MARK-UP 8/13/98
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 June 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 43-0921172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 August 12, 1998, there were 39,699,781 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 June 30, 1998 and
December 31, 1997.........................................................1
Condensed Consolidated Statements of Income for the Three Months
Ended June 30, 1998 and 1997 and the Six Months Ended
June 30, 1998 and 1997....................................................2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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 .................9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................24
Item 4. Submission of Matters to a Vote of Security Holders............24
Item 6. Exhibits and Reports on Form 8-K...............................25
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,518 $ 9,177
Trade accounts receivable 180,229 133,810
Other receivables 40,653 14,046
Inventories 89,218 50,419
Prepaid royalties 13,458 17,745
Deferred income taxes 8,506 8,506
Other 9,058 9,475
---------- ----------
Total current assets 367,640 243,178
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,953,042 1,149,926
---------- ----------
OTHER ASSETS
Prepaid royalties 35,357 20,826
Coal supply agreements 194,742 185,306
Deferred income taxes 48,655 44,023
Investment in Canyon Fuel 285,606 --
Other 35,223 13,065
---------- ----------
Total other assets 599,583 263,220
---------- ----------
Total assets $2,920,265 $1,656,324
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 119,811 $ 84,692
Accrued expenses 135,573 88,082
Current portion of long-term debt 103,000 29,500
---------- ----------
Total current liabilities 358,384 202,274
Long-term debt 1,227,386 248,425
Accrued postretirement benefits other
than pension 356,802 323,115
Accrued reclamation and mine closure 154,777 116,199
Accrued workers' compensation 110,170 97,759
Accrued pension cost 25,045 21,730
Other noncurrent liabilities 55,673 35,324
---------- ----------
Total liabilities 2,288,237 1,044,826
---------- ----------
STOCKHOLDERS' EQUITY
Common stock 397 397
Paid-in capital 472,741 472,425
Retained earnings 158,890 138,676
---------- ----------
Total stockholders' equity 632,028 611,498
---------- ----------
Total liabilities and
stockholders' equity $2,920,265 $1,656,324
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
1
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<TABLE>
<CAPTION>
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
Coal sales $ 342,315 $ 190,957 $ 641,178 $ 383,386
Income from equity investment 2,416 -- 2,416 --
Other revenues 8,607 5,468 22,396 11,601
--------- --------- --------- ---------
353,238 196,425 665,990 394,887
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of coal sales 305,266 168,893 576,516 340,433
Selling, general and 9,235 3,302 16,744 8,200
administrative expenses
Amortization of coal supply
agreements 7,302 2,084 13,664 4,200
Other expenses 3,985 5,850 9,258 9,445
--------- --------- --------- ---------
325,788 180,129 616,182 362,278
--------- --------- --------- ---------
Income from operations 27,450 16,296 49,808 32,609
Interest expense, net:
Interest expense (10,366) (3,240) (14,170) (6,792)
Interest income 115 276 181 535
--------- --------- --------- ---------
(10,251) (2,964) (13,989) (6,257)
--------- --------- --------- ---------
Income before income taxes
and extraordinary item 17,199 13,332 35,819 26,352
Provision for income taxes 2,200 1,600 5,000 4,200
--------- --------- -------- --------
Net income before
extraordinary item 14,999 11,732 30,819 22,152
Extraordinary item from the
extinguishment of debt (1,488) -- (1,488) --
-------- -------- -------- --------
NET INCOME $ 13,511 $ 11,732 $ 29,331 $ 22,152
======== ======== ========= ========
Basic and diluted earnings
per common share before
extraordinary item $ 0.38 $ 0.56 $ 0.78 $ 1.06
======== ======== ========= ========
Basic and diluted earnings per
common share $ 0.34 $ 0.56 $ 0.74 $ 1.06
======== ======== ========= ========
Weighted average shares
outstanding 39,668 20,948 39,664 20,948
======== ======== ========= ========
Dividends declared per share $ 0.115 $ 0.108 $ 0.230 $ 0.216
======== ======== ========= ========
See notes to condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,331 $ 22,152
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion and amortization 85,619 57,852
