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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998 COMMISSION FILE NUMBER: 1-13105
ARCH COAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 43-0921172
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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CITYPLACE ONE, SUITE 300, ST. LOUIS, MO 63141
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 994-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any amendment to this form 10-K. [X]
At February 26, 1999, based on the closing price of the registrant's common
stock on the New York Stock Exchange on that date, the aggregate market value of
the voting stock held by non-affiliates of the registrant was approximately
$138,166,273. In determining this figure, the registrant has assumed that all of
its executive officers and directors, and persons known to it to be the
beneficial owners of more than five percent of its common stock are affiliates.
Such assumption shall not be deemed conclusive for any other purpose.
At February 26, 1999, there were 38,667,981 shares of the registrant's
common stock outstanding.
Documents incorporated by reference:
1. Portions of the registrant's definitive proxy statement, to be filed with the
Securities and Exchange Commission no later than March 12, 1999 are
incorporated by reference into Part III of this Form 10-K.
2. Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated by reference into Parts II and IV of this
Form 10-K.
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TABLE OF CONTENTS
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PART I........................................................................ 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 10
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II....................................................................... 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 13
ITEM 6. SELECTED FINANCIAL DATA..................................... 14
ITEM 7...... MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 14
ITEM 9...... CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 14
PART III...................................................................... 14
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 14
ITEM 11. EXECUTIVE COMPENSATION...................................... 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 15
PART IV....................................................................... 15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 15
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PART I
ITEM 1. BUSINESS
GENERAL
Arch Coal, Inc. ("Arch Coal" or the "Company") is the second largest coal
producer in the United States. The Company mines, processes and markets
primarily compliance and low-sulfur coal from 40 surface, underground and auger
mines located in western, central Appalachian, and midwestern United States coal
fields. Compliance and low-sulfur coal are types of coal that, when burned, emit
1.2 pounds and 1.6 pounds or less of sulfur dioxide per million Btu,
respectively. As of December 31, 1998, the Company controlled approximately 3.7
billion tons of measured and indicated coal reserves, of which approximately 1.9
billion tons were located in coal fields in the western United States, 1.4
billion tons were located in coal fields in central Appalachia, and the
remainder in midwestern coal fields.
On June 1, 1998, Arch Western Resources, LLC ("Arch Western"), in which the
Company owns a 99% membership interest, acquired the United States coal
operations of Atlantic Richfield Company (the "Arch Western transaction"). The
principal operating units of Arch Western are Thunder Basin Coal Company,
L.L.C., which operates the Black Thunder and Coal Creek mines in the Southern
Powder River Basin in Wyoming; Mountain Coal Company, L.L.C., which operates the
West Elk mine in Colorado; Canyon Fuel Company, LLC ("Canyon Fuel"), which
operates three mines in Utah; and Arch of Wyoming, LLC, which operates two coal
mines in the Carbon Basin of Wyoming. Arch Western owns a 65% membership
interest in Canyon Fuel, with the remaining 35% membership interest owned by a
subsidiary of ITOCHU Corporation of Japan.
The Company and its operating subsidiaries (but not including Canyon Fuel
as Arch Coal accounts for its interest in Canyon Fuel using the equity method)
sold approximately 81.1 million tons of coal in 1998, 75.8 million tons of which
were produced by the Company and the balance of which was purchased for resale.
Approximately 76% of this tonnage was sold under long-term contracts (contracts
having a term greater than one year) and the balance was sold on the spot market
(contracts having a term of one year or less). Approximately 78% of 1998 total
revenues were derived from sales of coal under long-term contracts. Sales of
metallurgical coal in 1998 totaled 2.8 million tons, or approximately 5% of the
Company's 1998 coal sales. In 1998, sales of coal in the export market totaled
approximately 3.7 million tons. Sales of steam coal accounted for approximately
60% of these export sales, while the balance of export sales consisted of sales
of metallurgical coal.
RECENT DEVELOPMENTS
The Company previously announced that during 1999 it will consider
divestiture of non-core and under-performing assets. In this regard, on March 2,
1999, the Company announced its intention to explore the potential disposition
of its Coal-Mac (Kentucky), Lone Mountain and Pardee mining operations. These
operations collectively contributed approximately 9.7% and 1% of the Company's
total revenues and operating profit, respectively, for 1998. For additional
information relating to these mining operations, see the information contained
in the table on page 6. The Company intends to use the proceeds of any
disposition to reduce debt, fund purchases under the Company's share repurchase
program and to fund capital expenditures at its other operations. 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.
On February 3, 1999, the United States District Court for the Southern
District of West Virginia entered a temporary restraining order enjoining the
U.S. Army Corps of Engineers from issuing a Section 404 permit needed for a new
area at the Company's Dal-Tex mine. The temporary restraining order was
subsequently extended until March 5, 1999. At the time the temporary restraining
order was first entered, the court also began hearings on a motion for a
preliminary injunction. The hearing concluded on February 26, 1999 and the
Company expects a ruling on the preliminary injunction motion prior to the
expiration of the temporary restraining order. See Item 3. "Legal Proceedings".
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On January 20, 1999, Canyon Fuel amended the coal supply agreements
pursuant to which it supplied coal to the Intermountain Power Agency's
Intermountain Power Project ("IPA"). Pursuant to the amended coal supply
agreements, Canyon Fuel will supply coal to IPA through 2010 with a mutual
option to extend 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 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. This transaction will be accounted for in connection with
the purchase price accounting for the Arch Western transaction and, therefore,
no gain or loss will be recognized.
BUSINESS ENVIRONMENT
Demand for Coal. Production of coal in the United States has increased
almost three-fold since 1960 and today, coal generates 57% of the electricity
consumed in the United States. This represents a 24% increase in market share
over competing energy sources during the last 20 years. Coal attained this
market share because of its relatively low cost and its availability throughout
the United States. On an average, all-in cost per megawatt-hour ("MWh") basis,
coal-fired generation is substantially less expensive than electricity generated
from natural gas, oil or nuclear power. Hydroelectric power is inexpensive but
is limited geographically and there are few suitable sites for new hydroelectric
power dams. Consequently, in recent years nearly 90% of domestic coal production
has been consumed by electric utilities. In addition to the relative
competitiveness of coal-fired generation plants, coal consumption patterns are
also influenced by the demand for electricity, governmental regulation impacting
coal production and power generation, technological developments and the
location, availability, and quality of competing sources of coal, as well as
alternative fuels (natural gas, oil and nuclear) and alternative energy sources
(hydroelectric).
Long-term demand for electric power will depend on a variety of economic,
regulatory, technological and climatic factors beyond the Company's control.
Historically, domestic demand for electric power has generally increased as the
U.S. economy has grown. Recently, two important regulatory initiatives, one
designed to increase competition among utilities and lower the cost of
electricity for consumers (see "Electricity Utility Deregulation," below), and
another to improve air quality by reducing the level of sulfur emitted from
coal-burning power generation plants (see "Clean Air Act Amendments," below),
have had and are expected to continue to have significant effects on the
electric utility industry and its coal suppliers.
Electric Utility Deregulation. Electric utility deregulation is expected to
cause utilities to focus even more on minimizing their fuel costs and has caused
electric utilities to be more aggressive in negotiating prices with coal
suppliers and to be more willing to switch to alternative coals. To the extent
utility deregulation affects the Company's customers, the Company believes some
aspects of deregulation may adversely affect the Company's business and
operating results while other aspects of deregulation may have a positive
effect. Deregulation should result in increased utilization of low cost
coal-fired generating plants, but at the same time there will be increased price
pressure on coal producers since fuel costs account for a high percentage of the
cost of operating a generating plant.
Clean Air Act Amendments. A major regulatory change affecting the coal
industry is Title IV of the Clean Air Act Amendments (the "Amendments") enacted
in 1990. The Amendments have had, and will continue to have, a significant
effect on the domestic coal industry. In general, Phase I of the Amendments,
which became effective in 1995, regulates the level of emissions of sulfur
dioxide from power plants and targets the highest sulfur dioxide emitters. Phase
II, to be implemented in 2000, will extend the restrictions of the Amendments to
all power plants of greater than 75 megawatt capacity. The Amendments do not
define allowable emission levels on a per plant basis, but instead allocate
emission allowances to the affected plants
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and allow the emission allowances to be traded so that market participants can
fashion more efficient and flexible compliance strategies. The emission
allowance allocations for Phase I units were based on 2.5 pounds of sulfur
dioxide per million Btus and Phase II allocations will be based on 1.2 pounds of
sulfur dioxide per million Btus.
It was generally anticipated that Phase I of the Amendments would increase
prices for low-sulfur coal. This effect did not materialize, primarily because
of increased investment in low-sulfur production capacity and related
transportation facilities in the western United States, and to a lesser degree
in central Appalachia, in reaction to the anticipated price increase. When the
Amendments were enacted, many plants switched to low-sulfur coal supplied from
the Powder River Basin, located predominantly in Wyoming. This compliance
strategy generated an unexpectedly large number of emission allowances. Some of
these emission allowances were marketed together with higher sulfur coal and
sold in competition with lower-sulfur production. The Company believes that
these factors reduced or capped the anticipated price increase for low-sulfur
coal in Phase I.
The Company believes that a price premium for low-sulfur coal is more
likely to develop during Phase II because additional coal-burning electric power
plants will be affected by Phase II. However, this price premium is not expected
to develop until well into Phase II, after the large bank of Phase I emissions
allowances has been reduced and before utilities electing to comply with Phase
II by installing so-called "scrubber" sulfur-reduction technologies are able to
implement this compliance strategy. The Company does not believe that compliance
strategies utilizing scrubbers will result in significant downward pressure on
compliance coal prices during initial phases of Phase II. However, if the prices
of compliance coal and/or emission allowances rise, scrubber compliance
strategies may become more competitive. The expected reduction of the existing
bank of emission allowances during Phase II should also help to rationalize the
market for compliance coal in the long term to the extent utilities are unable
to utilize strategies to create a new bank of emission allowances.
Industry Competition, Market Prices and the Cost of Production. Even
assuming that Clean Air Act Phase II requirements and electric utility
deregulation will strengthen demand for low-sulfur coal, the Company still faces
substantial competition from other coal producers with excess supply. The coal
industry has historically been prone to oversupply situations as there have been
few barriers to entry. At the same time, profit margins from remaining
above-market contracts, coupled with high exit costs in the form of
environmental and employee-related liabilities, have encouraged the perpetuation
of marginal operations.
The price at which the Company's production can be sold is dependent upon
many factors, many of which are beyond the Company's control. The Company sells
coal under long-term contracts and on the spot market. Generally, the relative
competitiveness of coal vis-a-vis other fuels or other coals is evaluated on a
delivered cost per heating value unit basis. See "Sales and Marketing." In
addition to competition from other fuels, coal quality, the marginal cost of
producing coal in various regions of the country and transportation cost are
major determinants of the price for which the Company's production can be sold.
Coal production costs vary widely depending upon the region in which the coal is
produced. Factors that directly influence production cost, include geological
characteristics (including seam thickness), overburden ratios, depth of
underground reserves and transportation costs. Western coal is relatively
inexpensive to mine because the seams are thick and typically close to the
surface. As a result, open-cast mining methods are used. The large capital costs
associated with dragline mining and truck and shovel mining are amortized over a
relatively large amount of coal produced. Western mines are also highly
productive and labor is a much smaller component of the cost structure. Eastern
coal is more expensive to mine than western coal because there is a high
percentage of underground coal in the east and eastern surface coal tends to
have thinner coal seams. Additionally, underground mining has higher labor
(including reserves for future costs associated with labor benefits and health
care) and capital (including modern mining equipment and construction of
extensive ventilation systems) costs than those of surface mining. In recent
years, increased development of large surface mining operations, particularly in
the western United States, and more efficient mining equipment and techniques,
have contributed to the excess coal production capacity in the United States.
Competition resulting from excess capacity encourages producers to reduce prices
and to pass productivity gains through to customers.
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The lower production cost in the western mines is offset somewhat by the higher
quality of many eastern coals and higher transportation cost to many coal-fired
power plants in the country.
Demand for the Company's low-sulfur coal and the prices that the Company
will be able to obtain for it will also be affected by the price and
availability of high-sulfur coal, which can be marketed in tandem with emissions
allowances. Intraregional and interregional competition is keen as producers
seek to position themselves as the low-cost producer and supplier of high-demand
product to electric power utilities.
Transportation of Coal. Transportation costs are another fundamental factor
affecting coal industry competition, particularly interregional competition.
Nearly 80% of coal deliveries to utilities are made by rail. Coordination of the
many eastern loadouts, the large number of small shipments, terrain and labor
issues all combine to make shipments originating in the eastern United States
inherently more expensive on a per-mile basis than shipments originating in the
western United States. Historically, coal transportation rates from the Powder
River Basin into central Appalachian markets limited the use of Powder River
Basin coal in those markets. More recently, lower rail rates from the Powder
River Basin to markets served by eastern producers have created major
competitive challenges for eastern producers.
Barge transportation is the lowest-cost method of transporting coal long
distances in the eastern United States and the large numbers of eastern
producers with river access keep coal prices very competitive for river
shipments. The Company believes that many utilities with plants located on the
Ohio River system are well positioned for deregulation as competition for river
shipments should remain high for central Appalachian coal. With close proximity
to competitively-priced central Appalachian coal and the ability to receive
western coals, the Company believes utilities with plants located on the Ohio
River system will become price setters in a deregulated environment. The ability
of these utilities to blend western and eastern coals will also create a new,
dynamic fuel procurement environment that could place western and eastern coals
in even greater competition and limit rail price premiums. River transport is an
important transportation option not available to Powder River Basin producers
between Wyoming and midwestern river terminals.
Railroads move more coal than any other commodity, and in 1996 coal
accounted for 22% of total U.S. rail freight revenue and 44% of total freight
tonnage. Most coal mines are served by a single rail company, but much of the
Powder River Basin mines are served by two competing rail carriers. Rail
competition in this producing region is important, since rail costs constitute
up to 75% of the delivered cost of Powder River Basin coal in remote markets.
Although undergoing significant consolidation, the coal industry in the
United States remains highly fragmented. There can be no assurance that the
Company's costs will permit it to compete effectively with other producers
seeking to provide coal to a customer. To prosper in the business environment
described above, a coal producer must be able to maintain low production costs,
offer a variety of products and have access to multiple transportation systems.
SALES AND MARKETING
The Company sells coal under long-term contracts (contracts having a term
of greater than 12 months) as well as on a current market, or spot, basis. When
the Company's coal sales contracts expire, the Company is exposed to the risk of
having to sell coal into the spot market, where demand is variable and prices
are therefore subject to greater volatility. Historically, the price of coal
sold pursuant to contracts exceeded then prevailing spot prices for coal.
However, in the past several years new contracts have been priced at or near
existing spot rates.
The terms of coal sales contracts result from bidding and extensive
negotiations with customers. Consequently, the terms of such contracts vary
significantly in many respects, including price adjustment features, price
reopener terms, coal quality requirements, quantity parameters, flexibility and
adjustment mechanisms, permitted sources of supply, treatment of environmental
constraints, options to extend, and force majeure, termination and assignment
provisions.
Frequently, base prices are set at the beginning of the term of a contract
and are then adjusted at intervals for changes due to inflation or deflation
and, in many cases, changes in costs such as taxes, reclamation fees,
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black lung charges and royalties. The inflation or deflation adjustments are
measured by public indices, the most common of which is the implicit price
deflator for the gross domestic product as published by the United States
Department of Commerce. The base price is also often adjusted to a market price
which is either negotiated or determined in a predetermined manner when there is
a price reopener.
Price reopeners are present in many of the more recently executed long-term
contracts and usually occur periodically midway through the term of a contract.
Reopeners typically allow the contract price to be renegotiated in order to be
in line with the then-prevailing market price. In some circumstances, customers
have the option to terminate the contract if the parties do not agree on a new
price. The length of sales contracts has decreased significantly over the last
few years as electricity generators have prepared for federal Clean Air Act
requirements and the impending deregulation of their industry.
Quality and volumes for the coal are stipulated in coal sales contracts,
although customers normally have the option to vary volume to some limited
extent. Variations in the quality and volumes of coal may lead to adjustments in
the contract price. Coal sales contracts typically stipulate procedures for
quality control, sampling and weighing.
Contract provisions in some cases specify how coal will be supplied in the
event of a force majeure, including such events as strikes, adverse mining
conditions, serious transportation problems or, in certain instances, changes in
laws. More recent contracts stipulate that this tonnage can be made up by mutual
agreement or at the discretion of the customer. Coal sales contracts typically
contain termination clauses if either party fails to comply with the terms and
conditions of the contract.
In certain contracts, the Company has a right of substitution, allowing it
to provide coal from different mines as long as it is of a certain specified
quality and will be sold at the same delivered cost.
There are certain contracting terms that differ between a standard "eastern
U.S." contract and a standard "western U.S." contract. In the eastern United
States, many customers require that the coal be sampled and weighed at the
destination whereas in the western United States samples are still taken at the
source. More eastern United States coal is purchased on the spot market. The
eastern United States market has traditionally been a more short-term market
because of the larger number of smaller mining operations in that region.
Western U.S. contracts normally stipulate that certain production taxes and coal
royalties be reimbursed in full by the buyer rather than being a pricing
component within the contract. These items are a significant portion of western
U.S. coal pricing.
Another factor that may impact the sale of coal in the future is the
development of coal commodity trading. The New York Mercantile Exchange
initiated electricity commodity trading a few years ago and has been developing
standards for coal contracts. It has announced its intention to initiate coal
contract trading in the summer of 1999, based on a Huntington, West Virginia
hub. The development of the standards to determine price has been difficult
because of the non-homogeneous character of coal and diversity in mining
locations, conditions and operations. Nonetheless, in anticipation of commodity
trading, some brokerage and marketing firms have entered the coal markets and
devised transactions that mimic commodity activity. The financial markets will
provide sellers and buyers with more commonly used hedging tools such as put and
call options. The trend to more commodity type transactions could mark a
significant change in how coal is sold. It is too early to determine whether
this trend will have a material effect on the Company and its operating results.
RELIANCE ON MAJOR CUSTOMERS
The Company's total sales to American Electric Power Company, Inc. ("AEP")
and Southern Company and their respective affiliates accounted for approximately
13.0% and 11.3%, respectively, of the Company's total revenues in 1998. AEP and
Southern Company and/or their affiliates each currently has multiple long-term
contracts with the Company. If the Company experienced an unanticipated and
immediate loss of all of the contracts with either of these customers, the loss
could have a material adverse effect on the Company's business and results of
operations.
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OPERATIONS
As of December 31, 1998, the Company operated a total of 40 mining
complexes, all located in the United States. Coal is transported from the
Company's mining complexes to customers by means of railroad cars, river barges
or trucks, or a combination of these means of transportation. The following
table provides the location and a summary of information regarding the Company's
principal mining complexes and the coal reserves associated with these
operations as of December 31, 1998:
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TONS
PRODUCED IN RECOVERABLE COST(3)/BOOK
CAPTIVE CONTRACT MINING 1998(2) RESERVES VALUE
MINING COMPLEX (LOCATION) MINE(S)* MINE(S)* EQUIPMENT(1) TRANSPORTATION (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
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CENTRAL APPALACHIA
Mingo Logan (WV)........ S(2), U U(4), S(3) L, LW, C NS 11.0 32.5 $119/$83
Coal-Mac (KY)........... S(3) -- L CSX 1.5 7.2 21/13
Dal-Tex (WV)............ S, U -- D, L, S, CM(4) CSX 4.6 86.5 60/48
Hobet 21 (WV)........... S, U U(2) D, L, S(5) CSX 4.1 94.0 77/63
Arch of West Virginia
(WV).................. S(2) -- D, L, S(6) CSX 5.5 24.3 130/34
Samples (WV)............ S -- D, L, S(7) barge, CSX 4.9 33.1 92/45
Campbells Creek (WV).... -- U(2) -- barge .9 12.8 5/1
Lone Mountain (KY)...... U(2) -- C NS 2.4 63.1 83/40
Pardee (VA)............. S, U U L, C NS 1.4 11.0 33/14
WESTERN UNITED STATES
Black Thunder (WY)...... S -- D, S(8) UP, BN 24.7 1,129.0 171/164
Coal Creek (WY)......... -- S -- UP, BN 4.4 268.6 44/42
West Elk (CO)........... U -- LW, C UP 3.9 145.2 81/73
Skyline (UT)............ U -- LW, C UP 2.4 72.2 (9)
SUFCO (UT).............. U -- LW, C UP 3.7 81.2 (9)
Dugout Canyon (UT)...... U -- C(10) UP .2 54.7 (9)
Arch of Wyoming (WY).... S(2) -- D, S(11) UP 1.3 1.5 60/4
MIDWESTERN UNITED STATES
Arch of Illinois (IL)... U -- C UP, IC 3.5(12) 22.4 168/10
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S = Surface Mine D = Dragline UP = Union Pacific Railroad
U = Underground Mine L = Loader/Truck IC = Illinois Central Railroad
S = Shovel/Truck BN = Burlington Northern Railroad
LW = Longwall NS = Norfolk Southern Railroad
C = Continuous Miner
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* Multiple captive and contract mines are included in parentheses.
(1) Reported for captive operations only.
(2) Represents seven months production for the mines acquired in the Arch
Western transaction, including Black Thunder, Coal Creek, West Elk,
Skyline, SUFCO and Dugout Canyon. Skyline, SUFCO and Dugout Canyon are
mines operated by Canyon Fuel; production represents 100% for these
facilities.
(3) Reflects purchase accounting adjustments.
(4) Utilizes an 80-yard dragline and two 51-cubic-yard shovels.
(5) Utilizes an 83-cubic-yard dragline and a 51-cubic-yard shovel.
(6) Utilizes a 49-cubic-yard dragline, a 43-cubic-yard shovel, a 22-cubic-yard
shovel and a 28-cubic-yard loader at the Ruffner Mine, and a 53-cubic-yard
shovel and a 28-cubic-yard loader at the Wylo Mine.
(7) Utilizes a 110-cubic-yard dragline, a 53-cubic-yard shovel, a 22-cubic-yard
hydraulic excavator and two 28-cubic-yard loaders.
(8) Currently utilizes 156-cubic-yard, 90-cubic-yard and 45-cubic-yard
draglines and 60-cubic-yard and 82-cubic-yard shovels. This mining complex
is currently being expanded to include the addition of a 130-cubic-yard
dragline.
(9) Canyon Fuel is an equity investment and its financial statements are not
consolidated into the Company's financial statements.
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(10) Currently under development; full production projected to begin with the
addition of a longwall in the 3(rd) quarter of 2000.
(11) Utilizes 76-cubic-yard and 64-cubic-yard draglines at Medicine Bow and
32-cubic-yard dragline at Seminoe II.
(12) Includes production from a surface mine which was idled in 1998 due to the
exhaustion of reserves.
All mining complexes described above have unit train load-out facilities
except Campbell's Creek. Preparation plants are located at the following
complexes: Mingo Logan, Dal-Tex, Hobet 21, Arch of West Virginia, Samples,
Campbell's Creek, and Lone Mountain. The mining complexes, mines and related
facilities described above are accessible by public road, and power to the
complexes, mines and facilities is supplied by public utility companies doing
business in the area of such operations. The plant and equipment at each of the
mining complexes are suitable for the mining operations undertaken at each
complex.
All of the coal reserves at the mining complexes described above are either
compliance or low-sulfur coal, with the exception of the coal reserves at the
Arch of Illinois mining complex.
Although the Company believes it has a strong reserve base relative to its
competition, the Company's profitability depends substantially on having access
to 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 represented by the
tonnage produced at such mines.
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, long-term contracts;
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 subject to conditions or events beyond the
Company's control that can affect the cost of mining at particular mines for
varying lengths of time and could have an adverse effect on results of
operations. These factors include weather conditions; fires and explosions;
equipment replacement and repair requirements; variations in coal seam
thickness; amount of overburden, rock and other natural materials; 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 make the third quarter not comparable
to the other quarters and not indicative of results to be expected for the full
year.
TRANSPORTATION
Coal from the mines of the Company's subsidiaries is transported by rail,
truck and barge to domestic customers and to Atlantic or Pacific coast terminals
for shipment to domestic and international customers.
Arch Coal Terminal is located on a 60-acre site on the Big Sandy River
approximately seven miles upstream from its confluence with the Ohio River. Arch
Coal Terminal provides coal storage and transloading services. On December 31,
1998, the Company sold its idled Big Sandy Terminal operation to Aquila Energy
Corporation.
The Paint Creek Terminal is located on leased property on the Kanawha River
at Crown Hill, West Virginia. The facility transloads coal trucked from the
Samples Mine for shipment by barge to the Company's customers.
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<PAGE> 10
Company subsidiaries together own a 17.5% interest in Dominion Terminal
Associates ("DTA"), which leases and operates a ground storage-to-vessel coal
transloading facility (the "DTA Facility") in Newport News, Virginia. The DTA
Facility has a rated throughput capacity of 20 million tons of coal per year and
ground storage capacity of approximately 1.7 million tons. The DTA Facility
serves international customers, as well as domestic coal users located on the
eastern seaboard of the United States.
Arch Western owns a 5.4% equity interest and Canyon Fuel owns a 9.2% equity
interest in the Los Angeles Export Terminal ("LAXT"), which leases a dry bulk
terminal operation within the Port of Los Angeles. LAXT is served by the Union
Pacific railroad. Three loop tracks circle a stockpile area with a capacity of
75 million tons. Current annual rated capacity at the terminal is 10 million
tons. The City of Los Angeles owns the land upon which the facility has been
constructed. LAXT has entered into a 35 year lease with the City which provides
compensation for its contribution of cash and land to the venture. The total
cost of the facility is approximately $143 million.
REGULATIONS AFFECTING COAL MINING
Coal mining is subject to strict regulation by federal, state, and local
authorities. The scope of the regulation includes environmental and health and
safety matters, and permits are required to be obtained by mining companies, the
terms of which strictly regulate the environmental effects of coal mining.
Permitting and Environmental Matters
Numerous permits are required for mining operations. Other than as
described in "Item 3. Legal Proceedings" below, 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
described in "Item 3. Legal Proceedings" below, the regulatory environment in
West Virginia is changing with respect to current or future large scale surface
mines. The regulatory authorities have considerable discretion in the timing of
permit issuance. Because both private individuals and the public at large
possess rights to comment on and otherwise engage in the permitting process,
including intervention in the courts. There can be no assurance that all permits
will be issued in a timely matter or that permitting requirements will not be
changed in a manner adversely affecting the Company.
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA")
was enacted to regulate certain surface mining of coal and the surface effects
of underground mining. All states in which the Company's subsidiaries operate
have similar laws and regulations enacted pursuant to SMCRA which regulate
surface and deep mining and that impose, among other requirements, reclamation
and environmental requirements and standards.
The federal Clean Water Act ("CWA") affects coal mining operations in two
principal ways. First, the Army Corps of Engineers (the "Corps") issues permits
under Section 404 of the CWA whenever a mine operator proposes to build a fill
or impoundment in waters of the United States. In addition, the Environmental
Protection Agency (the "EPA") must approve the issuance by a state agency of an
NPDES (National Pollutant Discharge Elimination System) permit under Section 402
of the CWA. These permits encompass storm water discharges from a mine facility.
Regular monitoring and compliance with reporting requirements and performance
standards are preconditions for the issuance and renewal of NPDES permits
governing the discharge of pollutants into waters. All states in which the
Company's subsidiaries operate also have laws restricting discharge of
pollutants into the waters of those states.
The federal Resource Conservation and Recovery Act ("RCRA") and
implementing federal regulations exclude from the definition of hazardous waste
all coal extraction, beneficiation and processing wastes. Additionally, other
coal mining wastes which are subject to a SMCRA permit are exempt from RCRA
permits and standards. Each of the states in which the Company's subsidiaries
are currently engaged in mining similarly exempt coal mining waste from their
respective state hazardous waste laws and regulations. The federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act, affects coal mining operations
by subjecting them to
8
<PAGE> 11
liability for the remediation of releases of hazardous substances (other than
waste excluded from federal and state regulation, as noted above) that may
endanger public health or welfare or the environment.
The federal Clean Air Act, as amended in 1990, imposes numerous
requirements on various categories of emission sources and West Virginia state
air regulations impose permitting obligations and performance standards on
certain coal preparation plants and coal handling facilities, such as crushers
and screens.
Health and Safety Matters
The federal Mine Safety and Health Act of 1977 imposes health and safety
standards on all mining operations. Regulations are comprehensive and affect
numerous aspects of mining operations, including training of mine personnel,
mining procedures, blasting, and the equipment used in mining operations. The
Black Lung Benefits Reform Act of 1977 generally requires each coal mine
operator to secure payment of federal and state black lung benefits to its
employees through insurance, bonds, or contributions to a state-controlled fund.
The Black Lung Benefits Reform Act of 1977 also provides for the payment from a
trust fund of benefits and medical expenses to employees for whom no benefits
have been obtainable from their employer. This trust is financed by a tax on
coal sales.
The Coal Industry Retiree Health Benefit Act of 1992 ("Benefit Act")
addressed two under-funded trust funds which were created to provide medical
benefits for certain United Mine Workers Association ("UMWA") retirees. The
Benefit Act provides for the funding of medical and death benefits for certain
retired members of the UMWA through premiums to be paid by assigned operators
(former employers), transfers of monies in 1993 and 1994 from an overfunded
pension trust established for the benefit of retired UMWA members, and transfers
from the Abandoned Mine Lands Fund (funded by a federal tax on coal production)
that commenced in 1995.
Compliance with Regulatory Requirements and Existing Environmental
Liability
The Company's operating subsidiaries endeavor to conduct their operations
in compliance with all applicable federal, state, and local laws and
regulations. However, because of the extensive and comprehensive regulatory
requirements, violations during mining operations are not unusual in the
industry. From time to time the Company and its subsidiaries are party to civil
and administrative proceedings as a result of alleged failures to comply with
mandatory federal or state health and safety regulations. The Company believes
that any adverse results in the currently pending proceedings, if incurred,
would not have a material adverse effect on the Company's consolidated financial
condition, results of operations, or liquidity. See "Item 3. Legal Proceedings."
EMPLOYEES
As of February 5, 1999, the Company and its subsidiaries (including Canyon
Fuel) employed a total of 4,455 persons (including 27 part-time employees),
1,003 of whom were represented by the UMWA under a collective bargaining
agreement that expires in 2002.
EXECUTIVE OFFICERS
The following is a list of the Company's executive officers, their ages and
their positions and offices held during the last five years.
Steven F. Leer, 46, has been President and Chief Executive Officer of the
Company since 1992.
Kenneth G. Woodring, 49, has been Executive Vice President -- Mining
Operations of the Company since 1997. Mr. Woodring served as Senior Vice
President -- Operations of Ashland Coal since 1989.
C. Henry Besten, Jr., 50, has been Vice President -- Strategic Marketing of
the Company and President of the Company's Arch Energy Resources, Inc.
subsidiary since 1997. Mr. Besten served as Senior Vice President -- Marketing
for Ashland Coal since 1990.
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<PAGE> 12
John W. Eaves, 41, has been Vice President -- Marketing of the Company
since 1997 and President of the Company's Arch Coal Sales Company, Inc. since
1995. Prior to 1995, he held a series of sales related positions with the
Company.
Patrick A. Kriegshauser, 37, has been Senior Vice President and Chief
Financial Officer of the Company since July 1998. Mr. Kriegshauser served as
Senior Vice President, Treasurer and Chief Financial Officer of the Company from
August 1996. From 1995 to 1996 he served as the Company's Vice President and
Controller and from 1993 to 1995 he served as its Vice President -- Planning and
Development.
David B. Peugh, 44, has been Vice President--Business Development of the
Company since 1993. Prior to 1993, Mr. Peugh was Director of Exploration and
Development of Ashland Coal.
Jeffry N. Quinn, 40, has been Senior Vice President -- Law & Human
Resources, Secretary and General Counsel of the Company since 1995 and, during
the prior five years, he served as its Senior Vice President, Secretary and
General Counsel.
Robert W. Shanks, 45, has been Vice President -- Operations of the Company
since 1997. He was President of the Company's Apogee Coal Company subsidiary
since 1988.
ITEM 2. PROPERTIES
Arch Coal and its operating subsidiaries (but not including Canyon Fuel as
Arch Coal's interest in it is accounted for on the equity method) sold 81.1
million tons of coal in the twelve months ended December 31, 1998, as compared
to 40.5 and 29.4 million tons sold in the twelve months ended December 31, 1997
and 1996, respectively. The growth in the tons sold is due to the Ashland Coal
merger effective July 1, 1997 and the Arch Western transaction effective June 1,
1998. Of the total tonnage sold in the twelve months ended December 31, 1998,
approximately 76% was sold under long-term contracts, as compared to 72% for the
twelve months ended December 31, 1997 and 1996, respectively, with the balance
being sold on the spot market. In the twelve months ended December 31, 1998,
Arch Coal and its operating subsidiaries sold 3.7 million tons of coal in the
export market (which does not include tons sold by Canyon Fuel), compared to 1.9
and 0.1 million tons in the twelve months ended December 31, 1997 and 1996,
respectively.
The Company estimates that as of December 31, 1998 it owned or controlled
measured (proven) and indicated (probable) coal reserves of approximately 3.7
billion tons, as set forth in the following table. Reserve estimates are
prepared by the Company's engineers and geologists and are reviewed and updated
periodically. Total reserve estimates will change from time to time reflecting
mining activities, analysis of new engineering and geological data, changes in
reserve holdings and other factors. Anticipated losses from extraction and,
where applicable, washing of the coal have been eliminated from the estimate.
The Company believes that a majority of these reserves are comprised of
low-sulfur coal, and a substantial portion of such low-sulfur coal is so-called
"compliance coal." Compliance coal emits 1.2 pounds or less of sulfur dioxide
per million Btu upon combustion without the aid of sulfur reduction technology,
and is referred to as such because combustion of such coal results in sulfur
emissions within the parameters required by the Clean Air Act.
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<PAGE> 13
RECOVERABLE COAL:
<TABLE>
<CAPTION>
REGION OR STATE MEASURED INDICATED TOTAL
--------------- -------- --------- -----
(THOUSANDS OF TONS)
<S> <C> <C> <C>
Wyoming..................................................... 1,469.1 68.8 1,537.9
Central Appalachia.......................................... 1,010.2 418.2 1,428.4
Illinois.................................................... 243.7 86.7 330.4
Utah*....................................................... 191.0 57.4 248.4
Colorado.................................................... 120.3 24.9 145.2
------- ----- -------
Total....................................................... 3,034.3 656.0 3,690.3
</TABLE>
- -------------------------
* Represents 100% of the reserves held by Canyon Fuel
On October 1, 1998, the Company was the successful bidder in a competitive
federal coal lease auction for the 3,546 acre Thundercloud Tract in the Powder
River Basin of Wyoming. The Thundercloud Tract contains an estimated 412 million
tons of demonstrated coal reserves and is contiguous with Arch Coal's Black
Thunder mine.
The Company's coal properties are either owned outright or controlled by
lease. As of December 31, 1998, the Company's subsidiaries owned, or controlled
primarily through long-term leases, approximately 100,800, 50,400 and 14,500
acres of coal lands in Wyoming, Utah and Colorado, respectively; 273,000, 90,500
and 2,000 acres of coal lands in West Virginia, Eastern Kentucky, and Virginia,
respectively; and 118,600 acres of coal lands in the Illinois Basin.
Approximately 77,700 acres of the Company's 650,000 acres of coal land
(which totals include 100% of the acreage held by Canyon Fuel) are leased from
the federal government with terms expiring between 1999 and 2018, subject to
readjustment and/or extension and to earlier termination for failure to meet
diligent development requirements. Additionally, private term leases covering
principal reserves under the Company's current mining plans are not scheduled to
expire prior to expiration of projected mining activities. The Company's
subsidiaries also control through ownership or long-term leases approximately
5,880 acres of land which are used either for its coal processing facilities or
are being held for possible future development. Royalties are paid to lessors
either as a fixed price per ton or as a percentage of the gross sales price of
the mined coal. Most of these leases run until the exhaustion of mineable and
merchantable coal. The remaining leases have primary terms ranging from one to
40 years from the date of their execution, with most containing options to
renew. The majority of the significant leases are on a percentage royalty basis.
In certain cases, a lease bonus (prepaid royalty) is required, payable either at
the time of execution of the lease or in annual installments following such
execution. In most cases, the prepaid royalty amount is applied to reduce future
production royalties. Mining plans are not necessarily indicative of the life of
the mine. The extent to which reserves will eventually be mined depends upon a
variety of factors, including future economic conditions and governmental
actions affecting both the mining and marketability of coal.
The Pine Creek, Black Bear, Campbells Creek, Samples, Ruffner and Holden
25/Ragland preparation plants and related loadout facilities are located on
properties held under leases which expire at varying dates over the next thirty
years with either optional 20-year extensions or with unlimited extensions, and
the balance of the Company's preparation plants and loadout facilities are
located on property owned by the Company.
All of the identified coal reserves held by the Company's subsidiaries have
been subject to preliminary coal seam analysis to test sulfur content. Of these
reserves, approximately 66% consist of compliance coal while an additional 24%
could be sold as low-sulfur coal. The balance is classified as high-sulfur coal.
Some of the Company's low-sulfur coal can be marketed as compliance coal when
blended with other compliance coal. Accordingly, most of the Company's reserves
are primarily suitable for the domestic steam coal markets. However, a
substantial portion of the low-sulfur and compliance coal reserves at the Mingo
Logan operations may also be used as a high-volatile, low-sulfur, metallurgical
coal.
Title to coal properties held by lessors or grantors to the Company and its
subsidiaries and the boundaries of properties are normally verified at the time
of leasing or acquisition. However, in cases involving less
11
<PAGE> 14
significant properties and consistent with industry practices, title and
boundaries are not completely verified until such time as the Company's
independent operating subsidiaries prepare to mine such reserves. If defects in
title or boundaries of undeveloped reserves are discovered in the future,
control of and the right to mine such reserves could be adversely affected.
From time to time, lessors or sublessors of land leased by the Company's
subsidiaries have sought to terminate such leases on the basis that such
subsidiaries' have failed to comply with the financial terms of the leases or
that the mining and related operations conducted by such subsidiaries are not
authorized by the leases. Some of these allegations relate to leases upon which
the Company conducts operations material to the Company's consolidated financial
position, results of operations and liquidity, but the Company does not believe
any pending claims by such lessors or sublessors have merit or will result in
the termination of any material lease or sublease.
The carrying cost of the Company's coal reserves at December 31, 1998 was
$1.33 billion, consisting of $13.6 million of prepaid royalties included in
current assets, $31.6 million of prepaid royalties classified as an other asset,
and $1.28 billion net book value of coal lands and mineral rights.
The Company's executive headquarters occupy approximately 50,000 square
feet of leased space at CityPlace One, St. Louis, Missouri. See "Item 1.
Business" incorporated by reference herein for a further description of the
Company's subsidiaries' mining complexes, mines, transportation facilities and
other operations. The Company's subsidiaries currently own or lease the
equipment that is utilized in their mining operations.
ITEM 3. LEGAL PROCEEDINGS
A customer of the Company informed the Company that its power plant to
which the Company supplies coal will no longer provide baseload capacity to the
public utility which purchases the electricity produced from the plant and
instead will be used to provide peak demand only. It is alleged by the customer
that the plant will require substantially less coal under the customer's
existing above-market contract with the Company. The Company has filed a civil
action in Federal District Court in the Southern District of West Virginia
alleging breach of contract and other causes of action against the customer in
respect of the customer's failure to comply with the terms of this contract. On
July 17, 1998, the court granted the customer's motion to stay the lawsuit
pending arbitration. As of December 31, 1998, the carrying amount of acquisition
costs allocated to this coal supply contract amounts to approximately $13.7
million. The Company currently expects that it will recover the carrying amount
of this asset, however, the ultimate outcome of this matter is uncertain.
On October 24, 1996, the rock strata overlaying an 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 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 EPA on December 1,
1997. Any liability which might be asserted by 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 whom the subsidiary
contracted to dispose of the waste material has agreed to indemnify the Company
for any costs associated with this action.
