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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 1-13105
ARCH COAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-0921172
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
CityPlace One, Suite 300, St. Louis, 63141
MO (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (314) 994-2700
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
(Title of each class) (Name of each exchange on which
registered)
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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 1, 2000, 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
$103,718,446. 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 March 1, 2000, there were 38,164,482 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 May 1, 2000
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, 1999 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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Page
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PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 11
Item 3. Legal Proceedings............................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............. 15
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters................................................................ 15
Item 6. Selected Financial Data......................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..... 16
Item 8. Financial Statements and Supplementary Data..................... 16
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant............. 16
Item 11. Executive Compensation......................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management. 16
Item 13. Certain Relationships and Related Transactions................. 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K...................................................................... 17
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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
compliance and low-sulfur coal from 31 surface, underground and auger mines
located in coal fields in the western United States and in the central
Appalachian region. 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, 1999, the Company controlled
approximately 3.5 billion tons of measured and indicated coal reserves, of
which approximately 1.8 billion tons were located in coal fields in the
western United States and 1.3 billion tons were located in coal fields in
central Appalachia. The remaining reserves were located in midwestern coal
fields. In December 1999, the Company closed its last mining operation in the
midwest due to a lack of demand for the mine's high-sulfur coal.
The Company owns a 99% membership interest in Arch Western Resources, LLC
("Arch Western"), a joint venture that was formed in connection with the
Company's acquisition of the United States coal operations of Atlantic
Richfield Company on June 1, 1998 (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
mines in the Hanna Basin of Wyoming. Arch Western owns 100% of the membership
interests of Thunder Basin Coal Company, L.L.C., Mountain Coal Company, L.L.C.
and Arch of Wyoming, LLC. Arch Western owns a 65% membership interest in
Canyon Fuel, with the remaining 35% membership interest owned by ITOCHU Coal
International Inc., a subsidiary of ITOCHU Corporation of Japan.
The Company and its operating subsidiaries (other than Canyon Fuel, the
results of operations of which are accounted for using the equity method) sold
approximately 111.2 million tons of coal in 1999, 107.1 million tons of which
were produced by the Company and the balance of which was purchased for
resale. Approximately 82% 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
76% of 1999 total revenues were derived from sales of coal under long-term
contracts. Sales of steam coal in 1999 totaled 108.7 million tons, or
approximately 98% of the Company's 1999 coal sales, while sales of
metallurgical coal in 1999 totaled 2.5 million tons, or approximately 2% of
the Company's 1999 coal sales. In 1999, sales of coal in the export market
totaled approximately 3.5 million tons. Sales of steam coal accounted for
approximately 59% of these export sales, while the balance of export sales
consisted of sales of metallurgical coal.
Recent Developments
West Elk Operations. The Company temporarily idled its West Elk underground
mine in Gunnison County, Colorado, on January 28, 2000 following the detection
of higher-than-normal levels of carbon monoxide in a portion of the mine.
Higher-than-normal readings of carbon monoxide indicate that combustion is
present somewhere within the affected portion of the mine. The Company has
sealed the affected portion of the mine while it further isolates the affected
area and determines the cause of and solutions to the problem. West Elk
produced approximately 7.3 million tons of coal in 1999, employs approximately
300 people and generated approximately $13.1 million of the Company's total
operating income in 1999. The Company does not believe the mine's closure will
have a material long-term effect on the Company's financial condition, but it
could have a material adverse effect on the Company's results of operations
until the mine is reopened and fully operating.
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Ashland Inc. Proposal. Ashland Inc. ("Ashland"), which owns approximately
58% of the outstanding common stock of the Company, announced on March 16,
2000 that its Board of Directors has declared a taxable distribution to
Ashland's stockholders of approximately 17.4 million of its 22.1 million
shares of the Company's common stock. The shares will be distributed on or
around March 27, 2000 to Ashland's stockholders of record as of March 24,
2000. Ashland also confirmed that it plans to dispose of its remaining 4.7
million shares of the Company's common stock in a tax efficient manner after
the distribution, subject to then-existing market conditions. There will be no
impact on the operations of the Company as a result of the distribution by
Ashland. Ashland first announced its interest in exploring strategic
alternatives for its investment in the Company on June 22, 1999.
West Virginia Operations. Recent regulatory developments in West Virginia
have adversely affected the Company's ability to economically exploit its
mining properties. On October 20, 1999, the U.S. District Court for the
Southern District of West Virginia permanently enjoined the West Virginia
Division of Environmental Protection (the "West Virginia DEP") from issuing
any new permits that authorize the construction of valley fills as part of
coal mining operations. The West Virginia DEP complied with the injunction by
issuing an order banning the issuance of nearly all new permits involving
valley fills and prohibiting the further advancement of nearly all existing
fills. On October 29, 1999, the district court granted a stay of its
injunction, pending the outcome of an appeal of the court's decision filed by
the West Virginia DEP with the U.S. Court of Appeals for the Fourth Circuit.
The West Virginia DEP rescinded its order in response to the stay granted by
the court. It is impossible to predict the outcome of the West Virginia DEP's
appeal to the Fourth Circuit. If, however, the district court's ruling is not
overturned or if a legislative or other solution is not achieved, then the
ability of the Company and other coal producers to mine coal in West Virginia
would be seriously compromised.
Business Environment
Demand for Coal. Coal is the fuel used to generate 51% of all electricity
produced in the United States. Coal has consistently maintained a 51-53%
market share over competing energy sources during the past 10 years because of
its relatively low cost and its availability throughout the United States. On
an average, all-in cost per megawatt-hour basis, coal-fired generation is
substantially less expensive than electricity generated utilizing 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, nearly 85% of the approximate 1.1 billion tons of coal
produced in the United States in 1999 was sold in the domestic market as a
fuel to generate electricity. The remaining tons were sold into the export
market (6%), were sold as metallurgical coal (2%), or were sold as steam coal
for other industrial/residential purposes (7%). 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. 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
continue to cause utilities to focus on minimizing their fuel costs, be more
aggressive in negotiating prices with coal suppliers and be more willing to
switch to alternative fuels. 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 should increase pricing pressure on coal producers since fuel costs
account for a high percentage of the cost of operating a generating plant.
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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, which became effective on January 1, 2000, extends the
restrictions of the Amendments to all power plants of greater than a 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 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 are based on 1.2
pounds of sulfur dioxide per million Btus.
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 in an overall market
characterized by 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 a
variety of factors, many of which are beyond the Company's control. The
Company sells coal under long-term contracts and on the spot market. See the
"Sales and Marketing" section below. 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. In addition to competition from other fuels,
coal quality, the marginal cost of producing coal in various regions of the
country and transportation costs 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. The lower
production cost in the western mines is offset somewhat by the higher quality
of many eastern coals and higher transportation cost from these western mines
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 the electricity generating industry.
Transportation of Coal. Transportation costs are another fundamental factor
affecting coal industry competition, particularly interregional competition.
Nearly 65% 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
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Powder River Basin into central Appalachian markets limited the use of Powder
River Basin coal in those markets. More recently, however, 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 competitive. 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 coal 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.
Most coal mines are served by a single rail company, but many 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, due to deregulation and other factors discussed previously, 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, black
lung excise taxes 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 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
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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 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, analyzed and weighed
at the destination, whereas in the western United States most of that activity
is conducted 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 may 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. The Exchange has announced its
intention to initiate coal contract trading based on a Huntington, West
Virginia barge loading hub. However, to date, the Exchange has not initiated
such trading. The development of standards to determine pricing 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. Today, over-
the-counter trading is being conducted to a limited extent on both firm
forward transactions as well as put, call and other 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 10.0% and 10.5%, respectively, of the Company's total revenues
in 1999. 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, 1999, the Company operated a total of 33 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, 1999:
<TABLE>
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Tons Produced Recoverable Cost(/2/)/
Captive Contract Mining in 1999 Reserves Book Value
Mining Complex (Location) Mine(s)* Mine(s)* Equipment(/1/) Transportation (in millions) (in millions) (in millions)
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<S> <C> <C> <C> <C> <C> <C> <C>
Central Appalachia
Mingo Logan (WV)............ S, U U(3), S(2) L, LW, C NS 12.2 22.4 $133/$67
Coal-Mac (KY)(/3/).......... S(2) -- L CSX 1.0 5.9 14/4
Dal-Tex (WV)(/4/)........... S, U -- D, L, S CSX 2.3 84.2 10/3
Hobet 21 (WV)............... S, U U(2) D, L, S(/5/) CSX 5.1 88.9 45/31
Arch of West Virginia (WV).. S U D, L, S(/6/) CSX 4.7 19.6 120/25
Samples (WV)................ S -- D, L, S(/7/) Barge, CSX 5.9 27.5 115/48
Campbells Creek (WV)........ -- U(2) -- Barge 1.2 11.6 3/1
Lone Mountain (KY).......... U(2) -- C NS 2.3 60.6 85/36
Pardee (VA)................. S, U U L, C NS 1.7 9.3 34/11
Western United States
Black Thunder (WY).......... S -- D, S(/8/) UP, BN 50.9 1,052.5 226/203
Coal Creek (WY)............. -- S -- UP, BN 11.4 238.6 41/37
West Elk (CO)(/9/).......... U -- LW, C UP 7.3 141.3 96/71
Skyline (UT)................ U -- LW, C UP 3.8 79.6 (/10/)
SUFCO (UT).................. U -- LW, C UP 5.8 117.9 (/10/)
Dugout Canyon (UT).......... U -- C((/11/) UP .8 34.1 (/10/)
Arch of Wyoming (WY)........ S(2) -- D, S(/12/) UP 1.0 .4 58/4
Midwestern United States
Arch of Illinois (IL)(/13/). -- -- C UP, IC 2.4 20.0 107/3
</TABLE>
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S = Surface Mine D = Dragline UP = Union Pacific
U = Underground Mine L = Loader/Truck Railroad
S = Shovel/Truck IC = Illinois Central
LW = Longwall Railroad
C = Continuous Miner BN = Burlington Northern
Railroad
NS = Norfolk Southern
Railroad
* Multiple captive and contract mines are included in parentheses.
(/1/Reported)for captive operations only.
(/2/Reflects)purchase accounting adjustments.
(/3/The)Company idled the two captive mining operations at its Coal-Mac (KY)
complex on January 3, 2000 because of the small surface mines' high cost
structure compared to the Company's larger mines.
(/4/The)Company idled its mining operations at the Dal-Tex complex on July 23,
1999 due to a delay in obtaining mining permits resulting from legal action
in the U.S. District Court for the Southern District of West Virginia. See
"Part I, Item 3. Legal Proceedings--Dal-Tex Litigation" for further
discussion regarding this legal action.
(/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.
(/7/Utilizes)a 110-cubic-yard dragline, two 53-cubic-yard shovels, a 22-cubic-
yard hydraulic excavator and two 28-cubic-yard loaders.
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(/8/Utilizes)170-cubic-yard, 130-cubic-yard, 90-cubic-yard and 45-cubic-yard
draglines and 53-cubic-yard, 60-cubic-yard and 82-cubic-yard shovels.
(/9/The)Company temporarily idled its mining operations at West Elk on January
28, 2000 following the detection of higher-than-normal levels of carbon
monoxide in a portion of the mine. See "Part 1, Item 1. Business--Recent
Developments" for further information regarding this matter.
(/10/Canyon)Fuel is an equity investment and its financial statements are not
consolidated into the Company's financial statements.
(/11/Currently)under development; full production projected to begin with the
addition of a longwall in the 3rd quarter of 2001.
(/12/Utilizes)76-cubic-yard and 64-cubic-yard draglines at Medicine Bow and a
32-cubic-yard dragline at Seminoe II.
(/13/The)Company idled its remaining operations at the Arch of Illinois mining
complex and sealed the underground mine in December 1999 due to a lack of
demand for the mine's high-sulfur coal. The mining complex was the last
of the Company's mining operations in the midwestern United States.
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, Hobet 21, Arch of West Virginia, Samples, Campbell's
Creek, Pardee, and Lone Mountain, as well as the idled Dal-Tex complex. 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
idled 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; and
other surface or subsurface conditions. Such production factors frequently
result in significant fluctuations in operating results.
Third quarter results of operations are frequently adversely affected by
lower production and resultant higher costs due to scheduled vacation periods
at the Company's union 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.
7
<PAGE>
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.
The Company's 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.
The Company's Paint Creek Terminal is located on leased property on the
Kanawha River at Crown Hill, West Virginia. The facility transloads coal
trucked from the Campbells Creek and Samples mines for shipment by barge to
the Company's customers.
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.
As of December 31, 1999, Arch Western owned a 5.3% equity interest and
Canyon Fuel owned a 9.0% equity interest in the Los Angeles Export Terminal
("LAXT"), which owns and operates a dry bulk terminal operation within the
Port of Los Angeles. LAXT is served by the Union Pacific railroad. 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
was approximately $144 million.
Regulations Affecting Coal Mining
Federal, state and local 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. These regulations have had and will continue to have a
significant effect on the Company and the coal mining industry.
Permits and Environmental Matters. Mining companies must obtain numerous
permits that impose strict regulations on various environmental and health and
safety matters in connection with coal mining. For example, regulations are
imposed on the emission of air and water borne pollutants, the manner and
sequencing of coal extractions and reclamation, the storage, use and disposal
of waste and other substances, some of which may be hazardous, and the
construction of fills and impoundments. Regulatory authorities have
considerable discretion in the timing of permit issuance and 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. The Company idled its Dal-Tex operation in West Virginia on July 23,
1999, due to a delay in obtaining mining permits which resulted from legal
action in the U.S. District Court for the Southern District of West Virginia.
See "Part 1. Item 3. Legal Proceedings--Dal-Tex Litigation" for a discussion
of the legal action.
Certain Environmental Legislation. 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.
8
<PAGE>
The federal Clean Water Act affects coal mining operations in two principal
ways. First, the U.S. Army Corps of Engineers (the "Corps") issues permits
under Section 404 of the Clean Water Act whenever a mine operator proposes to
build a fill or impoundment in waters of the United States. In addition, the
Environmental Protection Agency (the "EPA") must approve the issuance by a
state agency of National Pollutant Discharge Elimination System ("NPDES")
permits under Section 402 of the Clean Water Act. 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 the federal
regulations thereunder 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 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.
Certain Health and Safety Legislation. 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 that commenced in 1995 from the Abandoned Mine Lands Fund (funded by
a federal tax on coal production).
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. See
"Part 1. Item 3. Legal Proceedings."
Employees
As of January 31, 2000, the Company and its subsidiaries (including Canyon
Fuel) employed a total of 3,764 persons (including 19 part-time employees),
623 of whom were represented by the UMWA under a collective bargaining
agreement that expires in 2002.
9
<PAGE>
EXECUTIVE OFFICERS
The following is a list of the Company's executive officers, their ages and
their positions and offices held with the Company during the last five years.
Bradley M. Allbritten, 42, is Vice President--Human Resources of the
Company and has served in such capacity since March 1, 2000. Mr. Allbritten
served as the Company's Director of Human Resources from February 1999 through
February 2000.
C. Henry Besten, Jr., 51, is Vice President--Strategic Marketing of the
Company and President of the Company's Arch Energy Resources, Inc. subsidiary
and has served in such capacities since July 1997. Mr. Besten is also serving
as Chief Financial Officer of the Company, on an interim basis, until the
Company names a permanent Chief Financial Officer. During the past five years,
Mr. Besten has also served as Senior Vice President--Marketing for Ashland
Coal, Inc., ("Ashland Coal"), which merged with a subsidiary of the Company in
July 1997.
John W. Eaves, 42, is Senior Vice President--Marketing of the Company and
President of the Company's Arch Coal Sales Company, Inc. and has served in
such capacities from March 1, 2000 and September 1995, respectively. Mr. Eaves
served as Vice President--Marketing of the Company from July 1997 through
February 2000.
Robert G. Jones, 43, is Vice President--Law & General Counsel of the
Company and has served in such capacity since March 1, 2000. Mr. Jones served
the Company as Assistant General Counsel from July 1997 through February 2000
and as Senior Counsel from August 1993 to July 1997.
Steven F. Leer, 47, is President and Chief Executive Officer of the Company
and has served in such capacity since 1992.
Terry L. O'Connor, 54, is Vice President--External Affairs of the Company
and has served in such capacity since June 1998.
David B. Peugh, 45, is Vice President--Business Development of the Company
and has served in such capacity since 1993.
Robert W. Shanks, 46, is Vice President--Operations of the Company and has
served in such capacity since July 1997. During the past five years, Mr.
Shanks has also served as President of the Company's Apogee Coal Company
subsidiary.
Kenneth G. Woodring, 50, is Executive Vice President--Mining Operations of
the Company and has served in such capacity since July 1997. During the past
five years, Mr. Woodring has also served as Senior Vice President--Operations
of Ashland Coal.
ITEM 2. PROPERTIES
Arch Coal and its operating subsidiaries (other than Canyon Fuel, the
results of operations of which are accounted for using the equity method) sold
111.2 million tons of coal in the twelve months ended December 31, 1999, as
compared to 81.1 and 40.5 million tons sold in the twelve months ended
December 31, 1998 and 1997, respectively. The growth in tons sold is due to
the Ashland Coal, Inc. merger which was effective July 1, 1997 and the Arch
Western transaction which was effective June 1, 1998. Of the total tonnage
sold in the twelve months ended December 31, 1999, approximately 82% was sold
under long-term contracts, as compared to 76% and 72% for the twelve months
ended December 31, 1998 and 1997, respectively, with the balance being sold on
the spot market. In the twelve months ended December 31, 1999, Arch Coal and
its operating subsidiaries (excluding Canyon Fuel) sold 3.5 million tons of
coal in the export market, compared to 3.7 and 1.9 million tons in the twelve
months ended December 31, 1998 and 1997, respectively.
10
<PAGE>
The Company estimates that as of December 31, 1999 it owned or controlled
measured (proven) and indicated (probable) coal reserves of approximately 3.5
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.
Recoverable Coal:
<TABLE>
<CAPTION>
Measured Indicated Total
-------- --------- -------
(thousands of tons)
<S> <C> <C> <C>
Wyoming.............................................. 1,430.6 24.3 1,454.9
Central Appalachia................................... 913.7 418.0 1,331.7
Illinois............................................. 218.2 80.8 299.0
Utah*................................................ 159.4 73.3 232.7
Colorado............................................. 118.0 23.2 141.2
------- ----- -------
Total................................................ 2,839.9 619.6 3,459.5
======= ===== =======
</TABLE>
- --------
* Represents 100% of the reserves held by Canyon Fuel
The Company's coal properties are either owned outright or controlled by
lease. As of December 31, 1999, the Company's subsidiaries owned, or
controlled primarily through long-term leases, approximately 106,000, 57,000
and 15,000 acres of coal lands in Wyoming, Utah and Colorado, respectively;
273,000, 101,000 and 10,000 acres of coal lands in West Virginia, Eastern
Kentucky, and Virginia, respectively; and 102,000 acres of coal lands in the
Illinois Basin.
Approximately 92,201 acres of the Company's 664,000 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. The majority of the significant leases are on a
percentage royalty basis. The terms of most of these leases extend 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. 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.
11
<PAGE>
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 69% consist of compliance coal while an
additional 21% 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 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, 1999
(which does not include the Company's 65% share of Canyon Fuel) was $916.6
million, consisting of $1.3 million of prepaid royalties included in current
assets and $915.3 million 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
Dal-Tex Litigation. On July 16, 1998, ten individuals and The West Virginia
Highlands Conservancy filed suit in U.S. District Court for the Southern
District of West Virginia against the director of the West Virginia DEP and
officials of the Corps alleging violations of SMCRA and the Clean Water Act.
The plaintiffs alleged that the West Virginia DEP and the Corps have violated
their duties under SMCRA and the Clean Water Act by authorizing the
construction of "valley fills" under certain surface coal mining permits.
These fills are the large, engineered works into which the excess earth and
rock extracted above and between the seams of coal that are removed during
surface mining are placed. The plaintiffs also alleged that the West Virginia
DEP has failed to require (i) that lands mined are restored to "approximate
original contour" and (ii) that approved post-mining land uses are enforced
following reclamation.
Four indirect, wholly owned subsidiaries of the Company hold nine permits
that were identified in the complaint as violating the legal standards that
the plaintiffs requested the district court interpret. In addition, a pending
permit application for the Company's Dal-Tex operation (known as the "Spruce
Fork Permit") was specifically identified as a permit the issuance of which
should be enjoined. Three subsidiaries of the Company intervened in the
lawsuit in support of the Corps and the West Virginia DEP on August 6, 1998.
12
<PAGE>
A partial settlement between the plaintiffs and the Corps was reached on
December 23, 1998. Pursuant to that settlement, all claims were dismissed
against the Corps for its alleged failure to execute its duties under the
Clean Water Act. The settlement agreement reached between the Corps and the
plaintiffs requires the preparation of a programmatic environmental impact
statement (an "EIS") under the National Environmental Policy Act of 1969
("NEPA") to evaluate the environmental effects of mountaintop mining. This EIS
is scheduled to be completed by January 2001. Until it is completed, any
proposed fill greater than 250 acres in size must secure an individual Clean
Water Act Section 404 "dredge and fill" permit, instead of a general permit
like the one the Corps indicated it would issue for the Dal-Tex operation
under its nationwide authorization program. The Spruce Fork Permit was not
included in the settlement, and the claims against the Corps with respect to
that permit were not dismissed.
On March 3, 1999, the district court issued a preliminary injunction which
prohibited the Corps from issuing a general Clean Water Act Section 404 dredge
and fill permit for the Dal-Tex operation and enjoined the Company from future
operations on the permit until a full trial on the merits could be held. As a
result of the entry of the preliminary injunction, the Company idled the Dal-
Tex mine on July 23, 1999.
On July 26, 1999, the plaintiffs and the West Virginia DEP tendered to the
district court a proposed consent decree which would resolve most of the
remaining issues in the case. Pursuant to the proposed consent decree, the
West Virginia DEP agreed in principal to amend its regulations and procedures
to correct alleged deficiencies. In addition, the parties agreed in principal
on a new definition of approximate original contour as it applies to
mountaintop mining, as well as to certain regulatory changes involving post-
mining land uses. After inviting public comment of the proposed consent
decree, the court entered the consent decree in a final order on February 17,
2000.
The Company's Hobet Mining subsidiary agreed as part of the consent decree
to revise portions of its Spruce Fork Permit application to conform to the new
definition of approximate original contour to be adopted by the West Virginia
DEP. Hobet Mining also agreed to seek an individual Clean Water Act Section
404 dredge and fill permit from the Corps as part of its future mining
operation. Before issuing that permit, the Corps must first complete an EIS to
comply with the provisions of NEPA. The completion of this EIS and issuance of
all permits are not expected until mid-2001 at the earliest.
The plaintiffs' allegation that the West Virginia DEP violated its duties
under the Clean Water Act by authorizing the construction of valley fills
under certain coal mining permits was not resolved by the consent decree. On
October 20, 1999, the district court entered a permanent injunction against
the West Virginia DEP prohibiting the issuance of any new permits that
authorize the construction of valley fills as part of mining operations. The
court concluded that the excess earth and rock that is placed in a valley fill
during mining is not fill material, but rather is waste, which may not be
placed in intermittent and perennial streams because the disposal of such
material cannot meet applicable water quality standards.
The West Virginia DEP immediately complied with the district court's
injunction by issuing an administrative order banning the expansion of nearly
all existing valley fills as well as prohibiting the issuance of nearly all
new permits for valley fills. The West Virginia DEP also filed an appeal of
the district court's decision with the U.S. Court of Appeals for the Fourth
Circuit. On October 29, 1999, the district court granted a stay of its
decision, pending the outcome of the appeal. The West Virginia DEP rescinded
its administrative order on November 1, 1999 in response to the district
court's action.
It is impossible to predict the outcome of the West Virginia DEP's appeal.
If, however, the district court's decision is upheld, the Company and other
coal producers may be forced to close all or a portion of their mining
operations in West Virginia because of the prohibition on constructing valley
fills for their existing and future mines. Regardless of the outcome of the
appeal, the Company determined that significant changes were necessary in the
manner and extent in which certain central Appalachia coal assets would be
deployed.
13
<PAGE>
Cumulative Hydrologic Impact Assessment ("CHIA") Litigation. On January 20,
2000, two environmental organizations, the Ohio Valley Environmental Coalition
and the Hominy Creek Watershed Association, filed suit against the West
Virginia DEP in U.S. District Court in Huntington, West Virginia. In addition
to allegations that the West Virginia DEP violated state law and provisions of
the Clean Water Act, the plaintiffs allege that the West Virginia DEP's
issuance of permits for surface and underground coal mining has violated
certain non-discretionary duties mandated by SMCRA. Specifically, the
plaintiffs allege that the West Virginia DEP has failed to require coal
operators seeking permits (i) to conduct water monitoring to verify stream
flows and ascertain water quality, (ii) to always include certain water
quality information in their permit applications and (iii) to analyze the
probable hydrologic consequences of their operations. The plaintiffs also
allege that the West Virginia DEP has failed to analyze the cumulative
hydrologic impacts of mining operations on specific watersheds.
The plaintiffs seek an injunction to prohibit the West Virginia DEP from
issuing any new permits which fail to comply with all of the elements
identified in their complaint. The complaint identifies, and seeks to enjoin,
three pending permits that are sought by the Company's Mingo Logan subsidiary
to continue existing surface mining operations at the Phoenix reserve. If the
permits are not issued, it is possible that those operations will have to be
suspended by the subsidiary early in 2001. On February 17, 2000, the West
Virginia DEP filed a motion to dismiss all claims in the lawsuit. Depending
upon the disposition of the motion, the Mingo Logan subsidiary may choose to
intervene in the matter.
It is impossible to predict whether this litigation will result in a
suspension of the affected surface mining operations. If, however, the
operations are suspended, the Company's financial condition and results of
operations could be adversely affected and, depending upon the length of the
suspension, the effect could be material.
Lone Mountain Litigation. 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 the discharge of
approximately 6.3 million gallons of water and fine coal slurry into a
tributary of the Powell River in Lee County, Virginia.
The U.S. Department of the Interior has notified the Company that it
intends to file a civil action under the Clean Water Act and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") to recover
the natural resource damages suffered as a result of the discharge. The
Interior Department alleges that fresh water mussels listed on the federal
Endangered Species List that reside in the Powell River were affected as a
consequence of the discharge. The Company and the Interior Department have
reached an agreement in principal to settle this matter, which would require a
payment of $2.5 million by the Company. The settlement is subject to the
Company and the Interior Department entering into a definitive agreement. The
Company's consolidated balance sheet as of December 31, 1999 reflects a
reserve for the full amount of this settlement.
Skyline Partners Litigation. In February 2000, Canyon Fuel and Skyline
Partners entered into a definitive settlement agreement to settle the
litigation between them. The settlement included a $7.2 million payment by
Canyon Fuel to Skyline Partners representing disputed amounts of advance
minimum royalties, interest, reimbursement of legal fees, a grant of an
overriding royalty interest to Skyline Partners covering land adjacent to the
Skyline Mine reserves and a reduction in the total amount of advance minimum
royalties available for recoupment by Canyon Fuel.
Other Litigation. 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-1980s, of fluids containing small quantities of
polychlorinated biphenyls ("PCBs") to a company authorized to engage in the
processing and disposal of these wastes. Some of these waste materials were
sent to one of the sites for final disposal. The Company responded to the
information request submitted by the EPA on December 1, 1997. Any liability
which might be asserted by the EPA against the Company is not believed to be
material because of the de minimis quantity and concentration of PCBs linked
to the Company. Moreover, the party with which the subsidiary contracted to
dispose of the waste material has agreed to indemnify the Company for any
costs associated with this action.
14
<PAGE>
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 1999.
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 1999
Annual Report to Stockholders under the caption "Stockholder Information" and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is contained in the Company's 1999
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 1999
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis," 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 1999
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis," 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
None.
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" in the Company's Proxy
Statement to be distributed to Company stockholders in connection with the
Company's 2000 Annual Meeting (the "2000 Proxy Statement"). See also the list
of the Company's executive officers and related information under "Executive
Officers" in Part I, Item 1. herein.
15
<PAGE>
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 and Retention Agreements
section, the Compensation of Directors section, and the Compensation Committee
Interlocks and Insider Participation section in the Company's 2000 Proxy
Statement. No portion of the Personnel and Compensation Committee Report on
Executive Compensation for 1999 or the Arch Coal Performance Graph is
incorporated herein in reliance on Regulation S-K, Item 402(a)(8).
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" in the Company's 2000 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" in the Company's 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Arch Coal, Inc.
and subsidiaries included in the Company's 1999 Annual Report to Stockholders
are incorporated by reference:
Consolidated Statements of Operations--Years Ended December 31, 1999,
1998 and 1997
Consolidated Balance Sheets--December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows--Years Ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
The following financial statements of Canyon Fuel Company, LLC are
incorporated by reference to Exhibit 99 to this Annual Report on Form
10-K:
Statements of Income--Years Ended December 31, 1999 and 1998 and the
period from December 20, 1996 (inception) through December 31, 1997
Balance Sheets--December 31, 1999 and 1998
Statements of Members' Equity--Years Ended December 31, 1999 and 1998 and
the period from December 20, 1996 (inception) through December 31, 1997
Statements of Cash Flows--Years Ended December 31, 1999 and 1998 and 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 25.
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.
16
<PAGE>
(a)(3) Exhibits filed as part of this Report are as follows:
<TABLE>
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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)
<CAPTION>
<C> <S> <C>
4.1 Stockholders Agreement, dated as of April 4, 1997, among
Carboex International, Ltd., Ashland Inc. and Arch Coal,
Inc. (formerly Arch Mineral Corporation) (incorporated
herein by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-4 (Registration No.