Prepaid royalties expensed 9,819 2,005
Net gain on disposition of assets (10,123) (409)
Income from equity investment (2,416) --
Changes in:
Receivables (20,715) 2,326
Inventories (13,019) (6,560)
Accounts payable and accrued
expenses 8,064 12,513
Income taxes 87 (11,313)
Accrued postretirement benefits
other than pensions 5,722 2,480
Accrued reclamation and mine
closure 1,520 (1,388)
Accrued workers' compensation 1,969 (7,394)
Other (7,946) 2,767
----------- -----------
Cash provided by operating activities 87,912 75,031
----------- -----------
INVESTING ACTIVITIES
Cash paid for acquisitions (1,090,000) (16,990)
Additions to property, plant
and equipment (40,050) (18,486)
Proceeds from dispositions of
property, plant and equipment 10,449 784
Additions to prepaid royalties (20,063) (2,718)
----------- -----------
Cash used in investing activities (1,139,664) (37,410)
----------- -----------
FINANCING ACTIVITIES
Net proceeds from (payments on)
revolver and lines of credit 100,713 (15,363)
Payments on senior notes (42,860) (15,140)
Proceeds from term loans 974,599 --
Proceeds from sale and leaseback
of equipment 45,442 --
Dividends paid (9,117) (4,512)
Proceeds from sale of common stock 316 --
----------- -----------
Cash (used in) provided by
financing activities 1,069,093 (35,015)
----------- -----------
Increase in cash and cash equivalents 17,341 2,606
Cash and cash equivalents,
beginning of period 9,177 13,716
----------- -----------
Cash and cash equivalents, end of period $ 26,518 $ 16,322
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
3
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Arch Coal, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 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 June 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, that operates two coal mines in the
Southern Powder River Basin in Wyoming; Mountain Coal Company, L.L.C., owned
100% by Arch Western, that 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, that operates three coal mines in
Utah; and Arch of Wyoming, LLC, owned 100% by Arch Western, that 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, primarily for sale to
domestic utility customers.
Summarized below are the unaudited pro forma combined results of operations for
the six months ended June 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>
Six Months Ended June 30,
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Revenues $ 827,983 $ 938,688
Income before extraordinary item $ 20,696 $ 67,287
Net income $ 19,208 $ 67,287
Earnings per share before
extraordinary item $ .52 $ 1.70
Earnings per share $ .48 $ 1.70
</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 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, on June 1, 1998, as part of Arch Western transaction
(described in Note B), was acquired by the Company and is accounted for on the
equity method:
One Month
Ended June 30, 1998
-------------------
(in thousands)
Revenues $ 17,593
Total costs and expenses 14,256
-------------
Net income $ 3,337
=============
Note D - Inventories
Inventories are comprised of the following:
June 30, 1998 December 31, 1997
------------- -----------------
(In thousands)
Coal $42,620 $25,359
Repair parts and supplies 46,598 25,060
-------- --------
$89,218 $50,419
======== ========
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<TABLE>
<CAPTION>
Note E - Debt
Debt consists of the following:
June 30, 1998 December 31, 1997
------------- -----------------
(In thousands)
<S> <C> <C>
Indebtedness to banks under
lines of credit $ 3,192 $ 36,302
Indebtedness to banks under revolving
credit agreement, expiring May 31, 2003 325,000 -
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 27,194 8,763
--------- ---------
1,330,386 277,925
Less current portion 103,000 29,500
---------- ---------
Long-term debt $1,227,386 $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 June 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>
Note F - 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 June 30, 1998 is $4.8 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 $.5 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. In addition, the
Company and the customer continue to explore a commercial resolution of the
underlying dispute. As of June 30, 1998, the carrying amount of acquisition
costs allocated to this coal supply contract is approximately $15.4 million. The
Company's current estimates of undiscounted cash flows indicate the carrying
amount of this asset is expected to be recovered.
