Filed Pursuant to Rule 424(B)(5)
Registration No. 333-136108

PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED JULY 28, 2006)

 

 

Peabody Energy Corporation

$675,000,000

 

4.75% Convertible Junior Subordinated Debentures Due 2066

 

 

We are offering $675,000,000 aggregate principal amount of our 4.75% convertible junior subordinated debentures, which we refer to as the convertible debentures, with a final maturity date of December 15, 2066. We will use our commercially reasonable efforts, subject to the occurrence of a market disruption event (as described herein), to raise sufficient net proceeds from the issuance of qualifying capital securities (as described herein) to pay holders the principal amount of the convertible debentures, together with accrued and unpaid interest, including any compounded interest thereon, on December 15, 2041, the scheduled maturity date.

The convertible debentures will be our unsecured obligations, ranking junior to all of our existing and future senior and subordinated debt (excluding trade accounts payable or accrued liabilities arising in the ordinary course of business), except for any future debt that by its terms ranks equal to or junior to the convertible debentures. Interest on the convertible debentures will accrue from the issue date at a fixed rate equal to 4.75% per year, and will be payable in arrears semi-annually on June 15 and December 15 of each year, commencing on June 15, 2007.

We may elect to, and if and to the extent that a mandatory trigger event (as described herein) has occurred and is continuing will be required to, defer interest payments on the convertible debentures. After five years of deferral at our option, or upon the occurrence of a mandatory trigger event, we generally must sell warrants or preferred stock with specified characteristics and use the funds from that sale to pay deferred interest, although this obligation is subject to limitations (as described herein) and any failure to comply with this obligation would constitute a covenant breach but not an event of default. In no event, however, may we defer payments of interest on the convertible debentures for more than 10 years, and an event of default will result if all accrued and unpaid interest in respect of the convertible debentures is not paid in full within 30 days after the tenth anniversary of the commencement of any deferral. In the event of our bankruptcy, insolvency or receivership, any claim in respect of interest that accrued during a mandatory interest deferral period in excess of two years of accrued and unpaid interest (including any compounded interest thereon) on the convertible debentures will be extinguished.

Under the circumstances described in this prospectus supplement, holders may convert their convertible debentures into cash and, if applicable, shares of our common stock, in the case of conversion following a notice of redemption or upon a non-stock change of control, or, in all other cases, into perpetual preferred stock and, if applicable, shares of our common stock. The consideration delivered upon conversion will be based upon a conversion rate of 16.1421 shares of our common stock per $1,000 principal amount of convertible debentures (which is equal to an initial conversion price of approximately $61.95 per share), subject to adjustment. Upon the occurrence of any non-stock change of control on or prior to December 20, 2036, under certain circumstances, we will increase the conversion rate for a limited time as described herein.

Any perpetual preferred stock delivered upon the conversion of convertible debentures will have a cumulative dividend rate of 3.0875% of liquidation preference and will be subject to remarketing after December 15, 2046 or earlier upon the first occurrence of a change of control, in which a holder may elect whether to participate.

Peabody Energy Corporation’s common stock is quoted on the New York Stock Exchange under the symbol “BTU.” The last reported sale price of the common stock on the New York Stock Exchange on December 14, 2006 was $44.25 per share.

The convertible debentures will not be subject to redemption prior to December 20, 2011. Between December 20, 2011 and December 19, 2036 we may redeem the convertible debentures, in whole or in part, if for at least 20 trading days within the 30 consecutive trading days immediately prior to the date on which notice of redemption is given, the closing sale price of our common stock has exceeded 130% of the then prevailing conversion price. On or after December 20, 2036, whether or not the redemption condition is satisfied, we may redeem the convertible debentures, in whole or in part. Any redemption will be at a cash redemption price of 100% of the principal amount of the convertible debentures to be redeemed, plus accrued and unpaid interest, including any compounded interest, to the date of redemption.

 

 

For a more detailed description of the convertible debentures, see “Description of the Convertible Debentures” beginning on page S-48.

 

 

Investing in the convertible debentures involves risks. See “Risk Factors” beginning on page S-24.

 

 

We have granted the underwriters the right to purchase up to an additional $75,000,000 principal amount of convertible debentures, solely to cover overallotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the convertible debentures to purchasers on December 20, 2006.

 

 

 

 

 

December 14, 2006

 

TABLE OF CONTENTS

 

 

This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering. The second part is the accompanying prospectus, which gives more general information, some of which may not apply to this offering.

 

If the description of the offering varies between the prospectus supplement and the accompanying prospectus, you should rely on the information in the prospectus supplement.

 

You should rely only on the information contained or incorporated by reference in this prospectus supplement, any free writing prospectus prepared by us and the accompanying prospectus. We have not authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We are offering to sell the convertible debentures, and seeking offers to buy the convertible debentures, only in jurisdictions where offers and sales are permitted. You should not assume that the information we have included in this prospectus supplement, any free writing prospectus prepared by us or the accompanying prospectus is accurate as of any date other than the date of this prospectus supplement, any free writing prospectus prepared by us or the accompanying prospectus or that any information we have incorporated by reference is accurate as of any date other than the date of the document incorporated by reference. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

Unless otherwise indicated, (i) the exchange rate used in translating Australian dollars into U.S. dollars was determined by reference to an assumed exchange rate of A$1 = US$0.7447, which was based on prevailing rates from October 18, 2006 through October 23, 2006 and (ii) all information contained in this prospectus supplement assumes no exercise of the underwriters’ option to purchase an additional $75,000,000 principal amount of convertible debentures to cover overallotments.

 

PROSPECTUS SUPPLEMENT SUMMARY

	•	Abundant:  Coal makes up more than 85% of fossil fuel reserves in the United States. The nation has an estimated 250-year supply of coal, based on current usage rates.
	•	Low-Cost:  At an average delivered price of $1.48 per million British thermal units, or Btu, to U.S. generating plants in 2005, coal’s cost advantage over natural gas is significant. The delivered price of natural gas averaged $6.74 per million Btu in 2005.
	•	Increasingly Clean:  Aggregate emissions from U.S. coal-fueled plants have declined significantly since 1970, even as coal consumption by electricity generators has more than tripled.

	•	We are the world’s largest private-sector producer and marketer of coal and the largest reserve holder of any private sector coal company.
	•	We are the largest producer and marketer of low-sulfur coal in the United States.
	•	We have a large portfolio of long-term coal supply agreements that is complemented by available production in attractive markets for sale at market prices.
	•	We are one of the safest and most productive producers of coal in the United States.
	•	We serve a broad range of high quality customers with mining operations located throughout all major U.S. coal producing regions and in Australia.
	•	We have received numerous awards for our reclamation excellence.
	•	Our management team has a proven record of success.

	•	Executing the Basics — Safe, low-cost operations provide us the foundation to grow and create value. We achieve improvements in both safety and productivity by targeting cost and productivity improvements that require little or no additional capital. Eight of our mines set new production records in 2005, and our Rawhide, Caballo and North Antelope Rochelle mines were the three most productive coal mines in the nation based on tons per worker hours according to U.S. Department of Labor Mine Safety & Health Administration data. In 2005, our emphasis on safe, low-cost operations resulted in a 33% improvement to our already-low accident rate. Our safety record has improved 48% in the past three years. We also use the same methods to achieve environmental excellence. In 2005, we were recognized with 11 awards, including five top awards from the U.S. Department of the Interior.

	•	Capitalizing on Organic Growth Opportunities — We control the most proven and probable coal reserves of any private-sector coal company in the world, which enables low-cost development to serve growing customer demand. We have an industry-leading track record of being able to construct, develop and deliver on organic growth initiatives. Over the past five years, we have developed new and expanded capacity that is equivalent to two-thirds of U.S. coal industry growth.
	•	Expanding in High Growth Global Markets — The United States, China and India represent nearly 90% of the forecasted growth in the world’s coal industry through 2030. We sell coal to customers in 15 countries on six continents. We also have opened an office in Beijing, increased import activities for South American coal into the United States, and recently entered the European trading markets.
	•	Participating in New Generation and Btu Conversion Projects — We are developing mine mouth electricity generating plants using our coal reserves. We have entered into several agreements to develop coal-to-liquids and coal-to-natural gas facilities. We have entered into a joint development agreement with Rentech to evaluate sites near our coal reserves for coal-to-liquids projects that would transform coal into diesel and jet fuel. We are exploring the development of a commercial-scale coal gasification project. The facility is expected to use technology from ConocoPhillips to transform coal into pipeline-quality synthetic natural gas.

	•	Wambo Open-Cut Mine — This Hunter Valley operation produces a premium thermal coal and serves export customers from the Port of Newcastle. Wambo produced 3.5 million tons in 2005.
	•	North Wambo Underground Mine — This operation is under development and is expected to begin shipments in 2007, with production targeted to reach approximately 3 million tons per year over the next several years. The mine plans to produce thermal and semi-soft coking coal for shipment to customers through the Port of Newcastle.
	•	Metropolitan Mine — This longwall operation produced 1.6 million tons of hard and semi-hard coking coal in 2005. Metropolitan serves domestic and export steel producers, shipping from Port Kembla.
	•	Wilpinjong Mine — This new open-cut mine is expected to produce 5 million tons of thermal coal in 2007, and is scheduled to ramp up to more than 7 million tons per year within two years that will be shipped to export customers through the Port of Newcastle in addition to serving a domestic electricity generator.
	•	Millennium Mine — This open-cut mine is in the Bowen Basin near our existing metallurgical coal mines. Millennium is expected to begin shipments of its coking coal later this year, with 2007 production targeted at 2 million tons and targeting 3 million tons per year over the next several years. Millennium offers rail and port synergies with our existing operations.
	•	Conarco Farm-In Agreement — Through a farm-in agreement with the Conarco Group, Excel may earn up to a 75% interest by the staged spending of up to A$12 million (US$9 million) over the next several years in two areas that cover a combined 1.65 million acres in Queensland near existing coal mines and infrastructure.
	•	Reserves — Excel Coal controls more than 500 million tons of proven and probable metallurgical and thermal coal reserves, and substantial additional coal resources, in Queensland and New South Wales, Australia.

	•	The Excel Acquisition is expected to triple our annual production capacity in the world’s largest coal-exporting nation. Australia provides nearly one-third of the world’s exports, serving primarily the fast-growth markets of Asia. The U.S. Energy Information Administration projects demand for Australian metallurgical and thermal coal products will grow 55% by 2030.
	•	The combination of our Australian operations and Excel’s assets creates a major new player in the Australian coal sector, with substantial market diversity, a broad portfolio of metallurgical and thermal coal products, both domestic and seaborne customers and the capacity to utilize multiple rail lines and ports.
	•	Prior to the Excel Acquisition, we produced nine million tons per year of mostly metallurgical coal in Queensland. The Excel Acquisition provides us with extensive growth opportunities from existing operations, along with major metallurgical and thermal coal mines in the latter stages of development. Excel produced approximately 5.6 million tons of coal in 2005. These operations are expected to produce up to 15 million tons in 2007, and up to 20 million tons in 2008, from coal mines in New South Wales and Queensland. The Excel Acquisition also provides substantial synergies in the areas of sales and trading, and reserve holdings in Queensland near our existing operations. Excel has more than 500 million tons of metallurgical and thermal coal reserves.
	•	The Excel Acquisition expands our existing Queensland base. In the past five years, we purchased the Wilkie Creek thermal coal mine, acquired the Burton and North Goonyella metallurgical coal mines, developed the Eaglefield metallurgical mine, and developed the Baralaba thermal and PCI mine. It also marks a return to New South Wales, where we have significant experience and prior success.

Issuer		Peabody Energy Corporation.
Offered Securities		4.75% convertible junior subordinated debentures.
Principal Amount		$1,000 per convertible debenture.
Aggregate Principal Amount		$675,000,000 (plus up to an additional $75,000,000 principal amount of convertible debentures pursuant to the option we have granted to underwriters to purchase additional convertible debentures to cover overallotments).
Scheduled Maturity Date		As described under “— Payment at Scheduled Maturity,” we will use our commercially reasonable efforts, subject to the occurrence of a market disruption event (as defined under “Description of the Convertible Debentures — Warrant and Preferred Stock Settlement Mechanism”), to raise sufficient net proceeds from the issuance of qualifying capital securities (as defined under “Description of the Convertible Debentures — Payment at Scheduled Maturity”) to pay holders the principal amount of the convertible debentures, together with accrued and unpaid interest, including any compounded interest thereon, on December 15, 2041 (the “scheduled maturity date”).
Final Maturity Date		Any unpaid principal amount of the convertible debentures, together with accrued and unpaid interest, including any compounded interest thereon, will be due and payable on December 15, 2066, the “final maturity date.”
Interest		Interest on the convertible debentures will accrue from the issue date until the earliest of the final maturity date or the date on which the convertible debentures are converted, redeemed or paid at scheduled maturity, at a fixed rate equal to 4.75% per year, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2007.
		We may elect to, and if, and to the extent that a mandatory trigger event (as described under “— Mandatory Trigger Events”) has occurred and is continuing will be required to, defer interest payments on the convertible debentures. These deferral mechanisms, as well as limitations on the sources we may use to fund interest payments under specified circumstances, are described under “— Optional Deferral” and “— Consequences of a Mandatory Trigger Event.” Additional restrictions on our ability to make payments (including payments of interest) on the convertible debentures and on any related claim in the event of our bankruptcy, insolvency or receivership are described under “— Subordination,” “Capital Replacement” and “— Limitation on Claims in the Event of our Bankruptcy, Insolvency or Receivership.”
Use of Proceeds		We estimate that our net proceeds from our sale of the convertible debentures in this offering, after deducting underwriting discounts and estimated expenses of the offering, will be approximately $654.8 million. We intend to use these net proceeds to repay indebtedness, including reducing indebtedness currently outstanding under our revolving credit facility and term loan facility, each of which were used to finance, in part, the acquisition of Excel Coal

		Limited (the “Excel Acquisition”), and for working capital and general corporate purposes. Our revolving credit facility commitment is scheduled to terminate and the loans thereunder are scheduled to mature in September 2011 and our term loan facility is scheduled to mature in September 2011. As of December 5, 2006, the floating interest rate on both our revolving credit facility and our term loan facility was 6.3%. For a more detailed discussion of these facilities, see “Description of Other Indebtedness.” Affiliates of Lehman Brothers, Morgan Stanley and Citigroup and certain of the other underwriters are lenders under these facilities and, accordingly, will receive a portion of the proceeds from this offering. See “Underwriting.”
Indenture		We will issue the convertible debentures under the Subordinated Indenture described in the attached prospectus and a supplemental indenture thereto to be dated as of December 20, 2006, each between Peabody Energy Corporation, as issuer, and U.S. Bank National Association, as trustee. In this prospectus supplement, we refer to that indenture, as supplemented by the supplemental indenture, and as further supplemented or amended from time to time, as the “indenture.”
Trustee and Paying Agent		U.S. Bank National Association.
Subordination		The convertible debentures will be our unsecured obligations, ranking junior to all existing and future senior and subordinated debt (excluding trade accounts payable or accrued liabilities arising in the ordinary course of business) of Peabody Energy Corporation, except for any future debt that by its terms ranks equal to or junior to the convertible debentures, as described under “Description of the Convertible Debentures — Subordination.” The convertible debentures will rank equal in right of payment with obligations we owe, from time to time, to our trade creditors.
		Substantially all of our existing indebtedness is senior to the convertible debentures. In addition, the convertible debentures will be effectively subordinated to all indebtedness of our subsidiaries.
		The indenture places no limitation on the amount of additional indebtedness that we or any of our subsidiaries may incur. We expect to incur additional indebtedness in the future.
Anticipated Ratings		We anticipate that the convertible debentures will be assigned the following ratings by the following rating agencies:
		• Moody’s Investors Service: Ba2
		• Standard & Poor’s: B
		• Fitch Ratings: BB−
		An explanation of the significance of ratings may be obtained from the rating agencies. Generally, rating agencies base their ratings on such material and information, and such of their own investigations, studies and assumptions, as they deem appropriate. The rating of the convertible debentures should be evaluated independently from similar ratings of other securities. A rating of a security is not a recommendation to buy, sell or hold securities and

		may be subject to review, revision, suspension, reduction or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
Conversion Rights		Unless earlier redeemed, holders may convert their convertible debentures, in whole or in part, under the circumstances described below and, depending on the particular basis for conversion, will receive cash or shares of perpetual preferred stock and, if the conversion value (as defined below) of the convertible debentures exceeds their principal return (as defined below), shares of our common stock, at any time on or prior to December 15, 2036:
		• during any calendar quarter if, for at least 20 of the 30 consecutive trading days immediately preceding the commencement of that calendar quarter, the closing sale price of our common stock exceeds 140% of the then applicable conversion price for the convertible debentures;
		• at any time following the issuance of a notice of redemption in respect of the convertible debentures until the business day immediately preceding the redemption date;
		• during the 10 trading days after any five-consecutive-trading-day period during which the trading price per $1,000 principal amount of convertible debentures for each day of such measurement period is determined, after a request as described under “Description of the Convertible Debentures — Conversion Upon Satisfaction of Trading Price Condition” to conduct such measurement, to be less than 98% of the product of the closing sale price of our common stock and the conversion rate in effect on such day;
		• during the 35 calendar days following the occurrence of a “change of control” (as defined under “Description of the Convertible Debentures — Conversion Rights — Conversion Upon a Change of Control”); or
		• during prescribed periods upon the occurrence of certain corporate events described under “Description of the Convertible Debentures — Conversion Rights — Conversion Upon Specified Corporate Transactions.”
		In addition, unless earlier redeemed, the convertible debentures will be convertible at any time after December 15, 2036 to (and including) December 15, 2041.
		The initial conversion rate is 16.1421 shares of common stock per $1,000 principal amount of convertible debentures, which represents an initial conversion price of approximately $61.95 per share, subject to adjustment as described under “Description of the Convertible Debentures — Conversion Procedures — Conversion Rate Adjustments.” The conversion rate will be applied as described below to determine the consideration holders will receive upon conversion.

Settlement of Conversion Following a Notice of Redemption or Upon a Non-Stock Change of Control		In the case of conversion either following a notice of redemption or upon a non-stock change of control (as defined under “Description of the Convertible Debentures — Conversion Procedures — Determination of the Make-Whole Amount”), with respect to each $1,000 principal amount of convertible debentures surrendered for conversion, we will deliver:
		• a cash payment in the amount of $1,000 (the “principal return”), and
		• if the conversion value of the convertible debentures converted is greater than the principal return, a number of shares of our common stock (the “net shares”) equal to the sum of the daily share amounts for each of the 20 consecutive trading days in the conversion reference period.
		The “conversion value” of each $1,000 principal amount of convertible debentures that are converted will equal the average of the products for each of the 20 consecutive trading days during the conversion reference period of (i) the applicable conversion rate for such day multiplied by (ii) the volume-weighted average price (as defined under “Description of the Convertible Debentures — Conversion Procedures — Settlement Upon Conversion”) per share of our common stock on such day.
		The “daily share amount” for a given trading day equals the amount obtained by (i) multiplying the volume-weighted average price for such day by the conversion rate applicable on such day, (ii) subtracting $1,000 from the resulting product and (iii) dividing the resulting difference by 20 times the volume-weighted average price for such day; provided, however, that the daily share amount will in no case be less than zero.
		“Conversion reference period” means:
		• for convertible debentures that are converted following a notice of redemption or during the period beginning on the 20th trading day prior to December 15, 2041, the 20 consecutive trading days beginning on the third trading day following (a) the redemption date or (b) December 15, 2041, as the case may be; and
		• in all other instances, the 20 consecutive trading days beginning on the third trading day following the conversion date.
		Upon any such conversion, holders will generally not receive any cash payment representing accrued and unpaid interest for the current interest period. Holders will, however, receive an additional cash amount equal to the amount of optionally or mandatorily deferred interest on the convertible debentures, plus any compounded interest thereon, to the last trading day of the conversion reference period.
Settlement of Other Conversions		Except in the case of a conversion following a notice of redemption or upon a non-stock change of control, with respect to each $1,000

		principal amount of convertible debentures surrendered for conversion, we will deliver:
		• one share of perpetual preferred stock with a liquidation preference of $1,000 (the amount of the principal return), and
		• if the conversion value of the convertible debentures converted is greater than the principal return, the net shares (in an amount equal to the sum of the daily share amounts for each of the 20 consecutive trading days during the conversion reference period).
		Upon any such conversion, holders will generally not receive any cash payment representing accrued and unpaid interest for the current interest period. The shares of perpetual preferred stock delivered to a holder upon any such conversion will, however, have initial accumulated dividends at issuance equal to the amount of any optionally or mandatorily deferred interest on the convertible debentures converted, plus any compounded interest thereon, to the last trading day of the conversion reference period.
Make-Whole Amount		Upon the occurrence of a non-stock change of control on or prior to December 20, 2036, under certain circumstances, we will increase the conversion rate, for the time period described herein, by a specified number of additional shares, as described under “Description of the Convertible Debentures — Conversion Procedures — Determination of the Make-Whole Amount.” The number of additional shares will be determined based on the price paid per share of our common stock in the transaction constituting a non-stock change of control and the effective date of such transaction. Notwithstanding the provision described in this paragraph, in no event will the total number of shares of our common stock issuable upon conversion exceed 22.5988 per $1,000 principal amount of convertible debentures, subject to adjustment.
		No increase to the conversion rate will be made upon a non-stock change of control if the stock price in connection with such non-stock change of control is less than $44.25 or more than $300.00 (in each case, subject to adjustment).
Perpetual Preferred Stock		The perpetual preferred stock issued to holders upon a conversion of convertible debentures:
		• will entitle holders to receive, when, as and if declared by our board of directors out of funds legally available for the payment of dividends, cumulative dividends at an annual rate of 3.0875% of liquidation preference (65% of the interest rate borne by the convertible debentures) or, following any remarketing, at the reset rate (as described under “— Remarketing of the Perpetual Preferred Stock”);
		• will be subject to
		• the capital replacement intention provisions described under “— Capital Replacement Intention Upon Optional Redemption or Cash Conversion” below, and
		• while a mandatory trigger event continues, a prohibition on our declaration of any dividends other than those funded