333-28149) filed on May 30, 1997)
4.2 Assignment of Rights, Obligations and Liabilities under
the Stockholders Agreement between Carboex International,
Limited and Carboex, S.A. effective as of October 15, 1998
(incorporated herein by reference to Exhibit 4.2 of the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998)
4.3 Registration Rights Agreement, dated as of April 4, 1997,
among Arch Coal, Inc. (formerly Arch Mineral Corporation),
Ashland Inc., Carboex International, Ltd. and the entities
listed on Schedules I and II thereto (incorporated herein
by reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-4 (Registration No. 333-28149) filed
on May 30, 1997)
4.4 Assignment of Registration Rights between Carboex
International, Limited and Carboex, S.A. effective as of
October 15, 1998 (incorporated herein by reference to
Exhibit 4.4 of the Company's Annual Report on Form 10-K
for the Year Ended December 31, 1998)
4.5 Agreement Relating to Nonvoting Observer, executed as of
April 4, 1997, among Carboex International, Ltd., Ashland
Inc., Ashland Coal, Inc. and Arch Coal, Inc. (formerly
Arch Mineral Corporation) (incorporated herein by
reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-4 (Registration No. 333-28149) filed
on May 30, 1997)
4.6 Assignment of Right to Maintain a Non-Voting Observer at
Meetings of the Board of Directors of Arch Coal, Inc.
between Carboex International, Limited and Carboex, S.A.
effective as of October 15, 1998 (incorporated herein by
reference to Exhibit 4.6 of the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1998)
4.7 Agreement for Termination of the Arch Mineral Corporation
Voting Agreement and for Nomination of Directors, dated as
of April 4, 1997, among Hunt Coal Corporation, Petro-Hunt,
L.L.C., 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>
17
<PAGE>
<TABLE>
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4.8 $600,000,000 Revolving Credit Facility, $300,000,000 Term
Loan Credit Agreement by and among Arch Coal, Inc., the
Lenders party thereto, PNC Bank, National Association, as
Administrative Agent, Morgan Guaranty Trust Company of New
York, as Syndication Agent, and First Union National Bank,
as Documentation Agent, dated as of June 1, 1998
(incorporated herein by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K filed June 15, 1998)
4.9 Amendment 1 to 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
January 21, 2000 (filed herewith)
4.10 $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)
<CAPTION>
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4.11 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)
4.12 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)
4.13 Form of Rights Agreement, dated March 3, 2000, between
Arch Coal, Inc. and First Chicago Trust Company of New
York, as Rights Agent (incorporated herein by reference to
Exhibit 1 to a current report on Form 8-A filed on March
9, 2000)
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)
</TABLE>
18
<PAGE>
<TABLE>
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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)
<CAPTION>
<C> <S> <C>
10.7 Lease between Little Coal Land Company and Ashland Land &
Development Co., a wholly-owned subsidiary of Ashland
Coal, Inc. 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>
19
<PAGE>
<TABLE>
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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)
</TABLE>
<TABLE>
<CAPTION>
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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 (incorporated herein by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1998)
10.18 Federal Coal Lease between the United States Department of
the Interior and Utah Fuel Company (incorporated herein by
reference to Exhibit 10.18 of the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1998)
10.19 Federal Coal Lease dated as of July 19, 1997 between the
United States Department of the Interior and Canyon Fuel
Company, LLC (incorporated herein by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1998)
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 (incorporated herein by
reference to Exhibit 10.20 of the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1998)
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 (incorporated herein by
reference to Exhibit 10.21 of the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1998)
10.22 Federal Coal Lease effective as of May 1, 1995 between the
United States Department of the Interior and Mountain Coal
Company (incorporated herein by reference to Exhibit 10.22
of the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1998)
</TABLE>
20
<PAGE>
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10.23 Federal Coal Lease dated as of January 1, 1999 between the
Department of the Interior and Ark Land Company
(incorporated herein by reference to Exhibit 10.23 of the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998)
10.24 Federal Coal Lease dated as of October 1, 1999 between the
United States Department of the Interior and Canyon Fuel
Company, LLC (incorporated herein by reference to Exhibit
10 of the Company's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1999)
10.25 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)
10.26 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)
10.27 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)
10.28 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)
<CAPTION>
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10.29 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)
10.30 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)
10.31 Arch Coal, Inc. Outside Directors' Deferred Compensation
Plan effective January 1, 1999 (incorporated herein by
reference to Exhibit 10.30 of the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1998)
10.32 Second Amendment to the Arch Mineral Corporation
Supplemental Retirement Plan effective January 1, 1998
(incorporated herein by reference to Exhibit 10.31 of the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998)
13 Portions of the Company's Annual Report to Stockholders
for the year ended December 31, 1999 (filed herewith)
18 Preferability Letter of Ernst & Young LLP dated May 11,
1999 (incorporated herein by reference to Exhibit 18 of
the Company's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1999)
21 Subsidiaries of the Company (filed herewith)
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23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 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)
</TABLE>
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21
<PAGE>
*Exhibits 10.27, 10.28, 10.29, 10.30 and 10.32 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.
(b) Reports on Form 8-K
A report on Form 8-K dated October 7, 1999 (confirming (i) the Company's
receipt of a proposal from Ashland Inc. that contemplates a tax-free spin-
off of Ashland's interest in the Company and (ii) that a Special Committee
of the Company's Board of Directors is in discussions with Ashland
concerning such proposal) was filed by the Company in the quarter ended
December 31, 1999.
22
<PAGE>
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)
/s/ John W. Lorson
By: _________________________________
John W. Lorson
Controller (Chief Accounting
Officer)
Date: March 16, 2000
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 16, 2000.
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Signature Capacity
--------- --------
<S> <C>
/s/ Steven F. Leer President and Chief Executive Officer and
___________________________________________ Director
Steven F. Leer
/s/ John W. Lorson Controller (Chief Accounting Officer)
___________________________________________
John W. Lorson
* Director
___________________________________________
Philip W. Block
* Director
___________________________________________
James R. Boyd
* Director
___________________________________________
Paul W. Chellgren
Director
___________________________________________
Ignacio Dominguez Urquijo
* Director
___________________________________________
Thomas L. Feazell
* Director
___________________________________________
Robert L. Hintz
* Director
___________________________________________
Douglas H. Hunt
* Director
___________________________________________
James L. Parker
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Director
___________________________________________
A. Michael Perry
* Director
___________________________________________
J. Marvin Quin
* Director
___________________________________________
Theodore D. Sands
</TABLE>
Robert G. Jones
*By: ________________________________
Robert G. Jones
As Attorney-in-fact
ORIGINAL POWERS OF ATTORNEY AUTHORIZING STEVEN F. LEER AND ROBERT G. JONES,
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.
24
<PAGE>
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,
1999
Reserves Deducted from
Asset Accounts
Property, Plant, and
Equipment.......... $ -- $ -- $ -- $ -- $ --
Other Assets--Other
Notes and Accounts
Receivable......... 582 325 366 -- 541
Current Assets--
Supplies Inventory. 23,901 5,966 6,325 -- 23,542
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
</TABLE>
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(/1/Reserves)utilized, unless otherwise indicated.
(/2/Balances)acquired in the Arch Western transaction and Ashland Coal merger.
25
<PAGE>
EXHIBIT 4.9
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This Amendment No. 1 to Credit Agreement (the "Amendment") is dated as of
January 21, 2000 and is made by and among ARCH COAL, INC., a Delaware
corporation (the "Borrower"), the LENDERS party to the Credit Agreement (as
hereinafter defined), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, in its capacity
as Syndication Agent, FIRST UNION NATIONAL BANK, in its capacity as
Documentation Agent and PNC BANK, NATIONAL ASSOCIATION, in its capacity as
Administrative Agent (the Syndication Agent, Documentation Agent and
Administrative Agent are hereinafter collectively referred to as the "Agents").
WHEREAS, the parties hereto are parties to that certain Credit Agreement
dated as of June 1, 1998 (the "Credit Agreement"), pursuant to which the Lenders
provided a $600,000,000 revolving credit facility and a $300,000,000 term loan
facility to the Borrower (the outstanding amount of such term loan facility as
of the date hereof being $135,000,000); and
WHEREAS, the Borrower, the Lenders and the Agents desire to amend the
Credit Agreement as hereinafter provided.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. Definitions.
Defined terms used herein unless otherwise defined herein shall have
the meanings ascribed to them in the Credit Agreement, as amended by this
Amendment.
2. Amendments to Credit Agreement.
(a) Section 1.1 [Certain Definitions] of the Credit Agreement is
hereby amended by the addition of the following new definitions:
"Apogee Synthetic Lease shall mean the lease dated as of January
15, 1998 among Apogee Coal Company, Catenary Coal Company, Hobet Mining, Inc.,
collectively as Lessees, First Security Bank, National Association, as Lessor,
and certain other Persons listed therein, as Certificate Purchasers, as amended
by the Omnibus Amendment Agreement, dated as of June 1, 1998."
"Collateral shall mean the Pledged Collateral, the UCC
Collateral, the Intellectual Property Collateral and the Real Property."
-1-
<PAGE>
"Collateral Documents shall mean collectively, the Indemnity
Agreements, the Mortgages, the Pledge Agreements, the Security Agreements, the
Patent, Trademark and Copyright Assignments, the Intercreditor Agreements and
each other agreement providing for a security interest in and/or lien on the
Collateral."
"Environmental Complaint shall mean any written complaint by any
Person or Official Body setting forth a cause of action for personal injury or
property damage, natural resource damage, contribution or indemnity for response
costs, civil or administrative penalties, criminal fines or penalties, or
declaratory or equitable relief arising under any Environmental Laws or any
order, notice of violation, citation, subpoena, request for information or other
written notice or demand of any type issued by an Official Body pursuant to any
Environmental Laws."
"Environmental Condition shall mean any conditions of the
environment, including the workplace, the ocean, natural resources (including
flora or fauna), soil, surface, water groundwater, any actual or potential
drinking water supply sources, substrata or the ambient air, relating to or
arising out of, or caused by, the use, handling, storage, treatment, recycling,
generation, transportation, release, spilling, leaking, pumping, emptying,
discharging, injecting, escaping, leaching, disposal, dumping, threatened
release or other management or mismanagement of Regulated Substances resulting
from the use of, or operations on, any owned or leased real property of the
Borrower or any Subsidiary."
"First Amendment Effective Date shall mean January 21, 2000,
which is the effective date of Amendment No. 1 to the Credit Agreement."
"Hobet Dragline Lease shall mean the lease dated as of March 1,
1983, between Kanawha Valley Bank, N.A., as Owner Trustee, Lessor, and Hobet
Mining & Construction Co., Inc., as Lessee, as amended through the Sixth
Amendment thereto, dated as of June 1, 1998."
"Indemnity Agreements shall mean collectively the Indemnity
Agreements with respect to the Real Property subject to a Mortgage, in form and
substance acceptable to the Administrative Agent, executed and delivered by each
of the applicable Loan Parties to the Administrative Agent for the benefit of
the Lenders, and Indemnity Agreement shall mean any of the Indemnity
Agreements."
"Intellectual Property Collateral shall mean all of the property
described in the Patent, Trademark and Copyright Assignments."
"Intercreditor Agreements shall mean collectively the
Intercreditor Agreements in form and substance acceptable to the Administrative
Agent, and Intercreditor Agreement shall mean any of the Intercreditor
Agreements."
-2-
<PAGE>
"Mortgages shall mean collectively all of the mortgages and
leasehold mortgages in form and substance acceptable to the Administrative
Agent, with respect to certain Real Property of the Borrower and its Significant
Subsidiaries, executed and delivered by Borrower and each other applicable Loan
Party to the Administrative Agent for the benefit of the Lenders, and Mortgage
shall mean any of the Mortgages."
"Patent, Trademark and Copyright Assignments shall mean
collectively the Patent, Trademark and Copyright Collateral Assignments in form
and substance acceptable to the Administrative Agent, executed and delivered by
each of the Loan Parties to the Administrative Agent for the benefit of the
Lenders, and Patent Trademark and Copyright Assignment shall mean any of the
Patent Trademark and Copyright Assignments."
"Pledge Agreements shall mean collectively the Pledge Agreements
in form and substance acceptable to the Administrative Agent, as executed and
delivered by the applicable Loan Parties to the Administrative Agent for the
benefit of the Lenders, and Pledge Agreement shall mean any of the Pledge
Agreements."
"Pledged Collateral shall mean the property of the applicable
Loan Parties in which security interests are to be granted under the Pledge
Agreements."
"Prior Security Interest shall mean a valid and enforceable
perfected first-priority security interest under the Uniform Commercial Code in
the UCC Collateral and the Pledged Collateral which is subject only to Liens for
taxes not yet due and payable to the extent such prospective tax payments are
given priority by statute or, in the case of the UCC Collateral, Purchase Money
Security Interests as permitted hereunder."
"Real Property shall mean the real estate owned or leased by
certain of the Loan Parties, which is encumbered by the Mortgages."
"Security Agreements shall mean collectively the Security
Agreements in form and substance acceptable to the Administrative Agent,
executed and delivered by each of the applicable Loan Parties to the
Administrative Agent for the benefit of the Lenders and Security Agreement shall
mean any of the Security Agreements."
"Subordination Agreement shall mean the Subordination Agreement
(Intercompany) in form and substance acceptable to the Administrative Agent
executed and delivered by each Loan Party to the Administrative Agent for the
benefit of the Lenders."
"UCC Collateral shall mean the property of the Loan Parties in
which security interests are to be granted under the Security Agreements."
"Uniform Commercial Code shall have the meaning assigned to that
term in Section 5.1.24."
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<PAGE>
(b) The definitions of Base Net Worth, Guaranty Agreement and Loan
Documents contained in Section 1.1 [Certain Definitions] of the Credit Agreement
are hereby amended and restated in their entirety as follows:
"Base Net Worth shall mean the sum of $163,000,000, plus 50% of
consolidated net income of the Borrower and its Subsidiaries (before the after-
tax effect of changes in accounting principles) for each fiscal quarter in which
net income was earned plus 80% of the net increase in Consolidated Tangible Net
Worth resulting from the issuance of any equity securities by the Borrower, for
the period from January 1, 2000 through the date of determination. In no event
shall Base Net Worth be reduced on account of a consolidated net loss for any
fiscal period."
"Guaranty Agreement shall mean the continuing Guaranty and
Suretyship Agreement in substantially the form of Exhibit 1.1(G)(2) executed and
delivered by each of the Guarantors to the Administrative Agent for the benefit
of the Lenders, as such agreement may be amended, restated, supplemented or
replaced from time to, with such amendment, restatement, supplement or
replacement to be in form and substance satisfactory to the Administrative
Agent."
"Loan Documents shall mean this Agreement, the Administrative
Agent's Letter, the Guaranty Agreement, the Notes, the Pledge Agreements, the
Mortgages, the Security Agreements, the Indemnity Agreements, the Intercreditor
Agreements, the Patent, Trademark and Copyright Assignment, Subordination
Agreement, and any other instruments, certificates or documents delivered or
contemplated to the delivered hereunder or thereunder or in connection herewith
or therewith as the same may be supplemented, amended, modified, restated or
replaced from time to time in accordance herewith or therewith, and Loan
Document shall mean any of the Loan Documents."
(c) Section 4.4.5 [Mandatory Prepayment Upon Issuance of Certain Debt
and Certain Equity] is hereby amended and restated in its entirety as follows:
"4.4.5 Mandatory Prepayment Upon Issuance of Certain Debt and
Certain Equity; Mandatory Reduction of Revolving Credit
Commitments.
Within five (5) Business Days of the issuance by the Borrower or
any Subsidiary of the Borrower (other than Excluded Subsidiaries), of any debt
or equity securities for cash proceeds (including any hybrid equity securities),
the Borrower shall make a mandatory prepayment of principal on the Term Loans
equal to 100% of the Net Cash Proceeds of any debt securities and equal to 50%
of the Net Cash Proceeds of any equity securities (each a "Mandatory
Prepayment"). Each Mandatory Prepayment first shall be applied to payment in
full of the principal amount of the Term Loans by application to the unpaid
installments of principal in the
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<PAGE>
inverse order of scheduled maturities and second to the payment of the principal
amount of the Revolving Credit Loans (with the Revolving Credit Commitments
automatically and permanently reduced simultaneously with and in an amount equal
to the amount of Revolving Credit Loans prepaid), provided, however that the
Revolving Credit Commitments shall not be required to be reduced below
$150,000,000 with respect to prepayments pursuant to this Section 4.4.5. Any
prepayment hereunder shall be subject to the Borrower's Obligation to indemnify
the Banks under Section 4.5.2 [Indemnity]. If the Borrower's senior unsecured
long-term debt, on a consolidated basis, is rated Investment Grade, then at any
time thereafter when the Borrower issues debt or equity securities if the senior
unsecured long-term debt of the Borrower is rated, as of the date of issuance of
such debt or equity securities, by either Moody's at Baa3 or better or Standard
& Poor's at BBB- or better, no Mandatory Prepayment pursuant to this Section
4.4.5 will be required to be made."
(d) Section 4.4.6 [Mandatory Prepayment Upon Sale of Assets.] is
hereby amended and restated in its entirety as follows:
"4.4.6 Mandatory Prepayment Upon Sale of Assets, Mandatory
Reduction of Revolving Credit Commitments.
Within five (5) Business Days of any sale of assets by any member
of the Arch Coal Group authorized by Section 7.2.4(v) [Disposition of Assets or
Subsidiaries], the Borrower shall make a mandatory prepayment in an amount equal
to the Net Cash Proceeds of such sale (as estimated in good faith by the
Borrower), with such prepayment to be applied first, to payment in full of the
principal amount of the Term Loans by application to the unpaid installments of
principal in the inverse order of scheduled maturities and second to the payment
of the principal amount of the Revolving Credit Loans (with the Revolving Credit
Commitments automatically and permanently reduced simultaneously with and in an
amount equal to the amount of Revolving Credit Loans prepaid), in either case,
together with accrued interest on such principal amount, provided, however that
the Revolving Credit Commitments shall not be required to be reduced below
$150,000,000 with respect to prepayments pursuant to this Section 4.4.6.. Any
prepayment hereunder shall be subject to the Borrower's Obligation to indemnify
the Banks under Section 4.5.2 [Indemnity]. If the Borrower's senior unsecured
long-term debt, on a consolidated basis, is rated Investment Grade, then at any
time thereafter when any member of the Arch Coal Group sells assets in
accordance with Section 7.2.4(v), if the senior unsecured long-term debt of the
Borrower is rated, as of the date of such asset sale, by either Moody's at Baa3
or better or by Standards & Poor's at BBB- or better, no prepayment pursuant to
this Section 4.4.6 will be required to be made."
(e) The first sentence of Section 5.1.6 [Litigation] is hereby amended
and restated in its entirety as follows:
"Except as set forth on Schedule 5.1.6, there are no actions,
suits, proceedings or investigations pending or, to the knowledge of any Loan
Party, threatened against
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<PAGE>
such Loan Party or any Subsidiary of such Loan Party at law or equity before any
Official Body which individually or in the aggregate could reasonably be
expected to result in a Material Adverse Change."
(f) The second sentence of clause (ii)(a) [Accuracy of Financial
Statements] of Section 5.1.7 [Financial Statements] is hereby amended and
restated in its entirety as follows:
"Since December 31, 1997, no Material Adverse Change has
occurred, except as set forth on Schedule 5.1.7."
(g) Section 5.1.18 [Environmental Matters] is hereby amended and
restated in its entirety as follows:
"5.1.18 Environmental Matters.
Except as set forth on Schedule 5.1.18:
(a) the Loan Parties and their Subsidiaries are and have been in
substantial compliance with all Environmental Laws, except where the failure to
so comply could not reasonably be expected to result in a Material Adverse
Change;
(b) neither any property of any Loan Party or any Subsidiary of
any Loan Party nor their respective operations conducted thereon violates any
order of any court of governmental authority made pursuant to Environmental Laws
except for noncompliance with respect thereto which could not reasonably be
expected to result in a Material Adverse Change;
(c) there are no threatened or pending Environmental Claims
against any Loan Party or any Subsidiary of any Loan Party which could
reasonably be expected to result in a Material Adverse Change; and
(d) neither any Loan Party nor any Subsidiary of any Loan Party
has received any notice from any governmental or regulatory authority regarding
actual or contingent liability in connection with any release or threatened
release of any Hazardous Substance into the environment which actual or
contingent liability could reasonably be expected to result in a Material
Adverse Change."
(h) The following new Sections 5.1.23 through 5.1.27 are hereby added
to Section 5 [Representations and Warranties] of the Credit Agreement:
"5.1.23 Patents, Trademarks, Copyrights, Licenses, Etc.
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<PAGE>
Each Loan Party and each Subsidiary of each Loan Party owns or
possesses all the material patents, trademarks, service marks, trade names,
copyrights, licenses, registrations and franchises necessary to own and operate
its properties and to carry on its business as presently conducted and planned
to be conducted by such Loan Party or Subsidiary, without known possible,
alleged or actual conflict with the rights of others. All material patents,
trademarks, service marks, trade names, copyrights, licenses, registrations and
franchises of each Loan Party and each Subsidiary of each Loan Party are listed
and described on Schedule 5.1.23.
5.1.24 Security Interests.
The Liens and security interests granted to the Administrative
Agent for the benefit of the Lenders pursuant to the Patent, Trademark and
Copyright Assignment, the Pledge Agreements and the Security Agreements in the
Collateral (other than the Real Property) constitute and will continue to
constitute Prior Security Interests under the Uniform Commercial Code as in
effect in each applicable jurisdiction (the "Uniform Commercial Code") or other
applicable Law entitled to all the rights, benefits and priorities provided by
the Uniform Commercial Code or such Law. Upon the filing of financing statements
relating to said security interests in each office and in each jurisdiction
where required in order to perfect the security interests described above,
taking possession of any stock certificates or other certificates evidencing the
Pledged Collateral and recordation of the Patent, Trademark and Copyright
Assignment in the United States Patent and Trademark Office and United States
Copyright Office, as applicable, all such action as is necessary or advisable to
establish such rights of the Agent will have been taken, and there will be upon
execution and delivery of the Patent, Trademark and Copyright Assignment, the
Pledge Agreements and the Security Agreements, such filings and such taking of
possession, no necessity for any further action in order to preserve, protect
and continue such rights, except the filing of continuation statements with
respect to such financing statements within six months prior to each five-year
anniversary of the filing of such financing statements or within not less than
six months prior to such other longer anniversary date in any jurisdiction (and
the Borrower shall notify the Administrative Agent, in writing if such
anniversary date is other than five years). All filing fees and other expenses
in connection with each such action have been or will be paid by the Borrower.
5.1.25 Mortgage Liens.
The Liens granted to the Administrative Agent for the benefit of
the Lenders pursuant to the Mortgages constitute valid first priority Liens
under applicable law. All such action as will be necessary or advisable to
establish such Liens of the Administrative Agent and their priority as described
in the preceding sentence will be taken at or prior to the time required for
such purpose, and there will be as of the date of execution and delivery of the
Mortgages no necessity for any further action in order to protect, preserve and
continue such Liens and such priority, except for the approval of the U.S.
Bureau of Land Management necessary for the Lenders to exercise their rights and
remedies under the Mortgage for the Thundercloud property.
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<PAGE>
5.1.26 Status of Pledged Collateral.
All the shares of capital stock, Partnership Interests or LLC
Interests included in the Pledged Collateral to be pledged pursuant to the
Pledge Agreements are or will be upon issuance validly issued and nonassessable
and owned beneficially and of record by the pledgor free and clear of any Lien
or restriction on transfer, except as otherwise provided by the Pledge
Agreements and except as the right of the Lenders to dispose of the shares of
capital stock, Partnership Interests or LLC Interests may be limited by the
Securities Act of 1933, as amended, and the regulations promulgated by the SEC
thereunder and by applicable state securities laws. There are no shareholder,
partnership, limited liability company or other agreements or understandings
with respect to the shares of capital stock, Partnership Interests or LLC
Interests included in the Pledged Collateral except for the partnership
agreements and limited liability company agreements described on Schedule
5.1.26. The Loan Parties have delivered true and correct copies of such
partnership agreements and limited liability company agreements to the
Administrative Agent.
5.1.27 Maintenance of Patents and Trademarks
Except as set forth on Schedule 5.1.27, each Loan Party shall,
and shall cause each of its Subsidiaries to, maintain in full force and effect
all patents, trademarks, service marks, trade names, copyrights, licenses and
franchises necessary for the ownership and operation of its properties and
business if the failure so to maintain the same would constitute a Material
Adverse Change."
(i) Section 7.1.3 [Maintenance of Insurance] is hereby amended and
restated in its entirety as follows:
"7.1.3 Maintenance of Insurance.
Each Loan Party shall, and shall cause each of its Subsidiaries
to, insure its properties and assets against loss or damage by fire and such
other insurable hazards as such assets are commonly insured (including fire,
extended coverage, property damage, workers' compensation, public liability and
business interruption insurance) and against other risks (including errors and
omissions) in such amounts as similar properties and assets are insured by
prudent companies in similar circumstances carrying on similar businesses, and
with reputable and financially sound insurers, including self-insurance to the
extent customary. At the request of the Administrative Agent, the Loan Parties
shall deliver to the Administrative Agent and each of the Lenders (x) on each
anniversary of the Closing Date and such other date as the Administrative Agent
shall reasonably request an original certificate of insurance signed by the Loan
Parties' independent insurance broker describing and certifying as to the
existence of the insurance on the Collateral required to be maintained by this
Agreement and the other Loan Documents, together with a copy of the endorsement
described in the next sentence attached to such certificate and (y) from time to
time a summary schedule indicating all insurance then in
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<PAGE>
force with respect to each of the Loan Parties. Such policies of insurance shall
contain special endorsements required by the provisions of the Collateral
Documents and shall be in form and substance acceptable to the Administrative
Agent, including, without limitation, specifying the Collateral Agent as an
additional insured, mortgagee and lender loss payee as its interests may appear,
with the understanding that any obligation imposed upon the insured (including
the liability to pay premiums) shall be the sole obligation of the applicable
Loan Parties and not that of the insured. The applicable Loan Parties shall
notify the Administrative Agent promptly of any occurrence causing a material
loss or decline in value of the Collateral and the estimated (or actual, if
available) amount of such loss or decline. If no Event of Default exists, any
monies received by the Loan Parties constituting insurance proceeds or
condemnation proceeds (pursuant to the Mortgages) may, at the option of the
Borrower (i) be applied by the Borrower to the payment of the Loans in such
manner as the Borrower may reasonably determine, or (ii) be disbursed for the
repair or restoration of such property and/or replacement with other operating
assets. If an Event of Default exists, any monies received by the Loan Parties
or the Administrative Agent constituting insurance proceeds or condemnation
proceeds (pursuant to the Mortgages) may, at the option of the Administrative
Agent, (i) be applied by the Administrative Agent to the payment of the Loans in
such manner as the Administrative Agent may reasonably determine, or (ii) be
disbursed to the applicable Loan Parties on such terms as are deemed appropriate
by the Administrative Agent for the repair, restoration and/or replacement of
property in respect of which such proceeds were received."
(j) Section 7.1 [Affirmative Covenants] is hereby amended to add the
following new Sections 7.1.12 through 7.1.14:
"7.1.12 Execution and Delivery of Collateral Documents.
The Borrower shall, and shall cause each of its Significant
Subsidiaries to use its best efforts to complete the following on or before
March 17, 2000, but if after so endeavoring such matters are not completed by
March 17, 2000, the Borrower shall, and shall cause each of its Significant
Subsidiaries to complete the following as promptly as possible thereafter, but
no later than May 17, 2000:
(a) grant to the Collateral Agent for the benefit of the Lenders
a Prior Security Interest in the accounts receivable, inventory and the material
patents, trademarks and copyrights of the Borrower and each Significant
Subsidiary (other than a pledge of such assets of Apogee Coal Company, a
Delaware corporation), and in the equity interests of the Subsidiaries of the
Borrower set forth on Schedule 7.1.12, including, without limitation, by
executing a Security Agreement, a Pledge Agreement, the Subordination Agreement,
and a Patent, Trademark and Copyright Assignment;
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<PAGE>
(b) cause the Borrower to grant to the Collateral Agent for the
benefit of the Lenders a Prior Security Interest in all of the outstanding
capital stock of AWAC, including, without limitation, by executing a Pledge
Agreement;
(c) as applicable, execute and deliver Mortgages on a first
priority perfected basis and Indemnity Agreements, with respect to the Real
Property set forth on Schedule 7.1.12 hereto;
(d) execute and deliver Intercreditor Agreements (i) required by
any other creditor of the Borrower or any of its Significant Subsidiaries under
the Apogee Synthetic Lease and the Hobet Dragline Lease, (ii) to the extent
necessary for the Borrower and its Significant Subsidiaries to provide the
Collateral to the Collateral Agent in accordance with the requirements of this
Section 7.1.12, and (iii) necessary to share the Collateral on a pro-rata, pari
passu basis with any lender entering into, on a secured basis, any interest rate
swap or similar transaction with the Borrower or any Significant Subsidiary of
the Borrower;
(e) amend, restate, ratify and confirm the Guaranty Agreement to
which such Significant Subsidiary is a party to give effect to the Prior
Security Interest of the Collateral Agent for the benefit of the Lenders in the
Collateral pursuant to the Collateral Documents;
(f) provide such UCC, lien, judgment, and tax lien searches with
respect to the properties and assets of the Borrower and its Significant
Subsidiaries as the Administrative Agent may request, all at the expense of the
Borrower, with all such searches and the results thereof to be in scope, form
and substance satisfactory to the Administrative Agent;
(g) in connection with the granting of the liens and security
interests under the Collateral Documents and the execution, delivery and
performance of the Intercreditor Agreements, provide such opinions of counsel as
the Administrative Agent may request, with such opinions to be satisfactory in
form and substance to the Administrative Agent;
(h) deliver to the Administrative Agent copies of all filing
receipts and acknowledgments issued by any governmental authority to evidence
any recordation or filing necessary to perfect the Lien of the Lenders on the
Collateral or other satisfactory evidence of such recordation and filing,
together with evidence in a form acceptable to the Administrative Agent that
such Lien constitutes a Prior Security Interest for the benefit of the Lenders
and, in the case of the Mortgages, a valid and perfected first priority Lien;
(i) deliver to the Administrative Agent copies of all consents
and approvals of third parties or any Official Body required for the Borrower
and its Significant Subsidiaries to grant the Liens and security interests
required by this Section 7.1.12, other than approvals and consents from the U.S.
