SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-13105
ARCH COAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-092117
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Address of principal executive offices) (Zip Code)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (314) 994-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At November 11, 1998, there were 39,455,181 shares of the registrant's
common stock outstanding.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997................................................1
Condensed Consolidated Statements of Income for the Three Months
Ended September 30, 1998 and 1997 and the Nine Months Ended
September 30, 1998 and 1997..........................................2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997.............................3
Notes to Condensed Consolidated Financial Statements.................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................22
Item 6. Exhibits and Reports on Form 8-K.............................22
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30 December 31
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 25,170 9,177
Trade accounts receivable 184,156 133,810
Other receivables 18,578 14,046
Inventories 71,320 50,419
Prepaid royalties 14,924 17,745
Deferred income taxes 8,506 8,506
Other 39,864 9,475
---------- ----------
Total current assets 362,518 243,178
---------- ----------
Property, plant and equipment,
net 1,909,320 1,149,926
---------- ----------
Other assets
Prepaid royalties 32,430 20,826
Coal supply agreements 203,735 185,306
Deferred income taxes 46,855 44,023
Investment in Canyon Fuel 277,759 -
Other 46,944 13,065
---------- ----------
Total other assets 607,723 263,220
---------- ----------
Total assets $2,879,561 $1,656,324
========== ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 164,394 $ 84,692
Accrued expenses 114,275 88,082
Current portion of long-term debt 103,000 29,500
---------- ----------
Total current liabilities 381,669 202,274
Long-term debt 1,198,397 248,425
Accrued postretirement benefits
other than pension 344,733 323,115
Accrued reclamation and mine
closure 147,203 116,199
Accrued workers' compensation 109,550 97,759
Accrued pension cost 25,076 21,730
Other noncurrent liabilities 50,082 35,324
---------- ----------
Total liabilities 2,256,710 1,044,826
---------- ----------
Stockholders' equity
Common stock 397 397
Paid-in capital 473,116 472,425
Retained earnings 150,266 138,676
Treasury stock, at cost (928) -
---------- ----------
Total stockholders' equity 622,851 611,498
---------- ----------
Total liabilities and
stockholders' equity $2,879,561 $1,656,324
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Coal sales $ 393,296 322,924 1,034,474 706,210
Income from equity investment 2,719 - 5,135 -
Other revenues 28,108 6,551 50,504 18,152
---------- --------- ---------- ---------
424,123 329,475 1,090,113 724,362
---------- --------- ---------- ---------
Costs and expenses
Cost of coal sales 366,922 288,301 943,438 628,734
Selling, general and administrative expenses 12,104 10,054 28,848 18,254
Amortization of coal supply agreements 11,062 6,504 24,726 10,704
Merger-related expenses - 39,132 - 39,132
Other expenses 10,126 5,952 19,384 15,397
---------- --------- --------- --------
400,214 349,943 1,016,396 712,221
---------- --------- --------- --------
Income (loss) from operations 23,909 (20,468) 73,717 12,141
Interest expense, net:
Interest expense (24,600) (5,950) (38,770) (12,742)
Interest income 135 117 316 652
----------- ---------- --------- ---------
(24,465) (5,833) (38,454) (12,090)
----------- ---------- --------- ---------
Income (loss) before income taxes (556) (26,301) 35,263 51
Provision (benefit) for income taxes (1,100) (13,300) 3,900 (9,100)
----------- ---------- --------- ---------
Income (loss) before extraordinary item 544 (13,001) 31,363 9,151
Extraordinary item from the extinguishment
of debt - - (1,488) -
----------- ---------- --------- ---------
Net income (loss) $ 544 (13,001) 29,875 9,151
=========== ========== ========= =========
Basic and diluted earnings (loss) per
common share before extraordinary item $ 0.01 $ (0.33) $ 0.79 $ 0.34
=========== ========== ========= =========
Basic and diluted earnings (loss) per
common share $ 0.01 $ (0.33) $ 0.75 $ 0.34
=========== ========== ========= =========
Weighted average shares outstanding 39,693 39,636 39,673 27,177
=========== ========== ========= =========
Dividends declared per common share $ 0.230 $ 0.115 $ 0.460 $ 0.330
=========== ========== ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 29,875 $ 9,151
Adjustments to reconcile to cash provided
by operating activities:
Depreciation, depletion and amortization 142,223 100,962
Prepaid royalties expensed 15,180 4,989
Net gain on disposition of assets (29,847) (400)
Merger-related expenses - 35,854
Income from equity investment (5,135) -
Distribution from equity investment 16,250 -
Changes in:
Receivables (10,085) (9,367)
Inventories 4,439 (2,071)
Accounts payable and accrued
expenses 39,226 5,893
Income taxes (5,405) (28,976)
Accrued postretirement benefits 9,173 5,286
Accrued workers' compensation benefits 1,293 (5,972)
Accrued reclamation and mine closure (2,035) (134)
Other (22,984) 6,933
-------- ---------
Cash provided by operating activities 182,168 122,148
-------- ---------
Investing activities
Cash paid for acquisitions (1,090,000) (16,990)
Additions to property, plant and equipment (65,326) (36,341)
Proceeds from dispositions of property,
plant and equipment 26,349 792
Additions to prepaid royalties and bid
deposit (55,481) (4,767)
----------- ---------
Cash used in investing activities (1,184,458) (57,306)
----------- ---------
Financing activities
Net proceeds from revolver and lines of
credit 56,190 127,873
Payments on senior notes (42,860) (181,110)
Proceeds from term loans 973,436 -
Proceeds from sale and leaseback of equipment 45,442 -
Dividends paid (13,688) (9,070)
Proceeds from sale of common stock 691 1,050
Purchases of common stock (928) -
--------- ---------
Cash (used in) provided by financing
activities 1,018,283 (61,257)
--------- ---------
Increase in cash and cash equivalents 15,993 3,585
Cash and cash equivalents, beginning of
period 9,177 13,716
--------- --------
Cash and cash equivalents, end of period 25,170 17,301
========= ========
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
ARCH COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Note A - General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations, but are
subject to any year-end adjustments which may be necessary. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Results of operations for
the periods ended September 30, 1998, are not necessarily indicative of results
to be expected for the year ending December 31, 1998. The Company produces steam
and metallurgical coal from surface and deep mines in Central Appalachian,
Western, and Midwestern coal fields for sale to utility, industrial and export
markets. Significant intercompany transactions and accounts have been eliminated
in consolidation. Certain amounts in the 1997 financial statements have been
reclassified to conform with the classifications in the 1998 financial
statements with no effect on previously reported net income or stockholders'
equity.
Note B - Acquisitions
On June 1, 1998, Arch Coal acquired the Colorado and Utah coal operations of
Atlantic Richfield Company ("ARCO") and simultaneously combined the acquired
ARCO operations and the Company's Wyoming operations with ARCO's Wyoming
operations in a new joint venture named Arch Western Resources, LLC ("Arch
Western"). The principal operating units of Arch Western are Thunder Basin Coal
Company, L.L.C., owned 100% by Arch Western, which operates two coal mines in
the Southern Powder River Basin in Wyoming; Mountain Coal Company, L.L.C., owned
100% by Arch Western, which operates a coal mine in Colorado; Canyon Fuel
Company, LLC ("Canyon Fuel"), 65% owned by Arch Western and 35% by ITOCHU Coal,
Inc., a subsidiary of ITOCHU Corporation, which operates three coal mines in
Utah; and Arch of Wyoming, LLC, owned 100% by Arch Western, which operates two
coal mines in the Hanna Basin of Wyoming.
Arch Western is 99% owned by Arch Coal and 1% owned by ARCO. The transaction is
valued at approximately $1.14 billion and Arch Coal is the managing member of
Arch Western. The transaction has been accounted for under the purchase method
of accounting. Accordingly, the cost to acquire ARCO's U.S. coal operations has
been preliminarily allocated to the assets acquired and liabilities assumed
according to their respective estimated fair values. Arch Western is
consolidated into the Company's financial statements. As a result of certain
super-majority voting rights, Arch Western's 65% ownership of Canyon Fuel is
accounted for under the equity method of accounting. Results of operations of
the acquired operations are included in the condensed consolidated statements of
income effective June 1, 1998. As was the case prior to the acquisition, the
acquired ARCO operations will produce low-sulfur coal for sale to primarily
domestic utility customers.
Summarized below are the unaudited pro forma combined results of operations for
the nine months ended September 30, 1998 and 1997. These results reflect the
July 1, 1997 merger with Ashland Coal, Inc. as if it had occurred on January 1,
1997 and the June 1, 1998 Arch Western transaction as if it had occurred on
January 1, 1998 and 1997.
4
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- ----------
(in thousands)
<S> <C> <C>
Revenues $1,252,106 $1,357,370
Income before extraordinary item $ 21,240 $ 32,945
Net income $ 19,752 $ 32,945
Earnings per share before
extraordinary item $ .54 $ .83
Earnings per share $ .50 $ .83
</TABLE>
In the opinion of the management of the Company, all adjustments necessary to
present pro forma results of operations have been made. The unaudited pro forma
results of operations do not purport to be indicative of the results that would
have occurred had these transactions actually occurred at the beginning of the
relevant periods or of the results of operations that may be achieved in the
future.