		through the sale of qualifying warrants or qualifying preferred stock (each as defined under “— Warrant and Preferred Stock Settlement Mechanism”),
		• will benefit from our obligation to raise funds using the warrant and preferred stock settlement mechanism while a mandatory trigger event continues or after we have failed to declare and pay dividends for a period of five consecutive years, which funds must be applied to pay accumulated dividends after the payment in full of any deferred interest on the convertible debentures, subject to the limitations described under “— Warrant and Preferred Stock Settlement Mechanism”;
		• will entitle holders thereof to elect two members of our board of directors, together with certain other holders of our capital stock, if we fail to declare and pay dividends for ten consecutive years (or, following remarketing, six dividend payment dates, whether or not consecutive);
		• may, at the holder’s election, be remarketed after December 15, 2046 or earlier, upon the first change of control to occur, if we do not exercise our right to redeem them;
		• will have a liquidation preference of $1,000 per share;
		• will be redeemable at our option at any time, out of funds legally available therefor, at a cash redemption price equal to their liquidation preference plus any accumulated dividends (though such redemption may only be in whole, and not in part, unless the redemption is being made in connection with, and in the same proportion as, a partial redemption of the convertible debentures);
		• will not be convertible.
		Any deferred interest on the convertible debentures at the time of notice of conversion, plus any compounded interest thereon, will be reflected as accumulated dividends on the perpetual preferred stock at issuance.
		For so long as any convertible debentures remain outstanding, the terms of the indenture will prohibit us from paying dividends, including accumulated dividends, on the perpetual preferred stock during any deferral period for the convertible debentures. See “Description of the Convertible Debentures — Certain Restrictions During Optional or Mandatory Deferral Periods.” Additional limitations on our ability to declare dividends on the perpetual preferred stock are described under “Description of the Perpetual Preferred Stock — Limitations on Declaration of Dividends.”
		Declaration of a dividend on the perpetual preferred stock at any permissible time will be at the discretion of our board of directors, who will not be required to declare any dividend on the perpetual preferred stock payable in respect of any dividend period, except in accordance with the warrant and preferred stock settlement mechanism. Any dividend that is not declared will accumulate.
		In the event of our liquidation, winding-up or dissolution, whether voluntary or not, prior to the redemption of the perpetual preferred

		stock, holders of perpetual preferred stock will have no claim in respect of amounts representing dividends that accumulated while a mandatory trigger event occurred and was continuing, to the extent the amount of such dividends exceeds two years of accumulated and unpaid dividends on the perpetual preferred stock.
Remarketing of Perpetual Preferred Stock		After December 15, 2046 or earlier upon the first occurrence of a change of control, unless the perpetual preferred stock has been redeemed or has been called for redemption, holders may elect to have their shares of perpetual preferred stock remarketed. A holder of convertible debentures may, upon a change of control other than a non-stock change of control, simultaneously elect to convert the convertible debentures and have perpetual preferred stock otherwise deliverable to such holder in respect of such conversion remarketed in such a remarketing.
		Pursuant to the remarketing agreement described under “Description of the Perpetual Preferred Stock — Remarketing — Remarketing Agreement,” a nationally recognized securities dealer selected by us as the remarketing agent will use its commercially reasonable efforts to remarket the perpetual preferred stock tendered for sale in a remarketing, at a reset dividend rate determined by the remarketing agent to be the rate necessary for the perpetual preferred stock to be remarketed at a price equal to at least the sum of (x) $1,000 per share and (y) the remarketing agent fee per share of perpetual preferred stock provided for in the remarketing agreement, plus accumulated dividends to the remarketing date. We may elect for the reset dividend rate to be a three-month LIBOR-based floating rate, rather than a fixed rate, with quarterly rather than semi-annual payment dates, and may also change the optional redemption provisions of the perpetual preferred stock for purposes of the remarketing, in each case to the extent that such election is not, in the reasonable judgment of the remarketing agent, likely to adversely affect the ability of the remarketing agent to remarket the perpetual preferred stock.
		Remarketing will initially occur on the sixth trading day after the remarketing election period. In the event a successful remarketing does not occur on such date, an additional remarketing will occur on the eleventh trading day after the last day of the remarketing election period, and, if a successful remarketing does not occur on such date, on the sixteenth trading day after the last day of the remarketing election period. If a successful remarketing does not occur on the sixteenth trading day after the last day of the remarketing election period, a final remarketing will occur on the 21st trading day after the last day of the remarketing election period (“the final remarketing date”).
		If the remarketing agent is unable to place successfully all perpetual preferred stock tendered for remarketing at a price equal to at least the sum of (x) $1,000 and (y) the remarketing agent fee per share of perpetual preferred stock provided for in the remarketing agreement, plus accumulated dividends to the remarketing date, on the final remarketing date, a “final failed remarketing” shall have occurred. In the event of a final failed remarketing, no perpetual

		preferred stock will be sold in the remarketing. See “Description of the Perpetual Preferred Stock — Remarketing.”
		In the event of a successful remarketing, dividends will become payable at the reset rate, and any changes to the optional redemption provisions will take effect, as of the “reset effective date,” which will be the third business day immediately following the successful remarketing. In the case of a final failed remarketing, the dividend rate applicable to the perpetual preferred stock will be reset as of the third business day immediately following the final remarketing date (which will be the reset effective date for a final failed remarketing), to a floating annual rate equal to three-month LIBOR plus 400 basis points, and dividends will thereafter be paid quarterly (on each three-month anniversary of the reset effective date) rather than semi-annually.
		All changes to the terms of the perpetual preferred stock as a result of a successful remarketing or a final failed remarketing, whether to the dividend rate, dividend payment dates or the optional redemption provisions, will apply to all perpetual preferred stock, whether remarketed or otherwise. Other than with respect to the dividend rate, dividend payment dates and the optional redemption provisions, the terms of all perpetual preferred stock, whether remarketed or otherwise, will remain unchanged.
		Notwithstanding the foregoing, the reset rate will in no event be less than the dividend rate then in effect on the perpetual preferred stock, which initially will be 3.0875% of the liquidation preference.
Redemption		The convertible debentures will not be subject to redemption prior to December 20, 2011.
		Between December 20, 2011 and December 19, 2036 we may redeem the convertible debentures, in whole or in part, at the par redemption price described below if for at least 20 trading days within the 30 consecutive trading days immediately prior to the date on which notice of redemption is given, the closing sale price of our common stock has exceeded 130% of the then prevailing conversion price.
		On or after December 20, 2036, whether or not the redemption condition described above is satisfied, we may redeem the convertible debentures, in whole or in part, at the par redemption price.
		We may not redeem any outstanding convertible debentures unless:
		• all accrued and unpaid interest, including any compounded interest thereon, has been paid in full on or prior to the redemption date for all interest periods terminating on or before the redemption date; and
		• if any perpetual preferred stock is outstanding at that time, we have first given notice to redeem the perpetual preferred stock (in the same proportion as our redemption of the convertible debentures, if such redemption is in part), which will require that we have funds legally available, under Delaware law, to effect

		such redemption (see “Description of the Perpetual Preferred Stock — Redemption”).
		The “par redemption price” will be a cash amount equal to 100% of the principal amount of the convertible debentures to be redeemed, plus accrued and unpaid interest to, but not including, the date of redemption.
		Whether paid in connection with a redemption of convertible debentures or otherwise, any mandatorily deferred interest and any optionally deferred interest accrued after the first five years of an optional deferral period may, and any compounded interest thereon, be paid only from the net proceeds received from the sale of qualifying warrants and qualifying preferred stock in accordance with the warrant and preferred stock settlement mechanism.
Capital Replacement Intention Upon Optional Redemption or Cash Conversion		At the time of
		• any redemption of convertible debentures or perpetual preferred stock, or
		• any conversion of convertible debentures that would require the principal return to be paid in cash (which would apply to conversions either upon a notice of redemption or upon a non-stock change of control),
		we intend to fund any cash payment upon such redemption or conversion, as the case may be, with net proceeds received by us from the sale, during the 180-day period prior to the date of redemption or conversion, by us or our subsidiaries to third-party purchasers, of securities for which we will receive equity credit, at the time of sale, that is equal to or greater than the equity credit attributed to the convertible debentures or perpetual preferred stock at the time of such redemption or conversion, in the opinion of our board of directors reasonably construing the standards employed by the rating agency that then attributes the greatest equity credit to the convertible debentures in making such determinations.
Payment at Scheduled Maturity		On the scheduled maturity date, December 15, 2041, we will pay holders the principal amount of the convertible debentures, together with accrued and unpaid interest, including any compounded interest thereon, if we successfully fund this payment through the sale of qualifying capital securities.
		We will be required to use our commercially reasonable efforts, subject to the occurrence of a market disruption event, to raise sufficient net proceeds to fund payment of the convertible debentures at scheduled maturity through the issuance of qualifying capital securities during a six-month period ending on the date we give notice of the payment we will make on the scheduled maturity date. We will also be permitted, but not required, to apply an amount equal to up to (x) 400% of the net proceeds from any issue and sale of our common stock or rights to acquire our common stock and (y) 100% of the net proceeds from any issue and sale of our mandatorily convertible preferred stock, debt exchangeable for

		equity or other replacement capital securities that are convertible into common stock (each as defined under “Capital Replacement”) to fund our payment obligation. We will be contractually obligated to third parties not to fund payment at scheduled maturity with funds from any source other than those described in this paragraph, as described below under “Capital Replacement.”
		If we have not raised sufficient funds for payment in full at the scheduled maturity date, we will be required (x) to make a partial payment using the proceeds, if any, that we were able to raise and (y) to attempt payment pursuant to the procedures described above on each successive interest payment date after the scheduled maturity date and before the final maturity date until payment in full is made.
Capital Replacement on or following the Scheduled Maturity Date		Prior to or concurrently with the initial issuance of the convertible debentures, we will enter into a capital replacement covenant in which we will covenant for the benefit of holders of a specified series of our long-term indebtedness that neither we nor any of our subsidiaries will pay the convertible debentures pursuant to the provision described above under “— Payment at Scheduled Maturity” or redeem or repurchase convertible debentures on or following the scheduled maturity date and prior to December 15, 2046, unless the amount of such payment, the redemption price or the repurchase price, as the case may be, does not exceed the sum of:
		• 400% of our net cash proceeds from the issue and sale of our common stock or rights to acquire our common stock;
		• our net cash proceeds from the issue and sale of our mandatorily convertible preferred stock or debt exchangeable for equity; and
		• our net cash proceeds from the issue and sale of other replacement capital securities (as defined under “Capital Replacement”)
		in each case, during the six months prior to the notice date for the relevant payment, redemption or repurchase.
		The capital replacement covenant is not intended to be for the benefit of holders of the convertible debentures, will not be enforceable by them, and will not be among the terms of the indenture or the convertible debentures. The capital replacement covenant will have no effect on our obligation to repay the convertible debentures with the proceeds of qualifying capital securities on the scheduled maturity date or on the absolute and unconditional nature of our obligation to pay holders the principal amount of (and accrued and unpaid interest on) the convertible debentures on the final maturity date.
Optional Deferral		As long as no event of default with respect to the convertible debentures has occurred and is continuing, subject to the conditions below, we may defer payments of interest on the convertible debentures. We refer to this as “optional deferral.” Upon optional deferral, any optionally deferred interest will continue to accrue and compound semi-annually, to the extent permitted by applicable law, from time to time, at the applicable rate of interest on the convertible debentures.

		After five years of optional deferral (calculated from the first payment date as of which we defer payments on the convertible debentures due to optional deferral), we generally must sell qualifying warrants or qualifying preferred stock and use the funds from that sale to pay deferred interest as described under “— Warrant and Preferred Stock Settlement Mechanism.” This obligation, however, is subject to limitations: we will not be required to sell qualifying warrants or qualifying preferred stock during the continuation of a market disruption event, and the maximum amount of qualifying warrants and qualifying preferred stock that we are required to sell will be limited by the warrant cap and the preferred stock cap described below under “— Warrant and Preferred Stock Settlement Mechanism.” In addition, any breach of our obligation to fund payments through the sale of qualifying warrants and qualifying preferred stock would constitute a covenant breach but not an event of default permitting acceleration of the principal amount of the convertible debentures. The remedy of holders of the convertible debentures for any covenant breach may be limited to direct monetary damages (if any). See “— Events of Default.”
		Notwithstanding the limitations described above, in no event may we defer payments of interest on the convertible debentures beyond the date that is 10 consecutive years after the date on which we began the deferral of interest (whether due to optional deferral, mandatory deferral, or any combination thereof) or past the final maturity date of, or any redemption date for, the convertible debentures. An event of default will result if all accrued and unpaid interest, including any compounded interest thereon, in respect of the convertible debentures has not been paid in full within 30 days after the tenth anniversary of the commencement of any interest deferral.
Mandatory Trigger Events		A mandatory trigger event will have occurred with respect to any interest period if on the 30th day prior to the interest payment date for such period (each such 30th day a “trigger determination date”), on the basis of our most recent publicly reported quarterly financial information:
		(i) our Leverage Ratio for each of the three most recently completed fiscal quarters is equal to or greater than 6.0; and
		(ii) our Interest Coverage Ratio for each of the three most recently completed fiscal quarters is less than or equal to 2.0.
		“Leverage Ratio,” for any fiscal quarter, means our Adjusted Debt at the end of such fiscal quarter divided by the sum of (a) four times our Adjusted EBITDA for such fiscal quarter and (b) our Annual Rent Expense.
		“Interest Coverage Ratio,” for any fiscal quarter, means the sum of (a) four times our Adjusted EBITDA for such fiscal quarter and (b) one-third of our Annual Rent Expense, divided by the sum of (x) four times our Adjusted Interest for such fiscal quarter and (y) one-third of our Annual Rent Expense.

		See “Description of the Convertible Debentures” for further information, including definitions of the terms “Adjusted Debt,” “Adjusted EBITDA,” “Adjusted Interest” and “Annual Rent Expense.”
		As of September 30, 2006, our Leverage Ratio was 2.3x and our Interest Coverage Ratio was 9.9x.
Consequences of a Mandatory Trigger Event		During the period beginning on any interest payment date for which a mandatory trigger event has occurred until (but not including), the earliest of
		• the first subsequent interest payment date for which no mandatory trigger event has occurred (the “mandatory deferral period”),
		• the date that is 10 consecutive years after the date on which we began the deferral of interest (whether due to optional deferral, mandatory deferral, or any combination thereof),
		• the occurrence of an event of default, or
		• the final maturity date of the convertible debentures,
		we may not pay interest on the convertible debentures unless we obtain funds for such payment through the sale of qualifying warrants or qualifying preferred stock. We refer to the deferral of interest following the occurrence of a mandatory trigger event as “mandatory deferral.” Any deferred interest that is accrued and unpaid during the occurrence and continuation of a mandatory deferral period will continue to accrue and compound, to the extent permitted by applicable law, at the applicable rate of interest on the convertible debentures.
		Upon the occurrence of a mandatory trigger event, we generally must sell qualifying warrants or qualifying preferred stock and use the funds from that sale to pay deferred interest as described under “— Warrant and Preferred Stock Settlement Mechanism.” This obligation is, however, subject to limitations: we will not be required to sell qualifying warrants or qualifying preferred stock during the continuation of a market disruption event, and the maximum amount of qualifying warrants and qualifying preferred stock that we are required to sell will be limited by the warrant cap and the preferred stock cap described below under “— Warrant and Preferred Stock Settlement Mechanism.” In addition, any breach of this obligation would constitute a covenant breach but not an event of default permitting acceleration of the principal amount of the convertible debentures. The remedy of holders of the convertible debentures for any covenant breach may be limited to direct monetary damages (if any). See “— Events of Default.”
		Notwithstanding the limitations described above, in no event may we defer payments of interest on the convertible debentures beyond the date that is 10 consecutive years after the date on which we began the deferral of interest (whether due to optional deferral, mandatory deferral, or any combination thereof) or past the final maturity date of, or any redemption date for, the convertible debentures. An event of default will result if all accrued and unpaid interest, including any compounded interest thereon, in respect of the

		convertible debentures has not been paid in full within 30 days after the tenth anniversary of the commencement of any interest deferral.
Warrant and Preferred Stock Settlement Mechanism		At the times described under “Description of the Convertible Debentures — Option to Defer Interest Payments” and “— Consequences of a Mandatory Trigger Event,” we will be required, subject to the occurrence of a market disruption event and the limits imposed by the warrant cap and the preferred stock cap (as described below), to sell qualifying warrants or qualifying preferred stock during the six month period prior to the notice date for the applicable payment and to apply the net proceeds of such sale to pay all deferred interest, including any compounded interest thereon. Instead of selling qualifying preferred stock, we may sell depositary shares representing the right to receive such preferred stock.
		“Qualifying warrants” means warrants to purchase our common stock that:
		• have an exercise price greater than the most recent closing sale price of our common stock as of their date of issuance; and
		• we are not entitled to redeem for cash and the holders of which are not entitled to require us to repurchase for cash in any circumstances.
		“Qualifying preferred stock” means our non-cumulative perpetual preferred stock (or depositary shares representing interests in such preferred stock) that (a) is non-callable, (b) is subject to a binding capital replacement covenant or (c) has capital replacement intention disclosure and includes provisions that, from and after the occurrence of the failure to satisfy one or more financial tests set forth in the terms of such securities or related transaction agreements, prohibit the issuer of such securities from paying any deferred distributions in an amount exceeding the net proceeds of the sale of our common stock, rights to purchase our common stock or qualifying preferred stock.
		Notwithstanding the foregoing, in no event will we be required to sell additional qualifying warrants after we have sold qualifying warrants in respect of 84,000,000 shares of common stock (the “warrant cap”) nor will we be permitted to sell additional qualifying preferred stock after we have sold an amount of qualifying preferred stock having an aggregate liquidation preference equal to 25% of the aggregate principal amount of the convertible debentures at the time of their original issuance (the “preferred stock cap”).
		The perpetual preferred stock will also benefit from our obligation to raise funds using the warrant and preferred stock settlement mechanism, and sales of qualifying warrants and qualifying preferred stock to fund dividends in respect of the perpetual preferred stock will also be counted in calculating when the warrant cap or the preferred stock cap has been reached.
Limitations on Deferrals		No deferral, whether optional or mandatory, may extend beyond the final maturity date of, or any redemption date for, the

		convertible debentures. In addition, no interest deferral period, whether optional or mandatory (or a combination thereof), may continue for more than 10 years. An interest deferral period will commence on the first interest payment date on which interest is deferred and will end on the first date thereafter on which all deferred interest, including any compounded interest thereon, is paid in full.
Payment Restrictions		On any date on which accrued interest through the most recent interest payment date has not been paid in full (including during any optional or mandatory interest deferral period) and until such time as all accrued and unpaid interest through the most recent interest payment date, together with any compounded interest, is paid in full, we will not, and will not permit any of our subsidiaries to, declare or pay any dividends or any distributions on, or make any payments of interest, principal or premium, or any guarantee payments on, or redeem, purchase, acquire or make a liquidation payment on, any capital stock of the company or any debt securities of the company or guarantees of the company ranking equal with or junior to the convertible debentures, with exceptions that are detailed under “Description of the Convertible Debentures — Certain Restrictions During Optional or Mandatory Deferral Periods.”
Limitation on Claims in the Event of our Bankruptcy, Insolvency or Receivership		In the event of our bankruptcy, insolvency or receivership, whether voluntary or not, prior to the final maturity date or redemption of the convertible debentures, any claim in respect of interest that accrued during a mandatory interest deferral period in excess of two years of accrued and unpaid interest (including any compounded interest thereon) on the convertible debentures will be extinguished.
Events of Default		The indenture will provide for the following events of default with respect to the convertible debentures:
		• default for 30 calendar days in the payment of any interest on the convertible debentures, including any compounded interest, when it becomes due and payable (however, a default under this bullet will not occur if we have deferred interest, as permitted under the indenture, in connection with an optional deferral or mandatory deferral);
		• deferral of interest on the convertible debentures, due to optional deferral or mandatory deferral, or a combination thereof, that continues for 10 consecutive years after the date on which we began the deferral of interest, without all accrued and unpaid interest, including any compounded interest thereon, having been paid in full within 30 days after the tenth anniversary of the commencement of such deferral;
		• default in the payment of the principal of the convertible debentures when due; and
		• certain events of bankruptcy, insolvency and reorganization, whether voluntary or not.
		The events of default contained in the indenture under which the convertible debentures will be issued (and the circumstances under

		which payment of the convertible debentures may be accelerated) will not include failure to comply with or breach of our other covenants in the indenture applicable to the convertible debentures, including those described under “— Warrant and Preferred Stock Settlement Mechanism” and “— Payment at Scheduled Maturity.” In the case of any breach of covenant that will not give rise to an event of default, there will be no right to declare the principal amount of the convertible debentures, or accrued and unpaid interest, including any compounded interest thereon, immediately payable, and the remedy of holders of the convertible debentures for any covenant breach may be limited to direct monetary damages (if any). Notwithstanding the foregoing, the indenture will acknowledge that in the case of any failure to deliver consideration deliverable in respect of any conversion, monetary damages would not be adequate and will provide for specific performance as the remedy for any such failure.
Form		The convertible debentures will be represented by one or more global securities registered in the name of Cede & Co., as nominee for The Depository Trust Company, or DTC. Beneficial interests in the convertible debentures will generally be evidenced by, and transfers thereof will be effected only through, records maintained by the participants in DTC.
Governing Law		New York.
U.S. Federal Income Tax Treatment		We intend to take the position that the convertible debentures will be classified as our indebtedness for all U.S. federal tax purposes. The convertible debentures are novel financial instruments and there is no statutory, judicial or administrative authority that directly addresses the U.S. federal income tax treatment of securities similar to the convertible debentures. Thus, no assurance can be given that the Internal Revenue Service (the “IRS”) or a court will agree with this characterization. We agree, and by purchasing a convertible debenture, you will agree (except with respect to withholding as provided under “Certain U.S. Federal Income and Estate Tax Considerations — Non-U.S. Holders — Payments of Interest”) to treat the convertible debentures as indebtedness for all U.S. federal tax purposes. If the IRS were to successfully challenge the characterization of the convertible debentures as indebtedness, interest payments on the convertible debentures would be treated for such purposes as dividends to the extent of our current or accumulated earnings and profits and non-U.S. holders would be subject to withholding tax on such payments. See “Certain U.S. Federal Income and Estate Tax Considerations.” Accordingly, an investment in the convertible debentures may not be suitable for non-U.S. holders. Non-U.S. holders should consult their tax advisors regarding the U.S. federal income tax consequences of an investment in the convertible debentures.

