SFAS No. 106 as multi-employer benefit
plans, which allows the Company to recognize expense as
contributions are made. The expense related to these funds was
$15.9 million, $6.9 million and $4.8 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. The Company expects to pay $10.9 million in
2008 related to these funds.
The Surface Mining Control and Reclamation Act of 2006 (the 2006
Act), enacted in December 2006, amended the federal laws
establishing the Combined Fund, 1992 Benefit Plan and the 1993
Benefit Plan. Among other things, the 2006 Act guarantees full
funding of all beneficiaries in the Combined Fund, provides
funds on a phased-in basis for the 1992 Benefit Plan, and
authorizes the trustees of the 1993 Benefit Plan to determine
the contribution rates through 2010 for pre-2007 beneficiaries.
The new and additional federal expenditures to the Combined
Fund, 1992 Benefit Plan, 1993 Benefit Plan and certain Abandoned
Mine Land payments to the states and Indian tribes are
collectively limited by an aggregate annual cap of
$490 million. To the extent that (i) the annual
funding of the programs exceeds this amount (plus the amount of
interest from the Abandoned Mine Land trust fund paid with
respect to the Combined Benefit Fund), and (ii) Congress
does not allocate additional funds to cover the shortfall,
contributing employers and affiliates, including some of the
Companys entities, would be responsible for the additional
costs.
Pursuant to the provisions of the Coal Act and the 1992 Benefit
Plan, the Company was required to provide security in an amount
equal to three times the annual cost of providing healthcare
benefits for all individuals receiving benefits from the 1992
Benefit 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. Beginning in 2007, the amount of security the Company
was required to provide for the 1992 Benefit Plan was reduced to
one times the annual cost to provide the above mentioned
healthcare benefits.
|
|
(17)
|
Related
Party Transactions
|
Pre-spin-off
relationship with Peabody
Prior to the spin-off, Patriot routinely entered into
transactions with Peabody and its affiliates. The terms of these
transactions were outlined in agreements executed by Peabody and
its affiliates. The amounts included in Net receivable
from former affiliates reflected the effects of the
related party transactions, which had not been settled
F-27
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by cash payments, as well as temporary cash advances to and from
affiliated companies. The following agreements/transactions with
Peabody impacted our results of operations, financial condition
and cash flows prior to the spin-off on October 31, 2007:
The Company sold 21.6 million tons of coal resulting in
revenues of $1.03 billion for the year ended
December 31, 2007 (includes two months of post-spin
activity); 24.3 million tons of coal resulting in revenues
of $1.13 billion for the year ended December 31, 2006;
and 21.5 million tons of coal resulting in revenues of
$891.2 million for the year ended December 31, 2005 to
a marketing affiliate of Peabody, who negotiated and maintained
coal sales contracts. These sales were made at prices paid by
outside third-party customers. Receivables related to sales
transactions with Peabody were included in Net receivable
from former affiliates on the consolidated balance sheet
prior to the spin-off.
Selling and administrative expenses include $37.3 million,
$47.9 million, and $57.1 million for the years ended
December 31, 2007, 2006, and 2005, respectively, for
services provided by Peabody and its affiliates prior to our
spin-off. These selling and administrative expenses represented
an allocation of Peabody general corporate expenses to all of
its mining operations, both foreign and domestic, based on
principal activity, headcount, tons sold and revenues as
applicable to the specific expense being allocated. The
allocated expenses generally reflected service costs for
marketing and sales, legal, finance and treasury, public
relations, human resources, environmental engineering and
internal audit. Different allocation bases or methods could have
been used and could have resulted in significantly different
operating results. The services fees incurred by the Company are
not necessarily indicative of the selling and administrative
expenses that would have been incurred if the Company had been
an independent entity.
The Company recognized interest expense of $4.1 million,
$5.0 million and $5.0 million for the years ended
December 31, 2007, 2006 and 2005, respectively, related to
a $62.0 million demand note payable to Peabody, which
reflected interest at 8.0%. In connection with the spin-off,
this note was forgiven by Peabody.
In 2007 and 2006, the Company received contributions from
Peabody of $43.6 million and $44.5 million,
respectively, primarily for the funding of acquisitions. In
2005, one of the Companys entities received a
$766.7 million non-cash dividend from a Peabody subsidiary
that was not included in the spin-off.
