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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 2, 2006
PEABODY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
         
Delaware   1-16463   13-4004153
(State or other jurisdiction of   (Commission File Number)   (I.R.S. Employer Identification No.)
incorporation or organization)        
     
701 Market Street, St. Louis, Missouri   63101
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code ccodecode (314) 342-3400
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


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Item 8.01. Other Events
Item 9.01. Financial Statements and Exhibits
SIGNATURE
Consent of KPMG


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Item 8.01. Other Events.
Structure and Price of the Transactions
On July 5, 2006, Peabody Energy Corporation (“Peabody”) signed a Merger Implementation Agreement (the “Merger Implementation Agreement”) to acquire Excel Coal Limited (“Excel”). The Merger Implementation Agreement was amended on September 18, 2006, when Peabody signed binding agreements to acquire 19.99 percent of Excel at A$9.50 per share (US$7.16) (“the Advance Purchase”). On September 20, 2006, Peabody closed on the Advance Purchase.
By the terms of the merger implementation agreement, as amended on September 18, 2006, Peabody will pay A$9.50 per share (approximately US$7.16) in cash for the remaining outstanding shares of Excel, resulting in a total acquisition price, including the Advance Purchase, of approximately US$1.54 billion plus assumed net debt of approximately US$193 million as of June 30, 2006.
The acquisition is intended to be financed through the net proceeds of senior note offerings and borrowings under Peabody’s senior unsecured credit facility.
Transaction Closing and Closing Conditions
The acquisition is expected to close in October 2006. The transaction is subject to approval by Excel shareholders by a vote currently scheduled on October 4, 2006, the absence of a material adverse change with respect to Excel and certain other conditions.
Financial Statements of Business to be Acquired
The consolidated financial statements of Excel Coal Limited and its Controlled Entities as of and for the year ended June 30, 2006 follow, all expressed in Australian dollars.
Unaudited pro forma combined financial statements of Peabody and Excel are presented beginning on page 64 of this Current Report on Form 8-K, after the financial statements of Excel.

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Excel Coal Limited
Income statement
For the year ended 30 June 2006
                     
        Consolidated  
                Unaudited  
        2006     2005  
    Note   $000     $000  
 
Revenue
  3     517,921       357,729  
Cost of sales
        (329,204 )     (226,095 )
 
Gross profit
        188,717       131,634  
 
Administrative expenses
        (26,745 )     (19,452 )
Other income
  4     606       107  
Other expenses
        (105 )     (4,436 )
 
Results from operating activities
  5     162,473       107,853  
 
Financial income
        4,585       4,691  
Financial expenses
        (15,189 )     (9,726 )
 
Net financing (costs)/income
  8     (10,604 )     (5,035 )
 
Share of profit of associates accounted for using the equity method
  16     443       6,214  
 
Profit before tax
        152,312       109,032  
Income tax (expense)/benefit
  9     (45,342 )     (31,229 )
 
Net profit
        106,970       77,803  
 
Minority interests
        (8,908 )     (14,955 )
 
Net profit attributable to members of the parent
        98,062       62,848  
 
Basic and diluted earnings per share attributable to ordinary equity holders
  10     47.9c       32.6c  
 
The income statement is to be read in conjunction with the notes to the consolidated financial statements.

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Statement of changes in equity
For the financial year ended 30 June 2006
                                                                 
    Issued     Retained     Translation     Hedging     Fair value             Minority        
    Capital     earnings     reserve     reserve     reserve     Total     interest     Total equity  
Consolidated   $000     $000     $000     $000     $ 000     $000     $000     $000  
Opening balance at 1 July 2004 (Unaudited)
    92,222       85,912                         178,134       37,541       215,675  
Foreign exchange translation difference (Unaudited)
                181                   181             181  
Adjustment arising from transactions with owners (Unaudited)
          (76,740 )                       (76,740 )     (1,134 )     (77,874 )
Recognition of capital profits in subsidiary (Unaudited)
          6,528                         6,528             6,528  
Deferred tax effect of IPO costs(Unaudited)
    (582 )                             (582 )           (582 )
 
Total non – profit items recognised directly in equity (Unaudited)
    (582 )     (70,212 )     181                   (70,613 )     (1,134 )     (71,747 )
Net profit (Unaudited)
          62,848                         62,848       14,955       77,803  
 
Total recognised income and expense for the period (Unaudited)
    (582 )     (7,364 )     181                   (7,765 )     13,821       6,056  
Shares issued net of transaction costs (Unaudited)
    90,059                               90,059             90,059  
Dividends (Unaudited)
          (26,920 )                       (26,920 )     (24,033 )     (50,953 )
 
Closing balance at 30 June 2005 (Unaudited)
    181,699       51,628       181                   233,508       27,329       260,837  
 
Amounts are stated net of tax
                                                               
 
                                                               
Opening balance at 1 July 2005
    181,699       51,628       181                   233,508       27,329       260,837  
Effect of change in accounting policy AASB132/139(note 36)
          736             14,561       (736 )     14,561       2,687       17,248  
 
Opening balance at 1 July 2005 – restated
    181,699       52,364       181       14,561       (736 )     248,069       30,016       278,085  
Effective portion of fair value of cash flows hedges
                      (21,294 )           (21,294 )     (2,341 )     (23,635 )
Adjustment arising from transactions with owners
          (706 )                       (706 )     (1,247 )     (1,953 )
Fair value adjustment
          (736 )                 765       29             29  
Deferred tax effect of IPO costs
    (413 )                             (413 )           (413 )
Foreign exchange translation differences
                (71 )                 (71 )     14       (57 )
 
Total non – profit items recognised directly in equity
    (413 )     (706 )     (71 )     (6,733 )     29       (7,894 )     (887 )     (8,781 )
Net profit
          98,062                         98,062       8,908       106,970  
 
Total recognised income and expense for the period
    (413 )     97,356       (71 )     (6,733 )     29       90,168       8,021       98,189  
Shares issued net of transaction costs
    102,713                               102,713             102,713  
Dividends
          (59,860 )                       (59,860 )     (9,152 )     (69,012 )
 
Closing balance at 30 June 2006
    283,999       89,124       110       (6,733 )     29       366,529       26,198       392,727  
 
Amounts are stated net of tax
     The statement of changes in equity are to be read in conjunction with the notes to the consolidated financial statements.

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Balance sheet
As at 30 June 2006
                     
        Consolidated  
                Unaudited  
        2006     2005  
    Note   $000     $000  
 
Current assets
                   
Cash and cash equivalents
  11     39,802       105,005  
Trade and other receivables
  12     84,963       61,488  
Inventories
  13     108,254       25,449  
Other financial assets
  14     3,191       3,611  
Other
        3,605       8,476  
 
Total current assets
        239,815       204,029  
 
Non-current assets
                   
Trade and other receivables
  12     7,878       9,927  
Other financial assets
  14     1,157       1,337  
Investments accounted for using the equity method
  16     10,106       9,664  
Deferred tax assets
  18     48,413       38,853  
Property, plant and equipment
  19     538,747       231,733  
Intangible assets
  20     113,205       109,056  
Other
        3,867       4,885  
 
Total non-current assets
        723,373       405,455  
 
Total assets
        963,188       609,484  
 
Current liabilities
                   
Trade and other payables
  21     106,278       95,467  
Interest bearing loans and borrowings
  22     24,262       14,154  
Deferred revenue
  21     28,208        
Employee benefits
  23     8,493       5,928  
Income tax payable
  15     22,321       12,173  
Provisions
  24     3,436       5,668  
 
Total current liabilities
        192,998       133,390  
 
Non-current liabilities
                   
Interest bearing loans and borrowings
  22     275,508       168,695  
Deferred tax liabilities
  18     43,141       21,014  
Employee benefits
  23     4,963       4,056  
Provisions
  24     14,483       14,364  
Deferred revenue
  21     25,266        
Other
        14,102       7,128  
 
Total non-current liabilities
        377,463       215,257  
 
Total liabilities
        570,461       348,647  
 
Net assets
        392,727       260,837  
 

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Balance sheet (continued)
As at 30 June 2006
                         
            Consolidated  
                    Unaudited  
            2006     2005  
Note     $000     $000  
 
Equity
                       
Issued capital
    25       283,999       181,699  
Reserves
            (6,594 )     181  
Retained earnings/(accumulated losses)
            89,124       51,628  
 
Total equity attributable to equity holders of the parent
            366,529       233,508  
Minority interest
            26,198       27,329  
 
Total equity
            392,727       260,837  
 
The balance sheet is to be read in conjunction with the notes to the consolidated financial statements.

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Statement of cash flows
For the year ended 30 June 2006
                     
        Consolidated  
                Unaudited  
        2006     2005  
    Note   $000     $000  
 
Cash flows from operating activities
                   
Cash receipts from customers
        480,237       365,610  
Cash paid to suppliers and employees
        (367,403 )     (249,378 )
 
Cash generated from operations
        112,834       116,232  
Interest paid
        (16,274 )     (8,681 )
Income taxes paid
        (22,371 )     (6,959 )
Interest received
        4,460       4,571  
Dividends received
        125       5,930  
 
Net cash from operating activities
  32     78,774       111,093  
 
Cash flows from investing activities
                   
Proceeds from sale of property, plant and equipment
        651        
Proceeds from sale of investments
        2,535       230  
Payments for investments
        (1,953 )     (1,334 )
Payments for security deposits
        (8,176 )     (12,710 )
Acquisition of subsidiary, net of cash acquired
  31           (35,639 )
Acquisition of property, plant and equipment
        (279,826 )     (87,927 )
Repayment/(advances) to other parties
              1,263  
Exploration and evaluation expenditure
        (7,948 )     (6,922 )
 
Net cash from investing activities
        (294,717 )     (143,039 )
 
Cash flows from financing activities
                   
Proceeds from the issue of share capital
        102,713       13,905  
Proceeds from borrowings – other parties
        92,748       140,611  
Proceeds from deferred revenue
        53,474        
Repayment of borrowings – other parties
        (8,000 )     (30,989 )
Dividends paid to members of the parent entity
        (59,860 )     (26,920 )
Dividends paid to minority interests
        (20,362 )     (11,696 )
Finance lease payments
        (9,973 )     (8,750 )
 
Net cash from financing activities
        150,740       76,161  
 
Net increase/(decrease) in cash and cash Equivalents
        (65,203 )     44,215  
Cash and cash equivalents at 1 July
        105,005       60,790  
 
Cash and cash equivalents at 30 June
  11     39,802       105,005  
 
The statement of cash flows is to be read in conjunction with the notes to the consolidated financial statements.

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Notes to the consolidated financial statements
1. Significant accounting policies
Excel Coal Limited (the “Company” or Excel) is a company domiciled in Australia. The consolidated financial report of the Company for the year ended 30 June 2006 and 2005 comprise the Company and its subsidiaries (together referred to as the “consolidated entity” or “Group”) and the consolidated entity’s interest in associates.
The consolidated financial report was authorised for issue by the directors on 29 September 2006.
(a) Statement of compliance
The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (“AAS”), being the Australian equivalent to International Financial Reporting Standards (“IFRS”), adopted by the Australian Accounting Standards Board(“AASB”).
(b) Basis of preparation
The financial report is presented in Australian dollars.
The financial report is prepared on the historical cost basis except that derivative financial instruments and financial instruments classified as available for sale assets are stated at their fair value.
The entity has elected early adoption of the following accounting standards:
  AASB 119 Employee Benefits (December 2004);
 
  AASB 2004-3 Amendments to Australian Accounting Standards (December 2004) amending AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 101 Presentation of Financial Statements, AASB 124 Related Party Disclosures;
 
  AASB 2005-1 Amendments to Australian Accounting Standards (May 2005) amending AASB 139 Financial Instruments: Recognition and Measurement;
 
  AASB 2005-3 Amendments to Australian Accounting Standards (June 2005) amending AASB 119 Employee Benefits (either July or December 2004);
 
  AASB 2005-4 Amendments to Australian Accounting Standards (June 2005) amending AASB 139 Financial Instruments : Recognition and Measurement, AASB 132 Financial Instruments: Disclosure and Presentation, AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004);
 
  AASB 2005-5 Amendments to Australia Accounting Standards (June 2005) amending AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004) and AASB 139 Financial Instruments: Recognition and Measurement;
 
  AASB 2005-6 Amendments to Australian Accounting Standards (June 2005) amending AASB 3 Business Combinations;
 
  AASB 2005-11 Amendments to Australian Accounting Standards (September 2005) amending AASB 101 Presentation of Financial Statements, AASB 112 Income Taxes, AASB 132 Financial Instruments: Disclosure and Presentation, AASB 133 Earnings per Share, AASB 139 Financial Instruments: Recognition and Measurement, and AASB 141 Agriculture; and
 
  Urgent Issues Group 4 Determining whether an Arrangement contains a lease.
The above standards have been applied consistently in the periods presented.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(b) Basis of preparation (continued)
Issued standards not early adopted
The following standards and amendments were available for early adoption but have not been applied by the consolidated entity in these accompanying financial statements:
  AASB 7 Financial instruments: Disclosure (August 2005) replacing the presentation requirements of financial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007;
 
  AASB 2005-9 Amendments to Australian Accounting Standards (September 2005) requires that liabilities arising from the issue of financial guarantee contracts are recognised in the balance sheet. AASB 2005-9 is applicable for annual reporting periods beginning on or after 1 January 2006
 