		(Audited)												(Unaudited)
		Year				Year				Year				Nine Months				Nine Months
		Ended				Ended				Ended				Ended				Ended
		December 31,				December 31,				December 31,				September 30,				September 30,
		2003				2004				2005				2005				2006
		(Dollars in thousands, except share and per share data)
Results of Operations Data:
Revenues:
Sales		$	2,729,323			$	3,545,027			$	4,545,323			$	3,343,620			$	3,805,838
Other revenues			85,973				86,555				99,130				66,156				87,348
Total revenues			2,815,296				3,631,582				4,644,453				3,409,776				3,893,186
Costs and expenses			2,670,510				3,384,884				4,126,070				3,048,779				3,373,246
Operating profit		$	144,786			$	246,698			$	518,383			$	360,997			$	519,940
Interest expense			98,540				96,793				102,939				76,088				79,130
Early debt extinguishment costs			53,513				1,751				—				—				—
Interest income			(4,086	)			(4,917	)			(10,641	)			(6,401	)			(6,026	)
Income tax provision (benefit)			(47,708	)			(26,437	)			960				29,300				10,905
Minority interests			3,035				1,282				2,472				1,526				10,267
Income from continuing operations		$	41,492			$	178,226			$	422,653			$	260,484			$	425,664
Loss from discontinued operations			—				(2,839	)			—				—				—
Cumulative effect of accounting changes			(10,144	)			—				—				—				—
Net income		$	31,348			$	175,387			$	422,653			$	260,484			$	425,664
Basic earnings per share from continuing operations		$	0.19			$	0.72			$	1.62			$	1.00			$	1.61
Diluted earnings per share from continuing operations		$	0.19			$	0.70			$	1.58			$	0.97			$	1.58
Weighted average shares used in calculating basic earnings per share			213,638,084				248,732,744				261,519,424				261,591,722				263,631,134
Weighted average shares used in calculating diluted earnings per share			219,342,512				254,812,632				268,013,476				267,711,408				269,320,801
Dividends declared per share		$	0.11			$	0.13			$	0.17			$	0.1225			$	0.18
Other Data:
Net cash provided by (used in):
Operating activities		$	188,861			$	283,760			$	702,759			$	422,169			$	434,298
Investing activities			(192,280	)			(705,030	)			(584,202	)			(343,079	)			(777,817	)
Financing activities			48,598				693,404				(4,915	)			10,015				157,646
Tons sold (unaudited, in millions):
United States			201.9				221.1				231.6				172.4				176.3
Australia			1.3				6.1				8.3				6.0				6.6
Operating profit (unaudited):
United States		$	143,438			$	209,700			$	353,405			$	285,511			$	361,348
Australia			1,348				36,998				164,978				75,486				158,592
Depreciation, depletion and amortization (unaudited):
United States		$	233,455			$	261,060			$	285,990			$	210,712			$	233,385
Australia			881				9,099				30,124				21,709				29,718
Adjusted EBITDA (1) (unaudited):
United States		$	408,053			$	508,872			$	667,816			$	515,824			$	620,022
Australia			2,225				50,372				202,582				101,345				188,932
Capital expenditures (unaudited):
United States		$	155,050			$	132,279			$	298,969			$	174,389			$	245,013
Australia			1,393				19,665				85,335				53,950				47,431
Federal coal lease expenditures		$	—			$	114,653			$	118,364			$	118,364			$	178,193
Purchase of mining assets			—				—				141,195				56,500				—
Ratio of earnings to fixed charges(2)			0.98				2.04				3.86				3.63				4.96
Balance Sheet Data (at end of period):
Total assets		$	5,280,265			$	6,178,592			$	6,852,006			$	6,654,795			$	7,228,537
Total debt			1,196,539				1,424,965				1,405,506				1,407,294				1,702,603
Total stockholders’ equity			1,132,057				1,724,592				2,178,467				2,037,275				2,369,632

(1)		Adjusted EBITDA is defined as income from continuing operations before deducting early debt extinguishment costs, net interest expense, income taxes, minority interests, asset retirement obligation expense and depreciation, depletion and amortization. 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. We believe that the amounts shown for Adjusted EBITDA as presented in this prospectus supplement are not materially different from the amounts calculated under the definition of Consolidated Cash Flow used in the indentures for our existing senior notes and in calculating Consolidated EBITDA under our senior unsecured credit facility, such measures being necessary to calculate our Fixed Charge Coverage Ratio and Consolidated Leverage Ratio. In order to incur debt under our existing indentures, the Fixed Charge Coverage Ratio must be at least 2.0 to 1.0, and under the senior unsecured credit facility we must maintain a Consolidated Leverage Ratio of 3.75x for each period of four consecutive fiscal quarters ending on or prior to December 31, 2007, 3.50x for each period of four consecutive fiscal quarters ending after January 1, 2008 and on or prior to December 31, 2008 and 3.25x for each period of four consecutive fiscal quarters ending after January 1, 2009 and thereafter, as tested at the end of each such four consecutive fiscal quarter period. Adjusted EBITDA is not a recognized term under U.S. generally accepted accounting principles (“GAAP”) and 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.

		Year				Year				Year				Nine Months				Nine Months
		Ended				Ended				Ended				Ended				Ended
		December 31,				December 31,				December 31,				September 30,				September 30,
		2003				2004				2005				2005				2006
		(Dollars in thousands, unaudited)
Income from continuing operations		$	41,492			$	178,226			$	422,653			$	260,484			$	425,664
Income tax provision (benefit)			(47,708	)			(26,437	)			960				29,300				10,905
Depreciation, depletion and amortization			234,336				270,159				316,114				232,421				263,103
Asset retirement obligation expense			31,156				42,387				35,901				23,751				25,911
Interest expense			98,540				96,793				102,939				76,088				79,130
Early debt extinguishment costs			53,513				1,751				—				—				—
Interest Income			(4,086	)			(4,917	)			(10,641	)			(6,401	)			(6,026	)
Minority interests			3,035				1,282				2,472				1,526				10,267
Adjusted EBITDA		$	410,278			$	559,244			$	870,398			$	617,169			$	808,954

(2)		Earnings were insufficient to cover fixed charges by $3.2 million for the year ended December 31, 2003. Excluding $53.5 million of early debt extinguishment costs incurred for the year ended December 31, 2003, the ratio of earnings to fixed charges would have been 1.34x for such year.

 

An investment in our convertible debentures involves risks. Before deciding to invest in the convertible debentures, you should carefully consider, in addition to the other information contained in or incorporated by reference into this prospectus supplement, the following risk factors:

 

Risks Related to our Business

 

If a substantial portion of our long-term coal supply agreements terminate, our revenues and operating profits could suffer if we were unable to find alternate buyers willing to purchase our coal on comparable terms, including price, to those in our contracts.

 

Most of our sales are made under coal supply agreements, which are important to the stability and profitability of our operations. The execution of a satisfactory coal supply agreement is frequently the basis on which we undertake the development of coal reserves required to be supplied under the contract. For the year ended December 31, 2005, 90% of our sales volume was sold under long-term coal supply agreements. At December 31, 2005, our coal supply agreements had remaining terms ranging from one to 19 years and an average volume-weighted remaining term of approximately 3.2 years.

 

Many of our coal supply agreements contain provisions that permit the parties to adjust the contract price upward or downward at specified times. We may adjust these contract prices based on inflation or deflation and/or changes in the factors affecting the cost of producing coal, such as taxes, fees, royalties and changes in the laws regulating the mining, production, sale or use of coal. In a limited number of contracts, failure of the parties to agree on a price under those provisions may allow either party to terminate the contract. We sometimes experience a reduction in coal prices in new long-term coal supply agreements replacing some of our expiring contracts. Coal supply agreements also 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. Failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or termination of the contracts. Moreover, some of these agreements permit the customer to terminate the contract if transportation costs, which our customers typically bear, increase substantially. In addition, some of these contracts 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.

 

The operating profits we realize from coal sold under supply agreements depend on a variety of factors. In addition, price adjustment and other provisions may increase our exposure to short-term coal price volatility provided by those contracts. If a substantial portion of our coal supply agreements were modified or terminated, we could be materially adversely affected to the extent that we are unable to find alternate buyers for our coal at the same level of profitability. Market prices for coal vary by mining region and country. As a result, we cannot predict the future strength of the coal market overall or by mining region and cannot assure you that we will be able to replace existing long-term coal supply agreements at the same prices or with similar profit margins when they expire. In addition, one of our largest coal supply agreements is the subject of ongoing litigation and arbitration.

 

The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues.

 

For the year ended December 31, 2005, we derived 21% of our total coal revenues from sales to our five largest customers. At December 31, 2005, we had 79 coal supply agreements with these customers expiring at various times from 2006 to 2011. We are currently discussing the extension of existing agreements or entering into new long-term agreements with some of these customers, but these negotiations may not be successful and those customers may not continue to purchase coal from us under long-term coal supply agreements. 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 financial condition and results of operations could suffer materially.

We had been supplying coal to the Mohave Generating Station pursuant to a long-term coal supply agreement through our Black Mesa Mine. The mine suspended its operations on December 31, 2005, and the coal supply agreement expired on that date. As a part of an alternate dispute resolution, our subsidiary, Peabody Western is participating in mediation with the Navajo Nation, the Hopi Tribe and the owners of the Mohave Generating Station and the Navajo Generating Station to resolve the complex issues surrounding groundwater and other disputes involving the two generating stations. On June 19, 2006, the owners of the Mohave Generating Station announced that they were halting efforts to reopen the plant and that they would try to sell it. There is no assurance that the Mohave Generating Station will resume operations. The Mohave plant was the sole customer of the Black Mesa Mine, which sold 4.6 million tons of coal in 2005. During 2005, the mine generated $29.8 million of Adjusted EBITDA, which represented 3.4% of our total 2005 Adjusted EBITDA of $870.4 million.

 

If transportation for our coal becomes unavailable or uneconomic for our customers, our ability to sell coal could suffer.

 

Transportation costs represent a significant portion of the total cost of coal and the cost of transportation is a critical factor in a customer’s purchasing decision. Increases in transportation costs and the lack of sufficient rail and port capacity could lead to reduced coal sales. As of December 31, 2005, certain coal supply agreements, which account for less than 5% of our tons sold, permit the customer to terminate the contract if the cost of transportation increases by an amount over specified levels in any given 12-month period.

 

Coal producers depend upon rail, barge, trucking, overland conveyor and ocean-going vessels 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 or other events could temporarily impair our ability to supply coal to our customers and thus could adversely affect our results of operations. For example, two primary railroads serve the Powder River Basin mines. Due to the high volume of coal shipped from all Powder River Basin mines, the loss of access to rail capacity could create temporary congestion on the rail systems servicing that region.

 

Risks inherent to mining could increase the cost of operating our business.

 

Our mining operations are subject to conditions that can impact the safety of our workforce, or delay coal deliveries or increase the cost of mining at particular mines for varying lengths of time. These conditions include fires and explosions from methane gas or coal dust; accidental minewater discharges; weather, flooding and natural disasters; unexpected maintenance problems; key equipment failures; variations in coal seam thickness; variations in the amount of rock and soil overlying the coal deposit; variations in rock and other natural materials and variations in geologic conditions. We maintain insurance policies that provide limited coverage for some of these risks, although there can be no assurance that these risks would be fully covered by our insurance policies. Despite our efforts, significant mine accidents could occur and have a substantial impact.

 

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, state and local authorities regulate the coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability. In addition, significant legislation mandating specified benefits for retired coal miners affects our industry. 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. 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. The possibility exists that new legislation and/or regulations and orders related to the environment or employee health and safety may be adopted and may materially adversely affect our mining operations, our cost structure and/or

our customers’ ability to use coal. New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs. 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 purchaser’s plant or results in specified increases in the cost of coal or its use. These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations.

 

In addition, the United States, Australia and more than 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which addresses emissions of greenhouse gases, such as carbon dioxide. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations. Although the specific emission targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. Although the United States has not ratified the emission targets and no comprehensive regulations focusing on greenhouse gas emissions are in place in the U.S., these restrictions, whether through ratification of the emission targets or other efforts to stabilize or reduce greenhouse gas emissions, could adversely affect the price and demand for coal. According to the Department of Energy’s Energy Information Administration, “Emissions of Greenhouse Gases in the United States 2003,” coal accounts for 31% of greenhouse gas emissions in the United States, and efforts to control greenhouse gas emissions could result in reduced use of coal if electricity generators switch to lower carbon sources of fuel. Legislation was introduced in Congress in 2006 to reduce greenhouse gas emissions in the United States. Such or similar federal legislative action could be taken in 2007 or later years. In addition, a number of states in the United States have taken steps to regulate greenhouse gas emissions. For example, seven northeastern states (New York, Vermont, New Hampshire, Maine, Connecticut, Delaware and New Jersey) entered into the Regional Greenhouse Gas Initiative (RGGI) agreement in December 2005 to reduce carbon dioxide emissions from power plants, and in August 2006 finalized a model rule to help implement the agreement; Maryland has approved legislation that may result in its joining the RGGI in 2007; the California legislature in August 2006 approved legislation supported by the governor of California allowing the imposition of statewide caps on and cuts in carbon dioxide emissions; and Arizona’s governor signed an executive order in September 2006 that calls for the state to reduce carbon dioxide emissions. Although the manner in which such state limits will be implemented is uncertain, further developments in connection with legislation, regulations or other limits on carbon dioxide emissions could have a material adverse effect on our financial condition or results of operations.

 

A number of laws, including in the U.S. the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund), impose liability relating to contamination by hazardous substances. Such liability may involve the costs of investigating or remediating contamination and damages to natural resources, as well as claims seeking to recover for property damage or personal injury caused by hazardous substances. Such liability may arise from conditions at formerly as well as currently owned or operated properties, and at properties to which hazardous substances have been sent for treatment, disposal, or other handling. Liability under CERCLA and similar state statutes is without regard to fault, and typically is joint and several, meaning that a person may be held responsible for more than its share, or even all of, the liability involved. Our mining operations involve some use of hazardous materials. In addition, we have accrued for liability arising out of contamination associated with Gold Fields Mining, LLC (“Gold Fields”), a dormant, non-coal-producing subsidiary of ours that was previously managed and owned by Hanson PLC, or with Gold Fields’ former affiliates. A predecessor owner of ours, Hanson PLC transferred ownership of Gold Fields to us in the February 1997 spin-off of its energy business. Gold Fields is currently a defendant in several lawsuits and has received notices of several other potential claims arising out of lead contamination from mining and milling operations it conducted in northeastern Oklahoma. Gold Fields is also involved in investigating or remediating a number of other contaminated sites. Although we have accrued for many of these liabilities known to us, the amounts of other potential losses cannot be estimated. Significant uncertainty exists as to whether claims will be pursued against Gold Fields in all cases, and where they are pursued, the amount of the eventual costs and liabilities, which could be greater or less than our accrual. Although we believe many

of these liabilities are likely to be resolved without a material adverse effect on us, future developments, such as new information concerning areas known to be or suspected of being contaminated for which we may be responsible, the discovery of new contamination for which we may be responsible, or the inability to share costs with other parties that may be responsible for the contamination, could have a material adverse effect on our financial condition or results of operations.

 

Our expenditures for postretirement benefit and pension obligations could be materially higher than we have predicted if our underlying assumptions prove to be incorrect.

 

We provide postretirement health and life insurance benefits to eligible union and non-union employees. We calculated the total accumulated postretirement benefit obligation under Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” which we estimate had a present value of $1,034.3 million as of December 31, 2005, $75.0 million of which was a current liability. We have estimated these unfunded obligations based on assumptions described in the notes to our audited consolidated financial statements. If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially higher. Moreover, regulatory changes could increase our obligations to provide these or additional benefits.

 

We are party to an agreement with the Pension Benefit Guaranty Corporation (the “PBGC”) and TXU Europe Limited, an affiliate of our former parent corporation, under which we are required to make specified contributions to two of our defined benefit pension plans and to maintain a $37.0 million letter of credit in favor of the PBGC. If we or the PBGC give notice of an intent to terminate one or more of the covered pension plans in which liabilities are not fully funded, or if we fail to maintain the letter of credit, the PBGC may draw down on the letter of credit and use the proceeds to satisfy liabilities under the Employee Retirement Income Security Act of 1974, as amended. The PBGC, however, is required to first apply amounts received from a $110.0 million guaranty in place from TXU Europe Limited in favor of the PBGC before it draws on our letter of credit. On November 19, 2002, TXU Europe Limited was placed under the administration process in the United Kingdom (a process similar to bankruptcy proceedings in the United States) and continues under this process.

 

In addition, certain of our subsidiaries participate in two defined benefit multi-employer pension funds that were established as a result of collective bargaining with the United Mine Workers of America (the “UMWA”) pursuant to the National Bituminous Coal Wage Agreement as periodically negotiated. The UMWA 1950 Pension Plan provides pension and disability pension benefits to qualifying represented employees retiring from a participating employer where the employee last worked prior to January 1, 1976. This is a closed group of beneficiaries with no new entrants. The UMWA 1974 Pension Plan provides pension and disability pension benefits to qualifying represented employees retiring from a participating employer where the employee last worked after December 31, 1975.

 

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, higher medical and drug costs or other funding deficiencies.

 

The United Mine Workers of America Combined Fund was created by federal law in 1992. This multi-employer fund provides health care 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 health care costs, offset by the mortality curve in this aging population of beneficiaries. Another fund, the 1992 Benefit Plan created by the same federal law in 1992, provides benefits to qualifying retired former employees of bankrupt companies who have defaulted in providing their former employees with retiree medical benefits. 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 under their employer’s plan who retired prior to October 1, 1994. A third fund, the 1993 Benefit Fund, was established through collective bargaining and provides benefits to qualifying retired 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.

 

Based upon the enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, we estimated future cash savings which allowed us to reduce our projected postretirement benefit obligations and related expense. Failure to achieve these estimated future savings under all benefit plans could adversely affect our financial condition, results of operations and cash flows.

 

A decrease in the availability or increase in costs of key supplies or commodities such as diesel fuel, steel, explosives and tires could decrease our anticipated profitability.

 

Our mining operations require a reliable supply of replacement parts, explosives, fuel, tires, steel-related products (including roof control) and lubricants. If the cost of any of these inputs increased significantly, or if a source for these supplies or mining equipment were unavailable to meet our replacement demands, our profitability could be reduced from our current expectations. Recent consolidation of suppliers of explosives has limited the number of sources for these materials, and our current supply of explosives is concentrated with one supplier. Further, our purchases of some items of underground mining equipment are concentrated with one principal supplier. In the past year, industry-wide demand growth has exceeded supply growth for certain surface and underground mining equipment and off-the-road tires. As a result, lead times for some items have increased significantly.

 

Our future success depends upon our ability to continue acquiring and developing coal 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 reserves. Furthermore, we may not be able to mine all of our reserves as profitably as we do at our current operations. Our future success depends upon our conducting successful exploration and development activities or acquiring properties containing economically recoverable reserves. Our current strategy includes increasing our reserves through acquisitions of government and other leases and producing properties and continuing to use our existing properties. The federal government also leases natural gas and coalbed methane reserves in the West, including in the Powder River Basin. Some of these natural gas and coalbed methane reserves are located on, or adjacent to, some of our Powder River Basin reserves, potentially creating conflicting interests between us and lessees of those interests. Other lessees’ rights relating to these mineral interests could prevent, delay or increase the cost of developing our coal reserves. These lessees may also seek damages from us based on claims that our coal mining operations impair their interests. Additionally, the federal government limits the amount of federal land that may be leased by any company to 150,000 acres nationwide. As of December 31, 2005, we leased a total of 62,330 acres from the federal government. The limit could restrict our ability to lease additional federal lands.

 

Our planned mine development projects and acquisition activities may not result in significant additional reserves and we may not have continuing success developing additional mines. Most of our mining operations are conducted on properties owned or leased by us. Because title to most of our leased properties and mineral rights are not thoroughly verified until a permit to mine the property is obtained, our right to mine some of our reserves may be materially adversely affected if defects in title or boundaries exist. In addition, in order to develop our reserves, we must receive various governmental permits. We cannot predict whether we will continue to receive the permits necessary for us to operate profitably in the future. We may not be able to negotiate new leases from the government or from private parties or obtain mining contracts for properties containing additional reserves or maintain our leasehold interest in properties on which mining operations are not commenced during the term of the lease. From time to time, we have experienced litigation with lessors of our coal properties and with royalty holders.

 

A decrease in the price or our production of metallurgical coal could decrease our anticipated profitability.

 

We have annual capacity to produce approximately 12 to 14 million tons of metallurgical coal (excluding the additional capacity obtained in the Excel Acquisition as described in “Prospectus Supplement Summary — Recent Developments”). Prices for metallurgical coal at the end of 2005 and during 2006 are near historically high levels. As a result, our projected margins from these sales have increased significantly, and will represent

a larger percentage of our overall revenues and profits in the future. To the extent we experience either production or transportation difficulties that impair our ability to ship metallurgical coal to our customers at anticipated levels, our profitability will be reduced in 2006.

 

After the first quarter of 2007, the majority of our metallurgical coal production has not yet been priced. As a result, a decrease in metallurgical coal prices could decrease our profitability.

 

Our financial performance could be adversely affected by our substantial debt.

 

Our financial performance could be affected by our substantial indebtedness. As of September 30, 2006, on a pro forma basis giving effect to (i) the convertible debentures offered hereby, (ii) the senior notes issued on October 12, 2006, (iii) borrowings under our senior unsecured credit facility and (iv) the application of the estimated net proceeds of these offerings and borrowings in connection therewith, including the consummation of the Excel Acquisition, we would have had approximately $3,299.7 million of indebtedness outstanding on a consolidated basis. The indentures governing the convertible debentures offered hereby and our recently offered senior notes do not limit the amount of indebtedness that we may issue, and the indentures governing our other senior notes permit the incurrence of additional indebtedness.

 

The degree to which we are leveraged could have important consequences, including, but not limited to:

 

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The senior unsecured credit facility and the indentures governing certain of our notes restrict our ability to sell assets and use the proceeds from the sales. We may not be able to consummate those sales or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

 

The covenants in our senior unsecured credit facility and the indentures governing our senior notes impose restrictions that may limit our operating and financial flexibility.

 

Our senior unsecured credit facility, the indentures governing our senior notes and the convertible debentures offered hereby and the instruments governing our other indebtedness contain a number of significant restrictions and covenants that limit our ability and our subsidiaries’ ability to:

 

 

 

Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with the financial covenants contained in our senior unsecured credit facility. If we violate these covenants and are unable to obtain waivers from our lenders, our debt under these agreements would be in default and could be accelerated by our lenders. If our indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, on terms that are acceptable to us or at all. If our debt is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of the convertible debentures and may make it more difficult for us to successfully execute our business strategy and compete against companies who are not subject to such restrictions.

 

An inability of contract miner or brokerage sources to fulfill the delivery terms of their contracts with us could reduce our profitability.

 

In conducting our trading, brokerage and mining operations, we utilize third party sources of coal production, including contract miners and brokerage sources, to fulfill deliveries under our coal supply agreements. Recently, certain of our brokerage sources and contract miners have experienced adverse geologic mining and/or financial difficulties that have made their delivery of coal to us at the contractual price difficult or uncertain. Our profitability or exposure to loss on transactions or relationships such as these is dependent upon the reliability (including financial viability) and price of the third-party supply, our obligation to supply coal to customers in the event that adverse geologic mining conditions restrict deliveries from our suppliers, our willingness to participate in temporary cost increases experienced by our third-party coal suppliers, our ability to pass on temporary cost increases to our customers, the ability to substitute, when economical, third-party coal sources with internal production or coal purchased in the market, and other factors.

 

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.

 

We could be negatively affected if we fail to maintain satisfactory labor relations.

 

As of December 31, 2005, we had approximately 8,300 employees. As of December 31, 2005, approximately 39% of our hourly employees were represented by unions and they generated 19% of our 2005 coal production. Relations with our employees and, where applicable, organized labor are important to our success. The labor contract for the majority of our represented employees expires on December 31, 2006. We could incur the risk of strikes and higher labor costs if the labor negotiations are not completed on mutually acceptable terms. In addition, the UMWA has identified Peabody as a target for union organizing activities.