Note G - Change in Estimate and Other Non-Recurring Revenues and Expenses
The Company's operating results for the six months and three months ended June
30, 1998 reflect pre-tax gains on the sale of surplus land totaling $9.9 million
and $1.4 million, respectively. The operating results for the first six and
three months ended June 30, 1998 also reflect a $6.7 million and $1.4 million
operating loss, respectively (including termination benefits totaling $1.3
million), at the Company's Mine No. 37 in eastern Kentucky which closed in
January 1998. The first six months and three months ended June 30, 1997 include
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
$3.1 million in costs associated with the October 1996 impoundment failure at
Lone Mountain Processing, Inc. The second quarter of 1997 also includes a $4.2
million reduction in workers' compensation reserves due to better than
anticipated safety performance recorded in the second quarter of 1997.
Note H - 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
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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 I - 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 Six months ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item $14,999 $11,732 $30,819 $22,152
Extraordinary item (1,488) - (1,488) -
------- ------- ------- -------
Net income $13,511 $11,732 $29,331 $22,152
======= ======= ======= =======
Dominator:
Weighted average shares -
denominator for basis 39,668 20,948 39,664 20,948
Dilutive effect of employee
stock options 39 - 44 -
------- ------- ------- -------
Adjusted weighted average
shares - denominator for diluted 39,707 20,948 39,708 20,948
======= ======= ======= =======
Basic and diluted earnings per common
share before extraordinary item $.38 $.56 $.78 $1.06
======= ======= ======= =======
Basic and diluted earnings per
common share $.34 $.56 $.74 $1.06
======= ======= ======= =======
</TABLE>
8
<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 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.
Acquisition of ARCO Coal Operations
On June 1, 1998, Arch Coal acquired the Colorado and Utah coal operations of
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. The principal operating units of Arch Western are Thunder Basin
Coal Company, L.L.C. ("Thunder Basin"), owned 100% by Arch Western, that
operates two coal mines in the Southern Powder River Basin in Wyoming; Mountain
Coal Company, L.L.C. ("Mountain Coal"), that 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, that operates three coal
mines in Utah; and Arch of Wyoming, LLC ("Arch of Wyoming"), owned 100% by Arch
Western, that 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. 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, primarily for sale to
domestic utility customers.
In connection with the acquisition of ARCO's U.S. coal operations, 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 revolving facility 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 to Arch Western. The
Arch Western credit facility is not guaranteed by the Company. On a historical
basis, at December 31, 1997, Arch Coal's debt was 31% of capital employed. At
June 30, 1998, Arch Coal's debt is approximately 68% of capital employed.
Merger With Ashland Coal
On July 1, 1997, Ashland Coal merged with a subsidiary of the Company, and
18,660,054 shares of Company common stock were issued in the merger. The merger
was accounted for as a purchase.
At the time of the merger, Ashland Coal was engaged in the mining, processing
and marketing of low-sulfur bituminous coal primarily in the eastern United
States, and Ashland Inc. ("Ashland") owned stock
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<PAGE>
representing approximately 57% of the voting power of Ashland Coal and 50% of
the voting power of the Company. Ashland currently owns approximately 55% of the
Company's outstanding common stock.
Results of Operations
Results of operations for the 1997 second quarter and six month period ended
June 30, 1997 did not include results of operations of Ashland Coal or those
attributable to ARCO's U.S. coal operations. Results of operations for the 1998
second quarter and six month period ended June 30, 1998 include results of
operations of Ashland Coal for the entirety of each period and results of
operations attributable to ARCO's U.S. coal operations commencing June 1, 1998.
Accordingly, the Company's results of operations for the second quarters and six
month periods ended June 30, 1997 and 1998 are not directly comparable.