  AASB 2005-10 Amendments to Australian Accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Instruments: Disclosures and Presentation, AASB 101 Presentation of Financial Statements, AASB 114 Segment Reporting, AASB 117 Leases, AASB 133 Earnings per Share, AASB 139 Financial Instruments: Recognition and Measurement, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts, arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007.
The consolidated entity will adopt AASB 7, AASB 2005-9 and AASB 2005-10 in the 2007 financial year.
The initial application of AASB 7 and AASB 2005-10 is not expected to have an impact on the financial results of the consolidated entity as the standard and the amendment are concerned only with disclosures.
The initial application of AASB 2005-9 could have an impact on the financial results of the consolidated entity as the amendment could result in liabilities being recognised for financial guarantee contracts that have been provided by the consolidated entity. However, the quantification of the impact is not known or reasonably estimable in the current financial year as an exercise to quantify the financial impact has not been undertaken by the consolidated entity to date.
The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements made by management in the application of Australian Accounting Standards that have a significant effect on the financial report and estimates with a significant risk of material adjustment in the next year are discussed in note aa.
The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report except for AASB 132: Disclosure and Presentation and AASB 139: Recognition and Measurement which was adopted on 1 July 2005, as set out in note 36.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(c) Basis of consolidation
Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in these financial statements from the date that control commences until the date that control ceases.
Associates
Associates are those entities for which the consolidated entity has significant influence, but not control, over the financial and operating policies. The financial report includes the consolidated entity’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the consolidated entity’s share of losses exceeds its interest in an associate, the consolidated entity’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the consolidated entity has incurred legal or constructive obligations or made payments on behalf of an associate.
Joint ventures
Joint ventures are those entities over whose activities the consolidated entity has joint control, established by contractual agreement.
Jointly controlled entities
In the consolidated financial statements, investments in jointly controlled entities are accounted for using equity accounting principles. Investments in joint venture entities are carried at the lower of the equity accounted amount and recoverable amount.
The consolidated entity’s share of the jointly controlled entity’s net profit or loss is recognised in the consolidated income statement from the date joint control commenced until the date joint control ceases. Other movements in reserves are recognised directly in the consolidated reserves.
Jointly controlled operations and assets
The interest of the consolidated entity in unincorporated joint ventures and jointly controlled assets are brought to account by recognising in its financial statements the assets it controls and the liabilities that it incurs, and the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint venture.
Transactions eliminated on consolidation
Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the financial report.
Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the consolidated entity’s interest in the entity, with adjustments made to the “Investment in associates” and “Share of associates’ net profit” accounts.
Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Gains and losses are recognised as the relevant assets are consumed or sold by the associate or jointly controlled entities or, if not consumed or sold by the associate or jointly controlled entity, when the consolidated entity’s interest in such entities is disposed of.
Changes in ownership interest
When a controlled entity makes a new issue of capital and the consolidated entity’s percentage ownership changes, the share of retained profits and reserves attributed to the Company and minority interest is adjusted to reflect the new ownership interest. The adjustment is not reflected in net profit but as a direct adjustment to the specific equity accounts.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(d) Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined.
Financial statements of foreign operations
The assets and liabilities for foreign operations, including goodwill and fair value adjustments arising on consolidation, generally are translated to Australian dollars at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions.
Net investment in foreign operations
Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges are taken to translation reserve. They are released into the income statement upon disposal.
(e) Derivative financial instruments
Current period policy (from 1 July 2005)
The consolidated entity uses derivative financial instruments to hedge its exposure to foreign exchange arising from operational and financing activities. In accordance with its treasury policy, the consolidated entity does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
Derivative financial instruments are initially recognised at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting policy f).
The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
Comparative period policy (to 30 June 2005) — Unaudited
The consolidated entity is exposed to changes in interest rates, foreign exchange rates and commodity prices from its activities. The consolidated entity uses forward foreign exchange contracts to hedge these risks. Derivative financial instruments are not held for speculative purposes. The accounting policy in respect of these derivatives are described in accounting policy note (f).
The impact of the change in accounting policy is set out in note 36.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(f) Hedging
Current period policy (from 1 July 2005)
Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non financial asset or non financial liability, or the forecast transaction for a non financial asset or non financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non financial asset or liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains or losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e., when interest income or expense is recognised).
For cash flow hedges, other than those described above, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit and loss. The ineffective part of any gain or loss is recognised immediately in the income statement.
When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to occur, then the cumulative unrealised gain or loss, previously recognised in equity, is transferred to the income statement.
Hedge of monetary assets and liabilities
When a derivative financial instrument is used to hedge the foreign exchange exposure of a recognised monetary asset or liability, hedge accounting is not applied and any gain or loss on the hedging instrument is recognised in the income statement.
Comparative period policy (to 30 June 2005) — Unaudited
Transactions are designated as a hedge of the anticipated specific purchase or sale of good or services, only when they are expected to reduce exposure to the risks being hedged, are designated prospectively so that it is clear when an anticipated transaction has or has not occurred and it is probable the anticipated transaction will occur as designated.
Gains or losses on the hedge arising up to date of the anticipated transaction, together with any costs or gains arising at the time of entering into the hedge, are deferred and included in the measurement of the anticipated transaction when the transaction has occurred as designated. Any gains or losses on the hedge transaction after that date are included in the income statement.
The net amounts receivable or payable under forward foreign exchange contracts and the associated deferred gains and losses are recorded on the balance sheet from the date of the inception of the hedge transaction. When recognised, the net receivables or payables are revalued using the foreign currency current at reporting date.
Option premiums are recorded in “other assets” when paid and included in the measurement of the transaction when it occurs.
When the anticipated transaction is no longer expected to occur as designated, the deferred gains or losses relating to the hedged transaction are recognised immediately in income statement.
Where a hedge transaction is terminated early and the anticipated transaction is still expected to occur as designated, the deferred gains or losses that arose on the hedge prior to its termination continue to be deferred and are included in the measurement of the purchase or sale or interest transaction when it occurs. Where a hedge transaction is terminated early because the anticipated transaction is no longer expected to occur as designated, deferred gains or losses that arose on the hedge prior to its termination are included in the income statement for the period.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(f) Hedging (continued)
Where a hedge is redesignated as a hedge of another transaction, gains or losses arising on the hedge prior to its redesignation are deferred only where the original anticipated transaction is still expected to occur as designated. When the original anticipated transaction is no longer expected to occur as designated, any gains or losses relating to the hedge instrument are included in the income statement for the period.
Gains or losses that arise prior to and upon the maturity of transactions entered into under hedge rollover strategies are deferred and included in the measurement of the hedged anticipated transaction if the transaction is still expected to occur as designated. If the anticipated transaction is no longer expected to occur as designated, the gains or losses are recognised immediately in the income statement.
Hedge of monetary assets and liabilities
All other hedge transactions are recorded initially at the relevant rate at the date of the transaction. Hedges outstanding at reporting date are valued at the rate ruling on that date and any gains or losses are brought to account in the income statement.
Costs or gains arising at the time of entering into the hedge are deferred and amortised over the life of the hedge.
(g) Property, plant and equipment
Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy n). The cost of self constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of self constructed assets and acquired assets includes:
(i)   the initial estimate at the time of installation and during the period of use, when relevant, of the costs of dismantling and removing the items and restoring the site on which they are located; and
 
(ii)   changes in the measurement of existing liabilities recognised for these costs resulting from changes in the timing or outflow of resources required to settle the obligation or from changes in the discount rate.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
Leased assets
Leases which the consolidated entity assumes substantially all of the risks and rewards of ownership are classified as finance leases. The owner occupied property acquired by way of a finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses (see accounting policy n). Lease payments are accounted for as described in accounting policy w.
Subsequent costs
The consolidated entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the consolidated entity and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(g) Property, plant and equipment (continued)
Depreciation
Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives in the current and comparative periods are as follows:
             
        2006   2005 (unaudited)
  buildings   20 years  
20 years
  open cut infrastructure   6 to 14 years   6 to 14 years
  plant and equipment   3 to 11 years   3 to 11 years
  leased assets   5 to 7 years   5 to 7 years
The residual value, if not insignificant, is reassessed annually.
(h) Intangible assets
Goodwill
Business combinations (since 1 July 2004)
All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired including coal reserves and exploration and evaluation expenditure.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is not amortised but is tested annually for impairment (see accounting policy n). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate.
Negative goodwill arising on an acquisition is recognised directly in profit or loss.
Coal reserves
Coal reserves are stated at cost. The carrying value is assessed annually for impairment.
Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.
Amortisation
Amortisation of coal reserves is based on saleable coal production and is charged to the income statement on a unit of production basis over the economically recoverable reserves. Goodwill and intangible assets with an indefinite useful life are tested for impairment at each annual balance sheet date.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(i) Investments
Investments in debt and equity securities
All investments are recognised initially at cost, being the fair value of consideration given and include acquisition costs associated with the investment.
After initial recognition, investments which are classified as available for sale are measured at fair value. Gains and losses on available for sale investments are recognised as a separate component of equity until the investment is sold, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is transferred to the income statement.
For investments that are actively traded in organised financial markets the fair value is determined by reference to the Stock Exchange quoted market bid prices at the close of business at the balance sheet date.
Comparative period policy (to 30 June 2005) — Unaudited
Investments in other listed entities and other unlisted entities are measured at the lower of cost and recoverable amount. Investments in marketable securities held for the purpose of trading are measured at fair value.
The quantitative effect of the change in accounting policy is set out in note 36.
(j) Trade and other receivables
Current accounting policy (from 1 July 2005)
Trade and other receivables are stated at their invoiced amount less impairment losses (see accounting policy n).
Comparative period policy (to 30 June 2005) — Unaudited
Trade and other receivables are carried at invoiced amounts. The collectability of debts is assessed at reporting date and specific provision is made for any doubtful accounts. Bad debts are written off as incurred.
(k) Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated selling costs.
The cost of coal stocks is based on a running average cost basis and includes an appropriate share of both fixed and variable costs incurred in extracting the coal and bringing it to its existing condition and location.
(l) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are payable on demand and form an integral part of the consolidated entity’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(m) Exploration, and evaluation expenditure
Pre licence costs are recognised in the income statement as incurred.
Exploration and evaluation expenditure, including the costs of acquiring licences, are capitalised as exploration and evaluation assets on an area of interest basis. The capitalised costs are presented as intangible exploration and evaluation assets. When a licence is relinquished or a project abandoned, the related costs are recognised in profit or loss.
Exploration and evaluation assets are only recognised if the rights of the area of interest are current and either:
(i)   the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or
 
(ii)   activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or other wise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.
Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount (see impairment, accounting policy n). For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. The cash generating unit shall not be larger than the area of interest.
Exploration and evaluation assets that have reached the development and production phase are reclassified as property, plant and equipment and are depreciated (amortised) on a units of production basis over the life of the economically recoverable reserve.
(n) Impairment
The carrying amounts of the consolidated entity’s assets other than, inventories (see accounting policy k), and deferred tax assets (see accounting policy x), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see below).
For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated annually.
An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement unless the asset has been revalued previously in which case the impairment loss is recognised as a reversal to the extent of the previous revaluation with any excess recognised through the income statement.
Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.
When a decline in the fair value of an available for sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(n) Impairment (continued)
Calculation of recoverable amount
The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.
Reversals of impairment
An impairment loss in respect of an investment in an equity instrument classified as available for sale is not reversed through profit or loss. If the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognised in the income statement.
In respect of assets, other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
(o) Dividends
Dividends are recognised as a liability in the period in which they are declared.
(p) Interest bearing borrowings
Current accounting policy (from 1 July 2005)
Interest bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
Comparative period policy (to 30 June 2005) — Unaudited
Bank loans are recognised at the principal amount, subject to set off arrangements. Interest expense is accrued at the contracted rate and included in Trade and other payables.
The quantitative effect of the change in accounting policy is set out in note 36.
(q) Net financing costs
Financing costs include interest payable on borrowings, calculated using the effective interest rate method, finance charges in respect of leases, exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs and differences relating to the unwinding of the discount of assets and liabilities measured at amortised costs.
Financing costs are recognised as an expense in the period in which they are incurred, unless they relate to a qualifying asset. Financing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale.
Financial income is recognised as it accrues taking into account the effective yield on the financial asset.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(r) Earnings per share
Basic earnings per share (EPS) is calculated by dividing the net profit attributable to members of the parent entity for the reporting period, after excluding any costs of servicing equity (other than ordinary shares and converting preference shares classified as ordinary shares for EPS calculation purposes), by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue.
Diluted EPS is calculated by dividing the basic EPS earnings, adjusted by the tax effect of financial costs associated with dilutive ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares, by the weighted average number of ordinary and dilutive potential ordinary shares adjusted for any bonus issue.
(s) Employee benefits
Defined contribution plans
Controlled entities of the Company contribute to various funds including the AUSCOAL superannuation fund. Contributions are charged against income as they are made.
Long term service benefits
The consolidated entity’s net obligation in respect of long term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating to the terms of the consolidated entity’s obligations.
Wages, salaries, annual leave, sick leave and non monetary benefits
Liabilities for employee benefits for wages, salaries, annual leave and sick leave represent present obligations resulting from employees’ services provided to the reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on costs, such as, workers compensation insurance and payroll tax.
Non accumulating non monetary benefits, such as medical care, housing and cars, are expensed based on the net marginal cost to the consolidated entity as the benefits are taken by the employees.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(t) Provisions
A provision is recognised in the balance sheet when the consolidated entity has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability.
Mine rehabilitation
Provisions are made for the estimated cost of rehabilitation relating to areas disturbed during the mine’s operation up to reporting date but not yet rehabilitated. Provision has been made in full for all disturbed areas at the reporting date based on current estimates of costs to rehabilitate such areas, discounted to their present value based on expected future cash flows. The estimated cost of rehabilitation includes the current cost of recontouring, topsoiling and revegetation employing legislative requirements. Changes in estimates are dealt with on a prospective basis as they arise.
Significant uncertainty exists as to the amount of rehabilitation obligations which may be incurred due to the impact of possible future changes in environmental legislation.
The amount of the provision relating to rehabilitation of mine infrastructure and dismantling obligations is recognised at the commencement of the mining project and/or construction of the assets where a legal or constructive obligation exists at that time. The provision is recognised as a liability with a corresponding asset included in mining property and development assets.
At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, and timing or amount of the costs to be incurred. Changes in the liability relating to rehabilitation of mine infrastructure and dismantling obligations are added to or deducted from the related asset, other than the unwinding of the discount which is recognised as a finance cost in the income statement as it occurs.
If the change results in a liability that exceeds the carrying amount of the asset, the asset is written-down to nil and the excess is recognised immediately in the income statement. If the change in the liability results in an addition to the cost of the asset, the recoverability of the new carrying amount is considered. Where there is an indication that the new carrying amount is not fully recoverable, an impairment test is performed with the write-down recognised in the income statement in the period in which it occurs.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(u) Trade and other payables
Current period policy (from 1 July 2005)
Trade and other payables are stated at their invoiced amount.
Comparative period policy (to 30 June 2005) — Unaudited
Trade and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the company.
(v) Revenue
Revenue from the sale of coal is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer, as specified by individual sale agreements, and is usually the date the goods are received by the shipping agent. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the costs incurred cannot be measured reliably, there is a risk of return of goods or there is continuing management involvement with the goods.
Deferred revenue
Deferred revenue is recognised as revenue when the significant risks and rewards of ownership have been transferred to the buyer.
(w) Leases
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total leased expense and spread over the lease term.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce constant periodic rate of interest on the remaining balance of the liability.
(x) Income tax
Income tax on the profit and loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill, the initial recognition of assets and liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

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Notes to the consolidated financial statements
Significant accounting policies (continued)
(y) Goods and services tax
Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.
(z) Deferred stripping costs
Expenditure incurred to remove overburden or waste material during the production phase of a mining operation is deferred as work in progress and capitalised as inventory to the extent it gives rise to future economic benefits and charged to operating costs on a units of production basis using the estimated average stripping ratio for the area being mined. Changes in estimates of average stripping ratios are accounted for prospectively.
For the purposes of assessing impairment, deferred stripping costs are grouped with other assets of the relevant cash generating unit.
(aa) Accounting estimates and judgements
Management discussed with the Audit and Corporate Governance Committee the development, selection and disclosure of the consolidated entity’s critical accounting policies and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Key sources of estimation uncertainty
Note 20 contains information about the assumptions and their risk factors relating to goodwill impairment. In note 26 detailed analysis is given of the foreign exchange exposure of the consolidated entity and risks in relation to foreign exchange movements.
Recoverability of development costs
The Group’s net assets held in Venezuela amount to $15,962,000 as at 30 June 2006, its carrying value is supported by discounted cash flows.
The Government of Venezuela has announced plans to nationalise certain privately held mining interests but it is not clear whether this policy will be implemented as announced or whether it will apply to Excel’s assets in Venezuela. If the policy does apply to Excel’s assets in Venezuela, it is not yet clear whether the carrying value of the asset will be affected. At the date of this report the Directors are of the opinion that the carrying value of the assets are not impaired.
Coal reserves amortisation
Coal reserves are being amortised based on saleable coal production over economically recoverable reserves. The amount of reserves that may be actually mined in future and the Company’s estimates of reserves from time to time in future may vary from current reserve estimates.
Critical accounting judgements in applying the consolidated entity’s accounting policies
Certain critical accounting judgements in applying the consolidated entity’s accounting policies are described below.
Business combinations
Under Australian Accounting Standards there are a number of options allowed when accounting for the acquisition of additional interests subsequent to acquiring control. Excel has elected to allocate the additional consideration over the net assets acquired to equity.