 

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 were to become unionized, we could incur an increased risk of work stoppages, reduced productivity and higher labor costs.

 

United States

 

Approximately 64% of our U.S. miners are non-union and are employed in the states of Wyoming, Colorado, Indiana, New Mexico, Illinois and Kentucky. The UMWA represented approximately 30% of our subsidiaries’ hourly employees, who generated 14% of our domestic production during the year ended December 31, 2005. An additional 6% of our hourly employees are represented by labor unions other than the

UMWA. These employees generated 2% of our production during the year ended December 31, 2005. Hourly workers at our mine in Arizona are represented by the UMWA under the Western Surface Agreement of 2000, which is effective through September 1, 2007. Our union labor east of the Mississippi River is primarily represented by the UMWA and the majority of union mines are subject to the National Bituminous Coal Wage Agreement. The current five-year labor agreement is effective through December 31, 2006. Our subsidiaries withdrew from the Bituminous Coal Operators’ Association in early 2006 and will be negotiating their own labor agreement with the UMWA for mines located east of the Mississippi River.

 

Australia

 

The Australian coal mining industry is highly unionized and the majority of workers employed at our Australian Mining Operations are members of trade unions. The Construction Forestry Mining and Energy Union represents our hourly production employees. Our Australian hourly employees are approximately 4% of our hourly workforce and generated 4% of our total production in the year ended December 31, 2005. Negotiations are underway to renew the labor agreement at our Wilkie Creek Mine. The Eaglefield Mine operates under a labor agreement that expires in May 2007. The Burton and North Goonyella Mines operate under agreements due to expire in 2008.

 

Our operations could be adversely affected if we fail to appropriately secure our obligations.

 

U.S. federal and state laws and Australian laws require us to secure certain of our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation, to secure coal lease obligations and to satisfy other miscellaneous obligations. The primary method for us to meet those obligations is to post a corporate guarantee (i.e. self bond) or to provide a third-party surety bond. As of September 30, 2006, we had $692.7 million of self bonds in place primarily for our reclamation obligations. As of September 30, 2006, we also had outstanding surety bonds with third parties of $487.0 million, of which $347.2 million was for post-mining reclamation, $80.1 million was for coal lease obligations and $59.7 million was for workers’ compensation and other obligations. 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. 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 the following:

 

 

Our ability to self bond reduces our costs of providing financial assurances. To the extent we are unable to maintain our current level of self bonding, due to legislative or regulatory changes or changes in our financial condition, our costs would increase.

 

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 assure you that key personnel will continue to be employed by us or that we will be able to attract and retain qualified personnel in the future. We 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.

 

Due to the current demographics of our mining workforce, a high portion of our current hourly employees are eligible to retire over the next decade. Failure to attract new employees to the mining workforce 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 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. Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Future 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 may materially adversely affect our operations. 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. It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to collect payments from our customers could be impaired if their creditworthiness deteriorates.

 

Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers. Our customer base has changed with deregulation as utilities have sold power plants to their non-regulated affiliates or third parties. These new power plant owners or other customers may have credit ratings that are below investment grade. If deterioration of the creditworthiness of our customers occurs, our $225.0 million accounts receivable securitization program and our business could be adversely affected.

 

Our certificate of incorporation and by-laws include provisions that may discourage a takeover attempt.

 

Provisions contained in our certificate of incorporation and by-laws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our by-laws and certificate of incorporation impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. For example, a change of control of our company may be delayed or deterred as a result of the stockholders’ rights plan adopted by our board of directors. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control.

 

We may be unable to successfully integrate the acquired Excel operations and realize the full cost savings we anticipate.

 

The process of integrating the operations of the Excel coal mines could cause an interruption of, or loss of momentum in, the activities of the business or the development of new mines. Among the factors considered by our board of directors in approving the Excel Acquisition were anticipated cost savings and synergies that could result from such transaction. We cannot give any assurance that these savings and synergies will be realized within the time periods contemplated or at the expected costs or that they will be realized at all.

 

There may be unknown environmental or other risks inherent in the Excel Acquisition.

 

We may not be aware of all of the risks associated with the Excel Acquisition. Any discovery of adverse information concerning the coal mines acquired by the Excel Acquisition could have a material adverse effect on our business, financial condition and results of operations. We will need to make capital expenditures that may be significant to maintain the assets we acquired by the Excel Acquisition and to comply with regulatory requirements, including environmental laws.

Risks Related to the Convertible Debentures and Perpetual Preferred Stock

 

We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to pay principal and interest on and to refinance our debt, including the convertible debentures, and to make payments in respect of the perpetual preferred stock, depends upon the operating performance of our subsidiaries, which may be affected by, among other things, general economic, financial, competitive, legislative, regulatory and other factors, many of which are beyond our control.

 

Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs for at least the next year, barring any unforeseen circumstances that are beyond our control. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities or otherwise in an amount sufficient to enable us to pay our indebtedness, including the convertible debentures, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the convertible debentures, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the convertible debentures, on commercially reasonable terms, on terms acceptable to us or at all.

 

The convertible debentures will be subordinated to substantially all of our other debt.

 

The convertible debentures will be our unsecured obligations, ranking junior to all existing and future senior indebtedness (including all existing subordinated indebtedness but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business) of Peabody Energy Corporation, as described under “Description of the Convertible Debentures — Subordination.” This means that no direct or indirect payment, in cash, property or securities, by set-off or otherwise, may be made or agreed to be made on account of the convertible debentures or interest thereon, or in respect of any payment, redemption, retirement, purchase or other acquisition of the convertible debentures, if we default in the payment of any principal, or premium, if any, or interest on any senior indebtedness, or if an event of default occurs with respect to any senior indebtedness permitting the holders to accelerate the maturity thereof and written notice of such event of default, requesting that payments on the convertible debentures cease, is given to us by the holders of such senior indebtedness, unless and until such default in payment or event of default has been cured or waived or ceases to exist, provided that the subordination provisions will not limit the rights of the holders of the convertible debentures to convert their convertible debentures into perpetual preferred stock and common stock (but not cash). In addition, in connection with any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relating to us, our creditors or our property and in certain other circumstances, payments that would otherwise be made on the convertible debentures will generally be paid to the holders of senior indebtedness, or their representatives, in accordance with the priorities existing among these creditors at that time until the senior indebtedness is paid in full.

 

As of September 30, 2006, on a pro forma basis giving effect to (i) the convertible debentures offered hereby, (ii) the senior notes issued on October 12, 2006, (iii) borrowings under our senior unsecured credit facility and (iv) the application of the estimated net proceeds of these offerings and borrowings in connection therewith, including the consummation of the Excel Acquisition, our consolidated indebtedness, substantially all of which will rank senior to our obligations under the convertible debentures, aggregated approximately $3,299.7 million. The indenture places no limitation on the amount of additional indebtedness that we or any of our subsidiaries may incur. We expect to incur additional indebtedness in the future.

 

Due to the subordination provisions contained in the indenture governing the convertible debentures, in the event of our bankruptcy, insolvency or receivership, funds which we might otherwise use to pay the holders of the convertible debentures would instead be used to pay the holders of our indebtedness until such indebtedness was paid in full. As a result of such payments, the holders of such other indebtedness would likely recover more, ratably, than the holders of the convertible debentures in the event of our bankruptcy, insolvency or receivership, and holders of the convertible debentures might not receive anything at all.

We will be dependent on dividends and other discretionary distributions from our subsidiaries to make payments in respect of the convertible debentures and the perpetual preferred stock. The convertible debentures and the perpetual preferred stock will be structurally subordinated to all indebtedness of our subsidiaries.

 

We will be dependent on dividends and other discretionary distributions from our subsidiaries to make payments in respect of the convertible debentures and the perpetual preferred stock. We derive substantially all of our revenues from our subsidiaries. All obligations of our subsidiaries would have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us. As of September 30, 2006, on a pro forma basis giving effect to (i) the convertible debentures offered hereby, (ii) the senior notes issued on October 12, 2006, (iii) borrowings under our senior unsecured credit facility and (iv) the application of the estimated net proceeds of these offerings and borrowings in connection therewith, including the consummation of the Excel Acquisition, our subsidiaries would have had total third party indebtedness and other liabilities (including trade payables and accrued expenses) of approximately $1,169.0 million.

 

We also have joint ventures and subsidiaries in which we own less than 100% of the equity so that, in addition to the structurally senior claims of creditors of those entities, the equity interests of our joint venture partners or other shareholders in any dividend or other distribution made by these entities would need to be satisfied on a basis proportionate to our interest. These joint ventures and less-than-wholly-owned subsidiaries may also be subject to contractual or regulatory restrictions that limit their ability to distribute cash to us and, as a result, we may not be able to access their cash flows to help service the convertible debentures or to pay dividends on the perpetual preferred stock.

 

You will not have any claim as a creditor against our subsidiaries, and indebtedness and other liabilities, including trade payables, whether secured or unsecured, of our subsidiaries will effectively be senior to your claims against those subsidiaries.

 

Despite our and our subsidiaries’ current level of indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial indebtedness.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Our senior unsecured credit facility provides borrowing capacity of $2.75 billion, consisting of a $1.8 billion revolving credit facility and a $950.0 million term loan facility. The term loan facility consists of a $440.0 million tranche, which has been drawn to replace our prior term loan facility, and a $510.0 million delayed draw term loan sub-facility, which has been fully drawn to provide a portion of the funding for the Excel Acquisition. If we incur any additional indebtedness that ranks equal to the convertible debentures, the holders of such indebtedness will be entitled to share ratably with the holders of the convertible debentures in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds paid to you. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

 

We may elect, or be required, to extend the date scheduled for payments of interest in respect of the convertible debentures and dividends in respect of the perpetual preferred stock and funds for those payments may be restricted.

 

We may defer interest payments on the convertible debentures in our sole discretion (subject to the limitations described under “Description of the Convertible Debentures — Option to Defer Interest Payments”) and dividends in respect of the perpetual preferred stock will be payable only when, as and if declared by our board of directors.

 

In addition, if we fail to achieve specified leverage and interest coverage ratios, a mandatory trigger event will occur and we will be required to defer interest payments on the convertible debentures, and prohibited from declaring dividends in respect of the perpetual preferred stock, except to the extent that such payments are funded through the sale of qualifying warrants or qualifying preferred stock in accordance with and subject to the warrant and preferred stock settlement mechanism. We are not required to sell qualifying warrants or qualifying preferred stock, and we will not do so, during any market disruption event. In addition, we will not be required to sell qualifying warrants or permitted to sell qualifying preferred stock to the extent that doing

so would exceed the warrant cap or the preferred stock cap described under “Description of the Convertible Debentures — Warrant and Preferred Stock Settlement Mechanism.”

 

Our ability to raise proceeds to pay interest on the convertible debentures or dividends on the perpetual preferred stock by selling qualifying warrants or qualifying preferred stock will depend on, among other things, market conditions at the time, our financial performance and a variety of other factors beyond our control, including our ability to obtain any required consents or approvals, such as any corporate, governmental or regulatory authorization that may be required. Accordingly, there could be circumstances where we would wish to pay interest on the convertible debentures or dividends on the perpetual preferred stock and sufficient cash is available for that purpose, but we may not because we have been unable to obtain proceeds from sales of qualifying warrants or qualifying preferred stock sufficient for that purpose. In addition, our ability to pay dividends on the perpetual preferred stock is further restricted by Delaware law, which limits the funds legally available for that purpose, as described under “Description of the Perpetual Preferred Stock — Limitations on Declaration of Dividends.” Restrictions on dividend payments may also be imposed by our present or future debt instruments.

 

During any deferral period in respect of the convertible debentures, interest will accrue and compound on the convertible debentures at the applicable interest rate, though there is no guarantee that such compounded interest will sufficiently compensate you for your loss as a result of us not making scheduled interest payments, or that we will be able to pay deferred interest and such compounded interest at the time we are no longer permitted to defer payment. See “Description of the Convertible Debentures — Option to Defer Interest Payments.” Dividends in respect of the perpetual preferred stock are not subject to compounding.

 

Your rights with respect to deferred interest in respect of the convertible debentures or accumulated dividends in respect of the perpetual preferred stock will be limited in the event of our bankruptcy, insolvency or receivership.

 

In the event of our bankruptcy, insolvency or receivership, whether voluntary or not, any claim in respect of interest that accrued during a mandatory interest deferral period in excess of two years of accrued and unpaid interest (including any compounded interest thereon) on the convertible debentures will be extinguished. In addition, in the event of our liquidation, winding up or dissolution, whether voluntary or not, holders of perpetual preferred stock will have no claim in respect of amounts representing dividends that accumulated while a mandatory trigger event occurred and was continuing, to the extent the amount of such dividends exceeds two years of accumulated and unpaid dividends on the perpetual preferred stock.

 

If the holders of the convertible debentures or our perpetual preferred stock, as applicable, amend or waive our covenants to mandatorily defer interest or refrain from declaring a dividend under certain circumstances or to pay interest or dividends only with proceeds from the sale of qualifying warrants or qualifying preferred stock while a mandatory trigger event continues, our credit ratings may be negatively affected.

 

The provisions of the convertible debentures and (other than as required by Delaware law) the provisions of the perpetual preferred stock that limit the circumstances under which we may pay interest or dividends, or the funds we may use to do so, may be amended, and compliance with these covenants may be waived, by the holders of a majority of the aggregate principal amount of the convertible debentures or a majority of the aggregate liquidation preference of the perpetual preferred stock, as the case may be. No holder of our senior indebtedness or senior subordinated indebtedness will have the right to enforce these covenants (although the capital replacement covenant described under “Capital Replacement — The Capital Replacement Covenant” is enforceable by holders of a specified series of our long-term indebtedness that ranks senior to the convertible debentures). Although, in the short term, holders of the convertible debentures or the perpetual preferred stock may have an economic incentive to waive these covenants in order to receive current or deferred interest or dividends, as the case may be, if such covenants are waived and we pay interest or dividends other than in accordance with the terms of the relevant securities, our credit ratings could be negatively affected, which in turn, might have an adverse effect on our business and financial condition and on the market values of the convertible debentures and the perpetual preferred stock.

The convertible debentures are convertible into cash and common stock only after a notice of redemption or upon a non-stock change of control.

 

You will be entitled to convert your convertible debentures only under specified circumstances, and conversions of the convertible debentures other than after a notice of redemption or upon a non-stock change of control will be settled through the delivery of perpetual preferred stock rather than cash or common stock (except that you will be entitled to receive shares of common stock in respect of the amount, if any, by which the conversion value of the convertible debentures exceeds their principal amount). The perpetual preferred stock may trade at a discount to the convertible debentures as a result of the fact that dividends are payable in respect of the preferred stock at a lower rate than the interest payable in respect of the convertible debentures, the greater subordination of the perpetual preferred stock, discretionary nature of the declaration of dividends in respect of the perpetual preferred stock and the non-convertible nature of the perpetual preferred stock. You will only be able to convert your convertible debentures if the applicable conditions are met, and upon any conversion you may not receive the value of the shares of common stock represented by the conversion ratio applicable to the convertible debentures.

 

The trading price of the perpetual preferred stock issued upon conversion of the convertible debentures may be less than the $1,000 principal amount of the convertible debentures.

 

The dividend rate and other terms of the perpetual preferred stock received upon conversion may not be the same as the terms of similar securities issued at the time. As a result, the perpetual preferred stock may trade at prices below the $1,000 liquidation preference per share of perpetual preferred stock. Additionally, if holders convert their convertible debentures at a time when few convertible debentures have been or are being converted, there may be no liquid market for the perpetual preferred stock.

 

The price of our common stock, and therefore of the convertible debentures, may fluctuate significantly.

 

Stock markets have experienced significant price and trading volume fluctuations, and the market prices of companies in our industry have been volatile. It is impossible to predict whether the price of our common stock will rise or fall. Trading prices of our common stock will be influenced by our operating results and prospects and by economic, financial and other factors. In addition, general market conditions, including the level of, and fluctuations in, the trading prices of stocks generally, and sales of substantial amounts of common stock by us, or the perception that such sales could occur, could affect the price of our common stock and make it more difficult for us to raise funds through future offerings of equity securities. In addition, because the convertible debentures are convertible and the conversion value in relation to any conversion will depend upon the price of our common stock, volatility or depressed prices for our common stock could have a similar effect on the trading price of the convertible debentures.

 

Future sales of our preferred stock and common stock in the public market could adversely affect the trading price of our perpetual preferred stock and common stock and the value of the convertible debentures and our ability to raise funds in new stock offerings.

 

Future sales of substantial amounts of our preferred stock, our common stock or other equity-related securities in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of the perpetual preferred stock and our common stock and the value of the convertible debentures and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that future sales of equity or equity-related securities, will have on the trading price of our perpetual preferred stock or our common stock or the value of the convertible debentures.

 

If we increase the cash dividend on our common stock and an adjustment to the conversion rate results, you will generally be deemed to have received a taxable dividend without the receipt of any cash.

 

If we increase the cash dividend on our common stock and an adjustment to the conversion rate results, you will generally be deemed to have received a taxable dividend subject to U.S. federal income tax even though you have not received any cash or property. If you are a non-U.S. holder (as defined in “Certain U.S. Federal Income and Estate Tax Considerations”), such deemed dividend may be subject to U.S. federal

withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. See “Certain U.S. Federal Income and Estate Tax Considerations.”

 

We anticipate that brokers and financial institutions acting as withholding agents will withhold tax at a 30% rate (or lower treaty rate) on interest payments to non-U.S. holders of the convertible debentures.

 

Although we intend to take the position that the convertible debentures are indebtedness for U.S. federal income tax purposes, we anticipate that brokers and financial institutions acting as withholding agents will withhold tax at a 30% rate (or lower treaty rate) on interest payments on the convertible debentures paid to non-U.S. holders. Assuming the IRS does not challenge the treatment of the convertible debentures as indebtedness, non-U.S. holders should be able to claim a refund for any such withholding, provided such interest would be eligible for the portfolio interest exemption (as defined under “Certain U.S. Federal Income and Estate Tax Considerations”). If however, contrary to our position, the convertible debentures were recharacterized as equity, holders would not be able to claim any such refund and payments on the convertible debentures would generally be subject to the 30% U.S. federal withholding tax (or lower treaty rate) discussed above. See “Certain U.S. Federal Income and Estate Tax Considerations.” Accordingly, an investment in the convertible debentures may not be suitable for non-U.S. holders. Non-U.S. holders should consult their tax advisors regarding the U.S. federal income tax consequences of an investment in the convertible debentures.

 

If interest payments are deferred, holders will be required to recognize income for U.S. federal income tax purposes in advance of the receipt of cash attributable to such income, and deferral could adversely affect the trading price of the convertible debentures.

 

If interest on the convertible debentures is deferred, you will be required to recognize interest income for U.S. federal income tax purposes (in the form of original issue discount, determined on a constant yield method) before you receive the cash attributable to such income. In addition, you may not receive this cash if you sell the convertible debentures before any payments are made in satisfaction of deferred interest. See “Certain U.S. Federal Income and Estate Tax Considerations — Interest Income and Original Issue Discount” and “Certain U.S. Federal Income and Estate Tax Considerations — Sale and Retirement of Convertible Debentures.”

 

We have no current intention of exercising our right to defer payments of interest on the convertible debentures and do not expect that payments of interest on the convertible debentures will be deferred as a result of a mandatory trigger event. However, should interest on the convertible debentures be deferred, either because we exercise our right to defer interest or because of the occurrence of a mandatory trigger event, the market price of the convertible debentures is likely to be affected adversely. In addition, the existence of our right to defer payments of interest on the convertible debentures or the fact that payments of interest on the convertible debentures will be deferred upon the occurrence of a mandatory trigger event may mean that the market price for the convertible debentures may be more volatile than other securities that do not provide for this right or possibility of deferral.

 

The conversion rate of the convertible debentures may not be adjusted for all diluting events that may adversely affect the trading price of the convertible debentures or perpetual preferred stock issued upon conversion of the convertible debentures.

 

The conversion rate of the convertible debentures is subject to adjustment upon the occurrence of certain events, including the issuance of stock dividends on our common stock, the issuance of rights or warrants, the payment of certain cash dividends on our common stock and our purchase of our common stock in certain tender or exchange offers, as described under “Description of the Convertible Debentures — Conversion Procedures — Conversion Rate Adjustments.” The conversion rate will not be adjusted for certain other events, such as third party tender or exchange offers, that may adversely affect the trading price of the convertible debentures or the perpetual preferred stock issued upon conversion of the convertible debentures.

 

The increase in the conversion rate upon the occurrence of a non-stock change of control may not adequately compensate you.

 

If a non-stock change of control (as defined herein) occurs on or prior to December 20, 2036, the conversion rate of the convertible debentures may be increased for a period of 35 days, as set forth under

“Description of the Convertible Debentures — Conversion Procedures — Determination of the Make-Whole Amount.” Although any such increase in the conversion rate is intended to compensate holders of convertible debentures for the lost option value of their convertible debentures, it may not adequately compensate holders for such loss.

 

The terms of the convertible debentures will not contain restrictive covenants and provide only limited protection in the event of a change of control.

 

The indenture under which the convertible debentures will be issued will not contain restrictive covenants that would protect you from several kinds of transactions that may adversely affect you. In particular, the indenture will not contain covenants that will limit our ability to pay dividends or make distributions on or redeem our capital stock (except during a deferral period) or limit our ability to incur additional indebtedness and, therefore, may not protect you in the event of a highly leveraged transaction or other similar transaction. Your ability to convert your convertible debentures and receive cash and, to the extent that the conversion value exceeds the principal return, shares of common stock is limited to the transactions specified in the definition of a “non-stock change of control” under “Description of the Convertible Debentures — Conversion Rights — Conversion Upon a Change of Control.” Similarly, the circumstances under which we are required to adjust the conversion rate upon the occurrence of a “non-stock change of control” are limited to circumstances in which a convertible debenture is converted in connection with such a transaction as set forth under “Description of the Convertible Debentures — Conversion Rights — Conversion Upon a Change of Control” and “Description of the Convertible Debentures — Conversion Procedures — Determination of the Make-Whole Amount.” Accordingly, subject to restrictions contained in our other debt agreements, we could enter into certain transactions, such as acquisitions, refinancings or recapitalizations, that could affect our capital structure and the value of the convertible debentures and common stock but would not constitute a non-stock change of control under the convertible debentures.

 

We may not be able to deliver cash owed in respect of conversion upon a non-stock change of control.