Quarter Ended June 30, 1998, Compared
to Quarter Ended June 30, 1997
Net income for the quarter ended June 30, 1998, was $13.5 million, compared to
$11.7 million for the quarter ended June 30, 1997. The results for the current
quarter of 1998 were impacted 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. The current quarter's results were also adversely affected by the January
closing of Mine No. 37 which had an operating loss of approximately $1.4 million
during the quarter. The Company decided to close the mine primarily due to poor
geologic conditions. In addition, the current quarter's results were negatively
affected by reduced shipments on a high margin contract and production
shortfalls at the Hobet 21 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. Offsetting these items
during the quarter were a continued strong performance at the Company's Mingo
Logan mining complex (where a longwall mine accomplished record production),
pre-tax gains of $2.0 million on sales of surplus land, and settlement of
litigation as a result of which Arch Coal realized a $2.4 million pre-tax gain.
Other items affecting the June 30, 1997 quarter included a $4.2 million
favorable adjustment to workers' compensation reserves due to better than
anticipated safety performance, offset by non-recurring charges of $1.5 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.
Gross profit on coal sales (selling price less cost of sales) on a per ton basis
decreased $.70 from the second quarter of 1997. The average selling price and
cost of sales per ton decreased by $4.79 and $4.09 per ton, respectively, from
the second quarter of 1997. The price and cost of sales per ton decreases are
primarily attributable to the inclusion of one month of the acquired ARCO
operations in the 1998 period. Western coal has a lower sales price than eastern
coal and western coal operations have a lower cost structure than eastern coal
operations. Other factors affecting the per ton information include the
expiration of the Georgia Power contract, the closing of Mine No. 37 referred to
above, a $4.2 million favorable adjustment to workers' compensation of which $.7
million affected selling, general and administrative expenses 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 since the date of acquisition (June 1, 1998).
10
<PAGE>
Other revenues were $3.1 million higher in the second quarter of 1998 than the
same period in 1997, primarily as a result of the $2.0 million pre-tax gain from
the sale of surplus land.
Selling, general and administrative expenses increased $5.9 million from the
comparable period in 1997 primarily due to the effects of the Ashland Coal
merger, the Arch Western transaction and a favorable workers' compensation
adjustment of $.7 million during the second quarter of 1997 described above.
Amortization of coal supply agreements increased $5.2 million from the quarter
ended June 30, 1997. This increase was attributable to the amortization of the
carrying value of sales contracts acquired in the Ashland Coal merger and Arch
Western transaction.
Other expenses decreased $1.9 million from the comparable period in the prior
year primarily as a result of the settlement of litigation in which Arch Coal
realized a $2.4 million gain, and the $1.5 million final settlement of the Trail
Mountain lawsuit during the second quarter of 1997. These factors were offset by
higher expenses at the Company's Ark Land subsidiary. These expenses rose as a
result of the Ashland Coal merger and the Arch Western transaction.
Second quarter interest expense was $7.1 million higher than the second quarter
1997. The increase is attributable to the debt incurred in connection with the
Arch Western transaction effective June 1, 1998.
The estimated annual effective income tax rate for the second quarter of 1998 is
approximately 1% higher than the second quarter of 1997. Changes in estimates of
annual profitability and percentage depletion are generally the primary factors
affecting the Company's effective income tax rate.
During the second quarter, 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 connection with the Arch Western transaction.
EBITDA (income from operations before the effect of changes in accounting
principles and extraordinary items, net interest expense, income taxes,
depreciation, depletion and amortization for Arch Coal, its subsidiaries and
equity investments) was $77.6 million for the quarter ended June 30, 1998
compared to $45.9 million for the same quarter 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. 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
may be computed differently by the Company in different contexts (i.e., public
reporting versus computations under financing agreements).
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Six Months Ended June 30, 1998 Compared
to Six Months Ended June 30, 1997
Net income for the six months ended June 30, 1998, was $29.3 million, compared
to $22.2 million for the six months ended June 30, 1997. The results for the
first six months of 1998 were impacted 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. The most recent six months' results were also adversely affected
by the January closing of Mine No. 37 which had an operating loss of
approximately $6.7 million during the first six months of 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 in West Virginia,
and by 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 $2.0 million for the six months
ended June 30, 1998. Offsetting these items was a continued strong performance
at the Company's Mingo Logan mining complex (where a longwall mine accomplished
record production), by pre-tax gains of $9.9 million on sales of surplus land
during the period, and by the settlement of litigation as a result of which Arch
Coal realized a $2.4 million pre-tax gain.