In June 2007, Peabody exchanged numerous oil and gas rights and
assets owned throughout its operations, including some owned by
Patriot, for coal reserves in West Virginia and Kentucky.
Peabody did not allocate gain recognized from this transaction
to Patriot but contributed to Patriot approximately
28 million tons of West Virginia coal reserves. These
reserves are located in the Pittsburgh coal seam adjacent to
Patriots Federal No. 2 mining operations and were
valued at $45.2 million.
Spin-off
and subsequent periods
On October 31, 2007, at the spin-off of Patriot from
Peabody, the Company received a net contribution from Peabody of
$781.3 million, which reflected the following:
|
|
|
|
|
retention by Peabody of certain retiree healthcare liabilities
of $615.8 million;
|
|
|
|
the forgiveness of the outstanding intercompany payables to
Peabody on October 31, 2007 of $81.5 million;
|
|
|
|
the retention by Patriot of trade accounts receivable at
October 31, 2007, previously recorded through intercompany
receivables, of $68.6 million;
|
|
|
|
a $30.0 million cash contribution;
|
|
|
|
the retention by Peabody of assets and asset retirement
obligations related to certain Midwest mining operations of a
net $8.1 million;
|
F-28
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
less the transfer of intangible assets of $22.7 million to
Peabody from Patriot related to purchased contract rights for a
supply contract retained by Peabody.
|
As part of the separation agreement with Peabody, Peabody funded
a portion of Patriots credit facility origination fees and
various legal fees related to the spin-off totaling
$7.1 million. In the fourth quarter of 2007, Peabody
monetized a receivable related to excise tax refunds of
$19.4 million as part of the settlement at the time of
spin-off.
After the spin-off, the Company continues to supply coal to
Peabody to satisfy third-party contracts. With the exception of
one contract, all sales were made at prices paid by outside
third-party customers. After the spin-off, all sales
transactions with Peabody are reflected in Accounts
receivable and other.
Patriot entered into certain agreements with Peabody to provide
certain transition services following the spin-off. Peabody
continues to provide support to Patriot, including services
related to information technology, certain accounting services,
engineering, geology, land management and environmental
services. The Company paid $0.9 million to Peabody in
November and December 2007 for transition services.
In the normal course of business, Patriot is a party to
guarantees and financial instruments with off-balance-sheet
risk, such as bank letters of credit, performance or surety
bonds and other guarantees and indemnities, which are not
reflected in the accompanying consolidated balance sheet. These
financial instruments are valued based on the amount of exposure
under the instrument and the likelihood of required performance.
In Patriots past experience, virtually no claims have been
made against these financial instruments. Management does not
expect any material losses to result from these guarantees or
off-balance-sheet instruments.
Letters
of Credit and Bonding
The Companys letters of credit and surety bonds in support
of the Companys reclamation, lease, workers
compensation and other obligations were as follows as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
|
|
|
|
|
|
|
|
|
|
Reclamation
|
|
|
Lease
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Surety Bonds
|
|
$
|
84,109
|
|
|
$
|
|
|
|
$
|
12,961
|
|
|
$
|
12,030
|
|
|
$
|
109,100
|
|
Letters of Credit
|
|
|
61,883
|
|
|
|
16,949
|
|
|
|
170,844
|
|
|
|
3,871
|
|
|
|
253,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,992
|
|
|
$
|
16,949
|
|
|
$
|
183,805
|
|
|
$
|
15,901
|
|
|
$
|
362,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Other includes letters of credit and surety bonds related to
collateral for surety companies and bank guarantees, road
maintenance and performance guarantees.
|
Additionally, as of December 31, 2007. Peabody continued to
guarantee certain bonds (self bonding) related to Patriot
liabilities that have not yet been replaced by Patriot surety
bonds. As of December 31, 2007, Peabody self bonding
related to Patriot liabilities aggregated $22.8 million, of
which $19.9 was for post-mining reclamation and
$2.9 million was for other obligations. Patriot expects to
replace these Peabody self bonds in 2008.