 

Upon a non-stock change of control, holders of the convertible debentures will be permitted to tender their convertible debentures for conversion into cash and, if applicable, shares of our common stock. However, if a non-stock change of control occurs and holders tender their convertible debentures for conversion, we may not have sufficient cash to pay the required cash conversion consideration at that time and, even if we have sufficient cash, we may be prohibited from making cash payments to holders of the convertible debentures unless waivers or consents are obtained. In the event that we do not have sufficient cash to make required payments, we may be required to seek third-party financing to do so. We may not be able to obtain such financing on commercially reasonable terms, on terms acceptable to us or at all. Moreover, we have other indebtedness, including our senior notes, which might also be subject to cash repayment in the event of a change of control and future debt agreements may include similar provisions.

 

A change of control may also result in an event of default under our credit facilities, which could cause the acceleration of our other indebtedness, in which case, we would be required to repay in full our senior indebtedness before we pay cash conversion consideration in respect of the convertible debentures. Our future indebtedness may also contain restrictions on our ability to pay such cash consideration upon certain events, including transactions that could constitute a change of control. Our failure to pay cash conversion consideration would constitute an event of default under the indenture and would have a material adverse effect on our financial condition.

 

Holders of the convertible debentures will have no rights as preferred or common shareholders until they acquire perpetual preferred stock or common shares upon conversion.

 

Until a holder acquires shares of perpetual preferred stock and common stock, if any, upon conversion, such holder will have no rights with respect to our capital stock, including voting rights, rights to respond to tender offers, and rights to receive dividends or other distributions on our capital stock. Upon conversion, a holder will be entitled to exercise the rights of a holder of perpetual preferred stock and common stock, to the extent issued upon a conversion, only as to matters for which the record date occurs after the holder receives shares following the conversion reference period. For example, in the event that an amendment is proposed to our bylaws or certificate of incorporation, requiring shareholder approval, and the record date for determining

the common shareholders of record entitled to vote on the amendment occurs prior to the holder receiving shares of common stock, to the extent issued upon a conversion, the converting holder will not be entitled to vote on the amendment, although it will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock. In addition, holders of perpetual preferred stock will have no voting rights except as expressly provided herein or otherwise required by the laws of the State of Delaware from time to time.

 

We may not pay our indebtedness under the convertible debentures on the scheduled maturity date.

 

Under the indenture, we will be required, on December 15, 2041, the scheduled maturity date, and, to the extent applicable, on each successive interest payment date thereafter and before the final maturity date of the convertible debentures on December 15, 2066, to use our commercially reasonable efforts, subject to the occurrence of a market disruption event (as defined under “Description of the Convertible Debentures — Warrant and Preferred Stock Settlement Mechanism”), to raise sufficient net proceeds from the issuance of qualifying capital securities to permit payment of the convertible debentures in full. However, we cannot assure you that we will be able to sell sufficient qualifying capital securities or any qualifying capital securities at all. In addition to market disruption events, our ability to sell qualifying capital securities may be affected by market conditions, our financial performance and a variety of other factors beyond our control, including our ability to obtain any required consents or approvals, such as any corporate, governmental or regulatory authorization that may be required. Finally, even in the absence of a market disruption event, we may fail to use our commercially reasonable best efforts to sell qualifying capital securities or pay the indebtedness under the convertible debentures and this will not result in an event of default. See “— Holders of the convertible debentures have limited rights to accelerate payment of the convertible debentures under the indenture.”

 

Any remarketing of perpetual preferred stock may not succeed.

 

After December 15, 2046, or earlier upon the first occurrence of a change of control, holders of the perpetual preferred stock received upon conversion may elect to have such perpetual preferred stock remarketed. However, we cannot assure you that any such remarketing will succeed. If a remarketing does not succeed, holders of perpetual preferred stock will keep their perpetual preferred stock but the dividend rate applicable thereto will be reset in a manner that may disadvantage holders.

 

In addition, in the event of a transaction that does not constitute a change of control or in the event that a change of control has already occurred as to which there has been a remarketing, we will not remarket the perpetual preferred stock, even though such transaction could increase the amount of our indebtedness, or otherwise adversely affect our capital structure, thereby adversely affecting holders of perpetual preferred stock.

 

Holders of the convertible debentures have limited rights to accelerate payment of the convertible debentures under the indenture.

 

Holders of the convertible debentures or the trustee may accelerate payment of principal and accrued and unpaid interest on the convertible debentures only upon the occurrence of an event of default under the indenture. These events of default are:

 

 

A default by us or by any of our subsidiaries on any of our or their indebtedness, respectively, or acceleration of any such indebtedness, will not result in a cross-default or cross-acceleration of the convertible debentures.

 

Events of default do not include failure to comply with or breach of our other covenants in the indenture applicable to the convertible debentures, including the covenant to sell qualifying warrants or qualifying preferred stock through the warrant and preferred stock settlement mechanism to pay deferred interest. For example, if we are required to sell qualifying warrants or qualifying preferred stock, but we decide not to sell shares even though no market disruption event has occurred and neither the warrant cap nor the preferred stock cap would be breached by our sale of additional qualifying warrants or qualifying preferred stock as the case may be, it will not be an event of default under the indenture and holders will have limited remedies against us. Accordingly, a covenant breach, other than the events of default described above, will not result in the acceleration of payment of the convertible debentures. Although failure to comply with such other covenants could give rise to a claim against us relating to the specific breach, the remedy of holders of the convertible debentures may be limited to direct monetary damages, if any. In addition, only the trustee or the holders of a majority of the convertible debentures, if the trustee fails to institute such a proceeding, may institute a proceeding against us on account of any such breach. Furthermore, the indenture will not require the trustee to take any action in case of such a breach (other than to give notice of default under specified circumstances) unless so directed by holders. See “Description of the Convertible Debentures — Events of Default.”

 

Trading prices of the convertible debentures may not reflect the value of accrued and unpaid interest on the convertible debentures and trading prices of the perpetual preferred stock may not reflect the value of accumulated dividends. Our right or obligation to defer interest payments on the convertible debentures or not to declare dividends in respect of the perpetual preferred stock may cause the respective market prices of such securities to decline.

 

If we defer interest payments on the convertible debentures in the future, or do not declare dividends in respect of the perpetual preferred stock, the market prices of those securities may not fully reflect the value of accrued but unpaid interest or accumulated dividends thereon. If you sell convertible debentures or perpetual preferred stock during a deferral period, you may not receive the same return on investment as someone who continues to hold those securities. We have no current intention of deferring interest payments on the convertible debentures. However, the existence of our rights and obligations to defer interest payments on the convertible debentures and dividends on the perpetual preferred stock may mean that their market price will be more volatile than the market prices of other securities that are not subject to these rights and obligations.

 

The rating agencies that rate the convertible debentures may change their rating methodologies, including their views on “notching” practices, which could result in a downgrade of the convertible debentures.

 

The rating methodologies for securities with features similar to the convertible debentures are still developing and the rating agencies may change their methodologies in the future. These changes may include (but are not limited to) the relationship between ratings assigned to an issuer’s senior securities and ratings assigned to securities with features similar to the convertible debentures, sometimes called “notching.” If any of the rating agencies were to change their practices for rating such securities in the future and one or more of the ratings of the convertible debentures were subsequently downgraded as a result of such changes, the trading price of the convertible debentures may be negatively affected.

 

Your ability to transfer the convertible debentures or the perpetual preferred stock may be limited by the absence of an active trading market.

 

We do not intend to apply for listing or quotation of the convertible debentures or the perpetual preferred stock on any securities exchange or stock market, although we expect that the convertible debentures and the perpetual preferred stock will be eligible for trading in DTC’s same-day funds settlement system. The liquidity of any market for the convertible debentures or the perpetual preferred stock will depend on a number of factors, including:

 

 

 

Historically, the market for convertible debt securities has been subject to disruptions that have caused volatility in price. We cannot assure you that the market for the convertible debentures will be free from disruptions. Any disruptions could have an adverse effect on holders of the convertible debentures.

 

In addition, perpetual preferred stock issued upon conversion of convertible debentures in respect of which interest payments have been deferred or perpetual preferred stock issued on a date other than a dividend payment date may initially bear a different amount of accumulated dividends than, and therefore not be fungible with, perpetual preferred stock issued on other dates, if any. Any such perpetual preferred stock will be issued under a separate CUSIP number. Non-fungibility may adversely affect the liquidity of the perpetual preferred stock.

 

Provisions of the convertible debentures could discourage an acquisition of us by a third party.

 

Certain provisions of the convertible debentures could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a change of control, holders of the convertible debentures will have the right, at their option, to convert and thereby require us to pay the principal amount of such converted debentures in cash. In addition, the occurrence of certain change of control transactions may result in the convertible debentures becoming convertible for additional shares or result in antidilution adjustments that may have the effect of making an acquisition of us less attractive.

We estimate that our net proceeds from our sale of the convertible debentures in this offering, after deducting underwriting discounts and estimated expenses of the offering, will be approximately $654.8 million. We intend to use these net proceeds to repay indebtedness, including reducing indebtedness currently outstanding under our revolving credit facility and term loan facility, each of which were used to finance, in part, the Excel Acquisition, and for working capital and general corporate purposes. Our revolving credit facility commitment is scheduled to terminate and the loans thereunder are scheduled to mature in September 2011, and our term loan facility is schedule to mature in September 2011. As of December 5, 2006, the floating interest rate on both our revolving credit facility and our term loan facility was 6.3%. Affiliates of Lehman Brothers, Morgan Stanley and Citigroup and certain of the other underwriters are lenders under these facilities and accordingly, will receive a portion of the proceeds of this offering. See “Underwriting.” For a more detailed description of these facilities, see “Description of Other Indebtedness — Credit Facilities.”

 

Our common stock is listed on the New York Stock Exchange and trades under the symbol “BTU.” The following table sets forth, for the periods indicated, the high and low sales prices per share as reported by the New York Stock Exchange, retroactively adjusted to reflect two-for-one stock splits effective February 22, 2006 and March 30, 2005.

 

 

On December 14, 2006, the last reported sale price for our common stock was $44.25 per share.

 

We currently declare and pay quarterly dividends of $0.06 per share. The declaration and payment of dividends and the amount of dividends will depend on our results of operations, financial condition, cash requirements, future prospects, any limitations imposed by our debt instruments and other factors deemed relevant by our board of directors. The payment of dividends is currently restricted by the terms of our senior unsecured credit facility and the indentures governing our existing senior notes. However, we presently expect that dividends will continue to be paid.

 

The following table sets forth our consolidated historical capitalization at September 30, 2006 on an actual basis and as adjusted to give effect to (i) the $675 million aggregate principal amount of convertible debentures offered hereby, (ii) the issuance of $650 million aggregate principal amount of 73/8% senior notes due 2016 and $250 million aggregate principal amount of 77/8% senior notes due 2026 in a public offering on October 12, 2006, (iii) borrowings under our senior unsecured credit facility and (iv) the application of the estimated net proceeds of these offerings and borrowings in connection therewith, including the consummation of the Excel Acquisition. The calculations under the “Adjustments” and “Pro Forma as Adjusted” columns of the table assume the successful completion of this offering and the application of the net proceeds as described in “Use of Proceeds.”

 

You should read this table in conjunction with our financial statements and the notes to those statements appearing elsewhere in this prospectus supplement, “Summary Financial and Operating Data,” “Use of Proceeds” and the unaudited pro forma financial information and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated herein by reference.

 

 

 

The following are summaries of the material terms and conditions of our principal indebtedness.

 

Credit Facilities.

 

On September 15, 2006, we entered into a third amended and restated credit agreement (as amended or otherwise modified from time to time) with Bank of America, N.A., as administrative agent, Citibank, N.A., as syndication agent, and the lenders named therein, which amends and restates in full our existing second amended and restated credit agreement, dated as of March 21, 2003 (as amended or otherwise modified from time to time), with Fleet National Bank, as administrative agent, Wachovia Bank N.A. and Lehman Commercial Paper Inc., each as syndication agent, Fleet Securities, Inc., Wachovia Securities, Inc. and Lehman Brothers Inc., each as arranger, Morgan Stanley Senior Funding, Inc. and U.S. Bank N.A., each as documentation agents and the lenders from time to time party thereto.

 

Our senior unsecured credit facility under the third amended and restated credit agreement provides for a $1.8 billion revolving credit facility and a $950.0 million term loan facility. The revolving credit facility includes capacity available for borrowing and the issuance of letters of credit and also includes a $50.0 million sub-facility available for same-day swingline loan borrowings. The term loan facility consists of a $440.0 million portion, which was drawn at closing, and a $510.0 million delayed draw term loan sub-facility, which was drawn after closing to provide a portion of the funding for the Excel Acquisition. Loans under the senior unsecured credit facility are available to us in U.S. dollars, with a sub-facility under the revolving credit facility available to us in Australian dollars, pounds sterling and Euros. Letters of Credit under the revolving credit facility are available to us and our subsidiaries in U.S. dollars with a sub-facility available in Australian dollars, pounds sterling and Euros. Extensions of credit under the senior unsecured credit facility are available to finance the Excel Acquisition and related fees and expenses, the financing of other capital expenditures, the refinancing of obligations under our existing credit facilities and our ongoing working capital and other corporate purposes. Availability of the revolving credit facility is subject to satisfaction of certain customary conditions. The revolving credit facility commitment is scheduled to terminate and the loans thereunder are scheduled to mature in September 2011. The term loan facility is scheduled to mature in September 2011.

 

All borrowings under the senior unsecured credit facility (other than swingline borrowings and borrowing denominated in currencies other than U.S. dollars) bear interest, at our option, at either: (A) a “base rate” equal to, for any day, the higher of: (a) 0.50% per year above the overnight federal funds effective rate, as published by the Federal Reserve Bank of New York, as in effect from time to time; and (b) the annual rate of interest in effect for that day as publicly announced by the administrative agent under the senior unsecured credit facility as its “prime rate” or (B) a “eurocurrency rate” equal to the rate (adjusted for reserve requirements, deposit insurance assessment rates and other regulatory costs for eurocurrency liabilities) at which eurocurrency deposits in the relevant currency for the relevant interest period (which will be one, two, three, six or, subject to availability, nine or 12 months, as selected by us) are offered in the interbank eurodollar market, as determined by the administrative agent under the senior unsecured credit facility, plus in each case a rate, dependent on the ratio of our debt as compared to our adjusted consolidated EBITDA, ranging from 0.50% to 0% per year for borrowings bearing interest at the “base rate” and from 1.50% to 0.50% per year for borrowings bearing interest at the “Eurocurrency Rate.” Swingline borrowings will bear interest at a “BBA LIBOR” rate equal to the rate (adjusted for reserve requirements, deposit insurance assessment rates and other regulatory costs for eurocurrency liabilities) at which deposits in the relevant currency for a one month term are offered in the interbank eurodollar market, as determined by the administrative agent, plus a rate, dependent on the ratio of our debt as compared to our adjusted consolidated EBITDA, ranging from 1.50% to 0.50% per year. Borrowings denominated in currencies other than U.S. dollars will bear interest at the Eurocurrency Rate.

 

We will be required to pay interest on borrowings bearing interest at the “eurocurrency rate” at the end of the selected interest period but no less frequently than quarterly. For borrowings bearing interest at the “base rate,” we will be required to pay interest quarterly.

 

We pay a usage-dependent commitment fee on the available unused commitment under the revolving credit facility. The fee is dependent upon the ratio of our debt compared to our adjusted consolidated EBITDA and ranges from 0.125% to 0.300% of the available unused commitment. For purposes of calculating the

commitment fee, swingline loans are not considered usage of the revolving credit facility. The fee accrues quarterly in arrears and is payable on the last business day of each March, June, September and December.

 

We also pay a letter of credit fee calculated at a rate, dependent on the ratio of our debt as compared to our adjusted consolidated EBITDA, ranging from 1.50% to 0.50% per year of the undrawn amount of each letter of credit and a fronting fee equal to 0.125% per year of the undrawn amount of each letter of credit. These fees are payable quarterly in arrears on the first business day of each March, June, September and December. In addition, we will also pay customary transaction charges in connection with any letters of credit.

 

The rates that depend on the ratio of our debt as compared to our adjusted consolidated EBITDA range from the high rate specified if the ratio is greater than or equal to 3.25 to 1.0 to the low rate specified if the ratio is less than 1.0 to 1.0.

 

The $950.0 million term loan facility is subject to quarterly amortization of 5.0% per year commencing on March 31, 2007, with the final payment of all amounts outstanding (including accrued interest) being due in September 2011.

 

The third amended and restated credit agreement imposes certain restrictions on us, including restrictions on our ability to: incur or suffer to exist debt or provide guarantees; grant or suffer to exist liens; enter into agreements with negative pledge clauses; pay dividends or make other distributions in respect of capital stock; make loans, investments, advances and acquisitions; sell our assets; make redemptions and repurchases of capital stock or otherwise return capital; liquidate or dissolve; engage in mergers or consolidations; engage in affiliate transactions; change our business; and restrict distributions from subsidiaries. In addition, the senior unsecured credit facility provides that we must meet or exceed certain interest coverage ratios and must not exceed certain leverage ratios. The senior unsecured credit facility also includes customary events of default.

 

If an event of default under our senior unsecured credit facility occurs and is continuing, the commitments thereunder may be terminated and the principal amount outstanding thereunder, together with all accrued unpaid interest and other amounts owed thereunder, may be declared immediately due and payable and any letters of credit outstanding may be required to be cash collateralized.

 

A substantial number of our direct and indirect domestic subsidiaries guarantee our obligations under the senior unsecured credit facility.

 

Our obligations under the senior unsecured credit facility and the related guarantee obligations of our subsidiaries are unsecured.

 

73/8% Senior Notes due 2016 and 77/8% Senior Notes due 2026

 

On October 12, 2006, we issued $650 million aggregate principal amount in senior notes, which bear interest at 73/8% and are due in November 2016 and $250 million aggregate principal amount in senior notes, which bear interest at 77/8% and are due in November 2026. Interest on the notes is payable each May 1 and November 1. The notes, which are unsecured, are guaranteed by all our existing domestic subsidiaries, subject to certain exceptions. In addition, any domestic subsidiary that executes a guarantee under our senior unsecured credit facility will be required to guarantee the notes. The indentures governing the senior notes contain covenants that, among other things, limit our ability to create liens and enter into sale and lease-back transactions. The notes are redeemable at any time at a redemption price equal to 100% of the principal amount plus a make-whole premium (as set forth in the indenture).

 

57/8% Senior Notes due 2016

 

As of September 30, 2006, we had outstanding $231.8 million aggregate principal amount in senior notes, which bear interest at 57/8% and are due in April 2016. Interest on the notes is payable each April 15 and October 15. The notes, which are unsecured, are guaranteed by our “restricted subsidiaries” as defined in the indenture governing the senior notes. The indenture contains covenants that, among other things, limit our ability to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, make other restricted payments and investments, create liens, sell assets and merge or consolidate with other entities. Many of these covenants will terminate if two specified ratings agencies assign the senior notes investment grade ratings and no event of default exists under the indenture governing these senior notes. The notes are redeemable prior to April 15, 2009 at a redemption price equal to 100% of the principal amount plus a make-whole premium (as defined in the indenture) and on or after April 15, 2009 at fixed redemption prices as set forth in the indenture.

67/8% Senior Notes due 2013

 

As of September 30, 2006, we had outstanding $650 million aggregate principal amount in senior notes, which bear interest at 67/8% and are due in March 2013. Interest on the notes is payable each March 15 and September 15. The notes, which are unsecured, are guaranteed by our “restricted subsidiaries” as defined in the indenture governing the senior notes. The indenture contains covenants that, among other things, limit our ability to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, make other restricted payments and investments, create liens, sell assets and merge or consolidate with other entities. Many of these covenants will terminate if two specified ratings agencies assign the senior notes investment grade ratings and no event of default exists under the indenture governing these senior notes. The notes are redeemable prior to March 15, 2008 at a redemption price equal to 100% of the principal amount plus a make-whole premium (as defined in the indenture) and on or after March 15, 2008 at fixed redemption prices as set forth in the indenture.

 

5.0% Subordinated Note

 

The 5.0% subordinated note, which had an original face value of $400.0 million and had a face value of $60.0 million as of September 30, 2006, is recorded net of discount at an imputed annual interest rate of approximately 12.0%, resulting in a long-term debt carrying amount of $58.8 million as of September 30, 2006. Interest and principal are payable each March 1, and the remaining $60.0 million is due March 1, 2007. The note is a subordinated and unsecured obligation of our subsidiary, Peabody Holding Company, LLC. The terms of the note permit the merger, consolidation or the sale of assets of Peabody Holding Company, LLC, as long as the successor corporation following the merger or consolidation (if Peabody Holding Company, LLC does not survive) expressly assumes payment of principal and interest on and performance of the covenants and conditions of the note.

 

Off Balance Sheet Arrangements

 

Surety Bonds.  Federal and state laws require surety bonds to secure our obligations to reclaim lands disturbed for mining, to pay federal and state workers’ compensation and to satisfy other miscellaneous obligations. The amount of these bonds varies constantly, depending upon the amount of acreage disturbed and the degree to which each property has been reclaimed. Under federal law, partial bond release is provided as mined lands (1) are backfilled and graded to approximate original contour, (2) are re-vegetated and (3) achieve pre-mining vegetative productivity levels on a sustained basis for a period of five to 10 years.

 

We use a combination of surety bonds, corporate guarantees (i.e. self bonds) and letters of credit to secure our financial obligations for post-mining reclamation, workers’ compensation, postretirement healthcare benefits, leases and pensions. As of September 30, 2006 we had outstanding surety bonds with third parties for these obligations totaling $487.0 million, letters of credit of $398.9 million, and an additional $692.7 million in self-bonding obligations.

 

Accounts Receivable Securitization Program.  In March 2000, we established an accounts receivable securitization program. Under the program, undivided interests in a pool of eligible trade receivables that have been contributed to our wholly-owned, bankruptcy-remote subsidiary (“Seller”) are sold, without recourse, to a multi-seller, asset-backed commercial paper conduit (“Conduit”). Purchases by the Conduit are financed with the sale of highly rated commercial paper. On September 16, 2004, we closed on an expansion of the accounts receivable securitization facility, and on September 30, 2005, we further amended and restated the agreement governing the terms of the facility. Under the terms of the amended agreement, the total facility capacity was increased from $140 million to $225 million and the receivables of additional wholly-owned subsidiaries of ours are now eligible to participate in the facility. The maturity of the facility was also extended to September 2009. The amount of undivided interests in accounts receivable sold to the Conduit were $225.0 million as of September 30, 2006.

 

We will issue the 4.75% convertible junior subordinated debentures under the Subordinated Indenture described in the attached prospectus and a supplemental indenture thereto to be dated December 20, 2006, each between Peabody Energy Corporation, as issuer, and U.S. Bank National Association, as trustee. In this prospectus supplement, we refer to the Subordinated Indenture, as supplemented by the supplemental indenture, and as further supplemented or amended from time to time, as the “indenture.”