Other items occurring in the first six months of 1997 affecting the comparison
with the first six 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.
Gross profit on coal sales (selling price less cost of sales) on a per ton basis
decreased $.58 from the first six months of 1997. The average selling price and
cost of sales per ton decreased by $2.95 and $2.37 per ton, respectively, from
the first six months of 1997. The price and cost of sales per ton decreases are
primarily attributable to the inclusion of one month of the acquired ARCO
operations in the 1998 period. Western coal has a lower sales price than eastern
coal and western coal operations have a lower cost structure than eastern coal
operations. Other factors affecting the per ton information include the
expiration of the Georgia Power contract, the closing of Mine No. 37, referred
to above, a $4.2 million favorable adjustment to workers' compensation 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 since the date of acquisition, June 1, 1998.
Other revenues were $10.8 million higher in the first six months of 1998 than
the same period in 1997, primarily as a result of the $9.9 million pre-tax gain
from the sale of surplus land.
Selling, general and administrative expenses increased $8.5 million from the
comparable period in 1997, primarily due to the effects of the Ashland Coal
merger, the Arch Western transaction and a favorable workers' compensation
adjustment of $.7 million during the second quarter of 1997 described above.
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Amortization of coal supply agreements increased $9.5 million from the six
months ended June 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 decreased $.2 million from the comparable period in 1997
primarily as a result of the settlement of litigation in which Arch Coal
realized a $2.4 million gain and the $1.5 million final settlement of the Trail
Mountain lawsuit during the second quarter of 1997. This decrease was offset by
higher expenses at the Company's Ark Land subsidiary. These expenses rose as a
result of the Ashland Coal merger and the Arch Western transaction
Interest expense for the first six months of 1998 was $7.4 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 estimated annual effective income tax rate for the first six months of 1998
is approximately 2% lower than the same period in 1997. Changes in estimates of
annual profitability and percentage depletion are generally the primary factors
affecting the Company's effective income tax rate.
During the first six 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 from operations before the effect of changes in accounting
principles and extraordinary items, net interest expense, income taxes,
depreciation, depletion and amortization for Arch Coal, its subsidiaries and
equity investments) was $138.9 million for the six months ended June 30, 1998
compared to $90.5 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
With the acquisition of ARCO's U.S. coal operations, Arch Coal is now the
nation's second largest coal producer with annual sales of nearly 110 million
tons, or roughly 10% of the nation's total annual coal sales. In 1997, ARCO's
U.S. coal operations, including its 65% interest in Canyon Fuel, generated
revenues of $537 million and after-tax operating income of $51 million on the
sale of 53.2 million tons of low-sulfur coal. On a pro forma basis, after giving
effect to the Arch Western transaction as of January 1, 1997, Arch Coal would
have had total 1997 revenues of approximately $1.8 billion, total assets at
December 31, 1997 of $2.8 billion and debt at December 31, 1997 of approximately
$1.4 billion. Arch Western's domestic measured and indicated coal reserves are
currently estimated to be approximately 1.3 billion tons which when added to
Arch Coal's existing reserve base gives the Company approximately 3.4 billion
tons of measured and indicated coal reserves. The Company believes this
acquisition places Arch Coal in a strategic position to serve the changing needs
of Arch Coal's primary customers - the nation's electric utilities - as they
prepare for more stringent clean air requirements and a deregulated market
place.