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Notes to the consolidated financial statements
2. Segment reporting
Business and geographical segments
The consolidated entity operates predominantly within the coal industry in Australia.
3. Revenue
                 
    Consolidated  
            Unaudited  
    2006     2005  
 
    $000       $000  
 
Coal sales
    512,289       353,853  
 
               
Other revenue
               
Other revenue
    2,167       3,876  
Port fees
    3,465        
 
 
    517,921       357,729  
 
4. Other income
                 
    Consolidated  
            Unaudited  
    2006     2005  
 
    $000       $000  
 
Net gain on disposal of property, plant and equipment
    606       107  
 
 
    606       107  
 
5. Results from operating activities
                 
    Consolidated  
            Unaudited  
    2006     2005  
 
    $000       $000  
 
Depreciation and amortisation
    24,589       20,973  
 
6. Personnel expenses
                 
    Consolidated  
            Unaudited  
    2006     2005  
 
    $000       $000  
 
Wages and salaries
    41,267       31,629  
Contributions to defined contribution plans
    2,756       2,099  
Increase in liability for long service leave
    907       546  
 
 
    44,930       34,274  
 

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Notes to the consolidated financial statements
7. Auditors’ remuneration
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Audit Services
               
Auditors of the Company
               
KPMG Australia:
               
Audit and review of financial reports
    337       275  
Other regulatory services
    8       5  
Overseas KPMG firms:
               
Audit and review of financial reports
    35       28  
 
 
    380       308  
 
Other Services
               
Auditors of the Company
               
Other audit related services
               
KPMG Australia:
               
IFRS accounting services
    52       50  
Accounting interpretation advice
    24       33  
 
 
    76       83  
 
Other non audit related services
               
KPMG Australia:
               
Other assurance services
    18       60  
Taxation compliance services
    59       79  
Due diligence services
    200        
Overseas KPMG firms:
               
Due diligence services
    73        
 
 
    350       139  
 
 
    806       530  
 
8. Net financing costs
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $000     $000  
 
Interest income
    4,460       4,571  
Dividend income
    125       120  
 
Financial income
    4,585       4,691  
 
               
Other investments:
               
Net loss on disposal
    (1,022 )      
Interest expense
    (13,243 )     (9,624 )
Unwinding of discount
    (637 )     (102 )
Net foreign exchange loss
    (287 )      
 
Financial expenses
    (15,189 )     (9,726 )
 
Net financing (costs)/income
    (10,604 )     (5,035 )
 

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Notes to the consolidated financial statement
9. Income tax expense
Recognised in the income statement
                         
            Consolidated  
                    Unaudited  
            2006     2005  
    Note     $ 000     $ 000  
 
Current tax expense
                       
Current year
            31,784       14,793  
Adjustments for prior years
                  (115 )
 
 
            31,784       14,678  
 
 
                       
Deferred tax expense
                       
Origination and reversal of temporary differences
            22,197       1,235  
(Benefit)/reversal of tax losses recognised
            (8,639 )     15,316  
 
 
    18       13,558       16,551  
 
Total income tax expense/(benefit) in income Statement (substantially domestic)
            45,342       31,229  
 
Numerical reconciliation between tax expense and pre-tax net profit
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Profit before tax (substantially domestic)
    152,312       109,032  
 
Income tax using the domestic corporation tax rate of 30% (2005: 30%)
    45,694       32,710  
Increase/(decrease) in income tax expense due to:
               
Share of associates’ net profit
    (133 )     (1,864 )
R&D claims
    (277 )      
Other non-deductible /(assessable) items
    58       1,048  
Tax losses recognised
          (550 )
 
 
               
Under/(over) provided in prior years
          (115 )
 
Income tax expense on pre-tax net profit
    45,342       31,229  
 
Deferred tax recognised directly in equity
                         
            Consolidated  
                    Unaudited  
            2006     2005  
    Note     $ 000     $ 000  
 
Relating to equity securities available for sale
            12        
Relating to hedge reserve
            (1,416 )      
IPO Costs
            413       582  
 
Total deferred tax recognised through equity
    18       (991 )     582  
 

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Notes to the consolidated financial statements
10. Earnings per share
Basic and diluted earning per share
The calculation of basic earnings share at 30 June 2006 was based on the profit attributable to ordinary shareholders of $98,062,000 (2005-Unaudited: $62,848,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2006 of 204,878,114 (2005-Unaudited: 192,725,185), calculated as follows:
Profit attributable to ordinary shareholders
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Profit for the period attributable to ordinary shareholders
    98,062       62,848  
 
Weighted average number of ordinary shares
                 
    Weighted average  
    number of shares  
            Unaudited  
    2006     2005  
Issued ordinary shares at 1 July
    199,870,470       182,742,325  
Effect of shares issued – Institutional placement
    4,879,512        
Effect of shares issued – Share purchase plan
    128,132        
Effect of shares issued to acquire 25% of HunterCoal Pty Ltd
          6,312,329  
Effect of shares issued to acquire 51% of Millennium Coal Pty Ltd
          1,829,285  
Effect of shares issued to acquire 26% of Millennium Coal Pty Ltd
          1,308,421  
Effect of shares issued to acquire 8% of Millennium Coal Pty Ltd
          532,825  
 
Weighted average number of ordinary shares at 30 June
    204,878,114       192,725,185  
 
Basic and diluted earnings per share attributable to ordinary shareholders
    47.9c       32.6c  
 
There were no potential dilutive ordinary shares. The number of shares on issue at 30 June 2006 was 214,977,360 (Refer note 25 for details of movements in capital)
11. Cash and cash equivalents
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Bank balances
    32,972       66,889  
Call deposits
    6,830       38,116  
 
Cash and cash equivalents
    39,802       105,005  
 

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Table of Contents

Notes to the consolidated financial statements
12. Trade and other receivables
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Current
               
Trade receivables
    45,495       12,190  
Security deposits
    25,052       16,892  
Other receivables and prepayments
    10,725       6,040  
 
               
Fair value derivatives
    3,691       26,366  
 
 
    84,963       61,488  
 
 
               
Non current
               
Loan to associate
          1,304  
Other debtors
    7,878       8,623  
 
 
    7,878       9,927  
 
13. Inventories
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Current
               
Raw materials and consumables
    923       1,194  
Work in progress
    80,111       8,995  
Finished goods
    27,220       15,260  
 
 
    108,254       25,449  
 
14. Other financial assets
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Current investments
               
Listed equity securities available for sale
    143        
 
Listed investments
          3,611  
Other investments
    3,048        
 
 
    3,048       3,611  
 
 
    3,191       3,611  
 
 
               
Non current investments
               
Listed investments
          47  
Unlisted investments
    1,157       1,290  
 
 
    1,157       1,337  
 

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Notes to the consolidated financial statements
15. Current tax assets and liabilities
The current tax liability for the consolidated entity of $22,321,000 (2005-Unaudited: $12,173,000) represents the amount of income taxes payable in respect of current and prior periods. In accordance with the tax consolidation legislation, the Company as the head entity of the Australian tax-consolidated group has assumed the current tax liability initially recognised by the members in the tax consolidation group.
16. Investments accounted for using the equity method
Investments in associates
                         
                Ownership interest  
                    Unaudited  
Name   Principal activities   Country of incorporation   Reporting date   2006   2005  
 
ICC Holdings Pty Ltd
  Manufacturers of metallurgical coke   Australia   30 June   50%     50 %
Excel Coal Marketing Pty Ltd
  Coal marketing   Australia   30 June   30%      
GTN Copper Technology Ltd
  Dormant   Australia   30 June   55.9%     55.9 %
Antrim Coal Ltd
  Dormant   UK   31 December   50%     50 %
 
The consolidated entity has the following investments in associates:
                                                         
                    Share of                     Net assets as     Share of  
            Profit/     associates net     Total     Total     reported by     associate’s net  
    Revenues     (loss)     profit/(loss)     Assets     Liabilities     associates     assets equity  
    (100%)     (100%)     recognised     (100%)     (100%)     (100%)     accounted  
    $000     $ 000     $ 000     $ 000     $ 000     $ 000     $ 000  
 
2006
                                                       
ICC Holdings Pty Ltd
    53,246       68       34       29,850       11,058       18,792       9,396  
Excel Coal Marketing Pty Ltd
    35,627       1,363       409       25,329       23,966       1,363       409  
GTN Copper Technology Ltd
                      537             537       300  
Antrim Coal Ltd
                      2             2       1  
 
 
    88,873       1,431       443       55,718       35,024       20,694       10,106  
 
2005 (Unaudited)
                                                       
ICC Holdings Pty Ltd
    58,468       12,428       6,214       32,620       13,894       18,726       9,363  
GTN Copper Technology Ltd
                      537             537       300  
Antrim Coal
                      2             2       1  
 
 
    58,468       12,428       6,214       33,159       13,894       19,265       9,664  
 

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Notes to the consolidated financial statements
16. Investments accounted for using the equity method
Investments in associates (continued)
Results of associates
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Share of associate profit before income tax
    636       9,001  
Share of income tax expense
    (193 )     (2,787 )
 
Share of associates net profit – accounted for using the equity method
    443       6,214  
 
Associates did not have capital or expenditure commitments or contingent liabilities at 30 June 2006 (2005 Unaudited:$Nil).
17. Interest in joint venture operation
The consolidated entity has an 80% (2005-Unaudited: 80%) interest in the Wallarah Coal Joint Venture an unincorporated joint venture whose principal activity is coal mining at Chain Valley. For the year ended 30 June 2006, the contribution of the joint venture to the operating profit of the consolidated entity was $3,569,000 (2005-Unaudited: $2,322,000). Included in the assets and liabilities of the consolidated entity’s interest in the assets and liabilities employed in the joint venture:
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Current assets
               
Cash assets
    1,928       1,649  
Trade and other receivables
    3,393       2,262  
Inventories
    828       1,244  
 
Total current assets
    6,149       5,155  
 
Non current assets
               
Receivables
    537       169  
Plant and equipment
    9,101       5,137  
 
Total non current assets
    9,638       5,306  
 
Total assets
    15,787       10,461  
 
Current liabilities
               
Trade creditors
    3,392       2,214  
Interest bearing liabilities
    1,286       1,052  
Provisions
    4,019       3,251  
 
Total current liabilities
    8,697       6,517  
 
Non current liabilities
               
Interest bearing liabilities
    1,368       1,351  
Provisions
           
 
Total non current liabilities
    1,368       1,351  
 
Total liabilities
    10,065       7,868  
 

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Notes to the consolidated financial statements
18. Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
                                                 
    Assets     Liabilities     Net  
            Unaudited             Unaudited             Unaudited  
    2006     2005     2006     2005     2006     2005  
Consolidated   $000     $000     $000     $000     $000     $000  
 
Property, plant and equipment
    (11 )     (9 )     14,308       9,897       14,297       9,888  
Intangible assets
                22,099       21,626       22,099       21,626  
Other investments
    (32 )     (32 )     137             105       (32 )
Inventories
                18,900       396       18,900       396  
Interest bearing loans and borrowings
          (588 )     (810 )     (145 )     (810 )     (733 )
Employee benefits
    (2,451 )     (1,719 )                 (2,451 )     (1,719 )
Provisions
    (4,323 )     (3,307 )                 (4,323 )     (3,307 )
Contributed equity
    (1,333 )     (1,746 )                 (1,333 )     (1,746 )
Other items
    (2,802 )     (263 )     3,045       1,411       243       1,148  
Tax value of loss carry-forwards
    (51,999 )     (43,360 )                 (51,999 )     (43,360 )
 
Tax (assets)/liabilities
    (62,951 )     (51,024 )     57,679       33,185       (5,272 )     (17,839 )
Set off of tax
    14,538       12,171       (14,538 )     (12,171 )            
 
Net tax (assets)/liabilities
    (48,413 )     (38,853 )     43,141       21,014       (5,272 )     (17,839 )
 
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following items:
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Capital tax losses
    3,393        
 
Tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of capital tax losses because it is not probable that future taxable profit will be available against which the consolidated entity can utilise the benefits from the capital tax losses.

