PEABODY ENERGY CORP - 10-Q - 20020807 - MARKET_RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Trading Activities
We market and trade coal and emission allowances. These activities give
rise to market risk, which represents the potential loss that can be caused by a
change in the market value of a particular commitment. We actively measure,
monitor and adjust traded position levels to remain within market risk limits
prescribed by management. For example, we have policies in place that limit the
amount of total exposure we may assume at any point in time.
We account for coal and emission allowance trading using the fair value
method, which requires us to reflect financial instruments with third parties,
such as forwards, futures, options and swaps, at market value in the
consolidated financial statements.
We perform a value at risk analysis on our trading portfolio, which
includes over-the-counter and brokerage trading of coal and emission allowances.
Our value at risk model is based on the industry standard risk-metrics
variance/co-variance approach. This captures our exposure related to both option
and forward positions. Our value at risk model assumes a fifteen-day holding
period and a 95% one-tailed confidence interval.
The use of value at risk allows management to aggregate market risks
across products in the portfolio, compare risk on a consistent basis and
identify the drivers of risk. Due to the subjectivity in the choice of the
liquidation period, reliance on historical data to calibrate the models and the
inherent limitations in the value at risk methodology, including the use of
delta/gamma adjustments related to options, we perform regular stress, back
testing and scenario analysis to estimate the impacts of market changes on the
value of the portfolio. The results of these analyses are used to supplement the
value at risk methodology and identify additional market related risks.
During the six months ended June 30, 2002, the low, high and average
values at risk for our coal trading portfolio were $0.3 million, $3.9 million
and $1.8 million, respectively. Our emission allowance value at risk averaged
$0.1 million during the six months ended June 30, 2002, and did not exceed $0.2
million during that period. Sixty-two percent of the value of our trading
portfolio will be realized by the end of calendar 2003, and ninety-four percent
of the value of our trading portfolio will be realized by the end of calendar
2004.
We also monitor other types of risk associated with our coal and emission
allowance trading activities, including market liquidity, counterparty
nonperformance and position valuation.
Non-trading Activities
We manage our commodity price risk for non-trading purposes through the
use of long-term coal supply agreements, rather than through the use of
derivative instruments. We currently have sales commitments for 99% of our
planned calendar 2002 production.
Some of the products used in our mining activities, such as diesel fuel,
are subject to price volatility. We, through our suppliers, utilize forward
contracts to manage the exposure related to this volatility.
We have exposure to changes in interest rates due to our existing level of
indebtedness. As of June 30, 2002, after taking into consideration the effects
of interest rate swaps, we had $725.6 million of fixed-rate borrowings and
$358.7 million of variable-rate borrowings outstanding. A one percentage point
increase in interest rates would result in an annualized increase to interest
expense of $3.6 million on our variable-rate borrowings. With respect to our
fixed-rate borrowings, a one percentage point increase in interest rates would
result in a $37.9 million decrease in the fair value of these borrowings.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Navajo Nation
See Note 10 to the unaudited condensed consolidated financial statements
included in Part I, Item 1 of this report relating to certain legal proceedings
brought against us by the Navajo Nation and Hopi Tribe.
Salt River Project Agricultural Improvement and Power District-Price Review
See Note 10 to the unaudited condensed consolidated financial statements
included in Part I, Item 1 of this report relating to certain legal and
arbitration proceedings involving the Salt River Project Agricultural
Improvement and Power District.
Department of Justice
During 2001, along with other coal producers in the Powder River Basin in
Wyoming, we received a request for information from the U.S. Department of
Justice regarding an alleged agreement to restrict production of coal from this
region. In June 2002, we received notification from the U.S. Department of
Justice that it had closed that investigation.
Kentuckians for the Commonwealth v. Rivenburgh
On May 8, 2002, the U.S. District Court for the Southern District of West
Virginia issued an injunction against the U.S. Army Corps of Engineers from
issuing any new Section 404 Clean Water Act permits that involved the placement
of fill without a primary constructive purpose for the fill. On June 17, 2002,
the Court denied a motion for a stay that was filed by a coal association and
the federal government. On July 3, 2002, the defendants filed an appeal with the
Fourth Circuit Court of Appeals. Unless this decision is reversed, it may affect
our subsidiaries' ability to extend the life of their preparation plants or open
new mines in the future.
