e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
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o |
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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
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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43-0921172
(I.R.S. Employer
Identification Number) |
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One CityPlace Drive, Suite 300, St. Louis, Missouri
(Address of principal executive offices)
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63141
(Zip code) |
Registrants telephone number, including area code: (314) 994-2700
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At November 5, 2009 there were 162,440,949 shares of the registrants common stock
outstanding.
PART I
FINANCIAL INFORMATION
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Item 1. |
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Financial Statements. |
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share data)
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Three Months Ended September 30 |
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Nine Months Ended September 30 |
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2009 |
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2008 |
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2009 |
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2008 |
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(unaudited) |
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REVENUES |
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Coal sales |
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$ |
614,957 |
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$ |
769,458 |
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$ |
1,850,609 |
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$ |
2,253,925 |
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COSTS, EXPENSES AND OTHER |
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Cost of coal sales |
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489,290 |
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567,372 |
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1,503,937 |
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1,650,259 |
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Depreciation, depletion and amortization |
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71,468 |
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72,185 |
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212,986 |
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217,180 |
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Selling, general and administrative expenses |
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24,029 |
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22,235 |
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70,770 |
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80,937 |
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Change in fair value of coal derivatives
and coal trading activities, net |
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(3,342 |
) |
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18,382 |
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(10,328 |
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(65,336 |
) |
Costs related to acquisition of Jacobs Ranch |
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791 |
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7,166 |
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Other operating expense (income), net |
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(15,617 |
) |
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1,354 |
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(28,141 |
) |
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(2,993 |
) |
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566,619 |
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681,528 |
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1,756,390 |
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1,880,047 |
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Income from operations |
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48,338 |
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87,930 |
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94,219 |
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373,878 |
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Interest expense, net: |
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Interest expense |
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(29,791 |
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(17,019 |
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(70,466 |
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(56,228 |
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Interest income |
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399 |
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235 |
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7,284 |
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1,128 |
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(29,392 |
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(16,784 |
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(63,182 |
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(55,100 |
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Income before income taxes |
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18,946 |
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71,146 |
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31,037 |
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318,778 |
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Provision for (benefit from) income taxes |
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(6,270 |
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(26,881 |
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(9,590 |
) |
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26,059 |
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Net income |
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25,216 |
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98,027 |
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40,627 |
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292,719 |
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Less: Net (income) loss attributable to
noncontrolling interest |
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(31 |
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(179 |
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11 |
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(727 |
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Net income attributable to Arch Coal, Inc. |
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$ |
25,185 |
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$ |
97,848 |
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$ |
40,638 |
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$ |
291,992 |
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EARNINGS PER COMMON SHARE |
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Basic earnings per common share |
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$ |
0.16 |
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$ |
0.68 |
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$ |
0.28 |
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$ |
2.03 |
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Diluted earnings per common share |
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$ |
0.16 |
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$ |
0.68 |
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$ |
0.28 |
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$ |
2.02 |
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Basic weighted average shares outstanding |
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155,622 |
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144,035 |
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147,122 |
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143,885 |
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Diluted weighted average shares outstanding |
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156,005 |
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144,898 |
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147,332 |
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144,848 |
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Dividends declared per common share |
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$ |
0.09 |
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$ |
0.09 |
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$ |
0.27 |
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$ |
0.25 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
1
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
840,293 |
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$ |
70,649 |
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Trade accounts receivable |
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173,994 |
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215,053 |
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Other receivables |
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20,662 |
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43,419 |
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Inventories |
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237,293 |
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191,568 |
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Prepaid royalties |
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25,711 |
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43,780 |
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Deferred income taxes |
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33,830 |
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52,918 |
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Coal derivative assets |
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23,721 |
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43,173 |
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Other |
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45,539 |
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45,818 |
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Total current assets |
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1,401,043 |
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706,378 |
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Property, plant and equipment, net |
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2,745,469 |
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2,703,083 |
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Other assets: |
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Prepaid royalties |
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83,722 |
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66,918 |
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Goodwill |
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46,832 |
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46,832 |
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Deferred income taxes |
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302,377 |
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294,682 |
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Equity investments |
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90,306 |
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87,761 |
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Other |
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124,189 |
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73,310 |
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Total other assets |
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647,426 |
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569,503 |
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Total assets |
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$ |
4,793,938 |
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$ |
3,978,964 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
129,048 |
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$ |
186,322 |
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Coal derivative liabilities |
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5,640 |
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10,757 |
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Accrued expenses and other current liabilities |
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166,448 |
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249,203 |
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Current maturities of debt and short-term borrowings |
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195,333 |
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213,465 |
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Total current liabilities |
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496,469 |
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659,747 |
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Long-term debt |
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1,692,167 |
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1,098,948 |
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Asset retirement obligations |
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270,642 |
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255,369 |
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Accrued pension benefits |
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63,904 |
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73,486 |
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Accrued postretirement benefits other than pension |
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40,566 |
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58,163 |
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Accrued workers compensation |
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27,706 |
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30,107 |
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Other noncurrent liabilities |
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80,473 |
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65,526 |
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Total liabilities |
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2,671,927 |
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2,241,346 |
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Redeemable noncontrolling interest |
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8,940 |
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8,885 |
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Stockholders equity: |
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Common stock, $0.01 par value, authorized 260,000 shares, issued 163,953 and
144,345 shares, respectively |
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1,643 |
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1,447 |
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Paid-in capital |
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1,718,088 |
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1,381,496 |
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Treasury stock, 1,512 shares at September 30, 2009 and December 31, 2008, at cost |
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(53,848 |
) |
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(53,848 |
) |
Retained earnings |
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479,025 |
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478,734 |
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Accumulated other comprehensive loss |
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(31,837 |
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(79,096 |
) |
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Total stockholders equity |
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2,113,071 |
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1,728,733 |
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Total liabilities and stockholders equity |
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$ |
4,793,938 |
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$ |
3,978,964 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
2
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
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Nine Months Ended September 30 |
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2009 |
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2008 |
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(unaudited) |
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OPERATING ACTIVITIES |
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Net income |
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$ |
40,627 |
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$ |
292,719 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation, depletion and amortization |
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212,986 |
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217,180 |
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Prepaid royalties expensed |
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24,140 |
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27,161 |
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Gain on dispositions of property, plant and equipment |
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(81 |
) |
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(178 |
) |
Employee stock-based compensation |
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10,253 |
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9,768 |
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Changes in: |
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Receivables |
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63,785 |
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(29,646 |
) |
Inventories |
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(45,725 |
) |
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3,923 |
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Coal derivative assets and liabilities |
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21,911 |
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(57,929 |
) |
Accounts payable, accrued expenses and other current liabilities |
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(74,607 |
) |
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28,821 |
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Deferred income taxes |
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(15,165 |
) |
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8,067 |
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Other |
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8,319 |
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8,208 |
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Cash provided by operating activities |
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246,443 |
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508,094 |
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INVESTING ACTIVITIES |
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Capital expenditures |
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(280,033 |
) |
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(414,125 |
) |
Proceeds from dispositions of property, plant and equipment |
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806 |
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1,069 |
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Purchases of investments and advances to affiliates |
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(10,353 |
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(4,359 |
) |
Additions to prepaid royalties |
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(22,874 |
) |
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(19,429 |
) |
Reimbursement of deposits on equipment |
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3,209 |
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2,697 |
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Cash used in investing activities |
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(309,245 |
) |
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(434,147 |
) |
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FINANCING ACTIVITIES |
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Proceeds from the issuance of long-term debt |
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584,784 |
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Proceeds from the sale of common stock |
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326,452 |
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Purchases of treasury stock |
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(47,932 |
) |
Net increase in borrowings under lines of credit and commercial paper program |
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4,345 |
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|
50,882 |
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Net payments on other debt |
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(13,276 |
) |
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(10,995 |
) |
Debt financing costs |
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(29,596 |
) |
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(233 |
) |
Dividends paid |
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(40,347 |
) |
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(35,989 |
) |
Issuance of common stock under incentive plans |
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|
84 |
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6,306 |
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Cash provided by (used in) financing activities |
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832,446 |
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(37,961 |
) |
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Increase in cash and cash equivalents |
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769,644 |
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|
35,986 |
|
Cash and cash equivalents, beginning of period |
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70,649 |
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|
5,080 |
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Cash and cash equivalents, end of period |
|
$ |
840,293 |
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|
$ |
41,066 |
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|
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Arch Coal, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Arch Coal, Inc. and its subsidiaries and controlled entities (the Company). The Companys primary
business is the production of steam and metallurgical coal from surface and underground mines
located throughout the United States, for sale to utility, industrial and export markets. The
Companys mines are located in southern West Virginia, eastern Kentucky, Virginia, Wyoming,
Colorado and Utah. All subsidiaries (except as noted below) are wholly-owned. Intercompany
transactions and accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial
reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management,
all adjustments, consisting of normal, recurring accruals considered necessary for a fair
presentation, have been included. The Companys management evaluated the period from October 1,
2009 to November 9, 2009 for items requiring recognition or disclosure in the financial statements.