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Notes to the consolidated financial statements
18. Deferred tax assets and liabilities (continued)
Movement in temporary differences during the year
                                 
    Consolidated  
    Balance     Recognised     Recognised     Balance  
    1 July 2005     in income     in equity     30 June 2006  
    $ 000     $ 000     $ 000     $ 000  
 
Property, plant and equipment
    9,888       4,409             14,297  
Intangible assets
    21,626       473             22,099  
Other investments
    (32 )     137             105  
Inventories
    396       18,504             18,900  
Interest bearing loans and borrowings
    (733 )     (77 )           (810 )
Employee benefits
    (1,719 )     (732 )           (2,451 )
Provisions
    (3,307 )     (1,016 )           (4,323 )
Contributed equity
    (1,746 )           413       (1,333 )
Other items
    1,148       499       (1,404 )     243  
Tax value of loss carry-forwards (recognised)/derecognised
    (43,360 )     (8,639 )           (51,999 )
 
 
    (17,839 )     13,558       (991 )     (5,272 )
 
                                         
    Consolidated (unaudited)  
    Balance           Recognised           Balance  
    1 July     Recognised     on     Recognised     30 June  
    2004     in income     acquisition     in equity     2005  
    $ 000     $ 000     $ 000     $000     $ 000  
 
Property, plant and equipment
    9,194       694                     9,888  
Intangible assets
    8,815       1,085       11,726             21,626  
Other investments
    (32 )                         (32 )
Inventories
    266       130                     396  
Interest bearing loans and borrowings
    (676 )     (57 )                   (733 )
Employee benefits
    (1,413 )     (306 )                   (1,719 )
Provisions
    (3,192 )     (115 )                   (3,307 )
Contributed equity
    (2,328 )                   582       (1,746 )
Other items
    1,344       (196 )                   1,148  
Tax value of loss carry-forwards (recognised)/derecognised
    (58,676 )     15,316                     (43,360 )
 
 
    (46,698 )     16,551       11,726       582       (17,839 )
 

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Notes to the consolidated financial statements
19. Property, Plant and equipment
                                                 
    Consolidated  
                    Plant     Leased              
    Land and     Open cut     and     plant and     Capital WIP        
    buildings     infrastructure     equipment     equipment     at cost     Total  
    $ 000     $ 000     $ 000     $000     $000     $000  
 
Cost
                                               
Unaudited
                                               
Balance at 1 July 2004
    19,324       6,027       202,028       48,945       8,907       285,231  
Acquisitions through business combinations
                1,143                   1,143  
Additions
    24,454             13,556       2,233       74,447       114,690  
Disposals
                (2,660 )                 (2,660 )
Transfers
                    819       (819 )            
 
Balance at 30 June 2005 (Unaudited)
    43,778       6,027       214,886       50,359       83,354       398,404  
 
 
                                               
Balance at 1 July 2005
    43,778       6,027       214,886       50,359       83,354       398,404  
Additions
    2,017       93       13,362       41,935       274,906       332,313  
Transfers
    (931 )     613       50,951             (50,633 )      
Disposals
    (91 )           (227 )     (7,140 )     (12 )     (7,470 )
 
Balance at 30 June 2006
    44,773       6,733       278,972       85,154       307,615       723,247  
 
Unaudited
                                               
Depreciation
                                               
Balance at 1 July 2004
    2,600       1,415       137,246       11,015             152,276  
Depreciation charge for the year
    68       364       10,726       5,772             16,930  
Disposals
                (2,535 )                 (2,535 )
 
Balance at 30 June 2005 (Unaudited)
    2,668       1,779       145,437       16,787             166,671  
 
 
                                               
Balance at 1 July 2005
    2,668       1,779       145,437       16,787             166,671  
Depreciation charge for the Year
    45       376       13,079       7,231       58       20,789  
Transfers
    (1,064 )     673       391                    
Disposals
    (71 )           (216 )     (2,673 )           (2,960 )
 
Balance at 30 June 2006
    1,578       2,828       158,691       21,345       58       184,500  
 
Carrying amounts
                                               
At 1 July 2004 (Unaudited)
    16,724       4,612       64,782       37,930       8,907       132,955  
 
At 30 June 2005 (Unaudited)
    41,110       4,248       69,449       33,572       83,354       231,733  
 
 
                                               
At 1 July 2005
    41,110       4,248       69,449       33,572       83,354       231,733  
 
At 30 June 2006
    43,195       3,905       120,281       63,809       307,557       538,747  
 

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Notes to the consolidated financial statements
19. Property, Plant and equipment (continued)
Leased plant and machinery
The consolidated entity leases production equipment under a number of finance lease agreements. At the end of each of the leases the consolidated entity has the option to purchase equipment at an arm’s length price. At 30 June 2006, the net carrying amount of leased plant and machinery was $63,809,000 (2005-Unaudited: $33,572,000). The leased equipment secures lease obligations (see note 22).
Property, plant and equipment under construction
During the year ended 30 June 2006, the consolidated entity continued construction of its Millennium mine located near Moranbah, in Northern Queensland and various projects at its Wambo mine in the Hunter Valley. In addition, the Excel Group commenced construction of the Wilpinjong mine in February 2006. At 30 June 2006 and 2005 the following amounts were included in capital WIP:
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
LakeCoal
    518        
Millennium
    179,987       56,036  
Wambo
    73,673       27,318  
Wilpinjong
    53,437        
 
 
    307,615       83,354  
 

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Notes to the consolidated financial statements
20. Intangible assets
                                         
    Consolidated  
    Exploration                          
    and                          
    evaluation     Coal reserves     Goodwill     Other     Total  
    $ 000     $ 000     $ 000     $ 000     $ 000  
 
Cost
(Unaudited)
                                       
Balance at 1 July 2004
    40,254       18,787       2,333       987       62,361  
Acquisitions through business combinations
    16,414       50,812       5,447             72,673  
Additions
    4,806                   1,196       6,002  
 
Balance at 30 June 2005 (Unaudited)
    61,474       69,599       7,780       2,183       141,036  
 
 
                                       
Balance at 1 July 2005
    61,474       69,599       7,780       2,183       141,036  
Additions
    7,948                   1       7,949  
Amounts written off
    (12,017 )                       (12,017 )
 
Balance at 30 June 2006 (Unaudited)
    57,405       69,599       7,780       2,184       136,968  
 
Amortisation and impairment losses
(Unaudited)
                                       
Balance at 1 July 2004
    23,694       3,616             627       27,937  
Amortisation for the year
    2,818       1,205             20       4,043  
 
Balance at 30 June 2005
    26,512       4,821             647       31,980  
 
 
                                       
Balance at 1 July 2005
    26,512       4,821             647       31,980  
Amortisation for the year
    2,575       1,205             20       3,800  
Amounts written off
    (12,017 )                       (12,017 )
 
Balance at 30 June 2006
    17,070       6,026             667       23,763  
 
 
                                       
Carrying amounts
                                       
At 1 July 2004 (Unaudited)
    16,560       15,171       2,333       360       34,424  
 
At 30 June 2005 (Unaudited)
    34,962       64,778       7,780       1,536       109,056  
 
 
                                       
At 1 July 2005
    34,962       64,778       7,780       1,536       109,056  
 
At 30 June 2006
    40,335       63,573       7,780       1,517       113,205  
 

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Notes to the consolidated financial statements
20. Intangible assets (continued)
Amortisation charge

The amortisation charge is recognised in the following line items in the income statement:
                 
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Cost of sales
    3,800       4,043  
 
Impairment tests for cash generating units containing goodwill
The following units have significant carrying amounts of goodwill:
                 
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Venezuela (TCSV)
    7,780       7,780  
 
The recoverable amount of the cash generating unit is based on value in use calculations. Those calculations use cash flow projections based on actual operating results and a 20-year cash flow model. A pre-tax discount rate of 8% has been used in discounting the projected cash flows.
The key assumptions and the approach to determining their value in the current and previous period are:
     
Assumption   How determined
Coal prices
  Statistical analysis of long term market price trends adjusted annually for actual experience.
Exploration and evaluation assets
The recoverability of the carrying amounts of exploration and evaluation assets is dependent on the successful development and commercial exploitation or sale of the respective area of interest.
21. Trade and other payables
                 
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Trade payables
    49,074       31,301  
Other trade payables and accrued expenses
    55,208       37,800  
Fair value derivatives
    1,996       26,366  
Loans from controlled entities
           
 
 
    106,278       95,467  
 
Deferred revenue
                 
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Current
               
Deferred revenue
    28,208        
 
 
               
Non Current
               
Deferred revenue
    25,266        
 
Deferred revenue relates to cash received in advance of physical delivery of coal. The consolidated entity’s contractual commitments are to deliver 600,000 tonnes prior to 30 June 2007 and a further 543,000 tonnes prior to 31 March 2008.

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Notes to the consolidated financial statements
22. Interest bearing loans and borrowings
This note provides information about the contractual terms of the consolidated entity’s interest bearing loans and borrowings. For more information about the consolidated entity’s exposure to interest rate and foreign currency risk, see note 26.
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Current liabilities
               
Unsecured bank loans
    15,284        
Loan from associate
          8,000  
Finance lease liabilities
    8,978       6,154  
 
 
    24,262       14,154  
 
 
               
Non current liabilities
               
Unsecured bank loans
    78,229        
Unsecured bond issues
    141,177       139,750  
Finance lease liabilities
    56,102       28,945  
 
 
    275,508       168,695  
 
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Financing facilities
               
Unsecured bank loans
    145,513        
Loan from associate
          8,000  
Unsecured bond issues
    141,177       139,750  
 
 
    286,690       147,750  
 
 
               
Facilities utilised at reporting date
               
Unsecured bank loans
    93,513        
Loan from associate
          8,000  
Unsecured bond issues
    141,177       139,750  
 
 
    234,690       147,750  
 
 
               
Facilities not utilised at reporting date
               
Unsecured bank loans (working capital facility)
    52,000        
Loan from associate
           
Unsecured bond issues
           
 
 
    52,000        
 

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Notes to the consolidated financial statements
22. Interest bearing loans and borrowings (continued)
Financing arrangements
Bank loans
Bank loans are denominated in Australian dollars. The bank loans amount in current liabilities comprises the portion of the consolidated entity’s bank loan payable within one year $15,284,000 (2005-Unaudited: $Nil).
The bank loans are unsecured. The non-current bank loans are payable on or before 31 December 2009 on predetermined equal instalment basis. The working capital facility is subject to annual review.
The loans bear interest at the banks’ prime rates plus 1.25% (2005-Unaudited: 1.25%), payable at the discretion of the consolidated entity between one and six months.
Bond issue
The bonds were issued in the US Private Placement market in December 2004. The bonds are denominated in US dollars and are unsecured. The bonds bear an average fixed rate of 6.7%. The bonds are payable in predetermined instalment basis, commencing December 2009 and finishing in December 2015. Interest is paid six monthly in arrears.
Finance lease facility
The consolidated entity’s lease liabilities are secured by the leased assets of $63,809,000 (2005-Unaudited: $33,572,000), as in the event of default, the assets revert to the lessor.
Finance lease liabilities
Finance lease liabilities of the consolidated entity are payable as follows:
                                                 
    Consolidated    
    Minimum                     Minimum              
    lease                     lease              
    payments     Interest     Principal     payments     Interest     Principal  
                            Unaudited     Unaudited     Unaudited  
    2006     2006     2006     2005     2005     2005  
    $ 000     $ 000     $ 000     $ 000     $ 000     $ 000  
 
Less than one year
    13,249       (4,271 )     8,978       8,491       (2,337 )     6,154  
Between one and five years
    47,120       (9,948 )     37,172       33,493       (4,548 )     28,945  
More than five years
    20,679       (1,749 )     18,930                    
 
 
    81,048       (15,968 )     65,080       41,984       (6,885 )     35,099  
 
The consolidated entity leases plant and equipment under finance leases expiring from one to seven years. At the end of the lease term, the consolidated entity has the option to purchase the equipment.

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Notes to the consolidated financial statements
23. Employee benefits
Current
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Salaries and wages accrued
    1,625        
Liability for annual leave
    6,868       5,928  
 
 
    8,493       5,928  
 
Non Current
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Liability for long service leave
    4,963       4,056  
 
Defined contribution plans
The consolidated entity makes contributions to various third party defined contribution superannuation schemes. The amount recognised as expense was $3,036,000 for the year ended 30 June 2006 (2005- Unaudited: $1,999,000).

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Notes to the consolidated financial statements
24. Provisions
                         
    Mine rehabilitation     Other     Total  
    $ 000     $ 000     $ 000  
 
Consolidated
                       
Balance at 1 July 2005
    17,155       2,876       20,031  
Provisions made during the year
    3,565       495       4,060  
Provisions used during the year
    (375 )     (3,066 )     (3,441 )
Provisions reversed during the year
    (3,368 )           (3,368 )
Unwinding of discount
    637             637  
 
Balance at 30 June 2006
    17,614       305       17,919  
 
 
                       
2005
                       
Current (Unaudited)
    2,791       2,877       5,668  
Non current (Unaudited)
    14,364             14,364  
 
 
    17,155       2,877       20,032  
 
 
                       
2006
                       
Current
    3,131       305       3,436  
Non current
    14,483             14,483  
 
 
    17,614       305       17,919  
 
Mine rehabilitation
In accordance with State government legislative requirements, a provision for mine rehabilitation has been recognised in relation to the consolidated entity’s coal mining operations. The basis for accounting is set out in note (t) of the significant accounting policies.

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Notes to the consolidated financial statements
25. Capital and reserves
Share capital
                                 
                    Unaudited     Unaudited  
    2006     2006     2005     2005  
    $ 000     No. of shares     $ 000     No. of shares  
 
On issue at 1 July
    181,699       199,870,470       92,222       182,742,325  
Institutional placement net of transaction costs
    99,302       14,598,540              
Share purchase plan
    3,411       508,350              
Shares issued to acquire 25% of HunterCoal Pty Ltd
                28,320       8,000,000  
Shares issued to acquire 51% of Millennium Coal Pty Ltd
                12,624       2,703,195  
Shares issued to acquire 26% of Millennium Coal Pty Ltd
                32,066       4,264,050  
Shares issued to acquire 8% of Millennium Coal Pty Ltd
                17,049       2,160,900  
Reversal of deferred taxes in equity
    (413 )           (582 )      
 
On issue at 30 June – fully paid
    283,999       214,977,360       181,699       199,870,470  
 
Translation reserve
The translation reserve comprises all of foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge to Company’s net investment in a foreign subsidiary.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.
Fair value reserve
The fair value reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised or considered impaired.
Share Purchase Plan
In February 2006 the Company offered shares to shareholders under a share purchase plan. Each shareholder on the relevant record date was entitled to buy up to $5,000 worth of Company shares at $6.72 per share.

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Notes to the consolidated financial statements
25. Capital and reserves (continued)
Dividends
Dividends paid or declared by the Company to members since the end of the previous financial year were:
                                 
    Cents per     Total amount             Date of  
    share     $000     Franked %     payment  
 
Declared and paid during 2006
                               
Interim 2006 ordinary
    13.0       27,881       100 %   14 Mar 2006
Final 2005 ordinary
    16.0       31,979       100 %   16 Sep 2005
 
Total amount
            59,860                  
 
 
                               
(Unaudited)
                               
Declared and paid during 2005
                               
Interim 2005 ordinary
    8.0       15,476       100 %   14 Mar 2005
Final 2004 ordinary
    6.0       11,444       100 %   20 Oct 2004
 
Total amount
            26,920                  
 
Declared after end of year
After the balance sheet date the following dividends were declared by the directors. The dividends have not been provided and there are no income tax consequences.
 