Bureau of Land Management necessary for the Lenders to exercise their rights and
remedies with respect to the Mortgage applicable to Borrower's Thundercloud
tract.;
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<PAGE>
(j) make available to the Administrative Agent a list of all Real
Property of the Borrower and its Significant Subsidiaries together with a copy
of all lease agreements with respect to their respective leased Real Property
and make available to the Administrative Agent the books and records of the
Borrower and its Significant Subsidiaries with respect to such Real Property,
including without limitation, copies of any property maps, surveys, title
commitments, title reports, mining permits and title insurance;
(k) deliver to the Administrative Agent a list of all Significant
Subsidiaries of the Borrower specifying the authorized and outstanding equity
interests thereof, the owner of such equity interests, the jurisdiction of
formation thereof, and each jurisdiction where such Significant Subsidiary owns
assets or operates its business;
(l) deliver to the Administrative Agent (i) an original
certificate of insurance signed by the Loan Parties' independent insurance
broker describing and certifying as to the existence of the insurance on the
Collateral required to be maintained by this Agreement and the other Loan
Documents, together with a copy attached thereto of the endorsements required by
the provisions of the Collateral Documents, all in form and substance acceptable
to the Administrative Agent, including, without limitation, an endorsement
specifying the Collateral Agent as an additional insured, mortgagee and lender
loss payee as its interests may appear, and (ii) a summary schedule indicating
all insurance then in force with respect to each of the Loan Parties; and
(m) deliver to the Administrative Agent such reports and
assessments as the Administrative Agent reasonably requests with respect to the
environmental condition of the Loan Parties' and their Significant Subsidiaries'
assets and shall cause an Authorized Officer of the applicable Loan Parties to
deliver to the Administrative Agent, in form and substance satisfactory to the
Administrative Agent, a certificate from the Borrower's General Counsel to the
effect that to his best knowledge, the Loan Parties have made known to the
Administrative Agent all information known to them and their Significant
Subsidiaries concerning material Environmental Conditions and Environmental
Complaints which could reasonably be expected to result in a Material Adverse
Change.
7.1.13 Further Assurances.
Each Loan Party shall, from time to time, at its expense,
faithfully preserve and protect the Collateral Agent's Lien on and Prior
Security Interest in the Collateral as a continuing first priority perfected
Lien, subject only to Permitted Liens, and shall do such other acts and things
as the Administrative Agent or the Collateral Agent in their sole discretion may
deem necessary or advisable from time to time in order to preserve, perfect and
protect the Liens granted under the Loan Documents and to exercise and enforce
its rights and remedies thereunder with respect to the Collateral, including,
without limitation, obtaining necessary approvals and consents from the U.S.
Bureau of Land Management necessary for the Lenders to
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<PAGE>
exercise their rights and remedies with respect to the Mortgage applicable to
Borrower's Thundercloud tract.
7.1.14 Subordination of Intercompany Loans.
Each Loan Party shall cause any intercompany Indebtedness, loans
or advances owed by any Loan Party to any other Loan Party to be subordinated
pursuant to the terms of the Subordination Agreement."
(k) Clause (ii) of Section 7.2.1 [Indebtedness] is hereby amended to
delete "$300,000,000" therein and insert in lieu thereof "$150,000,000".
(l) Section 7.2.2 [Liens] of the Credit Agreement is hereby amended
and restated in its entirety as follows:
"7.2.2 Liens.
The Borrower shall not, and shall not permit AWAC or any member
of the Arch Coal Group to, (i) at any time create, incur, assume or suffer to
exist any Lien on any of its respective property or assets, tangible or
intangible, now owned or hereafter acquired, or agree or become liable to do so,
except Liens in favor of the Collateral Agent for the benefit of the Lenders
under the Loan Documents and, in the case of the Borrower and the Arch Coal
Group, except Permitted Liens so long as the aggregate amount of all payments by
any such Person in respect of all Indebtedness secured by such Permitted Liens
does not at any time exceed five percent (5%) of the total assets of the Arch
Coal Group (exclusive of Investment in the Arch Western Group), as determined
and consolidated in accordance with GAAP; or (ii) at any time, directly or
indirectly, enter into any agreement (other than the Apogee Synthetic Lease and
the Hobet Dragline Lease), understanding or other arrangement which purports to
prohibit or limit in any manner the ability of AWAC or any member of the Arch
Coal Group to grant security interests or Liens with respect to any of its
respective property or assets that have not theretofore been encumbered or made
subject to the grant of a security interest."
(m) Subclause (ii) of Clause (3) of Section 7.2.3 [Liquidations,
Mergers, Consolidations, Acquisitions.] is hereby amended and restated in its
entirety as follows:
"(ii) the business acquired, or the business conducted by the
Person whose ownership interests are being acquired, as applicable, shall be
substantially the same as one or more line or lines of business conducted by the
Loan Parties and shall comply with Section 7.2.7 [Continuation of or Change in
Business], all of the accounts receivable, inventory, owned real property,
material patents, trademarks and copyrights and equity interests of the business
or Person acquired shall be pledged to the Administrative Agent for the benefit
of the Lenders on a first priority perfected basis pursuant to Pledge
Agreements, Mortgages, Security Agreements, Patent, Trademark and Copyright
Assignments, and such other Collateral
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<PAGE>
Documents as are necessary to create a Prior Security Interest in such assets,
to the extent that a Significant Subsidiary is acquired or formed in connection
with or as a result of such acquisition, the Loan Parties shall comply with the
provisions of Section 7.2.6 [Subsidiaries, Partnerships and Joint Ventures] and
Section 10.18 [Joinder of Guarantors], and in connection with such acquisition
and the granting of such Liens and security interests, the Borrower shall
deliver to the Administrative Agent for the benefit of the Lenders such opinions
of counsel, certificates and such other Loan Documents as the Administrative
Agent may reasonably request;"
(n) Clause (c) of subsection (iv) of Section 7.2.4 [Dispositions of
Assets or Subsidiaries.] is hereby amended and restated in its entirety as
follows:
"(c) the aggregate net book value, as determined in accordance
with GAAP, of all assets so sold by the Borrower and its Subsidiaries shall not
exceed in any calendar year $40,000,000;"
(o) Section 7.2.6 [Subsidiaries, Partnership, and Joint Ventures] of
the Credit Agreement is hereby amended and restated in its entirety as follows:
"7.2.6 Subsidiaries, Partnerships and Joint Ventures.
The Borrower shall not, and shall not permit any of its
Subsidiaries to, own or create directly or indirectly any Subsidiaries other
than (i) the Excluded Subsidiaries, (ii) Subsidiaries which are not Significant
Subsidiaries and (iii) any Significant Subsidiary which has joined the Guaranty
Agreement as Guarantor, whose accounts receivable, inventory, owned real
property, material patents, trademarks and copyrights and equity interests owned
in any other Person (other than any member of the Arch Western Group) are
pledged to the Collateral Agent for the benefit of the Lenders on a first
priority perfected basis pursuant to a Security Agreement, Mortgage(s), Patent,
Trademark and Copyright Assignment, and Pledge Agreement, who has executed all
other Loan Documents, who has also delivered to the Administrative Agent such
opinions of counsel and other documents in connection therewith as the
Administrative Agent may reasonably request, and who has caused all of the
issued and outstanding capital stock, partnership interests, member interests or
other equity interest of such Significant Subsidiary that are owned by the
Borrower or another Subsidiary of the Borrower to be pledged on a first priority
perfected basis to the Collateral Agent for the benefit of the Lenders pursuant
to the Pledge Agreement, all in form and substance satisfactory to the
Administrative Agent. Neither the Borrower nor any Subsidiary of the Borrower
shall become or agree to become a general or limited partner in any general or
limited partnership or become a member or manager of, or hold a limited
liability company interest in, a limited liability company, except that (1) the
Loan Parties may make an Investment in a Permitted Joint Venture; provided,
however, that the aggregate permitted Investments in all Permitted Joint
Ventures shall not at any time exceed, for all Loan Parties and their
Subsidiaries, $50,000,000, or (2) the Loan Parties may be general or limited
partners in other Loan Parties or be members or managers of, or hold limited
liability company interests in, other Loan Parties and except that the Borrower
may hold a limited
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<PAGE>
liability company interest in Arch Western and Arch Western may hold limited
liability company interests in its Subsidiaries which are members of the Arch
Western Group."
(p) Section 7.2.9 [Off-Balance Sheet Financing] is hereby amended by
deleting in the first sentence thereof "7.5%" and inserting in lieu thereof
"5%".
(q) Section 7.2.10 [Maximum Leverage Ratio] of the Credit Agreement is
hereby amended and restated in its entirety as follows:
"7.2.10 Maximum Leverage Ratio.
The Borrower shall not at any time permit the Leverage Ratio to
exceed the ratio set forth below for the periods specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through and including
December 31, 1998 4.50 to 1.00
January 1, 1999 through and including
September 30, 2000 4.25 to 1.00
October 1, 2000 through and including
December 31, 2001 4.00 to 1.00
January 1, 2002 and thereafter 3.00 to 1.00"
</TABLE>
(r) Section 7.2.11 [Minimum Fixed Charge Coverage Ratio] is hereby
amended and restated in its entirety as follows:
"7.2.11 Minimum Fixed Charge Coverage Ratio.
The Borrower shall not permit the Fixed Charge Coverage Ratio to
be less than the ratio set forth below for the periods specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through and including
December 31, 1998 2.50 to 1.00
January 1, 1999 through and including
September 30, 2000 2.75 to 1.00
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
October 1, 2000 through and including
December 31, 2000 3.00 to 1.00
January 1, 2001 and thereafter 3.25 to 1.00"
</TABLE>
(s) Section 7.2. [Negative Covenants] is hereby amended to add the
following new Section 7.2.16 [Prohibited Transactions With Respect to AWAC]:
"7.2.16 Prohibited Transactions With Respect to AWAC
The Borrower shall not permit AWAC to: (i) incur any indebtedness or
other obligation or liabilities (whether matured or unmatured, liquidated or
unliquidated, direct or indirect, absolute or contingent, or joint or several);
and (ii) own any asset other than its member interest in Arch Western."
(t) Section 10.18 [Joinder of Guarantors] is hereby amended and
restated in its entirety to read as follows:
"10.18 Joinder of Guarantors.
Any Significant Subsidiary of the Borrower which is required to become
a Guarantor pursuant to Section 7.2.6. [Subsidiaries, Partnerships and Joint
Ventures] shall execute and deliver to the Administrative Agent (i) a Guarantor
Joinder in substantially the form attached hereto as Exhibit 1.1(G)(1) pursuant
to which it shall join as a Guarantor each of the documents to which the
Guarantors are parties; (ii) all of the other Loan Documents required by Section
7.2.6, and (iii) documents in the forms described in Section 6.1 [First Loans
and Letters of Credit] modified as appropriate to relate to such Subsidiary."
(u) Schedule 1.1(A) Part A- Pricing Grid of the Credit Agreement is
hereby amended and restated in its entirety as set forth on the schedule titled
as Schedule 1.1(A) Part A attached hereto.
(v) Schedule 1.1(B) of the Credit Agreement [Commitments of Banks and
Addresses for Notices] is hereby amended and restated in its entirety as set
forth on the schedule titled as Schedule 1.1(B) attached hereto.
(w) Exhibit 7.3.3 of the Credit Agreement [Quarterly Compliance
Certificate] is hereby amended and restated in its entirety as set forth on the
exhibit titled as Exhibit 7.3.3 attached hereto.
(x) The following new schedules and exhibits attached hereto are
hereby added as new schedules and exhibits to the Credit Agreement:
-15-
<PAGE>
Schedules
---------
5.1.6 Litigation
5.1.7 Certain Disclosures Regarding Financial Statements
5.1.18 Certain Disclosures Regarding Environmental Matters
5.1.23 Patents, Trademarks, Copyrights, Licenses, etc.
5.1.26 Partnership Agreements; LLC Agreements
7.1.12 Owned and Leased Real Property of Loan Parties; Certain
Equity Interests of Subsidiaries to be Pledged
3. Conditions of Effectiveness of Amendments.
The effectiveness of the Amendments of Credit Agreement set forth in
Section 2 hereof is expressly conditioned upon satisfaction of each of the
following conditions precedent:
(a) Officer's Certificate.
The representations and warranties of the Borrower contained in
Section 5 of the Credit Agreement including as amended by the modifications and
additional representations and warranties of this Amendment, and of each Loan
Party in each of the other Loan Documents shall be true and accurate on and as
of the date hereof with the same effect as though such representations and
warranties had been made on and as of such date (except representations and
warranties which relate solely to an earlier date or time, which representations
and warranties shall be true and correct on and as of the specific dates or
times referred to therein), and each of the Loan Parties shall have performed
and complied with all covenants and conditions hereof and thereof, no Event of
Default or Potential Default shall have occurred and be continuing or shall
exist; and there shall be delivered to the Administrative Agent for the benefit
of each Lender a certificate of the Borrower dated the date hereof and signed by
the Chief Executive Officer, President or Chief Financial Officer of the
Borrower to each such effect.
(b) Secretary's Certificate.
There shall be delivered to the Administrative Agent for the
benefit of each Lender a certificate dated the date hereof and signed by the
Secretary or an Assistant Secretary of each of the Loan Parties, certifying as
appropriate as to:
(1) all action taken by each Loan Party in connection with this
Amendment and the other Loan Documents;
(2) the names of the officer or officers authorized to sign this
Amendment and the other Loan Documents and the true signatures of such officer
or officers and specifying the Authorized Officers permitted to act on behalf of
each Loan Party for purposes of
-16-
<PAGE>
this Agreement and the true signatures of such officers, on which the
Administrative Agent and each Lender may conclusively rely; and
(3) copies of its organizational documents, including its
certificate of incorporation and bylaws as in effect on the date hereof and, in
the case of the certificate of incorporation of the Borrower, certified by the
appropriate state official where such documents are filed in a state office,
together with certificates from the appropriate state officials as to the
continued existence and good standing of the Borrower in the state of its
formation and the state of its principal place of business.
(c) Opinion of Counsel.
There shall be delivered to the Administrative Agent for the
benefit of each Lender a written opinion of Jeffry Quinn, the General Counsel
for the Loan Parties (who may rely on the opinions of such other counsel as may
be acceptable to the Administrative Agent), dated the date hereof and in form
and substance satisfactory to the Administrative Agent and its counsel as to
such matters incident to the transactions contemplated herein as the
Administrative Agent may reasonably request.
(d) No Actions or Proceedings.
No action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, this Amendment, the other Loan Documents or the
consummation of the transactions contemplated hereby or thereby or which, in the
Administrative Agent's sole discretion, would make it inadvisable to consummate
the transactions contemplated by this Agreement or any of the other Loan
Documents.
(e) Payment of Fees.
The Borrower shall pay or cause to be paid to the Administrative
Agent for itself and for the account of the Lenders an amendment fee (the
"Amendment Fee") payable to those Lenders which approve this Amendment on or
before noon (Pittsburgh, Pennsylvania time) on Friday, January 21, 2000, in the
amount of the product of 25 basis points multiplied by the amount of such
Lender's Commitments and the other fees, costs and expenses payable to the
Administrative Agent or for which the Administrative Agent is entitled to be
reimbursed, including but not limited to the fees and expenses of the
Administrative Agent's legal counsel.
(f) Consents.
All material consents required to effectuate the transactions
contemplated by the Amendment and the other Loan Documents and shall have been
obtained.
-17-
<PAGE>
(g) Officer's Certificate.
There shall have been delivered to the Administrative Agent for
the benefit of each Lender a certificate dated the date hereof, in form and
substance satisfactory to the Administrative Agent and signed by the Chief
Executive Officer, President or Chief Financial Officer of the Borrower
certifying the accuracy of all representations and warranties by the Loan
Parties under the Loan Documents, the compliance with all covenants under the
Loan Documents and the absence of any Event of Default or Potential Default.
(h) Legal Details.
All legal details and proceedings in connection with the
transactions contemplated by this Amendment and the other Loan Documents shall
be in form and substance satisfactory to the Administrative Agent and counsel
for the Administrative Agent, and the Administrative Agent shall have received
all such other counterpart originals or certified or other copies of such
documents and proceedings in connection with such transactions, in form and
substance satisfactory to the Administrative Agent and its counsel, as the
Administrative Agent or its counsel may reasonably request.
4. Consent to Negotiation, Execution and Delivery of the Collateral
Documents by the Administrative Agent. By execution of this Amendment, each
Agent and each Lender acknowledges that it has reviewed a copy of the Credit
Agreement as amended hereby and hereby consents and agrees to: (a) the
acceptance by the Administrative Agent on behalf of each Lender of the
Collateral from the Loan Parties to secure the Obligations of the Borrower, AWAC
and each Significant Subsidiary of the Borrower to the Lenders; (b) the service
by the Administrative Agent as Collateral Agent (as defined in the Intercreditor
Agreements) on behalf of each Agent and each Lender with respect to the
Collateral Documents and the Collateral; and (c) the negotiation, execution and
delivery or acceptance, as applicable, of the Collateral Documents by the
Administrative Agent on behalf of each Agent and each Lender.
5. Force and Effect. Except as otherwise expressly modified by this
Amendment, the Credit Agreement and the other Loan Documents are hereby ratified
and confirmed and shall remain in full force and effect after the date hereof.
6. Governing Law. This Amendment shall be deemed to be a contract
under the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
7. Effective Date; Certification of the Borrower. This Amendment
shall be dated as of and shall be binding, effective and enforceable upon the
date of (i) satisfaction of all conditions set forth in Section 3 hereof and
(ii) receipt by the Administrative Agent of duly executed original counterparts
of this Amendment from the Borrower and the Required Banks,
-18-
<PAGE>
and from and after such date this Amendment shall be binding upon the Borrower,
each Lender and the Agents, and their respective successors and assigns
permitted by the Credit Agreement. The Borrower by executing this Amendment,
hereby certifies that this Amendment has been duly executed and that as of the
date hereof no Event of Default or Potential Default exists under the Credit
Agreement or the other Loan Documents.
8. No Novation. This Amendment amends the Credit Agreement, but is
not intended to constitute, and does not constitute, a novation of the
Obligations of the Loan Parties under the Credit Agreement.
[Intentionally Blank]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed this Amendment No. 1 to Credit Agreement as of the day
and year first above written.
ARCH COAL, INC.
By: /s/ Patrick A. Kriegshauser
----------------------------------
Name: Patrick A. Kriegshauser
--------------------------------
Title: Senior Vice President
-------------------------------
PNC BANK, NATIONAL ASSOCIATION,
individually and as Administrative Agent
By: /s/ Richard C. Munsick
----------------------------------
Title: Vice President
-------------------------------
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, individually
and as Syndication Agent
By: /s/ Robert Bottamedi
----------------------------------
Title: Vice President
-------------------------------
FIRST UNION NATIONAL BANK,
individually and as Documentation Agent
By: /s/ Frank Meade
----------------------------------
Title: Vice President
-------------------------------
BANK OF AMERICA, N.A. (formerly
NationsBank, N.A.)
By: /s/ Paul L. Colon
----------------------------------
Title: Vice President
-------------------------------
BANK OF MONTREAL
By: /s/ Ian M. Plester
----------------------------------
Title: Director
-------------------------------
-20-
<PAGE>
THE BANK OF NEW YORK
By: /s/ Raymond J. Palmer
-----------------------------------------
Title: Vice President
--------------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ F. C. H. Ashby
-----------------------------------------
Title: Senior Manager Loan Operations
--------------------------------------
BARCLAYS BANK PLC
By: /s/ Nicholas A. Bell
-----------------------------------------
Title: Director, Loan Transaction Management
-------------------------------------
THE CHASE MANHATTAN BANK
By: /s/ Peter S. Predun
-----------------------------------------
Title: Vice President
--------------------------------------
THE BANK OF TOKYO-MITSUBISHI,
LTD., CHICAGO BRANCH
By: /s/ Hisashi Miyashiro
-----------------------------------------
Title: Deputy General Manager
--------------------------------------
CREDIT LYONNAIS NEW YORK
BRANCH
By: /s/ Illegible Signature
-----------------------------------------
Title: Vice President
--------------------------------------
NATIONAL BANK OF KUWAIT, SAK
By: /s/ Robert J. McNeill
-----------------------------------------
Title: Executive Manager
--------------------------------------
By: /s/ Muhannad Kamal
-----------------------------------------
Title: General Manager
--------------------------------------
-21-
<PAGE>
BANQUE NATIONALE DE PARIS
By: /s/ Arnaud Collin du Bocage
----------------------------------------
Title: Executive Vice President and
-------------------------------------
General Manager
-------------------------------------
BANK ONE, NA (formerly known as The
First National Bank of Chicago)
By: /s/ Mary Lu D. Cramer
----------------------------------------
Title: Vice President
-------------------------------------
THE DAI-ICHI KANGYO BANK, LTD.
By: /s/ Nobuyasu Fukatsu
----------------------------------------
Title: General Manager
-------------------------------------
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By: /s/ Walter Wolff
----------------------------------------
Title: Joint General Manager
-------------------------------------
MERCANTILE BANK NATIONAL
ASSOCIATION
By: /s/ Gregory Dryden
----------------------------------------
Title: Vice President
-------------------------------------
ABN AMRO BANK, N.V.
By: /s/ Philip J. Leigh
----------------------------------------
Title: Vice President
-------------------------------------
By: /s/ Kevin S. McFaddin
----------------------------------------
Title: Vice President
-------------------------------------
-22-
<PAGE>
DRESDNER BANK A.G. NEW YORK
AND GRAND CAYMAN BRANCHES
By: /s/ P. Douglas Sherrod
----------------------------------------
Title: Vice President
-------------------------------------
By: /s/ Michael E. Higgins
----------------------------------------
Title: Vice President
-------------------------------------
BANK HAPOALIM B.M.
By: /s/ Illegible Signature
----------------------------------------
Title: Vice President
-------------------------------------
By: /s/ Illegible Signature
----------------------------------------
Title: Vice President
-------------------------------------
CIBC, INC.
By: /s/ Howard Palmer
----------------------------------------
Title: Executive Director
-------------------------------------
FLEET NATIONAL BANK
By:
----------------------------------------
Title:
-------------------------------------
KEYBANK NATIONAL BANK
By: /s/ Frank Jancar
----------------------------------------
Title: Vice President
-------------------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ William S. Richardson
----------------------------------------
Title: Duly Authorized Signatory
-------------------------------------
-23-
<PAGE>
GULF INTERNATIONAL BANK
By: /s/ Abdel-Fattah Tahoun
----------------------------------------
Title: Senior Vice President
-------------------------------------
By: /s/ William B. Shepard
----------------------------------------
Title: Vice President
-------------------------------------
BANK POLSKA KASA OPIEKI S.A.,
NEW YORK BRANCH (formerly Bank
Polska Kasa Opieki S.A. Pekao S.A. Group,
New York Branch)
By: /s/ Illegible Signature
----------------------------------------
Title: Vice President
-------------------------------------
ARAB BANK PLC
By: /s/ Illegible Signature
----------------------------------------
Title: Executive Vice President &
-------------------------------------
Regional Manager
-------------------------------------
CREDIT INDUSTRIEL ET
COMMERCIAL (formerly Compagnie
Financiere de Cic et de L'Union
Europeenne)
By: /s/ Brian O'Leary
----------------------------------------
Title: Vice President
-------------------------------------
By: /s/ Anthony Rock
----------------------------------------
Title: Vice President
-------------------------------------
BANK LEUMI USA
By: /s/ Joung Hee Hong
----------------------------------------
Title: Vice President
-------------------------------------
-24-
<PAGE>
SCHEDULE 1.1(A)
PART (A)
PRICING GRID
<TABLE>
<CAPTION>
Applicable Facility Revolving Credit Letter of Term Loan
Level Leverage Ratio Fee Euro-Rate Spread Credit Fee Euro-Rate Spread
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Less than or
I equal to 2.0 to .20% .675% .675% .875%
1.0
- ---------------------------------------------------------------------------------------------------------
Greater than
2.0 to 1.0 .225% .75% .750% .975%
II but less than or
equal
to 2.5 to 1.0
- ---------------------------------------------------------------------------------------------------------
Greater than
2.5 to 1.0 .25% .775% .775% 1.025%
III but less than or
equal
to 3.0 to 1.0
- ---------------------------------------------------------------------------------------------------------
Greater than
3.0 to 1.0 .275% .975% .975% 1.250%
IV but less than or
equal
to 3.5 to 1.0
- ---------------------------------------------------------------------------------------------------------
Greater than
3.5 to 1.0 .30% 1.20% 1.20% 1.500%
V but less than or
equal
to 4.0 to 1.0
- ---------------------------------------------------------------------------------------------------------
Greater than
VI 4.0 to 1.0 .40% 1.35% 1.35% 1.750%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Applicable Leverage Ratio means, at any date, the Leverage Ratio as at
the last day of the fiscal quarter of the Borrower most recently ended prior to
such date, for which the Borrower has delivered financial statements pursuant to
Section 7.3.1 or 7.3.2, as the case may be, together with the duly executed
compliance certificate required by Section 7.3.3; provided that if the Borrower
shall fail to timely deliver the financial statements required to be delivered
by it pursuant to Section 7.3.1 or 7.3.2, as the case may be, together with the
duly executed compliance certificate required by Section 7.3.3, the Applicable
Leverage Ratio for each date from and including the date on which such
statements are required to be delivered until the date on which such statements
are delivered shall be deemed to be greater than 4.0:1.
(b) It is expressly agreed that through and including the Initial Delivery
Date, the Applicable Margin, Applicable Facility Fee Rate and Applicable Letter
of Credit Fee Rate shall be such rates as determined in accordance with
paragraph (a) above but shall be no less than the respective amounts set forth
under Level IV of Part (A) of Schedule 1.1(A). It is expressly agreed that after
the Initial Delivery Date until such time as the Borrower's senior unsecured
long-term debt, on a consolidated basis, has been rated Investment Grade, the
Applicable Margin, Applicable Facility Fee Rate and Applicable Letter of Credit
Fee Rate shall be determined based upon Part (A) of Schedule 1.1(A), and for any
period thereafter when a Debt Rating is in effect, the Applicable Margin,
Applicable Facility Fee Rate and Applicable Letter of Credit Fee Rate shall be
the respective amounts determined under Part (B) of Schedule 1.1(A). If, at any
time during any period when Applicable Margin, Applicable Facility Fee Rate and
Applicable Letter of Credit Fee Rate are determined based upon this Part (A) of
Schedule 1.1(A), the Borrower's "senior corporate credit rating" is rated either
BB- or lower by Standard & Poor's or the Borrower's "senior implied issuer
rating" is rated Ba3 or lower by Moody's, the Applicable Margin and the
Applicable Letter of Credit Rate set forth above will be increased by .50%.
<PAGE>
SCHEDULE 1.1(B)
COMMITMENTS OF BANKS AND ADDRESSES FOR NOTICES
ARCH COAL, INC. CREDIT FACILITY
Part 1 - Commitments of Banks and Addresses for Notices to Banks
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Commitment for Term Loan
Bank Credit Loans Ratable Share Term Loans Ratable Share
---- ------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Name: PNC Bank, National Association 79,398,305.03 13.233051% 14,677,118.56 10.871940%
Address: One PNC Plaza
3rd Floor
249 Fifth Avenue
Pittsburgh, PA 15222
Attention: Richard Munsick, Vice President
Telephone: (412) 762-4299
Telecopy: (412) 762-2571
Name: Morgan Guaranty Trust 33,290,743.15 5.548457% 12,948,750.54 9.591667%
Company of New York
Address: 60 Wall Street
5th Floor
New York, NY 10260
Attention: Rob Bottamedi, Vice President
Telephone: (212) 648-1349
Telecopy: (212) 648-5018
Name: First Union National Bank 47,457,627.12 7.909605% 10,677,966.09 7.909605%
Address: 213 South Jefferson St.
15th Floor
Mail Code VA7406
Roanoke, VA 24011
Attention: Frank Meade
Telephone: (540) 563-7501
Telecopy: (540) 563-6320
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Ratable Commitment for Term Loan
Bank Credit Loans Share Term Loans Ratable Share
---- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Name: Bank of America, N.A. 50,847,457.63 8.474576% 11,440,677.96 8.474576%
(formerly NationsBank, N.A.)