These notes include disclosures of subsequent events to the extent necessary to keep the
accompanying condensed consolidated financial statements from being misleading. Results of
operations for the three and nine month periods ended September 30, 2009 are not necessarily
indicative of results to be expected for the year ending December 31, 2009. These financial
statements should be read in conjunction with the audited financial statements and related notes as
of and for the year ended December 31, 2008 included in the Companys Annual Report on Form 10-K
filed with the U.S. Securities and Exchange Commission.
The Company owns a 99% membership interest in a joint venture named Arch Western Resources,
LLC (Arch Western) which operates coal mines in Wyoming, Colorado and Utah. The Company also acts
as the managing member of Arch Western.
2. Accounting Policies
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has established the FASB Accounting
Standards Codification (Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the United States for financial
statements of interim and annual periods ending after September 15, 2009. References to
authoritative accounting principles after the effective date will reference the Codification and
not the previous accounting guidance.
On January 1, 2009, the Company changed its presentation of noncontrolling interests in
subsidiaries, pursuant to new guidance in the Consolidation topic of the Codification, which
requires that a noncontrolling interest (previously referred to as minority interest) in a
consolidated subsidiary be displayed in the consolidated balance sheet as a separate component of
equity and the amount of net income attributable to the noncontrolling interest be included in
consolidated net income on the face of the consolidated statement of income. Because the
noncontrolling interest in Arch Western is redeemable, it is presented in the mezzanine between
liabilities and equity. This change resulted in a decrease in other liabilities of $8.9 million as
of December 31, 2008 from what was previously reported for the reclassification of the
noncontrolling interest in Arch Western. This change also resulted in an increase in other
operating income, net and net income of $0.2 million for the three months ended September 30, 2008
from what was previously reported for the amount of income attributable to the noncontrolling
interest in Arch Western. For the nine months ended September 30, 2008 this change resulted in an
increase in other operating income, net and in net income of $0.7 million from what was previously
reported for the amount of income attributable to the noncontrolling interest in Arch Western.
On January 1, 2009, the Company adopted the new disclosure requirements of the Derivatives and
Hedging topic of the Codification. The new disclosures include qualitative disclosures about
objectives for using derivatives, tabular disclosures about the gross fair value of derivative
instruments, gains and losses from derivative instruments by type of contract, and the locations of
these amounts in the interim and annual financial statements. See Note 7, Derivatives for the
disclosures required.
New authoritative guidance related to the accounting for assets acquired and liabilities
assumed in business combinations was effective on January 1, 2009 for business combinations
occurring after that date. The new provisions of the Business Combinations topic of the
Codification clarify and amend the accounting guidance for the acquirers recognition and
measurement of the assets acquired, liabilities assumed and any noncontrolling interest in the
acquiree in a
4
business combination. Also, assets acquired and liabilities assumed in a business combination
that arise from pre-acquisition contingencies are to be recognized at fair value and new
disclosures are required to include changes in the range of possible outcomes for both recognized
and reasonably possible unrecognized pre-acquisition contingencies.
On January 1, 2009, the Company adopted amendments to the Earnings Per Share topic of the
Codification. The amendments clarify whether instruments granted in share-based payment
transactions are participating securities prior to vesting and therefore need to be included in the
earnings allocation in computing earnings per share under the two-class method. The amendments
require retrospective adjustments to prior-period financial statements, however the amendments had
no effect on basic or diluted earnings per share for the three and nine months ended September 30,
2009 and September 30, 2008.
Beginning January 1, 2009, the provisions of the Fair Value Measurements and Disclosures topic
of the Codification are applicable prospectively to fair value measurements other than those that
are recognized or disclosed at fair value in the financial statements on a recurring basis. There
was no transition impact upon initial adoption; however, the provisions of the Fair Value
Measurements and Disclosures topic of the Codification are effective for all fair value
measurements prescribed by generally accepted accounting principles for nonfinancial assets and
nonfinancial liabilities after the date of adoption.
3. Business Combinations
On October 1, 2009, the Company consummated its previously announced purchase of all of the
issued and outstanding membership interests of Jacobs Ranch Holdings I LLC, the parent of the
Jacobs Ranch mining operations, for a purchase price of $764.0 million, including approximately 352
million tons of coal reserves adjacent to the Companys Black Thunder mining complex. Disclosures
with respect to the acquisition are not included in these notes to the condensed consolidated
financial statements due to ongoing valuation and purchase price allocation efforts.
The Company recognized costs of $0.8 million and $7.2 million related to the acquisition in
the accompanying condensed consolidated statement of income for the three and nine months ended
September 30, 2009, respectively.
4. Equity and Debt Offerings
On July 31, 2009, the Company sold 17 million shares of its common stock at a public offering
price of $17.50 per share and issued $600.0 million in aggregate principal amount of 8.75% senior
unsecured notes due 2016 at an initial issue price of 97.464% of the face amount. On August 6,
2009, the Company issued an additional 2.55 million shares of its common stock under the same terms
and conditions to cover underwriters over-allotments. The net proceeds received from the issuance
of common stock were $326.5 million and the net proceeds received from the issuance of the 8.75%
senior unsecured notes were $570.3 million. The proceeds from these transactions were used
primarily to finance the purchase of the Jacobs Ranch mining complex discussed in Note 3, Business
Combinations.
5. Commercial Transactions
During the three months ended September 30, 2009, approximately half of our other operating
income was generated by financial settlements of physical forward contracts.
6. Fair Value Measurements
The hierarchy of fair value measurements prioritizes the inputs to valuation techniques used
to measure fair value. The levels of the hierarchy, as defined below, give the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs.
|
|
|
Level 1 is defined as observable inputs such as quoted prices in active markets for
identical assets. Level 1 assets include available-for-sale equity securities and coal
futures that are submitted for clearing on the New York Mercantile Exchange. |
|
|
|
Level 2 is defined as observable inputs other than Level 1 prices. These include
quoted prices for similar assets or liabilities in an active market, quoted prices for
identical assets and liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities. The Companys level 2 assets and liabilities
include commodity contracts (coal and heating oil) with fair values derived from quoted
prices in over-the-counter markets or from prices received from direct broker quotes. |
|
|
|
Level 3 is defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions. These include the
Companys commodity option contracts (primarily coal |
5
|
|
|
and heating oil) valued using modeling techniques, such as Black-Scholes, that require
the use of inputs, particularly volatility, that are not observable. |
The table below sets forth, by level, the Companys financial assets and liabilities that are
accounted for at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at September 30, 2009 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in equity securities |
|
$ |
2,636 |
|
|
$ |
2,269 |
|
|
$ |
|
|
|
$ |
367 |
|
Derivatives |
|
|
25,283 |
|
|
|
|
|
|
|
22,368 |
|
|
|
2,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
27,919 |
|
|
$ |
2,269 |
|
|
$ |
22,368 |
|
|
$ |
3,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
11,846 |
|
|
$ |
1,869 |
|
|
$ |
11,877 |
|
|
$ |
(1,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys contracts with certain of its counterparties allow for the settlement of
contracts in an asset position with contracts in a liability position in the event of default or
termination. For classification purposes, the Company records the net fair value of all the
positions with these counterparties as a net asset or liability. Each level in the table above
displays the underlying contracts according to their classification in the accompanying condensed
consolidated balance sheet, based on this counterparty netting.