Other
Guarantees
In connection with the exchange transaction involving the
acquisition of Illinois Basin coal reserves discussed in
Note 4, the Company guaranteed bonding for a partnership in
which it formerly held an interest. The aggregate amount
guaranteed by the Company was $2.8 million, and the fair
value of the guarantee recognized as a liability
F-29
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
was $0.4 million as of December 31, 2007. The
Companys obligation under the guarantee extends to
September 2015.
Patriot is the lessee under numerous equipment and property
leases. It is common in such commercial lease transactions for
Patriot, as the lessee, to agree to indemnify the lessor for the
value of the property or equipment leased, should the property
be damaged or lost during the course of Patriots
operations. Patriot expects that losses with respect to leased
property would be covered by insurance (subject to deductibles).
Patriot and certain of its subsidiaries have guaranteed other
subsidiaries performance under their various lease
obligations. Aside from indemnification of the lessor for the
value of the property leased, Patriots maximum potential
obligations under their leases are equal to the respective
future minimum lease payments, assuming no amounts could be
recovered from third parties.
|
|
(19)
|
Commitments
and Contingencies
|
Commitments
As of December 31, 2007, purchase commitments for capital
expenditures were $6.3 million. Commitments for
expenditures to be made under coal leases are reflected in
Note 8.
Other
At times Patriot becomes a party to other claims, lawsuits,
arbitration proceedings and administrative procedures in the
ordinary course of business. Management believes that the
ultimate resolution of such other pending or threatened
proceedings is not reasonably likely to have a material effect
on Patriots consolidated financial position, results of
operation or liquidity.
Patriot reports its operations through two reportable operating
segments, Appalachia and Illinois Basin. The Appalachia and
Illinois Basin segments consist of Patriots mining
operations in West Virginia and Kentucky, respectively. The
principal business of the Appalachia segment is the mining,
preparation and sale of thermal coal, sold primarily to electric
utilities and metallurgical coal, sold to steel and coke
producers. The principal business of the Illinois Basin segment
is the mining, preparation and sale of thermal coal, sold
primarily to electric utilities. For the year ended
December 31, 2007, 77% of Patriots sales were to
electricity generators and 23% to steel and coke producers. For
the years ended December 31, 2007 and 2006, Patriots
revenues attributable to foreign countries, based on where the
product was shipped, were $120.8 million and
$142.0 million, respectively. Patriots operations are
characterized by primarily underground mining methods, coal with
high and medium Btu content and relatively short shipping
distances from the mine to the customer. Corporate and
Other includes selling and administrative expenses, net
gains on asset disposals and costs associated with past mining
obligations.
Patriots chief operating decision makers use Adjusted
EBITDA as the primary measure of segment profit and loss.
Consolidated Adjusted EBITDA is defined as net income (loss)
before deducting net interest expense, income taxes, minority
interests, asset retirement obligation expense and depreciation,
depletion and amortization. Segment Adjusted EBITDA also
excludes past mining obligation expense, including retiree
healthcare and workers compensation expenses related to
non-operating locations. Total assets are not separately
identified as part of the financial information provided to the
chief operating decision makers and therefore, not disclosed
herein.
F-30
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operating segment results for the year ended December 31,
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Appalachia
|
|
|
Illinois Basin
|
|
|
and Other
(1)
|
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
821,116
|
|
|
$
|
252,246
|
|
|
$
|
|
|
|
$
|
1,073,362
|
|
Adjusted EBITDA
|
|
|
89,850
|
|
|
|
11,862
|
|
|
|
(101,281
|
)
|
|
|
431
|
|
Additions to property, plant, equipment and mine development
|
|
|
48,955
|
|
|
|
6,639
|
|
|
|
|
|
|
|
55,594
|
|
Income from equity affiliates
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Operating segment results for the year ended December 31,
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Appalachia
|
|
|
Illinois Basin
|
|
|
and Other
(1)
|
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
890,198
|
|
|
$
|
257,721
|
|
|
$
|
|
|
|
$
|
1,147,919
|
|
Adjusted EBITDA
|
|
|
204,827
|
|
|
|
(1,900
|
)
|
|
|
(76,158
|
)
|
|
|
126,769
|
|
Additions to property, plant, equipment and mine development
|
|
|
72,236
|
|
|
|
7,988
|
|
|
|
|
|
|
|
80,224
|
|
Income from equity affiliates
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Operating segment results for the year ended December 31,
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Appalachia
|
|
|
Illinois Basin
|
|
|
and Other
(1)
|
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
742,753
|
|
|
$
|
235,524
|
|
|
$
|
|
|
|
$
|
978,277
|
|
Adjusted EBITDA
|
|
|
227,100
|
|
|
|
1,645
|
|
|
|
(104,134
|
)
|
|
|
124,611
|
|
Additions to property, plant, equipment and mine development
|
|
|
67,775
|
|
|
|
7,376
|
|
|
|
|
|
|
|
75,151
|
|
Income from equity affiliates
|
|
|
15,578
|
|
|
|
|
|
|
|
|
|
|
|
15,578
|
|
|
|
|
(1)
|
|
Corporate and Other results include the gains on disposal of
assets discussed in Note 4.