Address: 333 Clay Street
45th floor
Houston, TX 77002
Attention: Daryl G. Patterson, Managing
Director
Telephone: (713) 651-4950
Telecopy: (713) 651-4808
Name: Bank of Montreal 30,508,474.58 5.084746% 6,864,406.79 5.084746%
Address: 430 Park Avenue
14th Floor
New York, NY 10022
Attention: Ian Plester, Director
Telephone: (212) 605-1417
Telecopy: (212) 605-1451
Name: The Bank of New York 30,508,474.58 5.084746% 6,864,406.79 5.084746%
Address: The Energy Industries Division
One Wall Street
19th Floor
New York, NY 10286
Attention: Kevin C. Walker
Telephone: (212) 635-7609
Telecopy: (212) 635-7923
Name: The Bank of Nova Scotia 30,508,474.58 5.084746% 6,864,406.79 5.084746%
Address: 181 West Madison Street
Suite 3700
Chicago, IL 60602
Attention: Michael Manick
Telephone: (312) 201-4061
Telecopy: (312) 201-4108
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Commitment for Term Loan
Bank Credit Loans Ratable Share Term Loans Ratable Share
---- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Name: The Bank of Tokyo-Mitsubishi, 14,039,548.03 2.339925% 2,033,898.30 1.506591%
Ltd., Chicago Branch
Address: 227 West Monroe Street
Suite 2300
Chicago, IL 60606
Attention: William Murray
Telephone: (312) 696-4653
Telecopy: (312) 696-4535
Name: Barclays Bank PLC 30,508,474.58 5.084746% 6,864,406.79 5.084746%
Address: 222 Broadway
New York, NY 10038
Attention: Nicholas A. Bell
Telephone: (212) 412-4029
Telecopy: (212) 412-7589
Name: The Chase Manhattan Bank 30,508,474.58 5.084746% 6,864,406.79 5.084746%
Address: 270 Park Avenue
23rd Floor
New York, NY 10017
Attention: Peter Predun
Telephone: (212) 270-7005
Telecopy: (212) 270-4724
Name: ABN AMRO Bank, N.V. 20,338,983.05 3.389831% 4,576,271.19 3.389831%
Address: 135 South LaSalle Street
Suite 710
Chicago, IL 60603
Attention: David Wright
Telephone: (312) 904-5212
Telecopy: (312) 904-9387
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Commitment for Term Loan
Bank Credit Loans Ratable Share Term Loans Ratable Share
---- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Name: Credit Lyonnais New York Branch 20,338,983.05 3.389831% 4,576,271.19 3.389831%
Address: 227 West Monroe Street
38th Floor
Chicago, IL 60606
Attention: Joe Philbin
Telephone: (312) 220-7314
Telecopy: (312) 641-0527
Name: Dresdner Bank A.G. New York 20,338,983.05 3.389831% 4,576,271.19 3.389831%
and Grand Cayman Branches
Address: 75 Wall Street
New York, NY 10005
Attention: Andrew Cullinan
Telephone: (212) 429-2226
Telecopy: (212) 429-2192
Name: Bank One, NA (formerly known 30,508,474.58 5.084746% 6,864,406.79 5.084746%
as The First National Bank of
Chicago)
Address: 1 Bank One Plaza
Mail Code IL1-0363
Chicago, IL 60670
Attention: Mary Lu Cramer
Telephone: (312) 732-7579
Telecopy: (312) 732-3055
Name: Bank Hapoalim B.M. 10,169,491.53 1.694915% 2,288,135.60 1.694915%
Address: 1177 Avenue of the Americas
New York, NY 10036-2790
Attention: Laura Raffa
Telephone: (212) 782-2177
Telecopy: (212) 782-2187
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Ratable Commitment for Term Loan
Bank Credit Loans Share Term Loans Ratable Share
---- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Name: The Industrial Bank of Japan, 10,169,491.53 1.694915% 2,288,135.60 1.694915%
Limited
Address: 1251 Avenue of the Americas
New York, NY 10020
Attention: Ed Jones
Telephone: (212) 282-3421
Telecopy: (212) 282-4480
Name: Mercantile Bank National 10,169,491.53 1.694915% 2,288,135.60 1.694915%
Association
Address: #1 Mercantile Center
St. Louis, MO 63101
Attention: Gregory Dryden
Telephone: (314) 418-3983
Telecopy: (314) 418-2203
Name: The Dai-Ichi Kangyo Bank, Ltd. 10,000,000.00 1.666667% 2,250,000.00 1.666667%
Address: 10 S. Wacker
26th Floor
Chicago, IL 60606
Attention: Brian W. Riley, Vice
President
Telephone: (312) 715-6364
Telecopy: (312) 876-2011
Name: CIBC, Inc. 10,169,491.53 1.694915% 2,288,135.60 1.694915%
Address: 425 Lexington Avenue
New York, NY 10017
Attention: Howard Palmer
Telephone: (212) 856-3504
Telecopy: (212) 856-3761
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Commitment for Term Loan
Bank Credit Loans Ratable Share Term Loans Ratable Share
---- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Name: Fleet National Bank 8,333,333.33 1.388889% 1,875,000.00 1.388889%
Address: 100 Federal Street
Mail Stop 01-08-04
Boston, MA 02110
Attention: Christopher Holmgren, Director
Telephone: (617) 434-4067
Telecopy: (617) 434-3652
Name: Bank Polska Kasa Opieki S.A., 3,333,333.33 0.555556% 750,000.00 0.555556%
New York Branch (formerly
Bank Polska Kasa Opieki S.A.
Pekao S.A. Group, New York
Branch)
Address: 470 Park Avenue South
15th Floor
New York, NY 10016
Attention: Hussein B. El-Tawil
Telephone: (212) 251-1245
Telecopy: (212) 679-5910
Name: Banque Nationale de Paris 8,135,593.22 1.355932% 1,830,508.47 1.355932%
Address: 209 South LaSalle Street
Suite 500
Chicago, IL 60604
Attention: Jo Ellen Bender
Telephone: (312) 977-2225
Telecopy: (312) 977-1380
Name: Arab Bank Plc 5,000,000.00 0.833333% 2,250,000.00 1.666667%
Address: 520 Madison Avenue
2nd Floor
New York, NY 10022
Attention: William Marquardt
Telephone: (212) 715-9715
Telecopy: (212) 593-4632
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Commitment for Term Loan
Bank Credit Loans Ratable Share Term Loans Ratable Share
---- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Name: Bank Leumi USA 3,389,830.51 0.564972% 762,711.87 0.564972%
Address: 579 Fifth Avenue
2nd Floor
New York, NY 10017
Attention: Benjamin Huang
Telephone: (212) 407-4305
Telecopy: (212) 407-4317
Name: Credit Industriel et Commercial 7,692,307.70 1.282051% 1,730,769.23 1.282051%
(formerly Compagnie Financiere
de Cic et de L'Union Europeene)
Address: 520 Madison Avenue
37th Floor
New York, NY 10022
Attention: Brian O'Leary
Telephone: (212) 715-4422
Telecopy: (212) 715-4535
Name: National Bank of Kuwait, SAK 2,500,00.00 0.416667% 3,750,000.00 2.777778%
Address: 299 Park Avenue
New York, NY 10171
Attention: Jeff Ganter
Telephone: (212) 303-9868
Telecopy: (212) 319-8269
Name: Gulf International Bank 6,666,666.67 1.111111% 1,666,666.67 1.234568%
Address: 380 Madison Avenue
New York, NY 10017
Attention: Mireille Khalidi
Telephone: (212) 922-2327
Telecopy: (212) 922-2339
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Amount of
Commitment for Revolving Amount of
Revolving Credit Commitment for Term Loan
Bank Credit Loans Ratable Share Term Loans Ratable Share
---- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Name: KeyBank National Bank 25,000,000.00 4.166667% -0- -0-
Address: 127 Public Square
OH-01-27-0606
Cleveland, OH 44114
Attention: Frank Jancar
Telephone: (216) 689-4442
Telecopy: (216) 689-4981
Name: General Electric Capital 10,169,491.53 1.694915% 2,288,135.60 1.694915%
Corporation
Address: 60 Long Ridge Road
Stamford, CT 06927
Attention: William Richardson
Telephone: (203) 316-7589
Telecopy: (203) 316-7978
TOTAL $ 600,000,000 100% $ 135,000,000 100%
===== ============== ==== ============== ====
</TABLE>
-8-
<PAGE>
Part 2 - Addresses for Notices to Administrative Agent and to Borrower:
- ----------------------------------------------------------------------
ADMINISTRATIVE AGENT
Name: PNC Bank, National Association
Address: One PNC Plaza
3rd Floor
249 Fifth Avenue
Pittsburgh, PA 15222
Attention: Richard Munsick, Vice President
Telephone: (412) 762-4299
Telecopy: (412) 762-2571
BORROWER:
Name: Arch Coal, Inc.
Address: CityPlace One
CityPlace Drive
St. Louis, MO 63141
Attention: James Florczak
Telephone: (314) 994-2785
Telecopy: (314) 994-2739
-9-
<PAGE>
SCHEDULE 5.1.6
LITIGATION
Without regard to whether a Material Adverse Change has occurred, Borrower
hereby discloses the information in its Form 10-K for the period ending December
31, 1998 and Form 10-Q's for the periods ending March 31, 1999, June 30, 1999
and September 30, 1999 with respect to its Dal-Tex property.
<PAGE>
SCHEDULE 5.1.7
CERTAIN DISCLOSURES REGARDING
FINANCIAL STATEMENTS
Without regard to whether a Material Adverse Change has occurred, Borrower
hereby discloses (i) the information in its Form 10-K for the period ending
December 31, 1998 and Form 10-Q's for the periods ending March 31, 1999, June
30, 1999 and September 30, 1999 with respect to its Dal-Tex property and (ii)
the one-time charges to Borrower's financial statements for the period ending
December 31, 1999 due to the restructuring of its administrative work force and
to the write-down of assets at its Dal-Tex and Hobet 21 operations and certain
coal reserves in central Appalachia.
<PAGE>
SCHEDULE 5.1.18
CERTAIN DISCLOSURES REGARDING
ENVIRONMENTAL MATTERS
Without regard to whether a Material Adverse Change has occurred, Borrower
hereby discloses the information in its Form 10-K for the period ending December
31, 1998 and Form 10-Q's for the periods ending March 31, 1999, June 30, 1999
and September 30, 1999 with respect to its Dal-Tex property.
<PAGE>
SCHEDULE 5.1.23
PATENTS, TRADEMARKS,
COPYRIGHTS, LICENSES, ETC.
None
<PAGE>
SCHEDULE 5.1.26
PARTNERSHIP AGREEMENTS; LLC AGREEMENTS
Limited Liability Company Agreement of Arch Western Resources, LLC, a Delaware
Limited Liability Company, dated as of June 1, 1998
Limited Liability Company Agreement of Arch of Wyoming, LLC, a Delaware Limited
Liability Company, dated as of April 15, 1998
Limited Liability Company Agreement of Arch Uinta, LLC, a Delaware Limited
Liability Company, dated as of April 29, 1998
Limited Liability Company Agreement of AU Sub, LLC, a Delaware Limited Liability
Company, dated as of April 8, 1998
Third Amended and Restated Limited Liability Company Agreement of Canyon Fuel
Company, LLC, a Delaware Limited Liability Company, dated as of June 1, 1998
Limited Liability Company Agreement of Mountain Coal Company, L.L.C., a Delaware
Limited Liability Company, dated as of March 6, 1998
Limited Liability Company Agreement of State Leases LLC, a Delaware Limited
Liability Company, dated as of April 8, 1998
Limited Liability Company Agreement of Thunder Basin Coal Company, L.L.C., a
Delaware Limited Liability Company, dated as of July 10, 1997, as amended
<PAGE>
SCHEDULE 7.1.12
OWNED AND LEASED REAL PROPERTY;
CERTAIN EQUITY INTERESTS OF SUBSIDIARIES TO BE PLEDGED
Owned Real Property. Borrower's fee interest in the coal reserves with
respect to the following properties:
RP-9729 at Hobet Mine/Allegheny Land (West Ridge/Conley Branch)
RP-9238 at Hobet Mine (Borrower has an undivided partial interest in the
coal reserves with respect to this property.)
RP-9117 (Borrower has an undivided partial interest in the coal reserves
with respect to this property.)
RP-9123
RP-9124
RP-9154 (Borrower has an undivided partial interest in the coal reserves
with respect to this property.)
H21-004213-3
RP-9729
Leasehold Property: Thundercloud Tract
Subsidiaries:
Ark Land Company
Arch Western Acquisition Corp.
Mountaineer Land Company
Mountain Mining, Inc.
Julian Tipple, Inc.
Hobet Mining, Inc.
Mountain Gem Land, Inc.
Allegheny Land Company
Catenary Coal Holdings, Inc.
Mingo Logan Coal Company
Arch Coal Sales Company, Inc.
<PAGE>
EXHIBIT 7.3.3
form of
QUARTERLY COMPLIANCE CERTIFICATE
____________________,_____
PNC Bank, National Association, as Administrative Agent
249 Fifth Avenue
Pittsburgh, PA 15222-2707
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of _______________, 1998 (as
amended, restated, modified or supplemented from time to time, the "Credit
Agreement") between Arch Coal, Inc. (the "Borrower"), the Lenders party thereto,
Morgan Guaranty Trust Company of New York as syndication agent, First Union
National Bank as documentation agent and PNC Bank, National Association, as
administrative agent (the "Administrative Agent"). Unless otherwise defined
herein, terms defined in the Credit Agreement are used herein with the same
meanings.
I, ______________________, [Chief Executive Officer/President/Chief
Financial Officer] of the Borrower, do hereby certify in my capacity as [Chief
Executive Officer/President/Chief Financial Officer] as of the [quarter/year
ended ______________, ____] (the "Report Date"), as follows (each calculation
determined in accordance with GAAP):
(1) Off Balance-Sheet Financing/1/. The aggregate amount of off-balance sheet
transactions (i.e., the liabilities in respect of which do not appear on
the liability side of the balance sheet) for the Borrower and its
Subsidiaries, providing the functional equivalent of borrowed money
(including asset securitizations [other than accounts receivable or
inventory securitizations], sale/leasebacks or Synthetic Leases) is
$____________, which amount does not exceed the amount shown in item (iv)
below, each determined as of the Report Date.
<TABLE>
<S> <C> <C>
(i) total consolidated assets of Borrower and its Subsidiaries $__________
(ii) sum of the total assets of each Special Subsidiary,
each multiplied by the Appropriate Percentage /2/ $__________
(iii) sum of (i) and (ii), without duplication $__________
(iv) 5% of item (iii) $__________
</TABLE>
- -----------------
/1/ See Section 7.2.9 of the Credit Agreement.
/2/ For each Special Subsidiary, attach a detailed schedule showing the
applicable Appropriate Percentage and calculation of "total assets" for each.
<PAGE>
PNC Bank, National Association Report for the
Page 2 Fiscal Quarter Ending_______
(2) Maximum Leverage Ratio/3/. The ratio of (A) Debt to (B) EBITDDA is ________
to 1.00, determined as of the end of each fiscal quarter of the Borrower
for the four fiscal quarters then ended, which ratio does not exceed the
permitted ratio for the period as set forth in Section 7.2.10 of the Credit
Agreement, Debt and EBITDDA being determined as in (A) and (B) below.
(A) Debt of the Borrower and its Subsidiaries/4/, computed as follows:
(i) all indebtedness for borrowed money (including without
limitation all subordinated indebtedness but excluding
obligations under any interest rate swap, cap, collar or floor
agreement or other interest rate management device)
$_____________________________________________________________
(ii) all amounts raised under or liabilities in respect of any note
purchase or acceptance credit facility
$_____________________________________________________________
(iii) all indebtedness in respect of any other transaction (including
production payments [excluding royalties], installment
purchase agreements, forward sale or purchase agreements,
capitalized leases and conditional sale agreements) having the
commercial effect of a borrowing of money entered into by the
Borrower or any of its Subsidiaries to finance its operations or
capital requirements
$_____________________________________________________________
(iv) reimbursement obligations (contingent or otherwise) under any
letter of credit EXCLUDING (a) contingent reimbursement
obligations aggregating at any time up to $10,000,000 and (b)
contingent reimbursement obligations in respect of the Letter of
Credit issued to support the Port Bond
$_____________________________________________________________
(v) all indebtedness (whether matured or unmatured, liquidated or
unliquidated, direct or indirect, absolute or contingent or
joint or several) in respect of all Guarantees by the Borrower
- --------------
/3/ See Section 7.2.10 and the definition of "Leverage Ratio" in Section 1.1 of
the Credit Agreement.
/4/ See definition of "Debt" in Section 1.1 of the Credit Agreement and attach a
schedule for each Special Subsidiary showing the applicable Appropriate
Percentage and calculation of Debt for each.
<PAGE>
PNC Bank, National Association Report for the
Page 3 Fiscal Quarter Ending_______
and its Subsidiaries of Debt of other Persons EXCLUDING
indebtedness in respect of the Guaranty by the Borrower of the
Port Bond
$_____________________________________________________________
(vi) adjustment for the difference between actual funded indebtedness
and the fair market value of funded indebtedness recorded as
required by Accounting Principles Board Opinion No. 16 as in
effect on the Closing Date
$_____________________________________________________________
(vii) sum of items (i) through (v) as adjusted by item (vi) equals
Debt $__________
(B) EBITDDA of Borrower and its Subsidiaries/5/ for the four fiscal
quarters ending as of the Report Date, computed as follows:
(i) income from operations before the effect of changes in
accounting principles, nonrecurring charges, and extraordinary
items
$_____________________________________________________________
(ii) net interest expense $__________
(iii) income taxes $__________
(iv) depreciation $__________
(v) depletion $__________
(vi) amortization $__________
(vii) sum of items (i) through (vi) equals EBITDDA $__________
- --------------
/5/ See definition of "EBITDDA" in Section 1.1 of the Credit Agreement for
assumptions regarding (1) calculation of EBITDDA of the Special Subsidiaries and
(2) calculation of EBITDDA for the fiscal quarters ending March 31, 1998, June
30, 1998, and September 30, 1998, attaching a detailed schedule showing the
calculation of EBITDDA for Arch Western Resources, LLC and its Subsidiaries for
each of those three fiscal quarters. To each Compliance Certificate submitted,
attach a schedule showing the applicable Appropriate Percentage and calculation
of EBITDDA for each Special Subsidiary.
<PAGE>
PNC Bank, National Association Report for the
Page 4 Fiscal Quarter Ending_______
(3) Minimum Fixed Charge Coverage Ratio/6/. The ratio of (A) fixed charges to
(B) consolidated net interest expense of the Borrower and its Subsidiaries,
in each case determined on a consolidated basis as of the last day of each
fiscal quarter for the four fiscal quarters of the Borrower then ended, is
_____ to 1.00, which is not less than the minimum required ratio for the
period, as set forth in Section 7.2.11 of the Credit Agreement, fixed
charges and interest expense being calculated as in (A) and (B) below.
(A) Fixed charges are computed as follows:
(i) operating lease expense of the Borrower and its
Subsidiaries/7/ $________
(ii) EBITDDA of Borrower and its Subsidiaries (from item
(2)(B)(vii) above) $________
(iii) item (i) plus (ii) without duplication equals fixed
charges $________
(B) Interest expense of the Borrower and its Subsidiaries for the four
fiscal quarters ending as of the Report Date is computed as follows:
(i) operating lease expense (from item (3)(A)(i) above) $________
(ii) interest expense of Borrower and its Subsidiaries/8/ $________
(iii) Permitted Loan Origination Expense
$_____________________________________________________
(iv) sum of items (i) and (ii) less item (iii) equals interest
expense
$_____________________________________________________
- -------------
/6/ See Section 7.2.11 of the Credit Agreement.
/7/ See definition of "Fixed Charge Coverage Ratio" in Section 1.1 of the Credit
Agreement for assumptions regarding (1) calculation of "operating lease expense"
of the Special Subsidiaries and (2) calculation of operating lease expense for
the fiscal quarters ending June 30, 1998, September 30, 1998, and December 31,
1998, attaching a detailed schedule hereto showing the calculation of operating
lease expense for Arch Western Resources, LLC and its Subsidiaries for each of
those three fiscal quarters. To each Compliance Certificate submitted, attach a
schedule showing the applicable Appropriate Percentage and calculation of
operating lease expense for each Special Subsidiary.
/8/ See definition of "Fixed Charge Coverage Ratio" in Section 1.1 of the Credit
Agreement for assumptions regarding (1) calculation of "interest expense" of the
Special Subsidiaries and (2) calculation of interest expense for the fiscal
quarters ending June 30, 1998, September 30, 1998, and December 31, 1998,
attaching a detailed schedule hereto showing the calculation of interest expense
for Arch Western Resources, LLC and its Subsidiaries for each of those three
fiscal quarters. To each Compliance Certificate submitted, attach a schedule
showing the applicable Appropriate Percentage and calculation of interest
expense for each Special Subsidiary.
<PAGE>
PNC Bank, National Association Report for the
Page 5 Fiscal Quarter Ending_______
(4) Minimum Net Worth/9/. The Borrower's Consolidated Tangible Net Worth as of
the Report Date is $___________, which is not less than the Borrower's Base
Net Worth of $_______________, as calculated in (A) and (B) below.
(A) Consolidated Tangible Net Worth of the Borrower and its Subsidiaries
as of the Report Date, computed as follows:
(i) total stockholders' equity
$_____________________________________________________________
(ii) intangible assets of the Borrower and its Subsidiaries
$_____________________________________________________________
(iii) the amount of the Investment by the Borrower and its
Subsidiaries in Permitted Joint Ventures in excess of
$30,000,000, adjusted to exclude the after-tax effect of any
changes in accounting principles subsequent March 31, 1998
$_____________________________________________________________
(iv) item (i) less items (ii) and (iii) equals Consolidated Tangible
Net Worth
$_____________________________________________________________
(B) Base Net Worth, computed as follows:
(i) [fixed amount]
$_____________________________________________________________
(ii) 50% of consolidated net income of the Borrower and its
Subsidiaries (before the after-tax effects of changes in
accounting principles) for each fiscal quarter in which net
income was earned (but not to be less than $0 if the Borrower
and its Subsidiaries experienced a consolidated net loss during
any fiscal quarter)
$_____________________________________________________________
- -------------------
/9/ See Section 7.2.12 of the Credit Agreement.
<PAGE>
PNC Bank, National Association Report for the
Page 6 Fiscal Quarter Ending_______
(iii) 80% of net increase in Consolidated Tangible Net Worth resulting
from the issuance of equity securities by the Borrower for the
period from January 1, 2000, through the Report Date
$_____________________________________________________________
(iv) sum of items (i) through (iii) equals Base Net Worth
$_____________________________________________________________
(5) Liens/10/. The consolidated aggregate amount of all payments in respect to
all Indebtedness of the Arch Coal Group secured by Permitted Liens as of
the Report Date is $__________, which amount is not greater than item (iv)
below, each determined as of the Report Date.
(i) total assets of Arch Coal Group $________
(ii) Investment of Arch Coal Group in Arch Western Group $________
(iii) item (i) less item (ii) $________
(iv) 5% of item (iii) $________
(6) Investments in Permitted Joint Ventures. As of the date hereof, the
aggregate of all permitted Investments in Permitted Joint Ventures of the
Borrower and its Subsidiaries (each such Investment being listed on the
attached schedule, showing the name and nature of the Joint Venture, amount
of the Investment, the Person making such Investment, and the other
Person(s) party to the Joint Venture), totals $______________, which amount
does not exceed, for the Borrower and all Significant Subsidiaries, the
amount set forth in Section 7.2.6 of the Credit Agreement.
(7) Permitted Investments in Arch Western. The Borrower's Permitted Investment
in Arch Western totals as of the Report Date totals $____________________,
which amount does not exceed the limit on such Investments set forth in
Section 7.2.14(v) of the Credit Agreement.
(8) As of the date hereof, the Borrower has performed and complied with all
covenants and conditions of the Credit Agreement; all of the
representations and warranties contained in Section 5 of the Credit
Agreement and in the other Loan Documents are true on and as of the date
hereof with the same effect as though such representations and warranties
had been made on the date hereof (except representations and warranties
which expressly relate solely
- -----------------
/10/ See Section 7.2.2 of the Credit Agreement.
<PAGE>
PNC Bank, National Association Report for the
Page 7 Fiscal Quarter Ending_______
to an earlier date or time, which representations and warranties shall be
true and correct on and as of the specific dates or times referred to
therein); no Event of Default or Potential Default exists and is
continuing.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of ____________, _____.
ARCH COAL, INC.
By:
---------------------------------------
Name:
Title: [Chief Executive Officer/
President/Chief Financial Officer]
<PAGE>
Financial Review
<TABLE>
<CAPTION>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS............. 26
REPORT OF INDEPENDENT AUDITORS................... 46
REPORT OF MANAGEMENT............................. 47
CONSOLIDATED STATEMENTS OF OPERATIONS............ 48
CONSOLIDATED BALANCE SHEETS...................... 49
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.. 50
CONSOLIDATED STATEMENTS OF CASH FLOWS............ 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....... 52
SELECTED FINANCIAL INFORMATION................... 73
DIRECTORS AND OFFICERS........................... 75
STOCKHOLDER INFORMATION.......................... 76
</TABLE>
25
<PAGE>
Management's Discussion and Analysis
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements in the "Outlook" and "Liquidity and
Capital Resources" sections below. Words such as "anticipates," "believes,"
"estimates," "expects," "is likely," "predicts," "may" and variations of such
words and similar expressions are intended to identify such forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions, it cannot assure that the expectations contained in such
statements will be achieved. Important factors which could cause actual results
to differ materially from those contained in such statements are discussed in
the "Contingencies" and "Certain Trends and Uncertainties" sections below.
RESULTS OF OPERATIONS
Ashland Coal, Inc. ("Ashland Coal") merged with Arch Mineral Corporation
effective July 1, 1997 (the "Ashland Coal merger") to form Arch Coal, Inc. (the
"Company"). The Company acquired the U.S. coal operations of Atlantic Richfield
Company (the "Arch Western operations") effective June 1, 1998 (the "Arch
Western transaction"). Results of operations do not include activity of Ashland
Coal or the Arch Western operations prior to the effective dates of these
transactions. Accordingly, the Company's results of operations for 1999, 1998
and 1997 are not directly comparable.
1999 Compared to 1998
The Company incurred a net loss in 1999 of $346.3 million compared to net income
of $30.0 million in 1998. Current year results include operating results of the
Arch Western operations for the entire year, whereas the prior year only
includes results of the Arch Western operations from June 1, 1998, including a
65% share of Canyon Fuel Company, LLC ("Canyon Fuel") income, net of purchase
accounting adjustments.
Results of operations for 1999 include various one-time charges which are
detailed below.
During the fourth quarter of 1999, the Company determined that significant
changes were necessary in the manner and extent in which certain central
Appalachia coal assets would be deployed. The anticipated changes were
determined during the Company's annual planning process and were necessitated by
the adverse legal and regulatory rulings related to surface mining techniques
(see additional discussion in the "Contingencies--Legal Contingencies--Dal-Tex
Litigation" section of this report) as well as the continued negative pricing
trends related to central Appalachia coal production experienced by the Company.
As a result of the planned changes in the deployment of its long-lived assets in
the central Appalachia region and pursuant to FAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the
Company evaluated the recoverability of its active mining operations and its
coal reserves for which no future mining plans exist. This evaluation indicated
that the future undiscounted cash flows of three mining operations, Dal-Tex,
Hobet 21 and Coal-Mac, and certain coal reserves with no future mining plans
were below the carrying value of such long-lived assets. Accordingly, during the
fourth quarter of 1999, the Company adjusted the operating assets and coal
reserves to their estimated fair value of approximately $99.7 million, resulting
in a non-cash impairment charge of $364.6 million (including $50.6 million
relating to operating assets and $314.0 million relating to coal reserves). The
estimated fair value for the three mining operations was based on anticipated
future cash flows discounted at a rate commensurate with the risk involved. The
cash flow assumptions used in this determination are consistent with the
Company's future plans for those operations and consider the impact of inflation
on coal prices and operating costs which are expected to offset each other. The
estimated fair
26
<PAGE>
Arch Coal, Inc. and Subsidiaries
value for the coal reserves with no future mining plans was based upon the fair
value of these properties to be derived from subleased operations. Management
does not expect the impairment charge to have a material impact on the operating
results of the Company in any future period.
During the current year, the Company also recorded pre-tax charges totaling
$23.1 million related to (i) the restructuring of its administrative workforce;
(ii) the closure of its Dal-Tex mine in West Virginia due to permitting
problems; and (iii) the closure of several mines in Kentucky and the one
remaining underground mine in Illinois due to depressed coal prices, which was
caused in part by increased competition from western coal mines. Of the $23.1
million charge, $20.3 million was recorded in cost of coal sales, $2.3 million
was recorded in selling, general and administrative expenses and $.5 million was
recorded in other expenses in the consolidated statements of operations. The
following are the components of severance and other exit costs included in the
restructuring charge along with related 1999 activity:
<TABLE>
<CAPTION>
Balance at
1999 Utilized in December 31,
(in thousands) Charge 1999 1999
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Employee costs.......... $7,354 $ 704 $6,650
Obligations for
non-cancelable
lease payments........ 9,858 484 9,374
Reclamation
liabilities........... 3,667 1,200 2,467
Depreciation
acceleration.......... 2,172 2,172 --
-------------------------------------------------
$23,051 $4,560 $18,491
-------------------------------------------------
</TABLE>
Except for the charge related to depreciation acceleration, all of the 1999
restructuring charge will require the Company to use cash. Also, the Company
expects to utilize the balance of the amounts reserved for employee costs in
2000, while the obligations for non-cancelable lease payments and reclamation
liabilities will be utilized in future periods as lease payments are made and
reclamation procedures are performed.
During 1999, the Company also recorded a $112.3 million valuation allowance
for a portion of its deferred tax assets that management believes, more likely
than not, will not be realized. These deferred tax assets include a portion of
the alternative minimum tax credits and some of the deductible temporary
differences that will likely not be realized at the maximum effective tax rate.
The valuation allowance has been recorded in the benefit for income taxes line
item in the consolidated statements of operations.
Effective January 1, 1999, the Company changed its method of depreciation on
preparation plants and loadouts from a straight-line basis to a units-of-
production basis, which is based upon units produced, subject to a minimum level
of depreciation. These assets are usage-based assets and their economic lives
are typically based and measured on coal throughput. The Company believes the
units-of-production method is preferable to the method previously used because
the new method recognizes that depreciation of this equipment is related
substantially to physical wear due to usage as well as the passage of time. This
method, therefore, more appropriately matches production costs over the lives of
the preparation plants and loadouts with coal sales revenue and results in a
more accurate allocation of the cost of the physical assets to the periods in
which the assets are consumed. The cumulative effect of applying the new method
for years prior to 1999 is an increase to income of $3.8 million net-of-tax
($6.3 million pre-tax) reported as a cumulative effect of accounting change in
the consolidated statement of operations for 1999.