 

The terms of the convertible debentures include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”). The following description of the particular terms of the convertible debentures supplements, and to the extent inconsistent therewith replaces, the description of the debt securities set forth in the accompanying prospectus under the heading “Description of Debt Securities” and together therewith is a summary of the provisions of the indenture that we consider material. It does not restate the indenture in its entirety. We urge you to read the indenture because it, and not this description, will define your rights as a holder of the convertible debentures. You may request copies of the indenture at our address set forth under “Incorporation of Certain Documents by Reference.” Unless otherwise specified, references herein to holders are to registered holders. The registered holder of a convertible debenture will be treated as the owner of it for all purposes. Only registered holders will have rights under the indenture.

 

Unless otherwise specified, the words “we” “us” and “our” as used in this section refer only to Peabody Energy Corporation and not to any of its subsidiaries.

 

General

 

We will initially issue $675,000,000 aggregate principal amount of the convertible debentures (and may issue up to an additional $75,000,000 principal amount of convertible debentures pursuant to the option we have granted to underwriters to purchase additional convertible debentures solely to cover overallotments). We may from time to time, without the consent of the existing holders, issue additional convertible debentures having the same terms and conditions as the convertible debentures being offered hereby in all respects, except for issue date, issue price and, if applicable, the first payment of interest thereon and the date from which interest shall accrue. Additional convertible debentures issued in this manner will constitute a single series with the previously outstanding convertible debentures.

 

As described under “— Payment at Scheduled Maturity,” we will use our commercially reasonable efforts, subject to the occurrence of a market disruption event, to raise sufficient net proceeds from the issuance of qualifying capital securities to pay holders the principal amount of the convertible debentures, together with accrued and unpaid interest, including any compounded interest thereon, on December 15, 2041 (the “scheduled maturity date”).

 

Subject to the foregoing, the final maturity date of the convertible debentures will be December 15, 2066. The entire principal amount of the convertible debentures will mature and become due and payable, together with accrued and unpaid interest thereon, including any compounded interest thereon, on such date.

 

The convertible debentures will not be subject to any sinking fund provision.

 

Interest

 

Interest will accrue at an annual rate equal to 4.75% from (and including) the date of initial issuance or from the last date in respect of which interest has been paid or duly provided for to, but excluding, the next interest payment date, until the date on which the convertible debenture is converted, date at which payment is made on scheduled maturity (“scheduled maturity payment date”), redemption date or final maturity date, as the case may be. Subject to certain requirements during any optional deferral period or mandatory deferral period described below, interest will be payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2007. The term “interest period” as used in this prospectus supplement refers to each period from and including an interest payment date to, but excluding, the next interest payment date, date on which the convertible debenture is converted, scheduled maturity payment date or redemption date, as the

case may be, except that the initial interest period will commence on, and include, the date of initial issuance of the convertible debentures and will end on, and exclude, the first interest payment date.

 

We may elect to, and if and to the extent that a mandatory trigger event (as defined under “— Mandatory Deferral of Interest Payments”) has occurred and is continuing will be required to, defer interest payments on the convertible debentures. Those deferral mechanisms, as well as limitations on the sources we may use to fund interest payments under specified circumstances, are described under “— Option to Defer Interest Payments” and “— Mandatory Deferral of Interest Payments.” Additional restrictions on our ability to make payments (including payments of interest) on the convertible debentures and on any related claim in the event of our bankruptcy, insolvency or receivership are described under “— Subordination,” “Capital Replacement” and “— Limitation on Claims in the Event of our Bankruptcy, Insolvency or Receivership.”

 

The amount of interest payable for any full interest period will be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of interest payable for any period shorter than a full interest period will be computed on the basis of 30-day months and, for periods of less than a 30-day month, the actual number of days elapsed in that period. In the event that any date on which interest is payable is not a business day, payment of the interest payable on such date will be made on the next succeeding day that is a business day (without any payment of interest or other amounts in respect of any such delay). Interest not paid on any payment date, including interest that is deferred pursuant to an optional deferral period or a mandatory deferral period, as described under “— Option to Defer Interest Payments” and “— Mandatory Deferral of Interest Payments,” will accrue and compound semi-annually at the applicable rate of interest on the convertible debentures until paid.

 

“Business day” means any day which is not a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies located in New York City are authorized or obligated by law to close.

 

For so long as the convertible debentures are held in book-entry only form, interest is payable on each payment date to the person in whose name a given convertible debenture is registered at the close of business on the business day before the interest payment date. In the event that the convertible debentures will not continue to remain in book-entry only form or are not in the form of a global certificate, we will have the right to select record dates, which will be at least one business day before an interest payment date.

 

Subordination

 

The payment of principal of and interest on the convertible debentures will be, to the extent provided in the indenture, subordinated to the prior payment in full of all existing and future senior indebtedness, as defined below.

 

Subject to the qualifications described below, the term “senior indebtedness” includes principal of, and interest and premium (if any) on, the following:

 

 

Notwithstanding anything to the contrary in the foregoing, however, senior indebtedness will not include:

 

 

The convertible debentures will rank senior to all of our equity securities, including any qualifying preferred stock or perpetual preferred stock we may issue in the future.

 

The senior indebtedness will continue to be senior indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of the senior indebtedness or extension or renewal of the senior indebtedness.

 

No direct or indirect payment, in cash, property or securities, by set-off or otherwise, may be made or agreed to be made on account of the convertible debentures or interest thereon, or in respect of any payment, redemption, retirement, purchase or other acquisition of the convertible debentures, if:

 

 

unless and until such default in payment or event of default has been cured or waived or ceases to exist, provided that this section will not limit the rights of the holders of the convertible debentures to convert their convertible debentures into perpetual preferred stock and common stock (but not cash), as described under “— Conversion Rights.”

 

All existing and future senior indebtedness, which will include, without limitation, interest accruing after the commencement of any proceeding, assignment or marshalling of assets described below, will first be paid in full before any payment, whether in cash, securities or other property, will be made by us on account of the convertible debentures in the event of:

 

 

provided that this section will not limit the rights of the holders of the convertible debentures to convert their convertible debentures into perpetual preferred stock and common stock (but not cash), as described under “— Conversion Rights.”

 

In any such event, payments that would otherwise be made on the convertible debentures will generally be paid to the holders of senior indebtedness, or their representatives, in accordance with the priorities existing among these creditors at that time until the senior indebtedness is paid in full.

 

No present or future holder of any senior indebtedness will be prejudiced in the right to enforce the subordination of the convertible debentures by any act or failure to act on our part.

 

In the event that, notwithstanding any of the foregoing prohibitions, the trustee or the holders of the convertible debentures receive any payment on account of or in respect of the convertible debentures at a time

when a responsible officer of the trustee or such holder has actual knowledge that such payment should not have been made to it, the trustee or such holder will hold such payment in trust for the benefit of, and, upon written request, will pay it over to, the holders of the senior indebtedness or their agents or representatives, for application to the payment of all principal, premium, if any, and interest then payable with respect to any senior indebtedness.

 

Senior indebtedness will only be deemed to have been paid in full if the holders of such indebtedness have received cash, securities or other property equal to the amount of the outstanding senior indebtedness.

 

After payment in full of all existing and future senior indebtedness, holders of the convertible debentures will be subrogated to the rights of any holders of senior indebtedness to receive any further payments that are applicable to the senior indebtedness until all the convertible debentures are paid in full. In matters between holders of the convertible debentures and any other type of our creditors, any payments that would otherwise be paid to holders of senior indebtedness and that are made to holders of the convertible debentures because of this subrogation will be deemed a payment by us on account of senior indebtedness and not on account of the convertible debentures.

 

Due to the subordination provisions described above, funds we would otherwise use to pay the holders of the convertible debentures will be used to pay the holders of senior indebtedness to the extent necessary to pay the senior indebtedness in full. See “Risk Factors — The convertible debentures will be subordinated to substantially all of our other debt.”

 

The indenture places no limitation on the amount of additional indebtedness that may be incurred by us. We expect to incur additional indebtedness constituting senior indebtedness in the future.

 

In addition to the limitations described above, in the event of our bankruptcy, insolvency or receivership, whether voluntary or not, prior to the final maturity date, payment at scheduled maturity or redemption of the convertible debentures, any claim in respect of interest that accrued during a mandatory interest deferral period in excess of two years of accrued and unpaid interest (including any compounded interest thereon) on the convertible debentures will be extinguished. See “— Limitation on Claims in the Event of Our Bankruptcy, Insolvency or Receivership.”

 

Conversion Rights

 

Unless earlier redeemed holders may convert their convertible debentures, in whole or in part:

 

 

The initial conversion rate for the convertible debentures is 16.1421 shares of common stock per $1,000 principal amount of convertible debentures, subject to adjustment as described under “— Conversion Procedures — Conversion Rate Adjustments,” which represents an initial conversion price of approximately $61.95 per share.

 

The amount of consideration delivered for each $1,000 principal amount of convertible debentures that are converted will be determined as described under “— Conversion Procedures — Settlement Upon Conversion” and will be delivered in the form of cash (in the case of conversion following a notice of redemption or upon a non-stock change of control) or perpetual preferred stock (in all other cases) and, if applicable, shares of our common stock.

 

The right to convert any convertible debentures will expire at 5:00 p.m., New York City time, on December 15, 2041 (or if not a trading day, the first trading day thereafter) or, if we call the convertible debentures for redemption prior to that, at 5:00 p.m., New York City time, on the business day immediately preceding the redemption date (unless we default in the payment of the redemption price).

 

A holder may convert only in denominations of $1,000 principal amount and whole multiples thereof. The “conversion price” on any day will equal $1,000 divided by the conversion rate in effect on that day.

Whenever we become aware that the convertible debentures have become convertible, we will notify holders of convertible debentures at their addresses shown in the register of the registrar. In addition, we will publish this information on our Internet site or otherwise publicly disclose it.

 

Conversion on or Prior to December 15, 2036

 

At any time on or prior to December 15, 2036, holders may convert their convertible debentures (subject to prior redemption) only during the specified periods under the following circumstances:

 

 

Conversion Upon Satisfaction of Closing Sale Price Condition

 

Holders will have the right to convert their convertible debentures on or prior to December 15, 2036 during any calendar quarter commencing after the date of original issuance of the convertible debentures, if the closing sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 140% of the then applicable conversion price for the convertible debentures.

 

“Closing sale price” of our common stock or any other security on any trading day means the closing sale price of our common stock or such other security (or if no closing sale price is reported, the average of the closing bid and closing ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported in composite transactions for the New York Stock Exchange or on the principal U.S. stock exchange or interdealer quotation system as is used for purposes of measuring trading days in accordance with the definition below.

 

A “trading day” in respect of our common stock or any other security means any day on which the New York Stock Exchange or, if our common stock or such other security is not listed on the New York Stock Exchange, the principal U.S. stock exchange or interdealer quotation system on which our common stock or such other security is listed, admitted for trading or quoted, is open for trading or, if our common stock or such other security is not so listed, admitted for trading or quoted, any business day. If our common stock or such other security is so listed, admitted for trading or quoted, “trading days” only include those days that have a scheduled closing time of 4:00 p.m. (New York City time) or the then standard closing time for regular trading on the relevant exchange or interdealer quotation system and do not include any day on which any suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the New York Stock Exchange or otherwise) in our common stock or such other security or in any options, contracts or future contracts relating thereto, occurs or exists for more than one half hour in the aggregate if such suspension or limitation occurs or exists at any time before 1:00 p.m. (New York City time) on such day.

Conversion Upon Notice of Redemption

 

If at any time on or prior to December 15, 2036 we call the convertible debentures for redemption, holders will have the right to convert their convertible debentures until 5:00 p.m., New York City time, on the last business day prior to the redemption date, after which time their right to convert, in relation to the convertible debentures called for redemption, will expire unless we default in the payment of the redemption price.

 

Conversion Upon Satisfaction of Trading Price Condition

 

Holders will have the right to convert their convertible debentures on or prior to December 15, 2036 during the 10 trading days immediately following any five-consecutive-trading-day period in which the trading price per $1,000 principal amount of convertible debentures for each day of such measurement period is determined, after a request as described below to conduct such measurement, to be less than 98% of the product of the closing sale price of our common stock and the conversion rate in effect on such day.

 

The trustee shall have no obligation to determine the trading price of the convertible debentures unless we have requested that it make such determination. We shall have no obligation to make such request unless so requested in writing by a holder that provides us with reasonable evidence that the trading price per $1,000 principal amount of convertible debentures would be less than 98% of the product of the closing sale price of our common stock and the conversion rate then in effect. If a holder submits such a request, we shall instruct the trustee to determine the trading price of the convertible debentures beginning on the next trading day and on each successive trading day until the trading price is greater than or equal to 98% of the product of the closing sale price of our common stock and the conversion rate then in effect for five consecutive trading days. If the trading price condition has been met, we shall so notify the holders of the convertible debentures. If, at any point after the trading price condition has been met, such condition shall no longer be satisfied, we shall so notify the holders of convertible debentures.

 

The “trading price per $1,000 principal amount of convertible debentures” on any date of determination means the average of the secondary market bid quotations per $1,000 principal amount of convertible debentures obtained by the trustee for $2,000,000 principal amount of the convertible debentures at approximately 3:30 p.m., New York City time, on such determination date from three independent nationally recognized securities dealers we select, provided that if three such bids cannot reasonably be obtained by the trustee, but two such bids are obtained, then the average of the two bids shall be used, and if only one such bid can reasonably be obtained by the trustee, this one bid shall be used. If the trustee cannot reasonably obtain at least one bid for $2,000,000 principal amount of the convertible debentures from a nationally recognized securities dealer, then the trading price per $1,000 principal amount of convertible debentures will be deemed to be less than 98% of the product of the closing sale price of our common stock and the conversion rate then in effect.

 

Conversion Upon a Change of Control

 

If a change of control (as defined below) occurs, holders will have the right to convert their convertible debentures at any time beginning on the effective date of the change of control and until and including the date which is 35 calendar days after the effective date of the change of control. If a holder converts convertible debentures in connection with a change of control, the holder will receive per $1,000 principal amount of convertible debentures then converted conversion consideration, determined as set forth under “— Conversion Procedures — Settlement Upon Conversion,” based on the kind and amount of cash, securities and other assets or property that a holder of a number of shares of common stock equal to the conversion rate would have owned or been entitled to receive in such transaction. In the case of any conversion in connection with a non-stock change of control the effective date of which is on or prior to December 20, 2036, under certain circumstances, we will increase the conversion rate applicable to a conversion in relation to such change of control by a number of additional shares of our common stock determined as set forth under “— Conversion Procedures — Determination of the Make-Whole Amount.”

“Change of control” means the occurrence of any of the following:

 

(1) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of our assets and those of our subsidiaries, taken as a whole, to any “person” (as such term is used in Section 13(d)(3) of the Exchange Act);

 

(2) the adoption of a plan relating to our liquidation or dissolution;

 

(3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any “person” (as defined above) becomes the “beneficial owner” (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our voting stock (measured by voting power rather than number of shares), excluding any transaction in which the voting stock that comes to be beneficially owned by such person as a result of the transaction is voting stock newly issued in connection with, or for the purpose of, the transaction; or

 

(4) the first day on which a majority of the members of our board of directors are not continuing directors.

 

The definition of change of control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of “all or substantially all” of our assets taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of convertible debentures to claim rights arising from a change of control as a result of a sale, lease, transfer, conveyance or other disposition of less than all of our assets to another person or group may be uncertain.

 

“Continuing directors” means, as of any date of determination, any member of our board of directors who (i) was a member of our board of directors on the original issue date of the convertible debentures or (ii) was nominated for election or elected to our board of directors with the approval of a majority of the continuing directors who were members of our board of directors at the time of such nomination or election.

 

We will notify holders and the trustee as promptly as practicable following the date we publicly announce any change of control transaction but, to the extent practicable, in no event less than 20 trading days prior to the anticipated effective date of such transaction.

 

As described under “Description of the Perpetual Preferred Stock — Remarketing — Remarketing Procedures,” the first occurrence of a change of control prior to December 15, 2046 will trigger remarketing rights with respect to our perpetual preferred stock. A holder of convertible debentures may, upon a change of control other than a non-stock change of control, simultaneously elect to convert the convertible debentures and have perpetual preferred stock otherwise deliverable to such holder in respect of such conversion remarketed in such a remarketing.

 

Conversion Upon Specified Corporate Transactions

 

Holders will have the right to convert their convertible debentures if we:

 

 

 

We will notify holders at least 25 trading days prior to the ex-dividend date for such distribution. Once we have given such notice, holders may surrender their convertible debentures for conversion at any time until the earlier of 5:00 p.m., New York City time, on the business day immediately preceding, but not including, the ex-dividend date or any announcement by us that such distribution will not take place. A holder may not convert any convertible debentures based on this conversion contingency if that holder will otherwise participate in the distribution without conversion as a result of holding the convertible debentures.

 

Conversion After December 15, 2036

 

After December 15, 2036 to (and including) December 15, 2041 (or, if that is not a trading day, the first trading day thereafter), holders may convert their convertible debentures (subject to prior redemption) regardless of whether any of the conditions described above are met. The right to convert any convertible debentures will expire at 5:00 p.m., New York City time, on December 15, 2041 (or, if that is not a trading day, the first trading day thereafter).

 

Conversion Procedures

 

Procedures to be Followed by a Holder

 

To convert, the holder of a beneficial interest in a global convertible debenture must complete, or cause to be completed the appropriate instruction form for conversion pursuant to DTC’s conversion program and, if required, pay funds equal to interest payable on the next interest payment date to which the holder is not entitled and, if required, pay all taxes or duties, if any. In order to exercise the conversion right with respect to any convertible debenture in certificated form, we must receive at the office or agency maintained by us for that purpose in The City of New York or, at the option of the holder of such convertible debenture, the corporate trust office, such convertible debenture with the original or facsimile of the form entitled “Conversion Notice” on the reverse thereof, duly completed and manually signed, together with such convertible debenture duly endorsed for transfer, accompanied by any required funds. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for any shares of our common stock or perpetual preferred stock which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer or similar taxes, if required.

 

The conversion date will be the date on which a holder has satisfied all of the foregoing requirements. The person in whose name any shares of common stock or perpetual preferred stock issued upon conversion of convertible debentures is registered shall be treated as a shareholder of record on and after the last trading day of the conversion reference period, all anti-dilution adjustments to the conversion rate and determinations as to entitlement to interest shall be carried out through that date in respect of the convertible debentures converted and upon that date the converting holder will no longer be a holder of such convertible debentures.

 

Holders will not be required to pay any taxes or duties relating to the issuance or delivery of perpetual preferred stock or common stock if they exercise their conversion rights, but they will be required to pay any tax or duty that may be payable relating to any transfer involved in the issuance or delivery of perpetual preferred stock or common stock in names other than their own. Certificates representing perpetual preferred stock or common stock will be issued and delivered only after all applicable taxes and duties, if any, payable by a holder have been paid in full.

Settlement Upon Conversion

 

Holders tendering convertible debentures will be entitled to receive, for each $1,000 principal amount of convertible debentures they convert, cash (in the case of conversion following a notice of redemption or upon a non-stock change of control) or perpetual preferred stock (in all other cases) and, if applicable, shares of our common stock, as provided below.

 

For purposes of the discussion below, the following terms, have the following meanings:

 

“Conversion value” means the average of the products for each of the 20 consecutive trading days in the conversion reference period of:

 

(1) the conversion rate in effect for such day, taking into account additional shares, if any, under the circumstances described under “— Determination of the Make-Whole Amount”; multiplied by

 

(2) the volume-weighted average price of our common stock for such day.

 

The “volume-weighted average price” per share of our common stock on any trading day will be the volume-weighted average price on the New York Stock Exchange or, if our common stock is not listed on the New York Stock Exchange, on the principal U.S. stock exchange or interdealer quotation system on which our common stock is then traded, from 9:30 a.m. to 4:00 p.m. (New York City time) on that trading day as displayed by Bloomberg (under the heading “Bloomberg VWAP” on Bloomberg page BTU <equity> AQR in respect of the period from (9:30 a.m. to 4:00 p.m. (New York City time) on such trading day) (or if such volume-weighted average price is not available, the market value of one share on such trading day as our board of directors determines in good faith using a volume-weighted method).

 

The “daily share amount” for a given trading day equals the amount obtained by (i) multiplying the volume-weighted average price for such day by the conversion rate applicable on such day, (ii) subtracting $1,000 from the resulting product and (iii) dividing the resulting difference by 20 times the volume-weighted average price for such day, provided, however, that the daily share amount will in no case be less than zero.

 

“Conversion reference period” means:

 

 

Conversion Upon Notice of Redemption or Conversion in Connection with a Non-Stock Change of Control

 

If conversion occurs pursuant to “— Conversion Rights — Conversion Upon Notice of Redemption” or in connection with a non-stock change of control pursuant to “— Conversion Rights — Conversion Upon a Change of Control,” with respect to each $1,000 principal amount of convertible debentures surrendered for conversion, we will deliver:

 

(1) a cash payment in the amount of $1,000 (the “principal return”); and

 

(2) if the conversion value of the convertible debentures converted is greater than the principal return, a number of shares of our common stock (the “net shares”) equal to the sum of the daily share amounts for each of the 20 consecutive trading days during the conversion reference period.

 

We will round the number of shares that is deliverable down to the nearest whole number and will deliver cash in lieu of any fractional shares of common stock that would otherwise be deliverable.

 

Potential limitations on our ability to deliver cash owed in respect of any conversion upon a non-stock change of control are described under “Risk Factors — Risks Related to the Convertible Debentures and

Perpetual Preferred Stock — We may not be able to deliver cash owed in respect of conversion upon a non-stock change of control.”

 

Upon any such conversion, holders will not receive any cash payment representing accrued and unpaid interest for the current interest period, except as provided below under “— Additional Information Regarding Settlement.” Holders, however, will receive an additional cash amount equal to the amount of optionally or mandatorily deferred interest on the convertible debentures, plus any compounded interest thereon, to the last trading day of the conversion reference period.

 

The conversion value, principal return, number of net shares, if any, deliverable upon conversion and amount of cash deliverable in lieu of fractional shares, if any, will be determined by us at the end of the conversion reference period.

 

Conversion Other than Upon Notice of Redemption or in Connection with a Non-Stock Change of Control

 

If conversion occurs other than pursuant to “— Conversion Rights — Conversion Upon Notice of Redemption” or in connection with a non-stock change of control pursuant to “— Conversion Rights — Conversion Upon a Change of Control,” with respect to each $1,000 principal amount of convertible debentures surrendered for conversion, we will deliver:

 

(1) perpetual preferred stock with a liquidation preference equal to $1,000 (the principal return); and

 

(2) if the conversion value of the convertible debentures converted is greater than $1,000, the net shares (in an amount equal to the sum of the daily share amounts for each of the 20 consecutive trading days during the conversion reference period).

 

We will round the number of shares that is deliverable down to the nearest whole number and will deliver cash in lieu of any fractional shares of common stock that would otherwise be deliverable.