The following table summarizes the change in the fair values of financial instruments
categorized as level 3.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
5,684 |
|
|
$ |
1,050 |
|
Realized and unrealized losses recognized in earnings |
|
|
(1,598 |
) |
|
|
(2,998 |
) |
Realized and unrealized gains (losses) recognized in
other comprehensive income |
|
|
(261 |
) |
|
|
2,219 |
|
Settlements, purchases and issuances |
|
|
1,357 |
|
|
|
4,911 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
5,182 |
|
|
$ |
5,182 |
|
|
|
|
|
|
|
|
Net unrealized losses during the three and nine months ended September 30, 2009 related to
level 3 financial instruments held on September 30, 2009 were $2.2 million and $0.5 million,
respectively.
7. Derivatives
The Company generally utilizes derivative financial instruments to manage exposures to
commodity prices. Additionally, the Company may hold certain coal derivative financial instruments
for trading purposes.
All derivative financial instruments are recognized in the balance sheet at fair value. In a
fair value hedge, the Company hedges the risk of changes in the fair value of a firm commitment,
typically a fixed-price coal sales contract. Changes in both the hedged firm commitment and the
fair value of a derivative used as a hedge instrument in a fair value hedge are recorded in
earnings. In a cash flow hedge, the Company hedges the risk of changes in future cash flows
related to a forecasted purchase or sale. Changes in the fair value of the derivative instrument
used as a hedge instrument in a cash flow hedge are recorded in other comprehensive income.
Amounts in other comprehensive income are reclassified to earnings when the hedged transaction
affects earnings and are classified in a manner consistent with the transaction being hedged. The
Company formally documents the relationships between hedging instruments and the respective hedged
items, as well as its risk management objectives for hedge transactions.
The Company evaluates the effectiveness of its hedging relationships both at the hedges
inception and on an ongoing basis. Any ineffective portion of the change in fair value of a
derivative instrument used as a hedge instrument in a fair value or cash flow hedge is recognized
immediately in earnings. The ineffective portion is based on the extent to which exact offset is
not achieved between the change in fair value of the hedge instrument and the cumulative change in
expected future cash flows on the hedged transaction from inception of the hedge in a cash flow
hedge or the change in the fair value of the firm commitment in a fair value hedge.
Diesel fuel price risk management
The Company is exposed to price risk with respect to diesel fuel purchased for use in its
operations. The Company
6
purchases approximately 50-60 million gallons of diesel fuel annually in its operations,
including the effect of the acquisition of the Jacobs Ranch operations. To reduce the volatility in
the price of diesel fuel for its operations, the Company uses forward physical diesel purchase
contracts, as well as heating oil swaps and purchased call options. At September 30, 2009, the
Company had protected the price of approximately 50% of its expected purchases for fiscal year 2009
and for fiscal year 2010. Since the changes in the price of heating oil highly correlate to changes
in the price of the hedged diesel fuel purchases, the heating oil swaps and purchased call options
qualify for cash flow hedge accounting. The Company held heating oil swaps and purchased call
options for approximately 33.0 million gallons as of September 30, 2009.
Coal risk management positions
The Company may sell or purchase forward contracts and options in the over-the-counter coal
market in order to manage its exposure to coal prices. The Company has exposure to the risk of
fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes
in the fair value of a fixed price physical sales contract. Certain derivative contracts may be
designated as hedges of these risks.
At September 30, 2009, the Company held derivatives for risk management purposes totaling 0.1
million tons of coal purchases that are expected to settle during the remainder of 2009 and 0.3
million tons of coal purchases that are expected to settle in 2010.
Coal trading positions
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter
coal market for trading purposes. The Company may also include non-derivative contracts in its
trading portfolio. The Company is exposed to the risk of changes in coal prices on its coal
trading portfolio. The timing of the estimated future realization of the value of the trading
portfolio is 47% in the remainder of 2009, 32% in 2010 and 21% in 2011.
Tabular derivatives disclosures
The Companys contracts with certain of its counterparties allow for the settlement of
contracts in an asset position with contracts in a liability position in the event of default or
termination. Such netting arrangements reduce our credit exposure related to these counterparties.
For classification purposes, the Company records the net fair value of all the positions with these
counterparties as a net asset or liability. The amounts shown in the table below represent the
fair value position of individual contracts, regardless of the net position presented in the
accompanying condensed consolidated balance sheet. The fair value and location of derivatives
reflected in the accompanying condensed consolidated balance sheet are as follows:
7
Fair Value of Derivatives as of September 30, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
Liability |
|
|
|
|
|
|
|
Derivatives |
|
|
Derivatives |
|
|
|
|
|
Derivatives Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating oil |
|
$ |
9,032 |
|
|
$ |
(13,676 |
) |
|
|
|
|
Coal |
|
|
2,487 |
|
|
|
(12,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,519 |
|
|
|
(26,446 |
) |
|
|
|
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal held for trading purposes |
|
|
78,259 |
|
|
|
(60,696 |
) |
|
|
|
|
Coal |
|
|
13,590 |
|
|
|
(2,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
91,849 |
|
|
|
(63,485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
103,368 |
|
|
|
(89,931 |
) |
|
|
|
|
Effect of counterparty netting |
|
|
(78,085 |
) |
|
|
78,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivatives as classified in the balance sheet |
|
$ |
25,283 |
|
|
$ |
(11,846 |
) |
|
$ |
13,437 |
|
|
|
|
|
|
|
|
|
|
|
Net derivatives as reflected on the balance sheet
|
|
|
|
|
|
|
|
|
Heating oil |
|
Other Current Assets |
|
$ |
1,562 |
|
|
|
|
|
Accrued Expenses |
|
|
(6,206 |
) |
|
|
|
|
|
|
|
|
|
Coal |
|
Coal Derivative Assets |
|
|
23,721 |
|
|
|
|
|
Coal Derivative
Liabilities |
|
|
(5,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,437 |
|
|
|
|
|
|
|
|
|
The Company had a current asset for the right to reclaim cash collateral of $11.3 million and
$6.6 million at September 30, 2009 and December 31, 2008. These amounts are not included with the
derivatives presented in the table above and are included in other current assets in the
accompanying condensed consolidated balance sheet.
The effects of derivatives on measures of financial performance are as follows:
Three Months Ended September 30, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Derivatives |
|
|
Hedged Items in |
|
|
Loss on Hedged Items |
|
Derivatives used in |
|
Used in Fair Value |
|
|
Fair Value Hedge |
|
|
In Fair Value Hedge |
|
Fair Value Hedging Relationships |
|
Hedge Relationships |
|
|
Relationships |
|
|
Relationships |
|
Coal |
|
$ |
2,235 1 |
|
|
Firm commitments |
|
$ |
(2,235) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
|
Losses |
|
|
Income (Ineffective |
|
|
|
Gain (Loss) |
|
|
Reclassified from |
|
|
Portion and Amount |
|
Derivatives used in |
|
Recognized in OCI |
|
|
OCI into Income |
|
|
Excluded from |
|
Cash Flow Hedging Relationships |
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
Effectiveness Testing) |
|
Heating oil |
|
$ |
(2,393 |
) |
|
$ |
(11,854) 2 |
|
|
$ |
|
|
Coal sales |
|
|
(4,739 |
) |
|
|
1 |
|
|
|
|
|
Coal purchases |
|
|
3,407 |
|
|
|
(5,652) 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
(3,725 |
) |
|
$ |
(17,506) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as |
|
|
|
Hedging Instruments |
|
Gain |
|
Coal |
|
$ |
7,8813 |
|
|
|
|
|
Location in Statement of Income:
|
|
|
1 |
|
-Coal sales |
|
2 |
|
-Cost of coal sales |
|
3 |
|
-Change in fair value of coal
derivatives and coal trading
activities, net |
8
The majority of the unrealized gain on derivatives not designated as hedging instruments
for the three months ended September 30, 2009 related to a change in categorization of certain
over-the-counter coal contracts as a result of certain commercial settlements discussed in Note 5,
Commercial Transactions. These derivative contracts were previously not recorded at fair value,
as allowed by an exemption for sales and purchases entered into for normal business purposes.