Note C - Investment in Canyon Fuel
The following table presents unaudited summarized financial information for
Canyon Fuel which, as part of the June 1, 1998 Arch Western transaction
(described in Note B), was acquired by the Company and is accounted for on the
equity method:
Three Months Four Months
Ended Ended
September 30 September 30
1998 1998
------------ -------------
(in thousands)
Revenues $ 65,570 $ 86,153
Total costs and expenses 66,152 83,398
--------- ---------
Net income (loss) $ (582) $ 2,755
========= =========
Arch Coal's income from
its equity investment
in Canyon Fuel $ 2,719 $ 5,135
========= =========
Arch Coal's income from its equity investment in Canyon Fuel represents 65% of
Canyon Fuel's net income after adjusting for the effect of Arch's investment in
Canyon Fuel.
Note D - Inventories
Inventories are comprised of the following:
September 30, December 31,
1998 1997
============= ============
(in thousands)
Coal $ 28,450 $ 25,359
Repair parts and supplies 42,870 25,060
----------- ---------
$ 71,320 $ 50,419
=========== =========
5
<PAGE>
<TABLE>
<CAPTION>
Note E - Debt
Debt consists of the following:
September 30, December 31,
1998 1997
============= ============
(in thousands)
<S> <C> <C>
Indebtedness to banks under lines
of credit $ 2,492 $ 36,302
Indebtedness to banks under
revolving credit agreement,
expiring May 31, 2003 280,000 -
Variable rate term loan payable
quarterly through May 31, 2003 300,000 -
Variable rate term loan payable
May 31, 2003 675,000 -
Indebtedness to banks under the
1997 revolving credit agreement - 190,000
7.79% senior unsecured notes - 42,860
Other 43,905 8,763
--------- ---------
1,301,397 277,925
Less current portion 103,000 29,500
========= =========
Long-term debt $1,198,397 $ 248,425
========== =========
</TABLE>
On July 1, 1997, concurrently with the Company's combination with Ashland Coal,
the Company entered into a $500 million revolving credit agreement. The $500
million revolving credit agreement had a five-year term, and the rate of
interest on borrowings under this agreement was, at the Company's option, a
money-market rate determined by a competitive bid process, the PNC Bank base
rate or a rate based on LIBOR. Indebtedness under this facility was repaid in
its entirety and the facility terminated effective June 1, 1998, using proceeds
from a new Company revolving credit facility entered into effective June 1,
1998.
In connection with the Arch Western transaction (referred to in Note B), the
Company entered into three new five-year credit facilities: a $675 million
non-amortizing term loan to Arch Western, a $300 million fully amortizing term
loan to Arch Coal, and a $600 million revolver to Arch Coal. Borrowings under
the new Arch Coal credit facilities were used to finance the acquisition of
ARCO's Colorado and Utah coal operations, to pay related fees and expenses, to
refinance existing corporate debt and for general corporate purposes. The
Company recognized an extraordinary charge, net of tax benefits, of $1.5 million
from the refinancing of existing corporate debt. Borrowings under the Arch
Western credit facility were used to fund a portion of a $700 million cash
distribution by Arch Western to ARCO, which distribution occurred simultaneously
with ARCO's contribution of its Wyoming coal operations and certain other
insignificant assets to Arch Western. The Arch Western credit facility is not
guaranteed by the Company. The rate of interest on the borrowings under the
agreements is, at the Company's option, the PNC Bank base rate or a rate based
on LIBOR. On a historical basis, at December 31, 1997, Arch Coal's debt was 31%
of capital employed. At September 30, 1998 Arch Coal's debt is approximately 68%
of capital employed.
Terms of the Company's credit facilities and leases contain financial and other
restrictive covenants that limit the ability of the Company to, among other
things, pay dividends, effect acquisitions or dispositions and borrow additional
funds, and require the Company to, among other things, maintain various
financial ratios and comply with various other financial covenants. Failure by
the Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company.
6
<PAGE>
The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Arch Coal debt. At September 30, 1998, the
Company had fifteen interest-rate swap agreements having a total notional value
of $725 million. These swap agreements were used to convert variable-rate debt
to fixed-rate debt. Under these swap agreements, the Company pays a weighted
average fixed rate of 5.60% (or 7.10% including a Euro-rate credit spread of
1.5%) and is receiving a weighted average variable rate based upon 30-day LIBOR.
The remaining term of the swaps at September 30, 1998, ranged from 50 to 72
months.
Note F - Treasury Stock
On September 29, 1998, Arch Coal's Board of Directors authorized the Company to
repurchase up to 2 million shares of Company common stock. The timing of the
purchases and the number of shares to be purchased are dependent on market
conditions. As of September 30, 1998, the Company has acquired 57,200 shares
under the repurchase program at the average price of $14.81 per share.
Note G - Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies, including
environmental matters, when a loss is probable and the amount is reasonably
determinable. The Company estimates that its probable aggregate loss as a result
of such claims as of September 30, 1998 is $6.4 million (included in other
nonconcurrent liabilities) and believes that probable insurance recoveries of
$.7 million (included in other assets) related to these claims will be realized.
The Company estimates that its reasonably possible aggregate losses from all
material currently pending litigation could be as much as $.6 million (before
taxes) in excess of the probable loss previously recognized. After conferring
with counsel, it is the opinion of management that the ultimate resolution of
these claims, to the extent not previously provided for, will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
A customer of the Company has informed the Company that one of its power plants
will no longer provide baseload capacity to a public utility and instead will be
used to provide peak demand only and, as a result, the plant will require
substantially less coal under the customer's existing above-market contract with
the Company. The Company has filed a civil action in Federal District Court in
the Southern District of West Virginia alleging breach of contract and other
causes of action against the customer in respect of the customer's failure to
comply with the terms of this contract. On July 17, 1998 the court granted the
customer's motion to stay the lawsuit pending arbitration. As of September 30,
1998, the carrying amount of acquisition costs allocated to this coal supply
contract is approximately $14.5 million. The Company currently expects that it
will recover the carrying amount of this asset, however, the ultimate outcome of
this matter is uncertain.
Note H - Changes in Estimates and Other Non-Recurring Revenues and Expenses
The Company's operating results for the three months and nine months ended
September 30, 1998 reflect pre-tax gains on the sale of surplus land totaling
$1.2 million ($.7 million after-tax) and $11.1 million ($6.5 million after-tax),
respectively. The operating results for the nine months ended September 30, 1998
also reflect a $6.3 million operating loss (including termination benefits
totaling $1.3 million), at the Company's Mine No. 37 in eastern Kentucky which
closed in January 1998. On September 29, 1998, the Company completed the sale of
inactive coal properties in eastern Kentucky, which resulted in a pre-tax gain
of $18.5 million ($11.3 after-tax). The nine months ended September 30, 1997
includes a $3.3 million reduction in the reclamation and mine closure reserve at
the Company's Illinois operation due to a change in permit requirements offset
by $4.6 million in costs associated with the October, 1996 impoundment failure
at Lone Mountain Processing, Inc. The nine months ended September 30, 1997 also
includes a $4.2 million reduction in workers' compensation reserves due to
better than anticipated safety performance.
7
<PAGE>
Note I - Sale and Leaseback
On January 29, 1998, the Company sold mining equipment for approximately $74.2
million and leased back the equipment under an operating lease with a term of
three years. This included the sale and leaseback of equipment purchased under
an existing operating lease that expired on the same day. The proceeds of the
sale were used to purchase the equipment under the expired lease for $28.3
million, pay related transaction fees of $.4 million and to pay down debt. The
lease provides for annual rental payments of approximately $9.1 million, $11.6
million, $11.2 million and $2.7 million in 1998, 1999, 2000 and 2001,
respectively. At the end of the lease term, the Company has the option to renew
the lease for two additional one year periods or purchase the equipment for
approximately $51.1 million. Alternatively, the equipment may be sold to a third
party. In the event of such a sale, the Company will be required to make payment
to the lessor in the event, and to the extent, that the sale proceeds are less
than $40.0 million. The gain on the sale and leaseback of $10.7 million has been
deferred and is being amortized over the base term of the lease as a reduction
of rental expense.
Note J - Computation of Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 ("FAS 128"), "Earnings per Share." FAS 128 replaced
the previously reported primary and fully diluted earnings per share ("EPS")
with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive
effects of options and convertible securities. Diluted EPS is very similar to
the previously reported fully diluted EPS. The following table sets forth the
computation of basic and diluted EPS from continuing operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $ 544 $ (13,001) $ 31,363 $ 9,151
Extraordinary item - - (1,488) -
========= ========= ======== ========
Net income (loss) $ 544 $ (13,001) $ 29,875 $ 9,151
========= ========= ======== ========
Dominator:
Weighted average shares - denominator
for basic 39,693 39,636 39,673 27,177
Dilutive effect of employee stock
options 8 76 33 94
--------- --------- -------- --------
Adjusted weighted average shares -
denominator for diluted 39,701 39,712 39,706 27,271
========= ========= ======== ========
Basic and diluted earnings (loss)
per common share before
extraordinary item $ .01 $ (.33) $ .79 $ .34
========= ========= ======== ========
Basic and diluted earnings (loss) per
common share $ .01 $ (.33) $ .75 $ .34
========= ========= ======== ========
</TABLE>
Note K - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in 1998. The Company is
evaluating the requirements of FAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
8
<PAGE>
In February 1998, FAS 132, "Employers Disclosure about Pensions and Other
Postretirement Benefits" was issued. FAS 132 does not change the recognition or
measurement of pension or postretirement benefit plans, but standardizes
disclosure requirements for pensions and other postretirement benefits,
eliminates unnecessary disclosure and requires additional information. FAS 132
is required to be adopted in 1998 and restatement of disclosures for prior
periods provided for comparative purposes is required. The application of FAS
132 is not expected to have a material effect on the disclosures included in the
Company's consolidated financial statements.