 

Upon any such conversion, holders will not receive any cash payment representing any accrued interest for the current interest period, except as provided below under “— Additional Information Regarding Settlement.” Upon any such conversion, however, the shares of perpetual preferred stock delivered to a holder will have initial accumulated dividends at issuance equal to the amount of optionally or mandatorily deferred interest on the convertible debentures, plus compounded interest thereon, as of the last day of the conversion reference period. The issuance of the perpetual preferred stock with accumulated dividends could subject holders to the constructive distribution provisions of Section 305 of the Internal Revenue Code of 1986, as amended (“the Code”), and corporate holders to the limitations of Section 1059 of the Code. See “Certain U.S. Federal Income and Estate Tax Considerations.”

 

The conversion value, number of net shares, if any, deliverable upon conversion and amount of cash deliverable in lieu of fractional shares, if any, will be determined by us at the end of the conversion reference period.

 

As described under “Description of the Perpetual Preferred Stock — Remarketing — Remarketing Settlement,” if, prior to the expiration of the remarketing election period, a holder of convertible debentures elects to convert the convertible debentures upon a change of control other than a non-stock change of control and simultaneously elects to remarket the perpetual preferred stock received, in the event of a successful remarketing the holder will receive the amount received for such perpetual preferred stock in such successful remarketing rather than the perpetual preferred stock otherwise deliverable. In the event that a holder has elected to convert the convertible debentures and have perpetual preferred stock otherwise deliverable to such holder in respect of such conversion remarketed in such a remarketing, the remarketing agent shall be advised of such election and such shares shall be delivered by us to the remarketing agent in time to enable the remarketing agent to settle any successful remarketing of such perpetual preferred stock, even if such delivery must occur prior to the otherwise applicable settlement date for the related conversion.

Additional Information Regarding Settlement

 

We will deliver the cash or perpetual preferred stock, the net shares, if any, payment in respect of deferred interest, if any, and cash in lieu of fractional shares, if any, as promptly as practicable after the final day of the conversion reference period, but in no event later than three business days thereafter; provided, however, that upon a change of control other than a non-stock change of control, if a holder has simultaneously elected to convert the convertible debentures and have perpetual preferred stock otherwise deliverable to such holder in respect of such conversion remarketed in such a remarketing, such shares shall be delivered by us to the remarketing agent in time to enable the remarketing agent to settle any successful remarketing of such perpetual preferred stock, even if such delivery must occur prior to the otherwise applicable settlement date for the related conversion.

 

If the last trading day of the conversion reference period for any conversion falls after the record date for an interest payment but prior to the corresponding interest payment date, a holder will receive on the corresponding interest payment date the interest accrued and unpaid on such convertible debentures, notwithstanding the holder’s conversion of those convertible debentures prior to the interest payment date, assuming the holder was the holder of record on the corresponding record date. However, except as provided in the next sentence, at the time a holder surrenders such convertible debentures for conversion, the holder must pay us an amount equal to the interest that has accrued and will be paid on the convertible debentures being converted on the corresponding interest payment date. A holder is not required to make such payment:

 

 

For purposes of this paragraph, we will assume that all days scheduled to be trading days at the time of any conversion ultimately qualify as trading days.

 

Except as described under “— Conversion Rate Adjustments,” we will not make any payment or other adjustment for dividends on any common stock issued upon conversion of the convertible debentures. Accrued interest, if any, to the date of conversion not paid in cash is deemed to be paid in full with the perpetual preferred stock, cash or shares of our common stock delivered upon conversion, rather than cancelled, extinguished or forfeited.

 

Conversion Rate Adjustments

 

We will adjust the conversion rate (as well as the stock prices and additional share amounts set forth in the table of make-whole amounts described under “— Determination of the Make-Whole Amount”) if any of the following events occurs:

 

(1) we issue to all or substantially all holders of our common stock shares of our common stock as a dividend or distribution on our common stock;

 

(2) we issue to all or substantially all holders of our common stock rights or warrants entitling them for a period expiring within 60 days after the record date for such distribution to purchase shares of our

common stock at less than the average of the closing sale prices of our common stock for the five consecutive trading days immediately preceding the first public announcement of such issuance of rights or warrants, provided that with respect to any rights provided for in our stockholder rights agreement, or in any future rights plan we adopt, that have separated from the shares of our common stock in accordance with the provisions of the applicable stockholder rights agreement so that the holders of the convertible debentures would not be entitled to receive any rights in respect of common stock issuable upon conversion of the convertible debentures, if any, the adjustment will be made pursuant to clause (4) below;

 

(3) we subdivide or combine our outstanding shares of common stock;

 

(4) we distribute to all or substantially all holders of shares of our common stock our capital stock, assets (including shares of any subsidiary or business unit of ours) or debt securities or certain rights to purchase our securities (excluding any rights described in clause (2) above and any cash dividends or other cash distributions), in which event the conversion rate will be adjusted by multiplying such conversion rate by a fraction, the numerator of which will be the current market price (as defined below) of our common stock, and the denominator of which will be the current market price of our common stock minus the fair market value, as determined by our board of directors, of the portion of those assets, debt securities, shares of capital stock or rights so distributed applicable to one share of our common stock. If we distribute capital stock of, or similar equity interests in, a subsidiary or other business unit of ours, then the conversion rate will be adjusted, based on the market value of the securities so distributed relative to the market value of our common stock, in each case based on the average closing sale price of those securities (where such closing sale prices are available) and our common stock for the 10 trading days commencing on and including the fifth trading day after the “ex-dividend date” (as defined below) for such distribution on the New York Stock Exchange or the principal U.S. stock exchange or interdealer quotation system on which the securities are then listed or quoted by multiplying the conversion rate by a fraction of which the numerator shall be such market value per share of our common stock plus such market value of securities so distributed per share of our common stock and the denominator shall be such market value per share of our common stock;

 

(5) we distribute cash dividends or other cash distributions to all or substantially all holders of our common stock, other than (i) distributions described in clause (6) below or (ii) any dividend or distribution in connection with our liquidation, dissolution or winding up, in which event the conversion rate will be increased so that it equals the rate determined by multiplying the conversion rate in effect on the trading day prior to the date on which “ex-dividend trading” commences for such distribution on the New York Stock Exchange or the principal U.S. stock exchange or interdealer quotation system on which the securities are then listed or quoted by a fraction:

 

 

(6) we or any of our subsidiaries distribute cash or other consideration in respect of a tender offer or exchange offer for our common stock, where such cash and the value of any such other consideration per share of our common stock validly tendered or exchanged exceeds the closing sale price of our common stock on the trading day immediately following the expiration date for such tender or exchange offer, in which event the conversion rate will be increased by multiplying such conversion rate by a fraction, the numerator of which will be the sum of (i) the fair market value, as determined by our board of directors, of the aggregate consideration payable for all shares of our common stock we purchase in such tender or exchange offer and (ii) the product of the number of shares of our common stock outstanding as of such expiration date, less such purchased shares, and the closing sale price of our common stock on the trading day immediately following the expiration date of the tender or exchange offer, and the denominator of which will be the product of the number of shares of our common stock outstanding as of such expiration date, including any such purchased shares, and the closing sale price of our common stock on the trading day immediately following the expiration date of the tender or exchange offer.

“Ex-dividend date” means the first date on which the shares of our common stock trade on the applicable exchange or in the applicable market, “regular way,” without the right to receive the relevant issuance or distribution.

 

“Dividend threshold amount” means $0.06 per quarter, appropriately adjusted from time to time to take into account the occurrence, on or before the date of determination, of any event that would require an anti-dilution adjustment and to account for any change in the frequency of payment of our regular dividend. Whenever the conversion rate is adjusted, the dividend threshold amount shall be adjusted by multiplying such dividend threshold amount by a fraction, the numerator of which is the conversion rate prior to adjustment and the denominator of which is the conversion rate following such adjustment.

 

“Current market price” of our common stock on any day means the average of the closing sale price per share of our common stock for each of the five consecutive trading days ending on the earlier of the day in question and the day before the “ex-dividend date” with respect to the issuance or distribution requiring such computation.

 

In the event of:

 

 

in which holders of our common stock would be entitled to receive capital stock, other securities, other property, assets or cash for their common stock, upon conversion of convertible debentures,

 

 

In the event holders of our common stock have the opportunity to elect the form of consideration to be received in such transaction, the type and amount of consideration that holders of convertible debentures would have been entitled to receive will be deemed to be the weighted average of the types and amounts of consideration received by the holders of our common stock that affirmatively make an election (or, if a majority of electing holders chose a single option, the types and amounts of consideration received by those majority electing holders).

 

Holders may, in certain circumstances, be deemed to have received a distribution or dividend subject to U.S. federal income tax as a result of an adjustment or the non-occurrence of an adjustment to the conversion rate. Holders will generally be deemed to have received such a distribution or dividend as a result of adjustments made in respect of taxable dividends to holders of our common stock and in respect of a change of control. See “Certain U.S. Federal Income and Estate Tax Considerations — U.S. Holders — Constructive Distributions” and “Certain U.S. Federal Income and Estate Tax Considerations — Non-U.S. Holders — Dividends and Constructive Dividends.”

 

We may, to the extent permitted by applicable law and in accordance with the indenture, from time to time, increase the conversion rate if our board of directors determines that this increase would be in our best interests. Any such determination by our board will be conclusive. In addition, we may increase the conversion rate if our board of directors deems it advisable to avoid or diminish any income tax to holders of common stock resulting from any dividend or distribution of our common stock or rights distribution or similar event.

We will not be required to make an adjustment in the conversion rate unless the adjustment would require a change of at least 1% in the conversion rate. However, we will carry forward any adjustments that are less than 1% of the conversion rate and make such carried forward adjustments, regardless of whether the aggregate adjustment is less than 1%, within one year of the first such adjustment carried forward, upon any call for redemption, upon a change of control or on December 15, 2041. Except as described above in this section and in “— Determination of the Make-Whole Amount,” we will not adjust the conversion rate.

 

Determination of the Make-Whole Amount

 

If a non-stock change of control occurs on or prior to December 20, 2036, and a holder elects to convert convertible debentures in connection with such non-stock change of control, we will increase the applicable conversion rate for the convertible debentures surrendered for conversion in connection therewith by a number of additional shares of our common stock (the “additional shares”), as described below. A conversion of convertible debentures will be deemed for these purposes to be “in connection with” such a change of control transaction if the notice of conversion of the convertible debentures is received by the conversion agent from and including the effective date of the non-stock change of control transaction up to and including the date that is 35 days after such date.

 

A “non-stock change of control” is any change of control described by clause (1) or (3) under the definition of “change of control” under “— Conversion Rights — Conversion Upon a Change of Control,” other than a transaction in which at least 90% of the consideration, excluding cash payments for fractional shares and cash payments pursuant to dissenters’ appraisal rights, for our common stock consists of common stock traded on a U.S. national securities exchange or interdealer quotation system (or which will be so traded or quoted when issued or exchanged in connection with such change of control).

 

The number of additional shares will be determined by reference to the table below, based on the effective date of, and the price paid per share of our common stock (the “stock price”) in, the transaction constituting the non-stock change of control. If holders of our common stock receive only cash in the transaction constituting the non-stock change of control, the stock price will equal the cash amount paid per share; in all other cases, the stock price will equal the average closing sale price of our common stock (as defined under “— Conversion Rights — Conversion Upon Satisfaction of Trading Price Condition”) over the five-trading-day period ending on the trading day immediately preceding the effective date.

 

The following table sets forth the stock price and number of additional shares of common stock per $1,000 principal amount of convertible debentures used to compute the conversion rate.

 

Notwithstanding the foregoing, in no event will the total number of common shares issuable upon conversion exceed 22.5988 per $1,000 principal amount of convertible debentures, subject to adjustment in the same manner as the conversion rate as set forth under “— Conversion Procedures — Conversion Rate Adjustments.”

 

The exact stock price and effective date of the non-stock change of control may not be set forth on the table. In such event:

 

 

The stock prices set forth in the first row of the table will be adjusted as of any date on which the conversion rate of the convertible debentures is adjusted as set forth under “— Conversion Procedures — Conversion Rate Adjustments” (other than any increase to the conversion rate for a non-stock change of control as described in this section). The adjusted stock prices will equal the stock prices applicable immediately prior to such adjustment multiplied by a fraction, the numerator of which is the conversion rate immediately prior to the adjustment giving rise to the stock price adjustment and the denominator of which is the conversion rate as so adjusted. The number of additional shares will be adjusted in the same manner as the conversion rate as set forth under “— Conversion Procedures — Conversion Rate Adjustments.”

 

Redemption

 

The convertible debentures will not be subject to redemption prior to December 20, 2011.

 

Between December 20, 2011 and December 19, 2036 we may redeem the convertible debentures, in whole or in part, at the par redemption price described below if, for at least 20 trading days within the 30 consecutive trading days immediately prior to the date on which notice of redemption is given, the closing sale price of our common stock has exceeded 130% of the then prevailing conversion price for the convertible debentures, determined as described above.

 

On or after December 20, 2036, whether or not the redemption condition described above is satisfied, we may redeem the convertible debentures at any time, in whole or in part, at the par redemption price described below.

 

We may not redeem any outstanding convertible debentures unless:

 

 

For purposes of clarification, this restriction does not apply to our obligation to repay the convertible debentures at the scheduled maturity date as described under — “Payment at Scheduled Maturity.”

 

The “par redemption price” will be cash amount equal to 100% of the principal amount of the convertible debentures to be redeemed, plus accrued and unpaid interest to, but not including, the date of redemption.

 

Whether paid in connection with a redemption of convertible debentures or otherwise, any mandatorily deferred interest and any optionally deferred interest accrued after the first five years of an optional deferral

period, and any compounded interest thereon, may be paid only from the net proceeds received from the sale of qualifying warrants and qualifying preferred stock in accordance with the warrant and preferred stock settlement mechanism.

 

Redemption Procedures

 

We will mail, or cause the trustee to mail, notice of every redemption of convertible debentures by first class mail, postage prepaid, addressed to the holders of the convertible debentures to be redeemed at their respective last addresses appearing on our books (provided that if the convertible debentures are held in book-entry form through DTC, we may give such notice in any manner permitted by DTC). Such notice will be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice made as provided in this paragraph will be conclusively presumed to have been duly given, whether or not a holder receives such notice, but failure duly to give such notice, or any defect in such notice or in the mailing of such notice, to any holder of convertible debentures designated for redemption will not affect the redemption of any other convertible debentures.

 

Each notice will state (i) the redemption date; (ii) the redemption price; (iii) that the convertible debentures are being redeemed pursuant to the indenture, together with the facts permitting such redemption; (iv) if less than all outstanding convertible debentures are to be redeemed, the principal amounts and, to the extent that the convertible debentures are not all held in global form, the identification of the particular convertible debentures to be redeemed; (v) the place or places where the convertible debentures are to be redeemed; and (vi) that interest on the convertible debentures to be redeemed will cease to accrue on the redemption date provided that the required payment is made. Notice of redemption, once given, will be irrevocable.

 

Any convertible debentures to be redeemed pursuant to the aforementioned notice will, on the date fixed for redemption, become due and payable at the redemption price. From and after such date, such convertible debentures will cease to bear interest provided that the required payment is made. Upon surrender of any such convertible debentures for redemption in accordance with said notice, such convertible debentures will be paid by us at the par redemption price. If any convertible debentures called for redemption are not so paid upon surrender thereof for redemption, the redemption price will, until paid, bear interest from the redemption date at the rate of interest borne by the convertible debentures. Any convertible debentures redeemed only in part will be surrendered in accordance with the provisions of the indenture. In exchange for the unredeemed portion of such surrendered convertible debentures, new convertible debentures in an aggregate principal amount equal to the unredeemed portion will be issued.

 

Payment at Scheduled Maturity

 

On December 15, 2041 (the scheduled maturity date), we will pay holders the principal amount of the convertible debentures, together with accrued and unpaid interest, including any compounded interest thereon, if we successfully fund this payment through the sale of qualifying capital securities. “Qualifying capital securities” means replacement capital securities (as defined under “Capital Replacement”) other than common stock, rights to acquire common stock and securities convertible into common stock.

 

We will be required to use our commercially reasonable efforts, subject to the occurrence of a market disruption event (as defined under “— Warrant and Preferred Stock Settlement Mechanism”), to raise sufficient net proceeds to fund payment at scheduled maturity through the issuance of qualifying capital securities during a six-month period ending on the date we give notice of the payment we will make on the scheduled maturity date. We will also be permitted, but not required, to apply an amount up to (x) 400% of the net proceeds from any issue and sale of our common stock or rights to acquire our common stock and (y) 100% of the net proceeds from any issue and sale of our mandatorily convertible preferred stock, debt exchangeable for equity (each as defined under “Capital Replacement”) or other replacement capital securities that are convertible into common stock to fund our payment obligation. We will be contractually obligated to third parties not to fund payment at scheduled maturity with funds from any source other than those described in this paragraph, as described under “Capital Replacement.”

“Commercially reasonable efforts” to sell our qualifying capital securities means commercially reasonable efforts to complete the offer and sale of our qualifying capital securities to third parties that are not subsidiaries of ours in public offerings or private placements. We will not be considered to have made commercially reasonable efforts to effect a sale of qualifying capital securities if we determine to not pursue or complete such sale due to pricing considerations.

 

If we have not raised sufficient funds for payment in full at the scheduled maturity date, we will be required (x) to make a partial payment using the proceeds, if any, that we were able to raise and (y) to attempt payment pursuant to the procedures described above on each successive interest payment date after the scheduled maturity date and before the final maturity date until payment in full is made.

 

Net proceeds that we are permitted to apply to payment of the convertible debentures on and after the scheduled maturity date will be applied first, to pay mandatorily deferred interest (to the extent of eligible proceeds under the warrant and preferred stock settlement mechanism), second, to pay optionally deferred interest (to the extent of such eligible proceeds if and to the extent required), third, to pay current interest that we are not paying from other sources and, fourth, to pay the principal of the convertible debentures, subject to a minimum principal amount of $5 million to be repaid on the scheduled maturity date or any successive interest payment date. However, if we are obligated to sell qualifying capital securities and apply the net proceeds to payments of principal of or interest on any other outstanding securities that rank equal to the convertible debentures, then on any date and for any period the amount of net proceeds received by us from those sales and available for such payments will be applied to the convertible debentures and other equal-ranking securities pro rata in accordance with their respective outstanding principal amounts.

 

A covenant breach will occur if we do not use our commercially reasonable efforts to sell qualifying capital securities as described above, or do not apply those proceeds to payment of the convertible debentures. Although a covenant breach would not constitute an event of default permitting the holders to accelerate the principal amount of the convertible debentures, it could give rise to a claim against us relating to the specific breach. The remedy of holders of the convertible debentures for any covenant breach could, however, be limited to direct monetary damages (if any). See “— Events of Default.”

 

Procedures

 

We will mail, or cause the trustee to mail, notice of every payment of the convertible debentures pursuant to this section (“— Payment at Scheduled Maturity”) by first class mail, postage prepaid, addressed to the holders of the convertible debentures to be redeemed at their respective last addresses appearing on our books. The date of such notice will be at least 10 business days and not more than 15 business days before the date fixed for payment. Each notice will state (i) the scheduled maturity payment date; (ii) the payment amount and the manner of its calculation; (iii) that the convertible debentures are being paid pursuant to the indenture; (iv) in the case of partial payment, the principal amounts of the convertible debentures to be paid; (v) the place or places where the convertible debentures are to be paid; and (vi) that interest on the convertible debentures to be paid will cease to accrue on the scheduled maturity payment date.

 

Any convertible debentures to be paid pursuant to the aforementioned notice will, on the date fixed for payment, become due and payable at the price for payment. From and after such date, such convertible debentures will cease to bear interest. If any convertible debentures called for payment are not so paid, the payment price will, until paid, bear interest from the scheduled maturity payment date at the rate prescribed therefor in the convertible debentures. Any convertible debentures paid only in part will be surrendered in accordance with the provisions of the indenture. In exchange for the portion of such surrendered convertible debentures that is not paid, new convertible debentures in an aggregate principal amount equal to that portion will be issued.

 

Deferral of Interest Payments

 

We may elect to, and if and to the extent that a mandatory trigger event has occurred and is continuing will be required to, defer interest payments on the convertible debentures. During the deferral period resulting from any such deferral, interest on the convertible debentures will not be currently payable, but will continue to accrue and compound semi-annually to the extent permitted by applicable law, at the applicable rate of

interest on the convertible debentures. Upon the termination of a deferral period, we will be required to pay all deferred interest then accrued and unpaid, together with interest thereon, to the extent permitted by applicable law, compounded semi-annually at the applicable rate of interest on the convertible debentures, which we refer to as “compounded interest.”

 

Notwithstanding any other term of the convertible debentures, in no event may we defer payments of interest on the convertible debentures beyond the date that is 10 consecutive years (20 consecutive semi-annual interest periods) after the date on which we began the deferral of interest (whether due to optional deferral, mandatory deferral, or any combination thereof) or past the final maturity date of, or redemption date for, the convertible debentures. An event of default will result if all accrued and unpaid interest, including any compounded interest thereon, in respect of the convertible debentures has not been paid in full within 30 days after the tenth anniversary of the commencement of interest deferral. In addition, no deferral period, unless settled through the warrant and preferred stock settlement mechanism, may end on a date other than an interest payment date.

 

Option to Defer Interest Payments

 

As long as no event of default with respect to the convertible debentures has occurred and is continuing, subject to the conditions below, we may defer payments of interest on the convertible debentures at any time and from time to time. We refer to this as “optional deferral.” Upon optional deferral, any optionally deferred interest will continue to accrue and compound semi-annually, to the extent permitted by applicable law, from time to time, at the applicable rate of interest on the convertible debentures.

 

After five years of optional deferral (calculated from the first payment date as of which we defer payments on the convertible debentures due to optional deferral), we generally must sell qualifying warrants or qualifying preferred stock and use the funds from that sale to pay deferred interest as described under “— Warrant and Preferred Stock Settlement Mechanism.” This obligation is, however, subject to limitations: we will not be required to sell qualifying warrants or qualifying preferred stock during the continuation of a market disruption event, and the maximum amount of qualifying warrants and qualifying preferred stock that we are required to sell will be limited. Notwithstanding these limitations, in no event may we defer payments of interest on the convertible debentures beyond the date that is 10 consecutive years after the date on which we began the deferral of interest (whether due to optional deferral, mandatory deferral, or any combination thereof) or past the final maturity date of, or redemption date for, the convertible debentures. An event of default will result if all accrued and unpaid interest, including any compounded interest thereon, in respect of the convertible debentures has not been paid in full within 30 days after the tenth anniversary of the commencement of an interest deferral.

 

We have no present intention of exercising our right to defer payments of interest.

 

The period commencing on the payment date on which payment is optionally deferred and ending on the date on which optionally deferred interest, plus compounded interest thereon, is paid in full is referred to herein as the “optional deferral period.” We refer to interest deferred pursuant to optional deferral as “optionally deferred interest.” Upon the termination of any optional deferral period and the payment of all amounts then due, we may commence a new optional deferral period, subject to the above requirements, there being no limit to the number of such new optional deferral periods that we may elect.