While the outcome of litigation is subject to uncertainties, based on our
preliminary evaluation of the issues and the potential impact on us, we believe
this matter will be resolved without a material adverse effect on our financial
condition or results of operations.
West Virginia Flooding Litigation
Three of our subsidiaries have been named in four separate complaints
filed in Boone, Kanawha and Wyoming Counties, West Virginia. These cases
collectively include 622 plaintiffs who are seeking damages for property damage
and personal injuries arising out of flooding that occurred in southern West
Virginia in July of 2001. The plaintiffs have sued coal, timber, railroad and
land companies under the theory that mining, construction of haul roads and
removal of timber caused natural surface waters to be diverted in an unnatural
way, thereby causing damage to the plaintiffs. The West Virginia Supreme Court
has ruled that these four cases, along with over 10 additional flood damage
cases not involving our subsidiaries, be handled pursuant to the Court's Mass
Litigation rules. As a result of this ruling, the cases have been transferred to
the Circuit Court of Raleigh County in West Virginia to be handled by a panel
consisting of three circuit court judges. They will, among other things,
determine whether the individual cases should be consolidated or returned to
their original circuit courts.
While the outcome of litigation is subject to uncertainties, based on our
preliminary evaluation of the issues and the potential impact on us, we believe
this matter will be resolved without a material adverse effect on our financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Please see Note 12 to the accompanying unaudited condensed consolidated
financial statements relating to the recent adoption by our Board of Directors
of a preferred share purchase rights plan.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on May 3, 2002. The following
persons were elected to serve as directors for terms expiring in 2005 and
received the number of votes set forth opposite their respective names:
For Withheld
---------- ---------
Roger H. Goodspeed 43,904,427 2,672,505
Felix Herlihy 43,903,377 2,673,555
James R. Schlesinger, PhD 46,381,812 195,120
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Exhibit Index at page 30 of this report.
(b) Reports on Form 8-K
On April 9, 2002, we filed a Form 8-K under Item 5, Other Events,
announcing a secondary offering of 9,000,000 shares of common stock by
certain shareholders of the Company.
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SIGNATURE
Pursuant to the requirements 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.
PEABODY ENERGY CORPORATION
Date: August 7, 2002 By: RICHARD A. NAVARRE
Richard A. Navarre
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Third Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 3.1 of the
Company's Form S-1 Registration Statement No. 333-55412).
3.2 Amended and restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 of the Company's Form S-1
Registration Statement No. 333-55412).
3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock of the Company, filed with the Secretary of
State of the State of Delaware on July 24, 2002. (Incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 8-A, filed on July 24, 2002.)
4.1 Rights Agreement, dated as of July 24, 2002, between the
Company and EquiServe Trust Company, N.A., as Rights Agent
(which includes the form of Certificate of Designations of
Series A Junior Preferred Stock of the Company as Exhibit A,
the form of Right Certificate as Exhibit B and the Summary of
Rights to Purchase Preferred Shares as Exhibit C).
(Incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, filed on July
24, 2002.)
99.1* Certification of the June 30, 2002 Quarterly Report on Form
10-Q by Peabody Energy Corporation's Chief Executive Officer
99.2* Certification of the June 30, 2002 Quarterly Report on Form
10-Q by Peabody Energy Corporation's Executive Vice President
and Chief Financial Officer
* Filed herewith.
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EXHIBIT 99.1
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
I, Irl F. Engelhardt, Chairman and Chief Executive Officer of Peabody Energy
Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002 (the "Periodic Report") which this statement accompanies fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of
Peabody Energy Corporation.
Dated: August 6, 2002
IRL F. ENGELHARDT
Irl F. Engelhardt
Chairman and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
I, Richard A. Navarre, Executive Vice President and Chief Financial Officer of
Peabody Energy Corporation, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2002 (the "Periodic Report") which this statement accompanies fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of
Peabody Energy Corporation.
Dated: August 1, 2002
RICHARD A. NAVARRE
Richard A. Navarre
Executive Vice President
and Chief Financial Officer
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