All of the domestic coal reserves acquired from ARCO are compliance coal,
meaning that it meets the sulfur dioxide emissions requirements of Phase II of
the Clean Air Act. Arch Western's Thunder Basin subsidiary operates the Black
Thunder and Coal Creek mines in the Powder River Basin of Wyoming. Black Thunder
is one of the nation's largest coal mines with 1997 production of 37.7 million
tons of low-sulfur compliance coal. Coal Creek produced 2.9 million tons of coal
in 1997. Arch Western's Mountain Coal subsidiary operates the West Elk Mine in
Colorado. With 1997 production of 5.6 million tons of low-sulfur
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compliance coal, West Elk is a highly productive longwall mine. During 1997,
Canyon Fuel produced 10.6 million tons of low-sulfur coal from three mines in
Utah.
With respect to other Arch Western operations, management has decided to
substantially scale back coal mining operations during 1998 at the Seminoe II
and Medicine Bow mines in Wyoming as a result of oversupply of competing coals
in this market. In addition, the Hobet 07 Complex in West Virginia and the Arch
of Illinois surface mine were closed due to the depletion of their economical
dedicated reserves. Production losses as a result of mine closures, scaled-back
production and depletion are expected to be offset by production from Mingo
Logan's new surface mine in the Phoenix reserves, which commenced production in
the second quarter of 1998.
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 six months ended June 30, 1998 and 1997:
1998 1997
------ ------
Cash provided by (used in): (In thousands)
Operating activities $ 87,912 $ 75,031
Investing activities (1,139,664) (37,410)
Financing activities 1,069,093 (35,015)
Cash provided by operating activities increased in the first six 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 six months of
1998 primarily resulted from the payment of $1.1 billion in cash 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 and a
$16 million annual royalty payment on a lease acquired in 1992.
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 as a
result of refinancing its debt for the Arch Western transaction. The previously
announced January 1998 sale and leaseback of equipment resulted in net proceeds
of $45.4 million.
The Company's capital expenditures in the six months ended June 30, 1998 were
$40.0 million. Approximately $3.9 million of these expenditures were to add a
third section to the Darby Fork mine. Equipment upgrades at the Conant mine, the
Hobet 21 mine Beth Station preparation plant, and the Mingo Logan longwall mine
accounted for $2.8 million, $2.0 million, and $3.9 million, respectively.
Equipment purchased to start up the new Phoenix surface mine totaled
approximately $6.8 million during the period. The Company estimates that during
the remainder of 1998, capital expenditures will be approximately $60 million,
assuming no acquisition of coal properties.
A significant portion of the Company's indebtedness bears interest at variable
rates that are linked to short-term interest rates. If interest rates rise, the
Company's costs relative to those obligations would also rise.
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
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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.
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
June 30, 1998, there were $20 million of such agreements and borrowings of $3.2
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. Based upon current levels of operations, 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
future liquidity needs for at least the next several years. However, there can
be no assurance that the Company's business 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.
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 six months
ended June 30, 1998. A favorable adjustment of $3.3 million was recorded in the
first six 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.
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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 June 30,
1998 its probable aggregate loss as a result of such claims is $4.8 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 $.5
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. In addition, the
Company and the customer continue to explore a commercial resolution of the
underlying dispute. As of June 30, 1998, the carrying amount of acquisition
costs allocated to this coal supply contract is approximately $15.4 million. The
Company's current estimates of undiscounted cash flows indicate the carrying
amount of this asset is expected to be recovered.
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
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 later this year.
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
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the excess earth and rock extracted during surface mining is placed. 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 a Clean Water
Act permits for 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 specifically seeks 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. The Company will seek dismissal of several of the
claims on procedural grounds and vigorously oppose the remaining claims.
Modification of existing or pending permits to restrict the use of valley fills
would have an adverse effect on the affected subsidiaries and the Company.
Depending upon the nature of such restrictions, the adverse effect on the
affected subsidiaries and the Company could be material. Elimination of valley
fills altogether as an engineering alternative for disposal of soil and rock in
large scale surface mining would have a material adverse effect on the results
of operations of the affected subsidiaries and the Company.
In a related matter, on August 4, 1998, the U.S. Environmental Protection Agency
("EPA") filed specific objections to the surface mining application filed by the
Company's Dal-Tex operation mentioned above. 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 water
treatment which may arise in the course of coal mining. Notwithstanding the
delegation of this authority to the DEP, EPA retains the right to issue
objections to a draft NPDES permit which the state has proposed.