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<PAGE> 15
On July 16, 1998, 10 individuals and The West Virginia Highlands
Conservancy filed suit in U.S. District Court for the Southern District of West
Virginia alleging violations of SMCRA and the Clean Water Act. Named as
defendants in the suit are the director of the West Virginia Division of
Environmental Protection ("DEP") and officials of the U.S. Army Corps of
Engineers (the "Corps"). In their complaint, the plaintiffs allege that the DEP
has violated its duties under SMCRA and the Clean Water Act by approving surface
mining permits that authorize the construction of "valley fills." These 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 is placed. The
approval of such permits are alleged to "result in unpermitted discharges of
pollutants into state waters, violations of state water quality standards,
disturbance to the 100-foot buffer zone around streams, [and] destruction to
riparian vegetation." The complaint also alleges that the DEP has failed to
require that lands mined be restored to their approximate original contour and
that approved post-mining land uses are enforced following reclamation.
Four indirect, wholly-owned subsidiaries of the Company currently hold nine
permits that were identified in the complaint as violating the legal standards
that the plaintiffs have requested the district court to interpret. In addition,
a pending permit application for the Company's Dal-Tex operation (known as the
"Spruce Fork Permit") is specifically identified as a permit whose issuance
should be enjoined. Three subsidiaries of the Company intervened in the lawsuit
in support of the Corps and the DEP on August 6, 1998. The Company and the other
defendants have vigorously opposed claims asserted in the lawsuit.
A settlement was entered between the plaintiffs and the Corps on December
23, 1998. Under that agreement, the plaintiffs agreed to dismiss all claims
against the Corps in return for the Corps agreeing, in conjunction with other
federal agencies, to conduct a comprehensive environmental impact study of the
long-term effects of valley fills. During the twenty-four (24) months
anticipated to complete the study, the agreement imposes new, interim standards
that will be used in reviewing and approving permits. The most significant
change imposed under the settlement agreement is the obligation of a permit
applicant to seek an individual sec. 404 Clean Water Act permit if it proposes
to construct a valley fill affecting a drainage area larger than 250 acres.
The Company's Dal-Tex operation's Spruce Fork Permit was specifically
excluded from the terms of the settlement. Nevertheless, EPA withdrew its final
objections to a Clean Water Act section 402 NPDES permit that had been pending
since mid-1998. The Company was notified by the Corps on January 21, 1999 that
it would issue its Clean Water Act section 404 permit within five (5) days,
which was the last permit, approval, or authorization needed to commence mining
on the Spruce Fork Permit. On January 26, 1999, the plaintiffs moved for a
temporary restraining order. On February 3, 1999, the U.S. District Court for
the Southern District of West Virginia entered the restraining order, which was
subsequently extended until March 5, 1999. Simultaneously, the court commenced a
hearing on plaintiff's motion for a preliminary injunction which concluded
February 26, 1999. The Company expects a ruling on the preliminary injuction
prior to the expiration of the temporary restraining order. Should the court
enter the preliminary injunction, or otherwise delay substantially the issuance
of the permit, the decision will have a material adverse effect on the Dal-Tex
operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company through the solicitation of proxies or otherwise during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the caption "Stockholder Information" and is
incorporated herein by reference.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the caption "Selected Financial Information"
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Annual Report for the
information required by Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 1, 1997, the Board of Directors of the Company engaged Ernst &
Young LLP, to act as the Company's independent certified public accountant.
Ernst & Young LLP replaced Arthur Andersen LLP on July 1, 1997. Ernst & Young
LLP also acts as the independent auditor for Ashland Inc., the Company's
majority stockholder. Arthur Andersen LLP's report on the Company's financial
statements for the fiscal year ended December 31, 1996 did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
between the Company and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures during such fiscal year or thereafter through and including the date
of the conclusion of Arthur Andersen LLP's services, which, if not resolved to
the satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen LLP
to make reference to the matter in their report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing under the subcaption "Nominees for Director"
which appears under the caption "Election of Directors" beginning on Page 2 in
the Company's Proxy Statement to be distributed to Company stockholders in
connection with the Company's 1999 Annual Meeting (the "1999 Proxy Statement").
See also the list of the Company's executive officers and related information
under "Executive Officers" in Part I, Item 1. herein.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing in the "Summary Compensation Table", the "Option
Grants in Last Fiscal Year" table, the "Aggregated Option Exercise in Last
Fiscal Year and Fiscal Year-End Option Values" table, the Pension Plan section
(including the table therein), the Employment Agreements section, the
Compensation of Directors section, and the Compensation Committee Interlocks and
Insider Participation section appearing on pages 11 to 14 in the Company's 1999
Proxy Statement. No portion of the Personnel and Compensation Committee Report
on Executive Compensation for 1998 or the Arch Coal Performance Graph is
incorporated herein in reliance on Regulation S-K, Item 402(a)(8).
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<PAGE> 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" beginning on Page 4 of the Company's 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing under the caption "Certain Relationships and
Related Transactions" beginning on Page 14 of the Company's 1999 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<C> <C> <S>
(a)(1) The following consolidated financial statements of Arch
Coal, Inc. and subsidiaries included in the Company's 1998
Annual Report to Stockholders are incorporated by reference:
Consolidated Statements of Income -- Years Ended December
31, 1998, 1997 and 1996
Consolidated Balance Sheets -- December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following financial statements of Canyon Fuel Company,
LLC are incorporated by reference in Exhibit 99:
Statements of Income -- Year Ended December 31, 1998 and for
the Period From December 20, 1996 (inception) Through
December 31, 1997
Balance Sheets -- December 31, 1998 and 1997
Statements of Members' Equity -- Year Ended December 31,
1998 and for the Period From December 20, 1996 (inception)
Through December 31, 1997
Statements of Cash Flows -- Year Ended December 31, 1998 and
For the Period From December 20, 1996 (inception) Through
December 31, 1997
Notes to Financial Statements
(a)(2) The following consolidated financial statement schedule of
Arch Coal, Inc. and subsidiaries is included in Item 14 at
the page indicated:
II -- Valuation and Qualifying Accounts at page 23.
Report of Arthur Andersen LLP (filed as Exhibit 99.1 hereto
and incorporated herein)
Report of PricewaterhouseCoopers LLP (filed as Exhibit 99.2
hereto and incorporated herein)
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been
omitted.
(a)(3) Exhibits filed as part of this Report are as follows:
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)
</TABLE>
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<PAGE> 18
<TABLE>
<C> <C> <S>
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
(filed herewith)
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)
4.4 Assignment of Registration Rights between Carboex
International, Limited and Carboex, S.A. effective as of
October 15, 1998 (filed herewith)
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 (filed herewith)
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)
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)
</TABLE>
16
<PAGE> 19
<TABLE>
<C> <C> <S>
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)
10.1 Coal Off-Take Agreement, executed as of April 4, 1997, among
Arch Coal, Inc. (formerly Arch Mineral Corporation), Carboex
International, Ltd. and Ashland Inc. (incorporated herein by
reference to Exhibit 10.1 of the Company's Registration
Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997)
10.2 Sales Agency Agreement, executed as of April 4, 1997, among
Arch Coal, Inc. (formerly Arch Mineral Corporation), Ashland
Inc. and Carboex S.A. (incorporated herein by reference to
Exhibit 10.2 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
10.3 Assignment, Assumption and Amendment of Coal Sales Agency
Agreement, executed as of April 4, 1997, among Arch Coal,
Inc. (formerly Arch Mineral Corporation), Ashland Coal,
Inc., Saarbergwerke AG and Carboex International, Ltd.
(incorporated herein by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-4 (Registration
No. 333-28149) filed on May 30, 1997)
10.4 Shareholder Services Contract, executed as of April 4, 1997,
among Arch Coal, Inc. (formerly Arch Mineral Corporation),
Ashland Coal, Inc., Carboex International, Ltd. and Ashland
Inc. (incorporated herein by reference to Exhibit 10.4 of
the Company's Registration Statement on Form S-4
(Registration No. 333-28149) filed on May 30, 1997)
10.5 Deed of Lease and Agreement between Dingess-Rum Coal Company
and Amherst Coal Company (predecessor to Ark Land Company),
dated June 1, 1962, as supplemented January 1, 1968, June 1,
1973, July 1, 1974, November 12, 1987, Lease Exchange
Agreement dated July 2, 1979 amended as of January 1, 1984
and January 7, 1993; February 24, 1993; Partial Release
dated as of May 6, 1988; Assignments dated March 15, 1990,
October 5, 1990 (incorporated herein by reference to Exhibit
10.8 of the Company's Registration Statement on Form S-4
(Registration No. 333-28149) filed on May 30, 1997)
10.6 Agreement of Lease by and between Shonk Land Company,
Limited Partnership and Lawson Hamilton (predecessor to Ark
Land Company), dated February 8, 1983, as amended October 7,
1987, March 9, 1989, April 1, 1992, October 31, 1992,
December 5, 1992, February 16, 1993, August 4, 1994, October
1, 1995, July 31, 1996 and November 27, 1996 (incorporated
herein by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)
10.7 Lease between Little Coal Land Company and Ashland Land &
Development Co., a wholly-owned subsidiary of Ashland Coal,
which was merged into Allegheny Land Company, a second tier
subsidiary of the Company (incorporated herein by reference
to Exhibit 10.11 of a Post-Effective Amendment No. 1 to a
Registration Statement on Form S-1 (Registration No.
33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)
</TABLE>
17
<PAGE> 20
<TABLE>
<C> <C> <S>
10.8 Agreement of Lease dated January 1, 1988, between Courtney
Company and Allegheny Land Company (legal successor by
merger with Allegheny Land Co. No. 2, the assignee of
Primeacre Land Corporation under October 5, 1992,
assignments), a second-tier subsidiary of the Company
(incorporated herein by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the Year Ended December 31,
1995, filed by Ashland Coal, Inc., a subsidiary of the
Company)
10.9 Lease between Dickinson Properties, Inc., the Southern Land
Company, and F. B. Nutter, Jr. and F. B. Nutter, Sr.,
predecessors in interest to Hobet Mining & Construction Co.,
Inc., an independent operating subsidiary of the Company
that subsequently changed its name to Hobet Mining, Inc.
(incorporated herein by reference to Exhibit 10.14 of a
Post-Effective Amendment No. 1 to a Registration Statement
on Form S-1 (Registration No. 33-22425), as amended, filed
by Ashland Coal, Inc., a subsidiary of the Company, on
August 11, 1988)
10.10 Lease Agreement between Fielden B. Nutter, Dorothy Nutter
and Hobet Mining & Construction Co., Inc., an independent
operating subsidiary of the Company that subsequently
changed its name to Hobet Mining, Inc. (incorporated herein
by reference to Exhibit 10.22 of a Post-Effective Amendment
No. 1 to a Registration Statement on Form S-1 (Registration
No. 33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)
10.11 Lease and Modification Agreement between Horse Creek Coal
Land Company, Ashland and Hobet Mining & Construction Co.,
Inc., an independent operating subsidiary of the Company
that subsequently changed its name to Hobet Mining, Inc.
(incorporated herein by reference to Exhibit 10.24 of a
Post-Effective Amendment No. 1 to a Registration Statement
on Form S-1 (Registration No. 33-22425), as amended, filed
by Ashland Coal, Inc., a subsidiary of the Company, on
August 11, 1988)
10.12 Lease Agreement between C. C. Lewis Heirs Limited
Partnership and Allegheny Land Company, a second-tier
subsidiary of the Company (incorporated herein by reference
to Exhibit 10.25 of a Post-Effective Amendment No. 1 to a
Registration Statement on Form S-1 (Registration No.
33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)
10.13 Sublease between F. B. Nutter, Sr., et al., and Hobet Mining
& Construction Co., Inc., an independent operating
subsidiary of the Company that subsequently changed its name
to Hobet Mining, Inc. (incorporated herein by reference to
Exhibit 10.27 of a Post-Effective Amendment No. 1 to a
Registration Statement on Form S-1 (Registration No.
33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)
10.14 Coal Lease Agreement dated as of March 31, 1992, among Hobet
Mining, Inc. (successor by merger with Dal-Tex Coal
Corporation) as lessee and UAC and Phoenix Coal Corporation,
as lessors, and related Company Guarantee (incorporated
herein by reference to a Current Report on Form 8-K dated
April 6, 1992 filed by Ashland Coal, Inc., a subsidiary of
the Company)
10.15 Lease dated as of October 1, 1987, between Pocahontas Land
Corporation and Mingo Logan Collieries Company whose name is
now Mingo Logan Coal Company (incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to a Current
Report on Form 8-K filed on February 14, 1990 by Ashland
Coal, Inc., a subsidiary of the Company)
10.16 Consent, Assignment of Lease and Guaranty dated January 24,
1990, among Pocahontas Land Corporation, Mingo Logan Coal
Company, Mountain Gem Land, Inc. and Ashland Coal, Inc.
(incorporated herein by reference to Exhibit 10.4 to
Amendment No. 1 to a Current Report on Form 8-K filed on
February 14, 1990 by Ashland Coal, Inc., a subsidiary of the
Company)
</TABLE>
18
<PAGE> 21
<TABLE>
<C> <C> <S>
10.17 Federal Coal Lease dated as of June 24, 1993 between the United States Department of the Interior
and Southern Utah Fuel Company (filed herewith)
10.18 Federal Coal Lease between the United States Department of the Interior and Utah Fuel Company
(filed herewith)
10.19 Federal Coal Lease dated as of July 19, 1997 between the United States Department of the Interior
and Canyon Fuel Company, LLC (filed herewith)
10.20 Federal Coal Lease dated as of January 24, 1996 between the United States Department of the
Interior and the Thunder Basin Coal Company (filed herewith)
10.21 Federal Coal Lease Readjustment dated as of November 1, 1967 between the United States Department
of the Interior and the Thunder Basin Coal Company (filed herewith)
10.22 Federal Coal Lease effective as of May 1, 1995 between the United States Department of the
Interior and Mountain Coal Company (filed herewith)
10.23 Federal Coal Lease dated as of January 1, 1999 between the Department of the Interior and Ark Land
Company (filed herewith)
10.24 Employment Agreement between Arch Mineral Corporation and Steven F. Leer, dated March 1, 1992
(incorporated herein by reference to Exhibit 10.12 to the Company's Registration Rights Statement
on Form S-4 (Registration No. 333-28149) filed on May 30, 1997)
10.25 Form of Indemnity Agreement between Arch Coal, Inc. and Indemnitee (as defined therein)
(incorporated herein by reference to Exhibit 10.15 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
10.26 Arch Coal, Inc. 1998 Incentive Compensation Plan (incorporated herein by reference to Exhibit
10.22 of the Company's Annual Report on Form 10-K for the Year Ended December 31, 1997)
10.27 Arch Coal, Inc. (formerly Arch Mineral Corporation) Deferred Compensation Plan (incorporated
herein by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8
(Registration No. 333-68131) filed on December 1, 1998)
10.28 Arch Coal, Inc. 1997 Stock Incentive Plan (incorporated herein by reference to Annex E to Appendix
A to the Proxy Statement/Prospectus forming part of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
10.29 Arch Mineral Corporation 1996 ERISA Forfeiture Plan (incorporated herein by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997)
10.30 Arch Coal, Inc. Outside Directors' Deferred Compensation Plan effective January 1, 1999 (filed
herewith)
10.31 Second Amendment to the Arch Mineral Corporation Supplemental Retirement Plan effective January 1,
1998 (filed herewith).
13 Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1998
(filed herewith)
16 Letter of Arthur Andersen LLP filed pursuant to Regulation S-K, Item 304(a)(3) (filed herewith)
21 Subsidiaries of the Company (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 Consent of Arthur Andersen LLP (filed herewith)
23.3 Consent of PricewaterhouseCoopers LLP (filed herewith)
24 Power of Attorney (filed herewith)
27 Financial Data Schedule (filed herewith)
</TABLE>
19
<PAGE> 22
<TABLE>
99 Financial Statements of Canyon Fuel Company, LLC (filed herewith)
<C> <C> <S>
99.1 Report of Arthur Andersen LLP (filed herewith)
99.2 Report of PricewaterhouseCoopers LLP (filed herewith)
</TABLE>
- -------------------------
* Exhibits 10.26, 10.27, 10.28, 10.29 and 10.31 are executive compensation
plans.
** Upon written or oral request to the Company's Secretary, a copy of any of the
above exhibits will be furnished at cost.
<TABLE>
<C> <C> <S>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the
quarter ended December 31, 1998.
</TABLE>
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: PATRICK A. KRIEGSHAUSER
------------------------------------
Patrick A. Kriegshauser
Senior Vice President and
Chief Financial Officer
Date: March 2, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 2, 1999.
<TABLE>
<CAPTION>
SIGNATURES CAPACITY
---------- --------
<C> <C> <S>
STEVEN F. LEER President and Chief Executive Officer and
- ---------------------------------------------------- Director
Steven F. Leer
PATRICK A. KRIEGSHAUSER Senior Vice President and Chief Financial
- ---------------------------------------------------- Officer (Principal Accounting Officer)
Patrick A. Kriegshauser
* Director
- ----------------------------------------------------
James R. Boyd
* Director
- ----------------------------------------------------
Paul W. Chellgren
* Director
- ----------------------------------------------------
Ignacio Dominguez Urquijo
* Director
- ----------------------------------------------------
Thomas L. Feazell
* Director
- ----------------------------------------------------
John R. Hall
* Director
- ----------------------------------------------------
Robert L. Hintz
* Director
- ----------------------------------------------------
Douglas H. Hunt
* Director
- ----------------------------------------------------
James L. Parker
* Director
- ----------------------------------------------------
A. Michael Perry
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
SIGNATURES CAPACITY
---------- --------
<C> <C> <S>
* Director
- ----------------------------------------------------
J. Marvin Quin
* Director
- ----------------------------------------------------
Theodore D. Sands
*By: JEFFRY N. QUINN
---------------------------------------------
Jeffry N. Quinn
As Attorney-in-fact
</TABLE>
ORIGINAL POWERS OF ATTORNEY AUTHORIZING STEVEN F. LEER, PATRICK A. KRIEGSHAUSER
AND JEFFRY N. QUINN, AND EACH OF THEM, TO SIGN THIS ANNUAL REPORT ON FORM 10-K
AND AMENDMENTS THERETO ON BEHALF OF THE ABOVE-NAMED PERSONS HAVE BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION AS EXHIBIT 24 TO THIS REPORT.
22
<PAGE> 25
SCHEDULE II
ARCH COAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) OTHER(2) YEAR
----------- ---------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Reserves Deducted from Asset
Accounts
Property, Plant, and
Equipment................. $ -- $ -- $ -- $ -- $ --
Other Assets -- Other Notes
and Accounts
Receivable........... 471 306 195 -- 582
Current Assets -- Supplies
Inventory................. 17,681 2,292 5,999 9,927 23,901
Year Ended December 31, 1997
Reserves Deducted from Asset
Accounts
Property, Plant, and
Equipment................. $ 100 $ -- $ 100 $ -- $ --
Other Assets -- Other Notes
and Accounts
Receivable........... 410 61 -- -- 471
Current Assets -- Supplies
Inventory................. 11,313 1,218 282 5,432 17,681
Year Ended December 31, 1996
Reserves Deducted from Asset
Accounts
Property, Plant, and
Equipment................. $ 1,111 $ -- $1,011 $ -- $ 100
Other Assets -- Other Notes
and Accounts
Receivable........... 408 150 148 -- 410
Current Assets -- Supplies
Inventory................. 11,976 500 1,163 -- 11,313
</TABLE>
- ---------------
(1) Reserves utilized, unless otherwise indicated.
(2) Balances acquired in the Arch Western transaction and Ashland Coal merger.
23
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
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
(filed herewith)............................................
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)...............................................
4.4 Assignment of Registration Rights between Carboex
International, Limited and Carboex, S.A. effective as of
October 15, 1998 (filed herewith)...........................
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 (filed herewith)...........
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).......................
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
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)..........................................
10.1 Coal Off-Take Agreement, executed as of April 4, 1997, among
Arch Coal, Inc. (formerly Arch Mineral Corporation), Carboex
International, Ltd. and Ashland Inc. (incorporated herein by
reference to Exhibit 10.1 of the Company's Registration
Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997)...............................................
10.2 Sales Agency Agreement, executed as of April 4, 1997, among
Arch Coal, Inc. (formerly Arch Mineral Corporation), Ashland
Inc. and Carboex S.A. (incorporated herein by reference to
Exhibit 10.2 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997).....
10.3 Assignment, Assumption and Amendment of Coal Sales Agency
Agreement, executed as of April 4, 1997, among Arch Coal,
Inc. (formerly Arch Mineral Corporation), Ashland Coal,
Inc., Saarbergwerke AG and Carboex International, Ltd.
(incorporated herein by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-4 (Registration
No. 333-28149) filed on May 30, 1997).......................
10.4 Shareholder Services Contract, executed as of April 4, 1997,
among Arch Coal, Inc. (formerly Arch Mineral Corporation),
Ashland Coal, Inc., Carboex International, Ltd. and Ashland
Inc. (incorporated herein by reference to Exhibit 10.4 of
the Company's Registration Statement on Form S-4
(Registration No. 333-28149) filed on May 30, 1997).........
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
10.5 Deed of Lease and Agreement between Dingess-Rum Coal Company
and Amherst Coal Company (predecessor to Ark Land Company),
dated June 1, 1962, as supplemented January 1, 1968, June 1,
1973, July 1, 1974, November 12, 1987, Lease Exchange
Agreement dated July 2, 1979 amended as of January 1, 1984
and January 7, 1993; February 24, 1993; Partial Release
dated as of May 6, 1988; Assignments dated March 15, 1990,
October 5, 1990 (incorporated herein by reference to Exhibit
10.8 of the Company's Registration Statement on Form S-4
(Registration No. 333-28149) filed on May 30, 1997).........
10.6 Agreement of Lease by and between Shonk Land Company,
Limited Partnership and Lawson Hamilton (predecessor to Ark
Land Company), dated February 8, 1983, as amended October 7,
1987, March 9, 1989, April 1, 1992, October 31, 1992,
December 5, 1992, February 16, 1993, August 4, 1994, October
1, 1995, July 31, 1996 and November 27, 1996 (incorporated
herein by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)...........................
10.7 Lease between Little Coal Land Company and Ashland Land &
Development Co., a wholly-owned subsidiary of Ashland Coal,
which was merged into Allegheny Land Company, a second tier
subsidiary of the Company (incorporated herein by reference
to Exhibit 10.11 of a Post-Effective Amendment No. 1 to a
Registration Statement on Form S-1 (Registration No.
33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)..............
10.8 Agreement of Lease dated January 1, 1988, between Courtney
Company and Allegheny Land Company (legal successor by
merger with Allegheny Land Co. No. 2, the assignee of
Primeacre Land Corporation under October 5, 1992,
assignments), a second-tier subsidiary of the Company
(incorporated herein by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the Year Ended December 31,
1995, filed by Ashland Coal, Inc., a subsidiary of the
Company)....................................................
10.9 Lease between Dickinson Properties, Inc., the Southern Land
Company, and F. B. Nutter, Jr. and F. B. Nutter, Sr.,
predecessors in interest to Hobet Mining & Construction Co.,
Inc., an independent operating subsidiary of the Company
that subsequently changed its name to Hobet Mining, Inc.
(incorporated herein by reference to Exhibit 10.14 of a
Post-Effective Amendment No. 1 to a Registration Statement
on Form S-1 (Registration No. 33-22425), as amended, filed
by Ashland Coal, Inc., a subsidiary of the Company, on
August 11, 1988)............................................
10.10 Lease Agreement between Fielden B. Nutter, Dorothy Nutter
and Hobet Mining & Construction Co., Inc., an independent
operating subsidiary of the Company that subsequently
changed its name to Hobet Mining, Inc. (incorporated herein
by reference to Exhibit 10.22 of a Post-Effective Amendment
No. 1 to a Registration Statement on Form S-1 (Registration
No. 33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)..............
10.11 Lease and Modification Agreement between Horse Creek Coal
Land Company, Ashland and Hobet Mining & Construction Co.,
Inc., an independent operating subsidiary of the Company
that subsequently changed its name to Hobet Mining, Inc.
(incorporated herein by reference to Exhibit 10.24 of a
Post-Effective Amendment No. 1 to a Registration Statement
on Form S-1 (Registration No. 33-22425), as amended, filed
by Ashland Coal, Inc., a subsidiary of the Company, on
August 11, 1988)............................................
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
10.12 Lease Agreement between C. C. Lewis Heirs Limited
Partnership and Allegheny Land Company, a second-tier
subsidiary of the Company (incorporated herein by reference
to Exhibit 10.25 of a Post-Effective Amendment No. 1 to a
Registration Statement on Form S-1 (Registration No.
33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)..............
10.13 Sublease between F. B. Nutter, Sr., et al., and Hobet Mining
& Construction Co., Inc., an independent operating
subsidiary of the Company that subsequently changed its name
to Hobet Mining, Inc. (incorporated herein by reference to
Exhibit 10.27 of a Post-Effective Amendment No. 1 to a
Registration Statement on Form S-1 (Registration No.
33-22425), as amended, filed by Ashland Coal, Inc., a
subsidiary of the Company, on August 11, 1988)..............
10.14 Coal Lease Agreement dated as of March 31, 1992, among Hobet
Mining, Inc. (successor by merger with Dal-Tex Coal
Corporation) as lessee and UAC and Phoenix Coal Corporation,
as lessors, and related Company Guarantee (incorporated
herein by reference to a Current Report on Form 8-K dated
April 6, 1992 filed by Ashland Coal, Inc., a subsidiary of
the Company)................................................
10.15 Lease dated as of October 1, 1987, between Pocahontas Land
Corporation and Mingo Logan Collieries Company whose name is
now Mingo Logan Coal Company (incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to a Current
Report on Form 8-K filed on February 14, 1990 by Ashland
Coal, Inc., a subsidiary of the Company)....................
10.16 Consent, Assignment of Lease and Guaranty dated January 24,
1990, among Pocahontas Land Corporation, Mingo Logan Coal
Company, Mountain Gem Land, Inc. and Ashland Coal, Inc.
(incorporated herein by reference to Exhibit 10.4 to
Amendment No. 1 to a Current Report on Form 8-K filed on
February 14, 1990 by Ashland Coal, Inc., a subsidiary of the
Company)....................................................
10.17 Federal Coal Lease dated as of June 24, 1993 between the
United States Department of the Interior and Southern Utah
Fuel Company (filed herewith)...............................
10.18 Federal Coal Lease between the United States Department of
the Interior and Utah Fuel Company (filed herewith).........
10.19 Federal Coal Lease dated as of July 19, 1997 between the
United States Department of the Interior and Canyon Fuel
Company, LLC (filed herewith)...............................
10.20 Federal Coal Lease dated as of January 24, 1996 between the
United States Department of the Interior and the Thunder
Basin Coal Company (filed herewith).........................
10.21 Federal Coal Lease Readjustment dated as of November 1, 1967
between the United States Department of the Interior and the
Thunder Basin Coal Company (filed herewith).................
10.22 Federal Coal Lease effective as of June 9, 1995 between the
United States Department of the Interior and Mountain Coal
Company (filed herewith)....................................
10.23 Federal Coal Lease dated as of January 1, 1999 between the
Department of the Interior and Ark Land Company (filed
herewith)...................................................
10.24 Employment Agreement between Arch Mineral Corporation and
Steven F. Leer, dated March 1, 1992 (incorporated herein by
reference to Exhibit 10.12 to the Company's Registration
Rights Statement on Form S-4 (Registration No. 333-28149)
filed on May 30, 1997)......................................
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
10.25 Form of Indemnity Agreement between Arch Coal, Inc. and
Indemnitee (as defined therein) (incorporated herein by
reference to Exhibit 10.15 of the Company's Registration
Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997)...............................................
10.26 Arch Coal, Inc. 1998 Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.22 of the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1997)..........................................
10.27 Arch Coal, Inc. (formerly Arch Mineral Corporation) Deferred
Compensation Plan (incorporated herein by reference to
Exhibit 4.1 of the Company's Registration Statement on Form
S-8 (Registration No. 333-68131) filed on December 1,
1998).......................................................
10.28 Arch Coal, Inc. 1997 Stock Incentive Plan (incorporated
herein by reference to Annex E to Appendix A to the Proxy
Statement/Prospectus forming part of the Company's
Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)...........................
10.29 Arch Mineral Corporation 1996 ERISA Forfeiture Plan
(incorporated herein by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-4 (Registration
No. 333-28149) filed on May 30, 1997).......................
10.30 Arch Coal, Inc. Outside Directors' Deferred Compensation
Plan effective January 1, 1999 (filed herewith).............
10.31 Second Amendment to the Arch Mineral Corporation
Supplemental Retirement Plan effective January 1, 1998
(filed herewith)............................................
13 Portions of the Company's Annual Report to Stockholders for
the year ended December 31, 1998 (filed herewith)...........
16 Letter of Arthur Andersen LLP filed pursuant to Regulation
S-K, Item 304(a)(3) (filed herewith)........................
21 Subsidiaries of the Company (filed herewith)................
23.1 Consent of Ernst & Young LLP (filed herewith)...............
23.2 Consent of Arthur Andersen LLP (filed herewith).............
23.3 Consent of PricewaterhouseCoopers LLP (filed herewith)......
24 Power of Attorney (filed herewith)..........................
27 Financial Data Schedule (filed herewith)....................
99 Financial Statements of Canyon Fuel Company, LLC (filed
herewith)...................................................
99.1 Report of Arthur Anderson LLP (filed herewith)..............
99.2 Report of PricewaterhouseCoopers LLP (filed herewith).......
</TABLE>
- -------------------------
* Exhibits 10.26, 10.27, 10.28, 10.29 and 10.31 are executive compensation
plans.
** Upon written or oral request to the Company's Secretary, a copy of any of the
above exhibits will be furnished at cost.
28
<PAGE> 1
EXHIBIT 4.2
Assignment of Rights, Obligations and Liabilities under the
Stockholders Agreement
This Assignment of October 15, 1998, between the assignor, Carboex
International, Limited ("CIL"), a company organized under the laws of the
Bahamas, and the assignee, Carboex, S.A. ("Carboex"), a company organized under
the laws of Spain:
WHEREAS, on April 4, 1997, CIL entered into an agreement known as the
Stockholders Agreement (the "Agreement") with Arch Mineral Corporation, now
known as Arch Coal, Inc. ("Arch"), and with Ashland, Inc., providing for the
nomination and election of a Director of Arch chosen by CIL, and giving CIL a
Tag-Along Right to sell shares of Arch under certain circumstances; and
WHEREAS, CIL is an Affiliate of Carboex, and Carboex is a Permitted Transferee
of CIL, both as defined in Section 1 of the Agreement; and
WHEREAS, CIL has sold to Carboex on the date hereof 1,640,000 shares of Arch
representing all of the shares of Arch owned by CIL at the time of sale; and
WHEREAS, Carboex wishes to receive the assignment, under the terms and
conditions of the Agreement and as a Permitted Transferee, of all of the rights,
obligations and liabilities of CIL under the Agreement, and CIL is willing to
assign to Carboex all of such rights, obligations and liabilities in connection
with its sale to Carboex of all of its shares of Arch;
NOW, THEREFORE, CIL hereby irrevocably assigns to Carboex, and Carboex accepts
as assignee and Permitted Transferee, all of its rights, obligations and
liabilities provided for in the Agreement, and Carboex agrees to be bound by the
terms of the Agreement to the same extent and in the same manner as CIL.
Carboex International, Limited
by /s/ Alfonso Martinez
Date:
Received:
Arch Coal, Inc.
Carboex, S.A.
by: /s/ Jeffry N. Quinn by /s/ I. Dominguez
Date: 2-2-99 Date:
<PAGE> 1
EXHIBIT 4.4
Assignment of Registration Rights
This Assignment of October 15, 1998, between the assignor, Carboex
International, Limited ("CIL"), a company organized under the laws of the
Bahamas, and the assignee, Carboex, S.A. ("Carboex"), a company organized under
the laws of Spain:
WHEREAS, on April 4, 1997, CIL entered into an agreement known as the
Registration Rights Agreement (the "Agreement") with Arch Mineral Corporation,
now known as Arch Coal, Inc. ("Arch"), Ashland, Inc. and certain other
shareholders of Arch known collectively as the Hunt Entities, providing for the
registration of the shares of Arch belonging to CIL; and
WHEREAS, CIL has not exercised any of its rights under the terms of the
Agreement; and
WHEREAS, CIL is an affiliate of Carboex, as defined in Article I, Section 1.01
of the Agreement; and
WHEREAS, CIL has sold to Carboex on the date hereof 1,640,000 shares of Arch,
representing all of the shares of Arch owned by CIL at the time of sale; and
WHEREAS, Carboex wishes to receive the assignment, under the terms and
conditions of the Agreement and as a Permitted Transferee, as defined in Article
I, Section 1.01 of the Agreement, of all of the registration rights enjoyed by
CIL to the extent provided for by the Agreement, and CIL is willing to assign to
Carboex, all of such registration rights in connection with its sale to Carboex
of all of its shares to Arch:
NOW, THEREFORE: CIL hereby irrevocably assigns to Carboex, and Carboex accepts
as assignee and Permitted Transferee, all of its rights to register shares of
Arch provided for in the Agreement, to the extent and with the terms and
conditions set forth therein for a Permitted Transferee, and the Agreement shall
be binding upon and shall inure to the parties thereto and to Carboex as a
Permitted Transferee, in accordance with Article X, Section 10.08 of the
Agreement.
Carboex International, Limited
by /s/ Alfonso Martinez
Date:
Received:
Arch Coal, Inc.
Carboex, S.A.
by: /s/ Jeffry N. Quinn by /s/ Ignacio Dominguez
Date: 2-2-99 Date:
<PAGE> 1
EXHIBIT 4.6
Assignment of Right to Maintain a Non-Voting Observer at Meetings of the
Board of Directors of Arch Coal, Inc.
This Assignment of October 15, 1998, between the assignor, Carboex
International, Limited ("CIL"), a company organized under the laws of the
Bahamas, and the assignee, Carboex, S.A. ("Carboex"), a company organized under
the laws of Spain:
WHEREAS, on April 4, 1997, CIL entered into an agreement (the "Agreement") with
Arch Mineral Corporation, now known as Arch Coal, Inc. ("Arch"), Ashland Coal,
Inc., and Ashland, Inc., giving CIL the right to have a non-voting observer in
attendance at regular and special meetings of the Board of Directors of Arch;
and
WHEREAS, CIL is a wholly owned subsidiary of Carboex, and the two companies are
affiliates; and
WHEREAS, CIL has sold to Carboex on the date hereof 1,640,000 shares of the
common stock of Arch, representing all of the shares of Arch owned by CIL at the
time of sale; and
WHEREAS, by a separate agreement CIL has assigned to Carboex the right CIL
previously enjoyed to choose a Director of Arch, who would be nominated and
elected to the Board of Directors of Arch; and
WHEREAS, the shares sold by CIL to Carboex represent more than 63% of the shares
of the common stock of Arch obtained by CIL upon the merger of Arch and Ashland
Coal, Inc., such amount being sufficient under the terms of the Agreement to
permit CIL to have a non-voting observer present at the regular and special
meetings of the Board of Directors of Arch; and
WHEREAS, CIL and Carboex wish Carboex to succeed to the rights of CIL under the
Agreement in order that Carboex shall have the right to choose directly the
non-voting observer:
NOW, THEREFORE, CIL, irrevocably assigns to Carboex; all of its rights under the
Agreement, and Carboex accepts as assignee all of the rights provided for in the
Agreement and agrees to be bound by the terms of the Agreement to the same
extent and in the same manner as CIL.
Carboex International, Limited
by /s/ Alfonso Martinez
Date:
Received:
Arch Coal, Inc.
Carboex, S.A.
by: /s/ Jeffry N. Quinn by /s/ I. Dominguez
Date: 2-2-99 Date:
<PAGE> 1
EXHIBIT 10.17
SUFCo Logical Mining Unit
The Mineral Leasing Act (MLA) of February 25, 1920, as amended by the Federal
Coal Leasing Amendments Act (FCLAA) of 1976, authorizes the consolidation of
coal leases into a Logical Mining Unit (LMU) . An LMU is an area of land in
which the coal resources can be developed in an efficient, economical, and
orderly manner as a unit with due regard to conservation of coal resources and
other resources.
1. UNIT AREA: This area, specified on the map attached hereto marked
Exhibit A, is hereby designated the LMU area, containing 17,255.32
acres and described as follows:
Federal Coal Lease SL-062583
T. 21 S., R. 4 E., Sec. 36, S 1/2.
T. 21 S., R. 5 E., Sec. 31, all.
T. 22 S., R. 4 E., Sec. 1, lots 1-4, S 1/2 N 1/2, S 1/2;
Sec. 12, NW 1/4.
T. 22 S., R. 5 E., Sec. 6, all;
Sec. 7, N 1/2 NE 1/4, E 1/2 NW 1/4.
Containing 2,199.83 acres.
Federal Coal Lease U-062453
T. 21 S., R. 5 E., Sec. 28, SW 1/4 SW 1/4;
Sec. 29, SE 1/4 SE 1/4;
Sec. 32, N 1/2;
Sec. 33, W 1/2 NW 1/4.
Containing 480 acres.
Federal Coal Lease U-0149084
T. 22 S., R. 4 E., Sec. 12, NE 1/4, N 1/2 SE 1/4.
Containing 240 acres.
Federal coal Lease U-47080
T. 21 S., R. 4 E., Sec. 25, all;
Sec. 36, N 1/2.
T. 21 S., R. 5 E., Sec. 30, lots 2-4, W 1/2 SE 1/4.
<PAGE> 2
Containing 1,158.05 acres.
Federal coal Lease U-28297
T. 21 S., R. 5 E. Sec. 32, lots 1-4, N 1/2 S 1/2;
Sec. 33, lot 1, NW 1/4 SW 1/4.
T. 22 S., R. 5 E. Sec. 4, lot 4, SW 1/4 NW1/4, W1/2 SW1/4;
Sec. 5, all;
Sec. 7, S 1/2 NE 1/4, E 1/2 SW 1/4, SE 1/4;
Sec. 8, all;
Sec. 17, NE 1/4, N 1/2 NW 1/4;
Sec. 18, NE 1/4, E 1/2 NW 1/4.
Containing 2,631.98 acres.
Federal Coal Lease U-63214
T. 21 S., R. 4 E., Sec. 12, E 1/2 SE 1/4;
Sec. 13, E 1/2 NE 1/4, S 1/2;
Sec. 14, E 1/2 SW 1/4, SE 1/4;
Sec. 23, E 1/2, E 1/2 W 1/2;
Sec. 24, all.
T. 21 S., R. 5 E., Sec. 15, W 1/2;
Sec. 16, all;
Sec. 17, all;
Sec. 18, all;
Sec. 19, all;
Sec. 20, all;
Sec. 21, all;
Sec. 22, W 1/2;
Sec. 26, W 1/2 NW 1/4 SW 1/4, SW 1/4 SW 1/4;
Sec. 27, all;
Sec. 28, N 1/2, N 1/2 SW 1/4, SE 1/4 SW 1/4, SE 1/4;
Sec. 29, E 1/2 NE 1/4, NE 1/4 SE 1/4;
Sec. 30, lot 1, N 1/2 NE 1/4;
Sec. 33, lots 2-4, NE 1/4, E 1/2 NW 1/4,
NE 1/4 SW 1/4, N 1/2 SE 1/4;
Sec. 34, all;
Sec. 35, lots 1,2, W 1/2 NW 1/4, N 1/2 SW 1/4;
T. 22 S., R. 5 E., Sec. 3, lots 1-4, S 1/2 N 1/2, NE 1/4 SW 1/4,
S 1/2 SW 1/4, N 1/2 SE 1/4, SW 1/4 SE 1/4.
<PAGE> 3
Sec. 4, lots 1,2, S 1/2 NE 1/4, SE 1/4 SE 1/4;
Sec. 9, NE 1/4 NE 1/4;
Sec. 10, W 1/2 NE 1/4, NW 1/4, N 1/2 SW 1/4.
Containing 9,905.46 acres.
Fee Land
T. 21 S., R. 5 E., Sec. 29, W 1/2, W 1/2E 1/2;
Sec. 30, S 1/2 NE 1/4, E 1/2 SE 1/4.
Containing 640 acres.
The LMU includes the following Federal coal leases described in Exhibit B
attached: SL-062583, U-062453, U-0149084, U-28297, U-47080, and U-63214.