|
A reconciliation of Adjusted EBITDA to net income (loss) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Total Adjusted EBITDA
|
|
$
|
431
|
|
|
$
|
126,769
|
|
|
$
|
124,611
|
|
Depreciation, depletion and amortization
|
|
|
(85,640
|
)
|
|
|
(86,458
|
)
|
|
|
(65,972
|
)
|
Asset retirement obligation expense
|
|
|
(20,144
|
)
|
|
|
(24,282
|
)
|
|
|
(15,572
|
)
|
Interest expense
|
|
|
(8,337
|
)
|
|
|
(11,419
|
)
|
|
|
(9,833
|
)
|
Interest income
|
|
|
11,543
|
|
|
|
1,417
|
|
|
|
1,553
|
|
Income tax provision
|
|
|
|
|
|
|
(8,350
|
)
|
|
|
|
|
Minority interests
|
|
|
(4,721
|
)
|
|
|
(11,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(106,868
|
)
|
|
$
|
(13,492
|
)
|
|
$
|
34,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(21)
|
Stockholders
Equity
|
Common
Stock
On October 31, 2007, the spin-off of Patriot from Peabody
was completed and holders of Peabody common stock received a
dividend of one share of Patriot common stock for each ten
shares of Peabody common stock that they owned, resulting in
total outstanding shares of 26,570,940 as of October 31,
2007. The Company has 100 million authorized shares of
$0.01 par value common stock. Each share of common stock
will be entitled to one vote in the election of directors and
all other matters submitted to stockholder vote. Except as
otherwise required by law or provided in any resolution adopted
by the Board of Directors with respect to any series of
preferred stock, the holders of common stock will possess all
voting power. The holders of common stock do not have cumulative
voting rights. In general, all matters submitted to a meeting of
stockholders, other than as described below, shall be decided by
vote of a majority of the shares of Patriots common stock.
Directors are elected by a plurality of the shares of
Patriots common stock.
Subject to preferences that may be applicable to any series of
preferred stock, the owners of Patriots common stock may
receive dividends when declared by the Board of Directors.
Common stockholders will share equally in the distribution of
all assets remaining after payment to creditors and preferred
stockholders upon liquidation, dissolution or winding up of the
Company, whether voluntarily or not. The common stock will have
no preemptive or similar rights.
The following table summarizes common share activity from
spin-off date to December 31, 2007:
|
|
|
|
|
|
|
Shares
|
|
|
|
Outstanding
|
|
|
October 31, 2007
(shares outstanding at spin-off)
|
|
|
26,570,940
|
|
Stock grants to employees
|
|
|
187,828
|
|
|
|
|
|
|
December 31, 2007
|
|
|
26,758,768
|
|
|
|
|
|
|
Preferred
Stock
In addition to the common stock, the Board of Directors is
authorized to issue up to 10 million shares of
$0.01 par value preferred stock. The authorized preferred
shares include one million shares of Series A Junior
Participating Preferred Stock. Patriots certificate of
incorporation authorizes the Board of Directors, without the
approval of the stockholders, to fix the designation, powers,
preferences and rights of one or more series of preferred stock,
which may be greater than those of the common stock. Patriot
believes that the ability of the Board to issue one or more
series of preferred stock will provide the Company with
flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs that might
arise. The issuance of shares of preferred stock, or the
issuance of rights to purchase shares of preferred stock, could
be used to discourage an unsolicited acquisition proposal. There
were no outstanding shares of preferred stock as of
December 31, 2007.
