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

United StatesThe United Mine Workers of America representedapproximately 30% of the Company’s subsidiaries’ hourlyemployees, who generated 14% of the Company’s domesticproduction during the year ended December 31, 2005. Anadditional 6% of the hourly employees are represented bylabor unions other than the United Mine Workers of America(“UMWA”). These employees generated 2% of the Company’sproduction during the year ended December 31, 2005. Hourlyworkers at the Company’s mines in Arizona and one of itsmines in Colorado are represented by the UMWA under theWestern Surface Agreement of 2000, which is effective throughSeptember 1, 2007. Union labor east of the Mississippi Riveris primarily represented by the UMWA and the majority ofunion mines are subject to the National Bituminous Coal WageAgreement. The current five-year labor agreement was ratifiedin December 2001 and is effective through December 31, 2006.AustraliaThe Australian coal mining industry is highly unionizedand the majority of workers employed at the Company’sAustralian mining operations are members of trade unions.The Construction Forestry Mining and Energy Union(“CFMEU”) represents the Australian mining operation’s hourlyproduction employees. The Australian hourly employees areapproximately 4% of the Company’s hourly workforce andgenerated 4% of the total production in the year endedDecember 31, 2005. Negotiations are underway to renewthe labor agreement at the Wilkie Creek Mine, which expiresin June 2006. The Eaglefield Mine operates under a laboragreement that expires in May 2007. The Burton and NorthGoonyella Mines operate under agreements due to expire in 2008.(3) SIGNIFICANT PROPERTY TRANSACTIONSIn the first quarter of 2005, the Company purchasedmining assets from Lexington Coal Company for $61.0 million.The purchased assets included $2.5 million of materials andsupplies that were recorded in “Inventories” in the consolidatedbalance sheet. The remaining purchased assets consisted ofapproximately 70 million tons of reserves, preparation plants,facilities and mining equipment that were recorded in “Property,plant, equipment and mine development” in the consolidatedbalance sheet. The Company is using the acquired assets toopen a new mine that is expected to produce 2 to 3 milliontons per year, after it reaches full capacity, and to provide othersynergies to existing properties. The new mine, which beganproduction early in the third quarter, will supply coal under anew agreement with terms that can be extended through 2015(and a minimum term through the end of 2008). The Companyalso recorded $21.6 million for the estimated asset retirementobligations associated with the acquired assets.In the third quarter of 2005, the Company exchangedcertain idle steam coal reserves for steam and metallurgicalcoal reserves as part of a contractual dispute settlement.Under the settlement, the Company received $10.0 millionin cash, a new coal supply agreement that partially replacedthe disputed coal supply agreement, and exchanged the idlesteam coal reserves. As a result of the final settlement andbased on the fair values of the items exchanged in the overallsettlement transaction, the Company recorded net contractlosses of $4.0 million and a gain on assets exchanged of$37.4 million. The fair value of assets exchanged exceeded thebook value by $33.4 million, a non-cash addition which is notincluded in “Additions to property, plant, equipment and minedevelopment” in the consolidated statement of cash flows.In the fourth quarter of 2005, the Company acquired rail,loadout and surface facilities as well as other mining assetsfrom another major coal producer for $84.7 million andexchanged 60 million ton blocks of leased coal reserves in thePowder River Basin. The Company will utilize these reservesand infrastructure to accelerate the development of a newmine, which will include adjoining Company-leased reserves.(4) ASSETS AND LIABILITIES FROM COALTRADING ACTIVITIESThe Company’s coal trading portfolio included forwardcontracts as of December 31, 2005, and included forward,futures, and options contracts as of December 31, 2004.The fair value of coal trading derivatives and related hedgecontracts as of December 31, 2005 and 2004 is set forth below:December 31, 2005 December 31, 2004(Dollars in thousands) Assets Liabilities Assets LiabilitiesForward contracts $146,596 $131,988 $89,042 $60,914Other – 385 123 2,651Total $146,596 $132,373 $89,165 $63,565Ninety-nine percent of the contracts in the Company’strading portfolio as of December 31, 2005, were valued utilizingprices from over-the-counter market sources, adjusted for coalquality and traded transportation differentials, and one percentof the Company’s contracts were valued based on similarmarket transactions. As of December 31, 2005, the timing ofthe estimated future realization of the value of the Company’strading portfolio was as follows:Year of ExpirationPercentage of Portfolio2006 76%2007 23%2008 1%100%At December 31, 2005, 42% of the Company’s creditexposure related to coal trading activities was with investmentgrade counterparties and 58% was with non-investment gradecounterparties, which were primarily other coal producers. TheCompany’s coal trading operations traded 36.2 million tons,33.4 million tons and 40.0 million tons for the years endedDecember 31, 2005, 2004, and 2003, respectively.62 Peabody Energy