Total revenues increased in 1999 from 1998 by 4.1% primarily as a result of
the inclusion of a full year of operating results from the Arch Western
operations compared to only seven months of operating results from the Arch
Western operations in 1998. Revenues were also favorably impacted by increased
production and
27
<PAGE>
Management's Discussion and Analysis
sales at the Company's Samples mine. The increase was partially offset by
reduced production and sales at the Company's Dal-Tex and Wylo operations, both
located in central Appalachia, and the Company's Arch of Illinois surface
operation. The Wylo and Arch of Illinois surface operations ceased production in
December 1999 and June 1998, respectively, due to the depletion of their
recoverable coal reserves. As planned, the Company idled the Dal-Tex operation
on July 23, 1999 due to a delay in obtaining new mining permits which resulted
from legal action in the U.S. District Court for the Southern District of West
Virginia (the "Dal-Tex Litigation") (see additional discussion in the
"Contingencies--Legal Contingencies--Dal-Tex Litigation" section of this
report). On a per-ton-sold basis, the Company's average selling price decreased
by $4.03, primarily because of the inclusion of the Arch Western operations for
all of 1999 compared to only seven months during 1998. Western coal has a
significantly lower average sales price than that provided from the Company's
eastern coal operations, due in part to the lower Btu content of Powder River
Basin coal.
Excluding the one-time charges discussed above, income from operations
decreased $27.2 million despite the inclusion of the Arch Western operations for
the entire year compared to only seven months in 1998. Net gains on the
disposition of assets were $7.5 million in 1999 compared to $41.5 million in
1998. The gain in 1998 included a pre-tax gain of $18.5 million on the sale of
certain idle properties in eastern Kentucky and a pre-tax gain of $7.5 million
on the sale of the Company's idle Big Sandy Terminal. The operating results in
1999 also include pre-tax gains of $5.0 million related to settlements with
various suppliers. Operating results in 1999 were negatively affected by
production shortfalls, deterioration of mining conditions and resulting lower
operating income from the Company's idled Dal-Tex mine complex. Operating
results were also negatively affected in 1999 at Mingo Logan, where, despite
another strong year from the Company's longwall operation (Mountaineer Mine)
which contributed $46.6 million of income to the Company's results of
operations, results were significantly below the $77.8 million contributed to
income from operations in 1998. The decrease was primarily caused by depressed
coal prices, generally less favorable mining conditions and increased mine
development expenses associated with the start-up of the Alma seam during 1999.
During the first half of 1999, the Company continued to experience production
shortfalls and operating challenges at its Black Thunder Mine in Wyoming due to
geologic, water drainage and sequencing problems. The negative impacts discussed
above were partially offset by lower operating losses in 1999 at the Arch of
Kentucky operation compared to 1998. The Arch of Kentucky operation shut-down in
January of 1998. Results during 1998 were impacted by the costs associated with
the shut-down of that operation.
Selling, general and administrative expenses increased $1.6 million primarily
due to the inclusion of the Arch Western operations for the entire year compared
to only seven months in 1998, the restructuring charge (see discussion above)
and additional legal and other expenses related to surface-mining issues in West
Virginia.
Sales contract amortization increased $2.0 million primarily from the
inclusion of a full year of the Arch Western operations compared to seven months
in 1998.
Interest expense increased $27.9 million due to the increase in debt
associated with the June 1998 Arch Western transaction.
The income tax benefit recorded in 1999 resulted from the generation of the
pre-tax loss (primarily attributable to the asset impairment and restructuring
charges) offset by the valuation allowance recorded against the Company's
deferred tax assets. Management believes that taxable income will be generated
by the Company in future periods that is consistent with his-
28
<PAGE>
Arch Coal, Inc. and Subsidiaries
torical income levels and will, more likely than not, permit the realization of
the remaining net deferred tax assets at December 31, 1999. The Company's
effective tax rate is sensitive to changes in annual profitability and
percentage depletion.
EBITDA (income (loss) from operations before the effect of changes in
accounting principles and extraordinary items; merger-related costs, unusual
items, asset impairment and restructuring charges; net interest expense; income
taxes; depreciation, depletion and amortization of Arch Coal, its subsidiaries
and its ownership percentage in its equity investments) was $325.9 million for
1999 compared to $313.5 million for 1998. The increase in EBITDA is primarily
attributable to the additional sales that resulted from the inclusion of an
entire year of Arch Western compared to only seven months in 1998. 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).
1998 Compared to 1997
Net income for 1998 was $30.0 million compared to $30.3 million for 1997. The
1998 results include a full year of operating results from the former Ashland
Coal operations, whereas 1997 included only six months of results from those
operations. In addition, 1998 includes results of the Arch Western operations
from June 1, 1998, including a 65% share of Canyon Fuel income, net of purchase
accounting adjustments.
Total revenues increased 41% as a result of the inclusion of a full year of
results from the former Ashland Coal operations in 1998 and seven months of
operating results from the Arch Western operations, 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 in part to the lower Btu content of Powder River Basin coal.
Selling prices were also affected by adverse market conditions in certain
western U.S. and export markets, as well as by reduced seasonal demand caused by
unusually warm winter weather.
Net income for 1998 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).
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 June 1998 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 new mining permits because of the Dal-Tex Litigation, the Dal-Tex
operation was 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 operating
difficulties at the Arch Western operations. The Company experienced production
shortfalls and operating challenges at its Black Thunder mine in Wyoming due to
geologic, water drainage and
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Management's Discussion and Analysis
equipment sequencing problems and substantial transportation delays at its West
Elk mine in Colorado. In addition, Canyon Fuel experienced difficult geologic
conditions at its Skyline Mine. Other items adversely affecting 1998 results, as
compared to 1997 results, included the expiration of an above-market-price long-
term coal supply contract with Georgia Power in December 1997, reduced shipments
under another above-market-price long-term coal supply 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 disposition 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. Results for 1997 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 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.
OUTLOOK
Ashland Distribution. Ashland Inc. ("Ashland"), which owns approximately 58% of
the outstanding common stock of the Company, announced on March 16, 2000 that
its Board of Directors has declared a taxable distribution of approximately 17.4
million of its 22.1 million shares of the Company's common stock. The
distribution will be in the form of a taxable dividend, to be distributed on or
around March 27, 2000 to Ashland's stockholders of record as of March 24, 2000.
Ashland also confirmed that it plans to dispose of its remaining 4.7 million
shares of the Company's common stock in a tax efficient manner after the
distribution, subject to then-existing market conditions. There will be no
impact on the operations of the Company as a result of the distribution by
Ashland. Ashland first announced its interest in exploring strategic
alternatives for its investment in the Company on June 22, 1999.
West Virginia Operations. On October 20, 1999, the U.S. District Court for
the Southern District of West Virginia permanently enjoined the West Virginia
Division of Environmental Protection (the "West Virginia DEP") from issuing any
new permits that authorize the construction of valley fills as part of coal
mining operations. The West Virginia DEP complied with the injunction by issuing
an order banning the issuance of nearly all new permits for valley fills and
prohibiting the further advancement of nearly all existing fills. On October 29,
1999, the district court granted a stay of its injunction, pending the out-
30
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Arch Coal, Inc. and Subsidiaries
come of an appeal of the court's decision filed by the West Virginia DEP with
the U.S. Court of Appeals for the Fourth Circuit. The West Virginia DEP
rescinded its order in response to the stay granted by the court. It is
impossible to predict the outcome of the West Virginia DEP's appeal to the
Fourth Circuit. If, however, the district court's ruling is not overturned or if
a legislative or other solution is not achieved, then the ability of the Company
and other coal producers to mine coal in West Virginia would be seriously
compromised.
The injunction discussed above was entered as part of the litigation that
caused the delay in obtaining mining permits for the Company's Dal-Tex operation
(see additional discussion of this litigation in the "Contingencies--Legal
Contingencies--Dal-Tex Litigation" section of this report). As a result of such
delay, the Company idled its Dal-Tex mining operation on July 23, 1999. The
Company remains hopeful that it can reopen the Dal-Tex operation after all
necessary permits are obtained, which is not expected to occur until mid-2001 at
the earliest. Reopening the mine is, however, contingent upon the district
court's injunction being overturned or a legislative or other solution being
achieved, as well as then-existing market conditions.
West Elk Mine. The Company temporarily idled its West Elk underground mine in
Gunnison County, Colorado, on January 28, 2000 following the detection of
higher-than-normal levels of carbon monoxide in a portion of the mine. Higher-
than-normal readings of carbon monoxide indicate that combustion is present
somewhere within the affected portion of the mine. The Company has sealed the
affected portion of the mine while it further isolates the affected area and
determines the cause of and solutions to the problem. West Elk produced
approximately 7.3 million tons of coal in 1999, employs approximately 300 people
and generated approximately $13.1 million of the Company's total operating
income in 1999. The Company does not believe the mine's closure will have a
material long-term effect on the Company's financial condition, but it could
have a material adverse effect on the Company's results of operations until the
mine is reopened and fully operating. The Company expects the mine to incur
after-tax losses of between $4 million and $6 million per month until normal
operations can be resumed. The Company also expects a portion of these losses to
be covered by business interruption insurance which will be received at some
point in the future.
Mine Closures. During 1999, in addition to idling the Dal-Tex mine as
discussed above, the Company closed two surface mines in Kentucky and its last
mining operation in the midwestern United States, the Conant underground mine in
southern Illinois. The Kentucky surface mines are affiliated with the Coal-Mac
operation and were closed as a result of its cost structure not being
competitive in the current market. The Conant Mine was affiliated with the Arch
of Illinois operation and was closed due to a lack of demand for the mine's
high-sulfur coal. Demand for high-sulfur coal has declined rapidly as a result
of the stringent Clean Air Act requirements that are driving a shift to low-
sulfur coal. The Coal-Mac and the Arch of Illinois operations combined,
produced 3.4 million tons of coal and had an operating loss of $12.4 million in
1999, which included a $6.0 million impairment charge at Coal-Mac and a combined
restructuring charge of $5.7 million (discussed previously), offset by a $2.5
million gain on the sale of a dragline at the Illinois operation.
Restructuring. As part of its corporate-wide effort to reduce costs, the
Company streamlined the structure of its organization and as a result eliminated
approximately 81 administrative jobs, 58 of which were corporate and the
remainder of which were subsidiary positions. The elimination of jobs occurred
through layoffs and attrition. The Company believes that the corporate-wide
restructuring will likely reduce future operating
31
<PAGE>
Management's Discussion and Analysis
costs by approximately $11 million a year compared to 1999.
Tax Provision. During 1999, the Company recorded a $112.3 million valuation
allowance for a portion of its deferred tax asset that management believes, more
likely than not, will not be realized (see additional discussion in the "Results
of Operations" section above). In analyzing its tax provision for 1999, the
Company determined that as it relates to future income taxes, the Company does
not anticipate recognizing all of its alternative minimum tax credit carry-
forwards in the future and, as a result, expects to recognize part of the
benefit of its deferred tax asset at the alternative minimum tax rate of
approximately 24%.
Coal Markets. Mild weather patterns over the last year, a depressed export
coal market and excessive production capacity continue to depress coal prices.
The Company does not believe that prices are likely to improve in the near term.
Despite these conditions, the Company will continue to focus on solidifying its
position in low-sulfur coal markets. With Phase II of the Clean Air Act taking
effect on January 1, 2000, the Company believes that in the long term,
compliance coal will command a premium in the marketplace, particularly in the
Powder River Basin. Compliance coal is coal that meets the requirements of Phase
II of the Clean Air Act without the use of expensive scrubbing technology. All
of Arch's western coal production and approximately half of its eastern coal
production is compliance quality.
The Company's acquisition of the Arch Western operations on June 1, 1998
strongly positioned the Company in western compliance coal markets. The
acquisition also helped solidify the Company's future as reserves of its other
operations deplete, most notably Mingo Logan's Mountaineer Mine, which will
deplete its long-wall-mineable reserves in 2002.
The Company continues to develop its assets at the Arch Western operations,
including the Black Thunder mine near Gillette, Wyoming. On March 12, 1999, the
Company entered into an agreement to transfer ownership of a portion of the 412-
million-ton Thundercloud federal coal lease (the "Thundercloud lease"), which is
part of the Company's Black Thunder mine, to Kennecott Energy Company
("Kennecott Energy"). The reserves, located adjacent to the western border of
Kennecott Energy's Jacobs Ranch mine, are estimated to contain 35 million tons
of coal. In exchange for that portion of the lease, the Company received
approximately $12 million along with baseline environmental data with respect to
the Thundercloud lease. The environmental data has allowed the Company to
expedite permitting of the property on which development is underway. In
addition, the Black Thunder mine recently completed the construction of a fourth
dragline.
Chief Financial Objectives. Despite the ongoing challenges of the coal
industry, the Company continues to believe that it is uniquely positioned to
capitalize on growing demand for electricity, the deregulation of the electric
utility industry and the ongoing shift to lower-sulfur coals. The Company will
continue to take the necessary steps to realize the substantial potential of its
assets and maximize shareholder value by focusing on its five chief financial
objectives:
(i) aggressively paying down debt, (ii) further strengthening cash generation,
(iii) improving earnings, (iv) increasing productivity and (v) reducing costs
throughout the Company.
LIQUIDITY AND CAPITAL RESOURCES
The following is a summary of cash provided by or used in each of the indicated
types of activities during the past three years:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in)
Operating activities............. $ 279,963 $ 188,023 $ 190,263
Investing activities............. (84,358) (1,271,371) (80,009)
Financing activities............. (219,736) 1,101,585 (114,793)
</TABLE>
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Arch Coal, Inc. and Subsidiaries
Cash provided by operating activities increased in 1999 compared to 1998
primarily as a result of increased operating activity from the Arch Western
transaction (which during 1999 was included for a full year compared to only
seven months in 1998), including distributions from the Company's investment in
Canyon Fuel. This increase was partially offset by increased interest payments
resulting from increased borrowings associated with the Arch Western transaction
and less favorable operating results in 1999 as discussed previously. The slight
decrease in cash provided by operating activities from 1998 to 1997 was
principally due to increased interest expense as a result of increased
borrowings associated with the Arch Western transaction, and tax payments
related to adjustments to income taxes payable in prior years. This slight
decrease was mostly offset by increased operating activity resulting from the
Arch Western transaction and distributions from the Company's investment in
Canyon Fuel.
A portion of the 1999 distributions from the Company's investment in Canyon
Fuel resulted from Canyon Fuel amending its coal supply agreements with the
Intermountain Power Agency's Intermountain Power Project ("IPA") during January
1999. Pursuant to the amended coal supply agreements, Canyon Fuel will supply
coal to IPA through 2010 with a mutual option to extend the terms of the
agreements to 2015 at a rate of approximately 2.2 million tons per year. The
amended coal supply agreements were entered into in connection with the
settlement of arbitration and litigation between Canyon Fuel and IPA. 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.
The decrease in cash used for investing activities in 1999 compared to 1998
primarily resulted from the payment of $1.1 billion in cash in the Arch Western
transaction. In addition, the Company amended another coal supply agreement
during 1999 that was acquired in the Arch Western transaction. The amendment
changed the contract terms from above-market to market-based pricing. As a
result of the amendment, the Company received proceeds of $14.1 million (net of
royalty and tax obligations) from the customer. 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. The Company's
expenditures for property, plant and equipment were $98.7 million, $141.7
million and $77.3 million in 1999, 1998 and 1997, respectively. Capital
expenditures are made to improve and replace existing mining equipment, expand
existing mines, develop new mines and improve the overall efficiency of mining
operations. Capital expenditures for 1998 included $31.6 million for the first
of five federal lease bonus payments on the Thundercloud lease. The four
remaining payments will be made in January of 2000 through 2003. The Company
estimates that its capital expenditures (excluding acquisitions) may be as much
as $105 million during 2000. It is anticipated that these capital expenditures
will be funded by available cash and existing credit facilities.
Cash used in financing activities principally reflects reductions in
borrowings of $189.1 million in 1999. The Company was able to reduce debt from
the higher amount of cash flow generated from operations. 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
33
<PAGE>
Management's Discussion and Analysis
$35.7 million of senior notes concurrently with its borrowings to finance the
Arch Western transaction. In addition, a January 1998 sale and leaseback of
equipment resulted in proceeds of $45.4 million. Cash used in financing
activities in 1997 principally reflects reductions in borrowings of $102.2
million. On September 29, 1998, the Company's Board of Directors authorized the
Company to repurchase up to 2 million shares of Company common stock. The timing
of the purchase and the number of shares to be purchased are dependent on market
conditions. Under this authorization, 1.7 million shares had been acquired by
the Company through December 31, 1999. The Company paid dividends of $17.6
million, $18.3 million and $13.6 million in 1999, 1998 and 1997, respectively.
On February 24, 2000, Arch declared a quarterly dividend of 5.75 cents per share
on the Company's common stock which represents a 50% reduction in the Company's
1999 quarterly dividends. The reduction is attributable to the Company's goal to
aggressively pay down debt. The Company 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 the Company's future
earnings, capital requirements and financial condition.
In connection with the Arch Western transaction, the Company entered into two
new five-year credit facilities: a $675 million non-amortizing term loan in the
name of Arch Western ("Arch Western credit facility"), the entity owning title
to coal reserves and operating assets acquired in the Arch Western transaction,
and a $900 million credit facility in the name of the Company ("Arch Coal credit
facility"), including a $300 million fully amortizing term loan and a $600
million revolver. Borrowings under the 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 $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, 1999, there were $65 million of such agreements in effect, under
which no borrowings were outstanding.
At December 31, 1999, as a result of the effect of the write-down of impaired
assets and other restructuring costs, the Company did not comply with certain
restrictive covenant requirements associated with the Company's credit
facilities. The Company received an amendment to the credit facilities on
January 21, 2000. These amendments contain, among other things, provisions for
the payment of fees of .25% and an increase in the interest rate of .375%
associated with the Company's term loan and the $600 million revolver. In
addition, the amendments require the pledging of assets to collateralize the
term loan and the $600 million revolver by May 20, 2000. The assets to be
pledged are expected to include equity interests in wholly owned entities,
certain real property interests, accounts receivable and inventory of the
Company.
The Company is exposed to market risk associated with interest rates. At
December 31, 1999, debt included $1.175 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.
34
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Arch Coal, Inc. and Subsidiaries
To manage these exposures, the Company enters into interest-rate swap agreements
to modify the interest characteristics of outstanding Company debt. At December
31, 1999, the Company had interest-rate swap agreements having a total notional
value of $780.0 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 5.53% (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, 1999 ranged
from 32 to 56 months. All instruments are entered into for other than trading
purposes.
The discussion below presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates and prices.
The range of changes 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, 1999, with all other variables held constant. A
100-basis-point decrease in market interest rates would result in an increase in
the net financial instrument position of the fixed portion of debt of $20.4
million at December 31, 1999. Based on the variable-rate debt included in the
Company's debt portfolio as of December 31, 1999, after considering the effect
of the swap agreements, a 100-basis-point increase in interest rates would
result in an annualized additional $4.0 million of interest expense incurred
based on year-end debt levels.
At December 31, 1999, the Company's debt level amounted to $1.181 billion,
compared to $1.370 billion at December 31, 1998. The decrease resulted from a
debt reduction program instituted by the Company. Stockholders' equity decreased
$376.9 million during 1999 primarily as a result of the operating losses
incurred during 1999, which included the one-time charges discussed above. At
December 31, 1999, the Company's debt represented 83% of capital employed, an
increase from 69% at December 31, 1998 as a result of the one-time charges
discussed above. The current assets to current liabilities ratio was .8 to 1.0
at December 31, 1999 compared to 1.1 to 1.0 at December 31, 1998.
CONTINGENCIES
Reclamation
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA") and
similar state statutes require that mine property be restored in accordance with
specified standards and an approved reclamation plan. The Company accrues for
the costs of final mine closure reclamation over the estimated useful mining
life of the property. These costs relate to reclaiming the pit and support
acreage at surface mines and sealing portals at deep mines. Other costs of final
mine closure common to surface and underground mining are related to reclaiming
refuse and slurry ponds, eliminating sedimentation and drainage control
structures and dismantling or demolishing equipment or buildings used in mining
operations. The Company also accrues for significant reclamation that is
completed during
35
<PAGE>
Management's Discussion and Analysis
the mining process prior to final mine closure. The establishment of the final
mine closure reclamation liability and the other ongoing reclamation liability
are based upon permit requirements and require 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 included a net increase in the
liability of $4.3 million and $4.9 million in 1999 and 1998, respectively, and a
net decrease in the liability of $4.4 million in 1997. 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, 1999, in
the aggregate, are estimated to be approximately $308.4 million. At December 31,
1999 and 1998, the accrual for such costs, which is included in accrued
reclamation and mine closure and in accrued expenses, was $156.4 million and
$157.5 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 its probable
aggregate loss as a result of such claims as of December 31, 1999 is $5.2
million (included in other noncurrent liabilities). The Company estimates that
its reasonably possible aggregate losses from all material litigation that is
currently pending could be as much as $.5 million (before taxes) in excess of
the loss previously recognized.
Dal-Tex Litigation. On July 16, 1998, ten individuals and The West Virginia
Highlands Conservancy filed suit in U.S. District Court for the Southern
District of West Virginia against the director of the West Virginia DEP and
officials of the U.S. Army Corps of Engineers (the "Corps") alleging violations
of SMCRA and the Clean Water Act. The plaintiffs alleged that the West Virginia
DEP and the Corps have violated their duties under SMCRA and the Clean Water Act
by authorizing the construction of "valley fills" under certain surface coal
mining permits. These fills are the large, engineered works into which the
excess earth and rock extracted above and between the seams of coal that are
removed during surface mining are placed. The plaintiffs also alleged that the
West Virginia DEP has failed to require (i) that lands mined are restored to
"approximate original contour" and (ii) that approved post-mining land uses are
enforced following reclamation.
Four indirect, wholly owned subsidiaries of the Company hold nine permits that
were identified in the complaint as violating the legal standards that the
plaintiffs requested the district court interpret. In addition, a pending permit
application for the Company's Dal-Tex operation (known as the "Spruce Fork
Permit") was specifically identified as a permit the issuance of which should be
enjoined. Three subsidiaries of the Company intervened in the lawsuit in support
of the Corps and the West Virginia DEP on August 6, 1998.
A partial settlement between the plaintiffs and the Corps was reached on
December 23, 1998. Pursuant to that settlement, all claims were dismissed
against the Corps for its alleged failure to execute its duties under the Clean
Water Act. The settlement agreement reached between the Corps and the plaintiffs
requires the preparation of a programmatic environmental impact statement (an
"EIS") under the National Environmental Policy Act of 1969 ("NEPA") to evaluate
the environmental effects of mountaintop mining. This EIS is scheduled to be
completed by January 2001. Until it is completed, any proposed fill greater than
250 acres in size must
36
<PAGE>
Arch Coal, Inc. and Subsidiaries
secure an individual Clean Water Act (S)404 "dredge and fill" permit, instead of
a general permit like the one the Corps indicated it would issue for the Dal-Tex
operation under its nationwide authorization program. The Spruce Fork Permit was
not included in the settlement, and the claims against the Corps with respect to
that permit were not dismissed.
On March 3, 1999, the district court issued a preliminary injunction which
prohibited the Corps from issuing a general Clean Water Act (S)404 "dredge and
fill" permit for the Dal-Tex operation and enjoined the Company from future
operations on the permit until a full trial on the merits could be held. As a
result of the entry of the preliminary injunction, the Company idled the Dal-Tex
mine on July 23, 1999.
On July 26, 1999, the plaintiffs and the West Virginia DEP tendered to the
district court a proposed consent decree which would resolve most of the
remaining issues in the case. Pursuant to the proposed consent decree, the West
Virginia DEP agreed in principal to amend its regulations and procedures to
correct alleged deficiencies. In addition, the parties agreed in principal on a
new definition of "approximate original contour" as it applies to mountaintop
mining, as well as to certain regulatory changes involving post-mining land
uses. After inviting public comment of the proposed consent decree, the court
entered the consent decree in a final order on February 17, 2000.
The Company's Hobet Mining subsidiary agreed as part of the consent decree to
revise portions of its Spruce Fork Permit application to conform to the new
definition of "approximate original contour" to be adopted by the West Virginia
DEP. Hobet Mining also agreed to seek an individual Clean Water Act (S)404
"dredge and fill" permit from the Corps as part of its future mining operation.
Before issuing that permit, the Corps must first complete an EIS to comply with
the provisions of NEPA. The completion of this EIS and issuance of all permits
are not expected until mid-2001 at the earliest.
The plaintiffs' allegation that the West Virginia DEP violated its duties
under the Clean Water Act by authorizing the construction of "valley fills"
under certain coal mining permits was not resolved by the consent decree. On
October 20, 1999, the district court entered a permanent injunction against the
West Virginia DEP prohibiting the issuance of any new permits that authorize the
construction of valley fills as part of mining operations. The court concluded
that the excess earth and rock that is placed in a valley fill during mining is
not fill material, but rather is "waste," which may not be placed in
intermittent and perennial streams because the disposal of such material cannot
meet applicable water quality standards.
The West Virginia DEP immediately complied with the district court's
injunction by issuing an administrative order banning the expansion of nearly
all existing valley fills as well as prohibiting the issuance of nearly all new
permits for valley fills. The West Virginia DEP also filed an appeal of the
district court's decision with the U.S. Court of Appeals for the Fourth Circuit.
On October 29, 1999, the district court granted a stay of its decision, pending
the outcome of the appeal. The West Virginia DEP rescinded its administrative
order on November 1, 1999 in response to the district court's action.
It is impossible to predict the outcome of the West Virginia DEP's appeal. If,
however, the district court's decision is upheld, the Company and other coal
producers may be forced to close all or a portion of their mining operations in
West Virginia because of the prohibition on constructing "valley fills" for
their existing and future mines. Regardless of the outcome of the appeal, the
Company determined that significant changes were necessary in the manner and
extent in which certain central Appalachia coal assets would be deployed.
Cumulative Hydrologic Impact Assessment ("CHIA") Litigation. On January 20,
2000, two environmental organizations, the Ohio Valley
37
<PAGE>
Management's Discussion and Analysis
Environmental Coalition and the Hominy Creek Watershed Association, filed suit
against the West Virginia DEP in U.S. District Court in Huntington, West
Virginia. In addition to allegations that the West Virginia DEP violated state
law and provisions of the Clean Water Act, the plaintiffs allege that the West
Virginia DEP's issuance of permits for surface and under-ground coal mining has
violated certain non-discretionary duties mandated by SMCRA. Specifically, the
plaintiffs allege that the West Virginia DEP has failed to require coal
operators seeking permits (i) to conduct water monitoring to verify stream flows
and ascertain water quality, (ii) to always include certain water quality
information in their permit applications and (iii) to analyze the probable
hydrologic consequences of their operations. The plaintiffs also allege that the
West Virginia DEP has failed to analyze the cumulative hydrologic impacts of
mining operations on specific watersheds.
The plaintiffs seek an injunction to prohibit the West Virginia DEP from
issuing any new permits which fail to comply with all of the elements identified
in their complaint. The complaint identifies, and seeks to enjoin, three pending
permits that are sought by the Company's Mingo Logan subsidiary to continue
existing surface mining operations at the Phoenix reserve. If the permits are
not issued, it is possible that those operations will have to be suspended by
the subsidiary early in 2001. On February 17, 2000, the West Virginia DEP filed
a motion to dismiss all claims in the lawsuit. Depending upon the disposition of
the motion, the Mingo Logan subsidiary may choose to intervene in the matter.
It is impossible to predict whether this litigation will result in a
suspension of the affected surface mining operations. If, however, the
operations are suspended, the Company's financial condition and results of
operations could be adversely affected and, depending upon the length of the
suspension, the effect could be material.
Lone Mountain Litigation. 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 the discharge of
approximately 6.3 million gallons of water and fine coal slurry into a tributary
of the Powell River in Lee County, Virginia.
The U.S. Department of the Interior has notified the Company that it intends
to file a civil action under the Clean Water Act and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") to recover the
natural resource damages suffered as a result of the discharge. The Interior
Department alleges that fresh water mussels listed on the federal Endangered
Species List that reside in the Powell River were affected as a consequence of
the discharge. The Company and the Interior Department have reached an agreement
in principal to settle this matter, which would require a payment of $2.5
million by the Company. The settlement is subject to the Company and the
Interior Department entering into a definitive agreement. The Company's
consolidated balance sheet as of December 31, 1999 reflects a reserve for the
full amount of this settlement.
Other Litigation. 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-1980s, of fluids containing small quantities of polychlorinated biphenyls
("PCBs") to a company authorized to engage in the processing and disposal of
these wastes. Some of these waste materials were sent to one of the sites for
final disposal. The Company responded to the information request submitted by
the EPA on December 1, 1997. Any liability which might be asserted by the EPA
against the Company is not believed to be material because of the de minimis
quantity and
38
<PAGE>
Arch Coal, Inc. and Subsidiaries
concentration of PCBs linked to the Company. Moreover, the party with which the
subsidiary contracted to dispose of the waste material has agreed to indemnify
the Company for any costs associated with this action.
CERTAIN TRENDS AND UNCERTAINTIES
Substantial Leverage; Variable Interest Rates; Restrictive Covenants
The Company has substantial leverage and significant debt service and lease and
royalty payment obligations. As of December 31, 1999, the Company had
outstanding consolidated indebtedness of approximately $1.2 billion,
representing approximately 83% of the Company's total capitalization.