Preferred
Share Purchase Rights Plan and Series A Junior
Participating Preferred Stock
The Board of Directors of Patriot adopted a stockholders rights
plan pursuant to the Rights Agreement with American Stock
Transfer & Trust Company (the Rights Agreement).
In connection with the Rights Agreement, on October 31,
2007, the Company filed the Certificate of Designations of
Series A Junior Participating Preferred Stock (the
Certificate of Designations) with the Secretary of State of the
State of Delaware. Pursuant to the Certificate of Designations,
the Company designated 1,000,000 shares of preferred stock
as Series A Junior Participating Preferred Stock having the
designations, rights, preferences and limitations set forth in
the Rights Agreement. Each preferred share purchase right
represents the right to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock.
F-32
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The rights have certain anti-takeover effects. If the rights
become exercisable, the rights will cause substantial dilution
to a person or group that attempts to acquire Patriot on terms
not approved by the Board of Directors, except pursuant to any
offer conditioned on a substantial number of rights being
acquired. The rights should not interfere with any merger or
other business combination approved by the Board since the
rights may be redeemed by the Company at a nominal price prior
to the time that a person or group has acquired beneficial
ownership of 15% or more of common stock. Thus, the rights are
intended to encourage persons who may seek to acquire control of
the Company to initiate such an acquisition through negotiations
with the Board. However, the effect of the rights may be to
discourage a third party from making a partial tender offer or
otherwise attempting to obtain a substantial equity position in
Patriots equity securities or seeking to obtain control of
the Company. To the extent any potential acquirers are deterred
by the rights, the rights may have the effect of preserving
incumbent management in office. There were no outstanding shares
of Series A Junior Participating Preferred Stock as of
December 31, 2007.
|
|
(22)
|
Stock-Based
Compensation
|
The Company has one equity incentive plan for employees and
non-employee directors that allows for the issuance of
share-based compensation in the form of restricted stock,
incentive stock options, nonqualified stock options, stock
appreciation rights, performance awards, restricted stock units
and deferred stock units. Members of the Companys Board of
Directors are eligible for deferred stock unit grants at the
date of their election and annually. This plan made
2.6 million shares of the Companys common stock
available for grant, with 1.2 million shares available for
grant as of December 31, 2007. Additionally, the Company
established an employee stock purchase plan that provided for
the purchase of up to 1.0 million shares of the
Companys common stock.
Restricted
Stock
In connection with the spin-off, the Company approved a form of
Restricted Stock Agreement for grants to employees and service
providers of Patriot and its subsidiaries and affiliates. On
November 1, 2007, 187,828 shares were granted at
$37.50 per share. The agreement provides that the restricted
stock will fully vest on the third anniversary of the date the
restricted stock was granted to the employee or service
provider. However, the restricted stock will fully vest sooner
if a grantee terminates employment with or stops providing
services to Patriot because of death or disability, or if a
change in control occurs (as such term is defined in the Patriot
Coal Corporation 2007 Long-Term Equity Incentive Plan (the
Equity Plan)).
Extended
Long-Term Incentive Restricted Stock Units
In connection with the spin-off, the Company approved a form of
Extended Long-Term Incentive Restricted Stock Units Agreement
for grants to employees and service providers of Patriot. The
agreement grants restricted stock units that vest over time as
well as restricted stock units that vest based upon
Patriots financial performance. On November 1, 2007,
restricted stock units totaling 590,131 were granted at $37.50
per unit. The restricted stock units that vest over time will be
50% vested on the fifth anniversary of the date of grant, 75%
vested on the sixth such anniversary and 100% vested on the
seventh such anniversary. However, the restricted stock units
that vest over time will fully vest sooner if a grantee
terminates employment with or stops providing services to
Patriot because of death or disability, or if a change in
control occurs (as such term is defined in the Equity Plan). The
restricted stock units that vest according to Patriots
financial performance vest according to a formula described in
the form of Extended Long-Term Incentive Restricted Stock Units
Agreement, the results of which are calculated on the December
31 following the fifth, sixth and seventh anniversaries of the
grant date. The Company estimated the number of
performance-based units that are expected to vest and utilized
this amount in the calculation of the stock-based compensation
expense related to these awards. Any changes to this estimate
will impact stock-based compensation expense in the period the
estimate is changed.