In June 1998, FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued, which is required to be adopted in years beginning after
June 15, 1999. FAS 133 permits early adoption as of the beginning of any fiscal
quarter after its issuance. FAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what effect FAS 133
will have on the earnings and financial position of the Company.
Note L - Subsequent Events
On October 1, 1998, the Company was the successful bidder in a federal auction
of certain mining rights in the 3,546 acre Thundercloud tract in the Powder
River Basin of Wyoming. The Company's lease bonus bid amounted to $158 million
for the tract, which contains approximately 412 million tons of demonstrated
coal reserves and is contiguous with the Company's Black Thunder mine. The first
installment of the lease bonus in the amount of $36.1 million was paid on
October 1, 1998, and four payments in the same amount are payable on each
October 1 thereafter through October 31, 2002. Final approval of this coal lease
is expected in the fourth quarter of 1998 following routine government review.
On October 30, 1998, the Company issued Worker Adjustment and Retraining
Notifications ("WARN Notices") to employees at its Dal-Tex Mine in Logan County,
West Virginia. Under the WARN Act, a company must provide workers with at least
60 days advance notification before layoffs can occur. The WARN Notices were
issued as a result of potential layoffs that could occur if the mining operation
does not receive the necessary permits from the U.S. Environmental Protection
Agency ("EPA") and the U.S. Army Corps of Engineers (the "Corps") to mine a new
reserve area adjacent to current operations. The permitting has been delayed by
various complaints before the agencies identified above. The required permits
consist of a surface mining permit that must be issued by the West Virginia
Department of Environmental Protection ("DEP"), an NPDES Permit that must be
approved by the EPA and a dredge and fill permit under Section 404 of the Clean
Water Act must be issued by the Corps. On November 4, 1998, the DEP issued the
required surface mining permit. Prior to the commencement of mining, however,
the NPDES Permit must be approved by the EPA and the Corps must issue the dredge
and fill permit. On October 24, 1998, a public hearing on the NPDES Permit was
held by the EPA. The EPA must allow at least thirty days for public comment
after the hearing prior to making a decision on the permit. On November 9, 1998,
the United States District Court for the Southern District of West Virginia
denied the motion of the plaintiffs for a temporary restraining order seeking
revocation of the DEP surface mining permit pending a hearing scheduled for
December 10, 1998 on plaintiffs' motion for a preliminary injunction. (See the
discussion in the "Legal Contingencies" subsection of Management's Discussion
and Analysis of Financial Condition and Results of Operations section of the
10-Q below).
On October 22, 1998, the Company reached agreement in principle to pay $2.0
million to settle a claim made by a third party that longwall mining at the
Company's Mingo Logan complex damaged an overlying seam of coal that had been
subleased by a Company subsidiary to the third party. The amount of the
settlement has been fully accrued for by the Company. The Company has also
agreed in principle to repurchase the overlying seam in other areas of the Mingo
Logan complex for $13.6 million. The settlement of the lawsuit and the
acquisition of the coal reserves are expected to be completed in the fourth
quarter of 1998, subject to completion of negotiations and execution of
definitive settlement and acquisition agreements.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the "Contingencies," "Certain Risk Factors," "Impact of
Year 2000" and "Factors Routinely Affecting Results of Operations" sections
below (all such sections being hereafter collectively referred to as the "Risk
Factors Disclosure") for a discussion of factors that may cause actual results
to differ materially from the forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) herein, including in the "Outlook" and "Liquidity and
Capital Resources" sections below.
Results of Operations
Ashland Coal merged with Arch Mineral Corporation effective July 1, 1997 to form
the Company and the Company acquired ARCO's U.S. coal operations effective June
1, 1998. Results of operations do not include activity of Ashland Coal or ARCO's
U.S. coal operations prior to the effective dates of these transactions.
Accordingly, the Company's results of operations for the third quarter and
nine-month periods ended September 30, 1997 and 1998 are not directly
comparable.
Quarter Ended September 30, 1998, Compared
to Quarter Ended September 30, 1997
Net income for the quarter ended September 30, 1998, was $.5 million, compared
to a net loss of $13.0 million for the quarter ended September 30, 1997. The
September 30, 1997 quarter included a $39.1 million charge ($23.8 million
after-tax) related to the Company's merger with Ashland Coal. The merger-related
charge is principally comprised of termination benefits, relocation costs and
costs associated with the idling of duplicate facilities. The third quarter 1998
results were affected by the previously announced expiration of the high margin
contract with Georgia Power at the end of 1997 and the depletion of the longwall
reserves at the Company's Mine No. 37 in eastern Kentucky in September 1997 and
subsequent closing of that mine in January, 1998. The Company decided to close
the mine primarily due to poor geologic conditions. On September 29, 1998, the
Company completed the sale of the inactive coal properties in eastern Kentucky.
The transaction resulted in a pre-tax gain of $18.5 million ($11.3 million
after-tax). In addition, third quarter 1998 results were negatively affected by
reduced shipments on a high margin contract and production shortfalls at the
Hobet 21 mine and Dal-Tex mine in West Virginia. The reduced shipments on the
high margin contract occurred upon the previously announced change of a
customer's plant from a baseload to a peak demand plant. This adversely affected
net income by approximately $1.0 million for the quarter. The quarterly results
were also negatively affected by poor rail service at the Company's western
operations and routine mine shutdowns in connection with miners' vacations.
Offsetting these items during the quarter was the continued strong performance
at the Company's Mingo Logan mining complex.
Gross profit on coal sales (selling price less cost of sales) on a per ton basis
decreased $1.73 from the third quarter of 1997. The average selling price and
cost of sales per ton decreased by $10.45 and $8.72 per ton, respectively, from
the third quarter of 1997. The price and cost of sales per ton decreases are
primarily attributable to the inclusion of the acquired ARCO operations in the
1998 period. Wyoming coal, which on a pro forma basis giving effect to the ARCO
acquisition as of January 1, 1998, accounts for approximately 47% of the
Company's production, has a lower average sales price than coal at Arch Coal's
other coal operations and Wyoming coal operations have a lower cost structure
than coal at Arch Coal's other coal operations. Other factors affecting the per
ton information include the expiration of the Georgia Power contract, the
closing of Mine No. 37, production shortfalls at the Hobet 21 mine and Dal-Tex
mine, reduced shipments on a high margin contract and the 1997 completion of
amortization of a 1993 unrecognized net gain related to pneumoconiosis (black
lung) liabilities.
As a result of certain super-majority voting rights, Arch Western's 65%
ownership of Canyon Fuel is accounted for under the equity method of accounting.
Income from equity investment represents Arch Coal's share (65%) of Canyon
Fuel's net income (after adjusting for the effect of Arch's investment in Canyon
Fuel) since the June 1, 1998 acquisition date.
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Other revenues were $21.6 million higher in the third quarter of 1998 than the
same period in 1997, primarily as a result of the $18.5 million pre-tax gain
from the sale of inactive coal properties in eastern Kentucky.
Selling, general and administrative expenses increased $2.1 million from the
comparable period in 1997 primarily due to the effects of the Arch Western
transaction.
Amortization of coal supply agreements increased $4.6 million from the quarter
ended September 30, 1997. This increase was attributable to the amortization of
the carrying value of sales contracts acquired in the Arch Western transaction.
Other expenses increased $4.2 million from the comparable period in the prior
year primarily as a result of accruing additional liabilities related to adverse
litigation developments and higher expenses at the Company's Ark Land
subsidiary. Ark Land expenses rose as a result of the Arch Western transaction.
Third quarter 1998 interest expense was $18.7 million higher than the third
quarter of 1997. The increase is attributable to the debt incurred in connection
with the Arch Western transaction effective June 1, 1998.
The Company's effective tax rate is sensitive to changes in estimates of annual
profitability and percentage depletion. The Company's income tax benefit
recorded in the third quarter has been reduced by income taxes generated as a
result of the sale of inactive properties in eastern Kentucky in the period.
EBITDA (income (loss) from operations before the effect of changes in accounting
principles and extraordinary items, merger-related costs, net interest expense,
income taxes, depreciation, depletion and amortization for Arch Coal, its
subsidiaries and equity investments) was $89.6 million for the quarter ended
September 30, 1998 compared to $61.8 million for the same quarter a year ago.
The increase in EBITDA is primarily attributable to the additional sales that
resulted from the Arch Western transaction. EBITDA is a widely accepted
financial indicator of a company's ability to incur and service debt, but EBITDA
should not be considered in isolation or as an alternative to net income,
operating income, or cash flows from operations, or as a measure of a company's
profitability, liquidity or performance under generally accepted accounting
principles. The Company's method of computing EBITDA also may not be the same
method used to compute similar measures reported by other companies, or EBITDA
may be computed differently by the Company in different contexts (i.e., public
reporting versus computations under financing agreements).