During the three months ended September 30, 2009, the Company recognized net unrealized and
realized losses related to its trading portfolio (including derivative and non-derivative
contracts) of $4.5 million as included in the caption Change in fair value of coal derivatives and
coal trading activities, net in the accompanying condensed consolidated statement of income.
These gains are not included in the previous table.
Nine Months Ended September 30, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Derivatives |
|
|
Hedged Items in |
|
|
Loss on Hedged Items |
|
Derivatives used in |
|
Used in Fair Value |
|
|
Fair Value Hedge |
|
|
In Fair Value Hedge |
|
Fair Value Hedging Relationships |
|
Hedge Relationships |
|
|
Relationships |
|
|
Relationships |
|
Coal |
|
$ |
651 1 |
|
|
Firm commitments |
|
$ |
(651) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
|
Losses |
|
|
Income (Ineffective |
|
|
|
Gain (Loss) |
|
|
Reclassified from |
|
|
Portion and Amount |
|
Derivatives used in |
|
Recognized in OCI |
|
|
OCI into Income |
|
|
Excluded from |
|
Cash Flow Hedging Relationships |
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
Effectiveness Testing) |
|
Heating oil |
|
$ |
6,346 |
|
|
$ |
(38,438) 2 |
|
|
$ |
|
|
Coal sales |
|
|
(6,055 |
) |
|
|
(2,984) 1 |
|
|
|
|
|
Coal purchases |
|
|
(1,095 |
) |
|
|
(11,092) 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
(804 |
) |
|
$ |
(52,514) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as |
|
|
|
Hedging Instruments |
|
Gain |
|
Coal |
|
$ |
8,569 3 |
|
|
|
|
|
Location in Statement of Income:
|
|
|
1 |
|
-Coal sales |
|
2 |
|
-Cost of coal sales |
|
3 |
|
-Change in fair value of coal
derivatives and coal trading
activities, net |
During the nine months ended September 30, 2009, the Company recognized net unrealized
and realized gains related to its trading portfolio (including derivative and non-derivative
contracts) of $1.8 million as included in the caption Change in fair value of coal derivatives and
coal trading activities, net in the accompanying condensed consolidated statement of income.
These gains are not included in the above table.
During the next twelve months, based on fair values at September 30, 2009, losses on
derivative contracts designated as hedge instruments in cash flow hedges of approximately $16.0
million are expected to be reclassified from other comprehensive income into earnings.
8. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Coal |
|
$ |
108,370 |
|
|
$ |
64,683 |
|
Repair parts and supplies, net of allowance |
|
|
128,923 |
|
|
|
126,885 |
|
|
|
|
|
|
|
|
|
|
$ |
237,293 |
|
|
$ |
191,568 |
|
|
|
|
|
|
|
|
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete
inventories of $13.0 million at September 30, 2009, and $12.7 million at December 31, 2008.
9
9. Debt
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009 |
|
|
December 31,
2008 |
|
|
|
(In thousands) |
|
Commercial paper |
|
$ |
43,612 |
|
|
$ |
65,671 |
|
Indebtedness to banks under credit facilities |
|
|
300,000 |
|
|
|
273,597 |
|
6.75% senior notes ($950.0 million face value) due July 1, 2013 |
|
|
955,123 |
|
|
|
956,148 |
|
8.75% senior notes ($600.0 million face value) due August 1, 2016 |
|
|
585,044 |
|
|
|
|
|
Other |
|
|
3,721 |
|
|
|
16,997 |
|
|
|
|
|
|
|
|
|
|
|
1,887,500 |
|
|
|
1,312,413 |
|
Less current maturities of debt and short-term borrowings |
|
|
195,333 |
|
|
|
213,465 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
1,692,167 |
|
|
$ |
1,098,948 |
|
|
|
|
|
|
|
|
The current maturities of debt include amounts borrowed that are supported by credit
facilities that have a term of less than one year and amounts borrowed under credit facilities with
terms longer than one year that the Company does not intend to refinance on a long-term basis,
based on cash projections and managements plans.
8.75% senior notes
On July 31, 2009, the Company entered into an indenture in connection with the issuance of the
8.75% senior notes as discussed in Note 4, Equity and Debt Offerings. Interest is payable on the
notes on February 1 and August 1 of each year, commencing February 1, 2010. At any time on or
after August 1, 2013, the Company may redeem some or all of the notes. The redemption price,
reflected as a percentage of the principal amount, is: 104.375% for notes redeemed between August
1, 2013 and July 31, 2014; 102.188% for notes redeemed between August 1, 2014 and July 31, 2015;
and 100% for notes redeemed on or after August 1, 2015.
The notes are guaranteed by most of the Companys subsidiaries, except for Arch Western and
its subsidiaries and Arch Receivable Company, LLC. If the Company fails to meet a coverage ratio
test as defined in the indenture, the ability of the Company and its subsidiaries to incur
additional debt; pay dividends and make distributions or repurchase stock; make investments; create
liens; issue and sell capital stock of subsidiaries; sell assets; enter into restrictions affecting
the ability of restricted subsidiaries to make distributions, loans or advances to the Company;
engage in transactions with affiliates; enter into sale and leasebacks; and merge or consolidate or
transfer and sell assets would be limited.
The Company and the guarantor subsidiaries entered into a registration rights agreement (the
Registration Rights Agreement) in connection with the senior notes. Pursuant to the Registration
Rights Agreement, the Company and the guarantor subsidiaries agreed to file a registration
statement with the Securities and Exchange Commission to exchange a like aggregate principal amount
of senior notes identical in all material respects to the 8.75% senior notes. Pursuant to the
Registration Rights agreement, the Company must make reasonable best efforts to cause the
registration statement to become effective by July 31, 2010 and complete the exchange by September
14, 2010. Should those events not occur within the specified time frame, the interest rate shall
be increased by one-quarter or one percent per annum for the first 90 days following such period.
Such interest rate will increase by an additional one-quarter of one percent per annum thereafter
up to a maximum aggregate increase of one percent per annum. Once any of the required events occur,
the interest rate will revert to the rate specified in the indenture.
Amendments to Credit Facilities
On August 27, 2009, the Company entered into an amendment (the Credit Amendment) to its
$800.0 million secured revolving credit facility. The Credit Amendment extended the maturity of
the credit facility from June 23, 2011 to March 31, 2013 and increased the Companys borrowing
capacity from $800.0 million to $860.0 million until June 23, 2011, when it will then decrease to
$762.5 million. New banks may join the credit facility after June 23, 2011, subject to an
aggregate maximum borrowing amount of $800.0 million. The Credit Amendment also increased the
maximum leverage ratio, as defined, that the Company must maintain.
On March 6, 2009, the Company entered into an amendment (the Credit Amendment) to its $800.0
million secured revolving credit facility. The Credit Amendment amended certain covenants to make
them less restrictive, including those related to lien creation, restricted payments and subsidiary
guarantees of debt, in addition to an increase in the maximum leverage ratio, as defined, that the
Company must maintain.
10
On March 31, 2009, the Company entered into an amendment to its accounts receivable
securitization program revising certain terms to strengthen the credit quality of the pool of
receivables and increasing the interest rate. The credit facility supporting the borrowings under
the program was also renewed and now expires on March 31, 2010. The size of the program continues
to allow for aggregate borrowings and letters of credit of up to $175.0 million, as limited by
eligible accounts receivable.