F-33
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Extended
Long-Term Incentive Non-Qualified Stock Option
In connection with the spin-off, the Company approved a form of
Extended Long-Term Incentive Non-Qualified Stock Option
Agreement for grants to employees and service providers of
Patriot. On November 1, 2007, options totaling 554,673 were
granted at an exercise price of $37.50. The agreement provides
that the option will become exercisable in three installments.
The option shall be 50% exercisable on the fifth anniversary of
the date of grant, 75% exercisable on the sixth such anniversary
and 100% exercisable on the seventh such anniversary. However,
the option will become fully exercisable sooner if a grantee
terminates employment with or stops providing services to
Patriot because of death or disability, or if a change in
control occurs (as such term is defined in the Equity Plan). No
option can be exercised more than ten years after the date of
grant, but the ability to exercise the option may terminate
sooner upon the occurrence of certain events detailed in the
form extended Long-Term Incentive Non-Qualified Stock Option
Agreement. Each award will be forfeited if the grantee
terminates employment with or stops providing services to
Patriot for any reason other than death or disability prior to
the time the award becomes vested.
The Company recognizes share-based compensation expense in
accordance with SFAS No. 123(R), Share-Based
Payment. The Company used the Black-Scholes option pricing
model to determine the fair value of stock options. Determining
the fair value of share-based awards requires judgment,
including estimating the expected term that stock options will
be outstanding prior to exercise and the associated volatility.
Judgment is also required in estimating the amount of
share-based awards expected to be forfeited prior to vesting. If
actual forfeitures differ significantly from these estimates,
share-based compensation expense could be materially impacted.
The Company utilized U.S. Treasury yields as of the grant
date for its risk-free interest rate assumption, matching the
treasury yield terms to the expected life of the option or
vesting period of the performance unit awards. The Company
utilized a seven-year peer historical lookback to develop its
expected volatility. Expected option life assumptions were
developed by taking the weighted average time to vest plus the
weighted average holding period after vesting.
|
|
|
|
|
December 31, 2007
|
|
Weighted-average fair value
|
|
$15.34
|
Risk-free interest rate
|
|
4.22%
|
Expected option life
|
|
6.69 years
|
Expected volatility
|
|
30.64%
|
Dividend yield
|
|
0%
|
On November 1, 2007, stock options representing
554,673 shares were granted with an exercise price of
$37.50. No shares were exercised, forfeited or expired. The
weighted average remaining contractual term in years is
10 years.
Share-based compensation expense of $1.3 million was
recorded in Selling and administrative expenses in
the consolidated statements of operations at December 31,
2007. Share-based compensation expense included
$0.3 million related to awards from restricted stock and
stock options granted by Peabody to Patriot employees prior to
spin-off. As of December 31, 2007, the total unrecognized
compensation cost related to nonvested awards granted after
spin-off was $8.3 million, net of taxes, which is expected
to be recognized over 7 years. As of December 31,
2007, the total unrecognized compensation cost related to
nonvested awards granted by Peabody prior to spin-off was
$3.2 million, net of taxes, which is expected to be
recognized through 2011.
Deferred
Stock Units
In connection with the spin-off, the Company approved a form of
Deferred Stock Units Agreement for grants to non-employee
directors of Patriot. On November 1, 2007,
18,670 units were granted at $37.50. The agreement provides
that the deferred stock units will fully vest on the first
anniversary of the date of grant, but only if the non-employee
director served as a director for the entire one-year period
between the date of grant and the first anniversary of the
grant. However, the deferred stock units will fully vest sooner
if a non-employee director ceases
F-34
PATRIOT
COAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to be a Patriot director due to death or disability, or if a
change in control occurs (as such term is defined in the Equity
Plan). Any unvested deferred stock units will be forfeited if a
non-employee director terminates service with Patriot for any
reason other than death or disability prior to the first
anniversary of the grant date. After vesting, the deferred stock
units will be settled by issuing shares of Patriot common stock
equal to the number of deferred stock units, and the settlement
will occur upon the earlier of (i) the non-employee
directors termination of service as a director or
(ii) the third anniversary of the grant date or a different
date chosen by the non-employee director, provided the date was
chosen by the non-employee director prior to January 1 of the
year in which the director received the grant.