                                 
Final 2006 ordinary
    10.5       22,573       100 %   15 Sep 2006
 
The financial effect of these dividends have not been brought to account in the financial statements of the year ended 30 June 2006 and will be recognised in subsequent financial reports.

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Notes to the consolidated financial statements
25. Capital and reserves (continued)
Dividends
                 
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Dividend franking account
               
 
               
30% franking credits available to shareholders of Excel Coal Limited for subsequent financial years
    24,985       15,178  
 
The above available amounts are based on the balance of the dividend franking account at year-end adjusted for:
(a)   franking credits that will arise from the payment of the current tax liabilities;
 
(b)   franking debits that will arise from the payment of dividends recognised as a liability at the year-end;
 
(c)   franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year-end; and
 
(d)   franking credits that the entity may be prevented from distributing in subsequent years.
The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.
The impact on the dividend franking account of dividends declared after the balance sheet date but not recognised as a liability is to reduce it by $9,674,000 (2005- Unaudited: $13,705,000).
26. Financial instruments
Exposure to credit, interest rate and currency risks arises in the normal course of the consolidated entity’s business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates.
Credit risk
Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. The consolidated entity does not require collateral in respect of financial assets. Where necessary the consolidated entity uses trade finance instruments such as letters of credit to secure trade debts.
Transactions involving derivative financial instruments are with counterparties with a sound credit rating. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations.
At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet.
Interest rate risk
The consolidated entity’s exposure to interest rate risk, which is the risk that a financial instrument will fluctuate as a result of changes in market interest rates has been addressed partially by the entity entering into fixed rate loans. The consolidated entity is exposed to movements in interest rates as set out in the table below.

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Notes to the consolidated financial statements
26. Financial instruments (continued)
Effective interest rates and repricing analysis
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they reprice.
                                                                                                                           
                                                                                              Unaudited                  
Consolidated              
    2006       2005  
            Effective                                             More       Effective                                            
            interest             6 months     6-12                     than 5       interest             6 months     6-12                     More than 5  
            rate     Total     or less     months     1-2 years     2-5 years     years       rate     Total     or less     months     1-2 years     2-5 years     years  
    Note     %     $000     $000     $000     $000     $000     $000       %     $000     $000     $000     $000     $000     $000  
       
Cash and cash equivalents
    11       5.75       39,802       39,802                                 4.17       105,005       105,005                          
Unsecured bank loans:
                                                                                                                         
AUD floating rate loan
    22       7.15       (93,513 )           (14,000 )     (28,000 )     (51,513 )                                                  
Unsecured bond issues:
                                                                                                                         
USD fixed rate bonds*
    22       6.67       (141,177 )                       (22,036 )     (119,141 )       6.67       (139,750 )                             (139,750 )
Loan from associate
    22                                                   7.41       (8,000 )     (8,000 )                        
Finance lease liabilities*
    22       6.79       (65,080 )     (4,392 )     (4,586 )     (7,977 )     (29,192 )     (18,933 )       6.79       (35,099 )           (6,154 )     (28,945 )            
       
 
                    (259,968 )     35,410       (18,586 )     (35,977 )     (102,741 )     (138,074 )               (77,844 )     97,005       (6,154 )     (28,945 )           (139,750 )
       
*These assets/liabilities bear interest at a fixed rate.

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Excel Coal Limited
Notes to the consolidated financial statements
26. Financial instruments (continued)
Foreign currency risk
The consolidated entity is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than the Australian dollar. The currencies giving rise to this risk are primarily US Dollars and to a lesser extent Pounds Sterling.
The consolidated entity hedges between 70 and 100 per cent of its estimated foreign currency exposure in respect of forecast sales and purchases over the following 12-18 months. The consolidated entity hedges beyond this period in respect of fixed price, fixed term contracts. The consolidated entity uses forward exchange contracts to hedge its foreign currency risk. Most of the forward exchange contracts have maturities of less than one year after the balance sheet date. Where necessary, the forward exchange contracts are rolled over at maturity.
The principal amounts of the consolidated entity’s USD notes (see note 22) have been fully hedged using forward contracts that mature on the same date as the notes are due for repayment. For the consolidated entity, the fair value of the derivative used to hedge the USD loan at 30 June 2006 was a $5,936,000 loss (2005-Unaudited: $Nil) which has been recorded in other non current liabilities.
Forecast transactions
The consolidated entity classifies its forward exchange contracts hedging forecast transactions as cash flow hedges and states them at fair value. The fair value of forward exchange contracts at 1 July 2005 was adjusted against the opening balance of the hedging reserve at that date.
For the consolidated entity, the net fair value of forward exchange contracts used as hedges of forecast transactions at 30 June 2006 was $1,695,000 (2005-Unaudited: $Nil), comprising assets of $3,691,000 (2005-Unaudited: $26,366,000) and liabilities of $1,996,000 (2005-Unaudited: $26,366,000) that were recognised as fair value derivatives.
Recognised assets and liabilities
Changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of “net financing costs” (see note 8).
Hedge of net investment in foreign subsidiary
The consolidated entity does not hedge its investment in its foreign subsidiary.
Fair values
All financial instruments are stated at fair value.

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Excel Coal Limited
Notes to the consolidated financial statements
26. Financial instruments (continued)
Estimation of fair values
The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table.
Securities
Fair value is based on quoted market prices at the balance sheet date without any deduction for transaction costs.
Derivatives
Forward exchange contracts are marked to market using listed market prices.
Interest-bearing loans and borrowings
Fair value is calculated based on discounted expected future principal and interest cash flows.
Finance lease liabilities
The fair value estimated as the present value of future cash flows, discounted at market interest rate for homogenous lease agreements. The estimated fair values reflect change in interest rates.
Trade and other receivables/payables
For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value.
Interest rates used for determining fair value
The entity uses the 90 day bank bill swap rate of 30 June 2006 plus an adequate constant credit spread to discount financial instruments. The interest rates used are as follows:
                 
            Unaudited  
    2006     2005  
 
Loans and borrowings
    7.0%-7.5 %     6.5%-7.5 %
Leases
    6.7%-7.7 %     7.0%-7.5 %
 
27. Operating leases
Leases as lessee
Non-cancellable operating lease rentals are payable as follows:
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Less than one year
    243       59  
Between one and five years
    1,002       933  
More than five years
    84       342  
 
 
    1,329       1,334  
 
Payments made under operating leases are expensed on a straight line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property.
The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter.

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Excel Coal Limited
Notes to the consolidated financial statements
28. Capital and other commitments
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $ 000     $ 000  
 
Capital expenditure commitments
               
Plant and equipment
               
Contracted but not provided for and payable:
               
Within one year
    130,024       175,676  
 
 
               
Joint venture commitments
               
Capital commitments of the consolidated entity to the joint venture operation:
               
Within one year
    4,339        
 
 
               
Share of capital commitments of the joint venture operations:
               
Within one year
    3,471        
 
Exploration expenditure and employee commitments
There were no material exploration or employee compensation commitments not otherwise provided for in the financial statements.
29. Contingencies
The consolidated entity has been implementing, in conjunction with the Department of Mineral Resources (DMR), a tailings disposal strategy in relation to Wambo Coal Pty Ltd. A condition in the sale and purchase contract for Wambo was for the vendor to provide an indemnity of up to $35,000,000 in relation to the cost of rectifying the tailings problem. Of this indemnity $20,000,000 was provided in the form of a security deposit to the DMR.
The liability for rectifying the tailings issue has not been recognised in the balance sheet as the vendor of Wambo Coal is responsible for meeting the cost of rectification.
The directors are of the opinion that additional provisions are not required in respect of this tailings issue, as it is not probable that a future sacrifice of economic benefits will be required.

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Excel Coal Limited
Notes to the consolidated financial statements
30. Consolidated entities
                         
            Ownership interest  
                    Unaudited  
    Country of     2006     2005  
Note   incorporation     %     %  
 
Parent entity
                       
Excel Coal Limited
  Australia                
 
                       
Subsidiaries
                       
Excel Holdings Pty Ltd
  Australia     100       100  
Excel Resources Pty Ltd
  Australia     100       100  
Excel Equities Pty Ltd
  Australia     100       100  
Excel Equities International Pty Ltd
  Australia     100       100  
Excel Employment Services Pty Ltd
  Australia     100       100  
Cumbo Land Pty Ltd
  Australia     100       100  
Hunter Coal Pty Ltd
  Australia     100       100  
Wambo Coal Pty Ltd
  Australia     75       75  
Wambo Coal Terminal Pty Ltd
  Australia     75       75  
SouthCoal Pty Ltd
  Australia     100       100  
Metropolitan Collieries Pty Ltd
  Australia     100       100  
Helensburgh Coal Pty Ltd
  Australia     100       100  
LakeCoal Pty Ltd
  Australia     100       90  
Millennium Coal Pty Ltd
  Australia     85       85  
Wilpinjong Coal Pty Ltd
  Australia     100       100  
Seaham #4 Colliery Pty Ltd
  Australia     75       75  
Newangle Mining Pty Ltd
  Australia     90       90  
Excelven Pty Ltd
  British Virgin Islands     51       51  
Complejo Siderurgico Del Lago, Cosila SA
  Venezuela     97       97  
Transportes Coal Sea de Venezuela
  Venezuela     100       100  
Tingha Mining Associates Pty Limited
  Australia     100       100  
Fibinv Pty Limited
  Australia     100       100  
RFC Americas Inc
  USA     100       100  
Happyclam Pty Limited
  Australia     100       100  
RFC Investment Management Pty Ltd
  Australia     100       100  
RFC Royalty Investments Pty Ltd
  Australia     100       100  
In the financial statement of the Company, investments in controlled entities and associates are measured at cost and included with other financial assets. Refer to notes 1(i) and 14 .

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Excel Coal Limited
Notes to the consolidated financial statements
31. Acquisitions of subsidiaries (Unaudited)
In the year ended 30 June 2005 the Company purchased 85% of the ordinary share capital of Millennium Coal Pty Ltd and the Group purchased 51% of TCSV and an effective 49% of Cosila. In the 8 months since acquisition Millennium Coal Pty Ltd, and 10 months for Cosila and TCSV contributed net profit of $Nil, $Nil and loss of $189,000 respectively to the consolidated net profit for the year. If the acquisition had occurred on 1 July 2004, consolidated net profit would have increased by $593,000.
                 
    Consolidated  
            Unaudited  
    2006     2005  
Note   $000     $000  
 
Cash consideration
          88,318  
Cash acquired
          (52,679 )
 
Net cash outflow/(inflow)
          35,639  
 
Fair value of net assets of equity acquired:
               
Cash assets
          52,679  
Receivables
          9,000  
Inventories
          2,948  
Other financial assets
          263  
Property, plant and equipment
          27,685  
Exploration, evaluation and development expenditure
          16,931  
Coal reserves
          56,252  
Other
          6,996  
Payables
          (6,354 )
Deferred tax liabilities
          (11,726 )
Interest bearing liabilities
          (12,643 )
Other provisions
          (7,475 )
Retained earnings
          76,740  
Outside equity interest on acquisition
          (12,510 )
 
 
          198,786  
 
 
               
Consideration – (cash)
          88,318  
Consideration – (non cash) — shares
          90,059  
Consideration – (non cash) — other
          20,409  
 
Total Consideration
          198,786  
 
The only adjustment to book values was to record coal reserves. Coal reserves of $76,740,000 acquired subsequent to obtaining control has been written off on acquisition to reserves as a transaction with owners.
The operating results for Cosila, TCSV and Millennium have been included in the statement of financial performance from the date of acquisition being 1 September 2004 (Cosila and TCSV) and 31 October 2004 (Millennium). Cosila and Millennium are coal projects in development. TCSV is a barge loading facility.

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Excel Coal Limited
Notes to the consolidated financial statements
32. Reconciliation of cash flows from operating activities
                 
    Consolidated  
            Unaudited  
    2006     2005  
Note   $000     $000  
 
Cash flows from operating activities
               
 
               
Profit for the period
    106,970       77,803  
Adjustments for:
               
Loss on sale of other financial assets
    1,022       1  
Gain on sale of plant and equipment
    (606 )     (107 )
Impairment of other financial assets
          1,052  
Interest on finance lease and borrowings
    5,367       2,675  
Depreciation and amortisation
    24,589       20,973  
Amortisation of borrowing costs
    1,369       400  
Unrealised foreign exchange losses/(gains)
    (123 )     148  
Share of associates’ net profit
    (443 )     (404 )
Other non-cash items
    94       9  
Income tax expense
    45,342       31,229  
 
 
               
(Increase)/decrease in trade and other receivables
    (21,426 )     (8,316 )
Increase in inventories
    (82,805 )     (12,799 )
Decrease in other current assets
    (4,871 )     (3,449 )
(Increase) in other non-current assets
    (1,018 )     (2,868 )
Increase/(decrease) in payables
    7,426       4,177  
 
               
Increase/(decrease) in provisions
    (2,113 )     569  
 
Net cash from operating activities
    78,774       111,093  
 
Non cash items
In accordance with Group policy interest expense of $5,663,000 (2005-Unaudited: $1,710,000) was capitalised and included in the cost of qualifying assets in property, plant and equipment.

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Excel Coal Limited
Notes to the consolidated financial statements
33. Related parties
The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period.
Non-Executive Directors
RB Massy-Greene (Chairman)
RW Chadwick
JC Conde AO
TW Williamson
Executive Directors
AJ Haggarty (Managing Director)
AJ Davies (Executive Director, Operations)
CJR Ellis (Executive Director, Project Development)
AH Plummer (Executive Director, Business Development)
Executives
A De Santis (General Manager, Metropolitan)
W Dean (General Manager, Wambo)
K Downham (General Manager Development and Operations, Wilpinjong)
N Jones (Chief Financial Officer)
M Madrigal (General Manager, Venezuelan Operations)
C Vorias (General Manager, Millennium)
Remuneration levels are set to attract and retain appropriately qualified and experienced directors and senior executives. As part of its agreed mandate the Audit and Corporate Governance Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies. Remuneration packages include a mix of fixed remuneration and performance-based remuneration.
The remuneration structures explained below are designed to attract suitably qualified candidates, and to affect the broader outcome of increasing the consolidated entity’s net profit attributable to members of the parent entity. The remuneration structures take into account:
  the overall level of remuneration for each director and executive;
 
  the executives’ ability to control performance; and
 
  the amount of incentives with each executive’s remuneration.
Executive directors and senior executives may receive bonuses based on the achievement of specified performance hurdles.