Availability
As of September 30, 2009 and December 31, 2008, the Company had $300.0 million and $205.0
million of borrowings outstanding under the revolving credit facility, respectively. At September
30, 2009, the Company had availability of $560.0 million under the revolving credit facility. The
Company had no borrowings under the accounts receivable securitization program at September 30,
2009 and $68.6 million borrowed at December 31, 2008. The Company also had letters of credit
outstanding under the securitization program of $62.2 million as of September 30, 2009. At
September 30, 2009, the Company had availability of $65.9 million under the accounts receivable
securitization program.
The Companys ability to issue commercial paper up to the $100.0 million maximum aggregate
principal amount of the program has been affected by economic conditions. The commercial paper
placement program is supported by a line of credit that has been renewed and expires on April 30,
2010.
Fair Value of Long-Term Debt
At September 30, 2009 and December 31, 2008, the fair value of the Companys senior notes and
other long-term debt, including amounts classified as current, was $1,901.4 million and $1,178.0
million, respectively.
10. Taxes
As part of the Emergency Economic Stabilization Act enacted on October 3, 2008, the Company
filed for black lung excise tax refunds on taxes paid on export sales subsequent to October 1,
1990, along with interest computed at statutory rates. The Company recognized refunds of $11.0
million, plus interest of $10.3 million, in the fourth quarter of 2008. The Internal Revenue
Service has approved the Companys claim for refund and the Company recorded additional income of
$6.8 million during the nine months ended September 30, 2009, to adjust the estimated amount to be
received, of which $6.1 million is reflected in the caption interest income in the accompanying
condensed consolidated income statement, with the remainder in cost of coal sales. As of September
30, 2009, the Company had received all of the refunds recognized.
During the third quarter of 2008, the Company reached a settlement with the IRS regarding the
Companys treatment of the acquisition of the coal operations of Atlantic Richfield Company
(ARCO) and the simultaneous combination of the acquired ARCO operations and the Companys Wyoming
operations into the Arch Western joint venture. The settlement did not result in a net change in
deferred tax assets, but involved a re-characterization of deferred tax assets, including an
increase in net operating loss carryforwards of $145.1 million and other amortizable assets which
will provide additional tax deductions through 2013. A portion of these future cash tax benefits
accrue to ARCO pursuant to the original purchase agreement, including $6.8 million that was
recorded as goodwill during the third quarter of 2008.
This settlement and the related increase in net operating loss carryforwards and amortization
deductions triggered a reassessment of the Companys ability to realize its deferred tax assets. As
a result of the reassessment, the Company reduced the valuation allowance related to alternative
minimum tax credits and net operating loss carryforwards by $52.6 million in the third quarter of
2008.
11. Stock-Based Compensation
During the nine months ended September 30, 2009, the Company granted options to purchase
approximately 1.0 million shares of common stock with a weighted average exercise price of $14.08
per share and a weighted average grant-date fair value of $6.63 per share. The options fair value
was determined using the Black-Scholes option pricing model, using a weighted average risk-free
rate of 1.75%, a weighted average dividend yield of 2.56% and a weighted average volatility of
69.26%. The options vest ratably over four years. The options provide for the continuation of
vesting for retirement-eligible recipients that meet certain criteria. The expense for these
options will be recognized through the date that the employee first becomes eligible to retire and
is no longer required to provide service to earn part or all of the award. The Company also
granted 35,000 shares of restricted stock during the nine months ended September 30, 2009 at a
weighted average grant-date fair value of $14.05 per share. The restricted stock vests in three to
four years.
The Company recognized stock-based compensation expense from all plans of $3.4 million and
$2.4 million for the three months ended September 30, 2009 and 2008, respectively, and $10.3
million and $10.4 million for the nine months ended September 30, 2009, and 2008, respectively.
This expense is primarily included in selling, general and administrative
11
expenses in the accompanying condensed consolidated statements of income.
12. Workers Compensation Expense
The following table details the components of workers compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Self-insured occupational disease benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
132 |
|
|
$ |
(289 |
) |
|
$ |
398 |
|
|
$ |
361 |
|
Interest cost |
|
|
139 |
|
|
|
(213 |
) |
|
|
418 |
|
|
|
337 |
|
Net amortization |
|
|
(719 |
) |
|
|
(2,012 |
) |
|
|
(2,159 |
) |
|
|
(2,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total occupational disease |
|
|
(448 |
) |
|
|
(2,514 |
) |
|
|
(1,343 |
) |
|
|
(2,214 |
) |
Traumatic injury claims and assessments |
|
|
2,781 |
|
|
|
2,017 |
|
|
|
6,333 |
|
|
|
7,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total workers compensation expense |
|
$ |
2,333 |
|
|
$ |
(497 |
) |
|
$ |
4,990 |
|
|
$ |
5,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Employee Benefit Plans
The following table details the components of pension benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Service cost |
|
$ |
3,360 |
|
|
$ |
3,388 |
|
|
$ |
10,082 |
|
|
$ |
9,688 |
|
Interest cost |
|
|
3,981 |
|
|
|
3,626 |
|
|
|
11,943 |
|
|
|
10,976 |
|
Expected return on plan assets |
|
|
(4,429 |
) |
|
|
(4,248 |
) |
|
|
(13,289 |
) |
|
|
(13,448 |
) |
Amortization of prior service cost |
|
|
48 |
|
|
|
(60 |
) |
|
|
145 |
|
|
|
(160 |
) |
Amortization of other actuarial gains and losses |
|
|
992 |
|
|
|
1,160 |
|
|
|
2,975 |
|
|
|
2,410 |
|
Curtailments |
|
|
|
|
|
|
|
|
|
|
586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,952 |
|
|
$ |
3,866 |
|
|
$ |
12,442 |
|
|
$ |
9,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the components of other postretirement benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Service cost |
|
$ |
815 |
|
|
$ |
736 |
|
|
$ |
2,446 |
|
|
$ |
2,204 |
|
Interest cost |
|
|
1,009 |
|
|
|
929 |
|
|
|
3,026 |
|
|
|
2,787 |
|
Amortization of prior service cost |
|
|
946 |
|
|
|
865 |
|
|
|
2,836 |
|
|
|
2,594 |
|
Amortization of other actuarial gains and losses |
|
|
(853 |
) |
|
|
(911 |
) |
|
|
(2,559 |
) |
|
|
(2,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,917 |
|
|
$ |
1,619 |
|
|
$ |
5,749 |
|
|
$ |
4,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2009, the Company notified participants of the retiree medical plan of
a plan change increasing the retirees responsibility for medical costs. This change resulted in a
remeasurement of the postretirement benefit obligation, which included a decrease in the discount
rate from 6.85% to 5.68%. The remeasurement resulted in a decrease in the liability of $21.0
million, with a corresponding increase to other comprehensive income, and will result in future
reductions in costs under the plan.
14. Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income items are transactions recorded in stockholders equity during the year,
excluding net income and transactions with stockholders.
12
The following table presents the components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income |
|
$ |
25,216 |
|
|
$ |
98,027 |
|
|
$ |
40,627 |
|
|
$ |
292,719 |
|
Other comprehensive income, net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension, postretirement and other
post-employment benefits, net of
reclassifications into net income |
|
|
13,729 |
|
|
|
(613 |
) |
|
|
14,631 |
|
|
|
(513 |
) |
Available-for-sale securities, net of
reclassifications into net income |
|
|
(38 |
) |
|
|
(287 |
) |
|
|
(132 |
) |
|
|
888 |
|
Unrealized gains and losses on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on derivatives |
|
|
(2,456 |
) |
|
|
(12,810 |
) |
|
|
(586 |
) |
|
|
(2,916 |
) |
Reclassifications of losses into net income |
|
|
10,892 |
|
|
|
(2,189 |
) |
|
|
33,297 |
|
|
|
(1,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
47,343 |
|
|
$ |
82,128 |
|
|
$ |
87,837 |
|
|
$ |
288,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the third quarter of 2009 in other comprehensive income relating to pension,
postretirement and other post-employment benefits resulted primarily from the postretirement
medical plan amendment discussed in Note 13, Employee Benefit Plans, with an offsetting
adjustment to the postretirement benefit obligation liability.