Nine Months Ended September 30, 1998 Compared
to Nine Months Ended September 30, 1997
Net income for the nine months ended September 30, 1998, was $29.9 million,
compared to $9.2 million for the nine months ended September 30, 1997. Results
for 1997 included a $39.1 million charge ($23.8 million after-tax) related to
the Company's merger with Ashland Coal. The merger-related charge is principally
comprised of termination benefits, relocation costs and costs associated with
idling of duplicate facilities. The results for the first nine months of 1998
were affected by the previously announced expiration of the high margin contract
with Georgia Power at the end of 1997 and the depletion of the longwall reserves
at the Company's Mine No. 37 in eastern Kentucky in September 1997 and
subsequent closing of that mine in January, 1998. The Company decided to close
the mine primarily due to poor geologic conditions. In addition, the results
were negatively affected by reduced shipments on a high margin contract,
production shortfalls at the Hobet 21 Mine and Dal-Tex mine in West Virginia and
severe snow storms in West Virginia during the first quarter. The reduced
shipments on the high margin contract occurred upon the previously announced
change of a customer's plant from a baseload to a peak demand plant. This
adversely affected net income by approximately $3.0 million for the nine months
ended September 30, 1998. The results for the nine months ended September 30,
1998 were also negatively affected by poor rail service at the Company's western
operations. Offsetting these items was a continued strong performance at the
Company's Mingo Logan mining complex and pre-tax gains of $29.6 million on sales
of surplus land and other property during the period, including the sale of
inactive eastern Kentucky coal properties for a pre-tax gain of $18.5 million.
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In addition to the merger-related charge, other items occurring in the first
nine months of 1997 affecting the comparison with the first nine months of 1998
include a $4.2 million favorable adjustment to workers' compensation reserves
due to better than anticipated safety performance and a $3.3 million decrease in
the accrual for reclamation and mine closure at its Illinois operations due to a
change in permit requirements. These items were offset by non-recurring charges
of $4.6 million associated with the impoundment discharge at Lone Mountain which
occurred in the fourth quarter of 1996, and $1.5 million for the settlement of
the Trail Mountain lawsuit in the second quarter of 1997.
Gross profit on coal sales (selling price less cost of sales) on a per ton basis
decreased $1.14 from the first nine months of 1997. The average selling price
and cost of sales per ton decreased by $6.51 and $5.37 per ton, respectively,
from the first nine months of 1997. The price and cost of sales per ton
decreases are primarily attributable to the inclusion of the acquired ARCO
operations beginning June 1, 1998. Wyoming coal, which on a pro forma basis
giving effect to the ARCO acquisition as of January 1, 1998, accounts for
approximately 47% of the Company's production, has a lower average sales price
than coal at Arch Coal's other coal operations, and Wyoming coal operations have
a lower cost structure than coal at Arch Coal's other coal operations. Other
factors affecting the per ton information include the expiration of the Georgia
Power contract in December, 1997, the closing of Mine No. 37 in 1998, production
shortfalls at the Hobet 21 mine and Dal-Tex mine in 1998, reduced shipments on a
high margin contract in 1998, a $4.2 million favorable adjustment to workers'
compensation in 1997 (of which $.7 million affected selling, general and
administrative expenses) and the 1997 completion of amortization on a 1993
unrecognized net gain related to pneumoconiosis (black lung) liabilities.
As a result of certain super-majority voting rights, Arch Western's 65%
ownership of Canyon Fuel is accounted for under the equity method of accounting.
Income from equity investments represents Arch Coal's share (65%) of Canyon
Fuel's net income (after adjusting for the effect of Arch's investment in Canyon
Fuel) since the June 1, 1998, date of acquisition.
Other revenues were $32.4 million higher in the first nine months of 1998 than
the same period in 1997, primarily as a result of the $29.6 million pre-tax gain
from sales of surplus land and other properties during the third quarter 1998,
including the sale of inactive coal properties in eastern Kentucky for $18.5
million.
Selling, general and administrative expenses increased $10.6 million from the
comparable period in 1997, primarily due to the effects of the Ashland Coal
merger, the Arch Western transaction and the favorable workers' compensation
adjustment of $.7 million during the second quarter of 1997 described above.
Amortization of coal supply agreements increased $14.0 million from the nine
months ended September 30, 1997. This increase was attributable to the
amortization of the carrying value of the sales contracts acquired in the
Ashland Coal merger and Arch Western transaction.
Other expenses increased $4.0 million from the comparable period in 1997
primarily as a result of accruing additional liabilities related to adverse
litigation developments and higher expenses at the Company's Ark Land
subsidiary. Ark Land expenses rose as a result of the Ashland Coal merger and
the Arch Western transaction. The second quarter of 1997 included the $1.5
million final settlement of the Trail Mountain lawsuit.
Interest expense for the first nine months of 1998 was $26.0 million higher than
the same period in 1997. The increase is attributable to the debt incurred in
connection with the Arch Western transaction effective June 1, 1998.
The Company's effective tax rate is sensitive to changes in estimates of annual
profitability and percentage depletion.
During the first nine months of 1998, Arch Coal incurred an extraordinary charge
of $1.5 million net of a tax benefit of $.9 million related to the early
extinguishment of debt in conjunction with the Arch Western transaction.
EBITDA (income (loss) from operations before the effect of changes in accounting
principles and extraordinary items, merger-related costs, net interest expense,
income taxes, depreciation, depletion and amortization for Arch Coal, it
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subsidiaries and equity investments) was $228.2 million for the nine months
ended September 30, 1998 compared to $152.2 million for the same period a year
ago. The increase in EBITDA is primarily attributable to the additional sales
that resulted from the Ashland Coal merger and the Arch Western transaction.
Outlook
Arch Coal's strategic position has been further strengthened by its successful
October 1, 1998, $158 million bid on the 3,546 acre Thundercloud tract in the
Powder River Basin of Wyoming. The tract has favorable geologic conditions,
contains demonstrated coal reserves of approximately 412 million tons of Clean
Air Act Phase II compliance quality coal and is contiguous with the Company's
Black Thunder mine. The Company plans to add a fourth dragline at the Black
Thunder mine in late 2000 to begin mining the Thundercloud tract.
With respect to other operations, management has decided to continue reduced
coal mining operations during the remainder of 1998 at the Seminoe II and
Medicine Bow mines in Wyoming as a result of oversupply of competing coals in
this market. The previously disclosed scheduled closures of the Hobet 07 Complex
in West Virginia and the Arch of Illinois surface mine due to the depletion of
their economical dedicated reserves and the closure of Mine No. 37 in Kentucky,
all in 1998, have reduced production. Production losses as a result of such
reduced mining and mine closures have been offset to some degree by production
from Mingo Logan's new surface mine in the Phoenix reserves, which commenced
production in the second quarter of 1998. The Company expects the poor rail
service to its Western operations to improve, although such service may continue
to hinder performance through the fourth quarter of 1998. Fourth quarter 1998
results also will be adversely affected by continuing production shortfalls at
Hobet 21, unexpected geologic difficulties at the Huff Creek mine and idle
shifts at the Darby Fork mine as a result of a fatality that occurred there in
early October, 1998.
On October 30, 1998, as a result of not having secured new permits for the
Dal-Tex operation in a timely fashion, the Company issued Worker Adjustment and
Retraining Notifications ("WARN Notices") to employees at its Dal-Tex Mine in
Logan County, West Virginia. Under the WARN Act, a company must provide workers
with at least 60 days advance notification before layoffs can occur. Potential
layoffs and curtailment of operations at that complex could occur if the mining
operation does not receive the necessary permits to continue mining from the
West Virginia Department of Environmental Protection ("DEP"), the U.S.
Environmental Protection Agency ("EPA") or the U.S. Army Corps of Engineers the
("Corps"). The permitting has been delayed by legal challenges.
The required permits consist of a surface mining permit issued by the DEP, an
NPDES Permit approved by the EPA and a "dredge and fill" permit under Section
404 of the Clean Water Act issued by the Corps. On November 4, 1998, the DEP
issued the required surface mining permit. Prior to the commencement of mining,
however, the NPDES Permit must be approved by the EPA and the Corps must issue
the dredge and fill permit, and claimants are seeking to have the DEP permit
revoked. On October 24, 1998, a public hearing on the NPDES Permit was held by
the EPA. The EPA must allow at least thirty days for public comment after the
hearing prior to making a decision about the permit. Substantial delay or
failure to issue the unissued permits, revocation of the issued DEP permit, or
the issuance of NPDES or dredge and fill permits which restrict the use of
valley fills, would have further adverse effects on the Dal-Tex operations and
the Company's results of operations. Depending upon the duration of the
curtailment of Dal-Tex operations or the nature of any restrictions imposed in
the NPDES and dredge and fill permits on the use of valley fills, the adverse
effect could be material. For additional discussion of these matters, see the
"Legal Contingencies" subsection of the Contingencies section below.
Liquidity and Capital Resources
The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 1998 and 1997:
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1998 1997
---------- ----------
(in thousands)
Cash provided by (used in):
Operating activities $ 182,168 $ 122,148
Investing activities (1,184,458) (57,306)
Financing activities 1,018,283 (61,257)
Cash provided by operating activities increased in the first nine months of 1998
from the level in the same period of 1997, due primarily to the Ashland Coal
merger and the Arch Western transaction.
The increase in cash used for investing activities in the first nine months of
1998 primarily resulted from the payment of $1.1 billion in the Arch Western
transaction. In addition, the Company had higher capital expenditures associated
with the start up of a new surface mine in the Phoenix reserves in West
Virginia, a $16 million annual royalty payment on a lease acquired in 1992 and a
bid deposit of $31.6 million related to the Thundercloud tract lease. In 1998,
cash was provided by $26.3 million of proceeds on the sale of property plant and
equipment, including the sale of inactive coal properties in eastern Kentucky.
Cash provided by financing activities reflects an increase in borrowings of $1.1
billion associated with the Arch Western transaction net of associated debt
repayment. Arch Coal repaid approximately $35.7 million of senior notes
concurrently with its borrowings to finance the Arch Western transaction. The
January 1998 sale and leaseback of equipment resulted in net proceeds of $45.4
million.