 

In calculating when we have completed five years of optional deferral for purposes of determining when the provisions described under “— Warrant and Preferred Stock Settlement Mechanism” apply, we will not count the period of any mandatory deferral period occurring within the relevant optional deferral period. Thus, the expiration of five years of optional deferral may occur subsequent to the fifth anniversary of the date upon which we first deferred payments on the convertible debentures due to optional deferral.

 

We will give notice of an optional deferral not more than 60 days and not less than 15 days prior to the related interest payment date, and such notice, once given, will be irrevocable and the deferral of payments on the related interest payment date shall be an optional deferral; provided that if a mandatory trigger event has occurred on the trigger determination date in relation to such interest payment date, the provisions governing

the mandatory deferral of interest payments described under “— Mandatory Deferral of Interest Payments” will be applicable.

 

A covenant breach will occur if we do not sell qualifying warrants or qualifying preferred stock to pay any outstanding optionally deferred interest after five years of optional deferral even though a market disruption event has not occurred and neither the warrant cap nor the preferred stock cap would be breached by the sale of additional qualifying warrants or qualifying preferred stock, respectively. Although a covenant breach would not constitute an event of default permitting the holders to accelerate the principal amount of the convertible debentures, it would give rise to a claim against us relating to the specific breach. The remedy of holders of the convertible debentures for any covenant breach could, however, be limited to direct monetary damages (if any). Failure to pay interest will constitute an event of default, giving rise to a right of acceleration, only if deferred interest and any compounded interest thereon is not paid in full within 30 days after the tenth anniversary of the first interest payment date on which an interest payment is deferred or at the final maturity date. See “— Events of Default.”

 

Mandatory Deferral of Interest Payments

 

During the period beginning on any interest payment date for which a mandatory trigger event has occurred until (but not including), the earliest of

 

 

we may not pay interest on the convertible debentures on the related interest payment date unless we obtain funds for such payment through the sale of qualifying warrants or qualifying preferred stock in accordance with and subject to the warrant and preferred stock settlement mechanism. We refer to the mandatory deferral of interest payments after the occurrence of a mandatory trigger event as a “mandatory deferral,” to interest so deferred as “mandatorily deferred interest,” and to the period in which interest is deferred as a “mandatory deferral period.” Any deferred interest that is accrued and unpaid during the occurrence and continuation of a mandatory deferral period will continue to accrue and compound, to the extent permitted by applicable law, at the applicable rate of interest on the convertible debentures.

 

Upon the occurrence of a mandatory trigger event, we generally must sell qualifying warrants or qualifying preferred stock and use the funds from that sale to pay deferred interest as described under “— Warrant and Preferred Stock Settlement Mechanism.” This obligation is, however, subject to limitations: we will not be required to sell qualifying warrants or qualifying preferred stock during the continuation of a market disruption event, and the maximum amount of qualifying warrants and qualifying preferred stock that we are required to sell will be limited. Notwithstanding these limitations, in no event may we defer payments of interest on the convertible debentures beyond the date that is 10 consecutive years after the date on which we began the deferral of interest (whether due to optional deferral, mandatory deferral, or any combination thereof) or past the final maturity date of, or redemption date for, the convertible debentures.

 

“Mandatory trigger event” with respect to each payment date means a determination by us on the day (which we refer to as the trigger determination date) that is the 30th day prior to such payment date (or, in the event that such date is not a business day, the immediately preceding business day) that both of the following conditions exist as of such trigger determination date:

 

(i) our Leverage Ratio for each of the three most recently completed fiscal quarters has been equal to or greater than 6.0; and

(ii) our Interest Coverage Ratio for each of the three most recently completed fiscal quarters has been less than or equal to 2.0.

 

For purposes of determining whether a mandatory trigger event has occurred on any relevant trigger determination date, any deferred interest payments resulting from an optional deferral will be counted as if they had been paid in cash.

 

If, because of a change in GAAP that, considered cumulatively with any other such changes, causes or results in a change in an accounting principle or a restatement, our Leverage Ratio or our Interest Coverage Ratio is higher or lower than it would have been absent such change, then for purposes of making the calculations described above, commencing with the fiscal quarter for which such change in GAAP becomes effective, our Leverage Ratio and our Interest Coverage Ratio, as applicable, will be calculated on a pro forma basis as if such change had not occurred.

 

By not later than the 15th day prior to each interest payment date for which a mandatory trigger event has occurred, we will give notice of such occurrence to the holders of the convertible debentures. Such notice, in addition to stating that interest payments must be paid in accordance with the warrant and preferred stock settlement mechanism or otherwise deferred, will set forth the results of the financial tests that triggered the mandatory trigger event. We may, on the applicable interest payment date, make interest payments from proceeds received from the sale of qualifying warrants or qualifying preferred stock in accordance with the warrant and preferred stock settlement mechanism, and to the extent interest is paid in full on such interest payment date, no mandatory deferral period will commence.

 

The consequences of a mandatory trigger event and the related restrictions on interest payments will continue until we no longer fail both of the tests described in clauses (i) and (ii) above on a subsequent trigger determination date.

 

As used in this section, for any fiscal quarter:

 

“Leverage Ratio,” for any fiscal quarter, means our Adjusted Debt at the end of such fiscal quarter divided by the sum of (a) four times our Adjusted EBITDA for such fiscal quarter and (b) our Annual Rent Expense.

 

“Interest Coverage Ratio,” for any fiscal quarter, means the sum of (a) four times our Adjusted EBITDA for such fiscal quarter and (b) one-third of our Annual Rent Expense, divided by the sum of (x) four times our Adjusted Interest for such fiscal quarter and (y) one-third of our Annual Rent Expense.

 

“GAAP” means, at any date or for any period, U.S. generally accepted accounting principles, as in effect on such date or for such period.

 

“Adjusted Debt” means (i) long-term debt and short-term debt, including any junior subordinated debt, but excluding any preferred stock on our balance sheet as of the end of that fiscal quarter, plus (ii) seven times Annual Rent Expense, plus (iii) the amount sold under our accounts receivable securitization program during that quarter.

 

“Adjusted EBITDA” means (i) quarterly net income or net loss, plus (ii) quarterly tax expense, plus (iii) Adjusted Interest, plus (iv) quarterly depreciation and amortization, in each case, for that fiscal quarter.

 

“Annual Rent Expense” means the annual rent expense of the most recently completed fiscal year.

 

“Adjusted Interest” means (i) quarterly debt interest expense plus (ii) the quarterly cost of sale associated with sales of accounts receivable under our accounts receivable securitization program during that quarter and (iii) quarterly debt extinguishment expense if not otherwise included in quarterly debt interest expense. For the avoidance of doubt, Adjusted Interest shall include the amount of any accrued and unpaid deferred interest, whether optionally or mandatorily deferred.

Satisfaction of Interest

 

Any mandatorily deferred interest, and compounded interest thereon, may be paid only from the net proceeds received from the sale of qualifying warrants and qualifying preferred stock in accordance with the warrant and preferred stock settlement mechanism. Optionally deferred interest accrued (a) during the first five years (subject to an extension to the extent of any mandatory deferral period occurring therein) of an optional deferral period may be paid from any available source of cash, and (b) thereafter may be paid only from the net proceeds received from the sale of qualifying warrants and qualifying preferred stock in accordance with the warrant and preferred stock settlement mechanism. Upon the sale of qualifying warrants or qualifying preferred stock in accordance with the warrant and preferred stock settlement mechanism, the proceeds thereof will be applied first to the payment of any mandatorily deferred interest, and second to any optionally deferred interest.

 

Certain Restrictions During Optional or Mandatory Deferral Periods

 

On any date on which accrued interest through the most recent interest payment date has not been paid in full (including during any optional or mandatory deferral period) and until such time as all accrued but unpaid interest, together with any compounded interest thereon, is paid in full, we will not, and will not permit any controlled subsidiary (as defined below) to:

 

 

(1) purchases of our capital stock in connection with employee or agent benefit plans or under any dividend reinvestment plan;

 

(2) purchases or repurchases of shares of our capital stock pursuant to a contractually binding requirement to buy stock existing prior to the commencement of the deferral period, including under a contractually binding stock repurchase plan;

 

(3) in connection with the reclassification of any class or series of our capital stock, or the exchange or conversion of one class or series of our capital stock for or into another class or series of our capital stock, in each case if the resulting capital stock ranks equal to or junior to the capital stock so reclassified, exchanged or converted;

 

(4) the purchase of fractional interests in shares of our capital stock in connection with the conversion or exchange provisions of that capital stock or the security being converted or exchanged;

 

(5) dividends or distributions in the form of our capital stock or rights to acquire our capital stock, where the dividend stock or stock underlying the dividend rights is the same class as the stock on which the dividend is being paid or ranks equal to or junior to such stock;

 

(6) any declaration of a dividend in connection with the implementation of a shareholders’ rights plan, or issuances of capital stock under any such plan in the future, or redemptions or repurchases of any rights outstanding under a shareholders’ rights plan;

 

(7) acquisitions of our capital stock previously issued in connection with acquisitions of businesses made by us (which acquisitions are made by us in connection with the satisfaction of indemnification obligations of the sellers of such businesses); or

 

(8) the payment of any dividend during an optional or mandatory deferral period within 60 days after the date of declaration thereof, if at the date of declaration no optional deferral was in effect and no mandatory trigger event had occurred;

 

 

 

A “controlled subsidiary,” for purposes of the restrictions above, is any corporation in which we own, directly or indirectly, more than 50% of the voting stock.

 

Warrant and Preferred Stock Settlement Mechanism

 

Under the circumstances described under “— Option to Defer Interest Payments” and “— Mandatory Deferral of Interest Payments,” we will be required to satisfy our obligation to pay interest by selling qualifying warrants or qualifying preferred stock, or any combination thereof, the sale of which will provide a cash amount to be paid to the holders of the convertible debentures in satisfaction of accrued but unpaid interest, together with any compounded interest. Instead of selling qualifying preferred stock, we may sell depositary shares representing the right to receive such preferred stock.

 

We will not be obligated to sell qualifying warrants or qualifying preferred stock, and may satisfy deferred interest payments with cash from any source, at the final maturity date, at the tenth anniversary of the commencement of any interest deferral or upon the occurrence of an event of default under the convertible debentures.

 

We will not be obligated to sell qualifying warrants or qualifying preferred stock upon the occurrence and during the continuation of a market disruption event. Moreover:

 

 

If the issued and outstanding shares of our common stock shall have been changed into a different number of shares or a different class by reason of any stock split, reverse stock split, stock dividend, reclassification, recapitalization, split-up, combination, exchange of shares or other similar transaction, then the warrant cap will be correspondingly adjusted.

 

The net proceeds received by us from the issuance of qualifying warrants or qualifying preferred stock during the 180 days prior to the notice date for the relevant interest payment will, at the time such proceeds are delivered to the trustee to satisfy the relevant interest payment, be deemed to satisfy our obligations to pay interest on the convertible debentures pursuant to the warrant and preferred stock settlement mechanism. During the occurrence and continuation of a market disruption event, we will not be required to sell qualifying warrants or qualifying preferred stock as provided hereunder; if we have reached the warrant cap, we will not be required to sell warrants as provided hereunder; and if we have reached the preferred stock cap, we will not be permitted to sell qualifying preferred stock as provided hereunder. However, a covenant breach will occur if we do not sell qualifying warrants or qualifying preferred stock even though a market disruption event has not occurred and neither the warrant cap nor the preferred stock cap would be breached by the sale of additional qualifying warrants or qualifying preferred stock, respectively. Although a covenant breach would not constitute an event of default permitting the holders to accelerate the principal amount of the convertible

debentures, it could give rise to a claim against us relating to the specific breach. The remedy of holders of the convertible debentures for any covenant breach could, however, be limited to direct monetary damages (if any). See “— Events of Default.”

 

Neither the warrant cap nor the preferred stock cap shall relieve us of our obligation to issue the number of warrants or shares of qualifying preferred stock that we can issue without breaching either of the respective caps and to apply the proceeds thereof in partial payment of deferred interest.

 

Funds raised through the warrant and preferred stock settlement mechanism will be applied first to the payment of accrued and unpaid interest on the convertible debentures and second to the payment of accumulated dividends on the perpetual preferred stock. Amounts paid to holders pursuant to the warrant and preferred stock settlement mechanism will be applied first to any outstanding mandatorily deferred interest and any compounded interest thereon and secondly to any outstanding optionally deferred interest and any compounded interest thereon.

 

The perpetual preferred stock will also benefit from our obligation to raise funds using the warrant and preferred stock settlement mechanism and apply those funds to pay accumulated dividends after the payment in full of any deferred interest on the convertible debentures and sales of qualifying warrants and qualifying preferred stock to fund dividends in respect of the perpetual preferred stock will also be counted in calculating when the warrant cap or the preferred stock cap has been reached.

 

As used in this section:

 

“Qualifying warrants” means warrants to purchase our common stock that:

 

 

We intend to issue qualifying warrants with exercise prices at least 10% above the most recent closing sale price of our common stock as of their date of issuance.

 

“Qualifying preferred stock” means our non-cumulative perpetual preferred stock (or depositary shares representing interests in such preferred stock) that (a) is non-callable, (b) is subject to a binding capital replacement covenant or (c) has capital replacement intention disclosure and includes provisions that, from and after the occurrence of the failure to satisfy one or more financial tests set forth in the terms of such security or related transaction agreements until, but excluding, a date specified in such security or related transaction agreements, prohibit us from paying any deferred distributions in an amount exceeding the net proceeds of the sale of our common stock, rights to purchase our common stock or qualifying preferred stock.

 

“Market disruption event” means the occurrence or existence of any of the following events or sets of circumstances:

 

 

 

where “relevant securities” means qualifying warrants or qualifying preferred stock in the case of our obligation to pay interest by selling qualifying warrants or qualifying preferred stock as described above, or qualifying capital securities in the case of our obligation to use our commercially reasonable efforts to issue qualifying capital securities as described under “— Payment at Scheduled Maturity” above.

 

If no mandatory deferral period is continuing and prior to a trigger determination date we determine that, based on the most recent publicly available financial statements, a mandatory trigger event will occur on such trigger determination date, we will commence good faith efforts, reasonably promptly following such determination, to begin the process of selling qualifying warrants or qualifying preferred stock, subject to the occurrence of a market disruption event (as well as the warrant cap and the preferred stock cap, if applicable), to raise the funds necessary to make the next interest payment on the convertible debentures.

 

Our common stock “available for issuance” pursuant to qualifying warrants will be calculated as follows. First we will determine the number of our authorized and unissued shares of common stock. Then we will subtract from that number the number of those shares of common stock that we are unable to issue due to their reservation for other purposes.

 

Our qualifying preferred stock “available for issuance” will be calculated in two steps. First, we will deduct from the number of our authorized and unissued shares of preferred stock the maximum number of such shares that can be issued under existing reservations and commitments under which we are able to determine such maximum number. After we deduct that number of shares from our authorized and unissued shares, we will allocate on a pro rata basis, or such other basis as we determine is appropriate, the remaining available shares to the warrant and preferred stock settlement mechanism and to any other similar commitment that is of an indeterminate nature and under which we are then required to issue shares. The definition of

qualifying preferred stock “available for issuance” will have the effect of giving absolute priority for issuance to those reservations and commitments under which we are able to determine the maximum number of shares issuable irrespective of when they were entered into.

 

We will be permitted to modify the definition of “qualifying preferred stock available for issuance” and the related provisions of the indenture without the consent of holders of the convertible debentures, provided that (i) we have determined, in our reasonable discretion, that such modification is not materially adverse to such holders and (ii) the rating agencies then rating the convertible debentures confirm the then current ratings of the convertible debentures.

 

A covenant breach will occur if we do not use our commercially reasonable efforts to seek the consent of our shareholders to increase the number of our authorized preferred shares or common shares, respectively, in accordance with the foregoing paragraph. Although a covenant breach would not constitute an event of default permitting the convertible debentures to be accelerated, it would give rise to a claim against us relating to the specific breach. The remedy of holders of the convertible debentures for any covenant breach could, however, be limited to direct monetary damages (if any). See “— Events of Default.”

 

In the event that net proceeds received by us from the issuance of qualifying warrants or qualifying preferred stock are not sufficient to satisfy the full amount of deferred interest on the convertible debentures and compounded interest thereon, such net proceeds will be paid to the holders of the convertible debentures on a pro rata basis; provided, however, that if we have outstanding securities in addition to the convertible debentures that rank equal to the convertible debentures and under which we are obligated to sell qualifying warrants or qualifying preferred stock and apply the net proceeds to payment of deferred interest, then on any date and for any period the amount of net proceeds received by us from such sales and available for payment of such deferred interest will be applied to the convertible debentures and such other securities on a pro rata basis.

 

Covenant Against Repurchases of Warrants and Preferred Stock

 

If any deferral period lasts longer than one year, we will not repurchase any qualifying warrants or any qualifying preferred stock sold at any time pursuant to the warrant and preferred stock settlement mechanism described above, or any of our common stock, until the first anniversary of the date on which all deferred interest on the convertible debentures, and compounded interest thereon, and accumulated dividends on the perpetual preferred stock have been paid. Failure by us to adhere to this requirement will constitute a covenant breach but not an event of default.

 

Limitation on Claims in the Event of Our Bankruptcy, Insolvency or Receivership

 

The indenture provides that the holders of convertible debentures, by their acceptance of the convertible debentures, agree that in the event of our bankruptcy, insolvency or receivership, whether voluntary or not, prior to the final maturity date or redemption or repayment of the convertible debentures, any claim in respect of interest that accrued during a mandatory interest deferral period in excess of two years of accrued and unpaid interest (including any compounded interest thereon) on the convertible debentures will be extinguished; provided that such limitation shall not reduce the amounts holders of senior indebtedness would have been entitled to receive in the absence thereof.

 

Merger and Consolidation

 

Subject to the make-whole provisions described under “— Conversion Procedures — Determination of the Make-Whole Amount,” the general provisions of the indenture relating to our possible merger or consolidation, and possible transfers of our assets, will apply to the convertible debentures. You should refer to the description of these provisions under “Description of Debt Securities — Merger and Consolidation” in the accompanying prospectus.

If, as a result of any merger or similar transaction, the convertible debentures become convertible into common stock or other securities issued by a third party, such third party must fully and unconditionally guarantee all obligations of ours or our successor under the convertible debentures and the indenture.

 

Events of Default

 

An event of default with respect to the convertible debentures means:

 

 

If an event of default occurs and is continuing, we will not be required to sell qualifying warrants or qualifying preferred stock to make deferred interest payments and may make such payments using cash from any source.

 

Events of default with respect to the convertible debentures, which replace the events of default described in “Description of Debt Securities — Events of Default” in the accompanying prospectus, do not include failure to comply with or breach of our other covenants in the indenture with respect to the convertible debentures, including the covenant to sell qualifying warrants or qualifying preferred stock through the warrant and preferred stock settlement mechanism to meet certain interest payment obligations. Although a covenant breach would not constitute an event of default permitting the convertible debentures to be accelerated, it would give rise to a claim against us relating to the specific breach. The remedy of holders of the convertible debentures for any covenant breach could, however, be limited to direct monetary damages (if any). See “Risk Factors — Risks Related to the Convertible Debentures and Perpetual Preferred Stock — Holders of the convertible debentures have limited rights to accelerate payment of the convertible debentures under the indenture.” Notwithstanding the foregoing, the indenture will acknowledge that in the case of any failure to deliver consideration deliverable in respect of any conversion, monetary damages would not be adequate and will provide for specific performance as the remedy for any such failure.

 

A covenant breach will only give rise to possible remedies if it continues for 90 days after delivery of the notices specified below. Our failure (if any) to sell qualifying warrants or qualifying preferred stock through the warrant and preferred stock settlement mechanism in accordance with the provisions of the indenture in the event that no market disruption event has occurred and we are not restricted by both the warrant cap and the preferred stock cap will result in the limited remedies against us described above, and will not include the right of holders to accelerate payment of principal on the convertible debentures. See “Risk Factors — Risks Related to the Convertible Debentures and Perpetual Preferred Stock Holders of the convertible debentures have limited rights to accelerate payment of the convertible debentures under the indenture.”

 

Within 90 days after a default, the trustee must give to the holders of the convertible debentures notice of all uncured and unwaived defaults by us known to it. However, except in the case of default in payment, the trustee may withhold such notice if it determines that doing so is in the interest of the holders of the convertible debentures.

 

Holders of the convertible debentures may not themselves institute a proceeding against us on account of a covenant breach unless, among other things, the trustee fails to institute such a proceeding, subject to the terms of the indenture. However, the holders of a majority in principal amount of the convertible debentures may direct the trustee to bring such a proceeding if a covenant breach continues for a period of 90 days after

delivery of the specified notice to us from the trustee or to us and the trustee from the holders of a majority in principal amount of the convertible debentures, subject to the terms of the indenture. The indenture will not require the trustee to take any action in case of a covenant breach (other than to give notice of such default to the holders of the convertible debentures under certain circumstances, as described above) unless so directed by the holders and unless, if so requested by the trustee, an indemnity reasonably satisfactory to it is granted by the holders.

 

If an event of default occurs in respect of any outstanding convertible debentures, the trustee or the holders of at least 25% in principal amount of the outstanding convertible debentures may declare the principal amount, and all unpaid and accrued interest and any compounded interest (other than interest with respect to which holders have agreed to waive their rights in case of certain events of bankruptcy, insolvency or receivership, whether voluntary or not) to be due and payable immediately by written notice thereof to us, and to the trustee if given by the holders of the convertible debentures, subject to the terms of the indenture. However, the payment of principal, and interest on the convertible debentures will remain subordinated to the extent provided in the indenture. In addition, at any time after such a declaration of acceleration but before a judgment or decree for payment of the money due has been obtained, the holders of a majority in principal amount of the convertible debentures may, subject to specified conditions, rescind and annul such acceleration if all events of default, other than the non-payment of accelerated principal, or interest on the convertible debentures have been cured or waived as provided in the indenture. See “— Modification and Waiver.” Notwithstanding the foregoing, any holder may bring an action against us for specific performance if we fail to deliver to that holder consideration due upon a conversion of convertible debentures other than a conversion upon notice of redemption or in connection with a non-stock change of control.

 

Satisfaction and Discharge

 

The satisfaction and discharge provisions of the indenture will apply to the convertible debentures. You should read these provisions of the indenture. The defeasance provisions of the Subordinated Indenture will not, however, apply to the convertible debentures.

 

Modification and Waiver

 

Generally, our rights and obligations and the holders’ rights may be modified with the consent of holders of a majority of the outstanding convertible debentures. No modification or amendment may occur without the consent of each affected holder of a convertible debenture, however, if that modification or amendment would do any of the following:

 

 

The indenture shall provide that we and the trustee, may make modifications without the consent of the holders of convertible debentures in order to do the following: