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, 1999
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 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 August 9, 1999, there were 38,186,428 shares of registrant's common stock
outstanding.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998........................................................1
Condensed Consolidated Statements of Income for the Three Months
Ended June 30, 1999 and 1998 and the Six Months Ended
June 30, 1999 and 1998...................................................2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998..................................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...................................................23
Item 4. Submission of Matters to a Vote of Security Holders.................23
Item 5. Other Information...................................................23
Item 6. Exhibits and Reports on Form 8-K....................................24
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,
1999 1998
---------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 17,040 $ 27,414
Trade accounts receivable 162,447 202,871
Other receivables 51,190 24,584
Inventories 80,344 68,455
Prepaid royalties 3,274 13,559
Deferred income taxes 8,694 8,694
Other 10,333 7,757
---------- ----------
Total current assets 333,322 353,334
---------- ----------
Property, plant and equipment, net 1,886,249 1,936,744
---------- ----------
Other assets
Prepaid royalties 54,248 31,570
Coal supply agreements 168,931 201,965
Deferred income taxes 96,761 83,209
Investment in Canyon Fuel 215,548 272,149
Other 37,105 39,249
---------- ----------
Total other assets 572,593 628,142
---------- ----------
Total assets $2,792,164 $2,918,220
========== ==========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 128,978 129,528
Accrued expenses 127,945 142,630
Current portion of long-term debt 61,000 61,000
---------- ----------
Total current liabilities 317,923 333,158
Long-term debt 1,208,272 1,309,087
Accrued postretirement benefits other
than pension 344,380 343,553
Accrued reclamation and mine closure 150,283 150,636
Accrued workers' compensation 104,450 105,333
Accrued pension cost 24,775 18,524
Other noncurrent liabilities 41,616 39,713
---------- ----------
Total liabilities 2,191,699 2,300,004
---------- ----------
Stockholders' equity
Common stock 397 397
Paid-in capital 473,332 473,116
Retained earnings 145,486 150,423
Treasury stock, at cost (18,750) (5,720)
---------- ----------
Total stockholders' equity 600,465 618,216
---------- ----------
Total liabilities and stockholders' equity $2,792,164 $2,918,220
========== ==========
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 Six Months Ended
June 30 June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Coal sales $ 379,730 $ 342,215 $ 785,682 $ 641,178
Income (loss) from equity investment (447) 2,416 3,582 2,416
Other revenues 12,009 8,607 23,154 22,396
--------- --------- --------- ---------
391,292 353,238 812,418 665,990
--------- --------- --------- ---------
Costs and expenses
Cost of coal sales 347,537 305,266 727,457 576,516
Selling, general and administrative expenses 9,880 9,235 22,377 16,744
Amortization of coal supply agreements 8,957 7,302 19,579 13,664
Other expenses 4,179 3,985 8,282 9,258
--------- --------- --------- ---------
370,553 325,788 777,695 616,182
--------- --------- --------- ---------
Income from operations 20,739 27,450 34,723 49,808
Interest expense, net:
Interest expense (22,714) (10,366) (46,706) (14,170)
Interest income 334 115 662 181
--------- --------- --------- ---------
(22,380) (10,251) (46,044) (13,989)
--------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of accounting change (1,641) 17,199 (11,321) 35,819
Provision (benefit) for income taxes (4,100) 2,200 (11,400) 5,000
--------- --------- --------- ---------
Income before extraordinary item and
cumulative effect of accounting change 2,459 14,999 79 30,819
Extraordinary item from the extinguishment
of debt, net of taxes - (1,488) - (1,488)
Cumulative effect of accounting change, net
of taxes - - 3,813 -
--------- --------- --------- ---------
Net income $ 2,459 $ 13,511 $ 3,892 $ 29,331
========= ========= ========= =========
Basic and diluted earnings per common share
Income before extraordinary item and
cumulative effect of accounting change $ 0.06 $ 0.38 $ - $ 0.78
Extraordinary item from the extinguishment
of debt, net of taxes - (0.04) - (0.04)
Cumulative effect of accounting change,
net of taxes - - 0.10 -
========= ========= ========= =========
Basic and diluted earnings per common share $ 0.06 $ 0.34 $ 0.10 $ 0.74
========= ========= ========= =========
Weighted average shares outstanding 38,207 39,668 38,603 39,664
========= ========= ========= =========
Dividends declared per share $ 0.115 $ 0.115 $ 0.230 $ 0.230
========= ========= ========= =========
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)
Six Months Ended
June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities
Net income $ 3,892 $ 29,331
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion and amortization 120,947 85,619
Prepaid royalties expensed 8,763 9,819
Net gain on disposition of assets (4,789) (10,123)
Income from equity investment (3,582) (2,416)
Distributions from equity investment 59,842 -
Cumulative effect of accounting change (3,813) -
Changes in:
Receivables 13,180 (20,715)
Inventories (11,889) (13,019)
Accounts payable and accrued expenses (14,089) 8,064
Income taxes (20,307) 87
Accrued postretirement benefits other
than pension 827 5,722
Accrued reclamation and mine closure (353) 1,520
Accrued workers' compensation benefits (883) 1,969
Other 5,704 (7,946)
---------- ----------
Cash provided by operating activities 153,450 87,912
---------- ----------
Investing activities
Cash paid for acquisitions - (1,090,000)
Additions to property, plant and equipment (53,586) (40,050)
Proceeds from dispositions of property, plant
and equipment 19,309 10,449
Proceeds from coal supply agreements 14,067 -
Additions to prepaid royalties (21,156) (20,063)
---------- ----------
Cash used in investing activities (41,366) (1,139,664)
---------- ----------
Financing activities
Net proceeds from (payments on) revolver
and lines of credit (69,674) 100,713
Proceeds from (payments on) term loans (31,141) 974,599
Payments on senior notes - (42,860)
Proceeds from sale and leaseback of equipment - 45,442
Dividends paid (8,829) (9,117)
Proceeds from sale of common stock - 316
Proceeds from sale of treasury stock 2,535 -
Purchases of treasury stock (15,349) -
---------- ----------
Cash provided by (used in) financing activities (122,458) 1,069,093
---------- ----------
Increase (decrease) in cash and cash equivalents (10,374) 17,341
Cash and cash equivalents, beginning of period 27,414 9,177
---------- ----------
Cash and cash equivalents, end of period $ 17,040 $ 26,518
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
ARCH COAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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, 1999 are not necessarily indicative of results to be
expected for the year ending December 31, 1999. Arch Coal, Inc. (the "Company")
operates one reportable segment: the production of steam and metallurgical coal
from surface and deep mines throughout the United States for sale to utility,
industrial and export markets. The Company's mines are primarily located in the
central Appalachian and western regions of the United States. All subsidiaries
(except as noted below) are wholly owned. Significant intercompany transactions
and accounts have been eliminated in consolidation.
The Company's 65% ownership of Canyon Fuel Company, LLC ("Canyon Fuel") is
accounted for on the equity method in the Condensed Consolidated Financial
Statements as a result of certain super-majority voting rights in the joint
venture agreement. Income (loss) from Canyon Fuel is reflected in the Condensed
Consolidated Statements of Income as income (loss) from equity investment (see
additional discussion in "Investment in Canyon Fuel" in Note C).
Note B - Change in Accounting Method
Plant and equipment have principally been depreciated on the straight-line
method over the estimated useful lives of the assets, which range from three to
twenty years. Effective January 1, 1999, depreciation on the Company's
preparation plants and loadouts was computed using the units-of-production
method which is based upon units produced, subject to a minimum level of
depreciation. These assets are usage-based assets and their economic lives are
typically based and measured on coal throughput. The Company believes the
units-of-production method is preferable to the method previously used because
the new method recognizes that depreciation of this equipment is related
substantially to physical wear due to usage and also to the passage of time.
This method, therefore, more appropriately matches production costs over the
lives of the preparation plants and loadouts with coal sales revenue and results
in a more accurate allocation of the cost of the physical assets to the periods
in which the assets are consumed. The cumulative effect of applying the new
method for years prior to 1999 is an increase to income of $3.8 million
net-of-tax ($6.3 million pre-tax) reported as a cumulative effect of accounting
change in the Condensed Consolidated Statement of Income for the six months
ended June 30, 1999. In addition, the net income of the Company for the three
months and six months ended June 30, 1999 is $.3 million and $.5 million,
respectively, or $.01 per share, respectively, lower than it would have been if
the Company had continued to follow the straight-line method of depreciation of
equipment for preparation plants and loadouts.
4
<PAGE>
The pro-forma amounts below reflect the retroactive application of
units-of-production depreciation on preparation plants and loadouts:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income as reported $ 2,459 $13,511 $ 3,892 $29,331
Net income adjusted for the cumulative
effect of accounting change and its
retroactive application $ 2,459 $13,385 $ 79 $28,964
Basic and diluted earnings per common
share as reported $ 0.06 $ 0.34 $ 0.10 $ 0.74
Basic and diluted earnings per common
share adjusted for the cumulative effect
of accounting change and its retroactive
application $ 0.06 $ 0.34 $ 0.00 $ 0.73
</TABLE>
Note C - Investment in Canyon Fuel
The following table presents unaudited summarized financial information for
Canyon Fuel which, as part of the Company's June 1, 1998 acquisition of Atlantic
Richfield Company's ("ARCO") coal operations (the "Arch Western transaction"),
is accounted for on the equity method:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended One Month Ended
June 30, 1999 June 30, 1999 June 30, 1998
------------- ---------------- ---------------
(in thousands)
<S> <C> <C> <C>
Revenues $ 63,444 $123,595 $ 20,583
Total costs and expenses 64,817 119,830 17,246
-------- -------- --------
Net income (loss) $ (1,373) $ 3,765 $ 3,337
======== ======== ========
The Company's income (loss) from
its equity investment in
Canyon Fuel $ ( 447) $ 3,582 $ 2,416
======== ======== ========
</TABLE>
The Company's income (loss) from its equity investment in Canyon Fuel represents
65% of Canyon Fuel's net income (loss) after adjusting for the effect of its
investment in Canyon Fuel. The Company's investment in Canyon Fuel reflects
purchase adjustments primarily related to sales contracts, mineral reserves and
other property, plant and equipment.
Note D - Inventories
Inventories are comprised of the following:
June 30, December 31,
1999 1998
--------- ------------
(in thousands)
Coal $ 40,547 $ 25,789
Repair parts and supplies 39,797 42,666
--------- --------
$ 80,344 $ 68,455
========= ========
5
<PAGE>
Note E - Debt
Debt consists of the following:
June 30, December 31,
1999 1998
---------- ------------
(in thousands)
Indebtedness to banks
under lines of credit $ 3,210 $ 12,884
Indebtedness to banks under
revolving credit agreement,
expiring May 31, 2003 330,000 390,000
Variable rate term loan payable
quarterly through May 31, 2003 255,000 285,000
Variable rate term loan
payable May 31, 2003 675,000 675,000
Other 6,062 7,203
---------- ----------
1,269,272 1,370,087
Less current portion 61,000 61,000
---------- ----------
Long-term debt $1,208,272 $1,309,087
========== ==========
In connection with the Arch Western transaction, the Company entered into two
new five-year credit facilities: a $675 million non-amortizing term loan to Arch
Western Resources, LLC, the entity owning the coal reserves and operating assets
acquired in the Arch Western transaction ("Arch Western"), and a $900 million
credit facility to the Company, including a $300 million fully amortizing term
loan and a $600 million revolver. Borrowings under the Company's new 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. 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 assets to Arch
Western. The $675 million term loan is secured by Arch Western's membership
interests in its subsidiaries. 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. At June 30, 1999, the Company'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.
The Company enters into interest-rate swap agreements to modify the interest
rate characteristics of the Company's outstanding debt. At June 30, 1999, the
Company had interest-rate swap agreements having a total notional value of
$925.0 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 5.49% (before the credit spread over LIBOR) and
is receiving a weighted-average variable-rate based upon 30-day and 90-day
LIBOR. The remaining term of the swaps at June 30, 1999 ranged from 38 to 62
months.
Note F - Treasury Stock
On September 29, 1998, the Company'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 June 30, 1999, the Company has acquired 1,704,000 shares under
the repurchase program at the average price of $12.32 per share.
6
<PAGE>
On February 25, 1999, the Company's Board of Directors authorized the Company to
amend its Automatic Dividend Reinvestment Plan to provide, among other things,
that dividends may be reinvested in the Company's common stock by purchasing
authorized but unissued shares (including treasury shares) directly from the
Company, as well as by purchasing shares in the open market. On May 4, 1999, the
Company filed a Form S-3 with the Securities and Exchange Commission to register
2,000,000 shares of the Company's common stock for issuance under the amended
Plan. As reflected in the Prospectus filed therewith, the amended Plan provides
that the Company determines whether the Plan's administrator should reinvest
dividends in shares purchased in the open market or in shares acquired directly
from the Company. On June 11, 1999, the Company authorized and directed its Plan
administrator to reinvest the June 15, 1999 dividend in the Company's treasury
stock. On June 15, 1999, the Company paid a dividend of approximately $4.4
million of which approximately $2.5 million was reinvested in 188,647 shares of
treasury stock. In accordance with the terms of the amended Plan, the treasury
stock was reissued by the Company at the average of the high and low per share
sales price as reported by the New York Stock Exchange on June 15, 1999, which
was $13.438 per share. The Company accounts for the issuance of the treasury
stock using the average cost method.
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 June 30, 1999 is $5.5 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 $1.1 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.
Note H - Changes in Estimates and Other Non-Recurring Revenues and Expenses
The Company's operating results for the six months ended June 30, 1999 reflect a
charge of $6.5 million related to the planned temporary shut down of its Dal-Tex
mine in Logan County, West Virginia on July 23, 1999. The charge is comprised
principally of severance costs, obligations for non-cancelable lease payments
and a change in the reclamation liability due to the temporary shut down. The
shut down is due to a delay in obtaining mining permits resulting from legal
action in the U.S. District Court for the Southern District of West Virginia
(for a discussion of the legal action, see the "Contingencies - Legal
Contingencies" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this report).
The Company's operating results for the three and six months ended June 30, 1998
reflect pre-tax gains on the sale of surplus land totaling $1.4 million and $9.9
million, respectively.
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, to pay related transaction fees of $.4 million and to pay down debt. 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. Alternatively, the
equipment may be sold to a third party. In the event of such a sale, the Company
will be required to make a 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 was deferred and is being amortized over the base
term of the lease as a reduction of rental expense. Effective April 1, 1999, as
a result of the pending temporary shut-down of the Dal-Tex operation, the
Company purchased several pieces of equipment under lease that were included in
this transaction for $14.4 million and transferred them to other operations
within the Company. A pro rata portion of the deferred gain, $3.1 million, was
utilized against the purchase value of the assets. As a result of this
7
<PAGE>
purchase, future non-cancelable rental payments remaining under this lease are
expected to be approximately $4.7 million for the remainder of 1999 and $8.3
million and $.6 million in 2000 and 2001, respectively.
Note J - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
common share from continuing operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item and
cumulative effect of accounting change $ 2,459 $ 14,999 $ 79 $ 30,819
Extraordinary item, net of taxes - (1,488) - (1,488)
Cumulative effect of accounting
change, net of taxes - - 3,813 -
-------- -------- -------- --------
Net income $ 2,459 $ 13,511 $ 3,892 $ 29,331
======== ======== ======== ========
Denominator:
Weighted average shares - denominator
for basic 38,207 39,668 38,603 39,664
Dilutive effect of employee stock options 89 39 77 44
-------- -------- -------- --------
Adjusted weighted averages shares -
denominator for diluted 38,296 39,707 38,680 39,708
======== ======== ======== ========
Basic and diluted earnings per common share
before extraordinary item and cumulative
effect of accounting change $ .06 $ .38 $ .00 $ .78
======== ======== ======== ========
Basic and diluted earnings per common share $ .06 $ .34 $ .10 $ .74
======== ======== ======== ========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the "Contingencies" and "Certain Trends And Uncertainties,"
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.
RESULTS OF OPERATIONS
The Company acquired Atlantic Richfield Company's U.S. coal operations (the
"Arch Western operations") effective June 1, 1998 (the "Arch Western
transaction"). Results of operations do not include activity of the Arch Western
operations prior to the effective date of this transaction. Accordingly, the
Company's results of operations for the three and six months ended June 30, 1999
and three and six months ended June 30, 1998 are not directly comparable.
Quarter Ended June 30, 1999, Compared
to Quarter Ended June 30, 1998
Net income for the quarter ended June 30, 1999 was $2.5 million, compared to net
income of $13.5 million for the quarter ended June 30, 1998. Current period
results include operating results of the Arch Western operations, whereas the
prior period results only include operating results of the Arch Western
operations from June 1, 1998, the effective date of the Arch Western
transaction.
Total revenues for the quarter ended June 30, 1999 increased 11% from the prior
period primarily as a result of the inclusion of revenues from the Arch Western
operations in the entire quarter compared to the inclusion of only one month's
revenues from the Arch Western operations in the quarter ended June 30, 1998.
Revenues also increased as a result of increasing production and sales at the
Samples mine. The increase in revenues was, however, partially offset by a
decrease in sales caused by reduced production at the Dal-Tex operation, which
was winding down operations for the planned temporary shut down, and at the Arch
of Illinois operation, which closed its surface operation in June 1998 after
depleting its recoverable reserves. Also, on a per-ton sold basis, the Company's
average selling price decreased by $6.33 primarily because of the inclusion of
the Arch Western operations. Western coal has a significantly lower average
sales price than coal provided from the Company's eastern coal operations, due
primarily to lower Btu content of Powder River Basin coal. Selling prices were
also affected by adverse market conditions in certain western regions of the
United States and export markets, as well as continuing reduced seasonal demand
caused by unusually warm winter weather resulting in utilities generally having
higher levels of stockpiled coal inventory.
Income from operations for the quarter ended June 30, 1999 decreased $6.7
million from the same period in the prior year despite the inclusion of the Arch
Western operations for the entire current quarter in 1999. Operating results
were negatively affected by production shortfalls, deterioration of mining
conditions and resulting lower income contributions from the Company's Dal-Tex
operation. The Company, as planned, temporarily shut down the Dal-Tex operation
on July 23, 1999. The shut down is due to a delay in obtaining mining permits
resulting from legal action in the U.S. District Court for the Southern District
of West Virginia (for a discussion of the legal action, see the "Contingencies-
Legal Contingencies" section below). Operating results were also negatively
affected by difficult market conditions, particularly for the Company's eastern
coal, resulting from the reduced seasonal demand described above. The Company
also experienced production shortfalls at its Black Thunder Mine in Wyoming due
primarily to water drainage and sequencing difficulties. Canyon Fuel had an
equity loss during the quarter as a result of two moves of longwall mining
equipment that took place during the quarter at its operations and significant
geologic difficulties at its Skyline Mine. These negative results were partially
offset by the sale of a dragline at the Arch of Illinois operation resulting in
a gain of $2.5 million, along with settlements with two suppliers that added
$2.5 million to the quarter's results. Other factors affecting quarter to
quarter comparisons relate to 1998 events that included a gain of $2.4 million
related to the settlement of litigation and a gain of $2.0 million on sales of
surplus land.
As a result of the carrying value of the sales contracts acquired in the Arch
Western transaction, amortization of coal
9
<PAGE>
supply agreements increased $1.7 million.
Interest expense increased $12.3 million due to the increase in debt as a result
of the Arch Western transaction.
The Company's effective tax rate is sensitive to changes in annual profitability
and percentage depletion.
EBITDA (income from operations before the effects of changes in accounting
principles and extraordinary items, merger-related costs and unusual items, net
interest expense, income taxes, depreciation, depletion and amortization, for
the Company, its subsidiaries and its ownership percentage in its equity
investments) was $88.2 million for the quarter ended June 30, 1999 compared to
$77.6 million for the same quarter a year ago. The increase in EBITDA is
primarily attributable to the additional activity generated from the Arch
Western operations offset, in part, by the negative variance in income from
operations previously discussed. 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).
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998
Net income for the six months ended June 30, 1999 was $3.9 million, compared to
$29.3 million for the six months ended June 30, 1998. Current period results
include operating results of the Arch Western operations, whereas the prior
period results only include operating results of the Arch Western operations
from June 1, 1998, the effective date of the Arch Western transaction.
Total revenues for the six months ended June 30, 1999 increased 22% from the
prior period primarily as a result of the inclusion of revenues from the Arch
Western operations for the entire six months ended June 30, 1999 compared to the
inclusion of revenues from the Arch Western operations from June 1, 1998 in the
six months ended June 30, 1998. Revenues also increased as a result of
increasing production and sales at the Samples mine. The increase in revenues
was, however, partially offset by a decrease in sales caused by reduced
production at the Dal-Tex operation, which was winding down operations for the
planned temporary shut down, and at the Arch of Illinois operation, which closed
its surface operation in June 1998 after depleting its recoverable reserves.
Also, on a per-ton sold basis, the Company's average selling price decreased by
$8.03 primarily because of the inclusion of the Arch Western operations. Western
coal has a significantly lower average sales price than coal provided from the
Company's eastern coal operations, due primarily to lower Btu content of Powder
River Basin coal. Selling prices were also affected by adverse market conditions
in certain western regions of the United States and export markets, as well as
continuing reduced seasonal demand caused by unusually warm winter weather
resulting in utilities generally having higher levels of stockpiled coal
inventory.
Income from operations for the six months ended June 30, 1999 decreased $15.1
million from the same period in the prior year despite the inclusion of the Arch
Western operations in the current period. Operating results were negatively
affected by production shortfalls, deterioration of mining conditions and
resulting lower income contributions from the Company's Dal-Tex operation. The
Company, as planned, temporarily shut down the Dal-Tex operation on July 23,
1999. The shut down is due to a delay in obtaining mining permits resulting from
legal action in the U.S. District Court for the Southern District of West
Virginia (for a discussion of the legal action, see the "Contingencies - Legal
Contingencies" section below). As a result of the shut down, the Company also
recorded a charge of $6.5 million in the first quarter of 1999 comprised
principally of severance costs, obligations for non-cancelable lease payments
and a change in the reclamation liability due to the temporary shut down.
Operating results were also negatively affected by difficult market conditions
particularly for the Company's eastern production as described above. The
Company also experienced production shortfalls at its Black Thunder Mine in
Wyoming due primarily to water drainage and sequencing difficulties. In
addition, the Skyline Mine had two moves of longwall mining equipment that took
place at
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its operations and experienced significant geologic difficulties in the second
quarter of 1999. These negative results were partially offset by the sale of a
dragline at the Arch of Illinois operation resulting in a gain of $2.5 million,
along with settlements with two suppliers that added $2.5 million to the second
quarter of 1999 results. Other factors affecting comparisons for the six months
relate to 1998 events that included a gain of $9.9 million on sales of surplus
land, and a gain of $2.4 million related to the settlement of litigation offset
by operating losses incurred at the Company's Mine No. 37, which was closed in
January, 1998.
Selling, general and administrative expenses increased $5.6 million primarily
due to the effects of the Arch Western transaction and additional legal and
media expenses related to mountaintop removal issues in West Virginia.
As a result of the carrying value of the sales contracts acquired in the Arch
Western transaction, amortization of coal supply agreements increased $5.9
million.
Interest expense increased $32.5 million due to the increase in debt as a result
of the Arch Western transaction.
The Company's effective tax rate is sensitive to changes in annual profitability
and percentage depletion.
Effective January 1, 1999, the Company changed its method of depreciation on
preparation plants and loadouts from a straight-line basis to a
units-of-production basis which is based upon units produced, subject to a
minimum level of depreciation. These assets are usage-based assets and their
economic lives are typically based and measured on coal throughput. The Company
believes the units-of-production method is preferable to the method previously
used because the new method recognizes that depreciation of this equipment is
related substantially to physical wear due to usage and also to the passage of
time. This method, therefore, more appropriately matches production costs over
the lives of the preparation plants and loadouts with coal sales revenue and
results in a more accurate allocation of the cost of the physical assets to the
periods in which the assets are consumed. The cumulative effect of applying the
new method for years prior to 1999 is an increase to income of $3.8 million
net-of-tax ($6.3 million pre-tax) reported as a cumulative effect of accounting
change in the Condensed Consolidated Statement of Income for the six months
ended June 30, 1999.
EBITDA (income from operations before the effects of changes in accounting
principles and extraordinary items, merger-related costs and unusual items, net
interest expense, income taxes, depreciation, depletion and amortization for the
Company, its subsidiaries and its ownership percentage in its equity
investments) was $174.2 million for the six months ended June 30, 1999 compared
to $138.9 million for the same period a year ago. The increase in EBITDA is
primarily attributable to the additional activity generated from the Arch
Western operations offset, in part, by the negative variance in income from
operations previously discussed.
OUTLOOK
The Arch Western transaction, which occurred on June 1, 1998, will help solidify
the Company's future as other operations' reserves deplete, most notably Mingo
Logan's Mountaineer Mine estimated to deplete longwall mineable tons in 2002.
The Company continues to develop its assets at the Arch Western operations
including the Black Thunder Mine near Gillette, Wyoming. On March 12, 1999, the
Company entered into an agreement to transfer ownership of a portion of the
412-million-ton Thundercloud federal coal lease, which is part of the Company's
Black Thunder Mine, to Kennecott Energy Company. The reserves, located adjacent
to the western border of Kennecott Energy's Jacobs Ranch Mine, are estimated to
contain 35 million tons of coal. In exchange for that portion of the lease, the
Company received approximately $12 million along with baseline environmental
data with respect to the Thundercloud leasehold. The environmental data will
allow the Company to expedite the permitting of the property. The Thundercloud
reserve has lower ratios than are currently being mined on average by the Black
Thunder Mine. In addition, Black Thunder Mine is currently constructing a fourth
dragline that is estimated to be placed in service in the first quarter of 2000.
The Company experienced poor rail service at its western operations in 1998.
Rail service has improved in the first six months of 1999 and management expects
this trend to continue. The Company has, however, experienced production
problems at its Black Thunder Mine arising from surface water run-off and
groundwater issues. During 1999, the Black
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Thunder Mine implemented a comprehensive water control and drainage program
which began to produce positive results at the end of the second quarter. The
Company believes that the corrective measures implemented through the first half
of 1999 should minimize water related difficulties at the operation.
As planned, the Company temporarily shut down its Dal-Tex operation in Logan
County, West Virginia on July 23, 1999. The shut down is due to a delay in
obtaining mining permits resulting from legal action in the U.S. District Court
for the Southern District of West Virginia (for a discussion of the legal
action, see "Contingencies - Legal Contingencies" below). Management expects the
decrease in production resulting from the shut-down of its Dal-Tex operation to
be offset, in part, by increased production at the Company's other eastern
mines. Management also plans to increase production at the Company's Black
Thunder Mine in the Powder River Basin where several pieces of mining equipment
from Dal-Tex have been relocated. Management is hopeful that it can re-open the
Dal-Tex operation after all necessary permits are obtained. Issuance of all
necessary permits is not expected until mid-2001 at the earliest.
On March 2, 1999, the Company announced its intention to explore the potential
disposition of its Coal-Mac (Kentucky operations), Lone Mountain and Pardee
mining operations. These operations collectively contributed approximately 8.5%
and 10.4% of the Company's total revenues and operating profit, respectively,
for the six months ended June 30, 1999. The Company intends to use the proceeds
of any disposition to reduce debt. The Company anticipates that the disposition
of these operations would be consummated prior to the end of the year; however,
there can be no assurance as to when, if at all, these operations will be sold
or at what price they will be sold.
On June 22, 1999, Ashland Inc., which owns approximately 58% of the Company's
outstanding shares of common stock, announced that it was exploring strategic
alternatives for its investment in the Company. There has been no immediate
impact on the operations of the Company as a result of such announcement, and
the Company continues to focus on its five chief financial objectives: 1)
aggressively paying down debt, 2) further strengthening cash generation, 3)
improving earnings, 4) increasing productivity, and 5) selling non-strategic and
underperforming assets.
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, 1999 and 1998:
1999 1998
---------- -----------
(in thousands)
Cash provided by (used in):
Operating activities $ 153,450 $ 87,912
Investing activities (41,366) (1,139,664)
Financing activities (122,458) 1,069,093
Cash provided by operating activities increased in the six months ended June 30,
1999 from the level in the same period of 1998 due primarily to decreases in
accounts receivable and to increased operating activity resulting from the Arch
Western transaction, including distributions from the Company's investment in
Canyon Fuel. This increase was partially offset by a reduction in accounts
payable and accrued expenses and increased interest expense resulting from
increased borrowings associated with the Arch Western transaction.
A portion of the distributions from the Company's investment in Canyon Fuel were
a result of Canyon Fuel amending coal supply agreements with the Intermountain
Power Agency's Intermountain Power Project ("IPA") during January 1999. Pursuant
to the amended coal supply agreements, Canyon Fuel will supply coal to IPA
through 2010 with a mutual option to extend the terms of the agreements to 2015
at a rate of approximately 2.2 million tons per year. Canyon Fuel and IPA
settled a pending arbitration and related litigation resulting from IPA's
assertion of a gross inequity under the coal supply contracts and disagreements
over the price escalation provisions of the contracts. As part of the
settlement, IPA agreed to pay to Canyon Fuel $12.7 million, which had been
withheld due to the dispute. The members of Canyon Fuel also agreed to terminate
certain indemnification rights, including indemnification rights relating to the
IPA coal supply agreements, arising in connection with the December 1996
acquisition of Canyon Fuel from The
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Coastal Corporation, and the Company agreed to terminate certain indemnification
rights relating to the IPA coal supply agreements under agreements relating to
the Arch Western transaction. In the aggregate, the Company will receive $29.9
million over three years for termination of the indemnity rights. The proceeds
from the termination of the indemnity rights will be used to repay debt and for
other corporate purposes.
The decrease in cash used for investing activities from the first six months of
1998 primarily results from payment of $1.1 billion in cash in the Arch Western
transaction during the second quarter of 1998. In addition, the Company amended
a coal supply agreement acquired in the Arch Western transaction. The amendment
changed the contract terms from above-market to market-based pricing. As a
result of the amendment, the Company received proceeds of $14.9 million (net of
royalty and tax obligations) from the customer. Proceeds from the disposition of
property, plant and equipment increased $8.9 million primarily as a result of
selling a portion of the Thundercloud lease to Kennecott Energy for
approximately $12 million (see additional discussion in OUTLOOK). In addition,
the Company's expenditures for property, plant and equipment were $53.6 million
and $40.1 million for the six months ended June 30, 1999 and 1998, respectively.
Expenditures in 1999 included approximately $20.3 million for equipment upgrades
and re-erection costs for assets at the Arch Western operations' Thunder Basin
Coal Company, including $11.8 million for the construction of a fourth dragline
at the Black Thunder Mine. The Company also incurred $8.3 million at its Samples
Mine to acquire a new spread of equipment and to relocate a shovel from the Wylo
operation. Also included in the six months ended June 30, 1999 were equipment
upgrades at Mingo Logan and Mountain Coal Company of $2.7 million and $5.9
million, respectively. The Company also purchased leased equipment associated
with the Dal-Tex operation for $14.4 million. Several pieces of the equipment
were subsequently moved to other operations.
Cash used in financing activities reflects a reduction in borrowings of $100.8
million during the first six months of 1999. During the same period of 1998,
there was an increase in borrowings of $1.1 billion associated with the Arch
Western transaction, net of associated debt repayment. In addition, in January
1998, a sale and leaseback of equipment resulted in net proceeds of $45.5
million. The Company also repurchased 1,373,800 shares of its own common stock
for $15.4 million as part of a stock repurchase program during 1999. The
repurchases were partially offset by the issuance of 188,647 treasury shares for
approximately $2.5 million associated with the Company's dividend reinvestment
plan.
The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
June 30, 1999, there were $65 million of such agreements in effect of which $3.2
million were outstanding.
The Company is exposed to market risk associated with interest rates. At June
30, 1999, debt included $1.263 billion of floating-rate debt which is, at the
Company's option, the PNC Bank base rate or a rate based on LIBOR and current
market rates for bank lines of credit. To manage these exposures, the Company
enters into interest-rate swap agreements to modify the interest rate
characteristics of outstanding Company debt. At June 30, 1999, the Company had
interest- rate swap agreements having a total notional value of $925.0 million.
These swap agreements are used to convert variable-rate debt to fixed-rate debt.
Under these swap agreements, the Company pays a weighted average fixed rate of
5.49% (before the credit spread over LIBOR) and is receiving a weighted average
variable rate based upon 30-day and 90-day LIBOR. The Company accrues amounts to
be paid or received under interest-rate swap agreements over the lives of the
agreements. Such amounts are recognized as adjustments to interest expense over
the lives of agreements, thereby adjusting the effective interest rate on the
Company's debt. The fair values of the swap agreements are not recognized in the
financial statements. Gains and losses on terminations of interest-rate swap
agreements would be deferred on the balance sheet (in other long-term
liabilities) and amortized as an adjustment to interest expense over the
remaining term of the terminated swap agreement. The remaining terms of the swap
agreements at June 30, 1999 ranged from 38 to 62 months. All instruments are
entered into for other than trading purposes.
The discussion below presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates and prices.
The range of changes reflects the Company's view of changes that are reasonably
possible over a one-year period. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
major accounting policies for these instruments are described in Note 1 to the
consolidated financial statements of the Company as of and for the year ended
December 31, 1998 as filed on Form 10-K with the Securities and Exchange
Commission.
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Changes in interest rates have different impacts on the fixed- and variable-rate
portions of the Company's debt portfolio. A change in interest rates on the
fixed portion of the debt portfolio impacts the net financial instrument
position but has no impact on interest incurred or cash flows. A change in
interest rates on the variable portion of the debt portfolio impacts the
interest incurred and cash flows but does not impact the net financial
instrument position.
The sensitivity analysis related to the fixed portion of the Company's debt
portfolio assumes an instantaneous 100-basis- point move in interest rates from
their levels at June 30, 1999 with all other variables held constant. A
100-basis-point decrease in market interest rates would result in an increase in
the net financial instrument position of the fixed portion of debt of $30.0
million at June 30, 1999. Based on the variable-rate debt included in the
Company's debt portfolio as of June 30, 1999, after considering the effect of
the swap agreements, a 100-basis-point increase in interest rates would result
in an annualized additional $3.4 million of interest expense incurred based on
quarter-end debt levels.
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 such adjustments were recorded in the six
months ended June 30, 1999 or in the six months ended June 30, 1998. 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 its probable
aggregate loss as a result of such claims as of June 30, 1999 is $5.5 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 $1.1
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.
On July 16, 1998, ten individuals and The West Virginia Highlands Conservancy
filed suit in U.S. District Court for the Southern District of West Virginia
against the director of the West Virginia Division of Environmental Protection
("DEP") and officials of the U.S. Army Corps of Engineers (the "Corps") alleging
violations of SMCRA and the Clean Water Act. The plaintiffs alleged that the DEP
and the Corps have violated their duties under SMCRA and the Clean Water Act by
authorizing the construction of "valley fills" under certain surface coal mining
permits. These fills are the large, engineered works into which the excess earth
and rock extracted above and between the seams of coal that are removed during
surface mining are placed. The plaintiffs also alleged that the DEP has failed
to require that lands mined be restored to "approximate original contour" and
that approved post-mining land uses are enforced following
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reclamation.
Four indirect, wholly owned subsidiaries of the Company hold nine permits that
were identified in the complaint as violating the legal standards that the
plaintiffs requested the district court interpret. In addition, a pending permit
application for the Company's Dal-Tex operation (known as the "Spruce Fork
Permit") was specifically identified as a permit the issuance of which should be
enjoined. Three subsidiaries of the Company intervened in the lawsuit in support
of the Corps and the DEP on August 6, 1998.
A partial settlement between the plaintiffs and the Corps was reached on
December 23, 1998. Pursuant to that settlement, all claims were dismissed
against the Corps for its alleged failure to execute its duties under the Clean
Water Act. The settlement agreement reached between the Corps and the plaintiffs
requires the preparation of a programmatic environmental impact statement (an
"EIS") under the National Environmental Policy Act of 1969 ("NEPA") to evaluate
the environmental effects of mountaintop mining. This EIS is scheduled to be
completed by January 2001. Until it is completed, any proposed fill greater than
250 acres in size must secure an individual Clean Water Act Section 404 "dredge
and fill" permit, instead of a general permit which the Corps had issued under
its nationwide authorization program for the Dal-Tex operation. The Spruce Fork
Permit, however, was not included in the settlement, and the claims against the
Corps with respect to that permit were not dismissed.
On March 3, 1999, the court issued a preliminary injunction which prohibited the
Corps from issuing the general Clean Water Act Section 404 "dredge and fill"
permit for the Dal-Tex operation and enjoined the Company from future operations
on the permit until a full trial on the merits is held. As a result of the entry
of the preliminary injunction, the Company announced on March 8, 1999 that it
would idle the mine and lay off more than 250 employees.
On July 26, 1999, the plaintiffs and DEP tendered to the court a proposed
consent decree which would resolve most of the remaining issues in the case.
Pursuant to the proposed consent decree, the DEP agreed to amend its regulations
and procedures to correct deficiencies that were alleged by the plaintiffs. The
Company's Hobet Mining subsidiary agreed as part of the proposed consent decree
to revise portions of its Spruce Fork Permit application to conform to a new
definition of "approximate original contour" that would be adopted pursuant to
the consent decree. Hobet Mining also agreed to seek an individual Clean Water
Act Section 404 "dredge and fill" permit from the Corps as part of its future
mining operation. Before issuing that permit, the Corps must first complete an
EIS to comply with the provisions of NEPA. The completion of the EIS and
issuance of all permits are not expected until mid-2001 at the earliest.
One remaining issue not resolved by the proposed consent decree is the
applicability of a regulation which imposes a "buffer zone" around certain
streams. The plaintiffs allege this regulation prohibits the construction of
valley fills. The parties have agreed that this issue should be resolved on
cross motions for summary judgment. The court has set a briefing schedule on
this issue which should be decided in September 1999.
In a hearing on July 30, 1999, the court declined at that time to enter the
consent decree as proposed, and has established a public comment period on the
proposed decree which closes on September 30, 1999. At the hearing, the Court
expressed concern that the decree purported to resolve the issues, but that such
resolution was conditioned upon future actions by the parties, such as the
enactment of new regulations by DEP. Accordingly, the court has retained
jurisdiction over the case generally, and has continued the injunction issued on
March 3, 1999, which prohibits any mining related activities on the area covered
by the Spruce Fork Permit. It is unclear as to the effect of the Court's failure
to enter the consent decree on the proposed settlement, however, at this time it
appears that all of the parties are committed to implement the terms of the
proposed consent decree and obtain court approval at a later date, after the
other conditions are resolved.
Canyon Fuel is in litigation with the Skyline Partners, the successor in
interest to a prior lessee of the coal reserves that comprise Canyon Fuel's
Skyline Mine. The litigation arises from an agreement between a subsidiary of
The Coastal Corporation, Canyon Fuel's predecessor in interest, and the Skyline
Partners' predecessor. The agreement requires the lessee, Canyon Fuel, to pay
the Skyline Partners an annual advance minimum royalty of $5 million per year
through 1997, 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 leaseholds.
In 1997, Canyon Fuel concluded that a number of recoverable tons which remain on
the
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leaseholds were insufficient to allow it to fully recoup the total amount of
advance royalties that have been paid to the Skyline Partners. Accordingly,
Canyon Fuel 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 leases. 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 agreement. The
Utah State Court action was removed to the Federal District Court in Utah and,
thereafter, the parties agreed to stay the Colorado proceeding and to proceed
with the Utah Federal District Court case. On June 18, 1999, the Skyline
Partners filed an amended answer and several counterclaims against Canyon Fuel.
The counterclaims asserted against Canyon Fuel include a bad faith claim, a
claim that Canyon Fuel did not develop the reserve in a prudent manner, a claim
that Canyon Fuel breached a duty to obtain the best price for the coal, and a
claim for an overriding royalty on tons produced from adjacent leases. The case
is scheduled for trial in March 2000.
On October 24, 1996, the rock strata overlaying an abandoned underground mine
adjacent to the coal-refuse impoundment used by the Lone Mountain 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. At the request of the Environmental Protection Agency (the
"EPA") and the U.S. Fish and Wildlife Service, the United States Attorney for
the Western District of Virginia opened a criminal investigation of the 1996
incident. The Company has cooperated with the U.S. Attorney throughout the
investigation which is still pending.
On October 31, 1997, the EPA notified a Company subsidiary that it was a
potentially responsible party in the investigation and remediation of two
hazardous waste sites located in Kansas City, Kansas, and Kansas City, Missouri.
The Company's involvement arises from the subsidiary's sale, in the mid-1980's,
of fluids containing small quantities of polychlorinated biphenyls ("PCBs") to a
company authorized to engage in the processing and disposal of these wastes.
Some of these waste materials were sent to one of the sites for final disposal.
The Company responded to the information request submitted by the EPA on
December 1, 1997. Any liability which might be asserted by the EPA against the
Company is not believed to be material because of the de minimis quantity and
concentration of PCBs linked to the Company. Moreover, the party with which the
subsidiary contracted to dispose of the waste material has agreed to indemnify
the Company for any costs associated with this action.
CERTAIN TRENDS AND UNCERTAINTIES
Substantial Leverage; Variable Interest Rates; Restrictive Covenants
The Company has substantial leverage, including significant debt service and
lease payment obligations. As of June 30, 1999, the Company had outstanding
consolidated indebtedness of $1.269 billion, representing approximately 68% of
capital employed.
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 their markets, as well as
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.
The degree to which the Company is leveraged could have material consequences to
the Company and its business, including, but not limited to: (i) making it more
difficult for the Company to satisfy its debt service, lease payment and other
obligations; (ii) increasing the Company's vulnerability to general adverse
economic and industry conditions; (iii) limiting the Company's ability to obtain
additional financing to fund future acquisitions, working capital, capital
expenditures or other general corporate requirements; (iv) reducing the
availability of cash flow from operations to fund
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acquisitions, working capital, capital expenditures or other general corporate
purposes; (v) limiting the Company's flexibility in planning for, or reacting
to, changes in its business and the industry in which it competes and (vi)
placing the Company at a competitive disadvantage when compared to competitors
with less debt.
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 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, would have a material adverse effect on the
Company.
Environmental and Regulatory Factors
Governmental authorities regulate the coal mining industry on matters as diverse
as employee health and safety, air quality standards, water pollution,
groundwater quality and availability, plant and wildlife protection, the
reclamation and restoration of mining properties, the discharge of materials
into the environment and surface subsidence from underground mining. In
addition, federal legislation mandates certain benefits for various retired coal
miners represented by the United Mine Workers of America ("UMWA"). These
regulations and legislation have had and will continue to have a significant
effect on the Company's costs of production and competitive position.
Mining companies must obtain numerous permits that impose strict regulations on
various environmental and health and safety matters in connection with coal
mining. Other than as described in "Contingencies-Legal Contingencies" above,
the Company believes all permits required to conduct present mining operations
have been obtained and that, upon the filing of the required information with
the appropriate regulatory agencies, all permits necessary for continuing
operations will be obtained. However, as indicated by the legal action involving
the Company's Dal-Tex operation which is discussed in "Contingencies-Legal
Contingencies" above, the regulatory environment in West Virginia is changing
with respect to current or future large scale surface mines.
The Company currently operates four large scale surface mines in West Virginia.
As discussed in "Contingencies-Legal Contingencies" above, the issuance of a
Clean Water Act Section 404 "dredge and fill" permit with respect to the
Company's Dal-Tex operation has been enjoined. Under current mining plans, the
Company's other three large scale surface mines in West Virginia do not have an
immediate need for any new Clean Water Act Section 404 "dredge and fill" permits
or for the renewal or extension of any such existing permits other than those
routine in nature. Because the regulatory authorities have considerable
discretion in the timing of permit issuance and 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 future Clean Water Act Section 404 "dredge and fill" permits or
any other permits will be issued, or if issued, that such issuance would be
timely, or that permitting requirements will not be changed or interpreted in a
manner adversely affecting the Company.
The federal Clean Water Act affects coal mining operations in two principal
ways. First, the Corps issues permits under Section 404 of the Clean Water Act
whenever a mine operator proposes to build a fill or impoundment in waters of
the United States. In addition, the EPA must approve the issuance by a state
agency of an NPDES ("National Pollutant Discharge Elimination System") permit.
This NPDES permit encompasses storm water discharges from a mine facility.
Regular monitoring and compliance with reporting requirements and performance
standards are conditions for the issuance and renewal of NPDES permits governing
pollutant discharge. All states in which the Company's subsidiaries operate also
have laws restricting discharge of pollutants into state waters.
New legislation, regulations or orders may be adopted or become effective which
may adversely affect the Company's mining operations or cost structure, or the
ability of the Company's customers to use coal. New legislation, regulations or
orders may also require the Company to incur increased costs or to change
operations significantly. These factors could have a material adverse effect on
the Company's business, results of operations and financial condition.
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The federal Clean Air Act requires utilities that currently are major sources of
nitrous oxide in moderate or higher ozone non-attainment areas to install
reasonably available control technology ("RACT") for nitrous oxide. In addition,
stricter ozone standards are expected to be implemented by the EPA by 2003. The
Ozone Transport Assessment Group ("OTAG") was formed to make recommendations to
the EPA for addressing ozone problems in the eastern United States. Based on
OTAG's recommendations, the EPA announced a proposal that would require
twenty-two eastern states, including states in which many of the Company's
customers are located, to make substantial reductions in nitrous oxide
emissions. The EPA expects that states will achieve these reductions by
requiring power plants to reduce their nitrous oxide emissions by an average of
85%. Installation of RACT and additional control measures required under the
proposal will make it more costly to operate coal-fired utility power plants
and, depending on the requirements of individual state attainment plans and the
development of revised new source performance standards, could make coal a less
attractive fuel alternative in the planning and building of utility power plants
in the future.
Any reduction in coal's share of the capacity for power generation could have a
material adverse effect on the Company's financial condition and results of
operations. The effect of such legislation or regulation, or other legislation
that may be enacted in the future, on the coal industry in general and on the
Company in particular cannot be predicted with certainty. Although a large
portion of the Company's coal reserves are comprised of compliance and
low-sulfur coal, there can be no assurance that the implementation of the Clean
Air Act or any future regulatory provisions will not materially adversely affect
the Company.
On December 11, 1997, U.S. government representatives at the climate change
negotiations in Kyoto, Japan, agreed to reduce the emissions of greenhouse gases
(including carbon dioxide and other gas emissions that are believed to be
trapping heat in the atmosphere and warming the earth's climate) in the United
States. The U.S. adoption of the requirements of the Kyoto protocol is subject
to conditions which may not occur and is also subject to the protocol's
ratification by the U.S. Senate. The U.S. Senate has indicated that it will not
ratify an agreement unless certain conditions, not currently provided for in the
Kyoto protocol, are met. At present, it is not possible to predict whether the
Kyoto protocol will attain the force of law in the United States or what its
impact would be on the Company. Further developments in connection with the
Kyoto protocol could adversely affect the Company's financial condition and
results of operations.
Reserve Degradation and Depletion
The Company's profitability depends substantially on its ability to mine coal
reserves that have the geologic characteristics that enable them to be mined at
competitive costs. There can be no assurance that replacement reserves,
particularly in central Appalachia, will be available when required or, if
available, that such replacement reserves can be mined at costs comparable to
those characteristic of the depleting mines. Exhaustion of reserves at
particular mines can also have an adverse effect on operating results that is
disproportionate to the percentage of overall production and operating income
represented by such mines. Mingo Logan's Mountaineer Mine is estimated to
exhaust its longwall mineable reserves in 2002. The Mountaineer Mine generated
$35.0 million of the Company's total operating income for the six months ended
June 30, 1999.
Reliance on and Terms of Long-Term Coal Supply Contracts
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 due to the 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 customer's requirements, which are subject to
change as a result of factors beyond the Company's (and in certain instances the
customer's) control, including utility deregulation. In addition, certain 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. The Company has from time to time renegotiated
contracts after execution to extend the 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 and force majeure
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provisions allowing suspension of performance or termination by the parties
during the duration of certain events beyond the control of the affected party.
Contracts occasionally include provisions that permit a 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 a similar or higher 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.
Although the Company cannot predict changes in its costs of production and coal
prices with certainty, the Company 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 short terms of sales contracts and the
consequent absence of price adjustment provisions in such contracts also make it
more likely that inflation related increases in mining costs during the contract
term will not be recovered by the Company through a later price adjustment.
Potential Fluctuations in Operating Results; Seasonality
The Company may experience significant fluctuations in operating results in the
future, both on an annual and quarterly basis, as a result of one or more
factors beyond its control, including expiration or termination of, or sales
price redeterminations or suspensions of deliveries under, coal supply
agreements; disruption of transportation services; changes in mine operating
conditions; changes in laws or regulations, including permitting requirements;
unexpected results in litigation; work stoppages or other labor difficulties;
competitive and overall coal market conditions; and general economic conditions.
The Company's mining operations are also subject to factors beyond its control
that can negatively or positively affect the level of production and thus the
cost of mining at particular mines for varying lengths of time. These factors
include weather conditions, equipment replacement and repair requirements;
variations in coal seam thickness, amount of overburden, rock and other natural
materials; and other surface or subsurface conditions. Such production factors
frequently result in significant fluctuations in operating results.
Third quarter results of operations are frequently adversely affected by lower
production and resultant higher costs due to scheduled vacation periods at the
majority of the Company's mines. In addition, costs are typically somewhat
higher during vacation periods because of maintenance activity carried on during
those periods. These adverse effects may prevent the third quarter from being
comparable to the other quarters and also prevent the third quarter results from
being indicative of results to be expected for the full year.
Certain Contractual Arrangements
Arch Western Resources, LLC ("Arch Western") owns the coal reserves and
operating assets acquired in the Arch Western transaction. The Limited Liability
Company Agreement pursuant to which Arch Western was formed provides that a
subsidiary of the Company, as the managing member of Arch Western, generally has
exclusive power and authority to conduct, manage and control the business of
Arch Western. However, if Arch Western at the time has a debt rating less
favorable than Ba3 from Moody's Investors Service or BB- from Standard & Poors
Ratings Group or does not meet certain specified indebtedness and interest
coverage ratios, then a proposal that Arch Western make certain distributions,
incur indebtedness, sell properties or merge or consolidate with any other
person would require the consent of all the members of Arch Western.
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In connection with the Arch Western transaction, the Company entered into an
agreement pursuant to which the Company agreed to indemnify another member of
Arch Western against certain tax liabilities in the event that such liabilities
arise as a result of certain actions taken prior to June 1, 2013, including the
sale or other disposition of certain properties of Arch Western, the repurchase
of certain equity interests in Arch Western by Arch Western or the reduction
under certain circumstances of indebtedness incurred by Arch Western in
connection with the Arch Western transaction. Depending on the time at which any
such indemnification obligation were to arise, it could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
The membership interests in Canyon Fuel are owned 65% by Arch Western and 35% by
a subsidiary of ITOCHU Corporation, a Japanese corporation. The agreement which
governs the management and operations of Canyon Fuel provides for a Management
Board to manage its business and affairs. Generally, the Management Board acts
by affirmative vote of the representatives of the members holding more than 50%
of the membership interests. However, certain actions require either the
unanimous approval of the members or the approval of representatives of members
holding more than 70% of the membership interests. The Canyon Fuel agreement
also contains various restrictions on the transfer of membership interests in
Canyon Fuel.
Ashland Inc. ("Ashland") currently owns approximately 58% of the Company's
outstanding common stock. Pursuant to a stockholders agreement among the
Company, Ashland and Carboex S.A. ("Carboex"), the Company has agreed to
nominate for election as a director of the Company, a person designated by
Carboex, and Ashland has agreed to vote its shares of common stock in a manner
sufficient to cause the election of such nominee, in each case for so long
(subject to earlier termination in certain circumstances) as shares of common
stock owned by Carboex represent at least 63% of the shares of common stock
acquired by Carboex in the Company's merger with Ashland's subsidiary, Ashland
Coal, Inc. In addition, for so long as the various trusts for the benefit of
descendants of H.L. and Lyda Hunt and various corporations owned by trusts for
the benefit of descendants of H.L. and Lyda Hunt (collectively the "Hunt
Entities") have the collective voting power to elect by cumulative voting one or
more persons to serve on the Board of Directors of the Company, the Company has
agreed to nominate for election as directors of the Company that number of
persons designated by certain of the Hunt Entities that could be elected to the
Board by the Hunt Entities by exercise of such cumulative voting power.
The Company's Restated Certificate of Incorporation requires the affirmative
vote of the holders of at least two-thirds of outstanding common stock voting
thereon to approve a merger or consolidation and certain other fundamental
actions involving or affecting control of the Company. The Company's Bylaws
require the affirmative vote of at least two-thirds of the members of the Board
of Directors of the Company in order to declare dividends and to authorize
certain other actions.
Transportation
The coal industry depends on rail, trucking and barge transportation to deliver
shipments of coal to customers. Disruption of these transportation services
could temporarily impair the Company's ability to supply coal to its customers
and thus adversely affect the Company's business and operating results. In
addition, transportation costs are a significant component of the total cost of
supplying coal to customers and can affect significantly a coal producer's
competitive position and profitability. Increases in the Company's
transportation costs, or changes in such costs relative to transportation costs
incurred by providers of competing coal or of other fuels, could have an adverse
effect on the Company's business and results of operations.
Importance of Acquisitions and Related Risks
The Company has grown, in part, through the acquisition of coal companies, coal
properties, coal leases and related assets, and management believes that such
acquisitions will continue to be important to the Company. Acquisitions involve
a number of special risks, including diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities and difficulties in the assimilation of the operations of
the acquired companies, some or all of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will be successful in the
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development of such acquisitions or that acquired operations will achieve
anticipated benefits to the Company.
Reliance on Estimates of Reserves; Title
There are numerous uncertainties inherent in estimating quantities of
recoverable reserves, including many factors beyond the control of the Company.
Estimates of economically recoverable coal reserves and net cash flows
necessarily depend upon the number of variable factors and assumptions, such as
geological and mining conditions (which may not be fully identified by available
exploration data and/or differ from experience in current operations),
historical production from the area compared with production from other
producing areas, the assumed effects of regulation by governmental agencies and
assumptions concerning coal prices, operating costs, severance and excise taxes,
development costs and reclamation costs, all of which may cause estimates to
vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of net cash flows expected therefrom prepared by different engineers
or by the same engineers at different times may vary substantially. Actual coal
tonnage recovered from identified reserve areas or properties and revenues and
expenditures with respect to the Company's reserves may vary from estimates, and
such variances may be material. No assurance can be given that these estimates
are an accurate reflection of the Company's actual reserves.
The Company's mining operations are conducted on properties owned or leased by
the Company. The loss of any lease could adversely affect the Company's ability
to develop the applicable reserves. Because title to most of the Company's
leased properties and mineral rights is not usually verified until a commitment
is made by the Company to develop a property, which may not occur until after
the Company has obtained necessary permits and completed exploration of the
property, the Company's right to mine certain of its reserves may be adversely
affected if defects in title or boundaries exist. In addition, there can be no
assurance that the Company can successfully negotiate new leases or mining
contracts for properties containing additional reserves or maintain its
leasehold interests in properties on which mining operations are not commenced
during the term of the lease.
Management of Growth
As a result of the Arch Western transaction, the Company has experienced rapid
growth that has placed and is expected to continue to place a significant strain
on its management, operations and other resources. The future success of the
Company will depend in part on its ability to successfully integrate the Arch
Western operations and to attract and retain qualified personnel. The failure to
obtain needed personnel or to implement management, operating or financial
systems necessary to successfully integrate acquired operations or otherwise
manage growth when and as needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
Year 2000 Readiness Disclosure
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 may simply cause the program or microprocessor to send
errant commands or cease functioning.
Assessment/Remediation Plan - The Company began its assessment of its exposure
to the Year 2000 problem prior to the Company's merger with Ashland Coal, Inc.
in June 1997 when, in connection with the necessary integration of the 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 the merger, and
essentially required 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 Arch Western transaction.
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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 in March 1999, the Company began rolling out a new
Oracle Payroll System to its individual mines. The Company anticipates that the
payroll system will be implemented at all locations by November 30, 1999. The
Company began 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 of the Company's
mining locations is November 1, 1999. All desktop computers, network devices and
related software are being tested and are being replaced if there is a Year 2000
problem. The Company standardized on Windows 95, Office 95, and NT file/printer
servers, effective in October 1998.
In late 1997, the Company 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. The
effort to identify potential Year 2000 problems within its mining and processing
equipment and in its interfaces with third parties has been completed. The
Company has contacted key customers, financial institutions, vendors,
manufacturers, transportation companies and others with which the Company
conducts business which, if interrupted, could have a material adverse affect on
the Company, and the Company plans to make cost effective efforts to remediate
or minimize possible Year 2000 problems.
Assuming the cooperation of third parties in connection with the Company's Year
2000 efforts, the Company believes that it will be able to complete its
remediation of Year 2000 problems within its mining and processing equipment and
within such third party systems and processes sufficiently in advance of January
1, 2000, where such measures are possible and cost effective. The Company is in
the process of remediating identified problems and has targeted November 1, 1999
for completion.
Costs of Plan - To date, the Company has expended approximately $8.5 million of
the total estimated $10.5 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.
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 depends 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 the Company 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 correct.
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 the possibility that any of its multitude of
sampling, processing and loading equipment at its mines, loadouts and terminals
would cease to function as a result of a processing error not identified and/or
corrected in the Company's assessment and 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.
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Contingency Plans - The Company has developed contingency plans for key
internal projects that, if delayed, could prevent certain mine operations from
gaining access to Year 2000-compliant systems. With respect to Year 2000
compliance by the Company's third party service providers (financial
institutions, transportation carriers, vendors/suppliers), the Company will
continue to monitor them for Year 2000 compliance. Any new information that may
change their Year 2000 status will be assessed and appropriate action will be
taken where cost effective alternatives are available.