2. UNIT OPERATOR: Southern Utah Fuel Company
397 South 800 East
Salina, Utah 84654
3. STIPULATIONS: As a consideration to the approval of this LMU, the
operator/lessee consents to the following stipulations which make all
Federal coal leases within the LMU subject to uniform requirements of
the Resource Recovery and Protection Plan (R2P2), LMU recoverable
reserves exhaustion, diligent development, continued operation, maximum
economic recovery, advanced royalty and royalty reporting reports. As
of April 2, 1990, the diligence term and conditions of the Federal coal
leases are subject to or are superseded by the diligence requirements
imposed on the LMU.
a. SUPERVISION: The Bureau of Land Management
Moab District office
82 East Dogwood Lane
Moab, Utah 84532
is responsible for the review and approval of exploration plans and
ions, and modifications, thereto, prior to the commencement of the
operation within the permit area approved pursuant to the Surface
Mining control and Reclamation Act of 1977. The Assistant District
manager is responsible for review and approval of R2P2s and
modifications thereto. The Assistant District Manager is also
responsible for inspection and enforcement, including production
verification of such operations and all lands and all coal contained in
the LMU, and for implementing all other applicable provisions of 43 CFR
3400.
b. DILIGENT DEVELOPMENT AND CONTINUED OPERATION: Pursuant to 43 CFR
3480.0-5(a)(13)(ii)(B), the diligent development period for the LMU
began effective July 1, 1989. Therefore, the LMU must have production
of commercial quantities (one
<PAGE> 4
percent of the recoverable reserves) by July 1, 1999. SUFCo must mine
1,292,900 tons from anywhere within the LMU to achieve diligent
development and yearly thereafter to maintain continued operation or
request to be allowed to pay advanced royalties in lieu of continued
operation.
c. ADVANCE ROYALTY: The number of years for which advance royalty may
be paid in lieu of continued operation is ten. Advance royalty may be
paid in lieu of continued operation only until July 1, 2009. No advance
royalty paid prior to that date may be credited against production
royalty after that date.
d. REPORTING PERIOD: Rental for Federal coal leases continued in the
LMU will be due, in a lump sum, annually on the anniversary date of the
LMU approval, April 2, 1990. Upon approval and for the duration of this
LMU, no Federal rentals may be credited against production royalties
for any Federal coal lease contained in the LMU, even though the
Federal coal lease terms may have allowed for such credits prior to the
effective date of the LMU.
Royalties for Federal recoverable coal reserves produced
within the LMU will be paid on the appropriate Minerals Management
Service (MMS) Production and Operation reports every royalty reporting
period. The LMU royalty reporting period will be on a monthly basis
beginning with the royalty period after the date that coal is first
produced following the effective date of the LMU approval. If coal is
being produced on the effective date of the LMU approval, the first
royalty reporting period will begin on the first day of the mouth
following the effective date of the LMU. Since production within an LMU
is credited to the entire LMU, a certified record of all non Federal
LMU coal production must be provided to the District Manager on an
annual basis. Progress maps and reports required by 43 CM 3495.1 shall
show all Federal and non Federal production from anywhere within the
LMU.
e. RECOVERABLE COAL RESERVES EXHAUSTION: The 40-year LMU recoverable
coal reserves exhaustion period commences the date that coal is first
produced from the LMU, following the effective date of LMU approval. If
there is production occurring within the LMU on the effective date of
LMU approval, the 40-year clock begins on the effective date of LMU
approval.
<PAGE> 5
f. If the LMU, of which Federal coal leases SL-062583, U-062453,
U-0149084, U-47080, U-28297, and U-63214 are part fails for whatever
reason, the above-mentioned leases will automatically be subject to the
diligence provisions that otherwise would have applied had they not
been included in an LMU.
Coastal States Energy Company Southern Utah Fuel Company
Company of Lessee Name Unit Operator
By /s/ Unintelligble By /s/ Unintelligible
(signature of Lessee) (signature of Unit Operator)
Senior Vice President General Manager
Title Title
June 24, 1993 June 24, 1993
Date Date
<PAGE> 6
[GRAPHIC OMITTED]
LEASES COMPRISING THE SUFCO LMU
SEVIER COUNTY, UTAH
<PAGE> 7
SUFCO LMU
Exhibit "B"
FEDERAL LEASE:
Serial Number: SL-062583
Lease Effective Date: September 11, 1941
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 21 S., R. 4 E., Sec. 36, S 1/2.
T. 21 S., R. 5 E., Sec. 31, all.
T. 22 S., R. 4 E., Sec. 1, lots 1-4, S 1/2 N 1/2, S 1/2
Sec. 12, NW 1/4.
T. 22 S., R. 5 E., Sec. 6, all;
Sec. 7, N 1/2 NE 1/4, E 1/2 NW 1/4.
Containing: 2,199.83 acres.
FEDERAL LEASE:
Serial Number: U-062453
Lease Effective Date: March 1, 1962
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 21 S., R. 5 E., Sec. 28, SW 1/4 SW 1/4;
Sec. 29, SE 1/4 SE 1/4;
Sec. 32, N 1/2;
Sec. 33, W 1/2 NW 1/4.
Containing: 480 acres.
FEDERAL LEASE:
Serial Number: U-0149084
Lease Effective Date: June 1, 1966
<PAGE> 8
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 22 S., R. 4 E., Sec. 12, NE 1/4, N 1/2 SE 1/4.
Containing: 240 acres.
FEDERAL LEASE:
Serial Number: U-47080
Lease Effective Date: October 1, 1981
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 21 S., R. 4 E., Sec. 25, all;
Sec. 36, N 1/2.
T. 21 S., R. 5 E., Sec. 30, lots 2-4, W 1/2 SE 1/4.
Containing: 1,158.05 acres.
FEDERAL LEASE:
Serial Number: U-28297
Lease Effective Date: January 1, 1979
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 21 S., R. 5 E., Sec. 32, lots 1-4, N 1/2 S 1/2;
Sec. 33, lot 1, NW 1/4 SW 1/4.
T. 22 S., R. 5 E., Sec. 4, lot 4, SW 1/4 NW 1/4, W 1/2
SW 1/4;
Sec. 5, all;
Sec. 7, S 1/2 NE 1/4, E 1/2 SW 1/4,
SE 1/4;
Sec. 8, all;
Sec. 17, NE 1/4, N 1/2 NW 1/4;
Sec. 18, NE 1/4, E 1/2 NW 1/4.
Containing: 2,631.98 acres.
<PAGE> 9
FEDERAL LEASE:
Serial Number: U-63214
Lease Effective Date: July 1, 1989
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 21 S., R. 4 E., Sec. 12, E 1/2 SE 1/4;
Sec. 13, E 1/2 NE 1/4, S 1/2;
Sec. 14, E 1/2 SW 1/4, SE 1/4;
Sec. 23, E 1/2, E 1/2 W 1/2;
Sec. 24, all.
T. 21 S., R. 5 E., Sec. 15, W 1/2;
Sec. 16, all;
Sec. 17, all;
Sec. 18, all;
Sec. 19, all;
Sec. 20, all;
Sec. 21, all;
Sec. 22, W 1/2;
Sec. 26, W 1/2 NW 1/4 SW 1/4, SW 1/4 SW 1/4;
Sec. 27, all;
Sec. 28, N 1/2, N 1/2 SW 1/4, SE 1/4 SW 1/4,
SE 1/4;
Sec. 29, E 1/2 NE 1/4, NE 1/4 SE 1/4;
Sec. 30, lot 1, N 1/2 NE 1/4;
Sec. 33, lots 2-4, NE 1/4, E 1/2 NW 1/4,
NE 1/4 SW 1/4 , N 1/2 SE 1/4,
Sec. 34, all;
Sec. 35, lots 1,2, W 1/2 NW 1/4, N 1/2
SW 1/4;
T. 22 S., R. 5. E., Sec. 3, lots 1-4, S 1/2 N 1/2, NE 1/4
SW 1/4, S 1/2 SW 1/4, N 1/2 SE 1/4,
SW 1/4 SE 1/4.
Sec. 4, lots 1,2, S 1/2 NE 1/4, SE 1/4
SE 1/4;
Sec. 9, NE 1/4 NE 1/4;
Sec. 10, W 1/2 NE 1/4, NW 1/4, N 1/2 SW 1/4.
Containing: 9,905-46 acres.
<PAGE> 10
FEE LAND
Description of Land committed:
T. 21 S., R. 5 E., Sec. 29, W 1/2 E 1/2, W 1/2;
Sec. 30, S 1/2 NE 1/4, E 1/2 SE 1/4.
Containing 640 acres.
<PAGE> 1
EXHIBIT 10.18
SKYLINE LOGICAL MINING UNIT
The Mineral Leasing Act (MLA) of February 25, 1920, as amended by the Federal
Coal Leasing Amendments Act (FCLAA) of 1976, authorizes the consolidation of
coal leases into a logical mining unit (LMU). An LMU is an area of land in which
the coal resources can be developed in an efficient, economical and orderly
manner as a unit with due regard to conservation of coal resources and other
resources.
As a result of an application for an LMU designation filed by Utah Fuel Company,
the Skyline LMU is approved effective August 1, 1988 and provides as follows:
1. UNIT AREA: The area specified on the map attached hereto marked Exhibit
A is hereby designated the LMU area, containing 6,367.14 acres as
described as follows:
T. 13 S., R. 6 E., SLM, Utah
Sec. 10, lots 3, 4, E 1/2 SW 1/4, SE 1/4;
Sec. 11, S 1/2 S 1/2;
Sec. 13, lots 1-8;
Secs. 14, 15, 22, 23, all;
Sec. 24, W 1/2;
Sec.25, beginning at the SW
corner; thence N. 0(Degree)
07' W. 74.9 chains along the
west section line to the NW
corner; thence East 40.1
chains along the north
section line to the N 1/4
corner; thence S. 28(Degree)
03' 38" W. 85 chains, more or
less, to the point of
beginning;
Sec. 26, all;
Sec. 27, all, (excluding reservoir R/W SL-062389);
Sec. 34, all, (excluding reservoir R/W SL-062389);
Sec. 35, all.
The LMU includes the following Federal coal leases described in Exhibit B
attached: U-073120, U-0142235, U-020305, U-0147570, and U-044076.
2. UNIT OPERATOR: Utah Fuel Company
175 East 400 South, Suite 800
Salt Lake City, Utah 84111
3. STIPMATIONS: As a consideration to the approval of the LMU, the
operator/lessee consents to the following stipulations which make all
Federal leases within the LMU
<PAGE> 2
subject to uniform requirements of this Resource Recovery and
Protection Plan (R2P2), LMU recoverable reserves exhaustion, diligent
development, continued operation, maximum economic recovery, advance
royalty and royalty reporting periods. As of August 1, 1988, the
diligence terms and conditions of the Federal lease are subject to or
are superseded by the diligence requirements imposed on the LMU.
A. SUPERVISION: Bureau of Land Management
Moab District Office
82 East Dogwood
P. 0. Box 970
Moab, Utah 84532
The District Manager located at the above location is
responsible for the review and approval of exploration plans
and operations, and modifications thereto, prior to the
commencement of mining operations within a permit area
approved pursuant to the Surface Mining Control and
Reclamation Act (SHCRA) of 1977. The District Manager is also
responsible for review and approval of resource recovery and
protection plans and modifications thereto, and is also
responsible for inspection and enforcement, including
production verification, of such operations and all lands and
all coal within the LMU, and for implementing all other
applicable provisions of the 43 CFR 3400 rules.
B. DILIGENT DEVELOPMENT AND CONTINUED OPERATION: Pursuant to 43
CFR 3480.0-5 (a)(13)(ii)(B), the diligent development period
for the LMU began on May 1, 1986. Therefore, the LMU must have
production of commercial quantities (It of the total
recoverable reserves) by May 1, 1996. Utah Fuel Company must
mine 986,470 tons from anywhere within the LMU to achieve
diligent development and, thereafter, to maintain continued
operation or request to be allowed to pay advance royalty in
lieu of continued operation.
C. ADVANCE ROYALTY: The number of years for which advanced
royalty may be paid in lieu of continued operation is ten
(10). Advance royalty may be paid in lieu of continued
operation only until May 1, 2006. No advanced royalty paid
prior to that date may be credited against production royalty
after that date.
D. REPORTING PERIOD: The rental amount for Federal coal leases is
to be prorated to the effective date of the LMU. Thereafter,
rental for Federal coal leases contained in the IXU will be
due, in a lump sum, annually on the anniversary date of the
LMU approval, August 1, 1988. Upon approval and for the
duration of this LMU, no Federal rentals may be credited
against production royalties for any Federal coal lease
contained in the LMU, even though the Federal coal lease terms
may have allowed for such credits prior to the effective date
of the LMU.
Royalties for Federal recoverable coal reserves produced
within the LMU will be paid on the appropriate Minerals
Management Service (MMS) Production and
<PAGE> 3
Operations reports every royalty reporting period. The LMU
royalty reporting period will be on a monthly basis beginning
with the royalty period after the date that coal is first
produced following the effective date of the LMU approval. If
coal is being produced on the effective date of LMU approval,
the first royalty reporting period will begin on the first day
of the month following the effective date of the LMU. Since
all production within an LMU is credited to the entire LMU, a
certified record of all non-Federal LMU coal production must
be provided to the District Manager on an annual basis.
Progress maps and reports required by 43 CFR 3483.2 shall show
all Federal and non-Federal production from anywhere within
the LMU.
E. RECOVERABLE COAL RESERVES EXHAUSTION: The 40-year LMU
recoverable coal reserves exhaustion period commences the date
that coal is first produced from the LMU, following the
effective date of LMU approval. if there is production
occurring within the LMU on the effective date of LMU
approval, the 40-year clock begins on the effective date of
LMU approval.
F. OTHER: If the LMU, of which Federal coal leases U-073120,
U-0142235, U-020305, U-0147570, and U-044076 are a part, fails
for whatever reason, the above mentioned leases will
automatically be subject to the diligence provisions that
otherwise would have applied had they not been included in an
LMU.
COASTAL STATES ENERGY COMPANY UTAH FUEL COMPANY
Unit Operator
By_____________________________ By_____________________________
_____________________________ _____________________________
Title Title
_____________________________ _____________________________
Date Date
KANAWHA & HOCKING COAL & COKE CO.
By______________________________________
SEE SEPARATE
________________________________________ CONCURRENCE
Title DOCUMENT
________________________________________
Date
<PAGE> 4
[GRAPHIC OMITTED]
<PAGE> 5
CONCURRENCE DOCUMENT
OF DECISION DATED
NOVEMBER 9, 1993
THE UNDERSIGNED CONCUR THAT THE JULY 28, 1989 AGREEMENT IS STILL
VALID AND IN EFFECT WITH NO OBJECTION TO INCLUSION OF COAL LEASE
U-073120 INTO THE SKYLINE LOGICAL MINING UNIT APPROVAL.
_______________________________________________________
Authorized Officer - David E. Lung, Secretary/Treasurer
Kanawha & Hocking Coal and Coke- Company
<PAGE> 6
SKYLINE LMU
EXHIBIT "B"
FEDERAL LEASE:
Serial Number: U-073120
Lease Effective Date: February 1, 1964
Lessee: Kanawha and Hocking Coal and Coke Company
Description of Land Committed:
T. 13 S., R. 6 E., SLM, Utah
Sec. 13, lots 1-6, and 8;
Sec. 14, NE 1/4, N 1/2 SE 1/4;
Sec. 24, NE 1/4 NW 1/4.
Acres: 557.22
FEDERAL LEASE:
Serial Number: U-0142235
Lease Effective Date: October 1, 1964
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 13 S., R. 6 E., SLM, Utah
Sec. 11, S 1/2 S 1/2;
Sec. 14, W 1/2, SW 1/4 SE 1/4.
Acres: 520.00
<PAGE> 7
FEDERAL LEASE:
Serial Number: U-0147570
Lease Effective Date: May 1, 1965
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 13 S., R. 6 E., SLM, Utah
Sec. 10, lots 3, 4, E 1/2 SW 1/4, SE 1/4;
Sec. 15, lots 1-4, E 1/2, E 1/2 W 1/2;
Sec. 23, W 1/2 E 1/2, W 1/2.
Acres: 2,092.70
FEDERAL LEASE:
Serial Number: U-020305
Lease Effective Date: March 1, 1962
Lessee: Coastal States Energy Company
Description of Land Committed:
T 13 S., R. 6 E. , SLM, Utah
Sec. 13, lot 7;
Sec. 14, SE 1/4 SE 1/4;
Sec. 23, E 1/2 E 1/2;
Sec. 24, W 1/2 NW 1/4, SE 1/4 NW 1/4, S 1/2;
Sec. 25, Beginning at the SW corner; thence N.
0(Degree) 06' 47" W. along the west section
line 74.948 chains to the NW corner; thence
N. 89(Degree) 57' 47" E. along the north
section Line 40.114 chains to the N 1/4
corner; thence S. 28(Degree) 03' 38" W. for
a distance of 84.961 chains to the point of
beginning;
Sec. 26, E 1/2 E 1/2.
Acres: 829.40
<PAGE> 8
FEDERAL LEASE:
Serial Number: U-044076
Lease Effective Date: September 1, 1965
Lessee: Coastal States Energy Company
Description of Land Committed:
T. 13 S., R. 6 E., SLM, Utah
Sec. 26, W 1/2 E 1/2, W 1/2;
Sec. 27, lots 1-4, E 1/2, E 1/2 W 1/2,
(excluding reservoir R/W SL-062389);
Sec. 34, lots 1-8, S 1/2, (excluding reservoir
R/W SL-062389);
Sec. 35, all.
Acres: 2,367.82
<PAGE> 1
EXHIBIT 10.19
Solider Creek Logical Mining Unit
The Mineral Leasing Act (MLA) of February 25, 1920, as amended by the Federal
Coal Leasing Amendments Act (FCLAA) of 1976, authorizes the consolidation of
coal leases into a logical mining unit (LMU). An LMU is an area of land which
the coal resources can be developed in an efficient, economical and orderly
manner as a unit with due regard to conservation of coal resources and other
resources.
As a result of a modification to an application for an LMU designation filed by
Coastal States Energy Company, the Soldier Creek LMU is approved effective March
1, 1996, and provides as follows:
1. Unit Area: The area specified on the map attached hereto marked Exhibit A
being hereby designated the LMU area, containing 12,142.5 acres as described as
follows:
Federal Coal Lease SL-051279-063188
T. 13 S., R. 11 E., SLM, Utah
Sec. 12, E1/2 E1/2;
Sec. 13, NE1/4 NE1/4.
T. 13 S., R. 12 E., SLM, Utah
Sec. 7, lots 1 through 4, E1/2 W1/2 , E1/2;
Sec. 8, W1/2;
Sec. 17, W1/2;
Sec. 18, lot 1, N1/2 NE1/4, SE1/4 NE1/4, NE1/4 NW1/4.
Contains 1548.31 acres
Federal Coal Lease U-07064-027821
T. 13 S., R. 12 E., SLM, Utah
Sec. 13, S1/2;
Sec. 23, E1/2 E1/2, W1/2 SE1/4, NE1/4 SW1/4;
Sec. 24, all;
Sec. 25, N1/4 N1/4;
Sec. 26, N1/2 NE1/4.
T. 13 S., R. 13 E., SLM, Utah
Sec. 18, lots 3,4, E1/2 SW1/4, SE1/4;
Sec. 19, lots 1-4, E1/2 W1/2, NE1/4, NW1/4 SE1/4;
Sec. 30, lot 1.
Contains 2416.14 acres more or less
Federal Coal Lease U-50722
T. 13 S., R. 11 E., SLM, Utah
Sec. 1, lot 8;
Sec. 12, E1/2 W1/2 , W1/2 E1/2;
Sec. 13, NW1/4 NE1/4, NE1/4 NW1/4.
<PAGE> 2
Contains 440 acres more or less.
Federal Coal Lease UTU-69635
T. 13 S., R. 11 E., SLM, Utah
Sec. 1, lots 1-7 and 8 (for all coal except the Rock
Cyn. Bed);
Sec. 10, E1/2 E1/2;
Sec. 11, all;
Sec. 12, W1/2 W1/2;
Sec. 13, W1/2 NW1/4, SE1/4 NW1/4, SW1/4;
Sec. 14, N1/2, N1/2 S1/2, SE1/4 SE1/4;
Sec. 15, NE1/4 NE1/4;
Sec. 23, N1/2 NE1/4 NE1/4;
Sec. 24, N1/2 N1/2 NW1/4.
Containing 2177.52 acres more or less
BLM Authorization to Mine
T. 13 S., R. 11 E., SLIVI, Utah
Sec. 13, SE1/4,NE1/4, NE1/4 SE1/4.
T. 13 S., R. 12 E., SLM, Utah
Sec. 18, S1/2 NW1/4.
Containing 120 acres more or less
State Lease
T. 13 S., R. 12 E., SLM, Utah
Sec. 8, E1/2;
Sec. 10, S1/2;
Sec. 11, S1/2;
Sec. 14, all;
Sec. 15, all;
Sec. 17, NE1/4, E1/2 SW1/4, SE1/4;
Sec. 20, E1/2 NW1/4, SW1/4 NW1/4, N1/2 NE1/4;
Sec. 21, N1/2 NW1/4, NE1/4;
Sec. 22, N1/2, N1/2 S1/2;
Sec. 23, W1/2 NW1/4
Containing 3640 acres more or less
Private Lands:
T. 13 S., R. 12 E.. SLM, Utah
Sec. 23, W1/2 NE1/4, E1/2 NW1/4;
Sec. 16, all.
T. 13 S., R. 11 E., SLM, Utah
Sec. 2;
<PAGE> 3
Sec. 3, lots 5,6,.7;
Sec. 9, E1/2 NE1/4, SW1/4 NE1/4, N1/2 SE1/4;
Sec. 10, NW1/4, W1/2 NE1/4, NW1/4 SW1/4, NW1/4 SE1/4.
Containing 1752.2 acres more or less.
The LMU includes the following Federal coal leases described in Exhibit B
attached: SL-051279063188, U-074064-027821, U-05722, UTU-69635.
2. Unit Operator:
Canyon Fuel Company, L.L.C.
P.O. Box 1029
Wellington, UT 84542
3. Stipulations: As a consideration to the approval of the LMU, the
operator/lessee consents to the following stipulations which make all Federal
leases within the LMU subject to uniform requirements of this Resource Recovery
and Protection Plan (R2P2), LMU recoverable reserves exhaustion, diligent
development, continued operation, maximum economic recovery, advance royalty and
royalty reporting periods. As of March 1, 1996, the diligence terms and
conditions of the Federal lease are subject to or are superseded by the
diligence requirements imposed on the LMU.
a. Supervision:
Bureau of Land Management
Price Field Office
125 South 600 West
P. O. Box 7004
Price, Utah 84501
The Price Field Office Manager located at the above location is responsible for
the review and approval of exploration plans and operations, and modifications
thereto, prior to the commencement of mining operations within a permit area
approved pursuant to the Surface Mining Control and Reclamation Act (SMCRA) of
1977. The Manager is also responsible for review and approval of resource
recovery and protection plans and modifications thereto, and is also responsible
for inspection and enforcement, including production verification, of such
operations and all lands and all coal within the LMU, and for implementing all
other applicable provisions of the 43 CFR 3400 rules for the LMU.
b. Diligent Development and Continued Operation requirements: Pursuant to 43 CFR
3480.0-5 (a)(13)(B), the diligent development period for the LMU began on
October 1, 1995. Therefore, the LMU must have production of commercial
quantities (1% of the total recoverable reserves) by October 1, 2005. Canyon
Fuel Company L.L.C. must mine 664,000 tons from anywhere within the Solider
Creek LMU to achieve diligent development. This requirement was met on January
1997. The LMU must maintain continued operation requirements (mining commercial
quantities) or a request to be allowed to pay advance royalty in lieu of
continued operation. This request must be submitted to BLM 30 days prior to the
start of the continued operation year. Since the LMU has met the requirement for
diligent development in January 1997, the LMU will be required to maintain
production of commercial quantities on an annual basis. The continued operation
period for this LMU began on February 1, 1997.
c. Advance Royalty: The number of years for which advanced royalty may be paid
in lieu of continued operation is ten (10). Advance royalty may be paid in lieu
of continued operation only until October 1, 2015. No advanced royalty paid
prior to that date may be credited against production royalty after that date.
<PAGE> 4
d. Reporting Period: The rental amount for Federal coal leases is to be prorated
to the effective date of the LMU. Thereafter, rental for Federal coal leases
contained in the LMU will be due, in a lump sum, annually on the anniversary
date of the LMU approval, March 1, 1997. Upon approval and for the duration of
this LMU, no Federal rentals may be credited against production royalties for
any Federal coal lease contained in the LMU, even though the Federal coal lease
terms may have allowed for such credits prior to the effective date of the LMU.
Royalties for Federal recoverable reserves produced within the LMU will be paid
on the appropriate Minerals Management Service (MMS) Production and Operations
reports every royalty reporting period. The LMU royalty reporting period will be
on a monthly basis beginning with the royalty period after the date that coal is
first produced following the effective date of the LMU. If coal is being
produced on the effective date of the LMU approval, the first royalty reporting
period will begin on the first day of the month following the effective date of
the LMU. Since all production within an LMU is credited to the entire LMU, a
certified record of all non-Federal LMU coal production must be provided to the
Price Office Manager on an annual basis. Progress maps and reports required by
43 CFR 3483.2 will show all Federal and non-Federal production from anywhere
within the LMU.
e. Recoverable Coal reserves Exhaustion: The 40-year LMU recoverable coal
reserves exhaustion period commences the date the coal is first produced from
the LMU, following the effective date of LMU approval. If there is production
occurring within the LMU on the effective date of LMU approval, the 40-year
clock begins on the effective date of LMU approval.
f. Other: If the LMU of which Federal coal leases SL-051279-063188,
U-074064-027821, U50722, UTU-69635 is a part, fails for whatever reason, the
above-mentioned leases will automatically be applied had they not been included
in an LMU.
Canyon Fuel Company. L.L.C. Bureau of Land Management
By /s/ R D Pick By /s/ Unintelligible
Title President and CEO Title Acting, Deputy State Director,
Natural Resources
Date May 13, 1997
Date July 19 1997
<PAGE> 1
EXHIBIT 10.20
3480
WYW136373
BLACK THUNDER MINE LOGICAL MINING UNIT
CASPLMU16
The Mineral Leasing Act of February 25, 1920, as amended by the Federal Coal
Leasing Amendments Act of 1976, authorizes the consolidation of coal leases into
a logical mining unit (LMU). A (LMU) is an area of land in which the coal
resources can be developed in an efficient, economical, and orderly manner as a
unit with due regard to conservation of coal resources and other resources.
As a result of an application for an LMU filed by Thunder Basin Coal Company,
the Black Thunder Mine LMU is hereby APPROVED EFFECTIVE MAY 1, 1995, and
provides as follows:
1. The following area is hereby designated the LMU area, containing 9,566.725
acres described as follows based on the coal status survey plats in the Wyoming
State Office of the Bureau of Land Management (BLM):
T. 42 N., R. 70 W., 6th P.M., Wyoming
Sec. 2: Lots 5-16;
Sec. 3: Lots 5-16;
T. 43 N., R. 70 W., 6th P.M Wyoming
Sec. 7: Lots 8 (S2), 13 (SW), 14-18,
19 (NW & S2);
Sec. 17: Lots 1-16;
Sec. 18: Lots 5-20;
Sec. 19: Lots 5-20;
Sec. 20: Lots 1-16;
Sec. 21: Lots 1-16;
Sec. 22: Lots 2, 3, 4 (W2W2), 9-13;
Sec. 27: Lots 2-14;
Sec. 28: Lots 1-16;
Sec. 29: Lots 1-16;
Sec. 30: Lots 5-20;
Sec. 31: Lots 5-12;
Sec. 32: Lots 1-8;
Sec. 33: Lots 1-10, 15, 16;
Sec. 34: Lots 1-16;
Sec. 35: Lots 2 (S2), 3-7, 9-16;
<PAGE> 2
3480
WYW136373
2
The unit includes the following Federal coal leases:
WYW2313 T. 42 N., R. 70 W., 6th P.M, Wyoming
Secs. 2, 3;
T. 43 N., R. 70 W., 6th P.M., Wyoming
Secs. 17, 20-22, 27-29, 33-35.
Containing 6,074.230 acres
WYW118907 T. 43 N., R. 70 W., 6th P.M., Wyoming
Secs. 7, 18, 19, 29-33.
Containing 3492.495 acres
2. UNIT OPERATOR, Thunder Basin Coal Company, a wholly owned subsidiary of
Atlantic Richfield Company, P.O. Box 406, Wright, Wyoming 82732, is hereby
designated as Unit Operator. Thunder Basin Coal Company is the lessee of Federal
coal lease, WYW2313, and co-lessee of Federal coal lease, WYW118907.
3. STIPULATIONS, As a consideration to the approval of this LMU, the Unit
Operator/lessee consents to the following stipulations which make all Federal
coal leases within the LMU subject to uniform requirements for submittal of
resource recovery and protection plans (R2P2), LMU recoverable coal reserves
exhaustion, diligent development, continued operation, maxLMUm economic
recovery, advance royalty, and royalty reporting periods (but not royalty
rates). As of the effective date of this LMU, the diligence terms and conditions
of Federal coal leases, WYW2313 and WYW118907, are subject to or are superseded
by the diligent development and continued operation requirements imposed on the
LMU.
(a) SUPERVISION. The Casper District Manager of the Bureau of Land
Management, Casper District Office, located at 1701 East E Street,
Casper, WY 82601, is responsible for the:
(1) review and approval of exploration plans and operations,
and modifications thereto, prior to commencement of mining
operations within a permit area approved pursuant to the
Surface Mining Control and Reclamation Act of 1977 (SMCRA);
(2) review and approval of resource recovery and protection
plans (R2P2) and modifications thereto; and,
<PAGE> 3
3480
WYW136373
3
(3) inspection and enforcement, including production
verification, of such operations and all lands and all coal
within the LMU and for implementing all other applicable
provisions of the 43 CFR Group 3400 rules.
(b) RESOURCE RECOVERY AND PROTECTION PLAN. The Black Thunder Mine
presently has an approved resource recovery and protection plan (R2P2)
and mine permit application covering the entire LMU. NO ADDITIONAL R2P2
SUBMITTAL IS REQUIRED AT THIS TIME.
(c) DILIGENT DEVELOPMENT AND CONTINUED OPERATION. Pursuant to 43 CFR
3480.0-5 (a) (13) (ii), the diligent development period for the LMU
began on October 1, 1992, the effective date of Federal coal lease
WYW118907. THE COMMERCIAL QUANTITIES DUE ON OR BEFORE OCTOBER 1, 2002,
FOR THE LMU ARE SET OUT ON ATTACHMENT 'A'. Since all production which
was credited toward diligent development or continued operation from
either Federal coal lease will be credited toward LMU diligent
development, continued operation commenced on the effective date of the
LMU, May 1, 1995. The LMU continued operation year is May 1 through
April 30. Thunder Basin Coal Company must maintain continued operation
on the LMU or request to be allowed to pay advance royalty in lieu of
continued operation.
(d) ADVANCE ROYALTY. The number of years for which advance royalty may
be paid in lieu of continued operation is ten (10) years. Advance
royalty may be paid in lieu of continued operation ONLY: UNTIL OCTOBER
1, 2012. No advance royalty paid prior to October 1, 2012, may be
credited against production royalty after that date.
(e) REPORTING PERIOD. Pursuant to 43 CFR 3487.1(e)(3), the rental
amount for each Federal coal lease is to be prorated to the effective
date of the LMU which is May 1, 1995. Thereafter, the rentals for
Federal coal leases WYW2313 and WYW118907 within the LMU will be due in
lump sum on the anniversary of the effective date of LMU approval, May
1, 1995. Upon approval of the LMU and for the duration of the LMU, no
Federal coal lease rentals may be credited against production royalties
for any Federal coal lease contained in the LMU, the Federal coal lease
terms of which allowed for such credits prior to the May 1, 1995,
effective date of the LMU.
Royalties for Federal recoverable coal reserves produced within the LMU will be
paid in lump sum, identified by individual Federal coal lease (WYW2313 and
WYW118907) on the Report of Sales and Royalty Remittance, Solid Minerals - Form
MMS 4014, and Solid Mineral Operations Report Part A - Production and
Disposition of Raw Materials Form MMS 4059-A, every royalty reporting period.
THE LMU ROYALTX REE2RTING PERIOD WILL BE ON A CALENDAR MONTH BASIS.
<PAGE> 4
3480
WYW136373
4
The reports and royalty payments shall be due within thirty (30) days after the
end of the reporting period. Since all production within an LMU is credited to
the entire LMU, a certified record of all non-Federal LMU coal production must
be provided to the Casper District Manager every royalty reporting period.
Progress maps and reports required by 43 CFR 3482.3 shall show all Federal and
non-Federal production from anywhere within the LMU.
(f) RECOVERABLE COAL RESERVES EXHAUSTION. The 40-year LMU recoverable
coal reserves exhaustion period commences the date that coal is first
produced from the LMU, following the effective date of LMU approval. If
there is production occurring within the LMU on the effective date of
LMU approval (May 1, 1995), the 40-year clock begins on the effective
date of LMU approval.
(g) SECTION 3. For purposes of meeting the commercial quantities of 30
U.S.C. paragraph 201(a)(2)(A) (Section 3 of the Federal Coal Leasing
Amendments Act of 1976) for all Federal coal leases within the LMU,
production of any coal within the LMU shall be construed as occurring
on all Federal coal leases within the LMU.
(h) FAILURE OF THE LMU. If the LMU, of which Federal coal leases,
WYW2313 and WYW118907, are a part, fails for whatever reason(s), the
Federal coal leases will automatically be subject to the diligence
provisions that otherwise would have applied had the Federal coal
leases not been included in the LMU.
(i) CULTURAL RESOURCES. (1) Before undertaking any activities that may
disturb the surface of the leased lands, the Unit Operator/Lessee shall
conduct a cultural resource intensive field inventory in a manner
specified by the Authorized Officer of the BLM or of the surface
managing agency, if different, on portions of the mine plan area and
adjacent areas, or exploration plan area, that may be adversely
affected by lease-related activities and which were not previously
inventoried at such a level of intensity. The inventory shall be
conducted by a qualified professional cultural resource specialist
(i.e., archeologist, historian, historical architect, as appropriate),
approved by the Authorized Officer of the surface managing agency (BLM,
if the surface is privately owned), and a report of the inventory and
recommendations for protecting any cultural resources identified shall
be submitted to the Assistant Director of the Western Support Center of
the Office of Surface Mining, the Authorized Officer of the BLM, if
activities are associated with coal exploration outside an approved
mining permit area (hereinafter called Authorized Officer), and the
Authorized Officer of the surface managing agency, if different. The
Unit Operator/Lessee shall undertake measures, in accordance with
instructions from the Assistant Director, or Authorized Officer, to
protect cultural resources on the Federally leased lands included in
the LMU. The Unit Operator/Lessee
<PAGE> 5
3480
WYW136373
5
shall not commence the surface disturbing activities until permission
to proceed is given by the Assistant Director or Authorized Officer.
(2) The Unit Operator/Lessee shall protect all cultural
resource properties within the Federally coal leased area
included in the LMU from lease-related activities until the
cultural resource mitigation measures can be implemented as
part of an approved mining and reclamation or exploration
plan.
(3) The cost of conducting the inventory, preparing reports,
and carrying out mitigation measures shall be borne by the
Unit Operator/Lessee.
(4) If cultural resources are discovered during operations
under thisLMU, the Unit Operator/Lessee shall immediately
bring them to the attention of the Assistant Director or
Authorized Officer, or the Authorized Officer of the surface
managing agency, if the Assistant Director is not available.
The Unit Operator/Lessee shall not disturb such resources
except as may be subsequently authorized by the Assistant
Director or Authorized Officer. Within two (2) working days of
notification, the Assistant Director or Authorized Officer
will evaluate or have evaluated any cultural resources
discovered and will determine if any action may be required to
protect or preserve such discoveries. The cost of datarecovery
for cultural resources discovered during LMU operations shall
be borne by the surface managing agency unless otherwise
specified by the Authorized Officer of the BLM or of the
surface managing agency, if different.
(5) All cultural resources shall remain under the jurisdiction
the United States until ownership is determined under
applicable law.
(j) PALEONTOLOGICAL RESOURCES. If paleontological resources, either
large and conspicuous, and/or of significant scientific value are
discovered during mining operations, the find will be reported to the
Authorized Officer immediately. Mining operations will be suspended
within 250 feet of said find. An evaluation of the paleontological
discovery will be made by a BLM approved professional paleontologist
within five (5) working days, weather permitting, to determine the
appropriate action(s) to prevent the potential loss of any significant
paleontological value. Mining operations within 250 feet of such
discovery will not be resumed until written authorization to proceed is
issued by the Authorized Officer. The Unit Operator/Lessee will bear
the cost of any required paleontological appraisals, surface collection
of fossils, or salvage of any large conspicuous fossils of significant
scientific interest discovered during the mining operations.
<PAGE> 6
3480
WYW136373
6
(k) MULTIPLE MINERAL DEVELOPMENT. Operations will not be approved
which, in the opinion of the Authorized Officer, would unreasonably
interfere with the orderly development and/or production from a valid
existing mineral lease issued prior to the Federal coal leases included
in the LMU for the same lands. Lessor reserves the right in accordance
with applicable coal regulations administered by Lessor to require the
Operator/Lessee to modify the Resource Recovery and Protection Plan
(R2P2) to minimize conflicts with other resources and to maximize
recovery of all resources.
(l) OIL AND GAS/COAL RESOURCES. The BLM realizes that coal mining
operations conducted on Federal coal leases issued within producing oil
and gas fields may interfere with the economic recovery of oil and gas;
just as Federal oil and gas leases issued in a Federal coal lease area
my inhibit coal recovery. BLM retains the authority to alter and/or
modify the resource recovery and protection plans (R2P2) for coal
operations and/or oil and gas operations on those lands covered by
Federal mineral leases so as to obtain maximum resource recovery.
(m) RESOURCE RECOVERY AND PROTECTION. Any bypass of Federal coal
previously determined to be economically recoverable under an approved
Resource Recovery and Protection Plan (R2P2), must have the written
approval of the Authorized Officer of the BLM in the form of an
approved modification to the R2P2 prior to the Federal coal being
bypassed. (43 CFR 3482.2(c)(2)) Failure to comply with this requirement
shall result in the issuance of a Notice of Noncompliance by the
Authorized Officer. The Notice of Noncompliance will include the amount
of damages to be assessed for the unauthorized bypass of Federal coal
as determined by the Authorized Officer. The Unit Operator/Lessee shall
pay royalty for all coal not recovered which was available for mining
and was economically recoverable by mining operations under an R2P2
approved by the Authorized Officer. The royalty shall be determined in
accordance with Section 2.(a), PRODUCTION ROYALTIES, of Federal coal
leases WYW2313 and WYW118907, and the value of the coal shall be
determined as set forth in the applicable coal regulations administered
by the Lessor. Federal coal not recovered, but which was available for
recovery, will be volumetrically determined by the Authorized Officer
using standard industry practices.
(n) RECORDS OF PRODUCTION AND SALES. The Unit Operator/Lessee will
accurately determine the weight of all leased coal deposits mined
(produced) and sold, will keep accurate records of such, and make those
available to the Authorized Officer for inspection.
(o) PUBLIC LAND SURVEY PROTECTION. The Unit Operator/Lessee will
protect all survey monuments, witness corners, reference monuments, and
bearing trees against
<PAGE> 7
3480
WYW136373
7
destruction, obliteration, or damage during operations on the lease
areas. If any monuments, corners or accessories are destroyed,
obliterated, or damaged by this operation, the Unit Operator/Lessee
will hire an appropriate county surveyor or registered land surveyor to
reestablish or restore the monuments, corners, or accessories at the
same location, using surveying procedures in accordance with the
"Manual of Surveying Instructions for the Survey of the Public Lands of
the United States." The survey will be recorded in the appropriate
county records, with a copy sent to the Authorized Officer.
Unit Operator/Lessee:
Thunder Basin Coal Company, a wholly owned subsidiary of Atlantic
Richfield Company
BY:
_______________________________ Date: ________________________
_______________________________
(Name)
_______________________________
(Title)
The Black Thunder Mine LMU is hereby approved effective May 1, 1995.
_______________________________ Date: ________________________
State Director
Attachment
1 - Attachment "A" contained in a sealed envelope.
