PERIOD ENDED DECEMBER 31, 2005 Annual ... - Peabody Energy

contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We baseour estimates on historical experience and on various other assumptions that we believeare reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates.Employee-Related LiabilitiesOur subsidiaries have significant long-term liabilities for our employees’ postretirementbenefit costs, workers’ compensation obligations and defined benefit pension plans. Detailedinformation related to these liabilities is included in Notes 16, 17 and 18 to our consolidatedfinancial statements. Liabilities for postretirement benefit costs and workers’ compensationobligations are not funded. Our pension obligations are funded in accordance with theprovisions of federal law. Expense for the year ended December 31, 2005, for these liabilitiestotaled $193.8 million, while payments were $147.1 million.Each of these liabilities are actuarially determined and we use various actuarialassumptions, including the discount rate and future cost trends, to estimate the costs andobligations for these items. Our discount rate is determined by utilizing a hypothetical bondportfolio 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 estimatesof retiree health care and work-related injuries and illnesses obligations. Our medical trendassumption is developed by annually examining the historical trend of our cost per claimdata. In addition, we make assumptions related to future compensation increases and rates ofreturn on plan assets in the estimates of pension obligations.If our assumptions do not materialize as expected, actual cash expenditures and coststhat we incur could differ materially from our current estimates. Moreover, regulatorychanges could increase our obligation to satisfy these or additional obligations. Our mostsignificant employee liability is postretirement health care, and assumed discount rates andhealth care cost trend rates have a significant effect on the expense and liability amountsreported for health care plans. Below we have provided two separate sensitivity analyses todemonstrate the significance of these assumptions in relation to reported amounts.Net Debt/Net CapitalOne-Percentage- One-Percentage-(Dollars in thousands) Point Increase Point DecreaseHealth care cost trend rate:Effect on total service and interest cost components (1) $ 8,789 $ (6,961)Effect on total postretirement benefit obligation (1) $161,903 $(135,501)One HalfOne Half-Percentage- Percentage-(Dollars in thousands) Point Increase Point DecreaseDiscount rate:Effect on total service and interest cost components (1) $ 1,183 $ (1,563)Effect on total postretirement benefit obligation (1) $(68,900) $ 75,878(1) In addition to the effect on total service and interest cost components of expense, changes in trend and discount rates would also increase ordecrease the actuarial gain or loss amortization expense component. The gain or loss amortization would approximate the increase or decrease inthe obligation divided by 8.99 years at December 31, 2005.Asset Retirement ObligationsOur asset retirement obligations primarily consist of spending estimates for surface landreclamation and support facilities at both surface and underground mines in accordancewith federal and state reclamation laws as defined by each mining permit. Asset retirementobligations 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, anda 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 obligationand asset are revised to reflect the new estimate after applying the appropriate credit-adjustedrisk-free rate. If our assumptions do not materialize as expected, actual cash expenditures39