Factors Routinely Affecting Results of Operations
Any one or a combination of the following factors may occur at times or in a
manner that causes results of the Company's operations to deviate from
expectations: changing demand; fluctuating selling prices; contract penalties,
suspensions or terminations; operational, geologic, transportation and
weather-related factors; unexpected regulatory changes; results of litigation;
or labor disruptions. Any event disrupting substantially all production at any
of the Company's principal mines for a prolonged period would have a material
adverse effect on the Company's current and projected results of operations. The
effect of such a disruption at the 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 information required by this Item is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report and is incorporated herein by reference.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is contained in the second through
eleventh paragraphs of the "Contingencies-Legal Contingencies" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report and is 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 9, 1999, 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, 1999, filed May 14, 1999 with the Securities and
Exchange Commission.
ITEM 5. OTHER INFORMATION
Stockholders of the Company may present proposals for consideration at the 2000
Annual Meeting of Stockholders by following the procedures outlined in Rule
14a-8 of the Securities Exchange Act of 1934 and the Company's Bylaws. Proposals
of stockholders which are the proper subject for inclusion in the Proxy
Statement and for consideration at the 2000 Annual Meeting must be received by
the Company's Corporate Secretary no later than November 13, 1999, in order to
be included in the Company's Proxy Statement and form of proxy card.
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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)
2.2 Contribution Agreement among Arch Coal, Inc., 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 Company's Current Report on Form 8-K filed
June 15, 1998)
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.2 of the Company's Registration Statement
on Form S-4 (Registration No. 333-28149) filed on May 30, 1997)
3.2 Restated and Amended Bylaws of Arch Coal, Inc. (incorporated herein by
reference to Exhibit 3.4 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Coal, Inc. (formerly Arch
Mineral Corporation) (incorporated herein by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)
4.2 Assignment of Rights, Obligations and Liabilities under the Stockholders
Agreement between Carboex International, Limited and Carboex, S.A.
effective as of October 15, 1998 (incorporated herein by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998)
4.3 Registration Rights Agreement, dated as of April 4, 1997, among Arch Coal,
Inc. (formerly 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 of the Company's
Registration Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997, except for amended Schedule I thereto, incorporated herein by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 1998)
4.4 Assignment of Registration Rights between Carboex International, Limited
and Carboex, S.A. effective as of October 15, 1998 (incorporated herein by
reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1998)
4.5 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997,
among Carboex International, Ltd., Ashland Inc., Ashland Coal, Inc. and
Arch Coal, Inc. (formerly Arch Mineral Corporation) (incorporated herein by
reference to Exhibit 4.3 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
4.6 Assignment of Right to Maintain a Non-Voting Observer at Meetings of the
Board of Directors of Arch Coal, Inc. between Carboex International,
Limited and Carboex, S.A. effective as of October 15, 1998 (incorporated
herein by reference to Exhibit 4.6 of the Company's Annual Report on Form
10-K for the Year Ended December 31, 1998)
4.7 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 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
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4.8 $600,000,000 Revolving Credit Facility, $300,000,000 Term Loan Credit
Agreement by and among Arch Coal, Inc., the Lenders 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 of the Company's Current Report on Form 8-K filed
June 15, 1998)
4.9 $675,000,000 Term Loan Credit Agreement by and among Arch Western Resources
LLC, the Banks 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 of the
Company's Current Report on Form 8-K filed June 15, 1998)
4.10 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
of the Company's Current Report on Form 8-K filed June 15, 1998)
4.11 Lease Intended as Security dated as of January 15, 1998, among Apogee Coal
Company, Catenary Coal Company and Hobet Mining, Inc., as Lessees; The
First Security Bank, National Association, as Lessor, and the Certificate
Purchasers named therein. (incorporated herein by reference to Exhibit 4.5
of the Company's Annual Report on Form 10-K for the Year Ended December 31,
1997)
18 Preferability Letter of Ernst & Young LLP dated May 11, 1999 (incorporated
herein by reference to Exhibit 18 of the Company's Quarterly Report on Form
10-Q for the Quarter Ended March 31, 1999)
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated June 25, 1999 (reporting the Company's comments
on Ashland Inc.'s decision to explore strategic alternatives for its
investment in the Company) was filed during the period covered by this
report and up to and including the date of filing of this report.
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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 12, 1999 /s/ John W. Lorson
-------------------
John W. Lorson
Controller
(Chief Accounting Officer)
Date: August 12, 1999 /s/ Jeffry N. Quinn
--------------------
Jeffry N. Quinn
Senior Vice President,
General Counsel and Secretary
(Duly Authorized Officer)
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Arch Coal, Inc.
Form 10-Q for Quarter Ended June 30, 1999
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 of the Company's Current Report on Form 8-K filed June 15,
1998)
2.2 Contribution Agreement among Arch Coal, Inc., 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 Company's Current Report on Form 8-K filed
June 15, 1998)
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.2 of the Company's Registration Statement
on Form S-4 (Registration No. 333-28149) filed on May 30, 1997)
3.2 Restated and Amended Bylaws of Arch Coal, Inc. (incorporated herein by
reference to Exhibit 3.4 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Coal, Inc. (formerly Arch
Mineral Corporation) (incorporated herein by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)
4.2 Assignment of Rights, Obligations and Liabilities under the Stockholders
Agreement between Carboex International, Limited and Carboex, S.A.
effective as of October 15, 1998 (incorporated herein by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998)
4.3 Registration Rights Agreement, dated as of April 4, 1997, among Arch Coal,
Inc. (formerly 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 of the Company's
Registration Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997, except for amended Schedule I thereto, incorporated herein by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 1998)
4.4 Assignment of Registration Rights between Carboex International, Limited
and Carboex, S.A. effective as of October 15, 1998 (incorporated herein by
reference to Exhibit 4.4 of the Company's Annual Report on Form 10- K for
the Year Ended December 31, 1998)
4.5 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997,
among Carboex International, Ltd., Ashland Inc., Ashland Coal, Inc. and
Arch Coal, Inc. (formerly Arch Mineral Corporation) (incorporated herein by
reference to Exhibit 4.3 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
4.6 Assignment of Right to Maintain a Non-Voting Observer at Meetings of the
Board of Directors of Arch Coal, Inc. between Carboex International,
Limited and Carboex, S.A. effective as of October 15, 1998 (incorporated
herein by reference to Exhibit 4.6 of the Company's Annual Report on Form
10-K for the Year Ended December 31, 1998)
4.7 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
1
<PAGE>
of the Company's Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)
4.8 $600,000,000 Revolving Credit Facility, $300,000,000 Term Loan Credit
Agreement by and among Arch Coal, Inc., the Lenders 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 of the Company's Current Report on Form 8-K filed
June 15, 1998)
4.9 $675,000,000 Term Loan Credit Agreement by and among Arch Western Resources
LLC, the Banks 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 of the
Company's Current Report on Form 8-K filed June 15, 1998)
4.10 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
of the Company's Current Report on Form 8-K filed June 15, 1998)
4.11 Lease Intended as Security dated as of January 15, 1998, among Apogee Coal
Company, Catenary Coal Company and Hobet Mining, Inc., as Lessees; The
First Security Bank, National Association, as Lessor, and the Certificate
Purchasers named therein. (incorporated herein by reference to Exhibit 4.5
of the Company's Annual Report on Form 10-K for the Year Ended December 31,
1997)
18 Preferability Letter of Ernst & Young LLP dated May 11, 1999 (incorporated
herein by reference to Exhibit 18 of the Company's Quarterly Report on Form
10-Q for the Quarter Ended March 31, 1999)
27 Financial Data Schedule
2
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,040
<SECURITIES> 0
<RECEIVABLES> 213,637
<ALLOWANCES> 0
<INVENTORY> 80,344
<CURRENT-ASSETS> 333,322
<PP&E> 2,682,084
<DEPRECIATION> 795,835
<TOTAL-ASSETS> 2,792,164
<CURRENT-LIABILITIES> 317,923
<BONDS> 0
0
0
<COMMON> 397
<OTHER-SE> 600,068
<TOTAL-LIABILITY-AND-EQUITY> 2,792,164
<SALES> 785,682
<TOTAL-REVENUES> 812,418
<CGS> 727,457
<TOTAL-COSTS> 777,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,706
<INCOME-PRETAX> (11,321)
<INCOME-TAX> 11,400
<INCOME-CONTINUING> 79
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,813
<NET-INCOME> 3,892
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