L.Steele:snd:1/12/95:LMU16.DOC
<PAGE> 1
EXHIBIT 10.21
- --------------------------------------------------------------------------------
WY 3400-6 Serial Number
(April 1985) UNITED STATES
DEPARTMENT OF THE INTERIOR WYW3446
BUREAU OF LAND MANAGEMENT
Date Lease Issued
COAL LEASE READJUSTMENT
NOVEMBER 1, 1967
- --------------------------------------------------------------------------------
PART I: LEASE RIGHTS GRANTED
This lease, entered into by and between the United States of America,
hereinafter called the lessor, through the Bureau of Land Management, and
(Name and Address)
THUNDER BASIN COAL COMPANY
P.O. BOX 406
WRIGHT, WYOMING 82732
hereinafter called the lessee, is readjusted, effective NOVEMBER 1, 1997, for a
period of 10 years and for so long thereafter as coal is produced in commercial
quantities from the leased lands, subject to readjustment of lease terms at the
end of each 10-year period.
Sec. 1. This lease readjustment is subject to the terms and provisions of the:
XX[ ] Mineral Lands Leasing Act of 1920, Act of February 25, 1920, as
amended, 41 Stat. 437, 30 U.S.C. 181-287, hereinafter referred to as the Act;
[ ] Mineral Leasing Act for Acquired Lands, Act of August 7, 1947, 61
Stat. 913, 30 U.S.C. 351-359;
and to the regulations and formal orders of the Secretary of the Interior which
are now or hereafter in force, when not inconsistent with the express and
specific provisions herein.
Sec. 2. Lessor, in consideration of any rents and royalties to be paid, and the
conditions and covenants to be observed as herein set forth, hereby grants to
lessee the exclusive right and privilege to drill for, mine, extract, remove or
otherwise process and dispose of the coal deposits in, upon, or under the
following described lands in Campbell County, Wyomng:
T. 45 N., R. 70 W., 6th P.M., Wyoming T. 46 N., R. 70 W., 6th P.M., Wyoming
- -------------------------------------- --------------------------------------
Sec. 4: Lots 7-10; Sec. 17: Lots 1-16;
Sec. 5: Lots 5, 6, 11, 12; Sec. 18: Lots 5, 6, 11-13, 18, 19,
SENE;
Sec. 19: Lots 5, 6, 11-14, 19, 20;
Sec. 20: Lots 1-16;
Sec. 21: Lots 1-16;
Sec. 22: Lots 3-6, 11-14;
Sec. 27: Lots 3-6, 11-14;
Sec. 28: Lots 1-13;
Sec. 29: Lots 1-12;
Sec. 32: Lots 1-4, 9, 10, 15,16;
Sec. 33: Lots 1-16;
Sec. 34: Lots 3-6, 11-14.
containing 5917.990 acres, more or less, together with the right to construct
such works, buildings, plants, structures, equipment and appliances and the
right to use such on-lease rights-of-way which may be necessary and convenient
to the exercise of the rights and privileges granted, subject to the conditions
herein provided.
PART II. TERMS AND CONDITIONS
Sec. 1. (a) RENTAL RATE - Lessee shall pay lessor rental annually and in advance
for each acre or fraction thereof during the continuance of the lease at the
rate of $3.00 for each lease year.
(b) RENTAL CREDITS - Rental shall not be credited against either production or
advance royalties for any year.
Sec. 2 (a) PRODUCTION ROYALTIES - The royalty shall be 12 1/2 per cent of the
value of the coal produced by strip or auger methods and 8 per cent of the value
of the coal produced by underground mining methods. The value of the coal shall
be determined as set forth in 43 CFR 3480. Royalties are due to lessor the final
day of the month succeeding the calendar month in which the royalty obligation
accrues.
(b) ADVANCE ROYALTIES - Upon request by lessee, the authorized officer may
accept, for a total of not more than 10 years, the payment of advance royalties
in lieu of continued operation, consistent with the regulations. The advance
royalty shall be based on a percent of the value of a minimum number of tons
determined in the manner established by the advance royalty regulations in
effect at the time the lessee requests approval to pay advance royalties in lieu
of continued operation. Sec. 3. BONDS - Lessee shall maintain in the proper
office a lease bond in the amount of $344,000. The authorized officer may
require an increase in this amount when additional coverage is determined
appropriate.
Sec. 4. DILIGENCE - This lease is subject to the conditions of diligent
development and continued operation, except that these conditions are excused
when operations under the lease are interrupted by strikes, the elements, or
casualties not attributable to the lessee. The lessor, in the public interest,
may suspend the condition of continued operation upon payment of advance
royalties in accordance with the regulations in existence at the time of the
suspension. Lessee's failure to produce coal in commercial quantities at the end
of the 10 years shall terminate the lease. If not submitted already, lessee
shall submit an operation and reclamation plan pursuant to Section 7 of the Act
no later than 3 years after the effective date of this lease readjustment.
The lessor reserves the power to assent to or under the suspension of the terms
and conditions of this lease in accordance with, INTER ALIA, Section 39 of the
Mineral Leasing Act, 30 U.S.C. 209.
Sec. 5. LOGICAL MINING UNIT (LMU) - Either upon approval by the lessor of the
lessee's application or at the direction of the lessor, this lease shall become
an LMU or part of an LMU, subject to the provisions set forth in the
regulations.
The stipulation established in an LMU approval in effect at the time of LMU
approval will supersede the relevant inconsistent terms of this lease so long as
the lease remains committed to the LMU. If the LMU of which this lease is a part
is dissolved, the lease shall then be subject to the lease terms which would
have been applied if the lease had not been included in an LMU.
<PAGE> 2
Sec. 6. DOCUMENTS, EVIDENCE AND INSPECTION - At such times and in such form as
lessor may prescribe, lessee shall furnish detailed statements showing the
amounts and quality of all products removed and sold from the lease, the
proceeds therefrom, and the amount used for production purposes or unavoidably
lost.
Lessee shall keep open at all reasonable times for the inspection of any duly
authorized officer of the lessor, the leased premises and all surface and
underground improvements, works, machinery, ore stockpits, equipment, and all
books, accounts, maps, and records relative to operations, surveys, or
investigations on or under the leased lands.
Lessee shall allow lessor access to and copying of documents reasonably
necessary to verify lessee compliance with terms and conditions of the lease.
While this lease remains in effect, information obtained under this section
shall be closed to inspection by the public in accordance with the Freedom of
Information Act (5 U.S.C. 552).
Sec. 7. DAMAGES TO PROPERTY AND CONDUCT OF OPERATIONS - Lessee shall comply at
its own expense with all reasonable orders of the Secretary, respecting diligent
operations, prevention of waste, and protection of other resources.
Lessee shall not conduct exploration operations, other than casual use, without
an approved exploration plan. All exploration plans prior to the commencement of
mining operations within an approved mining permit area shall be submitted to
the authorized officer.
Lessee shall carry on all operations in accordance with approved methods and
practices as provided in the operating regulations, having due regard for the
prevention of injury to life, health, or property, and prevention of waste,
damage, or degradation to any land, air, water, cultural, biological, visual,
and other resources, including mineral deposits and formations of mineral
deposit not leased hereunder, and to other land uses or users. Lessee shall take
measures deemed necessary by lessor to accomplish the intent of this lease term.
Such measures may include, but are not limited to modification to proposed
siting or design of facilities, timing of operations, to itself the right to
lease, sell or otherwise dispose of the surface or other mineral deposits in the
lands and the right to continue existing uses and to authorized future uses upon
or in the leased lands, including issuing leases for minerals deposits not
covered hereunder, and approving easements or rights-of-way. Lessor shall
condition such uses to prevent unnecessary or unreasonable interference with
rights of lessee as may be consistent with concepts of multiple use and multiple
mineral development.
Sec. 8. PROTECTION OF DIVERSE INTEREST, AND EQUAL OPPORTUNITY - Lessee shall:
pay when due all taxes legally assessed and levied under the laws of the State
or the United States; accord all employees complete freedom of purchase; pay all
wages at least twice each month in lawful money of the United States; maintain a
safe working environment in accordance with standard industry practices;
restrict the workday to not more than 8 hours in any one day for underground
workers except in emergencies; and take measure necessary to protect the health
and safety of the public. No person under the age of 16 years shall be employed
in any mine below the surface. To the extent that laws of the State in which the
lands are situated are more restrictive than the provisions in the paragraph,
then the State laws apply.
Lessee will comply with all provisions of Executive Order No. 11246 of September
24, 1965, as amended, and the rules, regulations, and relevant orders of the
Secretary of Labor. Neither lessee nor lessee's subcontractors shall maintain
segregated facilities.
Sec. 9. (a) TRANSFERS
XX[ ] This lease may be transferred in whole or in part to any person,
association or corporation qualified to hold such lease interest.
[ ] This lease may be transferred in whole or in part to another public body,
or to a person who will mine the coal on behalf of, and for the use of, the
public body or to a person who for the limited purpose of creating a
security interest in favor of a lender agrees to be obligated to mine the
coal on behalf of the public body.
[ ] This lease may only be transferred in whole or in part to another small
business qualified under 13 CFR 121.
Transfers of record title, working or royalty interest MUST be approved in
accordance with the regulations.
(b) RELINQUISHMENT - The lessee may relinquish in writing at any time all rights
under this lease or any portion thereof as provided in the regulations. Upon
lessor's acceptance of the relinquishment, lessee shall be relieved of all
future obligations under the lease or the relinquished portion thereof,
whichever is applicable.
Sec. 10. DELIVERY OF PREMISES, REMOVAL OF MACHINERY, EQUIPMENT, ETC. - At such
time as all portions of this lease are returned to lessor, lessee shall deliver
up to lessor the land leased, underground timbering, and such other supports and
structures necessary for the preservation of the mine workings on the leased
premises or deposits and place all workings in condition for suspension or
abandonment. Within 180 days thereof, lessee shall remove from the premises all
other structures, machinery, equipment, tools, and materials that it elects to
or as required by the authorized officer. Any such structures, machinery,
equipment, tools and materials remaining on the leased lands beyond 180 days or
approved extension thereof, shall become the property of the lessor, but lessee
shall either remove any or all such property or shall continue to be liable for
the cost of removal and disposal in the amount actually incurred by the lessor.
If the surface is owned by third parties, lessor shall waive the requirement for
removal, provided the third parties do not object to such waiver. Lessee shall,
prior to the termination of bond liability or at any other time when required
and in accordance with all applicable laws and regulations reclaim all lands the
surface of which has been disturbed, dispose of all debris or solid waste,
repair the offsite and onsite damage caused by lessee's activity or activities
incidental thereto, and reclaim access roads or trails.
Sec. 11. PROCEEDINGS IN CASE OF DEFAULT - If lessee fails to comply with
applicable laws, existing regulations, or the terms, conditions and stipulations
of this lease, and the noncompliance continues for 30 days after written notice
thereof, this lease shall be subject to cancellation by the lessor only by
judicial proceedings. This provision shall not be construed to prevent the
exercise by lessor of any other legal and equitable remedy, including waiver of
the default. Any such remedy or waiver shall not prevent later cancellation for
the same default occurring at any other time.
Sec. 12. HEIRS AND SUCCESSORS-IN-INTEREST - Each obligation of this lease shall
extend to and be binding upon, and every benefit hereof shall inure to, the
heirs, executors, administrators, successors, or assigns of the respective
parties hereto.
Sec. 13. INDEMNIFICATION - Lessee shall indemnify and hold harmless the United
States from any and all claims arising out of the lessee's activities and
operations under this lease.
Sec. 14. SPECIAL STATUTES - This lease is subject to the Federal Water Pollution
Control Act (33 U.S.C. 1151-1175), the Clean Air Act (42 U.S.C. 1857 et. seq.),
and to all other applicable laws pertaining to exploration activities, mining
operations and reclamation, including the Surface Mining Control and Reclamation
Act of 1977 (30 U.S.C. 1201 et. seq.).
SEC. 15. SPECIAL STIPULATIONS -
In addition to observing the general obligations and standards of performance
set out in the current regulations, the lessee shall comply with and be bound by
the following special stipulations.
<PAGE> 3
SEC. 15. SPECIAL STIPULATIONS, Continued Page 1 of 2
These stipulations are also imposed upon the lessee's agents and employees.
The failure or refusal of any of these persons to comply with these stipulations
shall be deemed a failure of the lessee to comply with the terms of the lease.
The lessee shall require his agents, contractors and subcontractors involved in
activities concerning this lease to include these stipulations in the contracts
between and among them. These stipulations may be revised or amended, in
writing, by the mutual consent of the lessor and the lessee at any time to
adjust to changed conditions or to correct an oversight.
(a) CULTURAL RESOURCES -
(1) Before undertaking any activities that may disturb the surface of
the leased lands, the lessee shall conduct a cultural resource
intensive field inventory in a manner specified by the authorized
officer of the BLM or of the surface managing agency, if different, on
portions of the mine plan area and adjacent areas, or exploration plan
area, that may be adversely affected by lease-related activities and
which were not previously inventoried at such a level of intensity. The
inventory shall be conducted by a qualified professional cultural
resource specialist (i.e., archeologist, historian, historical
architect, as appropriate), approved by the authorized officer of the
surface managing agency (BLM, if the surface is privately owned), and a
report of the inventory and recommendations for protecting any cultural
resources identified shall be submitted to the Assistant Director of
the Western Support Center of the Office of Surface Mining, the
authorized officer of the BLM, if activities are associated with coal
exploration outside an approved mining permit area (hereinafter called
Authorized Officer), and the Authorized Officer of the surface managing
agency, if different. The lessee shall undertake measures, in
accordance with instructions from the Assistant Director, or Authorized
Officer, to protect cultural resources on the leased lands. The lessee
shall not commence the surface disturbing activities until permission
to proceed is given by the Assistant Director or authorized officer.
(2) The lessee shall protect all cultural resource properties within
the lease area from lease-related activities until the cultural
resource mitigation measures can be implemented as part of an approved
mining and reclamation or exploration plan.
(3) The cost of conducting the inventory, preparing reports, and
carrying out mitigation measures shall be borne by the lessee.
(4) If cultural resources are discovered during operations under this
lease, the lessee shall immediately bring them to the attention of the
Assistant Director or Authorized Officer, or the Authorized Officer of
the surface managing agency, if the Assistant Director is not
available. The lessee shall not disturb such resources except as may be
subsequently authorized by the Assistant Director or Authorized
Officer. Within two (2) working days of notification, the Assistant
Director or Authorized Officer will evaluate or have evaluated any
cultural resources discovered and will determine if any action may be
required to protect or preserve such discoveries. The cost of data
recovery for cultural resources discovered during lease operations
shall be borne by the surface managing agency unless otherwise
specified by the Authorized Officer of the BLM or of the surface
managing agency, if different.
(5) All cultural resources shall remain under the jurisdiction of the
United States until ownership is determined under applicable law.
(b) PALEONTOLOGICAL RESOURCES - If paleontological resources, either large and
conspicuous, and/or of significant scientific value are discovered during
construction, the find will be reported to the Authorized Officer immediately.
Construction will be suspended within 250 feet of said find. An evaluation of
the paleontological discovery will be made by a BLM approved professional
paleontologist within five (5) working days, weather permitting, to determine
the appropriate action(s) to prevent the potential loss of any significant
paleontological value. Operations within 250 feet of such discovery will not be
resumed until written authorization to proceed is issued by the Authorized
Officer. The lessee will bear the cost of any required paleontological
appraisals, surface collection of fossils, or salvage of any large conspicuous
fossils of significant scientific interest discovered during the operations.
(c) MULTIPLE MINERAL DEVELOPMENT - Operations will not be approved which, in the
opinion of the Authorized Officer, would unreasonably interfere with the orderly
development and/or production from a valid existing mineral lease issued prior
to this one for the same lands.
(d) OIL AND GAS/COAL RESOURCES - The BLM realizes that coal mining operations
conducted on Federal coal leases issued within producing oil and gas fields may
interfere with the economic recovery of oil and gas; just as Federal oil and gas
leases issued in a Federal coal lease area may inhibit coal recovery. BLM
retains the authority to alter and/or modify the resource recovery and
protection plans for coal operations and/or oil and gas operations on those
lands covered by Federal mineral leases so as to obtain maximum resource
recovery.
(e) RESOURCE RECOVERY AND PROTECTION - Notwithstanding the approval of a
resource recovery and protection plan (R2P2) by the BLM, lessor reserves the
right to seek damages against the operator/lessee in the event (i) the
operator/lessee fails to achieve maximum economic recovery (MER) (as defined at
43 CFR 3480.0-5(21)) of the recoverable coal reserves or (ii) the
operator/lessee is determined to have caused a wasting of recoverable coal
reserves. Damages shall be measured on the basis of the royalty that would have
been payable on the wasted or unrecovered coal.
The parties recognize that under an approved R2P2, conditions may require a
modification by the operator/lessee of that plan. In the event a coalbed or
portion thereof is not to be mined or is rendered unmineable by the operation,
the operator/lessee shall submit appropriate justification to obtain approval by
the authorized officer (AO) to leave such reserves unmined. Upon approval by the
AO, such coalbeds or portions thereof shall not be subject to damages as
described above. Further, nothing in this section shall prevent the
operator/lessee from exercising its right to relinquish all or portion of the
lease as authorized by statute and regulation.
In the event the AO determines that the R2P2, as approved, will not attain MER
as the result of changed conditions, the AO will give proper notice to the
operator/lessee as required under applicable regulations. The AO will order a
modification if necessary, identifying additional reserves to be mined in order
to attain MER. Upon a final administrative or judicial ruling upholding such an
ordered modification, any reserves left unmined (wasted) under that plan will be
subject to damages as described in the first paragraph under this section.
<PAGE> 4
SEC. 15. SPECIAL STIPULATIONS, Continued - Page 2 of 2
Subject to the right to appeal hereinafter set forth, payment of the value of
the royalty on such unmined recoverable coal reserves shall become due and
payable upon determination by the AO that the coal reserves have been rendered
unmineable or at such time that the operator/lessee has demonstrated an
unwillingness to extract the coal.
The BLM may enforce this provision either by issuing a written decision
requiring payment of the MMS demand for such royalties, or by issuing a notice
of non-compliance. A decision or notice of non-compliance issued by the lessor
that payment is due under this stipulation is appealable as allowed by law.
(f) PUBLIC LAND SURVEY PROTECTION - The lessee will protect all survey
monuments, witness corners, reference monuments, and bearing trees against
destruction, obliteration, or damage during operations on the lease areas. If
any monuments, corners or accessories are destroyed, obliterated, or damaged by
this operation, the lessee will hire an appropriate county surveyor or
registered land surveyor to reestablish or restore the monuments, corners, or
accessories at the same location, using surveying procedures in accordance with
the "Manual of Surveying Instructions for the Survey of the Public Lands of the
United States." The survey will be recorded in the appropriate county records,
with a copy sent to the Authorized Officer.
<PAGE> 1
EXHIBIT 10.22
MOUNTAIN COAL COMPANY
WEST ELK MINE
MODIFICATION OF
LOGICAL MINING UNIT (LMU)
APPLICATION - FEDERAL COAL
LEASES D-044569, C-0117192
COC-54558, AND C-1362
NOVEMBER, 1994
<PAGE> 2
1.0 NAME AND ADDRESS OF THE DESIGNATED OPERATOR/LESSEE OF THE LMU:
Mountain Coal Company (MCC)
West Elk Mine
P.O. Box 591
Somerset, CO 81434
(303) 929-5015
2.0 FEDERAL COAL LEASES TO BE INCLUDED IN THE LMU:
D-0445692 Containing 1,187.61 acres and covering all coal in the
following described lands.
Township 13 South, Range 90 West, 6th PM
Section 9: Lots 1, 2, and 3 and S1/2 SW1/4 SW1/4 or that
part of the SW1/4 SW1/4 South of the North Fork
of the Gunnison River.
Section 16: All, except the following described parcel:
Beginning at the NW section corner of said
Section 16 as monumented by a General Land
Office brass cap and considering the line
between said NW section corner and the N1/4
corner of said Section 16, as monumented by a
General Land Office brass cap, to bear S
85(Degree) 21' 26" E, and running thence S
85(Degree) 21' 26" E along the north line of the
NW1/4 of said Section 16, 2357.80 feet; thence S
01(Degree) 27' 42" W 1822.95 feet; thence S
38(Degree) 27' 16" W, 4072.21 feet to the SW
corner of said Section 16 as monumented by a
General Land Office brass cap; thence N
02(Degree) 30' 02" E along the west line of the
SW1/4 of said Section 16, 2576.92 feet to the
W1/4 corner of said Section 16 as monumented by
a General Land Office brass cap; thence N
02(Degree) 32' 17" E along the west line of said
NW1/4 of Section 16, 2630.28 feet to said NW
Section corner of Section 16 and the point of
beginning.
Section 21: All
Removal of coal limited to "F"' Seam located west of Sylvester
Creek in the following described lands:
Township 13 South, Range 90 West, 6th PM
Section 15: W1/2 W1/2 SW1/4
<PAGE> 3
C-01171922 Containing 853.27 acres covering all coal in the following
described lands:
Township 13 South, Range 90 West, 6th PM
Section 19: E1/2
Section 20: All, except the following described parcel:
Beginning at the NE section corner of said
Section 20 as monumented by a General Land
Office brass cap and considering the line
between said NE section corner and the NIA
corner of said Section 20, as monumented by a
General Land Office brass cap, to bear N
87(Degree) 10' 19" W, and running thence N
87(Degree) 10' 19" W along said north line of
the NE1/4 of Section 20, 2623.15 feet to the
said N1/4 corner of Section 20; thence N
84(Degree) 39' 40" W along the north line of the
NW1/4 corner of Section 20; thence N 84(Degree)
39' 40" W along the north line of the NW1/4 of
Section 20, 236.00 feet; thence S 03(Degree) 08'
34" W, 630.00 feet; thence S 87(Degree) 10' 19"
E, 910.00 feet; thence S 03(Degree) 08' 34" W,
660.00 feet; thence S 87(Degree) 10' 19" E,
1948.88 feet to a point on the east line of the
said NE1/4 of Section 20; thence N 03(Degree)
08' 34" E along said east line of the NE1/4 of
Section 20, 1279.64 feet to the said NE section
corner of Section 20 and the point of beginning.
C-1362 2 Containing 4,836.36 acres and covering all coal in the
following described lands:
Township 13 South, Range 90 West, 6th PM
Section 27: All (Lots 1-16 Incl.)
Section 28: All (Lots 1-16 Incl.)
Section 29: Lots 1-14 Incl.
Section 30: Lots 5, 6, and 9
Section 32: Lots 1-9 Incl., excluding 24.8 acres in
independent reservoir.
Section 33: All (Lots 1-16 Incl.)
Section 34: All (Lots 1-16 Incl.)
LMU-2
<PAGE> 4
Township 14 South, Range 90 West, 6th PM
Section 3: All (Lots 1, 2, 3, 4, S1/2 N1/2, S1/2)
Section 4: Lots 1, 2, 3, S1/2 NE1/4, SE1/4, E1/2 SW1/4,
SE1/4 NW1/4
Section 9: N1/2 NE1/4, SE1/4 NE1/4
Section 10: N1/2
COC-54558 Containing 1,011.64 acres and covering all coal in the lands:
Township 13 South, Range 90 West, 6th PM
Section 19: Lots 15-18, Incl.
Section 30: Lots 7 and 8
Township 13 South, Range 91 West, 6th PM
Section23: S1/2 S1/2 NE1/4, E1/2 SE1/4 SW1/4, and SE1/4
Section 24: S1/2 S1/2 NW1/4, and S1/2
Section 25: Lots 14, Incl.
Section 26: NE1/4 NE 1/4
Descriptions of the land including all coal beds considered of minable
thickness, as well as descriptions of the geology, exploration drill holes and
mineable areas of coal seams, have been previously submitted to BLM and are
hereby incorporated by reference as follows:
1.) Mountain Coal Company, Mining and Reclamation Plan, Volumes 1 through 12
and including Volume 8A and the Permit Revision No. 5 application. This
document comprises the West Elk Mine, Mine Surface Mining Reclamation and
Control Act Permit under the Colorado Co-operative Agreement and serves
as the basis for mine plan approval under the Mineral Leasing Act.
2.) Phase I and Phase II resource evaluation and supporting documents.
- --------------------------------------------------------------------------------
1. Mountain Coal Company is a wholly-owned subsidiary of Atlantic
Richfield Company.
2. Atlantic Richfield Company assigned these leases to its
wholly-owned subsidiary, West Elk Coal Company, Inc., in 1984,
which changed its name to Mountain Coal Company in 1991.
LMU-3
<PAGE> 5
3.0 SURFACE OWNERSHIP:
The United States of America owns the surface of the above described
leased lands except for the following:
Surface Owner: Atlantic Richfield Company
515 Flower Street
Los Angeles, CA 90071
Township 13 South, Range 90 West, 6th PM
Section 9: Lots 1, 2, and 3, and S/2SW/4SW/4 or that
part of the SW/4SW/4 south of the North Fork of
the Gunnison River, except fo the two parcels
owned by the State Department of Highways
described below. These highway right-of-way
properties are located on the extreme Northern
portion of the lease area. No mining is planned
which will affect them.
Section 15: W/2W/2SW/4
Section 16: All
Section 21: Lots 1, 17, 20 and 22
Surface Owner: State Department of Highways
Division of Highways
State of Colorado
4201 E. Arkansas
Denver, CO 80222
Township 13 South, Range 90 West, 6th PM
A tract or parcel of land No. 5-A of the State Department of
Highways, Division of Highways, State of Colorado, Project No.
RS 0133(8) containing 4.13 acres, more or less, in the SE/4 of
Section 9, said tract or parcel being more particularly
described as follows:
Beginning at a point on the east line of Section 9 from which
the Southeast corner of said Section 9 bears S. 1(Degree) 17'
30" W. a distance of 875.7 feet:
1. Thence N. 1(Degree) 17' 30" E. along said east line a
distance of 334.3 feet to the center of the North Fork
of the Gunnison River;
2. Thence N. 86(Degree) 42' W. along the centerline of said
river a distance of 360.0 feet,
LMU-4
<PAGE> 6
3. Then S. 63(Degree) 05' W. continuing along the
centerline of said river a distance of 200.0 feet;
4. Thence S. 70(Degree) 11' W. continuing along the
centerline of said river a distance of 364.3 feet;
5. Thence along the arc of a curve to the left, having a
radius of 2,366.8 feet, a distance of 29.9 feet (the
chord of this arc bears S. 78(Degree) 28' E. a distance
of 29.9 feet);
6. Thence S. 81(Degree) 44' E. a distance of 355.6 feet;
7. Thence S. 83(Degree) 12' E. a distance of 338.8 feet;
8. Thence S. 74(Degree) 17' 30" E. a distance of 161.4
feet, more or less to the point of beginning.
A tract or parcel of land No. 4 of the State Department of Highways,
Division of Highways, State of Colorado, Project No. RS 0133(8)
containing 1.025 acres, more or less, in the SE/4SW/4 and the W/2SE/4
of Section 9, said tract or parcel being more particularly described as
follows: Beginning at a point from which the S/4 corner of Section 9
bears S 4(Degree) 54' E., a distance of 1,200.3 feet:
1. Thence N. 87(Degree) 09' E. a distance of 333.0 feet;
2. Thence along the arc of a curve to the right, having a radius
of 864.9 feet, a distance of 199.3 feet (the chord of this arc
bears S. 79(Degree) 09' 30" E. a distance of 198.8 feet;
3. Thence S. 64(Degree) 52' 30" E. a distance of 332.8 feet to
the centerline of the of the North Fork of the Gunnison River;
4. Thence N. 53(Degree) 35' W., continuing along said centerline,
a distance of 314 feet;
5. Thence N. 82(Degree) 04' W., continuing along said centerline
a distance of 309.0 feet;
6. Thence S. 85(Degree) 49' W., continuing along said centerline
a distance of 385.0 feet;
7. Thence S. 58(Degree) 28' W., continuing along said centerline
a distance of 119.4 feet;
8. Thence S. 83(Degree) 44' 30" E., a distance of 216.6 feet,
more or less, to the point of beginning.
LMU-5
<PAGE> 7
Surface Owner: Larry and Elaine Mautz
1938 Highway 133
Paonia, CO 81428
Township 13 South, Range 90 West, 6th PM
Section 19: E1/2 and Lots 15-18 Incl.
Section 20: N1/2, SW1/4
Township 13 South, Range 91 West, 6th PM
Section 23: S1/2S1/2NE1/4, El/2SE1/4SW1/4, and SE1/4
Section 24: S1/2S1/2NW1/4, and S1/2
4.0 DESCRIPTION OF COAL SEAMS:
The modified LMU contains portions of three minable coal seams, the F,
E, and B-Seams. The F-Seam averaged about 7 feet thick in the northern
LMU area. Most of the F-Seam in the LMU area is unminable due to coal
height, quality, geologic conditions, or a combination of these
factors. Plate 1 shows the mined-out F-Seam.
The B-Seam. is of minable thickness in the middle and northern portions
of the LMU area. The B-Seam ranges from 19 feet to 26 feet thick in the
LMU area. A portion of the B-Seam in which mining is precluded is
overlain by mined out C-Seam. The interburden in this area is as low as
15 feet. Plate 2 shows the minable B-Seam area in the LMU.
The E-Seam minable area is predominately in the middle and southern
portions of the LM'U, as shown on Plate 3. The E-Seam minable area
exists only in limited extent in the northern LMU area. The E-Seam
averages approximately 9 feet thick in this area. The E-Seam splits and
thins out to the west and northwest and is not minable in these areas.
Description of coal seams within the LMU to be mined and coal seams to
be excluded from mining within the LMU can be found in the Mountain
Coal Company, West Elk Mine, Mining and Reclamation Plan, Volume 1,
Section 2.04.6. Accompanying maps and cross-sections can be found in
Volumes 3 and 4.
Additional information on coal reserves can also be found in MCC
Resource Evaluation, Phase I and II, and related information previously
submitted to the BLM.
LMU-6
<PAGE> 8
A summary of the recoverable coal reserves for Federal Coal Leases
C-1362, C-0117192, D-044569, and COC-54558 as determined by the BLM is
as follows:
<TABLE>
<CAPTION>
RECOVERABLE RESERVES
LEASE NO. (MILLION OF TONS)
--------- --------------------
<S> <C>
C-1362 71.650
C-0117192 9.210
D-044569 10.140
COC-54558 10.044
-------
TOTAL 101.044
-------
</TABLE>
5.0 MER
Data to allow determination of MER has been previously submitted to the
BLM in following documents:
1.) Mountain Coal Company, West Elk Mine, Mining and Reclamation
Plan, Volumes 1 through 12, including Volumes 8A and the
Permit Revision No. 5 application.
2.) Phase I and Phase II Resource Evaluation and associated
documents.
6.0 40-YEAR MINEOUT PLAN
Enclosed Plates 1, 2, and 3 show mining of the LMU leases D-044569,
C-0117192, C-1362, and COC-54558. Under the current mining scenario,
the minable areas of the E and B-Seams will be depleted of recoverable
reserves in 40 years or less at production rates ranging from 4.0
million tons per year to 5.4 million tons per year.
LMU-7
<PAGE> 9
2
MOUNTAIN COAL COMPANY
WEST ELK MINE 11/94 MODIFIED LMU. COC 57201
c. DILIGENT DEVELOPMENT AND CONTINUED OPERATION: Pursuant to 43 CFR
3480.0-5(a)(13)(ii)(B), the diligent development period for the original LMU
began on June 1, 1985. Continued operation year I (COYI) for the original LMU
began on October 1, 1989. These dates shall be maintained for the LMU
modification. To maintain production of commercial quantities for the LMU
modification (which includes Recoverable Reserves from 2 additional federal
leases), MCC must mine 1,010,440 tons raw coal each continued operation year,
effective the start of COY7, October 1, 1995, from anywhere within the modified
LMU to maintain continued operation or request to be allowed to pay advance
royalty in lieu of continued operation.
d. ADVANCE ROYALTY: The number of times advance royalty may be paid is
ten, ending May 31, 2005. No advance royalty paid prior to that date may be
credited against production royalty after that date.
e. REPORTING PERIOD: The rental amount for each federal coal lease is
to be prorated to the effective date of the modified LMU. Thereafter, the
modified LMU rentals for all federal coal leases within the modified LMU will be
due in lump sum on each annual anniversary of the effective date of modified LMU
approval. Upon approval and for the duration of this modified LMU, no federal
rentals may be credited against production royalties for any federal coal lease
contained in the modified LMU, the federal coal lease terms of which allowed for
such credits prior to the effective date of the modified LMU.
Royalties for federal recoverable coal reserves produced within the modified LMU
will be paid in lump sum, identified by individual federal coal lease on the
appropriate forms specified by the Minerals Management Service.
The modified LMU royalty reporting period will be on a monthly basis beginning
the royalty reporting period after the date that coal is first produced from the
modified LMU, following the effective date of modified LMU approval. If coal is
being produced on the effective date of modified LMU approval, the first royalty
reporting period will begin the first day of the month following the effective
date of the modified LMU approval. Since all production within the modified LMU
will come from federal leases, coal production must be provided to the Resource
Arm Manager on a monthly basis showing production allocations to each lease.
Progress maps and reports required by 43 CFR 3482.3 shall show all federal and
nonfederal production from inside or outside the modified LMU.
f. RECOVERABLE COAL RESERVES EXHAUSTION: The 40-year LMU recoverable
coal reserves exhaustion period commences the date that coal is first produced
from the LMU, following the effective date of LMU approval (September 27, 1989).
If there is production occurring within the LMU on the effective date of LMU
approval, the 40-year clock begins on the effective date of LMU approval. The
modified LMU 40-year clock also begins on the effective date of the original LMU
approval.
<PAGE> 10
3
MOUNTAW COAL COMPANY
WEST ELK MINE 11/94 MODIFIED LMU. CO 57201
g. OTHER: If the modified LMU, made up of federal leases D-044569,
C-0117192, C-1362, and COC 54558, fails for whatever reason, each federal lease
will automatically be subject to the diligence provisions that otherwise would
have applied to them individually had they not been included in the modified
LMU.
Mountain Coal Company United States of America
BY: ______________________________ BY: ______________________________
(Signature of Lessee) State Director
______________________________ ______________________________
Title Title
______________________________ ______________________________
Date Date
<PAGE> 1
EXHIBIT 10.23
- --------------------------------------------------------------------------------
WY 3400-12 Serial Number
(April 1986) UNITED STATES
DEPARTMENT OF THE INTERIOR WYW136458
BUREAU OF LAND MANAGEMENT
COAL LEASE
- -------------------------------------------------------------------------------
PART I: LEASE RIGHTS GRANTED
This lease, entered into by and between the United States of America,
hereinafter called the lessor, through the Bureau of Land Management, and
(Name and Address)
Ark Land Company
CityPlace One, Suite 300
St. Louis, Missouri 63141
/s/ ML
hereinafter called the lessee, is readjusted, effective (date) Jan. 1, 1999, for
a period of 0 years and for so long thereafter as coal is produced in commercial
quantities from the leased lands, subject to readjustment of lease terms at the
end of each 10-year period.
Sec. 1. This lease readjustment is subject to the terms and provisions of the:
XX/ / Mineral Lands Leasing Act of 1920, Act of February 25, 1920, as
amended, 41 Stat. 437, 30 U.S.C. 181-287, hereinafter referred to as the Act;
/ / Mineral Leasing Act for Acquired Lands, Act of August 7, 1947, 61
Stat. 913, 30 U.S.C. 351-359;
and to the regulations and formal orders of the Secretary of the Interior which
are now or hereafter in force, when not inconsistent with the express and
specific provisions herein.
Sec. 2. Lessor, in consideration of any bonuses, rents and royalties to be paid,
and the conditions and covenants to be observed as herein set forth, hereby
grants and leases to lessee the exclusive right and privilege to drill for,
mine, extract, remove or otherwise process and dispose of the coal deposits in,
upon, or under the following described lands:
T.45 N., R. 70 W., 6th P.M., Wyoming
Sec. 4: Lots 8, 9, 15 thru 18;
Sec. 5: Lots 5 thru 20;
Sec, 6: Lots 8 thru 23;
Sec. 7: Lots 5 thru 7, 8 (N2), 9 thru 12,
13 (N2 & SE), 19 (NE);
Sec. 8: Lots 1 thru 16;
Sec. 9: Lots 3 thru 6, 11 thru 14;
T.43 N., R. 71 W., 6TH P.M., Wyoming
Sec. 1: Lots 5 thru 15, 16 (N2), 17 thru 19, SENE;
Sec. 12: Lots 1, 2 (NE)
containing 3545.503 acres, more or less, together with the right to construct
such works, buildings, plants, structures, equipment and appliances and the
right to use such on-lease rights-of-way which may be necessary and convenient
to the exercise of the rights and privileges granted, subject to the conditions
herein provided.
PART II. TERMS AND CONDITIONS
Sec. 1. (a) RENTAL RATE - Lessee shall pay lessor rental annually and in advance
for each acre or fraction thereof during the continuance of the lease at the
rate of $3.00 for each lease year.
(b) RENTAL CREDITS - Rental shall not be credited against either production or
advance royalties for any year.
Sec. 2 (a) PRODUCTION ROYALTIES - The royalty shall be 12.5 per cent of the
value of the coal as set forth in the regulations. Royalties are due to lessor
the final day of the month succeeding the calendar month in which the royalty
obligation accrues.
(b) ADVANCE ROYALTIES - Upon request by lessee, the authorized officer may
accept, for a total of not more than 10 years, the payment of advance royalties
in lieu of continued operation, consistent with the regulations. The advance
royalty shall be based on a percent of the value of a minimum number of tons
determined in the manner established by the advance royalty regulations in
effect at the time the lessee requests approval to pay advance royalties in lieu
of continued operation.
Sec. 3. BONDS - Lessee shall maintain in the proper office a lease bond in the
amount of $ . The authorized officer may require an increase in this amount when
additional coverage is determined appropriate.
Sec. 4. DILIGENCE - This lease is subject to the conditions of diligent
development and continued operation, except that these conditions are excused
when operations under the lease are interrupted by strikes, the elements, or
casualties not attributable to the lessee. The lessor, in the public interest,
may suspend the condition of continued operation upon payment of advance
royalties in accordance with the regulations in existence at the time of the
suspension. Lessee's failure to produce coal in commercial quantities at the end
of the 10 years shall terminate the lease. Lessee shall submit an operation and
reclamation plan pursuant to Section 7 of the Act no later than 3 years after
lease issuance.
The lessor reserves the power to assent to or under the suspension of the terms
and conditions of this lease in accordance with, inter alia, Section 39 of the
Mineral Leasing Act, 30 U.S.C. 209.
Sec. 5. LOGICAL MINING UNIT (LMU) - Either upon approval by the lessor of the
lessee's application or at the direction of the lessor, this lease shall become
an LMU or part of an LMU, subject to the provisions set forth in the
regulations.
The stipulation established in an LMU approval in effect at the time of LMU
approval will supersede the relevant inconsistent terms of this lease so long as
the lease remains committed to the LMU. If the LMU of which this lease is a part
is dissolved, the lease shall then be subject to the lease terms which would
have been applied if the lease had not been included in an LMU.
<PAGE> 2
Sec. 6. DOCUMENTS, EVIDENCE AND INSPECTION - At such times and in such form as
lessor may prescribe, lessee shall furnish detailed statements showing the
amounts and quality of all products removed and sold from the lease, the
proceeds therefrom, and the amount used for production purposes or unavoidably
lost.
Lessee shall keep open at all reasonable times for the inspection of any duly
authorized officer of the lessor, the leased premises and all surface and
underground improvements, works, machinery, ore stockpiles, equipment, and all
books, accounts, maps, and records relative to operations, surveys, or
investigations on or under the leased lands.
Lessee shall allow lessor access to and copying of documents reasonably
necessary to verify lessee compliance with terms and conditions of the lease.
While this lease remains in effect, information obtained under this section
shall be closed to inspection by the public in accordance with the Freedom of
Information Act (5 U.S.C. 552).
Sec. 7. DAMAGES TO PROPERTY AND CONDUCT OF OPERATIONS - Lessee shall comply at
its own expense with all reasonable orders of the Secretary, respecting diligent
operations, prevention of waste, and protection of other resources.
Lessee shall not conduct exploration operations, other than casual use, without
an approved exploration plan. All exploration plans prior to the commencement of
mining operations within an approved mining permit area shall be submitted to
the authorized officer.