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Excel Coal Limited
Notes to the consolidated financial statements
33. Related parties (continued)
Non-executive directors
Total remuneration for all non-executive directors, last voted upon by shareholders in March 2004, is not to exceed $500,000 per annum and is set based on advice from external advisors with reference to fees paid to non-executive directors of comparable companies. Directors’ base fees are $60,000 per annum (2005-Unaudited: $50,000). The Chairman receives $110,000 and the Deputy Chairman receives $75,000. Non-executive directors do not receive performance related remuneration. Directors’ fees cover all main Board activities. The independent non-executive directors who sit on the Audit and Corporate Governance Committee receive an additional payment of $25,000 pa (2005-Unaudited: $10,000). The Chairman of the Audit and Corporate Governance Committee receives an additional $5,000 pa (2005-Unaudited: $5,000). There are no termination or retirement benefits for non-executive directors.
Contract terms and conditions
The key terms and conditions common to all executive directors and specified executive contracts are as follows:
  the contracts are not for a fixed term;
 
  the remuneration comprises two elements:
  i)   a fixed component, which includes the cost to the Company of any superannuation contributions made by the Company on behalf of an executive; and
 
  ii)   a variable component targeted at 20% of base salary, subject to performance, that normally applies where the executive is in a position to impact directly the financial or operating performance of the Company;
  the Company can terminate employment at any time without prior notice if the executive director or specified executive commits any serious breach of any of the provisions of their agreement or is guilty of any grave misconduct or wilful neglect in the discharge of their duties. Either party may terminate their agreement at any time with one month written notice. The Company is entitled to make payment in lieu of notice on termination of the relevant agreement.
On termination other than redundancy, the executive director or specified executive is entitled to statutory accruals only and one month’s pay in lieu of notice. For redundancy, there is an entitlement to 3 weeks payment for each completed year of service.
Significant variations to the above terms are highlighted below.

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Excel Coal Limited
Notes to the consolidated financial statements
33. Related parties (continued)
Mr Davies
Mr Davies has a one year contract with the consolidated entity, which commenced 1 March 2005. The contract is renewable at the option of either party and the option was exercised in March 2006. This option has been exercised. The rate is set on a per diem basis and is commensurate with his position of executive director. Mr Davies does not accrue annual leave, long service or sick leave under the contract and no termination benefits are provided for.
Bonus Plans
The consolidated entity’s management remuneration is structured to promote superior financial performance. It is regarded as a key tool in motivating executives and employees to achieve goals consistent with Company goals that lead to long term corporate growth and success.
Non-executive directors
Non-executive directors do not receive any performance related remuneration.
Executive directors
For the bonuses paid in respect of the financial year ended 30 June 2005 the executive directors participated in the specified executive scheme. At 30 June 2006 an amount of 20% of base salary for each executive director has been accrued in the accounts.
Specified executives
Each of the specified executives participates in the Incentive Bonus Plan established in November 2002.
An individual’s incentive bonus is dependent upon two factors, an individual performance rating and the business performance pool.
An individual performance rating comprises an assessment of performance against KPIs which include financial, people, risk and strategy measures. Financial KPIs are consolidated entity performance against budget on a cost per saleable tonne basis and profitability. All budgets are approved by the Board at the beginning of each financial year.
Director and specified executive remuneration for the year ended 30 June 2006
Key management personnel compensation
The key management personnel compensation included in ‘personnel expenses’ are as follows:
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $     $  
 
Short term employee benefits
    3,976,741       3,407,224  
Post-employment benefits
    116,706       440,124  
 
 
    4,093,447       3,847,348  
 

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Excel Coal Limited
Notes to the consolidated financial statements
33. Related parties (continued)
Director and specified executive remuneration for the year ended 30 June 2006 (continued)
Individual directors and executive compensation disclosures
Apart from the details disclosed in this note, no director has entered into a material contract with the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end.
The following table provides the details of all directors of the Company (“specified directors”) and the five or more executives of the consolidated entity with the greatest authority (“specified executives”) and the nature and amount of the elements of their remuneration for the year ended 30 June 2006.
                                 
    Short term   Post Employment    
    Salary            
    and fees   Bonus1   Superannuation   Total
    $   $   $   $
 
Directors
                               
Non-Executive
                               
RB Massy-Greene
    97,861             12,139       110,000  
RW Chadwick2
    94,200                   94,200  
JC Conde AO
    90,000                   90,000  
TW Williamson
    85,000                   85,000  
 
                               
Executive
                               
AJ Haggarty
Managing Director
    487,036       97,407       12,139       596,582  
AJ Davies
Executive Director – Operations
    437,003       76,907             513,910  
CJR Ellis
Executive Director – Project Development
    384,536       76,907       12,139       473,582  
AH Plummer
Executive Director – Business
Development
    393,840       76,907       12,139       482,886  
 
                               
 
Total Directors
    2,069,476       328,128       48,556       2,446,160  
 
 
                               
Executives
                               
A De Santis
General Manager (Metropolitan)
    259,016       48,425       12,139       319,580  
W Dean
General Manager (Wambo)
    251,746       36,520       12,139       300,405  
K Downham
General Manager Development and
Operations (Wilpinjong Coal)
    152,212       33,104       7,455       192,771  
N Jones
Chief Financial Officer
    193,458       38,692       12,139       244,289  
M Madrigal
General Manager (Venezuelan Operations)
    200,290       31,835       12,139       244,264  
C Vorias
General Manager (Millennium Coal)
    278,199       55,640       12,139       345,978  
 
                               
 
Total executives
    1,334,921       244,216       68,150       1,647,287  
 
Total compensation: key management
personnel
    3,404,397       572,344       116,706       4,093,447  
 
 
1   Bonus amounts included in executive remuneration for key management personnel are estimates only and are subject to finalisation of performance reviews.
 
2   Mr Chadwick earned additional consulting fees of $19,200 for the year in respect of work on the Crumlin project.

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Excel Coal Limited
Notes to the consolidated financial statements
33. Related parties (continued)
Movements in shares
The movement during the reporting period in the number of ordinary shares of Excel Coal Limited held, directly, indirectly or beneficially, by each specified director and specified executive, including their personally-related entities is as follows:
                                                           
    Unaudited                          
                            Held at                          
    Held at                     30 June                       Held at  
    1 July 2004     Purchases     Sale     2005       Purchases     Sales     30 June 2006  
       
Directors
                                                         
RB Massy-Greene
    13,064,833                   13,064,833               (1,204,833 )     11,860,000  
RW Chadwick
    29,810,710                   29,810,720               (798,720 )     29,012,000  
AJ Haggarty
    25,893,438                   25,893,438               (2,458,438 )     23,435,000  
JC Conde AO
    50,000                   50,000                     50,000  
AJ Davies
    9,044,299                   9,044,299               (894,299 )     8,150,000  
CJR Ellis
    20,858,180                   20,858,180               (1,958,180 )     18,900,000  
AH Plummer
    9,777,334                   9,777,334               (757,334 )     9,020,000  
TW Williamson
    75,000                   75,000         744             75,744  
 
                                                         
Executives
                                                         
A De Santis
    57,000                   57,000               (27,000 )     30,000  
W Dean
    15,000                   15,000         744       (15,744 )      
K Downham
                                           
N Jones
    16,000                   16,000               (16,000 )      
M Madrigal
                                           
C Vorias
                              8,000       (8,000 )      
       
Equity Instruments
The Company has not granted any options over ordinary shares during the year and there are no outstanding options at 30 June 2006.
Directors’ transactions with the Company or its controlled entities
The Glen Rural Pty Ltd (The Glen), a company controlled by Mr Haggarty continued a cattle agistment agreement with Wambo Coal Pty Ltd. The agistment agreement was undertaken on an arm’s length basis and on normal commercial terms and conditions. Total fees charged to The Glen for the financial year were $25,000 (2005-Unaudited: $25,000).
Scopenergy Limited, a company controlled by Mr Massy-Greene, rented office space not required by the Company during the year on a month-to-month basis. Scopenergy also shared office facilities provided by the Company. The Company determined the charges for this space and facilities on an arm’s length cost sharing basis. Total fees charged to Scopenergy for the financial year were $7,884 (2005-Unaudited: $7,667).
Aggregate amounts receivable and payable to directors and their director related entities at balance date arising from these transactions were as follows:
                 
    Consolidated  
            Unaudited  
    2006     2005  
    $     $  
 
Accounts receivable - current
               
The Glen Rural
    13,750        
Scopenergy Ltd
    6,356       2,252  
 
The terms and conditions of the transactions with directors or their director related entities, outlined above, were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-director-related entities on an arm’s length basis.

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Excel Coal Limited
Notes to the consolidated financial statements
34. Non key management personnel disclosures
Identity of related parties
The consolidated entity has a related party relationship with its subsidiaries (see note 30), associates (see note 16), joint venture (see note 17) and with its directors and executive officers (see note 33).
Other related party transactions
The classes of non-director related parties are:
  wholly owned controlled entities;
  partly owned controlled entities;
  commonly controlled entities;
  associates; and
  directors of related parties and their personally related entities.
Transactions with non-director related parties are set out below:
Associates
In the normal course of business, the Company conducts transactions with entities in which it has an investment. In some cases, directors of the Company also serve as directors of investee companies. In all such cases transactions were on normal commercial terms and conditions.
For the year ended 30 June 2006 there were no amounts included in the determination of profit from ordinary activities before income tax that resulted from transactions with entities, which are associates (2005: $5,810,000).
35. Subsequent events
On 6 July 2006 the Company announced that it had entered a merger implementation agreement with Peabody Energy Corporation, for the proposed acquisition by Peabody of the shares in the Company via a scheme of arrangement. Under the offer, Excel shareholders will receive $8.50 cash per Excel share. The offer values the Group at $1,827,000,000. The shareholders’ meeting to vote on the proposed is expected to be held in early October 2006. Subsequent to this announcement Peabody advised that they were increasing the offer price to $9.50 cash per share and had acquired 19.99% of Excel shares.
In August 2006 the Company completed negotiations with its financers to increase its facility by $43,000,000, being $13,000,000 increase in performance bonds and $30,000,000 in the working capital facility. Total undrawn facilities available to the Company increased to $95,000,000.
In August 2006 Millennium management advised the plant commissioning was scheduled for the end of September 2006 but identified a further cost increase in relation to plant construction of approximately $15,000,000.
The directors have declared a fully franked and paid a fully franked dividend of 10.5 cents per share in respect of the financial year ended 30 June 2006. The total dividend of $22,573,000 was paid 15 September 2006.
Other than the matters discussed above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity, in future financial years.

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Excel Coal Limited
Notes to the consolidated financial statements
36. Changes in accounting policy
Application of AASB 132 and AASB 139 prospectively from 1 July 2005
In current financial year the consolidated entity adopted AASB 132: Financial Instruments: Disclosure and Presentation and AASB 139: Financial Instruments: Recognition and Measurement. This change in accounting policy has been adopted in accordance with the transition rules contained in AASB 1, which does not require the restatement of comparative information for financial instruments within the scope of AASB 132 and AASB 139.
The adoption of AASB 139 has resulted in the consolidated entity recognising available for sale investments and all derivative financial instruments as assets or liabilities at fair value. This change has been accounted for by adjusting the opening balance of equity (retained earnings), hedging reserve and fair value reserve at 1 July 2005. No change was recorded in respect of trade receivables and other receivables or trade and other payables.
The impact on the balance sheet in the comparative period is set out below as an adjustment to the opening balance sheet at 1 July 2005. The transitional provisions will not have any effect in future reporting periods.
                                 
                    Impact of        
                    change in        
            Opening     accounting     Adjusted  
            balance     policy     Balance  
Consolidated   Note     $ 000     $ 000     $ 000  
 
Other financial assets
    1       3,611       (736 )     2,875  
Deferred foreign currency payable
    2       26,366       (23,281 )     3,085  
Retained earnings
    2       49,783       736       50,519  
Deferred tax liabilities
            21,014       6,670       27,684  
Hedging reserve
    2             14,561       14,561  
Fair value reserve
    1             (736 )     (736 )
Interest bearing liabilities
    2,3       182,849       (3,408 )     179,441  
Minority interest
    2       27,329       2,687       30,016  
Footnotes
1.   Under previous Australian GAAP, the consolidated entity recorded available for sale equity securities at market value with any movement recorded through the income statement. In accordance with Australian Accounting Standards, they are recognised at fair value with movements recorded through equity.
 
    The effect in the consolidated entity is to increase retained earnings and decrease the fair value reserve and other financial assets by $736,000 ($1,051,000 less related deferred tax of $315,000) at 1 July 2005.
 
2.   Under previous Australian GAAP, the consolidated entity recorded movements in the market to market value of its derivatives as an increase to current assets and current liabilities of $26,366,000. In accordance with Australian Accounting Standards derivatives are now recognised at fair value and movements deferred through the hedging reserve. In addition the consolidated entity recognised a derivative for the USD coupon swap.
 
    The effect in the consolidated entity is to decrease the deferred foreign currency payable by $23,281,000 and increase the hedging reserve by $14,561,000, ($23,281,000 less related deferred tax of $6,985,000 less minority interest effect of $2,687,000 at 1 July 2005 and plus decrease in interest bearing liabilities by $952,000).
 
3.   Under previous Australian GAAP, the consolidated entity capitalised transaction costs of $2,456,000 associated with bank loans as an asset.
 
    In accordance with Australian Accounting Standards, these costs are now recognised directly against the loans. The effect on the consolidated entity is to decrease other current assets and interest bearing liabilities by $2,456,000 at 1 July 2005.

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
The consolidated financial report of Excel Coal Limited as of and for the year ended 30 June 2006 is prepared in accordance with Australian Accounting Standards . Certain significant differences exist between Australian Accounting Standards and accounting principles generally accepted in the United States of America (US GAAP). The significant differences between Australian Accounting Standards and US GAAP as they relate to the consolidated entity are presented in this note.
Reconciliation to US GAAP
Reconciliation of net income
The following is a summary of the significant adjustments to net income for the year ended 30 June 2006 that would be required if US GAAP had been applied instead of Australian Accounting Standards.
                 