15. Earnings per Share
The following table provides the basis for earnings per share calculations by presenting the
income available to common stockholders of the Company and by reconciling basic and diluted
weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Income for basic earnings per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stockholders |
|
$ |
25,162 |
|
|
$ |
97,745 |
|
|
$ |
40,597 |
|
|
$ |
291,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
155,622 |
|
|
|
144,035 |
|
|
|
147,122 |
|
|
|
143,885 |
|
Effect of common stock equivalents under incentive
plans |
|
|
383 |
|
|
|
863 |
|
|
|
210 |
|
|
|
917 |
|
Effect of common stock equivalents arising from
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
156,005 |
|
|
|
144,898 |
|
|
|
147,332 |
|
|
|
144,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of options to purchase 2.7 million and 2.1 million shares of common stock were
excluded from the calculation of diluted weighted average shares outstanding for the three and nine
months ended September 30, 2009, respectively, because the exercise price of these options exceeded
the average market price of the Companys common stock for these periods.
13
16. Guarantees
The Company has agreed to continue to provide surety bonds and letters of credit for the
reclamation and retiree healthcare obligations of Magnum Coal Company (Magnum) related to the
properties the Company sold to Magnum on December 31, 2005. The purchase agreement requires Magnum
to reimburse the Company for costs related to the surety bonds and letters of credit and to use
commercially reasonable efforts to replace the obligations. If the surety bonds and letters of
credit related to the reclamation obligations are not replaced by Magnum within a specified period
of time, Magnum must post a letter of credit in favor of the Company in the amounts of the
reclamation obligations. At September 30, 2009, the Company had approximately $91.6 million of
surety bonds related to properties sold to Magnum. As a result of Magnums purchase by Patriot
Coal Corporation, Magnum will be required to post letters of credit in the Companys favor for the
full amount of the reclamation obligation on or before February 2011.
Magnum also acquired certain coal supply contracts with customers who have not consented to
the contracts assignment from the Company to Magnum. The Company has committed to purchase coal
from Magnum to sell to those customers at the same price it is charging the customers for the sale.
In addition, certain contracts were assigned to Magnum, but the Company has guaranteed Magnums
performance under the contracts. The longest of the coal supply contracts extends to the year 2017.
If Magnum is unable to supply the coal for these coal sales contracts then the Company would be
required to purchase coal on the open market or supply contracts from its existing operations. At
market prices effective at September 30, 2009, the cost of purchasing 13.3 million tons of coal to
supply the contracts that have not been assigned over their duration would exceed the sales price
under the contracts by approximately $293.8 million, and the cost of purchasing 3.0 million tons of
coal to supply the assigned and guaranteed contracts over their duration would exceed the sales
price under the contracts by approximately $57.8 million. The Company has also guaranteed Magnums
performance under certain operating leases, the longest of which extends through 2011. If the
Company were required to perform under its guarantees of the operating lease agreements, it would
be required to make $3.5 million of lease payments. As the Company does not believe that it is
probable that it would have to purchase replacement coal or fulfill its obligations under the lease
guarantees, no losses have been recorded in the condensed consolidated financial statements as of
September 30, 2009. However, if the Company would have to perform under these guarantees, it could
potentially have a material adverse effect on the business, results of operations and financial
condition of the Company.
In connection with the Companys acquisition of the coal operations of ARCO and the
simultaneous combination of the acquired ARCO operations and the Companys Wyoming operations into
the Arch Western joint venture, the Company agreed to indemnify the other member of Arch Western
against certain tax liabilities in the event that such liabilities arise prior to June 1, 2013 as a
result of certain actions taken, 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 acquisition. If the Company were to become liable, the maximum amount of potential future tax
payments is $44.4 million at September 30, 2009, which is not recorded as a liability in the
Companys condensed consolidated financial statements. Since the indemnification is dependent upon
the initiation of activities within the Companys control and the Company does not intend to
initiate such activities, it is remote that the Company will become liable for any obligation
related to this indemnification. However, if such indemnification obligation were to arise, it
could potentially have a material adverse effect on the business, results of operations and
financial condition of the Company.
17. Contingencies
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 estimable. After conferring with counsel, it is the opinion of management that the
ultimate resolution of pending claims will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of the Company.
18. Segment Information
The Company has three reportable business segments, which are based on the major low-sulfur
coal basins in which the Company operates. Each of these reportable business segments includes a
number of mine complexes. The Company manages its coal sales by coal basin, not by individual mine
complex. Geology, coal transportation routes to customers, regulatory environments and coal quality
are generally consistent within a basin. Accordingly, market and contract pricing have developed by
coal basin. Mine operations are evaluated based on their per-ton operating costs (defined as
including all mining costs but excluding pass-through transportation expenses), as well as on other
non-financial measures, such as safety and environmental performance. The Companys reportable
segments are the Powder River Basin (PRB) segment, with operations in Wyoming; the Western
Bituminous (WBIT) segment, with operations in Utah, Colorado and southern Wyoming; and the Central
Appalachia (CAPP) segment, with operations in southern West Virginia, eastern Kentucky and
14
Virginia.
Operating segment results for the three and nine months ended September 30, 2009 and 2008 are
presented below. Results for the operating segments include all direct costs of mining. Corporate,
Other and Eliminations includes the change in fair value of coal derivatives and coal trading
activities, net; corporate overhead; land management; other support functions; and the elimination
of intercompany transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and |
|
|
|
|
PRB |
|
WBIT |
|
CAPP |
|
Eliminations |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Three months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales |
|
$ |
267,455 |
|
|
$ |
148,293 |
|
|
$ |
199,209 |
|
|
$ |
|
|
|
$ |
614,957 |
|
Income from operations |
|
|
19,465 |
|
|
|
16,349 |
|
|
|
29,694 |
|
|
|
(17,170 |
) |
|
|
48,338 |
|
Depreciation, depletion and amortization |
|
|
27,267 |
|
|
|
22,203 |
|
|
|
21,451 |
|
|
|
547 |
|
|
|
71,468 |
|
Capital expenditures |
|
|
7,518 |
|
|
|
13,871 |
|
|
|
10,864 |
|
|
|
1,218 |
|
|
|
33,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales |
|
$ |
292,358 |
|
|
$ |
161,085 |
|
|
$ |
316,015 |
|
|
$ |
|
|
|
$ |
769,458 |
|
Income from operations |
|
|
21,835 |
|
|
|
21,957 |
|
|
|
95,228 |
|
|
|
(51,090 |
) |
|
|
87,930 |
|
Depreciation, depletion and amortization |
|
|
29,773 |
|
|
|
18,888 |
|
|
|
23,145 |
|
|
|
379 |
|
|
|
72,185 |
|
Capital expenditures |
|
|
29,433 |
|
|
|
30,016 |
|
|
|
17,221 |
|
|
|
1,375 |
|
|
|
78,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales |
|
$ |
847,255 |
|
|
$ |
382,931 |
|
|
$ |
620,423 |
|
|
$ |
|
|
|
$ |
1,850,609 |
|
Income from operations |
|
|
68,772 |
|
|
|
4,238 |
|
|
|
85,527 |
|
|
|
(64,318 |
) |
|
|
94,219 |
|
Total assets |
|
|
1,896,245 |
|
|
|
2,074,320 |
|
|
|
1,164,377 |
|
|
|
(341,004 |
) |
|
|
4,793,938 |
|
Depreciation, depletion and amortization |
|
|
84,429 |
|
|
|
60,567 |
|
|
|
66,502 |
|
|
|
1,488 |
|
|
|
212,986 |
|
Capital expenditures |
|
|
49,389 |
|
|
|
57,377 |
|
|
|
41,392 |
|
|
|
131,875 |
|
|
|
280,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales |
|
$ |
865,707 |
|
|
$ |
517,714 |
|
|
$ |
870,504 |
|
|
$ |
|
|
|
$ |
2,253,925 |
|
Income from operations |
|
|
79,039 |
|
|
|
100,144 |
|
|
|
223,671 |
|
|
|
(28,976 |
) |
|
|
373,878 |
|
Total assets |
|
|
1,798,793 |
|
|
|
2,049,686 |
|
|
|
1,005,835 |
|
|
|
(912,747 |
) |
|
|
3,941,567 |
|
Depreciation, depletion and amortization |
|
|
87,594 |
|
|
|
60,189 |
|
|
|
68,097 |
|
|
|
1,300 |
|
|
|
217,180 |
|
Capital expenditures |
|
|
105,994 |
|
|
|
124,835 |
|
|
|
57,790 |
|
|
|
125,506 |
|
|
|
414,125 |
|
A reconciliation of segment income from operations to consolidated income before income taxes
is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Income from operations |
|
$ |
48,338 |
|
|
$ |
87,930 |
|
|
$ |
94,219 |
|
|
$ |
373,878 |
|
Interest expense |
|
|
(29,791 |
) |
|
|
(17,019 |
) |
|
|
(70,466 |
) |
|
|
(56,228 |
) |
Interest income |
|
|
399 |
|
|
|
235 |
|
|
|
7,284 |
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
18,946 |
|
|
$ |
71,146 |
|
|
$ |
31,037 |
|
|
$ |
318,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
This
document contains forward-looking statements that is, statements related to future,
not past, events. In this context, forward-looking statements often address our expected future
business and financial performance, and often contain words such as expects, anticipates,
intends, plans, believes, seeks, or will. Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. For us, particular uncertainties arise
from changes in the demand for our coal by the domestic electric generation industry; from
legislation and regulations relating to the Clean Air Act and other environmental initiatives; from
operational, geological, permit, labor and weather-related factors; from fluctuations in the amount
of cash we generate from operations; from future integration of acquired businesses; and from
numerous other matters of national, regional and global scale, including those of a political,
economic, business, competitive or regulatory nature. These uncertainties may cause our actual
future results to be materially different than those expressed in our forward-looking statements.