The Company's ability to satisfy its debt service and lease payment
obligations will depend upon the future operating performance of its
subsidiaries, which will be affected by prevailing economic conditions in their
markets, as well as financial, business and other factors, certain of which are
beyond their control. Based upon current levels of operations, the Company
believes that cash flow from operations and available cash, together with
available borrowings under the Company's credit facilities, will be adequate to
meet the Company's future liquidity needs for at least the next several years.
However, there can be no assurance that the Company's business will generate
sufficient cash flow from operations or that future borrowings will be available
in an amount sufficient to enable the Company to fund its debt service and lease
payment obligations or its other liquidity needs.
The degree to which the Company is leveraged could have material consequences
to the Company and its business, including, but not limited to; (i) making it
more difficult for the Company to satisfy its debt service, lease payment and
other obligations; (ii) increasing the Company's vulnerability to general
adverse economic and industry conditions; (iii) limiting the Company's ability
to obtain additional financing to fund future acquisitions, working capital,
capital expenditures or other general corporate requirements; (iv) reducing the
availability of cash flow from operations to fund acquisitions, working capital,
capital expenditures or other general corporate purposes; (v) limiting the
Company's flexibility in planning for, or reacting to, changes in its business
and the industry in which it competes; and (vi) placing the Company at a
competitive disadvantage when compared to competitors with less debt.
A 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, could have a material adverse effect on
the Company.
Environmental and Regulatory Factors
Federal, state and local 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
39
<PAGE>
Management's Discussion and Analysis
costs of production and competitive position.
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. For example, new
legislation, regulations or orders may require the Company to incur increased
costs or to significantly change its operations. New legislation, regulations or
orders may also cause coal to become a less attractive fuel source, resulting in
a reduction in coal's share of the market for fuels used to generate
electricity. Any such regulation, legislation or order could have an adverse
effect on the Company's business, results of operations and financial condition
and, depending upon the nature and scope of the legislation, regulations or
orders, the effect could be material.
Permits. Mining companies must obtain numerous permits that impose strict
regulations on various environmental and health and safety matters in connection
with coal mining, including the emission of air- and water-borne pollutants, the
manner and sequencing of coal extractions and reclamation, the storage, use and
disposal of waste and other substances, some of which may be hazardous, and the
construction of fills and impoundments. Because regulatory authorities have
considerable discretion in the timing of permit issuance and because both
private individuals and the public at large possess rights to comment on and
otherwise engage in the permitting process, including through intervention in
the courts, no assurance can be made (i) that permits necessary for mining
operations will be issued or, if issued, that such issuance would be timely or
(ii) that permitting requirements will not be changed or interpreted in a manner
that would have a materially adverse effect on the Company's financial condition
or results of operations.
As indicated by the Dal-Tex Litigation which is discussed in "Contingencies--
Legal Contingencies--Dal-Tex Litigation" above, the regulatory environment in
West Virginia is changing with respect to coal mining. No assurance can be made
that the Fourth Circuit will overturn the district court's decision in such
legal action or that a legislative or other solution will be achieved. If the
district court's ruling is not overturned or a legislative or other solution is
not achieved, there could be a material adverse effect on the Company's
financial condition and results of operations.
NOx Emissions. The use of explosives in surface mining causes oxides of
nitrogen ("NOx") to be emitted into the air. The emission of NOx from the use of
explosives at surface mines in the Powder River Basin is gaining increased
scrutiny from regulatory agencies and the public. The Company has taken steps to
monitor the level of NOx emissions from blasting activities at its surface mines
in the Powder River Basin and is continuing efforts to find a method of reducing
these NOx emissions. Any increase in the regulation of NOx emissions from
blasting activities could have an adverse effect on the Company's Powder River
Basin surface mines. Depending upon the nature and scope of any such
regulations, the effect on the mines could be material.
Kyoto Protocol. On December 11, 1997, the U.S. government representatives at
the climate change negotiations in Kyoto, Japan, agreed to reduce the emissions
of greenhouse gases (including carbon dioxide and other gas emissions that are
believed by some to be trapping heat in the atmosphere and warming the earth's
climate) in the United States. The U.S. adoption of the requirements of the
Kyoto protocol is subject to conditions which may not occur, including the
protocol's ratification by the U.S. Senate. The U.S. Senate has indicated that
it will not ratify an agreement unless certain conditions, not currently
provided for in the Kyoto protocol, are met. At present, it is not possible to
predict whether the Kyoto protocol will attain the force of law in the United
States or what its impact would be on the Company. Further developments
40
<PAGE>
Arch Coal, Inc. and Subsidiaries
in connection with the Kyoto protocol could have a material adverse effect on
the Company's financial condition and results of operations.
Customers. In July 1997, the EPA proposed that twenty-two eastern states,
including states in which many of the Company's customers are located, make
substantial reductions in nitrous oxide emissions. The EPA expects the states to
achieve these reductions by requiring power plants to reduce their nitrous oxide
emissions by an average of 85%. To achieve such reductions, power plants would
be required to install reasonably available control technology ("RACT") and
additional control measures. Installation of RACT and additional control
measures required under the EPA's proposal would make it more costly to operate
coal-fired utility power plants and, depending on the requirements of individual
state implementation 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.
The EPA is also proposing to implement stricter ozone standards by 2003. The
U.S. Court of Appeals for the District of Columbia has, however, enjoined the
EPA from implementing the new ozone standards on constitutional and other legal
grounds. Implementation of the standards may be delayed or precluded because of
the injunction. The injunction may also result in modification of the proposed
ozone standards.
The U.S. Department of Justice, on behalf of the EPA, recently filed a
lawsuit against seven investor-owned utilities and brought an administrative
action against one government-owned utility for alleged violations of the Clean
Air Act. The EPA claims that over thirty of these utilities' power stations have
failed to obtain permits required under the Clean Air Act for major improvements
which have extended the useful service of the stations or increased their
generating capacity. The Company supplies coal to seven of the eight utilities.
It is impossible to predict with certainty the outcome of this legal action. Any
outcome that adversely affects the Company's customers or makes coal a less
attractive fuel source could, however, have a material adverse effect on the
Company's financial condition or 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
$46.6 million of the Company's total operating income in 1999.
Reliance on and Terms of Long-Term Coal Supply Contracts
The Company sells a substantial portion of its coal production pursuant to long-
term coal supply agreements and, as a consequence, may experience fluctuations
in operating results due to the expiration or termination of such contracts, or
sales price redeterminations or suspensions of deliveries under such coal supply
agreements. Other short- and long-term contracts define base or optional tonnage
requirements by reference to the customer's requirements, which are subject to
change as a result of factors beyond the Company's (and in certain instances the
customer's) control, including utility deregulation. In addition, certain price
adjustment provisions permit a periodic increase or decrease in the contract
price to reflect increases and
41
<PAGE>
Management's Discussion and Analysis
decreases in production costs, changes in specified price indices or items such
as taxes or royalties. Price reopener provisions provide for an upward or
downward adjustment in the contract price based on market factors. The Company
has from time to time renegotiated contracts after execution to extend the
contract term or to accommodate changing market conditions. The contracts also
typically include stringent minimum and maximum coal quality specifications and
penalty or termination provisions for failure to meet such specifications and
force majeure 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 emissions limits
for NOx in connection with Phase II of the Clean Air Act 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 a quarterly basis, as a result of one or more
factors beyond its control, including expiration or termination of, or sales
price redeterminations or suspensions of deliveries under, coal supply
agreements; disruption of transportation services; changes in mine operating
conditions; changes in laws or regulations, including permitting requirements;
unexpected results in litigation; work stoppages or other labor difficulties;
competitive and overall coal market conditions; and general economic conditions.
The Company's mining operations are also subject to factors beyond its control
that can negatively or positively affect the level of production and thus the
cost of mining at particular mines for varying lengths of time. These factors
include weather conditions; equipment replacement and repair requirements;
variations in coal seam thickness, amount of overburden, rock and other natural
materials; and other surface or subsurface conditions. Such production factors
frequently result in significant fluctuations in operating results.
Third quarter results of operations are frequently adversely affected by lower
production and resultant higher costs due to scheduled vacation periods at the
Company's UMWA mines. In addition, costs are typically somewhat higher during
vacation periods because of maintenance
42
<PAGE>
Arch Coal, Inc. and Subsidiaries
activity carried on during those periods. These adverse effects may prevent the
third quarter from being comparable to the other quarters and also prevent the
third quarter results from being indicative of results to be expected for the
full year.
Certain Contractual Arrangements
Arch Western Resources, LLC ("Arch Western") owns the rights to the coal
reserves and operating assets acquired in the Arch Western transaction. The
Limited Liability Company Agreement pursuant to which Arch Western was formed
provides that a subsidiary of the Company, as the managing member of Arch
Western, generally has exclusive power and authority to conduct, manage and
control the business of Arch Western. However, if Arch Western at the time has a
debt rating less favorable than Ba3 from Moody's Investors Service or BB- from
Standard & Poor's Ratings Group or does not meet certain specified indebtedness
and interest coverage ratios, then a proposal that Arch Western make certain
distributions, incur indebtedness, sell properties or merge or consolidate with
any other entity would require the consent of all the members of Arch Western.
In connection with the Arch Western transaction, the Company entered into an
agreement pursuant to which the Company agreed to indemnify another member of
Arch Western against certain tax liabilities in the event that such liabilities
arise as a result of certain actions taken prior to June 1, 2013, including the
sale or other disposition of certain properties of Arch Western, the repurchase
of certain equity interests in Arch Western by Arch Western or the reduction
under certain circumstances of indebtedness incurred by Arch Western in
connection with the Arch Western transaction. Depending on the time at which any
such indemnification obligation was to arise, it could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
The membership interests in Canyon Fuel are owned 65% by Arch Western and 35%
by a subsidiary of ITOCHU Corporation, a Japanese corporation. The agreement
which governs the management and operations of Canyon Fuel provides for a
Management Board to manage its business and affairs. Generally, the Management
Board acts by affirmative vote of the representatives of the members holding
more than 50% of the membership interests. However, certain actions require
either the unanimous approval of the members or the approval of representatives
of members holding more than 70% of the membership interests. The Canyon Fuel
agreement also contains various restrictions on the transfer of membership
interests in Canyon Fuel.
Ashland Inc. ("Ashland") currently owns approximately 58% of the Company's
outstanding common stock. Pursuant to a stockholders agreement among the
Company, Ashland and Carboex S.A. ("Carboex"), the Company has agreed to
nominate for election as a director of the Company a person designated by
Carboex, and Ashland has agreed to vote its shares of common stock in a manner
sufficient to cause the election of such nominee, in each case for so long
(subject to earlier termination in certain circumstances) as shares of common
stock owned by Carboex represent at least 63% of the shares of common stock
acquired by Carboex in the Company's merger with Ashland's subsidiary, Ashland
Coal, Inc. In addition, for so long as the various trusts for the benefit of
descendants of H.L. and Lyda Hunt and various corporations owned by trusts for
the benefit of descendants of H.L. and Lyda Hunt (collectively the "Hunt
Entities") have the collective voting power to elect by cumulative voting one or
more persons to serve on the Board of Directors of the Company, the Company has
agreed to nominate for election as directors of the Company that number of
persons designated by certain of the Hunt Entities that could be elected to the
Board by the Hunt Entities by exercise of such cumulative voting power.
43
<PAGE>
Management's Discussion and Analysis
The Company's Restated Certificate of Incorporation requires the affirmative
vote of the holders of at least two-thirds of outstanding common stock voting
thereon to approve a merger or consolidation and certain other fundamental
actions involving or affecting control of the Company. The Company's Bylaws
require the affirmative vote of at least two-thirds of the members of the Board
of Directors of the Company in order to declare dividends and to authorize
certain other actions.
Transportation
The coal industry depends on rail, trucking and barge transportation to deliver
shipments of coal to customers. Disruption of these transportation services
could temporarily impair the Company's ability to supply coal to its customers
and thus adversely affect the Company's business and operating results. In
addition, transportation costs are a significant component of the total cost of
supplying coal to customers and can significantly affect a coal producer's
competitive position and profitability. Increases in the Company's
transportation costs, or changes in such costs relative to transportation costs
incurred by providers of competing coal or of other fuels, could have an adverse
effect on the Company's business and results of operations.
Importance of Acquisitions and Related Risks
The Company has grown, in part, through the acquisition of coal companies, coal
properties, coal leases and related assets, and management believes that such
acquisitions will continue to be important to the Company. Acquisitions involve
a number of special risks, including diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities and difficulties in the assimilation of the operations of
the acquired companies, some or all of which could have a material adverse
effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be successful in the
development of such acquisitions or that acquired operations will achieve
anticipated benefits to the Company.
Reliance on Estimates of Reserves; Title
There are numerous uncertainties inherent in estimating quantities of
recoverable reserves, including many factors beyond the control of the Company.
Estimates of economically recoverable coal reserves and net cash flows
necessarily depend upon the number of variable factors and assumptions, such as
geological and mining conditions (which may not be fully identified by available
exploration data and/or differ from experience in current operations),
historical production from the area compared with production from other
producing areas, the assumed effects of regulation by governmental agencies and
assumptions concerning coal prices, operating costs, severance and excise taxes,
development costs and reclamation costs, all of which may cause estimates to
vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of net cash flows expected therefrom prepared by different engineers
or by the same engineers at different times may vary substantially. Actual coal
tonnage recovered from identified reserve areas or properties and revenues and
expenditures with respect to the Company's reserves may vary from estimates, and
such variances may be material. No assurance can be given that these estimates
are an accurate reflection of the Company's actual reserves.
The Company's mining operations are conducted on properties owned or leased by
the Company. The loss of any lease could adversely affect the Company's ability
to develop the applicable reserves. Because title to most of the Company's
leased properties and mineral rights is not usually verified until a commitment
is
44
<PAGE>
Arch Coal, Inc. and Subsidiaries
made by the Company to develop a property, which may not occur until after the
Company has obtained necessary permits and completed exploration of the
property, the Company's right to mine certain of its reserves may be adversely
affected if defects in title or boundaries exist. In addition, there can be no
assurance that the Company can successfully negotiate new leases or mining
contracts for properties containing additional reserves or maintain its
leasehold interests in properties on which mining operations are not commenced
during the term of the lease.
Year 2000 Readiness Disclosure
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000-ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruption in mission-critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $9.3 million in capital expenditures since 1997 in
connection with replacing its non-compliant systems. The Company is not aware of
any material problems resulting from Year 2000 issues with its internal systems
or the products and services of third parties. The Company will continue to
monitor its mission-critical computer applications and those of its suppliers
and vendors throughout the Year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
Factors Routinely Affecting Results of Operations
Any one or a combination of the following factors may occur at times or in a
manner that causes results of the Company's operations to deviate from
expectations: changing demand; fluctuating selling prices; contract penalties,
suspensions or terminations; operational, geologic, transportation and weather-
related factors; unexpected regulatory changes; results of litigation; or labor
disruptions. Any event disrupting substantially all production at any of the
Company's principal mines for a prolonged period would have a material adverse
effect on the Company's current and projected results of operations. The effect
of such a disruption at the Mingo Logan Mountaineer Mine would be particularly
severe because of the high volume of coal produced by that mining operation and
the relatively high contribution to operating income from the sale of such coal.
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above (appearing on pages
48 to 72 of this annual report) present fairly, in all material respects, the
consolidated financial position of Arch Coal, Inc. and subsidiaries at December
31, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 3 to the financial statements, in 1999, the Company
changed its method of accounting for depreciation of its preparation plants and
loadouts.
Ernst & Young LLP
Louisville, Kentucky
January 21, 2000
46
<PAGE>
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
accounting principles generally accepted in the United States 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 John W. Lorson
President and Chief Executive Officer Controller
47
<PAGE>
Consolidated Statements of Operations
(in thousands of dollars except per share data)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Coal sales........................................... $1,509,596 $1,428,171 $1,034,813
Income from equity investment........................ 11,129 6,786 --
Other revenues....................................... 46,657 70,678 32,062
--------------------------------------
1,567,382 1,505,635 1,066,875
--------------------------------------
Costs and expenses
Cost of coal sales................................... 1,426,105 1,313,400 916,802
Selling, general and administrative expenses......... 46,357 44,767 28,885
Amortization of coal supply agreements............... 36,532 34,551 18,063
Write-down of impaired assets........................ 364,579 -- --
Merger-related expenses.............................. -- -- 39,132
Other expenses....................................... 20,835 25,070 22,111
--------------------------------------
1,894,408 1,417,788 1,024,993
--------------------------------------
Income (loss) from operations...................... (327,026) 87,847 41,882
Interest expense, net:
Interest expense..................................... (90,058) (62,202) (17,822)
Interest income...................................... 1,291 756 721
--------------------------------------
(88,767) (61,446) (17,101)
--------------------------------------
Income (loss) before income taxes, extraordinary
loss and cumulative effect of accounting change... (415,793) 26,401 24,781
Benefit from income taxes............................. (65,700) (5,100) (5,500)
--------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of accounting change............ (350,093) 31,501 30,281
Extraordinary loss from the extinguishment of debt,
net of taxes......................................... -- (1,488) --
Cumulative effect of accounting change, net of taxes.. 3,813 -- --
--------------------------------------
Net income (loss).................................. $ (346,280) $ 30,013 $ 30,281
======================================
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item and
cumulative effect of accounting change............... $ (9.12) $ .79 $ 1.00
Extraordinary loss from the extinguishment of debt,
net of taxes......................................... -- (.03) --
Cumulative effect of accounting change, net of taxes.. .10 -- --
--------------------------------------
Basic and diluted earnings (loss) per common share.... $ (9.02) $ .76 $ 1.00
======================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE>
Consolidated Balance Sheets
(in thousands of dollars except share and per share data)
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
=======================================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents................................................ $ 3,283 $ 27,414
Trade accounts receivable................................................ 162,802 202,871
Other receivables........................................................ 25,659 24,584
Inventories.............................................................. 62,382 68,455
Prepaid royalties........................................................ 1,310 13,559
Deferred income taxes.................................................... 21,600 8,694
Other.................................................................... 8,916 7,757
-------------------------
Total current assets................................................... 285,952 353,334
-------------------------
Property, plant and equipment
Coal lands and mineral rights............................................ 1,170,956 1,476,703
Plant and equipment...................................................... 1,042,128 1,111,120
Deferred mine development................................................ 92,265 80,926
-------------------------
2,305,349 2,668,749
Less accumulated depreciation, depletion and amortization................ (826,178) (732,005)
-------------------------
Property, plant and equipment, net..................................... 1,479,171 1,936,744
-------------------------
Other assets
Prepaid royalties........................................................ -- 31,570
Coal supply agreements................................................... 151,978 201,965
Deferred income taxes.................................................... 182,500 83,209
Investment in Canyon Fuel................................................ 199,760 272,149
Other.................................................................... 33,013 39,249
-------------------------
Total other assets..................................................... 567,251 628,142
-------------------------
Total assets........................................................... $2,332,374 $2,918,220
=========================
Liabilities and stockholders' equity
Current liabilities
Accounts payable......................................................... $ 109,359 $ 129,528
Accrued expenses......................................................... 145,561 142,630
Current portion of debt.................................................. 86,000 61,000
-------------------------
Total current liabilities.............................................. 340,920 333,158
Long-term debt............................................................. 1,094,993 1,309,087
Accrued postretirement benefits other than pension......................... 343,993 343,553
Accrued reclamation and mine closure....................................... 129,869 150,636
Accrued workers' compensation.............................................. 105,190 105,333
Accrued pension cost....................................................... 22,445 18,524
Other noncurrent liabilities............................................... 53,669 39,713
-------------------------
Total liabilities...................................................... 2,091,079 2,300,004
-------------------------
Stockholders' equity
Common stock, $.01 par value, 100,000,000 shares authorized,
38,164,482 issued and outstanding in 1999 and 39,371,581
issued and outstanding in 1998.......................................... 397 397
Paid-in capital.......................................................... 473,335 473,116
Retained earnings (deficit).............................................. (213,466) 150,423
Treasury stock, at cost (1,541,146 shares at December 31, 1999 and
333,952 shares at December 31, 1998).................................... (18,971) (5,720)
-------------------------
Total stockholders' equity............................................. 241,295 618,216
-------------------------
Total liabilities and stockholders' equity............................. $2,332,374 $2,918,220
=========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
49
<PAGE>
Consolidated Statements of Stockholders' Equity
Three years ended December 31, 1999
(in thousands of dollars except share and per share data)
<TABLE>
<CAPTION>
Retained Treasury
Common Paid-In Earnings Stock at
Stock Capital (Deficit) Cost Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net loss.................................... (346,280) (346,280)
Dividends paid ($.46 per share)............. (17,609) (17,609)
Issuance of 95 shares of common stock
under the stock incentive plan............ 1 1
Treasury stock purchases (1,396,700 shares),
net of issuances (189,506 shares)......... 218 (13,251) (13,033)
--------------------------------------------------------
Balance at December 31, 1999.................. $397 $473,335 $(213,466) $(18,971) $ 241,295
========================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
50
<PAGE>
Consolidated Statements of Cash Flows
(in thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss)...................................................................... $(346,280) $ 30,013 $ 30,281
Adjustments to reconcile to cash provided by
operating activities:
Depreciation, depletion and amortization.......................................... 235,658 204,307 143,632
Prepaid royalties expensed........................................................ 14,217 19,694 8,216
Net gain on disposition of assets................................................. (7,459) (41,512) (4,802)
Income from equity investment..................................................... (11,129) (6,786) -
Distributions from equity investment.............................................. 83,178 18,850 -
Cumulative effect of accounting change............................................ (3,813) - -
Merger-related expenses........................................................... - - 33,096
Write-down of impaired assets..................................................... 364,579 - -
Changes in operating assets and liabilities....................................... (69,471) (24,671) (28,842)
Other............................................................................. 20,483 (11,872) 8,682
-----------------------------------
Cash provided by operating activities........................................ 279,963 188,023 190,263
-----------------------------------
Investing activities
Payments for acquisition............................................................... - (1,126,706) -
Additions to property, plant and equipment............................................. (98,715) (141,737) (77,309)
Proceeds from coal supply agreements................................................... 14,067 - -
Additions to prepaid royalties......................................................... (26,057) (26,252) (7,967)
Additions to notes receivable.......................................................... - (10,906) -
Proceeds from disposition of property, plant and equipment............................. 26,347 34,230 5,267
-----------------------------------
Cash used in investing activities............................................ (84,358) (1,271,371) (80,009)
-----------------------------------
Financing activities
Proceeds from (payments on) revolver and lines of credit............................... (37,884) 176,582 78,897
Net proceeds from (payments on) term loans............................................. (151,210) 958,441 -
Payments on notes...................................................................... - (42,860) (181,110)
Payments for debt issuance costs....................................................... - (12,725) -
Proceeds from sale and leaseback of equipment.......................................... - 45,442 -
Dividends paid......................................................................... (17,609) (18,266) (13,630)
Proceeds from sale of common stock..................................................... - 691 1,050
Proceeds from sale of treasury stock................................................... 2,549 - -
Purchases of treasury stock............................................................ (15,582) (5,720) -
-----------------------------------
Cash provided by (used in) financing activities.............................. (219,736) 1,101,585 (114,793)
-----------------------------------
Increase (decrease) in cash and cash equivalents............................. (24,131) 18,237 (4,539)
Cash and cash equivalents, beginning of year........................................... 27,414 9,177 13,716
-----------------------------------
Cash and cash equivalents, end of year................................................. $ 3,283 $ 27,414 $ 9,177
===================================
Supplemental cash flow information:
Cash paid during the year for interest................................................. $ 100,781 $ 48,760 $ 18,593
Cash paid during the year for income taxes, net of refunds............................. $ 11,251 $ 29,090 $ 21,918
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
51
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
NOTE 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 operations as income
from equity investment. (See additional discussion in "Investment in Canyon
Fuel" in Note 6.)
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 operations.
Accounting Estimates
The preparation of financial statements in conformity with U.S. 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:
December 31
---------------------
1999 1998
- --------------------------------------------------------------------
Coal.......................................... $ 28,183 $ 25,789
Supplies...................................... 34,199 42,666
---------------------
$ 62,382 $ 68,455
---------------------
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 $23.5 million and $23.9 million at December 31, 1999 and
1998, 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 charged
to cost of coal sales.
Coal Supply Agreements
Acquisition costs allocated 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 $131.4 million
and $94.8 million at December 31, 1999 and 1998, respectively.
52
<PAGE>
Arch Coal, Inc. and Subsidiaries
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. Except for preparation plants and loadouts, 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.
Effective January 1, 1999, preparation plants and loadouts are depreciated using
the units-of-production method over the estimated recoverable reserves subject
to a minimum level of depreciation (see additional discussion in "Change in
Accounting Method" in Note 3). Prior to January 1, 1999, preparation plants and
loadouts were depreciated on a straight-line basis over their estimated useful
lives.
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. (See additional discussion in
"Restructuring Charge and Write-Down of Impaired Assets" in Note 2.)
Revenue Recognition
Coal sales revenues include sales to customers of coal produced at Company
operations and coal 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 are deferred on the balance sheets (in other long-term liabilities)
and amortized as an adjustment to interest expense over the remaining original
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.
53
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
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.
NOTE 2. RESTRUCTURING CHARGE AND WRITE-DOWN OF IMPAIRED ASSETS
In 1999, the Company recorded a pre-tax charge of $23.1 million related to the
restructuring of its administrative workforce, the closure of its Dal-Tex mining
operation in West Virginia due to permitting problems and the closure of several
mines in Kentucky and Illinois due to the depressed coal prices and increased
competition from western coal mines. Of the $23.1 million charge, $20.3 million
was recorded in cost of coal sales, $2.3 million was recorded in selling,
general and administrative expenses and $.5 million was recorded in other
expenses in the Company's consolidated statement of operations. The
restructuring of the administrative workforce included the elimination of 81
administrative jobs, 58 of which were corporate and the remainder of which were
subsidiary positions all of which was part of a corporate-wide effort to reduce
general and administrative expenses. The mine closures included the termination
of 161 employees. As of December 31, 1999, 74 administrative and 65 mine
employees have been terminated. The following are the components of
severance and other exit costs included in the restructuring charge along with
related 1999 activity:
<TABLE>
<CAPTION>
Balance at
Utilized in December 31,
1999 Charge 1999 1999
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Employee costs.............. $ 7,354 $ 704 $ 6,650
Obligations for
non-cancelable
lease payments............ 9,858 484 9,374
Reclamation
liabilities............... 3,667 1,200 2,467
Depreciation
acceleration.............. 2,172 2,172 --
-------------------------------------------
$23,051 $4,560 $18,491
-------------------------------------------
</TABLE>
Except for the charge related to depreciation acceleration, all of the 1999
restructuring charge will require the Company to use cash. Also, the Company
expects to utilize the balance of the amounts reserved for employee costs in
2000, while the obligations for non-cancelable lease payments and reclamation
liabilities will be utilized in future periods as lease payments are made and
reclamation procedures are performed.
In addition, during the fourth quarter of 1999, the Company determined that
significant changes were necessary in the manner and extent in which certain
central Appalachia coal assets would be deployed. The anticipated changes were
determined during the Company's annual planning process and were necessitated by
the adverse legal and regulatory rulings related to surface mining techniques
(see Note 20), as well as the continued negative pricing trends related to
central Appalachia coal production experienced by the Company. As a result of
the planned changes in the deployment of its long-
54
<PAGE>
Arch Coal, Inc. and Subsidiaries
lived assets in the central Appalachia region and pursuant to FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, the Company evaluated the recoverability of its active mining
operations and its coal reserves for which no future mining plans exist. This
evaluation indicated that the future undiscounted cash flows of three mining
operations, Dal-Tex, Hobet 21 and Coal-Mac, and certain coal reserves with no
future mining plans were below the carrying value of such long-lived assets.
Accordingly, during the fourth quarter of 1999, the Company adjusted the
operating assets and coal reserves to their estimated fair value of
approximately $99.7 million, resulting in a non-cash impairment charge of $364.6
million (including $50.6 million relating to operating assets and $314.0 million
relating to coal reserves). The estimated fair value for the three mining
operations was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved. The estimated fair value for the coal
reserves with no future mining plans was based upon the fair value of these
properties to be derived from subleased operations. The impairment loss has been
recorded as a loss from the write-down of impaired assets in the consolidated
statements of operations.
NOTE 3. CHANGE IN ACCOUNTING METHOD
Through December 31, 1998, plant and equipment had principally been depreciated
on the straight-line method over the estimated useful lives of the assets, which
range from three to 20 years. Effective January 1, 1999, depreciation on the
Company's preparation plants and loadouts was computed using the units-of-
production method, which is based upon units produced, subject to a minimum
level of depreciation. These assets are usage-based assets and their economic
lives are typically based and measured on coal throughput. The Company believes
the units-of-production method is preferable to the method previously used
because the new method recognizes that depreciation of this equipment is related
substantially to physical wear due to usage as well as to the passage of time.
This method, therefore, more appropriately matches production costs over the
lives of the preparation plants and loadouts with coal sales revenue and results
in a more accurate allocation of the cost of the physical assets to the periods
in which the assets are consumed. The cumulative effect of applying the new
method for years prior to 1999 is an increase to income of $3.8 million net-of-
tax ($6.3 million pre-tax) reported as a cumulative effect of accounting change
in the consolidated statement of operations for the year ended December 31,
1999. In addition, the net loss of the Company, excluding the cumulative effect
of accounting change, for the year ended December 31, 1999 is $.2 million less,
or $.01 per share less, than it would have been if the Company had continued to
follow the straight-line method of depreciation of equipment for preparation
plants and loadouts.
The unaudited pro-forma amounts below reflect the retroactive application of
units-of-production depreciation on preparation plants and loadouts and the
corresponding elimination of the cumulative effect of the accounting change.