Lessee shall carry on all operations in accordance with approved methods and
practices as provided in the operating regulations, having due regard for the
prevention of injury to life, health, or property, and prevention of waste,
damage, or degradation to any land, air, water, cultural, biological, visual,
and other resources, including mineral deposits and formations of mineral
deposit not leased hereunder, and to other land uses or users. Lessee shall take
measures deemed necessary by lessor to accomplish the intent of this lease term.
Such measures may include, but are not limited to modification to proposed
siting or design of facilities, timing of operations, to itself the right to
lease, sell or otherwise dispose of the surface or other mineral deposits in the
lands and the right to continue existing uses and to authorized future uses upon
or in the leased lands, including issuing leases for minerals deposits not
covered hereunder, and approving easements or rights-of-way. Lessor shall
condition such uses to prevent unnecessary or unreasonable interference with
rights of lessee as may be consistent with concepts of multiple use and multiple
mineral development.
Sec. 8. PROTECTION OF DIVERSE INTEREST, AND EQUAL OPPORTUNITY - Lessee shall:
pay when due all taxes legally assessed and levied under the laws of the State
or the United States; accord all employees complete freedom of purchase; pay all
wages at least twice each month in lawful money of the United States; maintain a
safe working environment in accordance with standard industry practices;
restrict the workday to not more than 8 hours in any one day for underground
workers except in emergencies; and take measure necessary to protect the health
and safety of the public. No person under the age of 16 years shall be employed
in any mine below the surface. To the extent that laws of the State in which the
lands are situated are more restrictive than the provisions in the paragraph,
then the State laws apply.
Lessee will comply with all provisions of Executive Order No. 11246 of September
24, 1965, as amended, and the rules, regulations, and relevant orders of the
Secretary of Labor. Neither lessee nor lessee's subcontractors shall maintain
segregated facilities.
Sec. 15. SPECIAL STIPULATIONS -
See Attached Pages
Sec. 9. (a) TRANSFERS
XX[ ] This lease may be transferred in whole or in part to any person,
association or corporation qualified to hold such lease interest.
[ ] This lease may be transferred in whole or in part to another public body,
or to a person who will mine the coal on behalf of, and for the se of, the
public body or to a person who for the limited purpose of creating a
security interest in favor of a lender agrees to be obligated to mine the
coal on behalf of the public body.
[ ] This lease may only be transferred in whole or in part to another small
business qualified under 13 CFR 121.
Transfers of record title, working or royalty interest must be approved in
accordance with the regulations.
(b) RELINQUISHMENT - The lessee may relinquish in writing at any time all rights
under this lease or any portion thereof as provided in the regulations. Upon
lessor's acceptance of the relinquishment, lessee shall be relieved of all
future obligations under the lease or the relinquished portion thereof,
whichever is applicable.
Sec. 10. DELIVERY OF PREMISES, REMOVAL OF MACHINERY, EQUIPMENT, ETC. - At such
time as all portions of this lease are returned to lessor, lessee shall deliver
up to lessor the land leased, underground timbering, and such other supports and
structures necessary for the preservation of the mine workings on the leased
premises or deposits and place all workings in condition for suspension or
abandonment. Within 180 days thereof, lessee shall remove from the premises all
other structures, machinery, equipment, tools, and materials that it elects to
or as required by the authorized officer. Any such structures, machinery,
equipment, tools and materials remaining on the leased lands beyond 180 days or
approved extension thereof, shall become the property of the lessor, but lessee
shall either remove any or all such property or shall continue to be liable for
the cost of removal and disposal in the amount actually incurred by the lessor.
If the surface is owned by third parties, lessor shall waive the requirement for
removal, provided the third parties do not object to such waiver. Lessee shall,
prior to the termination of bond liability or at any other time when required
and in accordance with all applicable laws and regulations reclaim all lands the
surface of which has been disturbed, dispose of all debris or solid waste,
repair the offsite and onsite damage caused by lessee's activity or activities
incidental thereto, and reclaim access roads or trails.
Sec. 11. PROCEEDINGS IN CASE OF DEFAULT - If lessee fails to comply with
applicable laws, existing regulations, or the terms, conditions and stipulations
of this lease, and the noncompliance continues for 30 days after written notice
thereof, this lease shall be subject to cancellation by the lessor only by
judicial proceedings. This provision shall not be construed to prevent the
exercise by lessor of any other legal and equitable remedy, including waiver of
the default. Any such remedy or waiver shall not prevent later cancellation for
the same default occurring at any other time.
Sec. 12. HEIRS AND SUCCESSORS-IN-INTEREST - Each obligation of this lease shall
extend to and be binding upon, and every benefit hereof shall inure to, the
heirs, executors, administrators, successors, or assigns of the respective
parties hereto.
Sec. 13. INDEMNIFICATION - Lessee shall indemnify and hold harmless the United
States from any and all claims arising out of the lessee's activities and
operations under this lease.
Sec. 14. SPECIAL STATUTES - This lease is subject to the Federal Water Pollution
Control Act (33 U.S.C. 1151-1175), the Clean Air Act (42 U.S.C. 1857 et. seq.),
and to all other applicable laws pertaining to exploration activities, mining
operations and reclamation, including the Surface Mining Control and Reclamation
Act of 1977 (30 U.S.C. 1201 et. seq.).
<PAGE> 3
WYS136458
Page 3 of 8
SEC. 15. SPECIAL STIPULATIONS , Cont'd -
- --------------------------------------------------------------------------------
The United States of America
Ark Land Company By x /s/ A. Pierson
- --------------------------------------- ----------------------------
Company or Lessee Name
X /s/ S. McCurdy Alan R. Pierson
- --------------------------------------- ----------------------------
(Signature of Lessee) (Signing Officer)
/s/ President State Director
- --------------------------------------- ----------------------------
(Title) (Title)
/s/ 12-2-98 December 18, 1998
- --------------------------------------- ----------------------------
(Date) (Date)
================================================================================
Title 18 U.S.C. Section 1001, makes it a crime for any person knowingly and
willfully to make to any department or agency of the United States any false,
fictitious or fraudulent statements or representations as to any matter within
its jurisdiction.;
================================================================================
This form does not constitute an information collection as defined by 44 U.S.C.
3502 and therefore does not require OMB approval.
================================================================================
<PAGE> 4
WYS136458
Page 4 of 8
SEC. 15. SPECIAL STIPULATIONS -
In addition to observing the general obligations and standards of performance
set out in the current regulations, the lessee shall comply with and be bound by
the following special stipulations.
These stipulations are also imposed upon the lessee's agents and employees. The
failure or refusal of any of these persons to comply with these stipulations
shall be deemed a failure of the lessee to comply with the terms of the lease.
The lessee shall require his agents, contractors and subcontractors involved in
activities concerning this lease to include these stipulations in the contracts
between and among them. These stipulations may be revised or amended, in
writing, by the mutual consent of the lessor and the lessee at any time to
adjust to changed conditions or to correct an oversight.
(a) CULTURAL RESOURCES -
(1) Before undertaking any activities that may disturb the surface of
the leased lands, the lessee shall conduct a cultural resource
intensive field inventory in a manner specified by the authorized
officer of the BLM or of the surface managing agency, if different, on
portions of the mine plan area and adjacent areas, or exploration plan
area, that may be adversely affected by lease-related activities and
which were not previously inventoried at such a level of intensity. The
inventory shall be conducted by a qualified professional cultural
resource specialist (i.e., archeologist, historian, or historical
architect, as appropriate), approved by the authorized officer of the
surface managing agency (BLM, if the surface is privately owned), and a
report of the inventory and recommendations for protecting any cultural
resources identified shall be submitted to the Assistant Director of
the Western Support Center of the Office of Surface Mining, the
authorized officer of the BLM, if activities are associated with coal
exploration outside an approved mining permit area (hereinafter called
Authorized Officer), and the Authorized Officer of the surface managing
agency, if different. The lessee shall undertake measures, in
accordance with instructions from the Assistant Director, or Authorized
Officer, to protect cultural resources on the leased lands. The lessee
shall not commence the surface disturbing activities until permission
to proceed is given by the Assistant Director or authorized officer.
(2) The lessee shall protect all cultural resource properties within
the lease area from lease-related activities until the cultural
resource mitigation measures can be implemented as part of an approved
mining and reclamation or exploration plan.
(3) The cost of conducting the inventory, preparing reports, and
carrying out mitigation measures shall be borne by the lessee.
(4) If cultural resources are discovered during operations under this
lease, the lessee shall immediately bring them to the attention of the
Assistant Director or Authorized Officer, or the Authorized Officer of
the surface managing agency, if the Assistant Director is not
available. The lessee shall not disturb such resources except as may be
subsequently authorized by the Assistant Director or Authorized
Officer.
Within two (2) working days of notification, the Assistant Director or
Authorized Officer will evaluate or have evaluated any cultural
resources discovered and will determine if any action may be required
to protect or preserve such discoveries. The cost of data recovery for
cultural resources discovered during lease operations
<PAGE> 5
WYW136458
Page 5 of 8
shall be borne by the surface managing agency unless otherwise
specified by the Authorized Officer of the BLM or of the surface
managing agency, if different.
(5) All cultural resources shall remain under the jurisdiction of the
United States until ownership is determined under applicable law.
(b) PALEONTOLOGICAL RESOURCES - If paleontological resources, either large and
conspicuous, and/or of significant scientific value are discovered during
construction, the find will be reported to the Authorized Officer immediately.
Construction will be suspended within 250 feet of said find. An evaluation of
the paleontological discovery will be made by a BLM approved professional
paleontologist within five (5) working days, weather permitting, to determine
the appropriate action(s) to prevent the potential loss of any significant
paleontological value. Operations within 250 feet of such discovery will not be
resumed until written authorization to proceed is issued by the Authorized
Officer. The lessee will bear the cost of any required paleontological
appraisals, surface collection of fossils, or salvage of any large conspicuous
fossils of significant scientific interest discovered during the operations.
(c) MULTIPLE MINERAL DEVELOPMENT - Operations will not be approved which, in the
opinion of the Authorized Officer, would unreasonably interfere with the orderly
development and/or production from a valid existing mineral lease issued prior
to this one for the same lands.
(d) OIL AND GAS/COAL RESOURCES - The BLM realizes that coal mining operations
conducted on Federal coal leases issued within producing oil and gas fields may
interfere with the economic recovery of oil and gas; just as Federal oil and gas
leases issued in a Federal coal lease area may inhibit coal recovery. BLM
retains the authority to alter and/or modify the resource recovery and
protection plans for coal operations and/or oil and gas operations on those
lands mineral leases so as to obtain maximum resource recovery.
(e) RESOURCE RECOVERY AND PROTECTION - Notwithstanding the approval of a
resource recovery and protection plan (R2P2) by the BLM, lessor reserves the
right to seek damages against the operator/lessee in the event (i) the
operator/lessee fails to achieve maximum economic recovery (MER) (as defined at
43 CFR 3480.0-5(21)) of the recoverable coal reserves or (ii) the
operator/lessee is determined to have caused a wasting of recoverable coal
reserves. Damages shall be measured on the basis of the royalty that would have
been payable on the wasted or unrecovered coal.
The parties recognize that under an approved R2P2, conditions may require a
modification by the operator/lessee of that plan. In the event a coalbed or
portion thereof is not to be mined or is rendered unminable by the operation,
the operator/lessee shall submit appropriate justification to obtain approval by
the authorized officer (AO) to leave such reserves unmined. Upon approval by the
AO, such coalbeds or portions thereof shall not be subject to damages as
described above. Further, nothing in this section shall prevent the
operator/lessee from exercising its right to relinquish all or portion of the
lease as authorized by statute and regulation.
In the event the AO determines that the R2P2, as approved, will not attain MER
as the result of changed conditions, the AO will give proper notice to the
operator/lessee as required under applicable regulations. The AO will order a
modification if necessary, identifying additional reserves to be mined in order
to attain MER. Upon a final administrative or judicial ruling upholding such an
ordered modification, any reserves left unmined (wasted) under that plan will be
subject to damages as described in the first paragraph under this section.
<PAGE> 6
WYS136458
Page 6 of 8
Subject to the right to appeal hereinafter set forth, payment of the value of
the royalty on such unmined recoverable coal reserves shall become due and
payable upon determination by the AO that the coal reserves have been rendered
unmineable or at such time that the operator/lessee has demonstrated an
unwillingness to extract the coal.
The BLM may enforce this provision either by issuing a written decision
requiring payment of the MMS demand for such royalties, or by issuing a notice
of non-compliance. A decision or notice of non-compliance issued by the lessor
that payment is due under this stipulation is appealable as allowed by law.
(f) PUBLIC LAND SURVEY PROTECTION - The lessee will protect all survey
monuments, witness comers, reference monuments, and bearing trees against
destruction, obliteration, or damage during operations on the lease areas. If
any monuments, comers or accessories are destroyed, obliterated, or damaged by
this operation, the lessee will hire an appropriate county surveyor or
registered land surveyor to reestablish or restore the monuments, comers, or
accessories at the same location, using surveying procedures in accordance with
the "Manual of Surveying Instructions for the Survey of the Public Lands of the
United States." The survey will be recorded in the appropriate county records,
with a copy sent to the Authorized Officer.
(g) RAILROAD RIGHT-OF-WAY - No mining activity of any kind may be conducted
within the Burlington Northern/Chicago and Northwestern railroad right-of-way.
The lessee shall recover all legally and economically recoverable coal from all
leased lands not within the foregoing right-of-way. Lessee shall pay all
royalties on any legally and economically recoverable coal which it fails to
mine without the written permission of the Authorized Officer.
<PAGE> 7
WYS136458
Page 7 of 8
R2-FS-2820-13 (92) Serial No. WYW136458
NOTICE FOR LANDS OF THE NATIONAL FOREST SYSTEM
UNDER JURISDICTION OF
DEPARTMENT OF AGRICULTURE
The permittee/lessee must comply with all the rules and regulations of the
Secretary of Agriculture set forth at Title 36, Chapter II, of the Code of
Federal Regulations governing the use and management of the National Forest
System (NFS) when not inconsistent with the rights granted by the Secretary of
Interior in the permit. The Secretary of Agriculture's rules and regulations
must be complied with for (1) all use and occupancy of the NFS prior to approval
of an exploration plan by the Secretary of the Interior, (2) uses of all
existing improvements, such as forest development roads, within and outside the
area permitted by the Secretary of the Interior, and (3) use and occupancy of
the NFS not authorized by an exploration plan approved by the Secretary of the
Interior.
All matters related to this stipulation are to be addressed
to: District Ranger
at: 2250 East Richards Street, Douglas, WY 82633
Telephone: 307/358-4690
who is the authorized representative of the Secretary of Agriculture.
NOTICE
CULTURAL AND PALEONTOLOGICAL RESOURCES - The FS is responsible for assuring that
the leased lands are examined to determine of cultural resources are present and
to specify mitigation measures. Prior to undertaking any surface-disturbing
activities on the lands covered by this lease, the lessee or operator, unless
notified to the contrary by the FS, shall:
1. Contact the FS to determine if a site specific cultural resource inventory
is required. If a survey is required, then:
2. Engage the services of a cultural resource specialist acceptable to the FS
to conduct a cultural resource inventory of the area of proposed surface
disturbance. The operator may elect to inventory an area larger than the
area of proposed disturbance to cover possible site relocation which may
result from environmental or other considerations. An acceptable inventory
report is to be submitted to the FS for review and approval at the time a
surface disturbing plan of operation is submitted.
<PAGE> 8
WYS136458
Page 8 of 8
3. Implement mitigation measures required by the FS and BLM to preserve or
avoid destruction of cultural resource values. mitigation may include
relocation of proposed facilities, testing, salvage, and recordation or
other protective measures. All costs of the inventory and mitigation will
be borne by the lessee or operator, and all data and materials salvaged
will remain under the jurisdiction of the U.S. Government as appropriate.
The lessee or operator shall immediately bring to the attention of the FS and
BLM any cultural or paleontological resources or any other objects of scientific
interest discovered as a result of surface operations under this lease, and
shall leave such discoveries intact until directed to proceed by FS and BLM.
FOREST SERVICE REGION 2 SENSITIVE SPECIES - The Forest Service is responsible
for assuring that the leased lands is examined prior to undertaking any
surface-disturbing activities to determine effects upon any plant or animal
species listed as sensitive by the Regional Forester. The findings of this
examination may result in some restrictions to the operator, a plan or even
disallow use and occupancy that would lead to the listing of a sensitive species
under the Endangered Species Act of 1973.
ENDANGERED OR THREATENED SPECIES - The FS is responsible for assuring that the
leased land is examined prior to undertaking any surface-disturbing activities
to determine effects upon any plant or animal species listed or proposed for
listing as endangered or threatened, or their habitats. The findings of this
examination may result in some restrictions to the operator's plans or even
disallow use and occupancy that would be in violation of the Endangered Species
Act of 1973 by detrimentally affecting endangered or -threatened species or
their habitats.
The lessee/operator may, unless notified by the FS that the above examinations
are not necessary, conduct the examinations on the leased lands at his
discretion and cost. These examinations must be done by or under the supervision
of a qualified resource specialist approved by the FS. Acceptable reports must
be provided to the FS identifying the anticipated effects of a proposed action
on endangered or threatened species or their habitats, and the anticipated
effects and impacts to Forest Service Region 2 Sensitive species that may occur
or have habitat in the area.
By: X /s/ S. McCurdy
-------------------------------
President
-------------------------------
(title)
<PAGE> 1
EXHIBIT 10.30
ARCH COAL, INC.
OUTSIDE DIRECTORS'
DEFERRED COMPENSATION PLAN
EFFECTIVE JANUARY 1, 1999
1. PURPOSE
The purpose of this Arch Coal, Inc. Outside Directors' Deferred
Compensation Plan (the "Plan") is to provide members of the Board who are not
officers or employees of the Company with an opportunity to defer fees to be
earned by them from the Company as a means of saving for retirement or other
future purposes.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan:
(a) "Accounting Date" means each Business Day on which a calculation
concerning a Participant's Fees Account is performed.
(b) "Beneficiary" means the person(s) designated by the Participant in
accordance with Section 11, or if no person(s) is/are so designated, the estate
of a deceased Participant.
(c) "Board" means the Board of Directors of Arch Coal, Inc. or its
designee.
(d) "Business Day" means a day on which the New York Stock Exchange is
open for trading activity.
(e) "Common Stock" means the common stock, $.01 par value, of Arch
Coal, Inc.
(f) "Common Stock Fund" means that investment option, approved by the
Board, in which a Participant's Fees Account may be deemed to be invested and
may earn income based on a hypothetical investment in Common Stock.
(g) "Company" means Arch Coal, Inc., its divisions, subsidiaries and
affiliates.
(h) "Corporate Human Resources" means the Corporate Human Resources
Department of the Company.
(i) "Credit Date" means the date on which Fees would otherwise have
been paid to the Participant or, in the case of the Participant's designation of
investment option changes, any
<PAGE> 2
date within three Business Days after the Participant's designation is received
by Corporate Human Resources, or as otherwise designated by the Board.
(j) "Deferred Fees" means the Fees elected by the Participant to be
deferred pursuant to the Plan.
(k) "Election" means a Participant's delivery of a written notice of
election to Corporate Human Resources electing to defer payment of all or a
portion of his or her Fees either until Termination, death or such other time as
further provided by the Board or the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means the price of a share of Common Stock, as
reported on the Composite Tape for New York Stock Exchange issues on the date
and at the time designated by the Company.
(n) "Fees" means any fees earned as a director of the Company.
(o) "Fees Account(s)" means the Retirement Account and/or the
In-Service Account(s).
(p) "Fiscal Year" means the fiscal year of the Company, which is
currently the annual period commencing January 1 and ending the following
December 31.
(q) "In-Service Account" means the account(s) to which the
Participant's Deferred Fees are credited and from which, pursuant to Section
10(b), distributions are made.
(r) "Outside Director" means a member of the Board who is neither an
officer nor employee of the Company.
(s) "Participant" means an Outside Director who has elected to defer
payment of all or a portion of his or her Fees under the Plan.
(t) "Plan" means this Arch Coal, Inc. Outside Directors' Deferred
Compensation Plan as it now exists or as it may hereafter be amended.
(u) "Retirement Account" means the account(s) to which the
Participant's Deferred Fees are credited and from which, pursuant to Section
10(a), distributions are made.
(v) "Service Year" means the calendar year or portion thereof during
which the services have been rendered for which Fees are payable.
(w) "Stock Unit(s)" means the share equivalents credited to the Common
Stock Fund of a Participant's Fees Account pursuant to Section 6.
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<PAGE> 3
(x) "Termination" means termination of services as an Outside Director
for any reason.
3. SHARES; ADJUSTMENTS IN EVENT OF CHANGES IN CAPITALIZATION
In the event of any change in the outstanding Common Stock of the
Company by reason of any stock split, share dividend, recapitalization, merger,
consolidation, reorganization, combination, or exchange or reclassification of
shares, split-up, split-off, spin-off, liquidation or other similar change in
capitalization, or any distribution to common shareholders other than cash
dividends, the number or kind of shares or Stock Units that may be credited
under the Plan shall be automatically adjusted so that the proportionate
interest of the Participants shall be maintained as before the occurrence of
such event. Such adjustment shall be conclusive and binding for all purposes of
the Plan.
4. ELIGIBILITY
All Outside Directors shall be eligible to participate in the Plan.
5. ADMINISTRATION
Full power and authority to construe, interpret and administer the Plan
shall be vested in the Company and the Board. This power and authority includes,
but is not limited to, selecting investment indices, establishing deferral
cycles for purposes of Section 10(b), establishing deferral terms and
conditions, and adopting modifications, amendments and procedures as may be
deemed necessary, appropriate or convenient by the Board. Decisions of the
Company and the Board shall be final, conclusive and binding upon all parties.
Day-to-day administration of the Plan shall be the responsibility of Corporate
Human Resources.
6. PARTICIPANT ACCOUNTS
Upon election to participate in the Plan, there shall be established a
Retirement Account and/or In-Service Account, as designated by the Participant,
to which there shall be credited any Deferred Fees, as of each Credit Date. Each
such Fees Account shall be credited (or debited) on each Accounting Date with
income (or loss) based upon a hypothetical investment in any one or more of the
investment options available under the Plan, as prescribed by the Board for the
particular Fees credited, which may include a Common Stock Fund, as elected by
the Participant under the terms of Section 9.
3
<PAGE> 4
7. FINANCIAL HARDSHIP
Upon the written request of a Participant or a Participant's legal
representative and a finding that continued deferral will result in an
unforeseeable financial emergency to the Participant, the Board (in its sole
discretion) may authorize (a) the payment of all or a part of a Participant's
Fees Account in a single installment prior to his or her ceasing to be a
Participant, or (b) the acceleration of payment of any multiple installments
thereof. It is intended that the Board's determinations as to whether the
Participant has suffered an "unforeseeable financial emergency" shall be made
consistent with the requirements under Section 457(d) of the Internal Revenue
Code of 1986, as amended.
8. ACCELERATED DISTRIBUTION
(a) Availability of Withdrawal Prior to Termination. The Participant or
the Participant's Beneficiary, (provided the Participant has died) may elect, in
writing, to withdraw all or a portion of such Participant's Fees Account at any
time prior to the time such Fees Account otherwise becomes payable under the
Plan, provided the conditions specified in Section 8(c), 8(d) and 8(e) hereof
are satisfied.
(b) Acceleration of Periodic Distributions. Upon the written election
of the Participant or the Participant's Beneficiary, such may elect to have all
or a portion of installment payments being distributed to him or her in the form
of an immediately payable lump sum, provided the conditions specified in Section
8(c) and 8(e) hereof are satisfied.
(c) Forfeiture Penalty. In the event of a withdrawal pursuant to
Section 8(a), or an accelerated distribution pursuant to Section 8(b), the
Participant shall forfeit from such Fees Account an amount equal to 10% of the
amount of the withdrawal or accelerated distribution, as the case may be. The
forfeited amount shall be deducted from the Fees Account prior to giving effect
to the requested withdrawal or acceleration. Neither the Participant nor the
Participant's Beneficiary shall have any right or claim to the forfeited amount,
and the Company shall have no obligation whatsoever to the Participant, the
Participant's Beneficiary or any other person with regard to the forfeited
amount.
(d) Minimum Withdrawal. In no event shall the amount withdrawn in
accordance with Section 8(a) be less than 25% of the amount credited to such
Participant's Fees Account immediately prior to the withdrawal.
(e) Suspension from Deferrals. In the event of a withdrawal pursuant to
Section 8(a) or 8(b), a Participant who is otherwise eligible to make deferrals
of Fees under this Plan shall be prohibited from making such deferrals with
respect to the remainder of the current Fiscal Year and the Fiscal Year of the
Plan immediately following the Fiscal Year of the Plan during which the
withdrawal was made, and any election previously made by the Participant with
respect to deferrals of Fees for such Fiscal Years of the Plan shall be void and
of no effect.
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<PAGE> 5
9. MANNER OF ELECTION
(a) General. An Outside Director may elect to participate in the Plan
by delivering to Corporate Human Resources an Election on a form prescribed by
Corporate Human Resources, designating the Fees Account to which the Deferred
Fees are to be credited, electing the timing and form of distribution, and
setting forth the manner in which such Deferred Fees shall be invested in
accordance with Section 6 hereof. The timing of the filing of the appropriate
form with Corporate Human Resources shall be determined by the Company or the
Board. An effective election to defer Fees may not be revoked or modified except
as otherwise determined by the Company or the Board or as stated herein.
(b) Investment Alternatives -- Existing Balances. A Participant may
elect to change an existing selection as to the investment alternatives in
effect with respect to an existing Fees Account (in increments prescribed by the
Board) as often, and with such restrictions, as determined by the Board.
(c) Change of Beneficiary. A Participant may, at any time, elect to
change the designation of a Beneficiary in accordance with Section 11 hereof.
10. DISTRIBUTION
(a) Retirement Account. A Participant's Retirement Account shall be
distributed in cash at the time and in the manner elected by the Participant in
his Election. If no Election is made by a Participant as to the distribution or
form of payment of his or her Retirement Account, upon the Participant's death
or Termination such account shall be paid in cash in a lump sum. The entire
Retirement Account must be paid out within forty years following the date of the
earliest of the Participant's death or Termination.
(b) In-Service Account. Deferred Fees credited to a Participant's
In-Service Account shall be distributed in cash at the time and in the manner
elected by the Participant in his Election. A Participant may make different
Elections with respect to the applicable distribution periods for different
deferral cycles in the In-Service Accounts.
(c) Change of Distribution of Fees Account. A Participant will be
allowed to change the Election as to the distribution of his or her Retirement
Account, subject to approval by the Board or the Company. Such change must be
made by the earlier of:
(1) the date six months prior to the first day of the
month following such Participant's Termination; or
(2) the December 31 immediately preceding the first day of the
month following such Participant's Termination.
5
<PAGE> 6
A Participant may not change the Election as to the distribution of
Deferred Fees in his or her In-Service Account(s) except as otherwise set forth
in Sections 7 and 8.
11. BENEFICIARY DESIGNATION
A Participant may designate one or more persons (including a trust) to
whom or to which payments are to be made if the Participant dies before
receiving distribution of all amounts due hereunder. A designation of
Beneficiary will be effective only after the signed Election is filed with
Corporate Human Resources while the Participant is alive and will cancel all
designations of Beneficiary signed and filed earlier. If the Participant fails
to designate a Beneficiary as provided above or if all of a Participant's
Beneficiaries predecease him or her and he or she fails to designate a new
Beneficiary, the remaining unpaid amounts shall be paid in one lump sum to the
estate of such Participant. If all Beneficiaries of the Participant die after
the Participant but before complete payment of all amounts due hereunder, the
remaining unpaid amounts shall be paid in one lump sum to the estate of the last
to die of such Beneficiaries.
12. UNSECURED GENERAL CREDITOR STATUS OF OUTSIDE DIRECTOR
The payments to Participants and their Beneficiaries hereunder shall be
made from the general corporate assets of the Company. No person shall have any
interest in any such assets by virtue of the provisions of this Plan. The
Company's obligation hereunder shall be an unfunded and unsecured promise to pay
money in the future. To the extent that any person acquires a right to receive
payments from the Company under the provisions hereof, such right shall be no
greater than the right of any unsecured general creditor of the Company; no such
person shall have nor acquire any legal or equitable right, interest or claim in
or to any property or assets of the Company. Any accounts maintained under this
Plan shall be hypothetical in nature and shall be maintained for bookkeeping
purposes only. Neither the Plan nor any account shall hold any actual funds or
assets.
13. INALIENABILITY OF BENEFITS
The interests of the Participants and their Beneficiaries under the
Plan may not in any way be voluntarily or involuntarily transferred, alienated
or assigned, nor subject to attachment, execution, garnishment or other such
equitable or legal process. A Participant or Beneficiary cannot waive the
provisions of this Section 13.
14. GOVERNING LAW
The provisions of this plan shall be interpreted and construed in
accordance with the laws of the State of Missouri, except to the extent
preempted by Federal law.
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<PAGE> 7
15. AMENDMENTS
The Company may amend, alter or terminate this Plan at any time by
resolution of the Board.
IN WITNESS WHEREOF, the Arch Coal, Inc. Outside Directors'
Deferred Compensation Plan is effective as of January 1, 1999.
ARCH COAL, INC.
By: /s/ Jeffry N. Quinn
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.31
SECOND AMENDMENT TO THE
ARCH MINERAL CORPORATION
SUPPLEMENTAL RETIREMENT PLAN
WHEREAS, Arch Mineral Corporation previously adopted the Arch Mineral
Corporation Supplemental Retirement Plan ("Arch Mineral Plan"); and
WHEREAS, Arch Mineral Corporation reserved the right to amend the Arch
Mineral Plan pursuant to Section 5.G thereof; and
WHEREAS, Arch Mineral Corporation changed its name to Arch Coal, Inc.
("Company") so that the Company is the successor to Arch Mineral Corporation;
and
WHEREAS, effective January 1, 1998, the Company desires to amend the Arch
Mineral Plan and change its name to the Arch Coal, Inc. Supplemental Retirement
Plan ("Plan");
NOW, THEREFORE, effective January 1, 1998, the Arch Mineral Plan is
amended and restated in its entirety as follows:
<PAGE> 2
SECTION 1
DEFINITIONS
A. "Code" means the Internal Revenue Code of 1986, as amended.
B. "Committee" means the committee appointed pursuant to Section 4.
C. "Company" means Arch Coal, Inc., a Delaware corporation.
D. "Deferred Vested Pension" means the monthly benefit for life
payable under the Pension Plan to a Participant whose employment terminates
before he is eligible for an Early Retirement Pension or Normal Retirement
Pension and who has a vested entitlement to benefits under the Pension Plan.
Such monthly benefit shall be calculated as of the first day of the month on
which the Participant would first be entitled to a monthly Deferred Vested
Benefit for life under the Pension Plan.
E. "Early Retirement Pension" means the monthly benefit for life payable
under the Pension Plan commencing as of the first day of the month coinciding
with or next following the date he attains age fifty-five (55) but is less than
age sixty-five (65), has ten years of Pension Credited Service, and ceases
employment with the Employer other than by death.
F. "Eligible Spouse" means the Participant's surviving spouse (if any)
to whom the Participant has been married for the full year ending on the
Participant's date of death.
G. "Employee" means a person who is classified as a salaried employee by
the Employer and who is a participant in the Retirement Plan.
H. "Employer" means the Company or any of its subsidiaries which adopts
the Plan with the consent of the Company and of which the majority of the
issued and outstanding voting stock is owned directly or indirectly by the
Company.
I. "Normal Retirement Pension" means the monthly benefit for life
payable to a Participant under the Pension Plan commencing as of the first day
of the month coinciding with or next following the date the Participant attains
age sixty-five (65).
J. "Participant" means an Employee who has satisfied the eligibility
requirements of Section 2.
K. "Pension Credited Service" means a Participant's service for vesting
purposes under the Pension Plan.
L. "Pension Plan" as above stated means the Arch Coal, Inc. Retirement
Account Plan as in effect on December 31, 1997.
M. "Plan" means this Arch Coal, Inc. Supplemental Retirement Plan.
2
<PAGE> 3
N. "Postponed Retirement Pension" means the monthly benefit for life
payable to a Participant under the Pension Plan commencing as of the first day
of the month coinciding with or next following the Participant's termination of
employment after attaining age sixty-five (65).
O. "Retirement Plan" as above stated means the Arch Coal, Inc.
Retirement Account Plan.
SECTION 2
ELIGIBILITY
Any individual who was a Participant in this Plan on December 31, 1997
shall continue as a Participant on January 1, 1998. On or after January 1,
1998, each Employee whose benefits under the Pension Plan or Retirement Plan
are limited by operation of Code Section 415 or Code Section 401(a)(17) shall
be a Participant in this Plan on the later of January 1, 1998 or the date the
Employee's Pension Plan or Retirement Plan benefits are first limited by Code
Section 415 or Code Section 401(a)(17).
SECTION 3
BENEFITS
Any Participant who terminated employment with the Company before January
1, 1998 or otherwise is not an Employee on January 1, 1998 shall be entitled to
receive benefits in accordance with Section 3.A of the Plan. A Participant who
is employed by the Company on or after January 1, 1998 shall be entitled to
receive benefits in accordance with Section 3.B of the Plan.
A. BENEFITS FOR PENSION PLAN PARTICIPANTS NOT EMPLOYED ON OR AFTER
JANUARY 1, 1998.
1. Benefits shall be payable under this Section 3.A of the Plan
only to those Participants whose benefits under the Pension Plan (a) have been
reduced on account of the limitations of Section 415 of the Code, or (b) are
limited on account of the limitation on compensation under Section 401(a)(17)
of the Code. The amount of benefits payable under this Section 3.A.1 shall
equal the excess (if any) of:
(i) the amount which would have been payable to the Participant
under the Pension Plan as a Normal Retirement Pension (or a Deferred Vested
Pension, Early Retirement Pension, or Postponed Retirement Pension, if
applicable), without regard to the limitations of Section 415 of the Code and
without regard to the limitation on compensation under Section 401(a)(17) of
the Code, over
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<PAGE> 4
(ii) the benefit the Participant would be entitled to receive
under the Pension Plan as a Normal Retirement Pension (or a Deferred Vested
Pension, Early Retirement Pension, or Postponed Retirement Pension, if
applicable), taking into account the limitations under Sections 415 and
401(a)(17) of the Code.
Benefits under this Section 3.A.1. shall commence as of the first day of the
month coinciding with or next following the earliest of (a) the date the
Participant would first become entitled to a Deferred Vested Benefit payable in
the form of a life annuity, (b) the date the Participant becomes entitled to an
Early Retirement Pension, (c) the date the Participant becomes entitled to a
Normal Retirement Pension, or (d) the date the Participant becomes entitled to
a Postponed Retirement Pension, and shall terminate as of the first day of the
month coinciding with or preceding the date of the Participant's death.
2. If the participant dies leaving an Eligible Spouse who is
entitled to a benefit under the Pension Plan, and if such benefit is reduced on
account of (a) the limitations of Section 415 of the Code, or (b) the
limitations on compensation under Section 401(a)(17) of the Code, such spouse
shall receive a monthly benefit for life under this Section 3.A.2 equal to the
excess (if any) of:
(i) the monthly benefit for life which would have been payable
to the spouse under the Pension Plan commencing as of the Participant's
earliest retirement date under the Pension Plan, without regard to the
limitations of Section 415 and without regard to the limitations on
compensation under Section 401(a)(17) of the Code, over
(ii) the monthly benefit for life which is payable to the spouse
under the Pension Plan commencing as of the Participant's earliest retirement
date under the Pension Plan, taking into account the limitations under Sections
415 and 401(a)(17) of the Code.
Benefits under this Section 3.A.2 shall commence as of the date benefits are
payable to the Eligible Spouse under the Pension Plan.
3. In lieu of the manner and form of payment provided above, the
Committee may pay a benefit to the Participant (or his spouse or beneficiary)
under this Plan in a lump sum distribution of equivalent actuarial value or in
the same manner and form as his benefit under the Pension Plan. When converting
the Participant's benefit under this Plan to a form other than a life annuity,
the Committee shall apply the actuarial assumptions set forth in the Pension
Plan.
B. BENEFITS FOR RETIREMENT PLAN PARTICIPANTS
4
<PAGE> 5
1. Benefits shall be payable under this Section 3.B.1 of the Plan
to those Participants who participate in the Retirement Plan and whose benefits
are limited (a) on account of the limitations of Section 415 of the Code, or
(b) on account of the limitation on compensation under Section 401(a)(17) of
the Code. The amount of benefits payable under this Section 3.B.1 shall equal
the excess (if any) of:
(i) the lump sum amount which would have been payable to the
Participant under the Retirement Plan (as of the date benefits commence
under this Plan) without regard to the limitations of Section 415 of the
Code and without regard to the limitation on compensation under Section
401(a)(17) of the Code, over
(ii) the lump sum benefit the Participant is entitled to receive
under the Retirement Plan (as of the date benefits commence under this
Plan), taking into account the limitations under Sections 415 and
401(a)(17) of the Code.
Benefits under this Section 3.B.1 shall commence as of the earliest date that
the Participant is eligible to begin receiving benefits under the Retirement
Plan and shall be paid in a lump sum.
2. If a Participant dies before his benefits begin under this Plan
and he leaves an Eligible Spouse who is entitled to a benefit under the
Retirement Plan, and if such benefit (a) is reduced on account of Section 415
of the Code or (b) is reduced on account of Section 401(a)(17) of the Code,
such spouse shall receive a benefit under this Section 3.B.2 equal to the
excess (if any) of:
(i) the lump sum amount which would have been payable to the
spouse under the Retirement Plan without regard to the limitations of
Sections 415 and 401(a)(17) of the Code, over
(ii) the lump sum benefit payable to the spouse under the
Retirement Plan taking into account the limitations under Sections 415 and
401(a)(17) of the Code (or any successors thereto).
Benefits under this Section 3.B.2 shall commence as of the date benefits are
payable to the Eligible Spouse under the Retirement Plan and shall be paid in a
lump sum.
SECTION 4
ADMINISTRATION AND CLAIMS PROCEDURE
A. The Committee for the Plan shall consist of the same individuals who
have been appointed by the Boards of Directors of the Company to serve as the
Pension Committee of the Retirement Plan.
5
<PAGE> 6
B. The Committee shall construe, interpret and administer all
provisions of the Plan and a decision of a majority of the members of the
Committee shall govern.
C. A decision of the Committee may be made by a written document signed
by a majority of the members of the Committee or by a meeting of the Committee.
The Committee may authorize any one of its members to sign documents or papers
on its behalf.
D. The Committee shall appoint a secretary who need not be a member of
the Committee. The secretary shall keep all records of meetings and of any
action by the Committee and any and all other records desired by the Committee.
The Committee may appoint such agents, who need not be members of the
Committee, as it may deem necessary for the effective exercise of its duties,
and may, to the extent not inconsistent herewith, delegate to such agents any
powers and duties, both ministerial and discretionary, as the Committee may
deem expedient and appropriate.
E. No member of the Committee shall make any decision or take any action
regarding his own benefits under the Plan, but all such matters shall be
decided by a majority of the remaining members of the Committee or, in the
event of inability to obtain a majority, by the Chairman of the Company.
F. A Participant who believes that he is being denied a benefit to which
he is entitled (hereinafter referred to as "Claimant") may file a written
request for such benefit with the Plan Administrator of the Retirement Plan
setting forth his claim. The request must be addressed to: Plan Administrator,
Arch Coal, Inc., City Place One, Suite 300, St. Louis, Missouri 63141.
G. Upon receipt of a claim, the Plan Administrator shall advise the
Claimant that a reply will be forthcoming within ninety (90) days and shall in
fact deliver such reply within such period. However, the Plan Administrator may
extend the reply period for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Plan Administrator will adopt a
written opinion using language calculated to be understood by the Claimant
setting forth:
1. the specific reason or reasons for denial,
2. specific references to pertinent Plan provisions on which the
denial in based,
3. a description of any additional material or information necessary
for the Claimant to perfect the claim and an explanation why such material
or such information is necessary,
4. appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review, and
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<PAGE> 7
5. the time limits for requesting a review under Subsection H
and for the review under Subsection I.