The Company has provided EPA with substantial information regarding the proposed
mining operation described in the Dal-Tex surface mining application, and it
will continue to cooperate with EPA in an effort to secure issuance of the
permit on a timely basis. There can be no assurance, however, that EPA will
withdraw it objections to the NPDES permit or that the DEP will issue the
surface mining permit, or if issued, that such issuance will be timely.
Substantial delay or failure to issue the permit, or the issuance of an NPDES
permit which restricts the use of valley fills, would have an adverse effect on
the Dal-Tex operations and the Company's results of operations. Depending upon
the nature of any restrictions imposed on the use of valley fills by EPA, 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
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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. The last annual advance minimum royalty payment
was to be paid in September, 1997. The lease also includes a production royalty
that is to be paid on each ton of coal mined and sold from the leasehold. The
lease further provides that the advance minimum royalty payments are fully
recoupable by Canyon Fuel.
In 1997, Canyon Fuel conducted a study to determine the amount of recoverable
tons remaining under the lease. The study concluded that a number of recoverable
tons which remain are insufficient to allow Canyon Fuel to fully recoup the
total amount of advance royalties that have been paid to the Skyline Partners.
In November, 1997, Canyon Fuel filed suit in Utah State Court against the
Skyline Partners seeking a ruling from the court that Canyon Fuel is not
required to make the final minimum advance royalty payment of $5 million. In the
suit, Canyon Fuel also seeks a refund from the Skyline Partners of $2.1 million,
which Canyon Fuel contends is the amount of 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, in which it seeks an order requiring Canyon Fuel to
pay the last $5 million advance minimum royalty payment, and seeks an order
declaring Canyon Fuel in default under the lease. To date, these cases have
principally involved procedural disputes concerning proper venue for the case.
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 customers 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 for 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 Coals' 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
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collective 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. Further, 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 limit exposure to depressed spot market prices
which result from industry overcapacity by entering into long-term coal supply
agreements, which ordinarily provide for prices in excess of spot market prices.
In the event of a disruption of supply, the Company could, depending on the
level of its sales commitments, benefit from higher spot prices if its own mines
were not affected by the disruption.
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. Because an increase in interest rates is usually an
outgrowth of a higher level of economic activity and because increased economic
activity would likely lead to a higher demand for electricity and consequently
to higher spot prices for coal, Arch Coal believes that 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.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Arch Coal debt. At June 30, 1998, the Company had
two interest-rate swap agreements having a total notional value of $50 million.
These agreements were used to convert variable-rate debt to fixed-rate debt.
Under these agreements, the Company pays a weighted average fixed rate of 6.005%
and is receiving a weighted average variable rate based upon 30-day LIBOR. The
remaining life on the swaps at June 30, 1998, was approximately 52 months.
Subsequent to June 30, 1998, Arch Western Resources entered into an
interest-rate swap agreement for a period of six years having a total notional
value of $100 million. The agreement was used to convert variable-rate debt to
fixed rate debt. The Company will pay a fixed rate of 5.81% and is receiving a
weighted average variable rate based on 30 day LIBOR.
Impact of Year 2000
At the time of the merger of Ashland Coal into the Company and the Arch Western
transaction, the entities utilized different computer systems. In order to
standardize key financial, informational and operational computer systems, the
Company is currently in the process of replacing its key systems. The new
systems, including associated software, will be Year 2000 compliant. The system
replacement project is estimated to be completed not later than the third
quarter of 1999, which is prior to any anticipated impact of year 2000 on the
Company's operating systems. The Company believes that with modifications to
existing software and conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions at the Company's principal operations are not
made, or are not completed on a timely basis, the current system's inability to
properly process year 2000 data could have a material adverse effect on the
operations of the Company.