<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
as reported....................... $(346,280) $30,013 $30,281
Pro-forma net
income (loss)..................... (350,093) 29,511 32,442
Basic and diluted earnings
(loss) per common share
as reported....................... (9.02) 0.76 1.00
Pro-forma basic and diluted
earnings (loss) per
common share...................... (9.12) 0.74 1.07
</TABLE>
55
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
NOTE 4. 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 a 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
was 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 operations effective June 1, 1998. The acquired ARCO
operations 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 operations 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 loss...................... .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 the results that would
have occurred had these transactions actually occurred at the beginning of the
relevant periods or of the results of operations that may be achieved in the
future.
NOTE 5. MERGER-RELATED EXPENSES
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
56
<PAGE>
Arch Coal, Inc. and Subsidiaries
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.
NOTE 6. 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 4), was acquired by the Company and is accounted for on the
equity method.
<TABLE>
<CAPTION>
Seven
Year Months
Ended Ended
Condensed Income December 31, December 31,
Statement Information 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Revenues............................. $241,062 $155,634
Total costs and expenses............. 230,512 153,039
------------------------------
Net income........................... $ 10,550 $ 2,595
==============================
65% of Canyon Fuel net income........ $ 6,858 $ 1,687
Effect of purchase adjustments....... 4,271 5,099
------------------------------
Arch Coal's income from its equity
investment in Canyon Fuel.......... $ 11,129 $ 6,786
==============================
December 31
Condensed Balance ------------------------------
Sheet Information 1999 1998
- --------------------------------------------------------------------
Current assets....................... $ 61,212 $ 87,620
Noncurrent assets.................... 452,103 532,119
Current liabilities.................. 37,065 31,459
Noncurrent liabilities............... 20,789 19,247
Members' equity...................... 455,461 569,033
</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 the reduction in amounts assigned to sales
contracts, mineral reserves and other property, plant and equipment totaling
$96.3 million at December 31, 1999 which are not reflected in the condensed
balance sheet information above.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Accrued payroll and
related benefits..................... $ 27,830 $ 29,878
Accrued taxes other than
income taxes......................... 47,727 44,665
Accrued postretirement
benefits other than pension.......... 14,755 15,555
Accrued workers'
compensation......................... 11,144 15,869
Accrued interest....................... 6,285 17,007
Accrued reclamation and
mine closure......................... 26,540 6,841
Other accrued expenses................. 11,280 12,815
------------------------
$145,561 $142,630
========================
NOTE 8. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
December 31
-----------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Current:
Federal.............................. $ 6,796 $ 8,077 $ 8,250
State................................ -- (260) (250)
-----------------------------------
Total current.......................... 6,796 7,817 8,000
Deferred:
Federal.............................. (54,135) (12,583) (13,180)
State................................ (18,361) (334) (320)
-----------------------------------
Total deferred......................... (72,496) (12,917) (13,500)
-----------------------------------
$(65,700) $ (5,100) $ (5,500)
===================================
</TABLE>
A reconciliation of the statutory federal income tax expense (benefit) on the
Company's pretax income (loss) before extraordinary loss and cumulative effect
of accounting change to the
57
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
actual provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
(benefit) at statutory
rate................................ $(145,526) $ 9,240 $ 8,673
Percentage depletion
allowance........................... (15,000) (14,437) (13,543)
State taxes, net of effect of
federal taxes....................... (18,361) (594) (570)
Change in valuation
allowance........................... 112,345 -- --
Non-deductible expenses............... 284 621 236
Other, net............................ 558 70 (296)
-------------------------------------
$(65,700) $ (5,100) $ (5,500)
=====================================
</TABLE>
The Company's federal income tax returns for the years 1995 and 1996 are
currently under review by the Internal Revenue Service (IRS).
During 1997, the Company settled its protest of certain adjustments proposed
by the IRS for the 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.
During 1998, the Company settled its protest of certain unagreed issues with
the IRS for the federal income tax returns for the 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 the 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 number 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 certain
coal reserves.
During 1999, the Company settled an audit of former Ashland Coal, Inc. for the
years January 1995 through June 1997. A payment of $.1 million was made in
January 1999 in settlement of all issues.
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 temporary differences between the financial
statement basis and tax basis of assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other
than pension $139,796 $136,004
Alternative minimum tax credit
carryforward 91,604 70,897
Workers' compensation................ 43,029 29,345
Reclamation and mine closure......... 30,016 22,567
Net operating loss carryforwards..... 11,507 10,232
Plant and equipment.................. 49,069 --
Advance royalties.................... 24,064 --
Other................................ 25,514 17,983
------------------------
Gross deferred tax assets......... 414,599 287,028
Valuation allowance.................. (112,345) --
------------------------
Total deferred tax assets......... 302,254 287,028
------------------------
Deferred tax liabilities:
Coal lands and mineral rights........ 8,965 78,869
Plant and equipment.................. -- 78,359
Leases............................... 21,990 7,884
Coal supply agreements............... 36,750 17,390
Other................................ 30,449 12,623
------------------------
Total deferred tax liabilities.... 98,154 195,125
------------------------
Net deferred tax asset........ 204,100 91,903
Less current asset................ 21,600 8,694
------------------------
Long-term deferred tax asset.. $182,500 $ 83,209
========================
</TABLE>
58
<PAGE>
Arch Coal, Inc. and Subsidiaries
The Company has a net operating loss carryforward for regular income tax
purposes of $35.4 million which will expire in the years 2008 to 2019. The
Company has an alternative minimum tax credit carryforward of $91.6 million
which may carry forward indefinitely to offset future regular tax in excess of
alternative minimum tax.
During 1999, the Company recorded a valuation allowance for a portion of its
deferred tax assets that management believes, more likely than not, will not be
realized. These deferred tax assets include a portion of the alternative minimum
tax credits and some of the deductible temporary differences that will likely
not be realized at the maximum effective tax rate.
NOTE 9. DEBT AND FINANCING ARRANGEMENTS
Debt consists of the following:
<TABLE>
<CAPTION>
December 31
---------------------------
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Indebtedness to banks under lines of
credit (weighted average rate at
December 31, 1998--5.40%)....................... $ -- $ 12,884
Indebtedness to banks under revolving
credit agreement, expiring
May 31, 2003 (weighted average rate
at December 31, 1999--7.61%;
December 31, 1998--6.27%)....................... 365,000 390,000
Variable rate fully amortizing term loan
payable quarterly from July 1, 2001
through May 31, 2003 (weighted
average rate at December 31, 1999--
7.49%; December 31, 1998--6.16%)................ 135,000 285,000
Variable rate non-amortizing term loan
due May 31, 2003 (weighted average
rate at December 31, 1999--7.85%;
December 31, 1998--6.87%)......................... 675,000 675,000
Other............................................. 5,993 7,203
---------------------------
1,180,993 1,370,087
Less current portion.............................. 86,000 61,000
---------------------------
Long-term debt.................................... $1,094,993 $1,309,087
===========================
</TABLE>
In connection with the Arch Western transaction, the Company entered into two
new five-year credit facilities: a $675 million non-amortizing term loan in the
name of Arch Western, the entity owning the right to the coal reserves and
operating assets acquired in the Arch Western transaction, and a $900 million
credit facility in the name of the Company, including a $300 million fully
amortizing term loan and a $600 million revolver. Borrowings under the Company's
new credit facilities were used to finance the acquisition of ARCO's Colorado
and Utah coal operations, to pay related fees and expenses, to refinance
existing corporate debt and for general corporate purposes. The Company
recognized an extraordinary charge of $1.5 million (net of a tax benefit of $.9
million) related to the refinancing of a July 1, 1997 credit facility and the
prepayment of certain other 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.
On August 23, 1999, the Company prepaid $105 million or seven required
quarterly installments on the $300 million fully amortizing term loan. The next
required quarterly installment will be July 1, 2001. The prepayments were funded
by additional borrowings under the $600 million revolver.
The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
December 31, 1999, there were $65 million of such agreements in effect, of which
no borrowings were outstanding.
Except for amounts expected to be repaid in 2000, amounts borrowed under the
revolving
59
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
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, 1999 for the next five
years are $86.0 million in 2000, $30.5 million in 2001, $60.5 million in 2002,
$1.0 billion in 2003 and $.6 million in 2004.
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. At December 31, 1999, as a result of the effect of the write-down
of impaired assets and other restructuring costs, the Company did not comply
with certain of these restrictive covenant requirements, for which the Company
received an amendment on January 21, 2000. These amendments contain, among other
things, provisions for the payment of fees of .25% and an increase in the
interest rate of .375% associated with the Company's term loan and the $600
million revolver. In addition, the amendments require the pledging of assets to
collateralize the term loan and the $600 million revolver by May 20, 2000. The
assets to be pledged are expected to include equity interests in wholly owned
entities, certain real property interests, accounts receivable and inventory of
the Company.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of the Company's outstanding debt. At December 31, 1999, the
Company had interest-rate swap agreements having a total notional value of $780
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 5.53% (before the credit spread over LIBOR) and is receiving a
weighted-average variable rate based upon 30-day and 90-day LIBOR. At December
31, 1999, the remaining terms of the swap agreements ranged from 32 to 56
months.
NOTE 10. 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, variable rate term loans and other long-term
debt approximate their fair value.
Interest rate swaps: The fair values of interest rate swaps are based on quoted
prices, which reflect the present value of the difference between estimated
future amounts to be paid and received. At December 31, 1999 and 1998, the fair
value of these swaps is an asset of $27.4 million and a liability of $14.2
million, respectively.
NOTE 11. 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 inde-
60
<PAGE>
Arch Coal, Inc. and Subsidiaries
pendent 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>
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Self-insured black lung benefits:
Service cost............................. $ 1,671 $ 1,022 $ 678
Interest cost............................ 3,522 3,173 2,353
Net amortization and deferral............ 327 111 (10,084)
---------------------------
5,520 4,306 (7,053)
Other workers' compensation benefits..... 13,241 19,396 12,182
---------------------------
$18,761 $23,702 $ 5,129
===========================
</TABLE>
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.50% as of December 31, 1999 (7.00% and 7.25% as of
December 31, 1998 and 1997, respectively) and a black lung benefit cost
escalation rate of 4% in 1999, 1998 and 1997. 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 1997.
Summarized below is information about the amounts recognized in the
consolidated balance sheets for workers' compensation benefits:
<TABLE>
<CAPTION>
December 31
-----------------------
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value for self-insured black lung:
Benefits contractually recoverable from others............. $ 3,254 $ 4,649
Benefits for Company employees............................. 48,267 51,137
------------------------
Accumulated black lung benefit obligation.................. 51,521 55,786
Unrecognized net gain (loss)............................... 4,890 (1,722)
------------------------
56,411 54,064
Traumatic and other workers' compensation..................... 59,923 67,138
------------------------
Accrued workers' compensation................................. 116,334 121,202
Less amount included in accrued expenses...................... 11,144 15,869
------------------------
$105,190 $105,333
========================
</TABLE>
Receivables related to benefits contractually recoverable from others of $3.3
million in 1999 and $4.7 million in 1998 are recorded in other long-term assets.
NOTE 12. 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
61
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
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 $12.9 million, $12.5 million and $10.8
million in 1999, 1998 and 1997, 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 $15.8 million, $15.0 million and $8.5 million for 1999, 1998 and
1997, respectively. Periodically, the Company reviews its entire environmental
liability and makes necessary adjustments for permit changes as granted by state
authorities, additional costs resulting from accelerated mine closures, and
revisions to costs and productivities, to reflect current experience. These
recosting adjustments are recorded in cost of coal sales. Adjustments included a
net increase in the liability of $4.3 million and $4.9 million in 1999 and 1998,
respectively, and a net decrease in the liability of $4.4 million in 1997. The
Company's management believes it is making adequate provisions for all expected
reclamation and other costs associated with mine closures.
13. 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, 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
62
<PAGE>
Arch Coal, Inc. and Subsidiaries
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>
Other
Pension benefits postretirement benefits
------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligations
Benefit obligations at January 1................................ $139,433 $ 84,085 $335,823 $333,908
Service cost.................................................... 7,118 5,841 2,424 3,715
Interest cost................................................... 8,980 8,137 21,580 23,101
Benefits paid................................................... (13,462) (8,562) (14,736) (13,224)
Plan amendments................................................. (435) (3,809) -- (15,924)
Acquisition of ARCO Coal operations............................. -- 39,674 -- 13,625
Other-primarily actuarial (gain) loss........................... (9,851) 14,067 (14,245) (9,378)
------------------------------------------------------------------
Benefit obligations at December 31.............................. $131,783 $139,433 $330,846 $335,823
------------------------------------------------------------------
Change in plan assets
Value of plan assets at January 1............................... $127,274 $ 64,577 $ -- $ --
Actual return on plan assets.................................... 31,308 21,771 -- --
Employer contributions.......................................... 2,097 8,346 14,736 13,224
Acquisition of ARCO Coal operations............................. -- 41,142 -- --
Benefits paid................................................... (13,462) (8,562) (14,736) (13,224)
------------------------------------------------------------------
Value of plan assets at December 31............................. $147,217 $127,274 $ -- $ --
------------------------------------------------------------------
Funded status of the plans
Accumulated obligations less plan assets........................ $(15,434) $ 12,159 $330,846 $335,823
Unrecognized actuarial gain..................................... 37,513 6,920 16,341 6,918
Unrecognized net transition asset............................... 689 887 -- --
Unrecognized prior service gain................................. 2,815 2,667 11,561 16,367
------------------------------------------------------------------
Net liability recognized........................................ $ 25,583 $ 22,633 $358,748 $359,108
------------------------------------------------------------------
Balance sheet liabilities (assets)
Prepaid benefit costs........................................... $ -- $ (1,092) $ -- $ --
Accrued benefit liabilities..................................... 25,583 23,725 358,748 359,108
------------------------------------------------------------------
Net liability recognized........................................ 25,583 22,633 358,748 359,108
Less current portion............................................ 3,138 4,109 14,755 15,555
------------------------------------------------------------------
$ 22,445 $ 18,524 $343,993 $343,553
==================================================================
</TABLE>
Changes in demographic information associated with the defined benefit pension
plan resulted in a $9.9 million actuarial gain in 1999 and a $14.1 million
actuarial loss for 1998. 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. The $14.2 million actuarial gain in the postretirement benefit plan during
1999 results primarily from reduced obligations associated with the Dal-Tex
closure. A January 1997 amendment to the postretirement benefit plan resulted in
a $15.9 million gain in 1998. 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 in 1998 resulted from favorable claims
experience compared to previous projections.
63
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
<TABLE>
<CAPTION>
Other
Pension benefits postretirement benefits
------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted Average Assumptions as of December 31
Discount rate.................................................... 7.50% 7.00% 7.50% 7.00%
Rate of compensation increase.................................... 5.25% 4.75% 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 5.0% 4.5%
</TABLE>
The following table details the components of pension and other postretirement
benefit costs.
<TABLE>
<CAPTION>
Other
Pension benefits postretirement benefits
-----------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost............................... $ 7,118 $ 5,841 $ 2,788 $ 2,424 $ 3,715 $ 3,717
Interest cost.............................. 8,980 8,137 4,970 21,580 23,101 19,546
Expected return on plan assets............. (9,929) (7,521) (4,391) -- -- --
Other amortization and deferral............ (1,122) 790 (503) (9,628) (2,884) (2,573)
-----------------------------------------------------------------------
$ 5,047 $ 7,247 $ 2,864 $14,376 $23,932 $20,690
=======================================================================
</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, 1999 by $44.5 million, or 13.5%,
and the net periodic postretirement benefit cost for 1999 by $3.1 million, or
21.6%.
Multiemployer Pension and Benefit Plans
Under the labor contract with the United Mine Workers of America ("UMWA"), the
Company made payments of $.2 million, $1.3 million and $2.0 million in 1999,
1998, and 1997, 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 $29.6 million at December 31, 1999. 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. At December 31,
1999, approximately 23% of the Company's workforce was represented by the UMWA.
The current UMWA collective bargaining agreement expires at December 31, 2002.
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 $2.7 million in 1999, $3.7 million in 1998, and
$3.9 million in 1997 in expense relative to premiums paid pursuant to the
Benefit Act.
64
<PAGE>
Arch Coal, Inc. and Subsidiaries
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 $8.4 million in 1999, $6.8 million in 1998, and
$4.6 million in 1997.
NOTE 14. 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, the Company's Board of Directors authorized the Company
to repurchase up to 2 million shares of Company common stock. The timing of the
purchases and the number of shares to be purchased are dependent on market
conditions. Through December 31, 1999, the Company had acquired 1,726,900 shares
under the repurchase program at an average price of $12.29 per share compared to
330,200 shares at an average price of $17.08 per share through December 31,
1998.
On February 25, 1999, the Company's Board of Directors authorized the Company
to amend its Automatic Dividend Reinvestment Plan to provide, among other
things, that dividends may be reinvested in the Company's common stock by
purchasing authorized but unissued shares (including treasury shares) directly
from the Company, as well as by purchasing shares in the open market. On May 4,
1999, the Company filed a Form S-3 with the Securities and Exchange Commission
to register 2 million shares of the Company's common stock for issuance under
the amended Plan. As reflected in the Prospectus filed therewith, the amended
Plan provides that the Company determines whether the Plan's administrator
should reinvest dividends in shares purchased in the open market or in shares
acquired directly from the Company. The Company authorized and directed its Plan
administrator (for all shareholders who had elected to reinvest their dividends
in Company stock) to reinvest the June 15, 1999 and September 15, 1999 dividends
in the Company's treasury stock. As of December 31, 1999, approximately $2.5
million of the Company's dividends were reinvested in 189,506 shares of treasury
stock. In accordance with the terms of the amended Plan, the treasury stock was
reissued by the Company at the average of the high and low per share sales price
as reported by the New York Stock Exchange on the date of the dividends, which
averaged $13.446 per share. The Company accounts for the issuance of the
treasury stock using the average cost method.
NOTE 15. 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 awards or units, performance stock or units, merit
awards, phantom stock awards and rights to acquire stock through purchase under
a stock purchase program ("Awards"). Awards the Board of Directors elect to pay
out in cash do not count against the 6,000,000 shares authorized in the 1997
Stock Incentive Plan. Stock options outstanding under the Ashland Coal stock
incentive plans at the date of the Ashland Coal 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
65
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
and are granted at a price equal to 100% of the fair market value of the stock
on the date of grant. SAR's entitle employees to receive a payment equal to the
appreciation in market value of the stated number of common shares from the
SAR's exercise price to the market value of the shares on the date of its
exercise. Unexercised options and SAR's lapse 10 years after the date of grant.
Restricted stock awards and restricted stock units entitle employees to purchase
shares or stock units 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.
Restricted stock units generally carry the same restrictions and potential
forfeiture, but are generally paid in cash upon vesting. Merit awards are grants
of stock without restriction and at a nominal cost. Performance stock 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 Company's 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 of
common stock. As of December 31, 1999, performance units and stock options were
the only types of awards granted. As of December 31, 1999, 361,550 performance
units 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 years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1................. 1,128 $24.86 926 $25.23 -- $ --
Issued in exchange for Ashland Coal
stock options.................................. -- -- -- -- 675 23.69
Granted.......................................... 744 10.69 360 22.88 300 27.88
Exercised........................................ -- -- (48) 14.50 (49) 21.25
Canceled......................................... (63) 16.28 (110) 25.88 -- --
------ ------ ------
Options outstanding at December 31............... 1,809 19.33 1,128 24.86 926 25.23
------ ------ ------
Options exercisable at December 31............... 837 $24.77 600 $25.04 626 $23.88
Options available for grant at December 31....... 4,094 4,775 5,025
</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 (loss) and earnings (loss) per common share would have been changed
to the pro forma amounts as
66
<PAGE>
Arch Coal, Inc. and Subsidiaries
indicated in the table below. The fair value of options granted in 1999, 1998
and 1997 was determined to be $2.9 million, $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 1999 vest over
four years, while the stock options granted in 1998 and 1997 vest ratably over
three years.
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma (unaudited)
Net income (loss) (in millions)......................................... $(347.7) $29.3 $30.1
Basic and diluted earnings (loss) per share............................ $ (9.06) $ .74 $ .98
----------------------------------------------
Weighted average fair value per share of options granted.................. $ 4.13 $7.22 $8.36
----------------------------------------------
Assumptions (weighted average)
Risk-free interest rate................................................. 6.6% 6.0% 6.3%
Expected dividend yield................................................. 2.0% 2.0% 2.0%
Expected volatility..................................................... 41.4% 31.8% 29.0%
Expected life (in years)................................................ 5.0 5.0 5.0
</TABLE>
The pro forma effect on net income (loss) for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income (loss) 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, 1999, range from
$10.6875 to $34.375, and the weighted average remaining contractual life at that
date was 7.3 years. The table below shows pertinent information on options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
(Options in thousands) Options outstanding Options exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average Weighted
Range of Number remaining contractual Weighted average Number average exercise
exercise prices outstanding life (years) exercise price exercisable price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10 - $18 754 8.63 $11.08 65 $15.24
$22 - $23 544 6.84 $22.58 342 $22.41
$25 - $35 511 5.77 $28.04 430 $28.07
</TABLE>
NOTE 16. 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, 1999 and 1998, accounts receivable from electric
utilities located in the United States totaled $120.2 million and $152.1
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.
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>
1999 1998 1997
- -------------------------------------------------
<S> <C> <C> <C>
AEP................. $157,278 $195,682 $129,981
Southern Company.... 163,826 170,452 187,800
</TABLE>
67
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
NOTE 17. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per common share:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary loss and cumulative effect of
accounting change............................................................. $(350,093) $31,501 $30,281
Extraordinary loss from the extinguishment of debt, net of taxes.............. -- (1,488) --
Cumulative effect of accounting change, net of taxes.......................... 3,813 -- --
----------------------------------------
Net income (loss)............................................................. $(346,280) $30,013 $30,281
========================================
Denominator:
Weighted average shares-denominator for basic................................. 38,392 39,626 30,374
Dilutive effect of employee stock options..................................... -- 25 34
----------------------------------------
Adjusted weighted average shares-denominator for diluted...................... 38,392 39,651 30,408
========================================
Basic and diluted earnings (loss) per common share before extraordinary
loss and cumulative effect of accounting change............................... $ (9.12) $ .79 $ 1.00
========================================
Basic and diluted earnings (loss) per common share.............................. $ (9.02) $ .76 $ 1.00
========================================
</TABLE>
At December 31, 1999, 1998 and 1997, 1.8 million, 1.1 million and .4 million
shares, respectively, were not included in the diluted earnings per share
calculation since the shares are antidilutive.
NOTE 18. 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. 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 a certain
threshold. The gain on the sale and leaseback of $10.7 million was deferred and
is being amortized over the base term of the lease as a reduction of rental
expense. Effective April 1, 1999, as a result of the shutdown of the Dal-Tex
operation, the Company purchased for $14.4 million several pieces of equipment
under lease that were included in this transaction and transferred them to the
Company's Wyoming operations. A pro-rata portion of the deferred gain, or $3.1
million, was offset against the cost of the assets. After the effect of this
purchase, at the end of the lease term, the remaining assets can be purchased
for $40.1 million or sold to a third party with the Company required to make a
payment to the lessor in the event, and to the extent that, proceeds are below
$31.3 million.
NOTE 19. 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 $4.8 million in 1999, $7.2 million in 1998, and
$4.7 million in 1997. At December 31, 1999, Ashland Inc. owns approximately 58%
of the Company's outstanding shares of common stock. Management believes that
charges between the Company and Ashland Inc. for services and purchases were
transacted 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
68
<PAGE>
Arch Coal, Inc. and Subsidiaries
from Canyon Fuel for managing the Canyon Fuel operations. The fees recognized as
other income by the Company and as expense by Canyon Fuel were $7.0 million and
$4.1 million for the years ended December 31, 1999 and 1998, respectively.
NOTE 20. 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 $44.2 million in 1999, $31.4
million in 1998, and $14.9 million in 1997. 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, 1999 are as follows:
<TABLE>
<CAPTION>
Leases Royalties
- ---------------------------------
<S> <C> <C>
2000........ $ 29,878 $ 63,421
2001........ 23,731 63,026
2002........ 17,728 62,799
2003........ 10,427 62,485
2004........ 6,389 30,474
Thereafter.. 21,950 196,805
-------------------
$110,103 $479,010
===================
</TABLE>
On October 20, 1999, the U.S. District Court for the Southern District of West
Virginia permanently enjoined the West Virginia Division of Environmental
Protection (the "West Virginia DEP") from issuing any new permits that authorize
the construction of valley fills as part of coal mining operations in West
Virginia. The West Virginia DEP complied with the district court's injunction
by issuing an order banning the issuance of nearly all new permits for valley
fills and prohibiting the further advancement of nearly all existing fills. The
West Virginia DEP also filed an appeal of the district court's decision with the
U.S. Court of Appeals for the Fourth Circuit. On October 29, 1999, the district
court granted a stay of its injunction, pending the outcome of the West Virginia
DEP's appeal. It is impossible to predict the outcome of the appeal. If,
however, the district court's decision is not overturned or if a legislative or
other solution is not achieved, then the Company's and other coal producer's
ability to mine coal in West Virginia will be seriously compromised. This
injunction was entered as part of the litigation that caused the delay in
obtaining mining permits for the Company's Dal-Tex operation. As a result of
such delay, the Company idled its Dal-Tex mining operation on July 23, 1999.
Reopening the Dal-Tex operation is contingent upon the district court's
injunction being overturned or a legislative or other solution being achieved,
as well as then-existing market conditions.
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, 1999, the
Company estimates that its probable aggregate loss as a result of such claims is
$5.2 million (included in other noncurrent liabilities). The Company estimates
that its reasonably possible aggregate losses from all currently pending
litigation could be as much as $.5 million (before tax) in excess of the loss
previously recognized.
69
<PAGE>
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
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.
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 (of which the Company is responsible for 17.5%, or $23.2 million)
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
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 $10.3 million
at December 31, 1999 (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.
In connection with the Arch Western transaction, the Company entered into an
agreement pursuant to which the Company agreed to indemnify another member of
Arch Western against certain tax liabilities in the event that such liabilities
arise as a result of certain actions taken prior to June 1, 2013, including the
sale or other disposition of certain properties of Arch Western, the repurchase
of certain equity interests in Arch Western by Arch Western or the reduction
under certain circumstances of indebtedness incurred by Arch Western in
connection with the Arch Western transaction. Depending on the time at which any
such indemnification obligation was to arise, it could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
NOTE 21. 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>
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease (increase) in operating assets:
Receivables......................................... $ 38,356 $(35,464) $(12,179)
Inventories......................................... 5,188 6,723 16,323
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses............... (15,593) 30,229 5,403
Income taxes........................................ (76,952) (35,057) (27,448)
Accrued postretirement benefits other than pension.. 440 6,813 7,437
Accrued reclamation and mine closure................ (20,767) 1,936 (9,370)
Accrued workers' compensation....................... (143) 149 (9,008)
-------------------------------
Changes in operating assets and liabilities............ $(69,471) $(24,671) $(28,842)
===============================
</TABLE>
70
<PAGE>
Arch Coal, Inc. and Subsidiaries
NOTE 22. 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, 2000. 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.
NOTE 23. SUBSEQUENT EVENTS (UNAUDITED)
The Company temporarily idled its West Elk underground mine in Gunnison County,
Colorado, on January 28, 2000 following the detection of higher-than-normal
levels of carbon monoxide in a portion of the mine. Higher-than-normal readings
of carbon monoxide indicate that combustion is present somewhere within the
affected portion of the mine. The Company has sealed the affected portion of the
mine while it further isolates the affected area and determines the cause of and
solutions to the problem. West Elk produced approximately 7.3 million tons of
coal in 1999, employs approximately 300 people and generated approximately $13.1
million of the Company's total operating income in 1999. The Company does not
believe the mine's closure will have a material long-term effect on the
Company's financial condition, but it could have a material adverse effect on
the Company's results of operations until the mine is reopened and fully
operating.
Ashland Inc., which owns approximately 58% of the outstanding common stock
of the Company, announced on March 16, 2000 that its Board of Directors has
declared a taxable distribution of approximately 17.4 million of its 22.1
million shares of the Company's common stock. The distribution will be in the
form of a taxable dividend, to be distributed on or around March 27, 2000 to
Ashland's stockholders of record as of March 24, 2000. Ashland also confirmed
that it plans to dispose of its remaining 4.7 million shares of the Company's
common stock in a tax efficent manner after the distribution, subject to then-
existing market conditions.
Subsequent to December 31, 1999, the Company's Board of Directors adopted a
stockholder rights plan under which preferred share purchase rights ("Rights")
are to be distributed as a dividend to holders of Company common stock on March
20, 2000 (the "Record Date"). The Rights will become exercisable only if a
person or group (other than certain affiliated entities, including Ashland Inc.,
except in certain circumstances, an "Acquiring Person") acquires 20% or more of
the Company common stock or announces a tender or exchange offer which would
result in the Acquiring Person becoming the beneficial owner of 20% or more of
the Company's outstanding shares of common stock. When exercisable, each Right
entitles the holder to purchase 1/100 of a share of a series of junior
participating preferred stock at an exercise price of $42 per 1/100 of a share,
or in certain circumstances, will allow the holder (except for the Acquiring
Person) to purchase common stock from the Company or voting stock of the
Acquiring Person at one-half the then current market price. At its option, the
Company's Board may allow holders (except for the Acquiring Person) to exchange
their Rights for Company common stock. The Rights will expire on March 20, 2010,
subject to earlier redemption by the Company.