H. Within sixty (60) days after the receipt by the Claimant of the
written opinion described above, the Claimant may request in writing that
the Committee review the determination of the Plan Administrator. Such
request must be addressed to: Committee, Arch Coal, Inc., City Place One,
Suite 300, St. Louis, Missouri 63141. The Claimant or his duly authorized
representative may, but need not, review pertinent documents and submit
issues and comments in writing for consideration by the Committee. If the
Claimant does not request a review of the Plan Administrator's
determination by the Committee within such sixty (60) day period, he shall
be barred and estopped from challenging the Plan Administrator's
determination.
I. Within sixty (60) days after the Committee's receipt of a request
for review, it will review the Plan Administrator's determination. After
considering all materials presented by the Claimant, the Committee will
render a written opinion setting forth the specific reasons for his
decision and containing specific references to the pertinent Plan
provisions on which his decision is based. If special circumstances require
that the sixty (60) day period be extended, the Committee will so notify
the Claimant and will render the decision as soon as possible but not later
than 120 days after receipt of the request for review.
SECTION 5
FORFEITURE
Subject to any divestiture limitations imposed by the then applicable
law, a Participant's right to his benefits, or any surviving spouse's or
Eligible Spouse's right related to such benefits, shall be divested if the
Participant is found to have violated the law as to any business matter of
the Employer and such violation materially affects the Employer's business
or reputation. Otherwise, there shall be no divestiture of rights of any
Employee who as become a Participant herein.
SECTION 6
MISCELLANEOUS
A. PLAN YEAR. The Plan shall operated on a calendar year basis.
B. SPENDTHRIFT. No Participant or beneficiary shall have the right to
assign, transfer, encumber or otherwise subject to lien any of the benefits
payable under this Plan.
C. INCAPACITY. If, in the opinion of the Committee, a person to whom a
benefit is payable is unable to care for his affairs because of illness,
accident or any other reason, any payment due the person, unless prior claim
therefor shall have been made by a duly qualified guardian or other duly
appointed and qualified representative of such person, may be paid to
7
<PAGE> 8
some member of the person's family, or to some party who, in the opinion of the
Committee, has incurred expense for such person. Any such payment shall be a
payment for the account of such person and shall be a complete discharge of any
liability therefor to such person.
D. EMPLOYEE RIGHTS. The Employer, in adopting this Plan, shall not be
held to create or vest in any Employee or any other person any benefits other
than the benefits specifically provided herein, or to confer upon any Employee
the right to remain in the service of the Employer.
E. SERVICE OF PROCESS AND PLAN ADMINISTRATOR. The Secretary of the
Company shall be the agent for service of legal process.
F. UNFUNDED PLAN. This Plan shall be unfunded. All payments to a
Participant under the Plan shall be made from the general assets of the
Participant's Employer. The rights of any Participant to payment shall be those
of an unsecured general creditor of his Employer.
G. COMPANY RIGHTS. The Company reserves the right to amend or terminate
the Plan, provided that the rights of each designated Participant shall remain
unaffected.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
by its duly authorized officer this 1st day of January, 1998.
ARCH COAL, INC.
By: /s/ Jeffry N. Ouinn
-----------------------------------
ATTEST: /s/ Miriam Rogers Singer
-----------------------------
8
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Reference is made to the "Certain Trends and Uncertainties" section below in
this Management's Discussion and Analysis for discussion of important factors
that could cause actual results to differ from expectations and non-historical
information contained herein.
RESULTS OF OPERATIONS
Ashland Coal, Inc. ("Ashland Coal") merged with Arch Mineral Corporation
effective July 1, 1997 (the "Ashland Coal merger") to form the Company and the
Company acquired the U.S. coal operations of Atlantic Richfield Company ("ARCO")
effective June 1, 1998 (the "Arch Western transaction" and "Arch Western").
Results of operations do not include activity of Ashland Coal or ARCO's U.S.
coal operations prior to the effective dates of these transactions. Accordingly,
the Company's results of operations for 1998, 1997 and 1996 are not directly
comparable.
1998 Compared to 1997
Net income for 1998 was $30.0 million compared to $30.3 for 1997. Current year
results include a full year of operating results from the former Ashland Coal
operations, whereas the prior year included only six months of results from
those operations. In addition, the current year includes results of operations
from the ARCO, now Arch Western operations from June 1, 1998, including a 65%
share of Canyon Fuel Company, LLC ("Canyon Fuel") income, net of purchase
accounting adjustments.
Total revenues increased 41% as a result of inclusion of a full year of
results from the former Ashland Coal operations in 1998 and seven months of Arch
Western operating results, including income from the Company's equity investment
in Canyon Fuel. On a per-ton sold basis, however, the Company's average selling
price decreased by $7.93, primarily because of the inclusion of the Arch Western
operations. Western coal has a significantly lower average sales price than that
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 United States and export markets, as well
as reduced seasonal demand caused by unusually warm winter weather.
Net income approximated that for 1997 despite the Arch Western transaction
and the inclusion of a full year of results from the former Ashland Coal
operations. Operating results were favorably impacted in 1998 by increased
production from the Company's Mingo Logan longwall operation (Mountaineer Mine),
which produced $77.8 million or 89% of the Company's income from operations for
the year. This positive result was offset, in part, by production shortfalls,
deterioration of mining conditions and resulting lower net income contributions
from the Company's Dal-Tex and Hobet mining complexes in central Appalachia and
the closure of the Company's large surface operation in Illinois as a result of
reserve depletion. In particular, as a result of the continued delay in
receiving a new mining permit, the Dal-Tex operation has been forced to operate
in less favorable mining areas with higher overburden ratios and lower
productivity, resulting in higher production costs. The Company's 1998 results
were also significantly impacted by Arch Western operating difficulties. The
Company experienced production shortfalls and other deficiencies at its Black
Thunder Mine in Wyoming due to geologic, water drainage and sequencing problems,
which are currently being addressed, and substantial transportation delays at
the West Elk Mine in Colorado. In addition, Canyon Fuel experienced difficult
geologic conditions at its Skyline Mine. Other items adversely affecting current
year results as compared to 1997 results included the expiration of the Georgia
Power contract in December 1997, reduced shipments under an above-market price
long-term contract in 1998, the completion in 1997 of $10.8 million annual
accretion of a 1993 unrecognized net gain related to pneumoconiosis (black lung)
liabilities, and a net increase in reclamation costs of $4.9 million in 1998 as
compared to a benefit in 1997 of $4.4 million resulting from the Company's
recosting of its reclamation liability. Operating results in 1998 include gains
from the dispositions
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<PAGE> 2
of assets of $41.5 million compared to $4.8 million in 1997. The gain in 1998
includes pre-tax gains of $18.5 million on the sale of certain idle properties
in eastern Kentucky and $7.5 million on the sale of the Company's idle Big Sandy
Terminal. Prior year results were also affected by a one-time charge of $39.1
million ($23.8 million after-tax) related to the Ashland Coal merger.
Selling, general and administrative expenses increased $15.9 million
primarily due to the effects of the Ashland Coal merger and the Arch Western
transaction.
As a result of the amortization of the carrying value of the sales
contracts acquired in the Ashland Coal merger and the Arch Western transaction,
amortization of coal supply agreements increased $16.5 million.
Interest expense increased $44.4 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.
During 1998, the Company incurred an extraordinary charge of $1.5 million
(net of a tax benefit of $.9 million) related to the early extinguishment of
debt in conjunction with the refinancing of Company debt resulting from the Arch
Western transaction.
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
Arch Coal, its subsidiaries and its ownership percentage in its equity
investments) was $313.5 million for 1998 compared to $224.6 million for 1997.
The increase in EBITDA is primarily attributable to the additional sales that
resulted from the Ashland Coal merger and the Arch Western transaction. EBITDA
is a widely accepted financial indicator of a company's ability to incur and
service debt, but EBITDA should not be considered in isolation or as an
alternative to net income, operating income, or cash flows from operations, or
as a measure of a company's profitability, liquidity or performance under
generally accepted accounting principles. The Company's method of computing
EBITDA also may not be the same method used to compute similar measures reported
by other companies, or EBITDA may be computed differently by the Company in
different contexts (e.g., public reporting versus computations under financing
agreements).
1997 Compared to 1996
Net income for 1997 was $30.3 million compared to net income of $33.0 million
for 1996. The 1997 year includes a one-time charge of $39.1 million ($23.8
million after-tax) related to the Ashland Coal merger. Excluding this charge,
the Company had net income of $54.1 million for the year. The merger-related
charge was comprised of termination benefits and relocation costs of $8.1
million and costs of $31.0 million associated with the idling of duplicate
facilities.
Gross profit on coal sales (selling price less cost of sales) on a per-ton
basis increased $.11 per ton from 1996 to 1997. The average selling price
increased $.05 per ton while cost of coal sold decreased $.06 per ton. The
reduction in cost was primarily attributable to higher production from the
Ruffner and Wylo mines, cost improvements at Lone Mountain's Huff Creek and
Darby Fork mines, and the addition, as a result of the merger, of low-cost
production from the Mingo Logan and Dal-Tex complexes. Largely offsetting those
effects were higher costs resulting from the depletion of the longwall reserves
at Mine No. 37, higher costs at the Company's Wyoming and Pardee operations, and
the addition of higher-cost surface production from the Hobet 21 Complex after
the Ashland Coal merger.
Selling, general and administrative expenses increased $8.4 million
primarily due to the effects of the Ashland Coal merger.
Primarily due to the amortization of the carrying value of the Ashland Coal
sales contracts, amortization of coal supply agreements increased $5.5 million.
This increase was partially offset by a decrease in amortization resulting from
the completion of amortization on certain other sales contracts at the end of
1996.
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<PAGE> 3
Interest expense declined $1.0 million in 1997 as a result of lower average
debt levels and the prepayment of higher-cost fixed-rate debt.
The income tax benefit recorded in 1997 was primarily attributed to the
$15.3 million tax benefit associated with the one-time merger-related charge
discussed above. The Company's effective tax rate is sensitive to annual
profitability and percentage depletion.
EBITDA was $224.6 million for 1997 compared to $170.8 million for 1996. The
increase in EBITDA is primarily attributable to the Ashland Coal merger.
OUTLOOK
Arch Coal's strategic position was strengthened in 1998 with the Arch Western
transaction and the Company's successful October 1, 1998, $158 million bid on
the 3,546 acre Thundercloud tract in the Powder River Basin of Wyoming. The
reserves acquired met Phase II requirements of the Clean Air Act and the
Thundercloud tract also has favorable geologic conditions, contains demonstrated
coal reserves of approximately 412 million tons of coal and is contiguous with
the Company's Black Thunder mine. The Company plans to add a fourth dragline at
the Black Thunder mine and intends to begin mining the Thundercloud tract once
necessary permits are obtained which it expects to secure in late 2000. The Arch
Western transaction will help solidify the Company's future as other operations'
reserves deplete, most notably Mingo Logan's Mountaineer Mine estimated to
deplete in 2002. The Mountaineer Mine generated $77.8 million, or 89% of the
Company's total operating income in 1998.
With respect to other operations, management has determined to continue a
lower level of coal mining operations at the Seminoe II and Medicine Bow mines
in Wyoming as a result of oversupply of competing coals in this market. The
scheduled and previously disclosed closures of the Hobet 07 Complex in West
Virginia and the Arch of Illinois surface mine due to the depletion of their
economical dedicated reserves and the closure of Mine No. 37 in Kentucky, all in
1998, have reduced production capacity in the Eastern United States. In
addition, the Wylo surface operation in West Virginia will deplete its
economical reserves in mid-1999. Results for 1998 were adversely affected by
continuing production shortfalls at the Hobet 21 Complex and the Lone Mountain
Complex. At the end of 1998, several changes were made at these operations,
including new management. However, there is no certainty that these operations
will improve production in 1999. Production losses as a result of such reduced
mining plans, mine closures and operational shortfalls have been offset to some
degree by production from Mingo Logan's new surface mine in the Phoenix
reserves, which commenced production in the second quarter of 1998. Additional
production capacity was added in the fourth quarter of 1998 at the Phoenix
reserve. The Company expects the poor rail service experienced at its Western
operations in 1998 to improve, although such service may continue to hinder
performance in 1999.
At the Company's Dal-Tex Mine in Logan County, West Virginia, the
permitting of a new portion of the mine has been delayed by legal challenges
initiated by environmental activists in a suit against the West Virginia
Department of Environmental Protection ("DEP"), the U.S. Environmental
Protection Agency ("EPA") and the U.S. Army Corps of Engineers (the "Corps").
Potential layoffs and curtailment of operations at that complex could occur and
major changes in mine plans will be necessary if the mining operation does not
receive the necessary permits to continue mining. The required permits consist
of a surface mining permit issued by the DEP, an NPDES Permit approved by the
EPA, and a "dredge and fill" permit under Section 404 of the Clean Water Act
issued by the Corps. On November 4, 1998 the DEP issued the required surface
mining permit. The EPA had approved the NPDES Permit and the Corps had indicated
it was prepared to issue the dredge and fill permit. However, on February 3,
1999 the United States District Court for the Southern District of West Virginia
issued a temporary restraining order enjoining the
26
<PAGE> 4
Corps from issuing the permit. That temporary restraining order was subsequently
extended until March 5, 1999. For additional discussion of these matters, see
the "Legal Contingencies" subsection of the Contingencies section below.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's debt represented 69% of capital employed
compared to 31% at the prior year end and its current assets to current
liabilities ratio was 1.1 to 1.0 at December 31, 1998, compared to 1.2 to 1.0 at
the end of the prior year. Debt as a percent of capital employed has increased
as a result of the financing that occurred in conjunction with the Arch Western
transaction. The following is a summary of cash provided by or used in each of
the indicated types of activities during the past three years:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities ..... $ 188,023 $ 190,263 $ 138,471
Investing activities ..... (1,271,371) (80,009) (72,638)
Financing activities ..... 1,101,585 (114,793) (69,619)
</TABLE>
The 1998 slight decrease in cash provided by operating activities from the 1997
level was principally due to increased interest expense as a result of increased
borrowings associated with the Arch Western transaction, and tax payments
related to prior years' IRS audits. This was mostly offset by increased
operating activity resulting from the Arch Western transaction and distributions
from the Company's investment in Canyon Fuel. The 1997 increase in cash provided
by operating activities from the 1996 level was principally due to the Ashland
Coal merger, partially offset by tax payments related to prior years' IRS
audits.
The increase in cash used for investing activities in 1998 from the 1997
level primarily resulted from the payment of $1.1 billion in the Arch Western
transaction. In addition, the Company's expenditures for property, plant and
equipment were $141.7 million, $77.3 million and $62.5 million in 1998, 1997 and
1996, respectively. Expenditures for 1998 included a $16.0 million royalty
payment on a lease acquired in 1992 by Ashland Coal and a federal lease bonus
payment of $31.6 million on the Wyoming coal reserve known as the Thundercloud
tract. Also included in 1998 expenditures were equipment upgrades at the Conant
Mine, the Hobet 21 Mine/Beth Station Preparation Plant, the Ruffner Mine, the
Lone Mountain Complex and the Mingo Logan longwall mine, which accounted for
$3.2 million, $4.5 million, $5.9 million, $9.8 million and $10.3 million,
respectively, and equipment purchases to start up the new Phoenix surface mine
which totaled $14.9 million. The Company also agreed in 1998 to repurchase a
sublease for an overlying seam in certain areas of the Mingo Logan longwall
operation for $13.6 million. The expenditures for 1997 included the acquisition
of reserves adjacent to the Samples Mine and reserves adjacent to the Hobet 21
Complex for $17.0 million and $6.0 million, respectively. Also included in 1997
expenditures was $6.5 million to complete the upgrade and extension of the Hobet
21 conveyor system, $8.6 million for improvements at Lone Mountain's Huff Creek
and Darby Fork mines and $4.1 million to add a second section to Pardee's Band
Mill Mine. 1996 expenditures included $15.1 million related to the final phase
of development of Lone Mountain's operations, $5.9 million for the development
of the Band Mill Mine, $14.2 million for Carbon Basin reserves and $4.8 million
for construction of the Archveyor system for the Conant Mine. The Company
estimates that its expenditures for replacement and improvement of existing
mining equipment, expansion of existing mines and development of new mines
(excluding acquisitions) may be as much as $180 million during 1999.
Cash provided by financing activities in 1998 reflects an increase in
borrowings of $1.1 billion associated with the Arch Western transaction, net of
associated debt repayment. The Company repaid approximately $35.7 million of
senior notes concurrently with its borrowings to finance the Arch Western
transaction. In addition, the
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<PAGE> 5
January 1998 sale and leaseback of equipment resulted in proceeds of $45.4
million. Cash used in financing activities in 1997 and 1996 principally reflects
reductions in borrowings of $102.2 million and $61.6 million, respectively. The
increase in debt repayments during 1997 versus 1996 primarily resulted from the
higher amount of cash flow generated by the Ashland Coal merger in the second
half of 1997.
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 ("Arch Western credit facility") and a $900 million credit facility
to the Company ("Arch Coal credit facility"), including a $300 million fully
amortizing term loan and a $600 million revolving credit facility. Borrowings
under the new Arch Coal credit facility were used to finance the acquisition of
ARCO's Colorado and Utah coal operations, to pay related fees and expenses, to
refinance existing corporate debt and for general corporate purposes. 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 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.
The Company periodically establishes uncommitted lines of credit with
banks. These agreements generally provide for short-term borrowings at market
rates. At December 31, 1998, there is $45 million of such agreements in effect
of which $12.9 million were outstanding.
The Company is exposed to market risk associated with interest rates. At
December 31, 1998, debt included $1.363 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
characteristics of outstanding Company debt. At December 31, 1998, the Company
has interest-rate swap agreements having a total notional value of $815.0
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 5.54% (before the credit spread over LIBOR) and is
receiving a weighted average variable rate based upon 30-day and 90-day LIBOR.
The remaining terms of the swap agreements at December 31, 1998 ranged from 44
to 68 months. All instruments are entered into for other than trading purposes.
This discussion 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 chosen reflects the Company's view of changes which 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.
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 December 31, 1998 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 $33.4
million at December 31, 1998. Based on the variable-rate debt included in the
Company's debt portfolio as of December 31, 1998,
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<PAGE> 6
after considering the effect of the swap agreements, a 100-basis-point increase
in interest rates would result in an annualized additional $5.6 million interest
expense incurred based on year-end debt levels.
CONTINGENCIES
Reclamation
The Federal Surface Mining Control and Reclamation Act of 1977 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 periodically 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. Adjustments to increase the liability were $4.9
million in 1998 and adjustments to decrease the liability were $4.4 million and
$4.5 million in 1997 and 1996, respectively. The Company's management believes
it is making adequate provisions for all expected reclamation and other
associated costs.
Reclamation and mine closing costs for operations as of December 31, 1998,
in the aggregate, are estimated to be approximately $292.0 million. At December
31, 1998 and December 31, 1997, the accrual for such costs, which is included in
accrued reclamation and mine closure and in accrued expenses, was $157.5 million
and $125.6 million, respectively.
Legal Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters, including those discussed below. The Company provides for costs related
to contingencies, including environmental matters, when a loss is probable and
the amount is reasonably determinable. The Company estimates that at December
31, 1998, its probable aggregate loss as a result of such claims is $3.8 million
(included in other noncurrent liabilities) and believes that probable insurance
recoveries of $.9 million (included in other assets) related to these claims
will be realized. The Company estimates that its reasonably possible aggregate
losses from all currently pending litigation could be as much as $.4 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 condition, results
of operations or liquidity of the Company.
A customer of the Company informed the Company that one of its power plants
to which the Company supplies coal will no longer provide baseload capacity to a
public utility which purchases the electricity produced from the plant and
instead will be used to provide peak demand only. As a result, the customer
maintains the plant will require substantially less coal under the customer's
existing above-market contract with the Company. The Company has filed a civil
action in Federal District Court in the Southern District of West Virginia
alleging breach of contract and other causes of action against the customer in
respect of the customer's failure to comply with the terms of this contract. On
July 17, 1998, the court granted the customer's motion to stay the lawsuit
pending arbitration. As of December 31, 1998, the
29
<PAGE> 7
carrying amount of acquisition costs allocated to this coal supply contract
amounts to approximately $13.7 million. The Company currently expects that it
will recover the carrying amount of this asset, however, the ultimate outcome of
this matter is uncertain.
Canyon Fuel is in litigation with the Skyline Partners, the lessors of the
coal reserves which comprise Canyon Fuel's Skyline Mine. The coal leases in
question were entered into between The Coastal Coal Corporation, Canyon Fuel's
predecessor in interest, and the Skyline Partners' predecessor. The coal leases
require the lessee, Canyon Fuel, to pay an annual advance minimum royalty of $5
million, which is fully recoupable against a production royalty that is to be
paid by Canyon Fuel on each ton of coal mined and sold from the leaseholds. In
1997, Canyon Fuel concluded that a number of recoverable tons which remain on
the leasehold were insufficient to allow it to fully recoup the total amount of
advance royalties that have been paid to the Skyline Partners, and filed suit in
Utah State Court against the Skyline Partners alleging that Canyon Fuel is not
required to make the final minimum advance royalty payment of $5 million and
seeking to recover $2.1 million in advance minimum royalties paid to the Skyline
Partners that Canyon Fuel will not be able to recoup based upon the estimated
number of recoverable tons under the 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 leases. To date, these cases have
principally involved procedural disputes concerning proper venue for the case.
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 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 EPA on December 1,
1997. Any liability which might be asserted by 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 whom the subsidiary
contracted to dispose of the waste material has agreed to indemnify the Company
for any costs associated with this action.
On July 16, 1998, 10 individuals and The West Virginia Highlands
Conservancy filed suit in U.S. District Court for the Southern District of West
Virginia alleging violations of SMCRA and the Clean Water Act. Named as
defendants in the suit are the director of the West Virginia Division of
Environmental Protection ("DEP") and officials of the U.S. Army Corps of
Engineers (the "Corps").
In their complaint, the plaintiffs allege that the DEP has violated its
duties under SMCRA and the Clean Water Act by approving surface mining permits
that authorize the construction of "valley fills." These 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 is placed. The
approval of such permits are alleged to "result in unpermitted discharges of
pollutants into state waters, violations of state water quality standards,
disturbance to the 100-foot buffer zone around streams, [and] destruction to
riparian
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vegetation." The complaint also alleges that the DEP has failed to
require that lands mined be restored to Approximate Original Contour ("AOC") and
that approved post-mining land uses are enforced following reclamation.
Four indirect, wholly-owned subsidiaries of the Company currently hold nine
permits that were identified in the complaint as violating the legal standards
that the plaintiffs have requested the district court to interpret. In addition,
a pending permit application for the Company's Dal-Tex operation (known as the
"Spruce Fork Permit") is specifically identified as a permit whose issuance
should be enjoined. Three subsidiaries of the Company intervened in the lawsuit
in support of the Corps and the DEP on August 6, 1998. The Company and the other
defendants have vigorously opposed claims asserted in the lawsuit.
A settlement was entered between the plaintiffs and the Corps on December
23, 1998. Under that agreement, the plaintiffs agreed to dismiss all claims
against the Corps in return for the Corps agreeing, in conjunction with other
federal agencies, to conduct a comprehensive environmental impact statement of
the long-term effects of valley fills. During the twenty-four (24) months
anticipated to complete the study, the agreement imposes new, interim standards
that will be used in reviewing and approving permits. The most significant
change imposed under the settlement agreement is the obligation of a permit
applicant to seek an individual ss.404 Clean Water Act permit if it proposes to
construct a valley fill affecting a drainage area larger than 250 acres.
The Company's Dal-Tex operation's Spruce Fork Permit was specifically
excluded from the terms of the settlement. Nevertheless, the EPA withdrew its
final objections to a Clean Water Act ss.402 NPDES permit that had been pending
since mid-1998. The Company was notified by the Corps on January 21, 1999 that
it would issue its Clean Water Act ss.404 permit within five (5) days which was
the last permit, approval, or authorization needed to commence mining on the
Spruce Fork Permit. On January 26, 1999, the plantiffs moved for a temporary
restraining order. On February 3, 1999, the U.S. District Court for the Southern
District of West Virginia entered the restraining order, which was subsequently
extended until March 5, 1999. Simultaneously, the court commenced a hearing on
the preliminary injunction which was concluded on February 26, 1999. The Company
expects a ruling on the preliminary injunction prior to the expiration of the
temporary restraining order. Should the court enter the preliminary injunction,
or otherwise delay substantially the issuance of the permit, the decision will
have a material adverse effect on the Dal-Tex operation.
CERTAIN TRENDS AND UNCERTAINTIES
Substantial Leverage; Variable Interest Rates; Restrictive Covenants
The Company has substantial leverage and significant debt service and lease and
royalty payment obligations. As of December 31, 1998, the Company had
outstanding consolidated indebtedness of approximately $1.4 billion,
representing approximately 69% of the Company's total capitalization.
The Company's ability to satisfy its debt service and lease and royalty
payment obligations will depend upon the future operating performance of its
subsidiaries, which will be affected by prevailing economic conditions in the
markets they serve and financial, business and other factors, certain of which
are beyond their control. Based upon current levels of operations, the Company
believes that cash flow from operations and available cash, together with
available borrowings under the Company's credit facilities, will be adequate to
meet the Company's future liquidity needs for at least the next several years.
However, there can be no assurance that the Company's business will generate
sufficient cash flow from operations or that future borrowings will be available
in an amount sufficient to enable the Company to fund its debt service and lease
and royalty 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 and
royalty payment and other obligations; (ii) increasing the Company's
vulnerability to general adverse economic and
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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 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 vis-a-vis
less leveraged competitors.
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.
Permits are required to be obtained by mining companies that strictly
regulate various environmental and health and safety matters in connection with
coal mining by the permittee. Numerous permits are required for mining
operations. Other than as described in "Legal Contingencies", 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 described in "Legal Contingencies", the regulatory
environment in West Virginia is changing with respect to current or future large
scale surface mines. The regulatory authorities have considerable discretion in
the timing of permit issuance. Because both private individuals and the public
at large possess rights to comment on and otherwise engage in the permitting
process, including through intervention in the courts, no assurance can be made
that all permits will be issued, 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 ("CWA") affects coal mining operations in two
principal ways. First, the Army Corps of Engineers (the "Corps") issues permits
under Section 404 of the CWA whenever a mine operator proposes to build a fill
or impoundment in waters of the United States. In addition, the Environmental
Protection Agency (the "EPA") must approve the issuance by a state agency of an
NPDES (National Pollutant Discharge Elimination System) permit under Section 402
of the CWA. These permits encompass storm water discharges from a mine facility.
Regular monitoring and compliance with reporting requirements and performance
standards are preconditions for the issuance and renewal of NPDES permits
governing the discharge of pollutants into waters. All states in which the
Company's subsidiaries operate also have laws restricting discharge of
pollutants into the waters of those states.
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,
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regulations or orders may also require the Company or its customers 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.
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 22 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, United States 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 by some
scientists to be trapping heat in the atmosphere and warming the earth's
climate) in the United States. The adoption of the requirements of the Kyoto
Protocol by the United States is subject to conditions which may not occur, and
are also subject to the Protocol's ratification by the United States Senate. The
United States 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
$77.8 million or 89% of the Company's total operating income in 1998.
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,
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and as a consequence may experience fluctuations in operating results in the
future as a result of expiration or termination of, or sales price
redeterminations or suspensions of deliveries under, such coal supply
agreements. Other short- and long-term contracts define base or optional tonnage
requirements by reference to the 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 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
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 also are 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.
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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 make the third quarter not comparable
to the other quarters and not indicative of results to be expected for the full
year.
Certain Contractual Arrangements
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, has generally 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 certain capital
expenditures, incur indebtedness, sell properties or merge or consolidate with
any other person would require the consent of all the members of Arch Western.
In connection with the Arch Western transaction, the Company entered into a
Tax Sharing Agreement pursuant to which the Company agreed to indemnify the
other 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 Third
Amended and Restated Limited Liability Company Agreement (the "Canyon Fuel
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.
Pursuant to a Stockholders Agreement (the "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 Ashland Coal merger. In addition, the Company, 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, 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
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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 Bylaws of the Company 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 possible adverse effects on the Company's
operating results, 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 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 in fact 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 thoroughly verified until
a permit is being obtained to mine 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.
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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
operations acquired in the Arch Western transaction 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 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 Ashland Coal merger, when, in
connection with the necessary integration of two companies' information services
technology, a comprehensive plan for achieving an internal information services
system free of Year 2000 concerns was adopted. Implementation of this plan
commenced upon consummation of this merger, and essentially 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.
In April 1998, the Company implemented the first phase of its Year 2000
plan by installing a new Oracle General Ledger running on Year 2000 compliant HP
9000 servers and operating systems. In October 1998, the Company implemented
Oracle's Human Resource System and plans to begin implementing a new Oracle
Payroll System to all the Company's locations during the first half of 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 the Company's mining
locations is October 31, 1999. All desktop computers, network devices and
related software are being tested and are replaced if there is a Year 2000
problem. The Company has standardized Windows 95, Office 95, and NT file/printer
servers, effective in October 1998.
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, in late 1997.
The effort to identify potential Year 2000 problems within the Company's mining
and processing equipment and in its interfaces with third parties is ongoing.
When complete, customers, financial institutions, vendors, manufacturers,
transportation companies and others with which the Company conducts business and
where the interruption of such business could have a material adverse affect on
the Company will be contacted, and cost effective efforts made to remediate or
minimize possible problems.
Assuming the cooperation of third parties in connection with the Company's
efforts, the Company believes that it will be able to complete its assessment of
material adverse risk associated with Year 2000 problems in its mining and
processing equipment and within such third-party systems and processes
sufficiently in advance of January 1, 2000, to effect remedial measures where
such
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measures are possible and cost effective. Arch is in the process of
finalizing its assessment and the target date for completing any remedial
measures is July 31, 1999.
Costs of Plan - To date, the Company has expended approximately $6.5
million of the total estimated $9.5 required to eliminate Year 2000 concerns
within the Company's internal information systems. The total costs include not
only the elimination of Year 2000 concerns, but also costs for new
state-of-the-art systems and costs addressing the Year 2000 concerns for the
newly acquired ARCO operations. The cost of the project is based on management's
best estimates and there can be no assurance that these estimates will be
achieved. Pending completion of the assessment of mining and processing
equipment and third-party system and processes risk, no amount can be reasonably
estimated for remediation in these areas.
Year 2000 Risk - The risks posed to the Company by the Year 2000 problems
are difficult to quantify with certainty. The Company's Year 2000 plan for
reconfiguring and standardizing internal information systems to properly process
Year 2000 information is dependent upon several factors beyond the Company's
immediate control. These factors include, for example, retention of qualified
information services personnel in a highly competitive labor market and
integrity of local and long distance carriers' Year 2000 telecommunication
networks, which will be necessary for operation of the Company's wide area
network. In addition, while the estimated completion date of the Company's
reconfiguration efforts will permit some testing of the internal systems, the
schedule would not likely give 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 true. The unavailability of the Company's
internal information systems for a sustained period would have an adverse effect
on the Company. Depending upon the nature of the unavailability of the Company's
internal information systems, the adverse effect on the Company could be
material.
With respect to the Company's mining and processing equipment, the Company
believes the greatest risk posed is that any of its multitude of sampling,
processing and loading equipment at its mines, loadouts and terminals 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 effect on the
Company. Depending upon the nature of the loss of service, the adverse effect on
the Company could be material.
Contingency Plans - The Company has begun to develop contingency plans for
key internal projects that, if delayed, could prevent certain mine operations
from gaining access to Year 2000 compliant systems. Likewise, following the Year
2000 assessment of its customers and third-party providers of goods and
services, Arch will determine from information that it has received through
correspondence and personal contact that if a company's Year 2000 remediation
efforts are incomplete and the consequence could be materially adverse, then
contingency plans will be developed if economically reasonable.
Factors Routinely Affecting Results of Operations
Any one or a combination of changing demand; fluctuating selling prices;
contract penalties, suspensions or terminations; operational, geologic,
transportation and
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weather-related factors; unexpected regulatory changes; results of litigation;
or labor disruptions may occur at times or in a manner that causes results of
operations of the Company to deviate from expectations. Any event disrupting
substantially all production at any of the Company's principal mines for a
prolonged period would have a significant adverse effect on the Company's
current and projected results of operations. The effect of such a disruption at
Mingo Logan operations would be particularly severe because of the high volume
of coal produced by those operations and the relatively high contribution to
operating income from the sale of such coal.
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To the Stockholders and Board of Directors
Arch Coal, Inc.
We have audited the accompanying consolidated balance sheets of Arch Coal,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of Arch Coal, Inc. as of December 31, 1996 and for the year then ended were
audited by other auditors whose report dated January 16, 1997, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 financial statements referred to above
(appearing on pages 42 to 64 of this Annual Report) present fairly, in all
material respects, the consolidated financial position of Arch Coal, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Ernst & Young, LLP
Louisville, Kentucky
January 22, 1999
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REPORT OF MANAGEMENT
The management of Arch Coal, Inc. is responsible for the preparation of the
consolidated financial statements and related financial information in this
annual report. The financial statements are prepared in accordance with
generally accepted accounting principles and necessarily include some amounts
that are based on management's informed estimates and judgments, with
appropriate consideration given to materiality.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that financial records are reliable for purposes of
preparing financial statements and that assets are properly accounted for and
safeguarded. The concept of reasonable assurance is based on the recognition
that the cost of a system of internal accounting controls should not exceed the
value of the benefits derived. The Company has a professional staff of internal
auditors who monitor compliance with and assess the effectiveness of the system
of internal accounting controls.
The Audit Committee of the Board of Directors, composed of directors who
are not officers or employees of Arch Coal, Inc., meets regularly with
management, the internal auditors, and the independent auditors to discuss
matters relating to financial reporting, internal accounting control, and the
nature, extent and results of the audit effort. The independent auditors and
internal auditors have full and free access to the Audit Committee, with and
without management present.
Steven F. Leer Patrick A. Kriegshauser
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
41
<PAGE> 19
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
(In thousands of dollars except per share data) 1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
REVENUES
Coal sales ........................................................... $ 1,428,171 $ 1,034,813 $ 750,123
Income from equity investment ........................................ 6,786 -- --
Other revenues ....................................................... 70,678 32,062 30,498
-----------------------------------------
1,505,635 1,066,875 780,621
-----------------------------------------
COSTS AND EXPENSES
Cost of coal sales ................................................... 1,313,400 916,802 669,295
Selling, general and administrative expenses ......................... 44,767 28,885 20,435
Amortization of coal supply agreements ............................... 34,551 18,063 12,604
Merger-related expenses .............................................. -- 39,132 --
Other expenses ................................................... 25,070 22,111 22,175
-----------------------------------------
1,417,788 1,024,993 724,509
-----------------------------------------
Income from operations ............................................... 87,847 41,882 56,112
-----------------------------------------
Interest expense, net:
Interest expense ..................................................... (62,202) (17,822) (18,783)
Interest income ...................................................... 756 721 1,191
-----------------------------------------
(61,446) (17,101) (17,592)
-----------------------------------------
Income before income taxes and extraordinary item .................... 26,401 24,781 38,520
Provision (benefit) for income taxes ...................................... (5,100) (5,500) 5,500
-----------------------------------------
Income before extraordinary item ..................................... 31,501 30,281 33,020
Extraordinary item from the extinguishment of debt ........................ (1,488) -- --
-----------------------------------------
NET INCOME ........................................................... $ 30,013 $ 30,281 $ 33,020
=========================================
Basic and diluted earnings per common share before extraordinary item ..... $ 0.79 $ 1.00 $ 1.58
=========================================
Basic and diluted earnings per common share ............................... $ 0.76 $ 1.00 $ 1.58
=========================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
42
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
(In thousands of dollars except share and per share data) 1998 1997
--------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ....................................... $ 27,414 $ 9,177
Trade accounts receivable ....................................... 202,871 133,810
Other receivables ............................................... 24,584 14,046
Inventories ..................................................... 68,455 50,419
Prepaid royalties ............................................... 13,559 17,745
Deferred income taxes ........................................... 8,694 8,506
Other ........................................................... 7,757 9,475
--------------------------
Total current assets ........................................ 353,334 243,178
--------------------------
Property, plant and equipment
Coal lands and mineral rights ................................... 1,476,703 853,053
Plant and equipment ............................................. 1,111,120 890,303
Deferred mine development ....................................... 80,926 102,909
--------------------------
2,668,749 1,846,265
Less accumulated depreciation, depletion and amortization ....... (732,005) (696,339)
--------------------------
Property, plant and equipment, net .......................... 1,936,744 1,149,926
--------------------------
Other assets
Prepaid royalties ............................................... 31,570 20,826
Coal supply agreements .......................................... 201,965 185,306
Deferred income taxes ........................................... 83,209 44,023
Investment in Canyon Fuel ....................................... 272,149 --
Other ........................................................... 39,249 13,065
--------------------------
Total other assets .......................................... 628,142 263,220
--------------------------
Total assets ................................................ $ 2,918,220 $ 1,656,324
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ $ 129,528 $ 84,692
Accrued expenses ................................................ 142,630 88,082
Current portion of debt ......................................... 61,000 29,500
--------------------------
Total current liabilities ................................... 333,158 202,274
Long-term debt ....................................................... 1,309,087 248,425
Accrued postretirement benefits other than pension ................... 343,553 323,115
Accrued reclamation and mine closure ................................. 150,636 116,199
Accrued workers' compensation ........................................ 105,333 97,759
Accrued pension cost ................................................. 18,524 21,730
Other noncurrent liabilities ......................................... 39,713 35,324
--------------------------
Total liabilities ........................................... 2,300,004 1,044,826
--------------------------
Stockholders' equity
Common stock, $.01 par value, 100,000,000 shares authorized,
39,371,581 issued and outstanding in 1998 and 39,657,898
issued and outstanding in 1997 .................................. 397 397
Paid-in capital ................................................. 473,116 472,425
Retained earnings ............................................... 150,423 138,676
Treasury stock, at cost (333,952 shares) ........................ (5,720) --
--------------------------
Total stockholders' equity .................................. 618,216 611,498
--------------------------
Total liabilities and stockholders' equity .................. $ 2,918,220 $ 1,656,324
==========================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
43
<PAGE> 21
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Years Ended December 31, 1998
----------------------------------------------------------------
Treasury
(In thousands of dollars except share and per share data) Common Paid-In Retained Stock
Stock Capital Earnings at cost Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .................................... $ 209 $ 8,392 $ 105,091 $ -- $ 113,692
Net income ................................................. 33,020 33,020
Dividends paid ($.38 per share) ............................ (8,000) (8,000)
Income tax charge related to assets acquired
from related parties .................................... (8,086) (8,086)
----------------------------------------------------------------
Balance at December 31, 1996 .................................... 209 8,392 122,025 -- 130,626
Net income ................................................. 30,281 30,281
Dividends paid ($.445 per share) ........................... (13,630) (13,630)
Issuance of 18,660,054 shares of common stock
to stockholders of Ashland Coal, Inc. pursuant
to the merger agreement ................................ 187 462,984 463,171
Issuance of 49,400 shares of common stock
under the stock incentive plan ......................... 1 1,049 1,050
----------------------------------------------------------------
Balance at December 31, 1997 .................................... 397 472,425 138,676 -- 611,498
Net income ................................................. 30,013 30,013
Dividends paid ($.46 per share) ............................ (18,266) (18,266)
Issuance of 47,635 shares of common stock
under the stock incentive plan ......................... 691 691
Treasury stock purchases (333,952 shares) .................. (5,720) (5,720)
----------------------------------------------------------------
Balance at December 31, 1998 .................................... $ 397 $ 473,116 $ 150,423 $ (5,720) $ 618,216
================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
44
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
(In thousands of dollars) 1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................ $ 30,013 $ 30,281 $ 33,020
Adjustments to reconcile to cash provided by operating activities:
Depreciation, depletion and amortization ............................. 204,307 143,632 114,703
Prepaid royalties expensed ........................................... 19,694 8,216 4,754
Net gain on disposition of assets .................................... (41,512) (4,802) (7,959)
Income from equity investment ........................................ (6,786) -- --
Distributions from equity investment ................................. 18,850 -- --
Merger-related expenses .............................................. -- 33,096 --
Changes in operating assets and liabilities .......................... (24,671) (28,842) (551)
Other ................................................................ (11,872) 8,682 (5,496)
-----------------------------------------
Cash provided by operating activities ......................... 188,023 190,263 138,471
-----------------------------------------
INVESTING ACTIVITIES
Payments for acquisition .................................................. (1,126,706) -- --
Additions to property, plant and equipment ................................ (141,737) (77,309) (62,490)
Additions to coal supply agreements ....................................... -- -- (7,150)
Additions to prepaid royalties ............................................ (26,252) (7,967) (7,071)
Additions to notes receivable ............................................. (10,906) -- --
Proceeds from dispositions of property, plant and equipment ............... 34,230 5,267 4,073
-----------------------------------------
Cash used in investing activities ................................ (1,271,371) (80,009) (72,638)
-----------------------------------------
FINANCING ACTIVITIES
Proceeds from (payments on) revolver and lines of credit .................. 176,582 78,897 (11,000)
Net proceeds from term loans .............................................. 958,441 -- --
Payments on notes ......................................................... (42,860) (181,110) (50,619)
Payments for debt issuance costs .......................................... (12,725) -- --
Proceeds from sale and leaseback of equipment ............................. 45,442 -- --
Dividends paid ............................................................ (18,266) (13,630) (8,000)
Proceeds from sale of common stock 691 1,050 --
Purchases of treasury stock ............................................... (5,720) -- --
-----------------------------------------
Cash provided (used) in financing activities .................. 1,101,585 (114,793) (69,619)
-----------------------------------------
Increase (decrease) in cash and cash equivalents .............. 18,237 (4,539) (3,786)
Cash and cash equivalents, beginning of year .............................. 9,177 13,716 17,502
-----------------------------------------
Cash and cash equivalents, end of year .................................... $ 27,414 $ 9,177 $ 13,716
=========================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest .................................... $ 48,760 $ 18,593 $ 20,294
Cash paid during the year for income taxes, net of refunds ................ $ 29,090 $ 21,918 $ 14,731
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
45
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
1. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Arch Coal, Inc.
and its subsidiaries ("the Company"), which operate in the coal mining industry.