The Company's capital expenditures in the nine months ended September 30, 1998
were $65.3 million. Approximately $8.0 million of these expenditures were for
equipment upgrades at the Lone Mountain complex, including the addition of a
third section to the Darby Fork mine. Equipment upgrades at the Conant mine, the
Hobet 21 mine/Beth Station preparation plant, the Ruffner mine and the Mingo
Logan longwall mine accounted for $3.0 million, $3.6 million, $3.7 million and
$9.0 million, respectively, during the period. Equipment purchases to start up
the new Phoenix surface mine totaled approximately $10.3 million during the
period.
In connection with the Arch Western transaction, Arch Coal retired its senior
notes of $35.7 million and paid off amounts borrowed under the $500 million
credit facility and entered into three new five-year credit facilities with a
group of banks. As a result, the Company incurred an extraordinary charge of
$1.5 million net of tax for the early retirement of debt. The rate of interest
on the borrowings under the agreements is, at the Company's option, the PNC Bank
base rate or a rate based on LIBOR.
The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
September 30, 1998, the face amount of such agreements was $20 million and there
were borrowings of $2.5 million outstanding under these agreements.
The Company's ability to satisfy its debt service and lease payment obligations
will depend upon the future operating performance of its subsidiaries, which
will be affected by prevailing economic conditions in the markets they serve and
financial, business and other factors, certain of which are beyond their
control. (See the Risk Factors Disclosure below). Based upon current operating
performance, the Company believes that cash flow from operations and available
cash, together with available borrowings under the Company's credit facilities,
will be adequate to meet the Company's current liquidity needs. However, there
can be no assurance that the Company's future operating performance will
generate sufficient cash flow from operations or that future borrowings will be
available in an amount sufficient to enable the Company to fund its debt service
and lease payment obligations or its other liquidity needs.
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Contingencies
Reclamation
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA") and
similar state statutes require that mine property be restored in accordance with
specified standards and an approved reclamation plan. The Company accrues for
the costs of final mine closure reclamation over the estimated useful mining
life of the property. These costs relate to reclaiming the pit and support
acreage at surface mines and sealing portals at deep mines. Other costs of final
mine closure common to both types of mining are related to reclaiming refuse and
slurry ponds. The Company also accrues for significant reclamation that is
completed during the mining process prior to final mine closure. The
establishment of the final mine closure reclamation liability and the other
ongoing reclamation liability is based upon permit requirements and requires
various estimates and assumptions, principally associated with costs and
productivities.
The Company reviews its entire environmental liability annually and makes
necessary adjustments, including permit changes and revisions to costs and
productivities to reflect current experience. These recosting adjustments are
recorded to cost of coal sales. No adjustments were recorded in the nine months
ended September 30, 1998. A favorable adjustment of $3.3 million was recorded in
the first nine months of 1997 at the Company's Illinois operation due to a
change in permit requirements. The Company's management believes it is making
adequate provisions for all expected reclamation and other associated costs.
Legal Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters, including those discussed below. The Company provides for costs related
to contingencies, including environmental matters, when a loss is probable and
the amount is reasonably determinable. The Company estimates that at September
30, 1998 its probable aggregate loss as a result of such claims is $6.4 million
(included in other noncurrent liabilities) and believes that probable insurance
recoveries of $.7 million (included in other assets) related to these claims
will be realized. The Company estimates that its reasonably possible aggregate
losses from all material currently pending litigation could be as much as $.6
million (before taxes) in excess of the probable loss previously recognized.
After conferring with counsel, it is the opinion of management that the ultimate
resolution of these claims, to the extent not previously provided for, will not
have a material adverse effect on the consolidated financial position, results
of operations or liquidity of the Company.
Disputes exist with customers under two above-market, large volume, long-term
coal supply agreements acquired in the acquisition of ARCO's U.S. coal
operations. The customer under one contract being supplied by Canyon Fuel claims
that a gross inequity exists under the contract because the price at which coal
is being sold under the contract significantly exceeds the market price for
similar quality coal. The customer under another contract, supplied by Thunder
Basin, principally alleges it is entitled to relief because the price of the
coal being sold under the contract was intended to track the producer's actual
cost rather than being determined by reference to the specific price adjustment
provisions set forth in the contract.
Another customer of the Company has informed the Company that one of its power
plants will no longer provide baseload capacity to a public utility and instead
will be used to provide peak demand only. As a result, the plant will require
substantially less coal under the customer's existing above-market contract with
the Company. The Company filed a civil action in Federal District Court in the
Southern District of West Virginia alleging breach of contract and other causes
of action against the customer in respect of the customer's failure to comply
with the terms of this contract. On July 17, 1998, the court granted the
customer's motion to stay the lawsuit pending arbitration. As of September 30,
1998, the carrying amount of acquisition costs allocated to this coal supply
contract is approximately $14.5 million. The Company currently expects that it
will recover the carrying amount of this asset, however, the ultimate outcome of
this matter is uncertain.
On October 24, 1996, the rock strata overlaying an old, abandoned underground
mine adjacent to the coal-refuse impoundment used by an Arch Coal subsidiary's
preparation plant failed, resulting in an accidental discharge of approximately
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6.3 million gallons of water and fine coal slurry into a tributary of the Powell
River in Lee County, Virginia. Certain civil actions regarding this incident
were resolved in 1997. At the request of the U.S. Environmental Protection
Agency and the U.S. Fish & Wildlife Service, the United States Attorney for the
Western District of Virginia has opened a criminal investigation of the 1996
incident. Arch Coal is cooperating with the investigation, the results of which
are not expected until sometime in 1999.
On July 16, 1998, 10 individuals and The West Virginia Highlands Conservancy
filed suit in U. S. District Court in Charleston, West Virginia alleging
violations of SMCRA and the federal Clean Water Act. The director of the West
Virginia Division of Environmental Protection ("DEP") and officials of the U.S.
Army Corps of Engineers (the "Corps") are named as defendants in the suit. The
complaint alleges that the DEP has violated its duties under SMCRA and the Clean
Water Act by approving surface mining permits that authorize the construction of
"valley fills", the large, engineered works into which the excess earth and rock
extracted during surface mining are placed. The DEP's approval of such permits
is alleged to "result in unpermitted discharges of pollutants into state waters,
violations of state water quality standards, disturbance to the 100-foot buffer
zone around streams, [and] destruction to riparian vegetation." The complaint
also alleges that the DEP has failed to require that lands mined be restored to
"Approximate Original Contour" and that approved post-mining land uses be
enforced following reclamation.
The complaint also alleges that the Corps has unlawfully failed to require the
preparation of environmental impact statements prior to issuing Clean Water Act
"dredge and fill" permits contemplating valley fills, that the Corps does not
possess the statutory authority to permit valley fills under the Clean Water
Act, and that even if it does possess the authority to permit such fills, the
regulatory structure the Corps has utilized since 1988 is inappropriate for this
purpose. Declaratory and injunctive relief is sought against the DEP and the
Corps on all of these counts, and the claimants specifically seek to enjoin the
Corps, "from granting any permits under ss.404 of the Clean Water Act for any
valley fills."
Four indirect, wholly-owned subsidiaries of the Company currently hold a total
of nine permits that are identified in the complaint as violating the legal
standards that the plaintiffs have requested the district court to interpret. In
addition, a pending permit application for the Company's Dal-Tex operation is
specifically identified as a permit whose issuance should be enjoined. Three
subsidiaries of the Company intervened in the lawsuit in support of the Corps
and the DEP on August 6, 1998, and have vigorously opposed plaintiffs' claims.
The Dal-Tex DEP surface mining permit application which was pending at the time
the lawsuit was filed was approved by the DEP on November 4, 1998. The
plaintiffs filed a motion for a temporary restraining order seeking revocation
of the DEP permit pending a hearing on their motion for a preliminary
injunction. That hearing is scheduled for December 10, 1998. The court denied
plaintiffs' motion for the temporary restraining order on November 9, 1998.
Notwithstanding the issuance of the DEP surface mining permit, prior to the
commencement of mining on the new reserve area at Dal-Tex, the NPDES Permit must
be approved by the EPA and the dredge and fill permit under Section 404 of the
Clean Water Act must be issued by the Corps. As previously disclosed by the
Company, the Company believes the delay in issuing the permits has resulted in
losses of approximately $1.0 million per month for the last several months at
the Dal-Tex operations. The U.S. Environmental Protection Agency ("EPA") filed
its specific objections to the surface mining application filed by the Company's
Dal-Tex operation on August 4, 1998. Under the system of permitting for a large
surface coal mine, the DEP is responsible for issuing the surface mining permit
which includes as a component the National Pollutant Discharge Elimination
System ("NPDES") permit. The NPDES program, which the EPA has delegated to the
DEP pursuant to the Clean Water Act, covers all discharges of water from
sedimentation ponds constructed at the mine as well as other point source
discharges which may arise in the course of coal mining. Notwithstanding the
delegation of this authority to the DEP, the EPA retains the right to issue
objections to a draft NPDES permit which the state has proposed.
The Company has provided the EPA with substantial information regarding the
proposed mining operation described in the Dal-Tex surface mining application,
and it will continue to cooperate with the EPA in an effort to secure issuance
of the NPDES permit. The Company believes the dredge and fill permit will be
issued by the Corps if issuance of the NPDES permit is authorized by the EPA.