71
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
NOTE 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for 1999 and 1998 is summarized below:
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Coal sales, equity income and other revenues........................$421,126 $391,292 $382,236 $ 372,728
Income (loss) from operations....................................... 13,983/(1)/ 20,739 12,602 (374,350)/(3)/
Income (loss) before cumulative effect of accounting change......... (2,380) 2,459 (1,820) (348,352)
Net income (loss)................................................... 1,433/(2)/ 2,459 (1,820) (348,352)
Basic and diluted earnings (loss) per common share before
cumulative effect of accounting change/(7)/........................ (0.06) 0.06 (0.05) (9.12)
Basic and diluted earnings (loss) per common share/(7)/............. 0.04 0.06 (0.05) (9.12)
1998:
Coal sales, equity income and other revenues........................$312,564/(4)/ $353,238 $424,123/(5)/ $ 415,710
Income from operations.............................................. 22,359 27,450 23,909 14,129/(6)/
Income before extraordinary loss.................................... 15,821 14,999 544 137
Net income.......................................................... 15,821 13,511 544 137
Basic and diluted earnings per common share before
extraordinary loss/(7)/............................................ 0.40 0.38 0.01 0.00
Basic and diluted earnings per common share/(7)/.................... 0.40 0.34 0.01 0.00
</TABLE>
(1) During the first quarter of 1999, the Company recorded a charge of $6.5
million related to severance costs, obligations for non-cancelable lease
payments and a change in the reclamation liability due to the shut-down of
the Company's Dal-Tex operation.
(2) During the first quarter of 1999, the Company changed its depreciation
method on preparation plants and loadouts and recorded a cumulative effect
adjustment which increased income by $3.8 million (net of tax) from
applying the new method for years prior to 1999.
(3) During the fourth quarter of 1999, the Company recorded a one-time pre-tax
charge of $364.6 million to write-down the assets at its Dal-Tex, Hobet 21
and Coal-Mac operations and write-down certain other coal reserves in
central Appalachia and a $16.3 million pre-tax charge related to the
restructuring of the Company's administrative work force and the closure of
mines in Illinois, Kentucky and West Virginia.
(4) During the first quarter of 1998, the Company recorded gains on the sale of
surplus land totaling $7.9 million.
(5) During the third quarter of 1998, the Company sold idle assets and reserves
in eastern Kentucky for a gain of $18.5 million.
(6) 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.
(7) The sum of the quarterly earnings (loss) per common share amounts may not
equal earnings (loss) 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.
72
<PAGE>
Arch Coal, Inc. and Subsidiaries
Selected Financial Information
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999/(2,3)/ 1998/(4,5)/ 1997/(6,7)/ 1996 1995/(8,9)/
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Coal sales, equity income and other revenues.......... $1,567,382 $1,505,635 $1,066,875 $780,621 $737,838
Costs and expenses:
Cost of coal sales.................................. 1,426,105 1,313,400 916,802 669,295 657,529
Selling, general and administrative expenses........ 46,357 44,767 28,885 20,435 19,680
Amortization of coal supply agreements.............. 36,532 34,551 18,063 12,604 13,374
Write-down of impaired assets....................... 364,579 -- -- -- 10,241
Merger-related expenses............................. -- -- 39,132 -- --
Restructuring expenses/(1)/......................... -- -- -- -- 8,250
Other expenses...................................... 20,835 25,070 22,111 22,175 18,739
---------------------------------------------------------------------------
Income (loss) from operations......................... (327,026) 87,847 41,882 56,112 10,025
Interest expense, net................................. 88,767 61,446 17,101 17,592 22,962
Provision (benefit) for income taxes.................. (65,700) (5,100) (5,500) 5,500 (1,900)
---------------------------------------------------------------------------
Income (loss) before extraordinary loss
and cumulative effective of accounting
change.............................................. (350,093) 31,501 30,281 33,020 (11,037)
Extraordinary loss.................................... -- (1,488) -- -- --
Cumulative effect of accounting change................ 3,813 -- -- -- --
---------------------------------------------------------------------------
Net income (loss)..................................... $ (346,280) $ 30,013 $ 30,281 $ 33,020 $(11,037)
===========================================================================
Balance Sheet Data:
Total assets.......................................... $2,332,374 $2,918,220 $1,656,324 $ 885,521 $940,768
Working capital....................................... (54,968) 20,176 40,904 33,166 40,077
Long-term debt, less current maturities............... 1,094,993 1,309,087 248,425 212,695 274,314
Other long-term obligations........................... 655,166 657,759 594,127 421,754 429,993
Stockholders' equity.................................. 241,295 618,216 611,498 130,626 113,692
Common Stock Data:
Basic and diluted earnings (loss) per common
share before extraordinary loss and
cumulative effect of accounting change.............. $ (9.12) $ 0.79 $ 1.00 $ 1.58 $ (0.53)
Basic and diluted earnings (loss) per
common share........................................ $ (9.02) $ 0.76 $ 1.00 $ 1.58 $ (0.53)
Dividends per share................................... $ .46 $ .46 $ .445 $ .38 $ .32
Shares outstanding at year-end........................ 38,164 39,372 39,658 20,948 20,948
Cash Flow Data:
Cash provided by operating activities................. $ 279,963 $ 188,023 $ 190,263 $ 138,471 $ 98,159
Depreciation, depletion and amortization.............. 235,658 204,307 143,632 114,703 100,101
Purchases of property, plant and equipment............ 98,715 141,737 77,309 62,490 80,347
Dividend payments..................................... 17,609 18,266 13,630 8,000 6,697
EBITDA/(10)/.......................................... 325,949 313,500 224,646 170,815 128,617
Operating Data:
Tons sold............................................. 111,177 81,098 40,525 29,443 26,742
Tons produced......................................... 109,524 75,817 36,698 26,887 25,562
Tons purchased from third parties..................... 3,781 4,997 2,906 2,062 1,218
</TABLE>
73
<PAGE>
Selected Financial Information
(1) During 1995, the Company classified a restructuring charge as a separate
component of costs and expenses. Subsequent to 1995, any restructuring
charges have not been identified separately.
(2) The Company changed its depreciation method on preparation plants and
loadouts during the first quarter of 1999 and recorded a cumulative effect
of applying the new method for years prior to 1999 which resulted in a
decrease to net loss in 1999 of $3.8 million net-of-tax.
(3) The loss from operations for 1999 reflects one-time pre-tax charges of
$364.6 million related principally to the write-down of assets at its Dal-
Tex, Hobet 21 and Coal-Mac operations and the write-down of certain other
coal reserves in central Appalachia and a $23.1 million pre-tax charge
related to the restructuring of the Company's administrative work force and
the closure of mines in Illinois, Kentucky and West Virginia.
(4) 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 tax benefit)
related to the early extinguishment of debt which existed prior to the
acquisition.
(5) 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 or certain assets and property in eastern Kentucky and the sale of
the Company's idle Big Sandy Terminal, respectively.
(6) Information for 1997 reflects the merger with Ashland Coal on July 1, 1997.
(7) 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 duplicate facilities.
(8) Income from operations for 1995 reflects charges of $18.5 million for
restructuring and asset write-downs.
(9) 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.
(10) EBITDA is defined as income (loss) from operations before the effect of
changes in accounting principles and extraordinary items (Note 2 above);
merger-related costs, unusual items, asset impairment and restructuring
charges (Notes 3, 4, 7 and 8 above); net interest expense; income taxes;
depreciation, depletion and amortization of 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 nor
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 U.S. 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).
74
<PAGE>
Directors
James R. Boyd c d
Chairman of the Board, Arch Coal, Inc.;
Senior Vice President & Group Operating Officer, Ashland Inc.
Philip W. Block d
Administrative Vice President of Human Resources, Ashland Inc.
Paul W. Chellgren b* d
Chairman of the Board & Chief Executive Officer, Ashland Inc.
Ignacio Dominguez Urquijo a c
Chief Executive Officer & Administrator, Carboex, S.A.;
Senior Vice President, Endesa Group
Thomas L. Feazell b d*
Retired Senior Vice President, Ashland Inc.
Robert L. Hintz a* b
Chairman of the Board, R.L. Hintz & Associates;
Retired Executive Vice President, CSX Corporation
Douglas H. Hunt a b d
Director of Acquisitions, Petro-Hunt, L.L.C.
Steven F. Leer b c
President & Chief Executive Officer, Arch Coal, Inc.
James L. Parker a c*
President, Hunt Petroleum Corporation
A. Michael Perry a c
Chairman of Bank One, West Virginia, N.A.
J. Marvin Quin c
Senior Vice President & Chief Financial Officer, Ashland Inc.
Theodore D. Sands a c d
President, HAAS Capital, LLC;
Retired Managing Director, Investment Banking for the Global Metals/Mining
Group, Merrill Lynch & Co.
a Audit Committee
b Committee on Directors
c Finance Committee
d Personnel and Compensation Committee
* Committee Chairman
Officers
Executive Officers
Steven F. Leer
President & Chief Executive Officer
Kenneth G. Woodring
Executive Vice President, Mining Operations
John W. Eaves
Senior Vice President, Marketing
Bradley M. Allbritten
Vice President, Human Resources
C. Henry Besten Jr.
Chief Financial Officer & Vice President, Strategic Marketing
Robert G. Jones
Vice President, Law & General Counsel
Terry L. O'Connor
Vice President, External Affairs
David B. Peugh
Vice President, Business Development
Robert W. Shanks
Vice President, Operations, & President, Arch Western Resources, LLC
Other Officers
Larry R. Brown
Vice President & Chief Information Officer
William H. Rose
Vice President, Tax Planning
James E. Florczak
Treasurer
Rosemary L. Klein
Secretary & Assistant General Counsel
John W. Lorson
Controller
C. David Steele
Auditor
75
<PAGE>
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.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
1998 1998 1998 1998
- --------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------
March 31 June 30 Sept. 30 Dec. 31
1999 1999 1999 1999
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Dividends per
common share $ .115 $ .115 $ .115 $ .115
High $16 3/4 $14 13/16 $15 5/16 $13
Low $ 9 3/4 $10 13/16 $11 3/8 $ 8 3/4
Close $13 1/4 $13 7/8 $12 5/16 $11 5/16
</TABLE>
On March 8, 2000, Arch Coal's common stock closed at $8 1/8 on the New York
Stock Exchange. At that date, there were 750 holders of record of Arch Coal's
common stock.
DIVIDENDS
In 1999, Arch Coal paid dividends totaling $17.6 million, or $.46 per share, on
its outstanding shares of common stock. In 1998, Arch Coal paid dividends
totaling $18.3 million, or $.46 per share, on its outstanding shares of common
stock. On February 24, 2000, Arch declared a quarterly dividend of 5.75 cents
per share on the company's common stock which represents a 50% reduction in the
company's recent quarterly dividends. The reduction is attributable to the
company's goal to aggressively pay down debt. The company 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.
STOCK INFORMATION
Questions by stockholders regarding stockholder records, stock certificates,
dividends, the Dividend Reinvestment Plan or other stock inquiries should be
directed to:
First Chicago Trust Company of New York
a division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303
Telephone: (800) 317-4445
Website: www.equiserve.com
FINANCIAL INFORMATION
Inquiries from stockholders and security analysts should be directed to:
Investor Relations
Arch Coal, Inc.
CityPlace One, Suite 300
St. Louis, MO 63141
Telephone: (314) 994-2700
Fax: (314) 994-2878
WEBSITE
Arch Coal's quarterly financial results as well as other corporate information
are available at www.archcoal.com.
CORPORATE COMMUNICATIONS
Copies of the Securities and Exchange Commission Form 10-K are available without
charge. Requests for this document and other inquiries should be directed to:
External Affairs
Arch Coal, Inc.
CityPlace One, Suite 300
St. Louis, MO 63141
Telephone: (314) 994-2700
Fax: (314) 994-2878
GENERAL OFFICES
Arch Coal, Inc.
CityPlace One, Suite 300
St. Louis, MO 63141
Telephone: (314) 994-2700
INDEPENDENT AUDITORS
Ernst & Young LLP
Suite 2100
400 West Market Street
Louisville, KY 40202
76
<PAGE>
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:
JURISDICTION OF
NAME INCORPORATION/FORMATION
---- -----------------------
Allegheny Land Company Delaware
Apogee Coal Company Delaware
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
(1) Arch Uinta, LLC Delaware
Arch Western Acquisition Corporation Delaware
(2) Arch Western Resources, LLC Delaware
Ark Land Company Delaware
Ashland Terminal, Inc. Delaware
(1) AU Sub, LLC Delaware
(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
(1) Owned by Arch Western Resources, LLC.
(2) Arch Western Acquisition Corporation owns a 99% membership interest in Arch
Western Resources, LLC.
(3) Arch Western Resources, LLC owns a 65% membership interest in Canyon Fuel
Company, LLC.
<PAGE>
Exhibit 23.1
Independent Auditor's Consent
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Arch Coal, Inc. of our report dated January 21, 2000, included in the 1999
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). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule 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. Employees 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 21, 2000 (except for Note 8,
for which the date is February 24, 2000), with respect to the consolidated
financial statements of Canyon Fuel Company, LLC included in, of our report
dated January 21, 2000, 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 Arch Coal, Inc. Annual Report (Form 10-K)
for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 14, 2000
<PAGE>
Exhibit 23.2
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 for the period from December 20, 1996 (inception) through December 31, 1997
which report is included in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 14, 2000
<PAGE>
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, and Robert G.
Jones, 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, 1999, 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.
<TABLE>
<CAPTION>
Dated: March 16, 2000
<S> <C>
/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/ Philip W. Block Director
- ------------------------------- --------
Philip W. Block
/s/ Paul W. Chellgren Director
- ------------------------------- --------
Paul W. Chellgren
Director
- ------------------------------- --------
Ignacio Dominguez Urquijo
/s/ Thomas L. Feazell Director
- ------------------------------- --------
Thomas L. Feazell
/s/ Robert L. Hintz Director
- ------------------------------- --------
Robert L. Hintz
/s/ Douglas H. Hunt Director
- ------------------------------- --------
Douglas H. Hunt
/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>
<TABLE> <S> <C>
<PAGE>
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,283
<SECURITIES> 0
<RECEIVABLES> 188,461
<ALLOWANCES> 0
<INVENTORY> 62,382
<CURRENT-ASSETS> 285,952
<PP&E> 2,305,349
<DEPRECIATION> 826,178
<TOTAL-ASSETS> 2,332,374
<CURRENT-LIABILITIES> 340,920
<BONDS> 0
0
0
<COMMON> 397
<OTHER-SE> 240,898
<TOTAL-LIABILITY-AND-EQUITY> 2,332,374
<SALES> 1,509,596
<TOTAL-REVENUES> 1,567,382
<CGS> 1,426,105
<TOTAL-COSTS> 1,894,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,767
<INCOME-PRETAX> (415,793)
<INCOME-TAX> (65,700)
<INCOME-CONTINUING> (350,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,813
<NET-INCOME> (346,280)
<EPS-BASIC> (9.02)
<EPS-DILUTED> (9.02)
</TABLE>
<PAGE>
Exhibit 99
Financial Statements
Canyon Fuel Company, LLC
Years ended December 31, 1999 and 1998
and the period from December 20, 1996
(inception) through December 31, 1997
with Report of Independent Auditors
<PAGE>
Report of Independent Auditors
To the Members of Canyon Fuel Company, LLC:
We have audited the accompanying balance sheets of Canyon Fuel Company, LLC (a
Delaware limited liability company) (the "Company") as of December 31, 1999 and
1998 and the related statements of income, members' equity, and cash flows for
the two 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Canyon Fuel Company, LLC at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the two years then ended in conformity with accounting principles generally
accepted in the United States.
Louisville, Kentucky /s/ Ernst & Young LLP
January 21, 2000,
except for Note 7, for which
the date is February 24, 2000
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of the Canyon Fuel Company, LLC:
In our opinion, the accompanying statements of income, members' equity and cash
flows present fairly, in all material respects, the results of operations and
cash flows of Canyon Fuel Company, LLC (a Delaware Limited Liability Company)
(the "Company") for the period from December 20, 1996 (inception) through
December 31, 1997, in conformity with accounting principles generally accepted
in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Denver, Colorado /s/ PricewaterhouseCoopers LLP
March 20, 1998
2
<PAGE>
Canyon Fuel Company, LLC
Statements of Income
(in thousands of dollars)
<TABLE>
<CAPTION>
Years ended December 31, 1999 and
1998 and the period from
December 20, 1996 (inception)
through December 31, 1997
-------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues
Coal sales $240,264 $275,303 $251,818
Other revenues 798 905 2,018
--------------------- --------------------- ---------------------
241,062 276,208 253,836
--------------------- --------------------- ---------------------
Costs and expenses
Cost of coal sales 205,268 250,248 210,500
Amortization of coal supply agreements 17,897 19,044 18,089
Fees to members 7,751 5,945 4,805
--------------------- --------------------- ---------------------
230,916 275,237 233,394
--------------------- --------------------- ---------------------
Income from operations 10,146 971 20,442
--------------------- --------------------- ---------------------
Interest, net:
Interest expense (230) (205) (294)
Interest income 634 1,110 1,120
--------------------- --------------------- ---------------------
404 905 826
--------------------- --------------------- ---------------------
Net income $ 10,550 $ 1,876 $ 21,268
===================== ===================== =====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Canyon Fuel Company, LLC
Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
1999 1998
------------------------ ---------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 436 $ 20,246
Trade accounts receivable 25,829 33,611
Other receivables 7,640 9,358
Inventories 25,430 23,842
Other 1,877 563
------------------------ ---------------------
Total current assets 61,212 87,620
------------------------ ---------------------
Property, plant and equipment
Coal lands and mineral rights 266,956 263,576
Plant and equipment 229,280 199,631
Deferred mine development 10,037 9,350
------------------------ ---------------------
506,273 472,557
Less accumulated depreciation, depletion and amortization (119,913) (77,764)
------------------------ ---------------------
Property, plant and equipment, net 386,360 394,793
Other assets
Prepaid royalties 22,399 24,829
Coal supply agreements 43,324 112,347
Other 20 150
------------------------ ---------------------
Total other assets 65,743 137,326
------------------------ ---------------------
Total assets $513,315 $619,739
======================== =====================
Liabilities and members' equity
Current liabilities
Accounts payable $ 25,334 $ 22,653
Accrued expenses 11,731 8,806
------------------------ ---------------------
Total current liabilities 37,065 31,459
Accrued postretirement benefits other than pension 8,219 6,902
Accrued reclamation and mine closure 3,280 2,793
Accrued workers' compensation 6,204 7,037
Accrued pension cost -- 1,461
Other noncurrent liabilities 3,086 1,054
------------------------ ---------------------
Total liabilities 57,854 50,706
------------------------ ---------------------
Members' equity 455,461 569,033
------------------------ ---------------------
Total liabilities and members' equity $513,315 $619,739
======================== =====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Canyon Fuel Company, LLC
Statements of Members' Equity
(in thousands of dollars)
Years ended December 31, 1999 and 1998 and the period from
December 20, 1996 (inception) through December 31, 1997
-------------
<TABLE>
<CAPTION>
ARCO Uinta Coal Company Through
June 1, 1998,
Arch Western Resources, LLC ITOCHU Coal
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
---------------------------------------------------------------------------------
Distributions (80,679) (43,443) (124,122)
Net income 6,858 3,692 10,550
---------------------------------------------------------------------------------
Members' equity, December 31, 1999 $296,050 $159,411 $455,461
=================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Canyon Fuel Company, LLC
Statements of Cash Flows
(in thousands of dollars)
<TABLE>
<CAPTION>
Years ended December 31, 1999 and 1998
and the period from December
20, 1996 (inception) through
December 31, 1997
--------------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Operating activities
Net income $ 10,550 $ 1,876 $ 21,268
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation, depletion and amortization 60,290 63,768 52,183
Prepaid royalties 3,344 2,704 2,954
Net loss (gain) on disposition of assets 111 260 (611)
Changes in operating assets and liabilities 14,489 1,691 8,716
Other 878 285 (3,205)
--------- -------- ---------
Cash provided by operating activities 89,662 70,584 81,305
--------- -------- ---------
Investing activities
Acquisition of coal operations, net of cash acquired -- -- (610,334)
Proceeds from coal supply agreements 11,155 -- --
Additions to property, plant and equipment (34,071) (43,499) (20,819)
Additions to prepaid royalties (912) -- --
--------- -------- ---------
Cash used in investing activities (23,828) (43,499) (631,153)
--------- -------- ---------
Financing activities
Members' contributions -- 18,131 631,758
Members' cash distributions (84,151) (29,000) (75,000)
Payments of other non-current liabilities (1,493) (1,413) (1,467)
--------- -------- ---------
Cash (used in) provided by financing activities (85,644) (12,282) 555,291
--------- -------- ---------
Increase (decrease) in cash and cash equivalents (19,810) 14,803 5,443
Cash and cash equivalents, beginning of period 20,246 5,443 --
--------- -------- ---------
Cash and cash equivalents, end of period $ 436 $ 20,246 $ 5,443
========= ======== =========
Supplemental cash flow information
Cash paid during the year for interest $ 159 $ 241 $ 184
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements
December 31, 1999
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'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 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, value was allocated to access rights
associated with reserves located on properties which were adjacent to the
properties acquired. During 1999, the Company was awarded a federal royalty
lease which is associated with a portion of these adjacent reserves (see
additional discussion in Note 7, "Commitments and Contingencies"). Accordingly,
a portion of the value assigned to access rights was re-allocated to the mineral
reserves under the acquired federal lease. As of December 31, 1999 and 1998,
approximately $20.4 million and $77.8 million, respectively, were allocated to
access rights associated with reserves located on properties adjacent to the
properties acquired in 1996. In the event the Company is not successful in
acquiring the remaining reserves located adjacent to the acquired properties,
the amount of the purchase price allocated to such reserves will be written off
in the period such determination is made.
7
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
2. Accounting Policies
Accounting Estimates
The preparation of financial statements in conformity with U.S. 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
----------------------
1999 1998
----------------------
(In Thousands)
<S> <C> <C>
Coal $14,850 $11,892
Supplies 10,580 11,950
----------------------
$25,430 $23,842
======================
</TABLE>
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. The Company has
recorded a valuation allowance for slow-moving and obsolete supplies inventories
of $.8 million at December 31, 1999. No valuation allowance was deemed necessary
at December 31, 1998.
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 future
production, they are capitalized. As mining occurs on these leases, the
prepayment is charged to cost of coal sales.
8
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
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 $54.9 million and
$37.1 million at December 31, 1999 and 1998, respectively. In January 1999, the
Company settled a coal supply agreement dispute with Intermountain Power Agency
("IPA") and Coastal. In return for termination of certain indemnification rights
and settlement of outstanding receivables, the Company received cash of
approximately $11.2 million and a note receivable of $43.7 million (collectively
"the settlement"). In 1999, the Company distributed the settlement to its
members. In addition, the Company has agreed to supply IPA with 2.2 million tons
of coal annually through 2010 (with a mutual option to extend this supply
agreement through 2015). The Company has adjusted the carrying value of the coal
supply agreements with IPA in the accompanying balance sheet at December 31,
1999 to reflect this settlement.
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 are
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.
9
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
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 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.
Accrued Workers' Compensation Costs
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 state
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 traumatic injuries which are accrued as injuries are incurred.
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.
10
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
3. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
----------------------
1999 1998
----------------------
(In Thousands)
<S> <C> <C>
Accrued payroll and related benefits $ 4,261 $2,225
Accrued pension 3,546 1,504
Accrued taxes other than income taxes 543 955
Accrued workers' compensation 798 1,100
Other accrued expenses 2,583 3,022
----------------------
$11,731 $8,806
======================
</TABLE>
4. 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.
11
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
4. Employee Benefit Plans (continued)
Defined Benefit Pension and Other Postretirement Benefit Plans (continued)
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:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
--------------------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligations at January 1 $5,435 $2,465 $9,493 $5,703
Service cost 1,760 1,674 415 463
Interest cost 338 353 619 612
Benefits paid (94) (38) (13) -
Plan amendments (482) - - 1,332
Other - primarily actuarial (gain) loss (319) 981 (1,156) 1,383
--------------------------------------------------------------------------------
Benefit obligations at December 31 $6,638 $5,435 $9,358 $9,493
--------------------------------------------------------------------------------
Change in plan assets
Value of plan assets at January 1 $1,305 $ 54 $ - $ -
Actual return on plan assets 532 (106) - -
Employer contributions 1,504 1,395 13 -
Benefits paid (94) (38) (13) -
--------------------------------------------------------------------------------
Value of plan assets at December 31 $3,247 $1,305 $ - $ -
--------------------------------------------------------------------------------
Funded status of the plans
Accumulated obligations less plan assets $3,391 $4,130 $9,358 $9,493
Unrecognized actuarial loss (287) (1,165) (81) (1,396)
Unrecognized prior service cost 442 - (1,058) (1,195)
--------------------------------------------------------------------------------
Net liability recognized $3,546 $2,965 $8,219 $6,902
================================================================================
Balance sheet liabilities
Current portion of the liability $3,546 $1,504 $ - $ -
Long-term portion of the liability - 1,461 8,219 6,902
--------------------------------------------------------------------------------
Total accrued benefit liabilities $3,546 $2,965 $8,219 $6,902
================================================================================
</TABLE>
Demographic and assumption changes under the defined benefit pension plan
resulted in a $.3 million gain and $1.0 loss in 1999 and 1998, respectively.
Demographic and assumption changes in other postretirement benefits resulted in
the $1.2 million gain and $1.4 million loss in 1999 and 1998, respectively. Plan
changes in the postretirement benefit plan related to increased participant cost
sharing associated with increased life insurance benefits resulted in a $1.3
million loss in 1998.
12
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
4. Employee Benefit Plans (continued)
Defined Benefit Pension and Other Postretirement Benefit Plans (continued)
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
-----------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average assumptions
as of December 31
Discount rate 7.50% 7.00% 7.50% 7.00%
Rate of compensation increase 5.25% 4.75% 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 5.00% 4.50%
</TABLE>
The following table details the components of pension and other postretirement
benefit costs.
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
-----------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost $1,760 $1,674 $1,451 $ 415 $ 463 $ 313
Interest cost 338 353 58 619 612 347
Expected return on plan assets (166) (42) - - - -
Other amortization and deferral 153 194 - 296 383 -
-----------------------------------------------------------------------------------
$2,085 $2,179 $1,509 $1,330 $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, 1999 by $55,000, or 0.6%, and the
net periodic postretirement benefit cost for 1999 by $5,000, or 0.4%.
Other Plans
The Company sponsors a savings plan which was established to assist eligible
employees in providing for their future retirement needs. The plan was
noncontributory by the Company through December 31, 1998. On January 1, 1999,
the Company amended the savings plan and now matches a certain percentage of
employee contributions. The Company's contribution to the savings plan was $1.3
million in 1999.
13
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
5. 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. IPA
accounted for approximately 34 percent, 29 percent and 34 percent of coal sales
in 1999, 1998 and 1997, respectively. This same customer accounted for 39
percent and 34 percent of accounts receivable at December 31, 1999 and 1998,
respectively. Sierra Pacific accounted for approximately 11 percent, 11 percent
and 10 percent of coal sales in 1999, 1998 and 1997, respectively. Approximately
6 percent, 8 percent and 15 percent of coal sales in 1999, 1998 and 1997,
respectively, were to ITOCHU Coal International Inc. for the export market.
6. 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 $7.8 million, $5.9 million and $4.8 million in 1999, 1998 and 1997,
respectively. The Company has a payable balance to Arch Western of $6.4 million
and $2.8 million at December 31, 1999 and 1998, respectively.
7. Commitments and Contingencies
The Company has entered into various non-cancelable royalty lease agreements and
federal lease bonus payments under which future minimum payments are due. On May
24, 1999, the Company was the successful bidder in a federal auction of certain
mining rights in the 7,172 acre Pines tract in Sevier and Emory counties in
Utah. The Company's lease bonus bid amounted to $16.9 million for the tract, of
which $3.4 million was paid on May 24, 1999. The tract contains approximately 60
million tons of demonstrated coal reserves and is contiguous with the Company's
Sufco mine. Geological surveys 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 lease agreements (including the Pines
tract lease) are $4.5 million in 2000, $3.4 million in 2001, $3.4 million in
2002 and $3.4 million in 2003.
14
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
7. Commitments and Contingencies (continued)
The Company was in litigation with the Skyline Partners, lessors of the majority
of the coal reserves which comprise the Company's Skyline Mine. The coal leases
required the Company to make annual advance minimum royalty payments which are
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
filed suit against Skyline Partners in Utah State Court alleging that the
Company was not required to make the final minimum advance royalty payment. On
February 24, 2000, the Company and Skyline Partners reached an agreement to
settle the litigation. The settlement includes a $7.0 million recoupable payment
by the Company to Skyline Partners which will be recorded as a prepaid royalty
in 2000 and a grant of an overriding royalty interest to Skyline Partners
covering land adjacent to the Skyline Partners' reserves.
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 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
percent investment in LAXT (recorded at cost) amounting to $11.5 million and
$12.3 million as of December 31, 1999 and 1998, respectively. LAXT began
operations in 1997 and has been experiencing operating losses and negative cash
flow since its inception principally due to weak demand for U.S. coal exports to
the Pacific Rim countries. The ability of LAXT to continue as a going concern is
dependent on its 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.
15
<PAGE>
Canyon Fuel Company, LLC
Notes to Financial Statements (continued)
8. Cash Flow
The changes in operating assets and liabilities as shown in the statements of
cash flows are comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Decrease (increase) in operating
assets:
Receivables $ 9,500 $(11,023) $ 1,802
Inventories (1,588) 8,552 (6,021)
Increase (decrease) in operating
liabilities:
Accounts payable and accrued
expenses 5,606 25 10,046
Accrued postretirement benefits
other than pension 1,317 1,463 2,160
Accrued reclamation and mine
closure 487 406 332
Accrued workers' compensation (833) 2,268 397
--------------------------------------------------
$14,489 $ 1,691 $ 8,716
==================================================
</TABLE>
9. 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, 2000. 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 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.
10. Year 2000 (Unaudited)
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruption in mission-critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues with its internal
systems or the products and services of third parties. The Company will continue
to monitor its misson-critical computer applications and those of its suppliers
and vendors throughout the Year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
16