We do not undertake to update our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by law. For a description of
some of the risks and uncertainties that may affect our future results, see Risk Factors under
Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2008 and in the Quarterly Reports on Form
10-Q that we have filed during interim periods.
Overview
We are one of the largest coal producers in the United States. We sell substantially all of
our coal to power plants, steel mills and industrial facilities. The locations of our mines enable
us to ship coal to most of the major coal-fueled power plants, steel mills and export facilities
located in the United States.
Our three reportable business segments are based on the low-sulfur U.S. coal producing regions
in which we operate the Powder River Basin, the Western Bituminous region and the Central
Appalachia region. These geographically distinct areas are characterized by geology, coal
transportation routes to consumers, regulatory environments and coal quality. These regional
similarities have caused market and contract pricing environments to develop by coal region and
form the basis for the segmentation of our operations.
The Powder River Basin is located in northeastern Wyoming and southeastern Montana. The coal
we mine from surface operations in this region has a very low sulfur content and a low heat value
compared to the other regions in which we operate. The price of Powder River Basin coal is
generally less than that of coal produced in other regions because Powder River Basin coal exists
in greater abundance, is easier to mine and thus has a lower cost of production. In addition,
Powder River Basin coal is generally lower in heat content, which requires some electric power
generation facilities to blend it with higher Btu coal or retrofit some existing coal plants to
accommodate lower Btu coal. The Western Bituminous region includes western Colorado, eastern Utah
and southern Wyoming. Coal we mine from underground and surface mines in this region typically has
a low sulfur content and varies in heat content. Central Appalachia includes eastern Kentucky,
Tennessee, Virginia and southern West Virginia. Coal we mine from both surface and underground
mines in this region generally has a high heat content and low sulfur content. In addition, we may
sell a portion of the coal we produce in the Central Appalachia region as metallurgical coal, which
has high heat content, low expansion pressure, low sulfur content and various other chemical
attributes. As such, the prices at which we sell metallurgical coal to customers in the steel
industry generally exceed the prices offered by power plants and industrial users for steam coal.
We estimate that 2009 year-to-date U.S. power generation has declined approximately 4% through
the third week of October in response to weak domestic and international economic conditions, as
well as an unseasonably mild summer in most of the U.S. U.S. coal consumption has declined
significantly, primarily as a result of weak industrial demand in geographic regions that
traditionally rely more heavily on coal-fueled electricity generation. As a result of these market pressures, coupled with continued geological
challenges in certain regions, cost pressures, regulatory hurdles and limited access to capital,
coal production and capital spending across the domestic coal industry have been curtailed. While
coal demand in Asia has begun to rebound, which we expect will eventually fuel increasing demand in
the U.S., we do not expect near-term improvements in domestic coal demand due to high inventory
levels at coal-fueled power generators.
In response to weakened demand caused by challenging domestic and international economic
conditions, we have curtailed production in all operating regions. In the Powder River Basin, we
idled a second dragline and associated equipment in the second quarter of 2009. In the Western
Bituminous region, we reduced production at our West Elk mine in response to declining demand from
power generation and industrial customers for Western Bituminous coal and elevated levels of
lower-quality, mid-ash coal currently being produced at the mine resulting from intermittent
sandstone intrusions. As a result of the curtailment, we laid off 61 employees and discontinued
the use of 38 contractors in the second quarter of
16
2009. In Central Appalachia, we reduced production by slowing the rate of advance of
equipment, by shortening or eliminating shifts at several mining complexes, and by idling an
underground mine and certain surface mining equipment at our Cumberland River mining complex, which
included the layoff of 85 employees in the second quarter of 2009. In addition, we have decreased
our expected capital expenditures for 2009 and are continuing other process improvement initiatives
and cost containment programs.
During the third quarter of 2009 we sold 19.55 million shares of our common stock at a price
of $17.50 per share and issued $600.0 million in aggregate principal amount, 8.75% senior unsecured
notes due 2016 at an initial issue price of 97.464%. The net proceeds received from the issuance
of common stock were $326.5 million and the net proceeds received from the issuance of the 8.75%
senior unsecured notes were $570.3 million. See further discussion of these transactions in
Liquidity and Capital Resources. We used the net proceeds from these transactions primarily to
finance the purchase of the Jacobs Ranch mining complex, as discussed below.
On October 1, 2009, we consummated the previously announced purchase of the Jacobs Ranch
mining operations, for a purchase price of $764.0 million, including approximately 352 million tons
of coal reserves located adjacent to our Black Thunder mining complex. We expect to achieve
significant operating efficiencies by combining the two operations. Roughly one half of our
estimated synergies represent operational cost savings, while others relate to administrative cost
reductions as well as enhanced coal-blending optimization opportunities. We also plan to use one of
the idled Black Thunder draglines on the new property, subject to permit approval.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Summary. Our results during the third quarter of 2009, when compared to the third quarter of
2008, were influenced primarily by lower sales volumes due to weak market
conditions and a reduction in the third quarter of 2008 in our valuation allowance against deferred
tax assets and an increase in interest expense; these factors were partially offset by gains from
our coal trading activities, compared to losses in the third quarter of 2008.
Revenues. The following table summarizes information about coal sales for the three months
ended September 30, 2009 and compares it with the information for the three months ended September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30 |
|
Decrease |
|
|
2009 |
|
2008 |
|
Amount |
|
% |
|
|
(Amounts in thousands, except per ton data and percentages) |
Coal sales |
|
$ |
614,957 |
|
|
$ |
769,458 |
|
|
$ |
(154,501 |
) |
|
|
(20.0 |
)% |
Tons sold |
|
|
29,338 |
|
|
|
35,239 |
|
|
|
(5,901 |
) |
|
|
(16.7 |
)% |
Coal sales realization per ton sold |
|
$ |
20.96 |
|
|
$ |
21.84 |
|
|
$ |
(0.88 |
) |
|
|
(4.0 |
)% |
Coal sales decreased in the third quarter of 2009 from the third quarter of 2008
primarily due to lower steam coal sales volumes in our western
operations and lower volumes of
metallurgical coal sales in our Central Appalachia region. Our coal sales realizations per ton
were slightly lower in the 2009 quarter, as higher realizations per ton in our western operations
were offset by a decrease in metallurgical coal prices, and the impact of lower metallurgical coal
volumes on our average coal realizations per ton. We have provided more information about the tons
sold and the coal sales realizations per ton by operating segment under the heading Operating
segment results beginning on page 19.