There can be no assurance, however, that the EPA will withdraw its objections to
the NPDES permit or that the Corps will issue the dredge and fill permit, or if
issued, when such issuances will occur. The EPA held a public hearing on the
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NPDES permit on October 24, 1998 and must allow at least thirty days for public
comment on the permit after the hearing prior to making a decision. Substantial
further delay or failure to issue the unissued permits, revocation of the issued
DEP permit or the issuance of NPDES or dredge and fill permits which restrict
the use of valley fills, would have further adverse effects on the Dal-Tex
operations and the Company's results of operations. Depending upon the duration
of the curtailment of Dal-Tex operations or the nature of any restrictions
imposed by the permits on the use of valley fills, the adverse effect could be
material.
Canyon Fuel is in litigation with the Skyline Partners, the lessor of the coal
reserves which comprise Canyon Fuel's Skyline Mine. The coal lease in question
was entered into between the Coastal Coal Corporation, Canyon Fuel's predecessor
in interest, and the Skyline Partners. The coal lease requires the lessee,
Canyon Fuel, to pay an annual advance minimum royalty of $5 million, which is
fully recoupable against a production royalty that is to be paid by Canyon Fuel
on each ton of coal mined and sold from the leasehold. In 1997, Canyon Fuel
concluded that a number of recoverable tons which remain on the leasehold were
insufficient to allow Canyon Fuel to fully recoup the total amount of advance
royalties that have been paid to the Skyline Partners, and filed suit in Utah
State Court against the Skyline Partners alleging that Canyon Fuel is not
required to make the final minimum advance royalty payment of $5 million and
seeking to recover $2.1 million in advance minimum royalties paid to the Skyline
Partners that Canyon Fuel will not be able to recoup based upon the estimated
number of recoverable tons under the lease. In November 1997, the Skyline
Partners filed a companion case in federal district court in Colorado, seeking
to compel Canyon Fuel to pay the last $5 million advance minimum royalty
payment, and alleging a default under the lease. To date, these cases have
principally involved procedural disputes concerning proper venue for the case.
The Company has agreed in principle to pay $2.0 million to settle a claim made
by a third party that longwall mining at the Company's Mingo Logan complex
damaged an overlying seam of coal that had been subleased by the Company to the
third party. The settlement of the lawsuit is expected to be finalized in the
fourth quarter of 1998, subject to negotiation and execution of definitive
agreements.
Certain Risk Factors
Credit risk - The Company markets its coal principally to electric utilities in
the United States. As a group, electric utilities generally are stable, well
capitalized entities with favorable credit ratings. Credit is extended based on
an evaluation of each customer's financial condition, and collateral is not
generally required. Historically, the Company's credit losses have been minimal.
Price risk - Selling prices for the Company's products are determined by
long-term contracts and the spot market. Selling prices in many of the Company's
long-term contracts are subject to adjustment, including changes in market
conditions. Falling market prices raise the risk of price redeterminations under
these contracts. Spot prices fluctuate primarily because of changes in demand
for and supply of coal. Demand for coal in the short term is primarily driven by
changes in demand for electricity in the areas serviced by the utilities
purchasing the Company's coal. Demand for electricity in turn depends on the
level of economic activity and other factors such as prolonged temperature
extremes. The supply of coal in the spot market has historically been most
affected by excess productive capacity in the industry and short-term
disruptions, sometimes labor-related. The coal industry is highly competitive,
and Arch Coal competes with a large number of other coal producers. Factors such
as the availability of sulfur dioxide emissions allowances issued by the EPA,
utility deregulation, and the prospect of Clean Air Act Phase II requirements
have had, or are expected to have, the effect of further intensifying
competition among producers. Some competing producers, because of geological
conditions, local labor costs, or access to inexpensive transportation modes,
are able to produce and deliver coal into some markets at a lower cost than the
Company. These competitive factors have an impact on the Company's results of
operations.
Arch Coal's operating subsidiaries purchase substantial amounts of power, fuel
and supplies, generally under purchase orders at current market prices or
purchase agreements of relatively short duration.
The Company's Apogee Coal Company ("Apogee") and Hobet Mining, Inc. ("Hobet")
subsidiaries are covered by the National Bituminous Coal Wage Agreement of 1998
("Wage Agreement"), which provides for certain wage rates and benefits.
Employees of two other operating subsidiaries are covered by other collective
17
<PAGE>
bargaining organizations, and employees at the Company's other operating
subsidiaries are not covered by a union contract but are compensated at rates
representative of prevailing wage rates in the local area. Among factors
influencing such wage rates are the wage rates paid under the Wage Agreement.
Although the Company cannot predict changes in its costs of production and coal
prices with certainty, Arch Coal believes that in the current economic
environment of low to moderate inflation, the price adjustment provisions in its
older long-term contracts will largely offset changes in the costs of providing
coal under those contracts, except for those costs related to changes in
productivity. However, the increasingly shorter terms of sales contracts and the
consequent absence of price adjustment provisions in such shorter long-term
contracts also make it more likely that increases in mining costs during the
contract term will not be recovered by the Company through a later price
adjustment. Because levels of general price inflation are closely linked to
levels of economic activity, it is expected that changes in costs of producing
coal for the spot market may be offset in part by changes in spot coal prices.
The Company attempts to secure stable revenues to finance operations and
expansion and to limit exposure to depressed spot market prices by entering into
long-term coal supply agreements, which ordinarily provide for prices in excess
of spot market prices. The Company's ability to benefit from rising spot market
prices or hedge against falling spot market prices depends on the level of its
sales commitments.
Interest rate risk - Arch Coal has significant debt which is linked to variable
interest rates. If interest rates rise, Arch Coal's costs relative to those
obligations would also rise. Arch Coal believes an increase in interest rates is
usually an outgrowth of a higher level of economic activity and that increased
economic activity would likely lead to a higher demand for electricity and
consequently to higher spot prices for coal. Accordingly, the negative effects
of higher interest rates on Arch Coal's earnings could be partially offset,
depending on the level of its sales commitments at the time, by higher spot
prices.
Terms of the Company's credit facilities and leases contain financial and other
restrictive covenants that limit the ability of the Company to, among other
things, pay dividends, effect acquisitions or dispositions and borrow additional
funds, and require the Company to, among other things, maintain various
financial ratios and comply with various other financial covenants. Failure by
the Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Arch Coal debt. For further information about
these agreements, See Note E to the Company's Condensed Consolidated Financial
Statements in Item 1 above.
Impact of Year 2000
Computer programs used by the Company for financial and operational purposes are
being reprogrammed to be "Year 2000" compliant. The "Year 2000 problem" exists
because many existing computer programs and embedded chip microprocessors were
programmed to read the "00" in a year 2000 entry as 1900, or will fail to
recognize "00" as a date at all. Failure to read the date properly or at all may
cause miscalculations, or simply cause the program or microprocessor to send
errant commands or cease functioning.
Assessment/Remediation Plan - Arch Coal began its assessment of its exposure to
the Year 2000 problem prior to the Arch Mineral/Ashland Coal merger in June,
1997, when, in connection with the necessary integration of two companies'
information services technology, a comprehensive plan for achieving an internal
information services system free of Year 2000 concerns was adopted.
Implementation of this plan commenced upon consummation of this merger, and
essentially called for company-wide replacement of key financial, informational
and operational computer systems with standardized equipment and programs that
were programmed to properly process year 2000 entries. The plan for
standardizing key internal systems was modified to incorporate the key internal
information systems acquired in the June 1998 Arch Western transaction.
In April 1998, the Company implemented the first phase of its Year 2000 plan by
installing a new Oracle General Ledger running on Year 2000 compliant HP 9000
servers and operating systems. In October 1998, the Company implemented Oracle's
Human Resource system and plans to begin rolling out a new payroll system to all
the Company's locations during the first half of 1999. The Company began
18
<PAGE>
installation of Mincom Inc. systems in July 1998 to replace non-compliant
purchasing, inventory and accounts payable systems. The scheduled completion for
installation of these Mincom systems at all the Company's mining locations is
October 31, 1999. All desktop computers, network devices and related software
are being tested and are replaced if there is a Year 2000 problem. The Company
has standardized Windows 95, Office 95, and NT file/printer servers, effective
in October 1998.
Arch Coal began the process of evaluating potential Year 2000 problems within
its mining and processing equipment and within its systems and processes
interfacing with, and hence dependent upon, third party systems, in late 1997.
The effort to identify potential Year 2000 problems within Arch Coal's mining
and processing equipment and in its interfaces with third parties is ongoing.
When complete, customers, financial institutions, vendors, manufacturers,
transportation companies and others with whom the Company conducts business and
where the interruption of such business could have a material adverse affect on
Arch Coal will be contacted, and cost effective efforts made to remediate or
minimize possible problems.
Assuming the cooperation of third parties in connection with the Company's
efforts, the Company believes that it will be able to complete its assessment of
material adverse risk associated with Year 2000 problems in its mining and
processing equipment and within such third party systems and processes
sufficiently in advance of January 1, 2000, to effect remedial measures where
such measures are possible and cost effective. The current target date for
completing the assessment is February 28, 1999 and the target date for
completing any remedial measures is July 31, 1999.
Costs of Plan - To date, Arch Coal has expended approximately $4.7 million of
the total estimated $7 million required to eliminate Year 2000 concerns within
the Company's internal information systems. The cost of the project is based on
management's best estimates and there can be no assurance that these estimates
will be achieved. Pending completion of the assessment of mining and processing
equipment and third party system and processes risk, no amount can be reasonably
estimated for remediation in these areas.