            Consolidated  
            30 June 2006  
    Note     $ 000  
 
Net profit attributable to members of the parent as reported under Australian Accounting Standards
            98,062  
 
               
Adjustments required to comply with US GAAP
               
Exploration and evaluation costs
    (a )     (5,373 )
Capitalised interest
    (b )     3,065  
Deferred underground longwall costs
    (c )     1,501  
Derivatives
    (d )     (32,380 )
Amortisation of non current assets
    (e), (f)     (1,574 )
Tax effect of US GAAP adjustments
    (h )     10,428  
Minority interest share of US GAAP adjustments
    (i )     4,010  
 
 
               
Net income under US GAAP
            77,739  
 

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
Reconciliation of Shareholders’ Equity
The following is a summary of the adjustments to shareholders equity for the year ended 30 June 2006, that would be required if US GAAP had been applied instead of Australian Accounting Standards.
                 
            Consolidated  
            30 June 2006  
    Note     $000  
 
Total equity attributable to equity holders of the parent as reported under Australian Accounting Standards
            366,529  
 
               
Cumulative adjustments required to comply with US GAAP
               
Exploration and evaluation costs
    (a )     (19,043 )
Capitalised interest
    (b )     3,065  
Deferred underground longwall costs
    (c )     (1,204 )
Acquisition of minority interests
    (e )     76,225  
Amortisation of non current assets
    (e), (f)     (3,116 )
Reverse acquisition
    (f )     3,926  
Amortisation of Goodwill
    (g )     338  
Tax effect of US GAAP adjustments
    (h )     5,988  
Minority interest share of US GAAP adjustments
    (i )     2,985  
 
 
               
Total shareholders’ equity under US GAAP
            435,693  
 
Reconciliation of movements in Shareholders’ Equity
         
    Consolidated  
    30 June 2006  
    $ 000  
 
Total shareholders’ equity at beginning of year (US GAAP)
    314,820  
Net income
    77,739  
Other comprehensive income, net of tax
       
Foreign currency translation
    (71 )
Fair value investments
    765  
Issued shares, net of transaction costs and tax
    102,300  
Dividends paid
    (59,860 )
 
 
       
Total shareholders equity at end of year (US GAAP)
    435,693  
 

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
Reconciliation of movements in Shareholders’ Equity (continued)
         
    Consolidated  
    30 June 2006  
    $ 000  
 
Shareholders’ equity at 30 June 2006 consists of:
       
Issued capital
    287,925  
Retained earnings
    147,629  
Foreign currency translation reserve
    110  
Fair value reserve
    29  
 
 
       
Total shareholders’ equity at end of year (US GAAP)
    435,693  
 
Earnings per share
         
    30 June 2006  
    $ 000  
 
Net income under US GAAP
    77,739  
 
Weighted average number of ordinary shares (Note 25)
    204,878,114  
 
         
    30 June  
    2006  
    Cents  
 
Basic and diluted earnings per share under US GAAP
    37.9  
 
There were no potential dilutive ordinary shares.
Explanation of US GAAP adjustments
(a)   Exploration and evaluation costs
Under Australian Accounting Standards exploration and evaluation expenditures, including the costs of acquiring licences and deferred exploration costs acquired in a business acquisition, are capitalised as exploration and evaluation assets on an area of interest basis. The capitalised costs are presented as intangible exploration and evaluation assets. When a licence is relinquished or a project abandoned, the related costs are recognised in the income statement.
     Exploration and evaluation assets are only recognised if the rights of the area of interest are current and either:
  (i)   the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or
 
  (ii)   activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or other wise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
(a)   Exploration and evaluation costs (continued)
Exploration and evaluation assets that have reached the development and production phase are reclassified to depreciable assets and amortised on a units of production basis over the life of the economically recoverable reserves.
Under US GAAP, exploration and evaluation costs are expensed as incurred up until such time that a property can be economically developed as a result of establishing proven and probable reserves. Accordingly the Company has recorded an adjustment to exploration expenditure, net of amortisation expenses, in 2006 of $5,373,000.
Cumulative deferred exploration and evaluation costs recorded under Australian Accounting Standards at 30 June 2006 total $40,335,000. Under US GAAP $19,043,000 has been adjusted in line with the above US GAAP policy and $21,292,000 (representing exploration and evaluation assets acquired in business combinations) reclassified to coal reserves with no resulting change in total shareholders’ equity.
(b)   Capitalised interest
Under Australian Accounting Standards financing costs are recognised as an expense in the period in which they are incurred. However, companies may chose to capitalise interest costs to the extent that they relate to qualifying assets. A qualifying asset is defined as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The amount capitalised is determined by reference to the actual finance cost incurred on the specific debt draw down in relation to the funding of the expenditure on the qualifying asset.
Under US GAAP capitalising of qualifying interest is required. The amount of interest capitalised against a qualifying asset represents the interest costs on the qualifying asset, regardless of whether the entire borrowing was used to finance the construction of the qualifying asset. The interest rate is determined either based on borrowings outstanding during the year to finance the qualifying asset or a weighted average of undesignated borrowings.
The above difference has resulted in a higher amount of interest being capitalised under US GAAP for the year ended 30 June 2006. This has resulted in an increase in property, plant and equipment at 30 June 2006 and corresponding reduction in interest expense in the income statement of $3,065,000. No additional amortisation charge has been recorded in the income statement under US GAAP as the qualifying assets were under construction at 30 June 2006.
(c)   Deferred underground longwall costs
Under Australian Accounting Standards expenditure (direct costs and share of overheads) incurred in respect of longwall block development is deferred until commencement of production. These costs are amortised over saleable production of the relevant longwall panel.
Under US GAAP, the initial set up costs associated with development of the first longwall panel are capitalised and amortised over the life of the entire panel on a units of production basis. Subsequent expenditure to relocate the longwall equipment is expensed as incurred.
The adjustment relates to the expensing of such relocation expenditure. The impact of this adjustment has been to reduce other assets by $1,204,000 at 30 June 2006 and decrease in cost of sales of $1,501,000.

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
(d)   Derivatives
Under Australian Accounting Standards and US GAAP, derivatives (“hedging instruments”) used to hedge foreign exchange exposures to variabilities in cash flows denominated in US dollars and pounds sterling are recorded on the balance sheet at fair value. Where the respective “hedge accounting” criteria have been met, any movements in the fair value of these derivatives, to the extent they are considered an effective hedge of the identified risk, are recorded in equity and released to the income statement when the hedged transaction occurs.
The Company has not sought to apply hedge accounting under US GAAP in part due to the nature of specific documentation requirements of US GAAP. As such, all derivative gains and losses deferred in equity under Australian Accounting Standards have been recognised in the income statement under US GAAP. This has resulted in a decrease in net income for 2006 of $32,380,000 and a $6,733,000 reclassification in total shareholders’ equity between hedge reserves and retained earnings.
(e)   Acquisition of minority interests
Under Australian GAAP when an entity acquires a portion of, or all of, the minority’s share of a consolidated subsidiary the excess of the consideration paid for the incremental ownership interest over the book value of the interest acquired is recorded directly as a reduction of equity.
Under US GAAP when less than 100% of an equity is acquired in a series of two or more separate transactions, each acquisition is accounted for under the purchase method and the consideration paid allocated over the proportionate share of the net assets acquired based on the fair value of those assets as at the acquisition date.
The impact of this difference is that the amounts recorded directly in equity under Australian Accounting Standards are reclassified onto the balance sheet as coal reserves. This resulted in an increase in coal reserves of $76,225,000 at 30 June 2006 and additional amortisation charges of $1,412,000 in respect of the 2006 year. The deferred tax liability of $22,867,000 associated with these additional coal reserves are recognised with a corresponding increase to coal reserves resulting in no net movement in shareholders equity.
(f)   Reverse acquisition
In November 2002 Eureka Capital Partners Limited (“Eureka” — now Excel Coal Limited) purchased the issued shares of Excel Holdings Pty Limited (“Excel Holdings”). Under Australian Accounting Standards applicable at that time, Eureka was identified as the acquirer as it became the legal parent entity following the acquisition. Consequently, the fair value of the consideration paid, being shares issued by Eureka, was allocated over the fair value of the net assets of Excel Holdings in accordance with the purchase method of accounting.
Following this transaction the Australian Accounting Standards rules relating to the identification of an acquirer have changed. As the company adopted an exemption to apply this change prospectively no adjustment was recorded in the Australian Accounting Standards financial statements.
Under US GAAP, the acquirer for accounting purposes is Excel Holdings as the shareholders of Excel Holdings subsequently controlled Eureka. The impact of this difference is that the purchase price is allocated over the net assets of Eureka in accordance with the purchase method of accounting. This resulted in additional coal reserves of $3,926,000 being recognised under US GAAP with a corresponding increase to issued capital, and additional amortisation expense of $162,000 recorded under US GAAP. The additional coal reserves arose due to the different value of the combined entity’s net assets treating Excel as the acquirer. The deferred tax liability of $1,178,000 associated with these additional coal reserves is recognised with a corresponding increase to coal reserves resulting in no net movement in shareholders equity.

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
(g)   Amortisation of goodwill
Under Australian Accounting Standards goodwill has not been amortised from 1 July 2004, but is subject to annual impairment testing. Prior to 1 July 2004, goodwill was amortised over its useful economic life not exceeding 20 years.
Under US GAAP amortisation of goodwill ceased with effect from 1 July 2002, and is subject to annual impairment testing. The adjustment of $338,000 relates to the reversal of goodwill amortisation for the period from 1 July 2002 to 30 June 2003.
(h)   Tax effect of US GAAP adjustments
The effect of the US GAAP adjustments outlined in (a) to (g) above resulted in a decrease in income tax expense of $10,428,000 for the year ended 30 June 2006 and a cumulative decrease in the deferred tax liability of $7,254,000.
(i)   Minority interest share of US GAAP adjustments
These adjustments relate to the effect on minority interest of the US GAAP adjustments outlined in (a) to (h) above.
New accounting pronouncements
In March 2005, the Emerging Issues Task Force of the FASB reached a consensus in Issue No. 04-6 ‘Accounting for Stripping Costs Incurred during Production in the Mining Industry’ (EITF 04-6) that stripping costs incurred during the production phase of a mine are variable production costs. As such, stripping costs incurred during the production phase are treated differently to stripping costs incurred during the development phase, and should be included in the cost of the inventory produced during the period that the stripping costs are incurred. This consensus is not applicable to Excel until 1 July 2006. The effect of adopting the EITF using the cumulative effect adjustment on 1 July 2006 would result in a reduction to retained earnings of $8,547,000, net of tax. Under Australian Accounting Standards these costs would continue to be capitalised and charged to operating costs on a units of production basis using the estimated average stripping ratio for the area being mined.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after 15 December 2006 (1 July 2007 for the Company). Any adjustments required upon the adoption of this interpretation must be recorded directly to retained earnings in the year of adoption and reported as a change in accounting principle. The Company is currently evaluating the impact of this interpretation on its financial statements.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. This statement applies only to fair-value measurements that are already required or permitted by other accounting standards. SFAS 157 is effective for fiscal years beginning after 15 November 2007 (1 July 2008 for the Company). The requirements of SFAS 157 will be applied prospectively except for certain derivative instruments that would be adjusted through the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of this standard on its financial statements.

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Excel Coal Limited
Notes to the consolidated financial statements
37. United States generally accepted accounting principles disclosures
US GAAP cash flow disclosures
Under Australian Accounting Standards proceeds from deferred revenue of $53,474,000 are classified as financing activities. Under US GAAP these proceeds would be recorded as an operating activity. Under Australian Accounting Standards interest on finance leases and borrowings of $5,367,000 are classified as operating activities. Under US GAAP these would be recorded as financing activities. Under Australian Accounting Standards exploration and evaluation expenditure of $7,948,000 is classified as investing activities. Under US GAAP these would be recorded as operating activities. Otherwise, cashflows from operating, investing and financing activities are the same under Australian Accounting Standards and US GAAP.
US GAAP Tax disclosures
Under Australian Accounting Standards capital tax losses of $3,393,000 have not been recorded on the balance sheet as it is not probable that future taxable profits will be available against which the entity can utilise the benefits from the capital tax losses. Under US GAAP these losses would be disclosed with a corresponding valuation allowance of the same amount based on the more likely than not criteria. This has no effect on net income or shareholders equity in 2006.

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Independent Auditors’ Report
To the Board of Directors of Excel Coal Limited:
We have audited the accompanying consolidated balance sheet of Excel Coal Limited and its subsidiaries (the “consolidated entity”) as of 30 June 2006, and the related consolidated income statement, statement of changes in equity and statement of cash flows for the year ended 30 June 2006, all expressed in Australian dollars. These consolidated financial statements are the responsibility of the consolidated entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the consolidated entity’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the consolidated entity as of 30 June 2006 and the results of its operations and its cash flows for the year ended 30 June 2006 in conformity with Australian Accounting Standards, being the Australian equivalents to International Financial Reporting Standards.
As further described in Note 36 to the consolidated financial statements, the consolidated entity changed its method of accounting for financial instruments for the year ended 30 June 2006 to conform with Australian Accounting Standards Board Standard 132: Financial Instruments: Disclosure and Presentation and Australian Accounting Standards Board Standard 139: Financial Instruments: Recognition and Measurement.
Australian Accounting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 37 to the consolidated financial statements.
KPMG
/s/ KPMG
Sydney, Australia
29 September 2006

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Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma combined financial statements give effect to Peabody’s anticipated acquisition of Excel and the related financings. The unaudited pro forma combined balance sheet as of June 30, 2006 is presented as if the acquisition and the related financings had occurred on that date. The unaudited pro forma combined statement of operations for the six months ended June 30, 2006 and 2005 and for the year ended December 31, 2005 assume that the acquisition had occurred on January 1, 2005. The acquisition and the related financings are accounted for using the purchase method of accounting, with the purchase price allocated to the assets acquired and liabilities assumed based on estimated fair values, pending the completion of independent appraisals.
The unaudited pro forma combined financial statements should be read in conjunction with (i) Peabody’s historical audited financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed in our Annual Report on Form 10-K for the year ended December 31, 2005, (ii) our historical unaudited financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed in our Quarterly Reports on Form 10-Q for the six months ended June 30, 2006 and 2005 and (iii) the historical audited financial statements of Excel.
The unaudited pro forma combined financial statements are for informational purposes only and are not necessarily indicative of the financial position that would have been obtained or the results of operations that would have occurred if the acquisition and the related financings had been consummated on the dates indicated, nor are they necessarily indicative of our financial position or results of operations in the future. The pro forma adjustments, as described in the Notes to Pro Forma Combined Financial Statements, are based upon available information and upon assumptions that Peabody’s management believes are reasonable. The actual amounts that Peabody records based on its final assessment of fair values may differ materially from the information presented in these unaudited pro forma combined financial statements.
Due to differing fiscal years between Peabody, which ends its fiscal year on December 31, and Excel, which ends its fiscal year on June 30, calculations were necessary to conform Excel’s financial information to the time periods presented.
Information related to Excel included in the unaudited pro forma combined balance sheet as of June 30, 2006 was translated from A$ to US$ using a foreign exchange rate of A$1.00=US$0.7433, based on the closing rate on June 30, 2006. The unaudited pro forma combined statement of operations for the six months ended June 30, 2006 was translated from A$ to US$ using an exchange rate of A$1.00=US$0.7433, based on the average closing rates for the period from January 3, 2006 through June 30, 2006. The unaudited pro forma combined statement of operations for the six months ended June 30, 2005 was translated from A$ to US$ using an exchange rate of A$1.00=US$0.7728, based on the average closing rates for the period from January 4, 2005 through June 30, 2005. The unaudited pro forma combined statement of operations for the year ended December 31, 2005 was translated from A$ to US$ using an exchange rate of A$1.00=US$0.7622, based on the average closing rates for the period from January 4, 2005 through December 30, 2005. Asset retirement obligation expense and depreciation, depletion and amortization were translated from A$ to US$ using a historical exchange rate equal to the opening rate on January 4, 2005 of A$1.00=US$0.7790 for all periods presented.