The cost of implementing these new systems is estimated at approximately
$7 million, which includes the purchase of new software and consulting services
used to implement this software. The majority of such
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costs will be capitalized. As of June 30, 1998, the Company has incurred
approximately $3.4 million in software and consulting costs. The Company
believes that the total costs associated with replacing and modifying its
current systems will not have a material adverse effect on its results of
operations. Additional systematic efforts are being made to identify and
evaluate Year 2000 risks with respect to the Company's vendors, suppliers, and
other entities with which it exchanges electronic information, and evaluate the
need for procedures to eliminate such risk at a reasonable cost.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated.
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
redeterminations 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. In addition, 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. Price reopener
provisions provide for an upward or downward adjustment in the contract price
based on market factors, and from time to time the Company has renegotiated
contracts after execution to extend contract term or to accommodate changing
market conditions. The contracts also typically include stringent minimum and
maximum coal quality specifications and penalty or termination provisions for
failure to meet such 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
include 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. Imposition of new nitrous oxide emissions limits in connection
with Phase II of the Clean Air Act in 2000 could result in price adjustments, or
in affected utilities seeking to terminate or modify long-term contracts in
reliance on such termination provisions. If the parties to any long-term
contracts with the Company were to modify, suspend or terminate those contracts,
the Company could be adversely affected to the extent that it is unable to find
alternative customers at the same or better level of profitability.
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 are subject to a variety of regulatory,
operational, geologic, transportation, and weather-related factors that
routinely cause production to fluctuate.
20
<PAGE>
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 at page 16 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, at Mingo Logan's Mountaineer Mine, the longwall equipment
must be dismantled and moved to a new area of the mine whenever the coal
reserves in a segment of the mine, called a panel, are exhausted. The size of a
panel varies, and therefore, the frequency of moves can also vary. 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. 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.
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
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.
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.
21
<PAGE>
Any one or a combination of changing demand; fluctuating selling prices;
contract 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.
22
<PAGE>
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
accounting policies with respect to its current derivatives positions do not
materially affect the Company's determination of financial position, cash flows
or results of operations.
23
<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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required under this item with respect to the Company's Annual
Meeting of Stockholders held on April 22, 1998, is incorporated by reference
herein from Part II, Item 4, of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, filed May 15, 1998 with the Securities and
Exchange Commission.
24
<PAGE>
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 3.1 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 as 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).
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).
- --------
* 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>
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 June 1, 1998 (reporting closing of the
acquisition of ARCO's U.S. coal operations), June 15, 1998 (reporting
the acquisition of ARCO's U.S. coal operations), July 22, 1998
(reporting that Ashland Inc., pursuant to its exercise of registration
rights, will 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) filed
during the period covered by this report and up to the date of filing
of this report.
26
<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: August 14, 1998 /s/Patrick A. Kriegshauser
--------------------------------------
Patrick A. Kriegshauser
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: August 14, 1998 /s/Jeffry N. Quinn
--------------------------------------
Jeffry N. Quinn
Senior Vice President, General Counsel
and Secretary
(Duly Authorized Officer)
27
<PAGE>
Arch Coal, Inc.
Form 10-Q for Quarter Ended June 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 3.1 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 as 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).
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,
- --------
* 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.
28
<PAGE>
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
29
<PAGE>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,518
<SECURITIES> 0
<RECEIVABLES> 220,882
<ALLOWANCES> 0
<INVENTORY> 89,218
<CURRENT-ASSETS> 367,640
<PP&E> 2,688,217
<DEPRECIATION> 735,173
<TOTAL-ASSETS> 2,920,265
<CURRENT-LIABILITIES> 358,384
<BONDS> 0
0
0
<COMMON> 397
<OTHER-SE> 631,631
<TOTAL-LIABILITY-AND-EQUITY> 2,920,265
<SALES> 641,178
<TOTAL-REVENUES> 665,990
<CGS> 576,516
<TOTAL-COSTS> 616,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,170
<INCOME-PRETAX> 35,819
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 30,819
<DISCONTINUED> 0
<EXTRAORDINARY> 1,488
<CHANGES> 0
<NET-INCOME> 29,331
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
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