Year 2000 Risk - The risks posed to the Company by the Year 2000 problems are
difficult to quantify with certainty. The Company's Year 2000 plan for
reconfiguring and standardizing internal information systems to properly process
year 2000 information is dependent upon several factors beyond the Company's
immediate control. These factors include, for example, retention of qualified
information services personnel in a highly competitive labor market and
integrity of local and long distance carriers' Year 2000 telecommunication
networks, which will be necessary for operation of the Company's wide area
network. In addition, while the estimated completion date of the Company's
reconfiguration efforts will permit some testing of the internal systems, the
schedule would not likely give Arch Coal adequate time to address defects in the
system's Year 2000 processing if vendors' or consultants' warranties with
respect to the new systems are not true. The unavailability of the Company's
internal information systems for a sustained period would have an adverse affect
on the Company. Depending upon the nature of the unavailability of the Company's
internal information systems, the adverse effect on the Company could be
material.
With respect to the Company's mining and processing equipment, the Company
believes the greatest risk posed is that any of its multitude of sampling,
processing and loading equipment at its mines, loadouts and terminals ceases to
function as a result of a processing error not identified and/or corrected in
the Company's assessment/remediation plan. Such failures could result in
breaches in or defaults under the Company's coal sales contracts (some of which
contain prices substantially above current market). Termination of certain or
multiple coal sales contracts could have an adverse effect on the Company, and
depending on the contracts involved, the adverse effect on the Company could be
material.
Finally, the Company believes the greatest Year 2000 risks are posed by the
Company's interfaces with third party services, systems and processes. Chief
among these risks are the loss of electrical power or transportation services at
mine sites where the Company is captive to a single service provider and
alternatives are unavailable or economically impractical. Loss of service from
any of these single service providers would have an adverse affect on the
Company. Depending upon the nature of the loss of service, the adverse effect on
the Company could be material.
19
<PAGE>
Contingency Plans - The Company has not established a formal contingency plan to
address failures in the Company's Year 2000 assessment and remediation plan.
Contingency plans will be developed for any area of the Year 2000 remediation
effort where such effort is incomplete, the consequence of a possible Year 2000
problem is materially adverse and a viable contingency plan is possible and
economically reasonable.
Factors Routinely Affecting Results of Operations
The Company sells a substantial portion of its coal production pursuant to
long-term coal supply agreements, and as a consequence may experience
fluctuations in operating results in the future, both on an annual and quarterly
basis, as a result of expiration or termination of, or sales price adjustments,
redeterminations, renegotiations or suspensions of deliveries under, such coal
supply agreements. Other short and long-term contracts define base or optional
tonnage requirements by reference to the customers requirements, which are
subject to change as a result of factors beyond the Company's (and in certain
instances the customers') control, including utility deregulation. Price
adjustment provisions permit a periodic increase or decrease in the contract
price to reflect increases and decreases in production costs, changes in
specified price indices or items such as taxes or royalties, and redetermination
provisions provide for an upward or downward adjustment in the contract price
based on market factors. The contracts also typically include penalty,
suspension and/or termination provisions for failure to meet quality
specifications; force majeure provisions allowing suspension of performance or
termination by the parties during the duration of certain events beyond the
control of the affected party; and occasionally provisions that permit the
utility to terminate the contract if changes in the law make it illegal or
uneconomic for the utility to consume the Company's coal or if the utility has
unexpected difficulties in utilizing the Company's coal. From time to time,
disputes with customers may arise under long-term contracts relating to, among
other things, coal quality, pricing and quantity. The Company may thus become
involved in arbitration and legal proceedings regarding its long-term contracts.
There can be no assurance that the Company will be able to resolve such disputes
in a satisfactory manner.
The Company's customers frequently combine various qualities of coal, nuclear
power, natural gas and other energy sources in their generating operations, and,
accordingly, their demand for coal of the kind produced by the Company varies
depending on price and transportation, regulatory and other factors. The
Company's coal production and sales also are subject to a variety of regulatory,
operational, geologic, transportation and weather-related factors that routinely
cause production to fluctuate.
Coal mining is subject to strict regulation by federal, state and local
authorities. The scope of the regulation includes environmental and health and
safety matters, and permits are required to be obtained by mining companies, the
terms of which permits strictly regulate the environmental effects of coal
mining by the permittee. Numerous permits are required for mining operations.
The Company believes all permits required to conduct present mining operations
have been obtained. The Company believes that, upon the filing of the required
information with the appropriate regulatory agencies, all permits necessary for
continuing operations will be obtained. Nevertheless, the regulatory authorities
exercise considerable discretion in the timing of permit issuance. Because both
private individuals and the public at large possess rights to comment on and
otherwise engage in the permitting process, including through intervention in
the courts, no assurance can be made that all permits will be issued in a timely
manner or that permitting requirements will not be changed in a manner adversely
affecting the Company. See the "Legal Contingencies" subsection of the
"Contingencies" section of this report above for a discussion of pending
proceedings that could adversely affect the permits of the Company's
subsidiaries.
Operational factors affecting production include anticipated and unanticipated
events. For example, the results of the third quarter of each year are normally
adversely affected by lower production and resultant higher costs because of
scheduled vacation periods. In addition, costs are typically somewhat higher
during vacation periods because of maintenance activity carried on during those
periods. These anticipated adverse effects on the third quarter may make the
third quarter not comparable to the other quarters and not indicative of results
to be expected for the full year. Unanticipated events, such as the
unavailability of essential equipment because of breakdown or unscheduled
maintenance, could adversely affect production. Permits are sometimes delayed by
unanticipated regulatory requests or processing delays. Timely completion of
improvement projects and equipment relocation depend to a large degree on
availability of labor and equipment, timely issuance of permits and the weather.
20
<PAGE>
Sales can be adversely affected by fluctuations in production and by
transportation delays arising from equipment unavailability and weather-related
events, such as flooding.
Changes in transportation rates and service also significantly influence the
Company's results. If lower costs are realized and freight rates are lowered as
a consequence of mergers among railroads, operational changes or other factors,
the coal of some producers could become less costly on a delivered basis and
therefore gain competitive advantage over the Company's coal in some markets.
Service disruptions and railcar shortages also may have an adverse effect on the
Company's sales and production.
Geologic conditions within mines are not uniform. Overburden ratios at the
surface mines vary, as do roof and floor conditions, seam thickness and geologic
anomalies in underground mines. These variations can be either positive or
negative for production.
Weather conditions can also have a significant effect on the Company's
production, depending on the severity and duration of the condition. For
example, extremely cold weather combined with substantial snow and ice
accumulations may impede surface operations directly and all operations
indirectly by making it difficult for workers and suppliers to reach the mine
sites.
Apogee and Hobet operations are parties to the Wage Agreement. From time to time
in the past, strikes and work stoppages have adversely affected production at
Apogee's and Hobet's mining complexes. Any future strike or work stoppage that
affected these operations for a prolonged period could have a material adverse
effect on the Company's results of operations.
Any one or a combination of changing demand; fluctuating selling prices;
contract penalties, suspensions or terminations; routine operational, geologic,
transportation and weather-related factors; unexpected regulatory changes;
results of litigation; or labor disruptions may occur at times or in a manner
that causes current and projected results of operations to deviate from
projections and expectations. Any event disrupting substantially all production
at any of the Company's principal mines for a prolonged period would have a
significant adverse effect on the Company's current and projected results of
operations. Decreases in production from anticipated levels usually lead to
increased mining costs and decreased net income. The effect of such a disruption
at Mingo Logan operations would be particularly severe because of the high
volume of coal produced by those operations and the relatively high contribution
to operating income from the sale of such coal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures of market risk under SEC Regulation
S-K, Item 305, will be provided, in accordance with the SEC's requirements, for
the Company's fiscal years ending after June 15, 1998. Reference is made to the
second paragraph under the Interest Rate Risk subsection of the Certain Risk
Factors discussion of this report for information about the Company's current
derivatives positions. The Company accrues amounts to be paid or received under
its interest rate swap agreements over the lives of the agreements, thereby
adjusting the effective interest rate on the Company's debt. The Company's
current accounting policies with respect to its current derivatives positions do
not materially affect the Company's determination of earnings or financial
position. The Company has not yet determined what the effect of FAS 133,
"Accounting for Derivative Instruments and Hedging Activities" - to be adopted
in 2000 - will have on its future earnings and financial position. For more
information about FAS 133, see Note K to the Company's Condensed Consolidated
Financial Statements above.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The fourth, fifth, sixth, seventh, eighth and ninth paragraphs of the Legal
Contingencies subsection of the Contingencies section of Management's Discussion
and Analysis of Financial Condition and Results of Operations in this report are
incorporated herein by reference. The audit of the Company's federal income tax
returns for years 1992-1994 previously disclosed in response to this Item in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, was
settled in November, 1998. The Company had adequately provided for all taxes due
in connection with the settlement. In addition, in connection with the
identification of the Company's Apogee subsidiary as a potentially responsive
party under the Comprehensive Environmental Response Compensation and Liability
Act and the Superfund Amendment and Reauthorization Act of 1996, as disclosed in
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, Apogee was notified by another party to the proceeding that the Company
would be indemnified by such party from liability in connection with the alleged
release of hazardous chemicals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
2.1 Purchase and Sale Agreement dated as of March 22, 1998 among Atlantic
Richfield Company, ARCO Uinta Coal Company, Arch Coal, Inc. and Arch
Western Acquisition Corporation* (incorporated herein by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed June 15,
1998, with the SEC (the "8-K)).
2.2 Contribution Agreement among Arch Coal, Inc., Arch Western, Arch Western
Acquisition Corporation, Atlantic Richfield Company, Delta Housing, Inc.,
and Arch Western Resources LLC, dated as of March 22, 1998* (incorporated
herein by reference to Exhibit 2.2 of the 8-K).