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, LLC (Canyon Fuel) is accounted
for on the equity method in the consolidated financial statements as a result of
certain super-majority voting rights in the joint venture agreement. Income from
Canyon Fuel is reflected in the consolidated statements of income as income from
equity investment. (See additional discussion in "Investment in Canyon Fuel" in
Note 3).
The Company's 17.5% partnership interest in Dominion Terminal Associates is
accounted for on the equity method in the consolidated balance sheets. Allocable
costs of the partnership for coal loading and storage are included in other
expenses in the consolidated statements of income.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost. Cash equivalents consist of highly
liquid investments with an original maturity of three months or less when
purchased.
Inventories
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
------------------
<S> <C> <C>
Coal .......... $25,789 $25,359
Supplies ...... 42,666 25,060
-----------------
$68,455 $50,419
=================
</TABLE>
Coal and supplies inventories are valued at the lower of average cost or market.
The Company has recorded a valuation allowance for slow-moving and obsolete
supplies inventories of $23.9 million and $17.7 million at December 31, 1998 and
1997, respectively.
Coal Acquisition Costs and Prepaid Royalties
Coal lease rights obtained through acquisitions are capitalized and amortized
primarily by the units-of-production method over the estimated recoverable
reserves.
Rights to leased coal lands are often acquired through royalty payments.
Where royalty payments represent prepayments recoupable against production, they
are capitalized, and amounts expected to be recouped within one year are
classified as a current asset. As mining occurs on these leases, the prepayment
is offset against earned royalties and is included in the cost of coal sales.
Coal Supply Agreements
Acquisition costs related to coal supply agreements (sales contracts) are
capitalized and amortized on the basis of coal to be shipped over the term of
the contract. Accumulated amortization for sales contracts was $94.8 million and
$60.3 million at December 31, 1998 and 1997, respectively.
46
<PAGE> 24
Exploration Costs
Costs related to locating coal deposits and determining the economic mineability
of such deposits are expensed as incurred.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Interest costs applicable to
major asset additions are capitalized during the construction period.
Expenditures which extend the useful lives of existing plant and equipment are
capitalized. Costs of purchasing rights to coal reserves and developing new
mines or significantly expanding the capacity of existing mines are capitalized
and amortized using the units-of-production method over the estimated
recoverable reserves. Plant and equipment are depreciated principally on the
straight-line method over the estimated useful lives of the assets, which range
from three to 20 years.
Asset Impairment
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the asset
will not be recoverable, as determined based on projected undiscounted cash
flows related to the asset over its remaining life, then the carrying value of
the asset is reduced to its estimated fair value.
Revenue Recognition
Coal sales revenues include sales to customers of coal produced at Company
operations and purchased from other companies. The Company recognizes revenue
from coal sales at the time title passes to the customer. Revenues from sources
other than coal sales, including gains and losses from dispositions of long-term
assets, are included in other revenues and are recognized as services are
performed or otherwise earned.
Interest Rate Swap Agreements
The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Company debt. The swap agreements essentially
convert variable-rate debt to fixed-rate debt. These agreements require the
exchange of amounts based on variable interest rates for amounts based on fixed
interest rates over the life of the agreement. 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.
Income Taxes
Deferred income taxes are based on temporary differences between the financial
statement and tax basis of assets and liabilities existing at each balance sheet
date using enacted tax rates for years during which taxes are expected to be
paid or recovered.
Stock Based Compensation
These financial statements include the disclosure requirements of Financial
Accounting Standards Board Statement No. 123 ("FAS 123"), Accounting for
Stock-Based Compensation. With respect to accounting for its stock options, as
permitted under FAS 123, the Company has retained the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, and related Interpretations.
Earnings Per Common Share
In 1997, FAS 128, Earnings per Share, was issued. FAS 128 replaced the
calculation of primary and fully diluted earnings per share ("EPS") with basic
and diluted EPS. Unlike primary, basic EPS excludes any dilutive effects of
47
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except per share and per share data)
options, warrants and convertible securities. Diluted EPS is very similar to
the previously reported fully diluted EPS. The adoption of the provisions of
FAS 128 did not have any effect on previously reported EPS amounts.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform with the classifications in the 1998 financial statements with no
effect on previously reported net income or stockholders' equity.
2. MERGER AND ACQUISITION
On June 1, 1998, the Company acquired the Colorado and Utah coal operations of
Atlantic Richfield Company ("ARCO") and simultaneously combined the acquired
ARCO operations and the Company's Wyoming operations with ARCO's Wyoming
operations in a new joint venture named Arch Western Resources, LLC ("Arch
Western"). The principal operating units of Arch Western are Thunder Basin Coal
Company, L.L.C., owned 100% by Arch Western, which operates two coal mines in
the Southern Powder River Basin in Wyoming; Mountain Coal Company, L.L.C., owned
100% by Arch Western, which operates one coal mine in Colorado; Canyon Fuel
Company, LLC ("Canyon Fuel"), 65% owned by Arch Western and 35% by ITOCHU Coal
International, Inc., a subsidiary of ITOCHU Corporation, which operates three
coal mines in Utah; and Arch of Wyoming, LLC, owned 100% by Arch Western, which
operates two coal mines in the Hanna Basin of Wyoming.
Arch Western is 99% owned by the Company and 1% owned by ARCO. The
transaction is valued at approximately $1.14 billion and a wholly owned
subsidiary of the Company is the managing member of Arch Western. The
transaction has been accounted for under the purchase method of accounting.
Accordingly, the cost to acquire ARCO's U.S. coal operations has been allocated
to the assets acquired and liabilities assumed according to their respective
estimated fair values. Results of operations of the acquired operations are
included in the consolidated statements of income effective June 1, 1998. The
acquired ARCO operations will continue to produce low-sulfur coal for sale to
primarily domestic utility customers.
On July 1, 1997, Ashland Coal, Inc. ("Ashland Coal") merged with a
subsidiary of the Company. Under the terms of the merger, Ashland Coal's
stockholders received one share of the Company's common stock for each common
share of Ashland Coal and 20,500 shares of the Company's common stock for each
share of Ashland Coal preferred stock. A total of 18,660,054 shares of Company
common stock were issued in the merger, resulting in a total purchase price
(including fair value of stock options and transaction related fees) of
approximately $464.8 million. The merger was accounted for under the purchase
method of accounting. Results of operations of Ashland Coal are included in the
consolidated statements of income effective July 1, 1997.
Summarized below are the unaudited pro forma combined results of operations
for the years ended December 31, 1998 and 1997. These results reflect the July
1, 1997 Ashland Coal merger as if it had occurred on January 1, 1997 and the
June 1, 1998 Arch Western transaction as if it had occurred on January 1, 1998
and 1997.
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Revenues ..................... $1,669,824 $1,792,582
Income before
extraordinary item ...... 22,994 36,175
Net income ................... 21,506 36,175
Earnings per share before
extraordinary item ...... $ .58 $ .91
Earnings per share ........... $ .54 $ .91
</TABLE>
In the opinion of the management of the Company, all adjustments necessary to
present pro forma results of operations have been made. The unaudited pro forma
results of operations do not purport to be indicative of
48
<PAGE> 26
the results that would have occurred had these transactions actually occurred at
the beginning of the relevant periods or of the results of operations that may
be achieved in the future.
3. INVESTMENT IN CANYON FUEL
The following tables present unaudited summarized financial information for
Canyon Fuel which, as part of the June 1, 1998 Arch Western transaction
(described in Note 2), was acquired by the Company and is accounted for on the
equity method.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
DECEMBER 31,
CONDENSED INCOME STATEMENT INFORMATION 1998
- -------------------------------------------------------
<S> <C>
Revenues ............................... $155,634
Total costs and expenses ............... 153,039
--------
Net income ............................. 2,595
Effect of purchase adjustments ......... 4,191
--------
Arch Coal's income from its equity
investment in Canyon Fuel ......... $ 6,786
========
</TABLE>
The Company's income from its equity investment in Canyon Fuel represents 65% of
Canyon Fuel's net income 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. The condensed balance sheet information below
reflects Canyon Fuel Company LLC's asset and liability values and does not
reflect the Company's investment in Canyon Fuel.
<TABLE>
<CAPTION>
AT DECEMBER
CONDENSED BALANCE SHEET INFORMATION 31, 1998
- -------------------------------------------------------
<S> <C>
Current assets ............................. $ 87,620
Noncurrent assets .......................... 532,119
Current liabilities ........................ 31,459
Noncurrent liabilities ..................... 19,247
Members' equity............................. 569,033
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
- ---------------------------------------------------
<S> <C> <C>
Accrued payroll and
related benefits ........ $ 29,878 $17,314
Accrued taxes other than
income taxes ............ 44,665 22,259
Accrued postretirement
benefits other than
pension ................. 15,555 14,390
Accrued workers'
compensation ............ 15,869 12,649
Accrued interest ............. 17,007 3,566
Other accrued expenses ....... 19,656 17,904
------------------
$142,630 $88,082
==================
</TABLE>
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal .......... $ 8,467 $ 8,250 $ 9,200
State ............ (650) (250) 1,050
--------------------------------
Total current ....... 7,817 8,000 10,250
Deferred:
Federal .......... (12,517) (13,100) (4,050)
State ............ (400) (400) (700)
--------------------------------
Total deferred ...... (12,917) (13,500) (4,750)
--------------------------------
$ (5,100) $ (5,500) $ 5,500
================================
</TABLE>
49
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
A reconciliation of the statutory federal income tax expense (benefit) on the
Company's pretax income before extraordinary item to the actual provision
(benefit) for income taxes follows: 1998 1997 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
at statutory rate ......... $ 9,240 $ 8,673 $ 13,482
Percentage depletion
allowance ................. (14,437) (13,543) (10,431)
State taxes, net of effect
of federal taxes .......... (594) (570) 350
Non-deductible
expenses .................. 621 236 1,000
Other, net .................... 70 (296) 1,099
-----------------------------------------
$ (5,100) $ (5,500) $ 5,500
=========================================
</TABLE>
The Company's federal income tax returns for the years ending 1995 and 1996 are
currently under review by the Internal Revenue Service (IRS). During 1996, the
IRS completed its audits for the tax years 1990 and 1991 and the Company and the
IRS agreed to a partial settlement of various tax issues for a payment of $6.5
million including interest which was charged against previously recorded
reserves. Part of the settlement related to the acquisition from the Company's
stockholders of certain Illinois coal reserves for $55.2 million. The
acquisition was valued for accounting purposes at the stockholders' net book
value of $22.8 million with the $32.4 million difference between the net book
value and fair market value less $12.3 million of deferred tax benefits being
recorded as a reduction to stockholders' equity. As part of the settlement with
the IRS, the Company agreed to adjust the fair market value of the coal
properties to $33.8 million for tax purposes resulting in a decrease to the
deferred tax asset of $8.1 million from $12.3 million to $4.2 million. The
decrease in the deferred tax asset was charged directly to stockholders' equity
in 1996.
During 1997, the Company settled its protest of certain adjustments
proposed by the IRS for federal income tax returns for the years 1987 through
1989. A deposit of $8.0 million was made in April 1997 in anticipation of the
settlement and a final payment of approximately $4.0 million was made in 1998.
During 1998, the Company settled its protest of certain unagreed issues
with the IRS for the federal income tax returns for years 1990 and 1991. A final
payment of $0.5 million was paid in June 1998 and charged against previously
recorded reserves. The IRS audit of the federal income tax returns for years
1992 through 1994 was completed during 1998 and agreed to at the examination
level. A payment of $15.5 million was made in December 1998 in settlement of all
issues. A significant amount of the issues were timing in nature and the tax
paid related to these temporary differences is accounted for as a deferred tax
asset and the remaining tax and interest paid was charged against previously
recorded reserves. A portion of the payment related to items that were settled
in the 1987 through 1991 audits previously discussed. Permanent differences
included a reduction in percentage depletion and a decrease in cost depletion
related to the settlement for the adjustment in fair market value of the
Illinois coal reserves.
Management believes that the Company has adequately provided for any income
taxes and interest which may ultimately be paid with respect to all open tax
years.
Significant components of the Company's deferred tax assets and liabilities
that result from carryforwards and
50
<PAGE> 28
temporary differences between the financial statement basis and tax basis of
assets and liabilities are summarized as follows: December 31 1998 1997
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other
than pension ................... $136,004 $129,818
Alternative minimum tax credit
carryforward ................... 70,897 80,441
Workers' compensation ............. 29,345 30,503
Reclamation and mine closure ...... 22,567 23,905
Net operating loss
carryforwards .................. 10,232 8,214
Other ............................. 17,983 28,498
-------------------
Total deferred tax assets ......... 287,028 301,379
-------------------
Deferred tax liabilities:
Coal lands and mineral rights ..... 78,869 86,471
Plant and equipment ............... 78,359 79,962
Deferred mine development ......... 941 3,643
Coal supply agreements ............ 17,390 38,406
Other ............................. 19,566 40,368
-------------------
Total deferred tax liabilities .... 195,125 248,850
-------------------
Net deferred tax asset ............ 91,903 52,529
Less current asset ................ 8,694 8,506
-------------------
Long-term deferred tax asset ...... $ 83,209 $ 44,023
===================
</TABLE>
If not used, the carryforwards for net operating losses of $26.2 million will
expire in the years 2008 through 2019. The alternative minimum tax credit
carryforward has no statutory expiration date.
The Company is required to record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. It is management's belief that the Company's net deferred income tax
asset will more likely than not be realized by generating sufficient taxable
income in the future.
6. DEBT AND FINANCING ARRANGEMENTS
Debt consists of the following:
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Indebtedness to banks under lines
of credit (weighted average rate
at December 31,1998-5.40%;
1997-7.05%) ............................ $ 12,884 $ 36,302
Indebtedness to banks under
revolving credit agreement,
expiring May 31, 2003
(weighted average rate at
December 31, 1998-6.27%) ............... 390,000 --
Variable rate fully amortizing
term loan payable quarterly
through May 31, 2003
(weighted average rate at
December 31, 1998-6.16%) ............... 285,000 --
Variable rate non-amortizing term
loan due May 31, 2003
(weighted average rate at
December 31, 1998-6.87%) ............... 675,000 --
Indebtedness to banks under
the 1997 revolving credit
agreement .............................. -- 190,000
7.79% senior unsecured notes ........... -- 42,860
Other .................................. 7,203 8,763
-----------------------
1,370,087 277,925
Less current portion ................... 61,000 29,500
-----------------------
Long-term debt ......................... $1,309,087 $ 248,425
=======================
</TABLE>
51
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
On July 1, 1997, concurrent with the Ashland Coal merger, the Company entered
into a $500 million revolving credit agreement which was repaid in its entirety
and the facility terminated effective June 1, 1998, using proceeds from a new
Company credit facility entered into effective June 1, 1998.
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 and a $900 million credit facility to Arch Coal, including a $300
million fully amortizing term loan and a $600 million revolver. Borrowings under
the new Arch Coal credit facilities were used to finance the acquisition of
ARCO's Colorado and Utah coal operations, to pay related fees and expenses, to
refinance existing corporate debt and for general corporate purposes. The
Company recognized an extraordinary charge of $1.5 million (net of a tax benefit
of $.9 million) related to the refinancing of the July 1, 1997 credit facility
and the prepayment of its 7.79% senior unsecured notes. 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.
The Company periodically establishes uncommitted lines of credit with
banks. These agreements generally provide for short-term borrowings at market
rates. At December 31, 1998, there were $45 million of such agreements in
effect, of which $12.9 million were outstanding at December 31, 1998.
Except for amounts expected to be repaid in 1999, amounts borrowed under
the revolving credit agreement and the bank lines of credit are classified as
long-term as the Company has the intent and the ability to maintain these
borrowings on a long-term basis. Aggregate maturities of debt at December 31,
1998 are $61.0 million in 1999, $60.6 million in 2000, $60.5 million in 2001,
$60.5 million in 2002 and $1,127.5 million in 2003.
Terms of the Company's credit facilities and leases contain financial and
other restrictive covenants that limit the ability of the Company to, among
other things, pay dividends, effect acquisitions or dispositions and borrow
additional funds, and require the Company to, among other things, maintain
various financial ratios and comply with various other financial covenants.
Failure by the Company to comply with such covenants could result in an event of
default which, if not cured or waived, could have a material adverse effect on
the Company.
The Company enters into interest-rate swap agreements to modify the
interest characteristics of outstanding Arch Coal debt. At December 31, 1998,
the Company had interest-rate swap agreements having a total notional value of
$815 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 5.54% (before the credit spread over LIBOR) and
is receiving a weighted-average variable rate based upon 3 day and 90-day LIBOR.
At December 31, 1998, the remaining terms of the swap agreements ranged from 44
to 68 months.
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value.
Debt: The carrying amounts of the Company's borrowings under its revolving
credit agreement, lines of credit and variable rate term loans approximate their
fair value. The fair values of the Company's senior notes and other long-term
debt are estimated using discounted cash flow analyses,
52
<PAGE> 30
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements at the end of each year presented.
Interest rate swaps: The fair values of interest rate swaps are based on
quoted market prices, which reflect the present value of the difference between
estimated future amounts to be paid and received.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ...... $ 27,414 $ 27,414 $ 9,177 $ 9,177
Lines of credit ................ 12,884 12,884 36,302 36,302
Revolving credit agreements .... 390,000 390,000 190,000 190,000
Variable rate term loans ....... 960,000 960,000 -- --
Senior notes ................... -- -- 42,860 $ 4,690
Other debt ..................... 7,203 7,203 8,763 8,763
Interest rate swaps ............ -- (14,151) -- (93)
</TABLE>
8. ACCRUED WORKERS' COMPENSATION
The Company is liable under the federal Mine Safety and Health Act of 1977, as
amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by such
persons on or after July 1, 1973. The Company is also liable under various
states' statutes for black lung benefits. The Company currently provides for
federal and state claims principally through a self-insurance program. Charges
are being made to operations as determined by independent actuaries, at the
present value of the actuarially computed present and future liabilities for
such benefits over the employees' applicable years of service. In addition, the
Company is liable for workers' compensation benefits for traumatic injuries
which are accrued as injuries are incurred. Workers' compensation costs
(credits) include the following components:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Self-insured black lung benefits:
Service cost ...................... $ 1,022 $ 678 $ 639
Interest cost ..................... 3,173 2,353 1,735
Net amortization
and deferral ................... 111 (10,084) (9,766)
--------------------------------
4,306 (7,053) (7,392)
Other workers' compensation
benefits ....................... 19,396 12,182 13,350
--------------------------------
$ 23,702 $ 5,129 $ 5,958
================================
</TABLE>
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.0% as of December 31, 1998 (7.25% and 7.5% as of
December 31, 1997 and 1996, respectively) and a black lung benefit cost
escalation rate of 4% in 1998, 1997 and 1996. In consultation with independent
actuaries, the Company changed the discount rate, black lung benefit cost
escalation rate, rates of disability and other assumptions used in the actuarial
determination of black lung liabilities as of January 1, 1993, to better reflect
actual experience. The effect of these changes was a significant increase in the
unrecognized net gain. This gain was amortized through 1997 and totaled $10.8
million (before tax) and $6.6 million (after tax) in each of the years 1997 and
1996.
Summarized below is information about the amounts recognized in the
consolidated balance sheets for workers' compensation benefits:
53
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value for self-insured black lung:
Benefits contractually
recoverable from others ......................... $ 4,649 $ 5,053
Benefits for
Company employees ............................... 51,137 42,677
----------------------
Accumulated black
lung benefit obligation ......................... 55,786 47,730
Unrecognized net loss .............................. (1,722) (3,004)
----------------------
54,064 44,726
Traumatic and other
workers' compensation ........................... 67,138 65,682
----------------------
Accrued workers'
compensation .................................... 121,202 110,408
Less amount included
in accrued expenses ............................. 15,869 12,649
----------------------
$ 105,333 $ 97,759
======================
</TABLE>
Receivables related to benefits contractually recoverable from others of $4,649
in 1998 and $5,053 in 1997 are recorded in other long-term assets.
9. ACCRUED RECLAMATION AND MINE CLOSING COSTS
The federal Surface Mining Control and Reclamation Act of 1977 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 accrued $12.5 million, $10.8 million and $6.1
million in 1998, 1997 and 1996, respectively, for current and final mine closure
reclamation excluding reclamation recosting adjustments identified below. Cash
payments for final mine closure reclamation and current disturbances
approximated $15.0 million, $8.5 million and $9.8 million for 1998, 1997 and
1996, respectively. Periodically, the Company reviews its entire environmental
liability and makes necessary adjustments, including permit changes as granted
by state authorities and revisions to costs and productivities, to reflect
current experience. These recosting adjustments are recorded in cost of coal
sales. Adjustments included an increase in the liability of $4.9 million in
1998, and decreases in the liability were $4.4 million and $4.5 million in 1997
and 1996, respectively. The Company's management believes it is making adequate
provisions for all expected reclamation and other costs associated with mine
closures.
10. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Other Postretirement Benefit Plans.
The Company has non-contributory defined benefit pension plans covering
certain of its salaried and non-union hourly employees. Benefits are generally
based on the employee's years of service and compensation. The Company funds the
plans in an amount not less than the minimum statutory funding requirements nor
more than the maximum amount that can be deducted for federal income tax
purposes.
The Company also currently provides certain postretirement health and life
insurance coverage for eligible employees. Generally, covered employees who
terminate employment after meeting the eligibility requirements for pension
benefits are also eligible for postretirement coverage for themselves and their
dependents. The salaried employee postretirement medical and dental plans are
contributory,
54
<PAGE> 32
with retiree contributions adjusted periodically, and contain other cost-sharing
features such as deductibles and coinsurance. The postretirement medical plan
for retirees who were members of the UMWA is not contributory. The Company's
current funding policy is to fund the cost of all postretirement health and life
insurance benefits as they are paid. Summaries of the changes in the benefit
obligations, plan assets (primarily listed stocks and debt securities) and
funded status of the plans are as follows:
<TABLE>
<CAPTION>
Pension benefits Other postretirement benefits
---------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 ................. $ 84,085 $ 56,710 $ 333,908 $ 220,332
Service cost ..................................... 5,841 2,788 3,715 3,717
Interest cost .................................... 8,137 4,970 23,101 19,546
Benefits paid .................................... (8,562) (2,769) (13,224) (10,442)
Plan amendments .................................. (3,809) -- (15,924) --
Acquisition of ARCO Coal operations in
1998 and the Ashland Coal merger in 1997 ...... 39,674 20,015 13,625 88,841
Other-primarily actuarial (gain) loss ............ 14,067 2,371 (9,378) 11,914
-----------------------------------------------
Benefit obligations at December 31 ............... $ 139,433 $ 84,085 $ 335,823 $ 333,908
===============================================
CHANGE IN PLAN ASSETS
Value of plan assets at January 1 ................ $ 64,577 $ 45,929 $ -- $ --
Actual return on plan assets ..................... 21,771 7,339 -- --
Employer contributions ........................... 8,346 499 13,224 10,442
Acquisition of ARCO Coal operations in
1998 and the Ashland Coal merger in 1997 ...... 41,142 13,579 -- --
Benefits paid .................................... (8,562) (2,769) (13,224) (10,442)
-----------------------------------------------
Value of plan assets at December 31 .............. $ 127,274 $ 64,577 $ -- $ --
===============================================
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets ......... $ 12,159 $ 19,508 $ 335,823 $ 333,908
Unrecognized actuarial gain (loss) ............... 6,920 3,451 6,918 (2,179)
Unrecognized net transition asset ................ 887 1,085 -- --
Unrecognized prior service gain (cost) ........... 2,667 (879) 16,367 5,776
-----------------------------------------------
Net liability recognized ......................... $ 22,633 $ 23,165 $ 359,108 $ 337,505
===============================================
BALANCE SHEET LIABILITIES (ASSETS)
Prepaid benefit costs ............................ $ (1,092) $ -- $ -- $ --
Accrued benefit liabilities ...................... 23,725 23,165 359,108 337,505
-----------------------------------------------
Net liability recognized ......................... $ 22,633 $ 23,165 $ 359,108 $ 337,505
===============================================
</TABLE>
The Company's primary defined benefit pension plan was amended January 1998 to a
cash balance plan, which resulted in a $3.8 million gain. Changes in demographic
information resulted in a $14.1 million actuarial loss for 1998. In addition, a
January 1997 amendment to the postretirement benefit plan resulted in a $15.9
million gain. The gain resulted from the implementation of a defined dollar
benefit cap which limits the Company's disbursements under the plan. The $9.4
million actuarial gain resulted from favorable claims experience compared to
previous projections.
55
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
<TABLE>
<CAPTION>
Pension benefits Other postretirement benefits
---------------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted Average Assumptions as of December 31
Discount rate............................................. 7.00% 7.25% 7.00% 7.25%
Rate of compensation increase............................. 4.75% 5.00% N/A N/A
Expected return on plan assets............................ 9.00% 9.00% N/A N/A
Health care cost trend on covered charges................. N/A N/A 4.5% 6.0% in 1998;
.......................................................... 5.0% thereafter
</TABLE>
The following table details the components of pension and other
postretirement benefit costs.
<TABLE>
<CAPTION>
Pension benefits Other postretirement benefits
-------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost............................ $5,841 $ 2,788 $2,295 $ 3,715 $ 3,717 $ 2,246
Interest cost........................... 8,137 4,970 4,051 23,101 19,546 15,648
Expected return on plan assets.......... (7,521) (4,391) (3,520) -- -- --
Other amortization and deferral......... 790 (503) 642 (2,884) (2,573) (1,527)
------------------------------------------------------------------------
$7,247 $ 2,864 $3,468 $23,932 $20,690 $16,367
========================================================================
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rate by one percentage point each year would increase the accumulated
postretirement obligation as of December 31, 1998 by $48.0 million, or 14.3%,
and the net periodic postretirement benefit cost for 1998 by $4.2 million, or
20.0%.
Multiemployer Pension and Benefit Plans
Under the labor contract with the United Mine Workers of America ("UMWA"), the
Company made payments of $1.3 million, $2.0 million and $1.9 million in 1998,
1997 and 1996, respectively, into a multiemployer defined benefit pension plan
trust established for the benefit of union employees. Payments are based on
hours worked and are expensed as paid. Under the Multiemployer Pension Plan
Amendments Act of 1980, a contributor to a multiemployer pension plan may be
liable, under certain circumstances, for its proportionate share of the plan's
unfunded vested benefits (withdrawal liability). The Company has estimated its
share of such amount to be $53.4 million at December 31, 1998. The Company is
not aware of any circumstances which would require it to reflect its share of
unfunded vested pension benefits in its financial statements.
The Coal Industry Retiree Health Benefit Act of 1992 ("Benefit Act")
provides for the funding of medical and death benefits for certain retired
members of the UMWA through premiums to be paid by assigned operators (former
employers), transfers of monies in 1993 and 1994 from an overfunded pension
trust established for the benefit of retired UMWA members, and transfers from
the Abandoned Mine Lands Fund (funded by a federal tax on coal production)
commencing in 1995. The Company treats its obligation under the Benefit Act as a
participation in a multiemployer plan and recognizes expense as premiums are
paid. The Company recognized $3.7 million in 1998, $3.9 million in 1997 and $2.8
million in 1996 in expense relative to premiums paid pursuant to the Benefit
Act.
56
<PAGE> 34
Other Plans
The Company sponsors savings plans which were established to assist eligible
employees in providing for their future retirement needs. The Company's
contributions to the plans were $6.8 million in 1998, $4.6 million in 1997 and
$3.4 million in 1996.
11. CAPITAL STOCK
On April 4, 1997, the Company changed its capital stock whereby the number of
authorized shares was increased to 100,000,000 common shares, the par value was
changed to $.01 per share, and a common stock split of 338.0857-for-one was
effected. All share and per share information reflect the stock split.
On September 29, 1998, Arch Coal's Board of Directors authorized the
Company to repurchase up to 2 million shares of Company common stock. The timing
of the purchases and the number of shares to be purchased are dependent on
market conditions. As of December 31, 1998, the Company has acquired 330,200
shares under the repurchase program at the average price of $17.08 per share.
12. STOCK INCENTIVE PLAN
On April 22, 1998, the stockholders ratified the adoption of the 1997 Stock
Incentive Plan (the "Company Incentive Plan") reserving 6,000,000 shares of Arch
Coal common stock for awards to officers and other selected key management
employees of the Company. The Company Incentive Plan provides the Board of
Directors with the flexibility to grant stock options, stock appreciation rights
(SARs), restricted stock, restricted stock units, performance stock, performance
units, merit awards, phantom stock awards and rights to acquire stock through
purchase under a stock purchase program ("Awards"). Stock options outstanding
under the Ashland Coal stock incentive plans at the date of the merger were
substituted for fully vested stock options in the Company Incentive Plan (and
are exercisable on the same terms and conditions including per share exercise
prices as were applicable to such options when granted.) Stock options generally
become exercisable in full or in part one year from the date of grant and are
granted at a price equal to 100% of the fair market value of the stock on the
date of grant. SARs entitle employees to receive a payment equal to the
appreciation in market value of the stated number of common shares from the SARs
exercise price to the market value of the shares on the date of its exercise.
Unexercised options and SARs' lapse 10 years after the date of grant. Restricted
stock awards entitle employees to purchase shares at a nominal cost. Such awards
entitle employees to vote shares acquired and to receive any dividends thereon,
but such shares cannot be sold or transferred and are subject to forfeiture if
employees terminate their employment prior to the prescribed period, which can
be from one to five years. Merit awards are grants of stock without restriction
and at a nominal cost. Performance share or unit awards can be earned by the
recipient if the Company meets certain pre-established performance measures.
Until earned, the performance awards are nontransferable, and when earned,
performance awards are payable in cash, stock, or restricted stock as determined
by the Board of Directors. Phantom stock awards are based on the appreciation of
hypothetical underlying shares or the earnings performance of such shares and
may be paid in cash or in shares. As of December 31, 1998, performance shares
and stock options were the only type of Awards granted. As of December 31, 1998,
361,550 phantom performance
57
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollar except share and per share data)
shares had been granted and will be earned by participants based on Company
performance for the years 1998 through 2001. Information regarding stock options
under the Company Incentive Plan is as follows for the year ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------
Weighted Weighted
Common Average Common Average
Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at January 1 ................. 926 $ 25.23 -- $ --
Issued in exchange for Ashland
Coal stock options ............................ -- -- 675 23.69
Granted .......................................... 360 22.88 300 27.88
Exercised ........................................ (48) 14.50 (49) 21.25
Canceled ......................................... (110) 25.88 -- --
----- -----
Options outstanding at December 31 ............... 1,128 24.86 926 25.23
===== =====
Options exercisable at December 31 ............... 600 $ 25.04 626 $ 23.88
Options available for grant at December 31 ....... 4,413 4,684
</TABLE>
The Company applies APB 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for the Company Incentive Plan.
Accordingly, no compensation expense has been recognized for the fixed stock
option portion of the Company Incentive Plan. Had compensation expense for the
fixed stock option portion of the Company Incentive Plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of FAS 123, Accounting for Stock-Based Compensation, the Company's
net income and earnings per common share would have been reduced to the pro
forma amounts in the table below. The fair value of options granted in 1998 and
1997 was determined to be $2.3 million and $2.5 million, respectively, using the
Black-Scholes option pricing model and the weighted average assumptions noted
below. For purposes of these pro forma disclosures, the estimated fair value of
the options is recognized as compensation expense over the options' vesting
period. The stock options granted in 1998 and 1997 vest ratably over three
years.
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Pro Forma
Net income (in millions) ............................... $ 29.3 $ 30.1
Basic and diluted earnings per share ................... $ .74 $ .98
---------- ---------
Weighted average fair value per share of options granted .... $ 7.22 $ 8.36
---------- ---------
Assumptions (weighted average)
Risk-free interest rate ................................ 6.0% 6.3%
Expected dividend yield ................................ 2.0% 2.0%
Expected volatility .................................... 31.8% 29.0%
Expected life (in years) ............................... 5.0 5.0
</TABLE>
58
<PAGE> 36
The pro forma effect on net income for 1998 and 1997 is not representative of
the pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants issued prior to
1996.
Exercise prices for options outstanding as of December 31, 1998, range from
$17.25 to $34.375, and the weighted average remaining contractual life at that
date was 7.2 years. The table below shows pertinent information on options
outstanding at December 31, 1998, priced below $25 per share and priced at $25
per share or more:
<TABLE>
<CAPTION>
Option Exercise Price
------------------------
Below $25 $25 or More
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding (in thousands) .................................. 607 521
Weighted-average exercise price ..................................... $ 22.20 $ 27.96
Weighted-average remaining contractual life (in years) .............. 7.4 6.9
Options currently exercisable (in thousands) ........................ 264 336
Weighted-average exercise price of options currently exercisable .... $ 21.33 $ 28.01
</TABLE>
13. MERGER RELATED EXPENSES AND CHANGES IN ESTIMATES
During 1997, in connection with the Ashland Coal merger, the Company recorded a
one-time charge of $39.1 million (before tax) or $23.8 million (after tax)
comprised of termination benefits and relocation costs of $8.1 million and costs
of $31.0 million associated with the idling of duplicate facilities. The $8.1
million costs arising from the termination benefits and relocation costs have
been paid. The $31.0 million costs associated with the idling of duplicate
facilities reduced the book value of the duplicate facilities. A portion of this
charge related to Big Sandy Terminal. As a result of a change in management
strategy related to the Big Sandy Terminal, the assets were sold in 1998 for a
pre-tax gain of $7.5 million.
During 1996, the Company reduced the estimated useful lives of certain
long-lived assets (primarily related to life-of-mine assets including
preparation plants and beltlines) for depreciation and amortization purposes.
These changes in estimates were primarily due to increased productivities and
reductions in recoverable reserves. As a result, an additional $11.3 million
(after-tax impact of $6.9 million or $.33 per share) of depreciation and
amortization expense was recorded in cost of coal sales. The assets included a
preparation plant that had an original life of 16 years that was adjusted to 7.5
years, a preparation plant and beltline related to a surface mine that carried
an original life of 20 years that was adjusted to 17 years and deferred mine
development for a surface mine with an original life of 5 years adjusted to 4
years.
14. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company places its cash equivalents in investment-grade short-term
investments and limits the amount of credit exposure to any one commercial
issuer.
The Company markets its coal principally to electric utilities in the
United States. As of December 31, 1998 and 1997, accounts receivable from
electric utilities located in the United States totaled $152.1 million and
$102.8 million, respectively. Generally, credit is extended based on an
evaluation of the customer's financial condition, and collateral is not
generally required. Credit losses are provided for in the financial statements
and historically have been minimal.
59
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
The Company is committed under long-term contracts to supply coal that
meets certain quality requirements at specified prices. These prices are
generally adjusted based on indices. Quantities sold under some of these
contracts may vary from year to year within certain limits at the option of the
customer. Sales (including spot sales) to major customers were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
<S> <C> <C> <C>
AEP ................. $195,682 $129,981 $ 86,756
Southern Company .... 170,452 187,800 147,567
</TABLE>
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Numerator:
Income before extraordinary item ............................. $ 31,501 $30,281 $33,020
Extraordinary item ........................................... (1,488) -- --
-----------------------------
Net income ................................................... $ 30,013 $30,281 $33,020
=============================
Denominator:
Weighted average shares-denominator for basic ................ 39,626 30,374 20,948
Dilutive effect of employee stock options .................... 25 34 --
-----------------------------
Adjusted weighted average shares-denominator for diluted 39,651 30,408 20,948
=============================
Basic and diluted earnings per common share before
extraordinary item ........................................... $ .79 $ 1.00 $ 1.58
=============================
Basic and diluted earnings per common share ....................... $ .76 $ 1.00 $ 1.58
=============================
</TABLE>
16. 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 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 for approximately $51.1 million. Alternatively, the equipment may be
sold to a third party. In the event of such a sale, the Company will be required
to make a payment to the lessor in the event, and to the extent, that the
proceeds are below $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.
17. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company receives certain services and
purchases fuel, oil and other products on a competitive basis from subsidiaries
of Ashland Inc., which totaled $7.2 million in 1998, $4.7 million in 1997 and
$3.8 million in 1996. At December 31, 1998, Ashland Inc. owns approximately 55%
of the Company's outstanding shares of common stock. Management believes that
charges between the Company and Ashland Inc. for services and purchases were
concluded on terms equivalent to those prevailing among unaffiliated parties.
As described in Note 1, the Company has a 65% ownership interest in Canyon
Fuel which is accounted for on the equity method. The Company receives
administration and production fees from Canyon Fuel for managing the Canyon Fuel
operations. The fees recognized as other income for the Company and as expense
by Canyon Fuel for the year ended December 31, 1998 were $4.1 million.
60
<PAGE> 38
18. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, land and various other properties under
noncancelable long-term leases, expiring at various dates. Rental expense
related to these operating leases amounted to $31.4 million in 1998, $14.9
million in 1997 and $8.5 million in 1996. The Company has also entered into
various noncancelable royalty lease agreements and federal lease bonus payments
under which future minimum payments are due. On October 1, 1998, the Company was
the successful bidder in a federal auction of certain mining rights in the
3,546-acre Thundercloud tract in the Powder River Basin of Wyoming. The
Company's lease bonus bid amounted to $158 million for the tract, of which $31.6
million was paid on October 1, 1998 (the remaining lease bonus payments are
reflected below under the caption "Royalties"). The tract contains approximately
412 million tons of demonstrated coal reserves and is contiguous with the
Company's Black Thunder mine. Geological surveys performed by outside
consultants indicate that there are sufficient reserves relative to these
properties to permit recovery of the Company's investment.
Minimum payments due in future years under these agreements in effect at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Leases Royalties
- ----------------------------------------------------------
<S> <C> <C>
1999 ..................... $ 31,975 $ 62,375
2000 ..................... 28,092 62,151
2001 ..................... 22,311 61,809
2002 ..................... 16,726 61,589
2003 ..................... 8,284 30,282
Thereafter ............... 10,564 225,824
--------------------------
$117,952 $504,030
==========================
</TABLE>
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. As of December 31, 1998, the
Company estimates that its probable aggregate loss as a result of such claims is
$3.8 million (included in other noncurrent liabilities) and believes that
probable insurance recoveries of $.9 million (included in other assets) related
to these claims will be realized. The Company estimates that its reasonably
possible aggregate losses from all currently pending litigation could be as much
as $.4 million (before tax) in excess of the probable loss previously
recognized. However, the Company believes it is probable that substantially all
of such losses, if any occur, will be insured. 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 condition, results of operations or liquidity of
the Company.