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PEABODY ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
(Dollars in thousands, except per share data)
                                         
    Peabody     Excel Coal                      
    Energy     Limited     Pro Forma             Pro Forma  
    Historical     Historical     Adjustments             as Adjusted  
 
                               
REVENUES
                                       
Sales
  $ 4,545,323     $ 326,208                     $ 4,871,531  
Other revenues
    99,130       2,130                       101,260  
 
                               
Total revenues
    4,644,453       328,338                     4,972,791  
 
                                       
COSTS AND EXPENSES
                                       
Operating costs and expenses
    3,715,836       221,509                       3,937,345  
Depreciation, depletion and amortization
    316,114       17,864       18,575       (a )     352,553  
Asset retirement obligation expense
    35,901       4,279                       40,180  
Selling and administrative expenses
    189,802       16,914                       206,716  
Net (gain) loss on disposal or exchange of assets
    (101,487 )     1                       (101,486 )
Income from equity affiliates
    (30,096 )     (3,445 )                     (33,541 )
 
                               
 
                                       
OPERATING PROFIT
    518,383       71,216       (18,575 )             571,024  
Interest expense
    102,939       7,997       (7,997 )     (b )     102,939  
 
                    127,068       (c )     127,068  
Interest income
    (10,641 )     (4,261 )     4,261       (b )     (10,641 )
 
                               
 
                                       
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS
    426,085       67,480       (141,907 )             351,658  
Income tax provision (benefit)
    960       18,695       (40,000 )     (d )     (20,345 )
Minority interests
    2,472       4,755                       7,227  
 
                               
NET INCOME
  $ 422,653     $ 44,030     $ (101,907 )           $ 364,776  
 
                               
Basic earnings per share
  $ 1.62     $ 0.17     $ (0.39 )           $ 1.39  
Diluted earnings per share
  $ 1.58     $ 0.16     $ (0.38 )           $ 1.36  
 
                                       
Weighted average shares outstanding — basic
    261,519,424       261,519,424       261,519,424               261,519,424  
Weighted average shares outstanding — diluted
    268,013,476       268,013,476       268,013,476               268,013,476  

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PEABODY ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005
(Dollars in thousands, except per share data)
                                         
    Peabody     Excel Coal                      
    Energy     Limited     Pro Forma             Pro Forma  
    Historical     Historical     Adjustments             as Adjusted  
 
                               
REVENUES
                                       
Sales
  $ 2,152,338     $ 144,004                     $ 2,296,342  
Other revenues
    33,928       470                       34,398  
 
                               
Total revenues
    2,186,266       144,474                     2,330,740  
 
                                       
COSTS AND EXPENSES
                                       
Operating costs and expenses
    1,791,986       91,013                       1,882,999  
Depreciation, depletion and amortization
    155,262       9,681       8,850       (a )     173,793  
Asset retirement obligation expense
    16,357       2,468                       18,825  
Selling and administrative expenses
    78,431       7,462                       85,893  
Net (gain) loss on disposal or exchange of assets
    (47,574 )     1                       (47,573 )
Income from equity affiliates
    (18,308 )     (3,166 )                     (21,474 )
 
                               
 
                                       
OPERATING PROFIT
    210,112       37,015       (8,850 )             238,277  
Interest expense
    50,761       4,492       (4,492 )     (b )     50,761  
 
                    63,534       (c )     63,534  
Interest income
    (3,183 )     (2,417 )     2,417       (b )     (3,183 )
 
                               
 
                                       
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS
    162,534       34,940       (70,309 )             127,165  
Income tax provision (benefit)
    14,586       8,832       (19,938 )     (d )     3,480  
Minority interests
    804       4,159                       4,963  
 
                               
NET INCOME
  $ 147,144     $ 21,949     $ (50,371 )           $ 118,722  
 
                               
 
                                       
Basic earnings per share
  $ 0.56     $ 0.08     $ (0.19 )           $ 0.45  
Diluted earnings per share
  $ 0.55     $ 0.08     $ (0.19 )           $ 0.44  
 
                                       
Weighted average shares outstanding — basic
    261,164,418       261,164,418       261,164,418               261,164,418  
Weighted average shares outstanding — diluted
    267,367,248       267,367,248       267,367,248               267,367,248  

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PEABODY ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006
(Dollars in thousands, except per share data)
                                         
    Peabody     Excel Coal                      
    Energy     Limited     Pro Forma             Pro Forma  
    Historical     Historical     Adjustments             as Adjusted  
 
                               
REVENUES
                                       
Sales
  $ 2,582,564     $ 201,176                     $ 2,783,740  
Other revenues
    45,634       2,561                       48,195  
 
                               
Total revenues
    2,628,198       203,737                     2,831,935  
 
                                       
COSTS AND EXPENSES
                                       
Operating costs and expenses
    2,075,876       123,017                       2,198,893  
Depreciation, depletion and amortization
    172,439       10,972       10,075       (a )     193,486  
Asset retirement obligation expense
    18,843       1,462                       20,305  
Selling and administrative expenses
    87,305       10,562                       97,867  
Net gain on disposal or exchange of assets
    (59,269 )     (450 )                     (59,719 )
Income from equity affiliates
    (13,932 )     (15 )                     (13,947 )
 
                               
 
OPERATING PROFIT
    346,936       58,189       (10,075 )             395,050  
Interest expense
    52,738       5,534       (5,534 )     (b )     52,738  
 
                    63,534       (c )     63,534  
Interest income
    (4,140 )     (1,578 )     1,578       (b )     (4,140 )
 
                               
 
                                       
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS
    298,338       54,233       (69,653 )             282,918  
Income tax provision (benefit)
    8,248       16,216       (19,373 )     (d )     5,091  
Minority interests
    6,434       3,003                       9,437  
 
                               
NET INCOME
  $ 283,656     $ 35,014     $ (50,280 )           $ 268,390  
 
                               
 
                                       
Basic earnings per share
  $ 1.08     $ 0.13     $ (0.19 )           $ 1.02  
Diluted earnings per share
  $ 1.05     $ 0.13     $ (0.19 )           $ 1.00  
 
                                       
Weighted average shares outstanding — basic
    263,726,123       263,726,123       263,726,123               263,726,123  
Weighted average shares outstanding — diluted
    269,597,156       269,597,156       269,597,156               269,597,156  

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PEABODY ENERGY CORPORATION
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2006
(Dollars in thousands)
                                 
    Peabody     Excel Coal     Pro Forma        
    Energy     Limited     Adjustments        
    Historical     Historical     (e)     Total  
ASSETS
                               
Cash and cash equivalents
  $ 318,736     $ 29,585     $ (29,585 )   $ 318,736  
Accounts receivable, less allowance
    261,997       33,816             295,813  
Inventories
    167,116       80,465       (6,353 ) (g)     241,228  
Assets from coal trading activities
    84,692                   84,692  
Deferred income taxes
    94,124                   94,124  
Other current assets
    78,682       33,493             112,175  
 
                       
Total current assets
    1,005,347       177,359       (35,938 )     1,146,768  
Property, plant, equipment and mine development, net
    5,511,559       493,688       1,475,000       7,480,247  
Deferred income taxes
          35,985             35,985  
Goodwill
          251       79,382  (g)     79,633  
Investments and other assets
    324,696       71,267       17,001       412,964  
 
                       
Total assets
  $ 6,841,602     $ 778,550     $ 1,535,445     $ 9,155,597  
 
                       
 
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Current liabilities
                               
Current maturities of long-term debt
  $ 72,088     $ 18,034     $ (18,034 )   $ 72,088  
Liabilities from coal trading activities
    74,271                   74,271  
Accounts payable and accrued expenses
    778,669       123,094             901,763  
 
                       
Total current liabilities
    925,028       141,128       (18,034 )     1,048,122  
Long-term debt, less current maturities
    1,308,565       204,785       1,577,329  (f)     3,090,679  
Deferred income taxes
    289,083       45,489             334,572  
Asset retirement obligations
    410,566       13,092             423,658  
Workers’ compensation obligations
    239,822                   239,822  
Accrued postretirement benefit costs
    971,493       3,689             975,182  
Other noncurrent liabilities
    350,940       29,263       300,000       680,203  
 
                       
Total liabilities
    4,495,497       437,446       1,859,295       6,792,238  
Minority interests
    12,828       17,254             30,082  
Stockholders’ equity
                               
Common stock
    2,661       272,891       (272,891 )     2,661  
Additional paid-in capital
    1,546,985                   1,546,985  
Retained earnings
    830,648       50,856       (50,856 )     830,648  
Accumulated other comprehensive loss
    (31,625 )     103       (103 )     (31,625 )
Treasury stock
    (15,392 )                 (15,392 )
 
                       
Total stockholders’ equity
    2,333,277       323,850       (323,850 )     2,333,277  
 
                       
Total liabilities and stockholders’ equity
  $ 6,841,602     $ 778,550     $ 1,535,445     $ 9,155,597  
 
                       

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NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
 
(a)   To adjust depreciation, depletion and amortization based on the portion of the acquisition cost allocated to long-lived assets.
 
(b)   To reverse historical interest expense incurred by Excel, as well as historical interest income earned by Excel.
 
(c)   Represents pro forma interest expense resulting from our new capital structure using, in the case of revolving and term loan borrowings, an assumed LIBOR rate of 5.38% (dollars in thousands):
                         
    Year Ended   Six Months   Six Months
    December 31,   Ended June 30,   Ended June 30,
    2005   2005   2006
Revolving credit facility (1)
  $ 29,766     $ 14,883     $ 14,883  
Term loan facility (2)
    52,089       25,335       28,650  
Senior notes (3)
    64,604       32,303       32,303  
6 7/8% Senior notes (4)
    47,746       23,815       23,815  
5 7/8% Senior notes (5)
    14,879       7,440       7,355  
Subordinated note (6)
    6,656       3,423       3,026  
Surety bond expense (7)
    11,095       5,292       4,165  
Other long-term debt (8)
    3,172       1,804       2,075  
 
                       
Total pro forma interest expense
  $ 230,007     $ 114,295     $ 116,272  
Less historical interest expense
    102,939       50,761       52,738  
 
                       
Net adjustment to interest expense
  $ 127,068     $ 63,534     $ 63,534  
 
                       
 
  (1)   Reflects pro forma interest expense on our revolving unsecured credit facility at an assumed LIBOR plus 1% interest rate of 6.38%. A portion of the revolving credit facility is expected to be drawn at closing of the acquisition of Excel.
 
  (2)   Reflects pro forma interest expense on our term loan facility at an assumed LIBOR plus 1% interest rate of 6.38%. A portion of the term loan facility is expected to be drawn at closing of the acquisition of Excel.
 
  (3)   Reflects pro forma interest expense on the senior notes at an assumed fixed interest rate of 7.75%. For each percentage point by which the average interest rate on the senior notes exceeds 7.75%, this adjustment would increase by approximately $8.25 million per year.
 
  (4)   Reflects historical interest expense on our 6 7/8% senior notes.
 
  (5)   Reflects historical interest expense on our 5 7/8% senior notes.
 
  (6)   Reflects historical interest expense on our subordinated note.
 
  (7)   Reflects historical fees for surety bonds outstanding.
 
  (8)   Reflects historical letter of credit fees, interest on capital leases and the effect of interest rate swaps.
 
(d)   To record income tax expense (benefit) on the pro forma adjustments to results of operations using the statutory rate in effect in Australia.

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(e)   To record the purchase transaction and allocate the $1,540 million purchase price (and $49 million of transaction costs) to the assets acquired and the liabilities assumed based on the estimated fair values of each item as follows (dollars in thousands):
         
    Estimated
    Fair Value
Current assets
  $ 171,006  
Property, plant, equipment and mine development, net
    1,968,688  
Goodwill
    79,633  
Investments and other assets
    124,253  
Current liabilities
    (123,094 )
Long-term debt
    (222,819 )
Asset retirement obligations
    (13,092 )
Accrued postretirement benefit costs
    (3,689 )
Other noncurrent liabilities
    (374,752 )
Minority interest
    (17,254 )
 
     
 
       
Total
  $ 1,588,880  
 
     
(f)   Reflects indebtedness incurred to finance the acquisition of Excel consisting of $512.5 million of the Term Loan Facility, $444.6 million of borrowings under our Revolving Credit Facility and $825.0 million of our Senior Notes that Peabody intends to issue.
(g)   To record the effects of Emerging Issues Task Force (“EITF”) Issue No. 04-6, “Accounting for Stripping Costs in the Mining Industry” (EITF Issue No. 04-6”), which states “that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred.” EITF Issue No. 04-6 is effective for the first reporting period in fiscal years beginning after December 15, 2005 (January 1, 2006 for Peabody and July 1, 2006 for Excel). On January 1, 2006, Peabody implemented EITF Issue No. 04-6 using its modified transition provisions which allow companies adopting in periods beginning after June 29, 2005 to utilize a cumulative effect adjustment approach where the cumulative effect adjustment is recorded directly to retained earnings in the year of adoption. The adjustment to recognize the impact of EITF Issue No. 04-6 as of June 30, 2006 for Excel resulted in a reduction of “Inventories” by $6.4 million.

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Item 9.01. Financial Statements and Exhibits.
     (d) Exhibit.
     
Exhibit    
Number   Description of Exhibit
99.1
  Consent of KPMG, Independent Auditors of Excel.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
  PEABODY ENERGY CORPORATION
 
 
Date: October 2, 2006      
  /s/ RICHARD A. NAVARRE    
  Richard A. Navarre   
  Chief Financial Officer and
Executive Vice President of Corporate Development 
 
 

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