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.2 to the Company's registration statement
on Form S-4, registration number 333-28149 (the "S-4")).
3.2 Restated and Amended By-Laws of Arch Coal, Inc. (incorporated herein by
reference to Exhibit 3.4 to the S-4).
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Mineral Corporation
(incorporated herein by reference to Exhibit 4.1 to the S-4).
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch
Mineral Corporation, Ashland Inc., Carboex International, Ltd. and the
entities listed on Schedules I and II thereto (incorporated herein by
reference to Exhibit 4.2 to the S-4, except for amended Schedule I, filed
herewith).
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997,
among Carboex International, Ltd., Ashland Inc., Ashland Coal, Inc. and
Arch Mineral Corporation (incorporated herein by reference to Exhibit 4.3
to the S-4).
- -----------------
* Portions of the exhibit have been omitted pursuant to a request for
confidential request.
Certain exhibits and schedules to the Exhibits filed herewith have been omitted
in accordance with Item 601(b)(2) of the Regulation S-K. A copy of any omitted
exhibit or schedule will be furnished to the Commission upon request.
22
<PAGE>
4.4 Agreement for Termination of the Arch Mineral Corporation Voting Agreement
and for Nomination of Directors, dated as of April 4, 1997, among Hunt Coal
Corporation, Petro-Hunt Corporation, each of the trusts listed on Schedule
I thereto, Ashland Inc. and Arch Mineral Corporation (incorporated herein
by reference to Exhibit 4.4 to the S-4).
4.5 $600,000,000 Revolving Credit Facility, $300,000,000 Term Loan Credit
Agreement by and among Arch Coal, Inc., the Lender's party thereto, PNC
Bank, National Association, as Administrative Agent, Morgan Guaranty Trust
Company of New York, as Syndication Agent, and First Union National Bank,
as Documentation Agent, dated as of June 1, 1998 (incorporated herein by
reference to Exhibit 4.1 in the 8-K).
4.6 $675,000,000 Term Loan Credit Agreement by and among Arch Western
Resources, LLC, the Bank's party thereto, PNC Bank, National Association,
as Administrative Agent, Morgan Guaranty Trust Company of New York, as
Syndication Agent, and NationsBank N.A., as Documentation Agent dated as of
June 1, 1998 (incorporated herein by reference to Exhibit 4.2 to the 8-K).
4.7 Omnibus Amendment Agreement dated as of June 1, 1998 in respect to Arch
Coal Trust No. 1998-1, Parent Guaranty and Suretyship Agreement, Lease
Intended as Security, Subsidiary Guaranty and Suretyship Agreement, each
dated as of January 15, 1998, among Apogee Coal Company, Catenary Coal
Company. Hobet Mining, Inc., Arch Coal, Inc., Great-West Life & Annuity
Insurance Company, Bank of Montreal, Barclays Bank, PLC, First Union
National Bank, BA Leasing and Capital Corporation, First Security Bank,
National Association, Arch Coal Sales Company, Inc., Ark Land Company, and
Mingo Logan Coal Company (incorporated herein by reference to Exhibit 4.3
in the 8-K).
27 Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K dated July 22, 1998 (reporting that Ashland Inc.,
pursuant to its exercise of registration rights, would register
approximately 2.1 million Company shares for sale in an underwritten public
offering) and August 12, 1998 (reporting that Ashland Inc. terminated its
exercise of registration rights with respect to approximately 2.1 million
Company shares and would not offer such shares in an underwritten public
offering) and a report on Form 8-K/A (amending Item 7 of the Form 8-K dated
June 1, 1998, to add audited financial statements in connection with the
Arch Western transaction) were filed during the period covered by this
report and up to and including the date of filing of this report.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARCH COAL, INC.
(Registrant)
Date: November ___, 1998 /s/ Patrick A. Kriegshauser
------------------------------------
Patrick A. Kriegshauser
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date: November ___, 1998 /s/ Jeffry N. Quinn
-------------------------------------
Jeffry N. Quinn
Senior Vice President, General
Counsel and Secretary (Duly
Authorized Officer)
24
<PAGE>
Arch Coal, Inc.
Form 10-Q for Quarter Ended September 30, 1998
INDEX TO EXHIBITS
2.1 Purchase and Sale Agreement dated as of March 22, 1998 among Atlantic
Richfield Company, ARCO Uinta Coal Company, Arch Coal, Inc. and Arch
Western Acquisition Corporation* (incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed June 15,
1998, with the SEC (the "8-K"))
2.2 Contribution Agreement among Arch Coal, Inc., Arch Western, Arch Western
Acquisition Corporation, Atlantic Richfield Company, Delta Housing, Inc.,
and Arch Western Resources LLC, dated as of March 22, 1998* (incorporated
herein by reference to Exhibit 2.2 of the 8-K).
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.2 to the Company's registration statement
on Form S-4, registration number 333-28149 (the "S-4")).
3.2 Restated and Amended By Laws of Arch Coal, Inc. (incorporated herein by
reference to Exhibit 3.4 to the S-4).
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Mineral Corporation
(incorporated herein by reference to Exhibit 4.1 to the S-4).
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch
Mineral Corporation, Ashland Inc., Carboex International, Ltd. and the
entities listed on Schedules I and II thereto (incorporated herein by
reference to Exhibit 4.2 to the S-4, except for amended Schedule I, filed
herewith).
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997,
among Carboex International, Ltd., Ashland Inc., Ashland Coal, Inc. and
Arch Mineral Corporation (incorporated herein by reference to Exhibit 4.3
to the S-4).
4.4 Agreement for Termination of the Arch Mineral Corporation Voting Agreement
and for Nomination of Directors, dated as of April 4, 1997, among Hunt Coal
Corporation, Petro-Hunt Corporation, each of the trusts listed on Schedule
I thereto, Ashland Inc. and Arch Mineral Corporation (incorporated herein
by reference to Exhibit 4.4 to the S-4).
4.5 $600,000,000 Revolving Credit Facility, $300,000,000 Term Loan Credit
Agreement by and among Arch Coal, Inc., the Lender's party thereto, PNC
Bank, National Association, as Administrative Agent, Morgan Guaranty Trust
Company of New York, as Syndication Agent, and First Union National Bank,
as Documentation Agent, dated as of June 1, 1998 (incorporated herein by
reference to Exhibit 4.1 in the 8-K).
4.6 $675,000,000 Term Loan Credit Agreement by and among Arch Western
Resources, LLC, the Bank's party thereto, PNC Bank, National Association,
as Administrative Agent, Morgan Guaranty Trust Company of New York, as
Syndication Agent, and NationsBank N.A., as Documentation Agent dated as of
June 1, 1998 (incorporated herein by reference to Exhibit 4.2 to the 8-K).
4.7 Omnibus Amendment Agreement dated as of June 1, 1998 in respect to Arch
Coal Trust No. 1998-1, Parent Guaranty and Suretyship Agreement, Lease
Intended as Security, Subsidiary Guaranty and Suretyship Agreement, each
dated as of January 15, 1998, among Apogee Coal Company, Catenary Coal
Company. Hobet Mining, Inc., Arch Coal, Inc., Great-West Life & Annuity
Insurance Company, Bank of Montreal, Barclays Bank, PLC, First Union
National Bank, BA Leasing and Capital Corporation, First Security Bank,
National Association, Arch Coal Sales Company, Inc., Ark Land Company, and
Mingo Logan Coal Company (incorporated herein by reference to Exhibit 4.3
in the 8-K).
27 Financial Data Schedule
- --------
* Portions of the exhibit have been omitted pursuant to a request for
confidential request.
Certain exhibits and schedules to the Exhibits filed herewith have been omitted
in accordance with Item 601(b)(2) of the Regulation S-K. A copy of any omitted
exhibit or schedule will be furnished to the Commission upon request.
25
<PAGE>
SCHEDULE I
Lyda Hunt-Herbert Trust - Douglas H. Hunt
Lyda Hunt-Herbert Trust - Barbara A. Hunt
Lyda Hunt-Herbert Trust - Lyda B. Hunt
Lyda Hunt-Herbert Trust - David S. Hunt
Lyda Hunt-Herbert Trust - Bruce W. Hunt
Petro-Hunt Corporation
Lyda Hunt-Margaret Trust - Al G. Hill, Jr.
Lyda Hunt-Margaret Trust - Lyda Hill
Lyda Hunt-Margaret Trust - Alinda Hunt Hill
Hunt Coal Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001037676
<NAME> ARCH COAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,170
<SECURITIES> 0
<RECEIVABLES> 202,734
<ALLOWANCES> 0
<INVENTORY> 71,320
<CURRENT-ASSETS> 362,518
<PP&E> 2,655,717
<DEPRECIATION> 746,397
<TOTAL-ASSETS> 2,879,561
<CURRENT-LIABILITIES> 381,669
<BONDS> 0
0
0
<COMMON> 397
<OTHER-SE> 622,454
<TOTAL-LIABILITY-AND-EQUITY> 2,879,561
<SALES> 1,034,474
<TOTAL-REVENUES> 1,090,113
<CGS> 943,438
<TOTAL-COSTS> 1,016,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,770
<INCOME-PRETAX> 35,263
<INCOME-TAX> 3,900
<INCOME-CONTINUING> 31,363
<DISCONTINUED> 0
<EXTRAORDINARY> 1,488
<CHANGES> 0
<NET-INCOME> 29,875
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