A customer of the Company has informed the Company that one of the
customer's power plants will no longer provide baseload capacity to a public
utility and instead will be used to provide peak demand only. As a result, the
plant will require substantially less coal under the customer's existing
above-market contract with the Company. The Company has filed a civil action in
Federal District Court in the Southern District of West Virginia alleging breach
of contract and other causes of action against the customer in respect of the
customer's failure to comply with the terms of this contract. On July 17, 1998
the court granted the customer's motion to stay the lawsuit pending arbitration.
As of December 31, 1998, the carrying amount of acquisition costs allocated to
this coal supply contract amounts to approximately $13.7 million. The Company
currently expects that it will recover the carrying amount of this asset,
however, the ultimate outcome of this matter is uncertain.
The Company holds a 17.5% general partnership interest in Dominion Terminal
Associates ("DTA"), which operates a ground storage-to-vessel coal transloading
facility in Newport News, Virginia. DTA leases the facility from Peninsula Ports
Authority of Virginia ("PPAV") for amounts sufficient to meet debt-service
requirements. Financing is provided through $132.8 million of tax-exempt bonds
issued by PPAV which mature July 1, 2016. Under the terms of a throughput and
handling agreement with DTA, each partner is charged its share of cash operating
and
61
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and pe share data)
debt-service costs in exchange for the right to use its share of the facility's
loading capacity and is required to make periodic cash advances to DTA to fund
such costs. On a cumulative basis, costs exceeded cash advances by $9.2 million
at December 31, 1998 (included in other noncurrent liabilities). Future payments
for fixed operating costs and debt service are estimated to approximate $3.3
million annually through 2015 and $26.0 million in 2016.
62
<PAGE> 40
19. CASH FLOW
The changes in operating assets and liabilities as shown in the consolidated
statements of cash flows are comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Decrease (increase) in operating assets:
Receivables ..................................................... $(35,464) $(12,179) $10,857
Inventories ..................................................... 6,723 16,323 4,024
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ........................... 30,229 5,403 (7,464)
Income taxes .................................................... (35,057) (27,448) (1,145)
Accrued postretirement benefits other than pension .............. 6,813 7,437 4,566
Accrued reclamation and mine closure ............................ 1,936 (9,370) (10,492)
Accrued workers' compensation ................................... 149 (9,008) (897)
--------------------------------
Changes in operating assets and liabilities .......................... $(24,671) $(28,842) $ (551)
================================
</TABLE>
20. ACCOUNTING DEVELOPMENT
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. FAS 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. FAS 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what effect FAS 133 will have on the earnings and financial
position of the Company.
63
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except share and per share data)
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for 1998 and 1997 is summarized below:
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Coal sales, equity income and other revenues ............. $312,564(1) $353,238 $ 424,123(2) $415,710
Income from operations ................................... 22,359 27,450 23,909 14,129(3)
Income before extraordinary item ......................... 15,821 14,999 544 137
Net income ............................................... 15,821 13,511 544 137
Basic and diluted earnings per
common share before extraordinary item(5) ........... 0.40 0.38 0.01 0.00
Basic and diluted earnings per common share(5) ........... 0.40 0.34 0.01 0.00
1997:
Coal sales and other revenues ............................ $198,461 $196,425 $ 329,475 $342,514
Income (loss) from operations ............................ 16,314 16,296 (20,468)(4) 29,740
Net income(loss) ......................................... 10,420 11,732 (13,001) 21,130
Basic and diluted earnings (loss) per common share(5) .... 0.50 0.56 (0.33) 0.53
</TABLE>
(1) During the first quarter of 1998, the Company recorded gains on the sale of
surplus land totaling $7.9 million.
(2) During the third quarter of 1998, the Company sold idle assets and reserves
in Eastern Kentucky for a gain of $18.5 million.
(3) During the fourth quarter of 1998, the Company sold its idle Big Sandy
Terminal for a gain of $7.5 million. This was partially offset by a net
unfavorable adjustment of $4.9 million associated with the Company's
routine, periodic review of reclamation accruals.
(4) During the third quarter of 1997, the Company recorded a $39.1 million
charge in connection with the Ashland Coal merger comprised of termination
benefits, relocation costs and costs associated with the idling of
duplicate facilities.
(5) The sum of the quarterly earnings per common share amounts may not equal
earnings per common share for the full year because per share amounts are
computed independently for each quarter and for the year based on the
weighted average number of common shares outstanding during each period.
64
<PAGE> 42
SELECTED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
(In thousands, except per share data) 1998(2,3) 1997(4,5) 1996 1995(6,7) 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Coal sales, equity income and other revenues .......... $ 1,505,635 $ 1,066,875 $780,621 $ 737,838 $785,287
Costs and expenses:
Cost of coal sales ............................... 1,313,400 916,802 669,295 657,529 648,091
Selling, general and administrative expenses ..... 44,767 28,885 20,435 19,680 21,758
Amortization of coal supply agreements ........... 34,551 18,063 12,604 13,374 15,346
Merger-related expenses .......................... -- 39,132 -- -- --
Write-down of impaired assets .................... -- -- -- 10,241 --
Restructuring expenses ........................... -- -- -- 8,250 --
Other expenses ................................... 25,070 22,111 22,175 18,739 35,150
--------------------------------------------------------------
Income from operations ................................ 87,847 41,882 56,112 10,025 64,942
Interest expense, net ................................. 61,446 17,101 17,592 22,962 21,582
Provision (benefit) for income taxes .................. (5,100) (5,500) 5,500 (1,900) 8,200
--------------------------------------------------------------
Income (loss) before extraordinary item ............... 31,501 30,281 33,020 (11,037) 35,160
Extraordinary item .................................... (1,488) -- -- -- --
--------------------------------------------------------------
Net income (loss) ..................................... $ 30,013 $ 30,281 $ 33,020 $ (11,037) $ 35,160
==============================================================
Balance Sheet Data:
Total assets .......................................... $ 2,918,220 $ 1,656,324 $885,521 $ 940,768 $993,361
Working capital ....................................... 20,176 40,904 33,166 40,077 27,512
Long-term debt, less current maturities ............... 1,309,087 248,425 212,695 274,314 308,166
Other long-term obligations ........................... 657,759 594,127 421,754 429,993 413,209
Stockholders' equity .................................. 618,216 611,498 130,626 113,692 131,426
Common Stock Data:
Basic and diluted earnings (loss) per
common share before extraordinary item ........... $ 0.79 $ 1.00 $ 1.58 $ (0.53) $ 1.68
Basic and diluted earnings (loss) per common share .... $ 0.76 $ 1.00 $ 1.58 $ (0.53) $ 1.68
Dividends per share ................................... $ .46 $ .445 $ .38 $ .32 $ --
Shares outstanding at year-end ........................ 39,372 39,658 20,948 20,948 20,948
Cash Flow Data:
Cash provided by operating activities ................. $ 188,023 $ 190,263 $138,471 $ 98,159 $ 81,273
Depreciation, depletion and amortization .............. 204,307 143,632 114,703 100,101 99,431
Purchases of property, plant and equipment ............ 141,737 77,309 62,490 80,347 96,717
Dividend payments ..................................... 18,266 13,630 8,000 6,697 --
EBITDA(8) ............................................. 313,500 224,646 170,815 128,617 164,373
Operating Data:
Tons sold ............................................. 81,098 40,525 29,443 26,742 27,898
Tons produced ......................................... 75,817 36,698 26,887 25,562 27,383
Tons purchased from third parties ..................... 4,997 2,906 2,062 1,218 1,190
</TABLE>
65
<PAGE> 43
SELECTED FINANCIAL INFORMATION(1)
(1) Certain amounts for years prior to 1998 have been reclassified to conform
with the 1998 classifications with no effect on previously reported net
income (loss) or stockholders' equity.
(2) Information for 1998 reflects the acquisition of Atlantic Richfield
Company's domestic coal operations on June 1, 1998. As a result of the
refinancing of Company debt resulting from the acquisition, the Company
incurred an extraordinary charge of $1.5 million (net of a tax benefit)
related to the early extinguishment of debt which existed prior to the
acquisition.
(3) Income from operations for 1998 reflects pre-tax gains of $41.8 million
from the disposition of assets including $18.5 million and $7.5 million on
the sale of certain assets and property in eastern Kentucky and the sale of
the Company's idle Big Sandy Terminal, respectively.
(4) Information for 1997 reflects the merger with Ashland Coal on July 1, 1997.
(5) Income from operations for 1997 reflects a $39.1 million charge in
connection with the Ashland Coal merger comprised of termination benefits,
relocation costs and costs associated with the idling of duplicate
facilities.
(6) Income from operations for 1995 reflects charges of $18.5 million for
restructuring and asset write-downs.
(7) On July 31, 1995, the Company sold its timber rights to approximately
100,000 acres of property in the eastern United States for a gain of $8.4
million.
(8) EBITDA is defined as income from operations before the effect of changes in
accounting principles and extraordinary items, merger-related costs and
unusual items (Notes 2, 5 and 6 above), net interest expense, income taxes,
depreciation, depletion and amortization for Arch Coal, its subsidiaries
and its ownership percentage in its equity investments. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to incur and service debt. EBITDA should not be considered in isolation or
as an alternative to net income, operating income, cash flows from
operations or as a measure of a company's profitability, liquidity or
performance under generally accepted accounting principles. This measure of
EBITDA may not be comparable to 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 arrangements).
66
<PAGE> 44
STOCKHOLDER INFORMATION
COMMON STOCK
Arch Coal's Common Stock is listed and traded on the New York Stock Exchange
and also has unlisted trading privileges on the Chicago Stock Exchange. The
ticker symbol is ACI.
Quarter Ended*
-----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
1997 1997 1997 1997
- -----------------------------------------------------------------------------
Dividends per common share $ .108 $ .108 $ .115 $ .115
High $ 30 3/8 $30 5/16
Low $ 27 1/8 $ 24 5/8
Close $28 9/16 $ 27 3/8
Quarter Ended
-----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
1998 1998 1998 1998
- -----------------------------------------------------------------------------
Dividends per common share $ .115 $ .115 $ .115 $ .115
High $29 $27 7/16 $ 25 $ 19 1/2
Low $25 1/4 $ 23 1/4 $ 14 1/2 $14 7/16
Close $27 $ 24 7/8 $ 14 7/8 $ 17 1/8
* Arch Coal stock began trading publicly on July 1, 1997.
On February 19, 1999, Arch Coal's common stock closed at $10.25 on the New York
Stock Exchange. At that date, there were 817 holders of record of Arch Coal's
common stock.
DIVIDENDS
In 1998, Arch Coal paid dividends totaling $18.3 million, or $.46 per share, on
its outstanding shares of common stock. In 1997, Arch Coal paid dividends
totaling $13.6 million, or $.445 per share, on its outstanding shares of common
stock. (Arch Coal stock began trading publicly on July 1, 1997). Arch Coal
expects to continue paying regular cash dividends, although there is no
assurance as to the amount or payment of dividends in the future because they
are dependent on Arch Coal's future earnings, capital requirements and
financial condition.
<PAGE> 1
EXHIBIT 16
LETTER OF PREDECESSOR ACCOUNTANT
To the Securities and Exchange Commission:
We have read Item 9 included in the attached Annual Report on Form 10-K
for the year ended December 31, 1998 of Arch Coal, Inc. to be filed with the
Securities and Exchange Commission and are in agreement with the statements
contained therein.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 26, 1999
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF ARCH COAL, INC.
The following is a complete list of the direct and indirect subsidiaries of Arch
Coal, Inc., a Delaware corporation:
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- -------------
<S> <C>
Allegheny Land Company Delaware
Apogee Coal Company Delaware
Arch Australia Pty Limited New South Wales, Australia
Arch Coal International, Ltd. Barbados
Arch Coal Sales Company, Inc. Delaware
Arch Coal Terminal Inc. Delaware
Arch Energy Resources, Inc. Delaware
(1)Arch of Wyoming, LLC Delaware
Arch Reclamation Services, Inc. Delaware
Arch Technology Corporation Delaware
(1)Arch Uinta, LLC Delaware
Arch Western Acquisition Corporation Delaware
(2)Arch Western Resources, LLC Delaware
Ark Land Company Delaware
Ashland Coal, Inc. Delaware
Ashland Terminal, Inc. Delaware
(1)AU Sub, LLC Delaware
(2)(3)Canyon Fuel Company, LLC Delaware
Catenary Coal Company Delaware
Catenary Coal Holdings, Inc. Delaware
Coal-Mac, Inc. Kentucky
Cumberland River Coal Company Delaware
Energy Development Co. Iowa
Hobet Mining, Inc. West Virginia
Julian Tipple, Inc. Delaware
Lone Mountain Processing, Inc. Delaware
Mingo Logan Coal Company Delaware
(1)Mountain Coal Company, L.L.C. Delaware
Mountain Gem Land, Inc. West Virginia
Mountain Mining, Inc. Delaware
Mountaineer Land Company Delaware
P. C. Holding, Inc. Delaware
Paint Creek Terminals, Inc. Delaware
(1)State Leases, LLC Delaware
(1)Thunder Basin Coal Company, L.L.C. Delaware
</TABLE>
(1) owned by Arch Western Resources, LLC.
(2) Arch Western Acquisition Corporation owns a 99% membership interest in Arch
Western Resources, LLC; Arch Western Resources, LLC owns a 65% in Canyon
Fuel Company, LLC.
(3) owned by Arch Western Resources, LLC.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Arch Coal, Inc. of our report dated January 22, 1999, included in the 1998
Annual Report to Stockholders of Arch Coal, Inc.
Our audits also included the financial statement schedule of Arch Coal, Inc.
listed in Item 14(a) as of December 31, 1998 and 1997 and for the years then
ended. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. The financial
statement schedule as of December 31, 1996 and for the year then ended was
audited by other auditors whose report dated January 16, 1997 expressed an
unqualified opinion on the schedule. In our opinion, the financial statement
schedule for 1998 and 1997 referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in (1) the Registration
Statement (Form S-8 No. 333-30565) pertaining to the Arch Coal, Inc. 1997 Stock
Incentive Plan and in the related Prospectus, (2) the Registration Statement
(Form S-8 No. 333-32777) pertaining to the Arch Coal, Inc. Employee Thrift Plan
and in the related Prospectus and (3) the Registration Statement (Form S-8
No. 333-68131) pertaining to the Arch Coal, Inc. Deferred Compensation Plan and
in the related Prospectus, of our report dated January 22, 1999, with respect to
the consolidated financial statements of Arch Coal, Inc. and subsidiaries
incorporated by reference in, and of our opinion with respect to the financial
statement schedule of Arch Coal, Inc. listed in Item 14(a) included in, the
Annual Report (Form 10-K) for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Louisville, Kentucky
February 26, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into previously filed Registration
Statements on Form S-8 (File No. 333-30565, 333-32777, and 333-68131) pertaining
to the Arch Coal, Inc. Stock Incentive Plan, the Arch Coal, Inc. Employee Thrift
Plan, and the Arch Coal, Inc. Deferred Compensation Plan.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 26, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
on Form S-8 (File No.'s 333-32777, 333-68131 and 333-30565) of our report dated
March 20, 1998 on our audit of the financial statements of Canyon Fuel Company,
LLC, as of December 31, 1997 and for the period from December 20, 1996
(inception) through December 31, 1997 which report is included in this Form
10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
March 1, 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS: That each of the undersigned directors and
the undersigned Director/Officer of ARCH COAL, INC., a Delaware corporation
("Arch Coal"), hereby constitutes and appoints Steven F. Leer, Patrick A.
Kriegshauser and Jeffry N. Quinn, and each of them, his true and lawful
attorneys-in-fact and agents, with full power to act without the others, to sign
Arch Coal's Annual Report on Form 10-K for the year ended December 31, 1998, to
be filed with the Securities and Exchange Commission under the provisions of the
Securities Exchange Act of 1934, as amended; to file such Annual Report and the
exhibits thereto and any and all other documents in connection therewith,
including without limitation amendments thereto, with the Securities and
Exchange Commission; and to do and perform any and all other acts and things
requisite and necessary to be done in connection with the foregoing as fully as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Dated: February 25, 1999
/s/ Steven F. Leer President and Chief Executive
- ----------------------------------- Officer and Director
Steven F. Leer
/s/ James R. Boyd Chairman of the Board and Director
- -----------------------------------
James R. Boyd
/s/ Paul W. Chellgren Director
- -----------------------------------
Paul W. Chellgren
/s/ Ignacio Dominguez Urquijo Director
- -----------------------------------
Ignacio Dominguez Urquijo
/s/ Thomas L. Feazell Director
- -----------------------------------
Thomas L. Feazell
/s/ John R. Hall Director
- -----------------------------------
John R. Hall
/s/ Robert L. Hintz Director
- -----------------------------------
Robert L. Hintz
/s/ Douglas H. Hunt Director
- -----------------------------------
Douglas H. Hunt
<PAGE> 2
/s/ James L. Parker Director
- -----------------------------------
James L. Parker
/s/ A. Michael Perry Director
- -----------------------------------
A. Michael Perry
/s/ J. Marvin Quin Director
- -----------------------------------
J. Marvin Quin
/s/ Theodore D. Sands Director
- -----------------------------------
Theodore D. Sands
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,414
<SECURITIES> 0
<RECEIVABLES> 227,455
<ALLOWANCES> 0
<INVENTORY> 68,455
<CURRENT-ASSETS> 353,334
<PP&E> 2,668,749
<DEPRECIATION> 732,005
<TOTAL-ASSETS> 2,918,220
<CURRENT-LIABILITIES> 333,158
<BONDS> 0
0
0
<COMMON> 397
<OTHER-SE> 617,819
<TOTAL-LIABILITY-AND-EQUITY> 2,918,220
<SALES> 1,428,171
<TOTAL-REVENUES> 1,505,635
<CGS> 1,313,400
<TOTAL-COSTS> 1,417,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,446
<INCOME-PRETAX> 26,401
<INCOME-TAX> (5,100)
<INCOME-CONTINUING> 31,501
<DISCONTINUED> 0
<EXTRAORDINARY> (1,488)
<CHANGES> 0
<NET-INCOME> 30,013
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
<PAGE> 1
Exhibit 99
CANYON FUEL COMPANY, LLC
-------------
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM
DECEMBER 20, 1996 (INCEPTION) THROUGH DECEMBER 31, 1997 WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of the Canyon Fuel Company, LLC:
We have audited the accompanying balance sheet of Canyon Fuel Company,
LLC (a Delaware Limited Liability Company) (the "Company") as of December 31,
1998, and the related statements of income, members' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canyon Fuel Company,
LLC at December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Louisville, Kentucky
January 22, 1999 /s/ ERNST & YOUNG LLP
2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of the Canyon Fuel Company, LLC:
We have audited the accompanying balance sheet of Canyon Fuel Company,
LLC (a Delaware Limited Liability Company) (the "Company") as of December 31,
1997, and the related statements of income, members' equity and cash flows for
the period from December 20, 1996 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canyon Fuel Company,
LLC as of December 31, 1997, and the results of its operations and its cash
flows for the period from December 20, 1996 (inception) through December 31,
1997, in conformity with generally accepted accounting principles.
Denver, Colorado
March 20, 1998 /s/ PRICEWATERHOUSECOOPERS, LLP
<PAGE> 4
CANYON FUEL COMPANY, LLC
STATEMENTS OF INCOME
(in thousands of dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM
DECEMBER 20, 1996 (INCEPTION)
THROUGH DECEMBER 31, 1997
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Coal sales $275,303 $251,818
Other revenues 905 2,018
-------- --------
276,208 253,836
-------- --------
COSTS AND EXPENSES
Cost of coal sales 250,248 210,500
Amortization of coal supply agreements 19,044 18,089
Fees to members 5,945 4,805
-------- --------
275,237 233,394
-------- --------
Income from operations 971 20,442
-------- --------
Interest, net:
Interest expense (205) (294)
Interest income 1,110 1,120
-------- --------
905 826
-------- --------
NET INCOME $ 1,876 $ 21,268
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
CANYON FUEL COMPANY, LLC
BALANCE SHEETS (in thousands of dollars)
<TABLE>
<CAPTION>
December 31
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets $ 20,246 $ 5,443
Cash and cash equivalents 33,611 23,450
Trade accounts receivable 9,358 8,496
Other receivables 23,842 32,394
Other 563 279
----------- ----------
Total current assets 87,620 70,062
----------- ----------
Property, plant and equipment
Coal lands and mineral rights 263,576 259,111
Plant and equipment 199,631 165,768
Deferred mine development 9,350 5,493
----------- ----------
472,557 430,372
Less accumulated depreciation, depletion and amortization (77,764) (34,094)
----------- ----------
Property, plant and equipment, net 394,793 396,278
----------- ----------
Other assets
Prepaid royalties 24,829 27,533
Coal supply agreements 112,347 131,391
Other 150 150
----------- ----------
Total other assets 137,326 159,074
----------- ----------
Total assets $ 619,739 $ 625,414
=========== ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Accounts payable $ 22,653 $ 16,842
Accrued expenses 8,806 14,592
----------- ----------
Total current liabilities 31,459 31,434
Accrued postretirement benefits other than pension 6,902 5,439
Accrued reclamation and mine closure 2,793 2,387
Accrued workers' compensation 7,037 4,769
Accrued pension cost 1,461 807
Other noncurrent liabilities 1,054 2,552
----------- ----------
Total liabilities 50,706 47,388
Members' equity 569,033 578,026
----------- ----------
Total liabilities an members' equity $ 619,739 $ 625,414
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
CANYON FUEL COMPANY, LLC
STATEMENTS OF MEMBERS' EQUITY
(in thousands of dollars)
YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM
DECEMBER 20, 1996 (INCEPTION) THROUGH DECEMBER 31, 1997
--------------
<TABLE>
<CAPTION>
ARCO UINTA COAL
COMPANY
THROUGH JUNE 1, 1998,
ARCH WESTERN RESOURCES, ITOCHU COAL
LLC THEREAFTER INTERNATIONAL INC. TOTAL
----------------------- ------------------ -----
<S> <C> <C> <C>
Contributions $410,643 $221,115 $631,758
Distributions (48,750) (26,250) (75,000)
Net income for the period from
December 20, 1996 (inception)
through December 31, 1997 13,824 7,444 21,268
-------- -------- --------
Members' equity, December 31, 1997 375,717 202,309 578,026
Contributions 11,785 6,346 18,131
Distributions (18,850) (10,150) (29,000)
Net income 1,219 657 1,876
-------- -------- --------
Members' equity, December 31, 1998 $369,871 $199,162 $569,033
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
CANYON FUEL COMPANY, LLC
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM
DECEMBER 20, 1996 (INCEPTION)
THROUGH DECEMBER 31, 1997
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,876 $ 21,268
Adjustments to reconcile to cash provided by operating activities:
Depreciation, depletion and amortization 63,768 52,183
Prepaid royalties 2,704 2,954
Net (gain) loss on disposition of assets 260 (611)
Changes in operating assets and liabilities 1,691 8,716
Other 285 (3,205)
---------- ---------
Cash provided by operating activities 70,584 81,305
---------- ---------
INVESTING ACTIVITIES
Acquisition of coal operations, net of cash acquired -- (610,334)
Additions of property, plant and equipment (43,499) (20,819)
---------- ---------
Cash used in investing activities (43,499) (631,153)
---------- ---------
FINANCING ACTIVITIES
Members' contributions 18,131 631,758
Members' distributions (29,000) (75,000)
Federal lease payments (1,413) (1,467)
---------- ---------
Cash provided by (used) in financing activities (12,282) 555,291
---------- ---------
Increase in cash and cash equivalents 14,803 5,443
Cash and cash equivalents, beginning of period 5,443 --
---------- ---------
Cash and cash equivalents, end of period $ 20,246 $ 5,443
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 241 $ 184
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
CANYON FUEL COMPANY, LLC (in thousands of dollars)
1. FORMATION OF THE COMPANY
Effective December 20, 1996, Canyon Fuel Company, LLC (the "Company") was
formed as a joint venture between ARCO Uinta Coal Company ("ARCO")(65%
ownership) and ITOCHU Coal International Inc. (35% ownership) for the purpose
of acquiring certain Utah coal operations and an approximate 9% interest in Los
Angeles Export Terminal, Inc. ("LAXT") from Coastal Coal, Inc. and The Coastal
Corporation (collectively, "Coastal"). Effective June 1, 1998, ARCO Uinta Coal
Company's ownership of the Company was acquired by Arch Western Resources, LLC
("Arch Western"). The owners of the Company are referred to herein as the
"Members".
The Company operates one reportable segment: the production of steam coal
from deep mines in Utah for sale primarily to utility companies primarily in the
United States. Net profits and losses are allocated to the Members based on
their respective ownership percentage. Distributions of the Company's earnings
are also allocated to the Members based on their respective ownership
percentage.
On December 20, 1996, the Company acquired the western operations of
Coastal for approximately $631.8 million in cash, plus assumed liabilities, for
a total purchase price of approximately $669.6 million (the "Acquisition").
These operations primarily consist of three coal mines in central Utah. The
Acquisition was funded through cash contributions by the Members in proportion
to their respective ownership percentage. The Acquisition has been accounted for
using the purchase method of accounting.
In the allocation of the purchase price, approximately $77.8 million was
allocated to access rights associated with reserves located on properties which
are adjacent to the properties acquired. In the event the Company is not
successful in acquiring the reserves located adjacent to the properties
acquired, the amount of the purchase price allocated to such reserves will be
written off in the period such determination is made.
2. ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost which approximates fair value.
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Coal $ 11,892 $ 20,491
Supplies 11,950 11,903
-------- --------
$ 23,842 $ 32,394
======== ========
</TABLE>
8
<PAGE> 9
Coal inventory is valued using the first-in-first-out ("FIFO") cost method
and is stated at the lower of cost or market. Coal inventory costs include
labor, equipment costs and operating overhead. Supplies are valued using the
average cost method and are stated at the lower of cost or market.
COAL ACQUISITION COSTS AND PREPAID ROYALTIES
Coal lease rights obtained through acquisition are capitalized and
amortized primarily by the units-of-production method over the estimated
recoverable reserves. Rights to leased coal lands are often acquired through
royalty payments. Where royalty payments represent prepayments recoupable
against production, they are capitalized. As mining occurs on these leases, the
prepayment is offset against earned royalties and is included in the cost of
coal sales.
COAL SUPPLY AGREEMENTS
Acquisition costs related to coal supply agreements (sales contracts) are
capitalized and amortized on the basis of coal to be shipped over the term of
the contract. Accumulated amortization for sales contracts was $37.1 million and
$18.1 million at December 31, 1998 and 1997, respectively.
EXPLORATION COSTS
Costs related to locating coal deposits and determining the economic
mineability of such deposits are expensed as incurred.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost.
Maintenance and repair costs are expensed as incurred. Mine development costs
are capitalized and amortized on the units-of-production method. Depletion of
mineral properties is computed on the units-of-production method based on
estimated recoverable coal reserves.
Depreciation and amortization of other property, plant and equipment is
computed by either the straight-line method over the expected lives of the
assets, which range from 3 to 16 years, or on the units-of-production method,
depending upon the type of asset. Fully depreciated assets are retained in
property and depreciation accounts until they are removed from service. Upon
disposal of depreciated assets, residual cost less salvage value is included in
the determination of current income.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
RECLAMATION AND MINE CLOSING COSTS
The Company charges current reclamation costs to expense as incurred. Final
reclamation costs, including dismantling and restoration, are estimated based
upon current federal and state regulatory requirements and are accrued during
operations. The final reclamation provision was calculated using the
units-of-production method on the basis of estimated costs as of the balance
sheet date. The effect of changes in estimated costs and production is
recognized on a prospective basis.
The Company is not aware of any events of noncompliance with environmental
laws and regulations. The exact nature of environmental issues and costs, if
any, which the Company may encounter in the future cannot be predicted,
primarily because of the changing character of environmental requirements that
may be enacted by governmental agencies.
9
<PAGE> 10
REVENUE RECOGNITION
Coal sales revenues include sales to customers of coal produced at Company
operations and purchased from other companies. The Company recognizes revenue
from coal sales at the time title passes to the customer. Revenues from sources
other than coal sales, including gains and losses from dispositions of long-term
assets, are included in other revenues and are recognized as services are
performed or otherwise earned.
INCOME TAXES
The financial statements do not include a provision for income taxes as the
Company is treated as a partnership for income tax purposes and does not incur
federal or state income taxes. Instead, its earnings and losses are included in
the Members' separate income tax returns.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform with the classifications in the 1998 financial statements with no effect
on previously reported net income or members' equity.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued payroll and related benefits $ 3,729 $ 10,250
Accrued taxes other than income taxes 955 699
Accrued workers' compensation 1,100 --
Other accrued expenses 3,022 3,643
-------- --------
$ 8,806 $ 14,592
======== ========
</TABLE>
4. FEDERAL LEASE PAYMENTS
The Company has been awarded federal leases which require the bid price to be
paid over a number of years. Royalty payments will be required when mining
begins on the leases. The liability for federal lease payments consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Alkai Creek lease payable; due in annual
installments of $533 through October 1, 1999,
with imputed interest at 5.67% $ 505 $ 983
Winter Quarters lease payable; due in annual
installments of $1,120 through June 20, 2000,
with imputed interest at 6.21% 2,047 2,982
-------- --------
2,552 3,965
Less current portion (1,498) (1,413)
-------- --------
$ 1,054 $ 2,552
======== ========
</TABLE>
10
<PAGE> 11
Annual maturities for federal lease payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 1,498
2000 1,054
--------
$ 2,552
========
</TABLE>
Interest expense recorded under federal leases was $205 for 1998 and $294 in
1997.
5. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Other Postretirement Benefit Plans
Essentially all of the Company's employees are covered by a defined benefit
pension plan sponsored by the Company. The benefits are based on years of
service and the employee's compensation, primarily during the last five years of
service. The funding policy for the pension plan is to make annual contributions
as required by applicable regulations.
The Company also provides certain postretirement medical and life insurance
benefits to substantially all employees who retire with the Company. The Company
has the right to modify the plans at any time. The Company's current policy is
to fund the cost of postretirement health care and life insurance benefits as
they are paid.
Summaries of the changes in the benefit obligations and plan assets
(primarily listed stocks and debt securities) and of the funded status of the
plans follow:
11
<PAGE> 12
<TABLE>
<CAPTION>
Pension benefits Other postretirement benefits
-------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1, 1998
and December 20, 1996 (inception) $ 2,465 $ 792 $ 5,703 $ 4,787
Service cost 1,674 1,451 463 313
Interest cost 353 58 612 347
Benefits paid (38) (53) -- (9)
Plan amendments -- -- 1,332 --
Other-primarily actuarial loss 981 217 1,383 265
- --------------------------------------------------------------------------------------------------------------------------
Benefit obligations at December 31 $ 5,435 $ 2,465 $ 9,493 $ 5,703
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Value of plan assets at January 1, 1998
and December 20, 1996 (inception) $ 54 $ -- $ -- $ --
Actual return on plan assets (106) (13) -- --
Employer contributions 1,395 -- -- 9
Acquisitions -- 120 -- --
Benefits paid (38) (53) -- (9)
- --------------------------------------------------------------------------------------------------------------------------
Value of plan assets at December 31 $ 1,305 $ 54 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets $ 4,130 $ 2,411 $ 9,493 $ 5,703
Unrecognized actuarial loss (1,165) (209) (1,396) (264)
Unrecognized prior service cost -- -- (1,195) --
- --------------------------------------------------------------------------------------------------------------------------
Net liability recognized $ 2,965 $ 2,202 $ 6,902 $ 5,439
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET LIABILITIES
Current portion of liability $ 1,504 $ 1,395 $ -- $ --
Long term portion of liability 1,461 807 6,902 5,439
- --------------------------------------------------------------------------------------------------------------------------
Total accrued benefit liabilities $ 2,965 $ 2,202 $ 6,902 $ 5,439
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Pension benefits Other postretirement benefits
--------------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.00% 7.00% 7.00% 7.00%
Rate of compensation increase 4.75% 5.00% 4.75% 5.00%
Expected return on plan assets 9.00% 10.50% N/A N/A
Health care cost trend on covered charges N/A N/A 4.5% 7.0% in 1998 to
5.0% thereafter
</TABLE>
The following table details the components of pension and other postretirement
benefit costs.
<TABLE>
<CAPTION>
Pension benefits Other postretirement benefits
---------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 1,674 $ 1,451 $ 463 $ 313
Interest cost 353 58 612 347
Expected return on plan assets (42) -- -- --
Other amortization and deferral 194 -- 383 --
------------------------------------------------------------------------------------------------------
$ 2,179 $ 1,509 $ 1,458 $ 660
------------------------------------------------------------------------------------------------------
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rate by one percentage point each year would increase the accumulated
postretirement obligation as of December 31, 1998 by $241, or 2.5%, and the net
periodic postretirement benefit cost for 1998 by $33, or 2.3%.
Other Plans
The Company sponsors a savings plan which was established to assist
eligible employees in providing for their future retirement needs. The plan is
non-contributory by the Company.
6. ACCRUED BLACK LUNG COMPENSATION
The Company is liable under the federal Mine Safety and Health Act of 1977,
as amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by such
persons on or after July 1, 1973. The Company is also liable under various
states' statutes for black lung benefits. The Company currently provides for
federal and state claims principally through a self-insurance program. Charges
are being made to operations as determined by independent actuaries, at the
present value of the actuarially computed present and future liabilities for
such benefits over the employees' applicable years of service. Black Lung
compensation costs include the following components:
13
<PAGE> 14
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Self-insured black lung benefits:
Service cost $ 228 $ 272
Interest cost 244 210
------ ------
$ 472 $ 482
====== ======
</TABLE>
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.0% as of December 31, 1998 (7.25% as of December
31, 1997) and a black lung benefit cost escalation rate of 4% in 1998 and 1997.
Summarized below is information about the amounts recognized in the
balance sheets for black lung compensation benefits:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------ ------
<S> <C> <C>
Actuarial present value for self-insured black lung
benefits:
Accumulated blank lung benefit obligation $7,265 $5,892
Unrecognized net loss (228) (1,123)
------ ------
$7,037 $4,769
====== ======
</TABLE>
7. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company places its cash equivalents in investment-grade short-term
investments and limits the amount of credit exposure to any one commercial
issuer.
The Company markets its coal principally to electric utilities in the
United States. Generally, credit is extended based on an evaluation of the
customer's financial condition, and collateral is not generally required. Credit
losses are provided for in the financial statements and historically have been
minimal.
The Company is committed under long-term contracts to supply coal that
meets certain quality requirements at specified prices. These prices are
generally adjusted based on indices. Quantities sold under some of these
contracts may vary from year to year within certain limits at the option of the
customer. The Intermountain Power Agency accounted for approximately 29% and 34%
of coal sales in 1998 and 1997, respectively. This same customer accounted for
34% and 35% of accounts receivable at December 31, 1998 and 1997, respectively.
Sierra Pacific accounted for approximately 11% and 10% of coal sales in 1998 and
1997, respectively. Approximately 8% and 15% of coal sales in 1998 and 1997,
respectively, were to ITOCHU Coal International Inc.
8. RELATED PARTY TRANSACTIONS
As described in Note 1, 65% of the Company was owned by ARCO and subsequent
to June 1, 1998 is owned by Arch Western. ARCO and now Arch Western act as the
Company's managing member. The Company pays administration and production fees
to ARCO and now Arch Western for managing the Canyon Fuel operations. These fees
were $5.9 million and $4.8 million in 1998 and 1997, respectively. The Company
has a payable balance to Arch Western and ARCO of $2.8 million and $7.9 million
at December 31, 1998 and 1997, respectively.
14
<PAGE> 15
9. COMMITMENTS AND CONTINGENCIES
The Company is in litigation with the Skyline Partners, lessors of the coal
reserves which comprise the Company's Skyline Mine. The coal leases in question
were entered into between The Coastal Coal Corporation, the Company's
predecessor in interest, and the Skyline Partners' predecessor. The coal leases
require the lessee, the Company, to pay an annual advance minimum royalty of $5
million, which is fully recoupable against a production royalty that is to be
paid by the Company on each ton of coal mined and sold from the leaseholds. In
1997, the Company concluded that the number of recoverable tons which remain on
the leasehold were insufficient to allow it to fully recoup the total amount of
advance royalties that have been paid to the Skyline Partners, and filed suit in
Utah State Court against the Skyline Partners alleging that the Company 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 the Company 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 the Company to pay the last $5 million advance minimum royalty
payment, and alleging a default under the leases. To date, these cases have
principally involved procedural disputes concerning proper venue for the case.
The Company is also the subject of or party to a number of other pending or
threatened legal actions. On the basis of management's best assessment of the
likely outcome of these actions, expenses or judgments arising from any of these
suits, or from any of the proceedings described above, are not expected to have
a material adverse effect on the Company's operations, financial position, or
cash flows.
Included in property, plant and equipment of the Company is an approximate
9% investment in LAXT recorded at cost amounting to $12.3 million and $12
million as of December 31, 1998 and 1997, respectively. LAXT is experiencing
operating losses and has negative cash flow principally due to weak demand for
U.S. coal exports to the Far East. The ability of LAXT to continue as a going
concern is dependent on their improving operating results and obtaining
additional financing, if necessary. If these issues are not satisfactorily
resolved in a timely manner, there can be no assurance that the Company's
investment in LAXT will be recoverable.
10. CASH FLOW
The changes in operating assets and liabilities as shown in the statements
of cash flows are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
Decrease (increase) in operating assets:
<S> <C> <C>
Receivables $(11,023) $ 1,802
Inventories 8,552 (6,021)
Increase in operating liabilities:
Accounts payable and accrued expenses 25 10,046
Accrued postretirement benefits other than pension 1,463 2,160
Accrued reclamation and mine closure 406 332
Accrued workers' compensation 2,268 397
--------- --------
Changes in operating assets and liabilities $ 1,691 $ 8,716
========= ========
</TABLE>
11. ACCOUNTING DEVELOPMENT
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. FAS 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. FAS 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the
15
<PAGE> 16
derivative will either be offset against the change in fair value of the hedged
assets or liabilities through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The Company has not yet determined what effect FAS 133 will have on
the earnings and financial position of the Company.
12. YEAR 2000 (UNAUDITED)
The Company has conducted a review of its computer systems to identify
areas that could be affected by the Year 2000 computer issue. The Company is in
the process of upgrading the accounting systems and the truck scale systems.
Testing will be conducted in April 1999 and the project should be completed
during the second quarter of 1999. Although there can be no guarantees, the
Company, to the best of its ability, has determined that other operations
systems are Year 2000 compliant. Other support systems are provided by Arch Coal
and are either Year 2000 compliant or will be later in 1999.
13. SUBSEQUENT EVENT
On January 20, 1999, the Company amended its coal supply agreements
pursuant to which it supplied coal to the Intermountain Power Agency's
Intermountain Power Project ("IPA"). Pursuant to the amended coal supply
agreements, the Company will supply coal to IPA through 2010 with a mutual
option to extend to 2015 at a rate of approximately 2.2 million tons per year.
The Company 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 the Company $12.7
million which had been withheld due to the dispute. The Members of the Company,
Arch Coal, Inc. and ITOCHU Coal International Inc., also agreed to terminate
certain indemnification rights, including indemnification rights relating to the
IPA coal supply agreements, arising under the December, 1996 acquisition of the
Company from The Coastal Corporation. Also, Arch Coal, Inc. agreed to terminate
certain indemnification rights relating to the IPA coal supply agreements
arising under its June 1, 1998 acquisition of Atlantic Richfield Company's
domestic coal operations. In the aggregate, the Company and its Members will
receive $54.9 million over three years for termination of the indemnify rights
and to settle existing receivable balances. Except for payments received to
settle existing trade receivables, the Company will apply the other proceeds
against the existing IPA coal supply contract value included in the Company's
balance sheet.
16
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Coal, Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows for the year ended December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Arch Coal,
Inc. and subsidiaries for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements at Item 14(a) is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
January 16, 1997 (except with
respect to the matter discussed in Note 11
as to which the date is April 4, 1997)
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of the Canyon Fuel Company, LLC:
We have audited the accompanying balance sheet of Canyon Fuel Company,
LLC (a Delaware Limited Liability Company) (the "Company") as of December 31,
1997, and the related statements of income, members' equity and cash flows for
the period from December 20, 1996 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canyon Fuel
Company, LLC as of December 31, 1197, and the results of its operations and its
cash flows for the period from December 20, 1996 (inception) through December
31, 1997, in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers, LLP
Denver, Colorado
March 20, 1998