Employee
Stock Purchase Plan
Based on the Companys employee stock purchase plan,
eligible full-time and part-time employees are able to
contribute up to 15% of their base compensation into this plan,
subject to a limit of $25,000 per person per year. Effective
January 1, 2008, employees are able to purchase Company
common stock at a 15% discount to the lower of the fair market
value of the Companys common stock on the initial or final
trading dates of each six-month offering period. Offering
periods begin on January 1 and July 1 of each year. The fair
value of the six-month look-back option in the
Companys employee stock purchase plan is estimated by
adding the fair value of 0.15 of one share of stock to the fair
value of 0.85 of an option on one share of stock. The Company
recognized no expense for the year ended December 31, 2007
related to its employee stock purchase plan.
|
|
(23)
|
Summary
Quarterly Financial Information (Unaudited)
|
A summary of the unaudited quarterly results of operations for
the years ended December 31, 2007 and 2006, is presented
below. Patriot common stock is listed on the New York Stock
Exchange under the symbol PCX.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Dollars in thousands except per share and stock price
data)
|
|
|
Revenues
|
|
$
|
269,663
|
|
|
$
|
256,221
|
|
|
$
|
293,301
|
|
|
$
|
254,177
|
|
Operating profit
|
|
|
(10,698
|
)
|
|
|
(4,392
|
)
|
|
|
(39,823
|
)
|
|
|
(50,440
|
)
|
Net loss
|
|
|
(11,951
|
)
|
|
|
(5,814
|
)
|
|
|
(39,451
|
)
|
|
|
(49,652
|
)
|
Basic and diluted loss attributable to common stockholders per
share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
(2.17
|
)
|
Weighted average shares used in calculating basic earnings per
share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
26,570,940
|
|
Stock price high and low prices
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
43.00-$27.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
289,107
|
|
|
$
|
312,495
|
|
|
$
|
285,038
|
|
|
$
|
261,279
|
|
Operating profit
|
|
|
21,530
|
|
|
|
2,648
|
|
|
|
9,290
|
|
|
|
(17,439
|
)
|
Net income (loss)
|
|
|
13,921
|
|
|
|
(1,774
|
)
|
|
|
(2,954
|
)
|
|
|
(22,685
|
)
|
F-35
PATRIOT
COAL CORPORATION
SCHEDULE
II VALUATION AND QUALIFYING ACCOUNTS
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
|
|
|
at End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
(1)
|
|
|
Other
|
|
|
Period
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance royalty recoupment reserve
|
|
$
|
4,716
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,985
|
)
(2)
|
|
$
|
2,731
|
|
Reserve for materials and supplies
|
|
|
1,458
|
|
|
|
74
|
|
|
|
|
|
|
|
(1,252
|
)
(2)
|
|
|
280
|
|
Allowance for doubtful accounts
|
|
|
252
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
251
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance royalty recoupment reserve
|
|
$
|
4,836
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(120
|
)
(3)
|
|
$
|
4,716
|
|
Reserve for materials and supplies
|
|
|
1,519
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
1,458
|
|
Allowance for doubtful accounts
|
|
|
92
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
252
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance royalty recoupment reserve
|
|
$
|
6,975
|
|
|
$
|
|
|
|
$
|
(2,551
|
)
|
|
$
|
412
|
(3)
|
|
$
|
4,836
|
|
Reserve for materials and supplies
|
|
|
1,816
|
|
|
|
|
|
|
|
(297
|
)
|
|
|
|
|
|
|
1,519
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
(1)
|
|
Reserves utilized, unless otherwise indicated.
|
|
(2)
|
|
Balance transferred to Peabody as part of Patriot spin-off.
|
|
(3)
|
|
Peabody restructured entities which resulted in the
reclassification of advances and related reserves.
|
F-36
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