17
Costs, expenses and other. The following table summarizes costs, expenses and other
components of operating income for the three months ended September 30, 2009 and compares them with
the information for the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Three Months Ended September 30 |
|
|
in Net Income |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(Amounts in thousands, except percentages) |
|
Cost of coal sales |
|
$ |
489,290 |
|
|
$ |
567,372 |
|
|
$ |
78,082 |
|
|
|
13.8 |
% |
Depreciation, depletion and amortization |
|
|
71,468 |
|
|
|
72,185 |
|
|
|
717 |
|
|
|
1.0 |
|
Selling, general and administrative expenses |
|
|
24,029 |
|
|
|
22,235 |
|
|
|
(1,794 |
) |
|
|
(8.1 |
) |
Change in fair value of coal derivatives
and coal trading activities, net |
|
|
(3,342 |
) |
|
|
18,382 |
|
|
|
21,724 |
|
|
|
118.2 |
|
Costs related to acquisition of Jacobs Ranch |
|
|
791 |
|
|
|
|
|
|
|
(791 |
) |
|
|
N/A |
|
Other operating expense (income), net |
|
|
(15,617 |
) |
|
|
1,354 |
|
|
|
16,971 |
|
|
|
1,253.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
566,619 |
|
|
$ |
681,528 |
|
|
$ |
114,909 |
|
|
|
16.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales. Our cost of coal sales decreased in the third quarter of 2009 from
the third quarter of 2008 primarily due to the lower sales volumes in all operating segments,
partially offset by the impact of higher per-ton costs due to lower production levels. We have
provided more information about our operating segments under the heading Operating segment
results beginning on page 19.
Depreciation, depletion and amortization. When compared with the third quarter of 2008, lower
depreciation and amortization costs in the third quarter of 2009 resulted from the impact of lower
volume levels on depletion and amortization costs calculated on a units-of-production method,
partially offset by the amortization of development costs related to the new seam at the West Elk
mine where we commenced longwall production in the fourth quarter of 2008.
Selling, general and administrative expenses. The increase in selling, general and
administrative expenses from the third quarter of 2008 to the third quarter of 2009 is due
primarily to the impact in the third quarter of 2008 of a decrease in our stock price of $42.14
per share on our deferred compensation plan obligation. Amounts recognized related to our deferred
compensation plan are impacted by changes in the value of our common stock and changes in the value
of the underlying investments. The dramatic drop in our stock price in 2008 caused our expense
related to the plan to be lower in the third quarter of 2008 when compared with the third quarter
of 2009 by $5.9 million, which was partially offset by a decrease in incentive compensation costs
of $3.7 million.
Change in fair value of coal derivatives and coal trading activities, net. Net (gains)
losses relate to the net impact of our coal trading activities and the change in fair value of
other coal derivatives that have not been designated as hedge instruments in a hedging
relationship. In 2008, a portion of the unrealized gains generated in the first half of the year
by our coal trading function were lost in the third quarter due to a downturn in the
over-the-counter coal markets during the quarter.
Costs related to acquisition of Jacobs Ranch. These costs represent costs we incurred during
the third quarter of 2009 related to our announced acquisition of the Jacobs Ranch mine. Under
accounting rules we adopted in the first quarter of 2009, the costs of acquiring a business are
expensed as incurred.
Other operating (income) expense, net. The net other operating income generated in the third
quarter of 2009 compared to the losses in the third quarter of 2008 is primarily the result of an increase
in net income from bookouts (the offsetting of coal sales and purchase contracts) and contract
settlements in 2009.
18
Operating segment results. The following table shows results by operating segment for the
three months ended September 30, 2009 and compares it with information for the three months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Increase (Decrease) |
|
|
2009 |
|
2008 |
|
$ |
|
% |
Powder River Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
21,528 |
|
|
|
26,153 |
|
|
|
(4,625 |
) |
|
|
(17.7 |
)% |
Coal sales realization per ton sold (1) |
|
$ |
12.26 |
|
|
$ |
11.21 |
|
|
$ |
1.05 |
|
|
|
9.4 |
% |
Operating margin per ton sold (2) |
|
$ |
0.95 |
|
|
$ |
0.81 |
|
|
$ |
0.14 |
|
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Bituminous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
4,560 |
|
|
|
5,135 |
|
|
|
(575 |
) |
|
|
(11.2 |
)% |
Coal sales realization per ton sold (1) |
|
$ |
29.08 |
|
|
$ |
26.77 |
|
|
$ |
2.31 |
|
|
|
8.6 |
% |
Operating margin per ton sold (2) |
|
$ |
3.51 |
|
|
$ |
4.08 |
|
|
$ |
(0.57 |
) |
|
|
(14.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Appalachia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
3,250 |
|
|
|
3,951 |
|
|
|
(701 |
) |
|
|
(17.7 |
)% |
Coal sales realization per ton sold (1) |
|
$ |
59.77 |
|
|
$ |
75.17 |
|
|
$ |
(15.40 |
) |
|
|
(20.5 |
)% |
Operating margin per ton sold (2) |
|
$ |
5.47 |
|
|
$ |
22.22 |
|
|
$ |
(16.75 |
) |
|
|
(75.4 |
)% |
|
|
|
(1) |
|
Coal sales prices per ton exclude certain transportation costs that we pass
through to our customers. We use these financial measures because we believe the amounts as
adjusted better represent the coal sales prices we achieved within our operating segments.
Since other companies may calculate coal sales prices per ton differently, our calculation may
not be comparable to similarly titled measures used by those companies. For the three months
ended September 30, 2009, transportation costs per ton were $0.17 for the Powder River Basin,
$3.44 for the Western Bituminous region and $1.52 for Central Appalachia. For the three months
ended September 30, 2008, transportation costs per ton were $0.02 for the Powder River Basin,
$4.60 for the Western Bituminous region and $4.82 for Central Appalachia. |
|
(2) |
|
Operating margin per ton sold is calculated as coal sales revenues less cost of coal
sales and depreciation, depletion and amortization divided by tons sold. |
Powder River Basin The decrease in sales volume in the Powder River Basin in the third
quarter of 2009 when compared with the third quarter of 2008 was due to weak market conditions. At
the Black Thunder mining complex, in response to these conditions, we reduced production and idled
one dragline in the fourth quarter of 2008 and another dragline in May 2009, along with the related
support equipment. Increases in sales prices during the third quarter of 2009 when compared with
the third quarter of 2008 primarily reflect higher pricing from contracts committed during 2008,
when market conditions were more favorable, partially offset by the
effect of lower pricing on market-index priced tons and the effect of lower sulfur dioxide
allowance pricing. On a per-ton basis, operating margins in the third quarter of 2009 increased
from the third quarter of 2008 due to the higher sales prices, partially offset by an increase in
per-ton costs. The increase in per-ton costs, despite our cost containment efforts, resulted
primarily from the effect of spreading fixed costs over lower volume.
Western Bituminous In the Western Bituminous region, we sold fewer tons in the third quarter
of 2009 than in the third quarter of 2008 due to weak market conditions, as well as quality issues
at the West Elk mining complex. We have encountered sandstone intrusions at the West Elk mining
complex that have resulted in a higher ash content in the coal produced, and declining coal demand
has had an impact on our efforts to market this coal. As a result of the weak market demand for
this coal, we have reduced our production levels at the mine. To address any ongoing quality
issues, we plan to build a preparation plant at the mine by mid-2010, with estimated capital costs
of $25 million to $30 million. The beneficial impact of the roll-off of lower-priced legacy
contracts in 2008 on our per-ton realizations was partially offset by the detrimental impact of
selling coal with a higher ash content. Lower per-ton operating margins in the third quarter of
2009 were the result of the West Elk quality issues and lower production levels.
Central Appalachia The decrease in sales volumes in the third quarter of 2009, when compared
with the third quarter of 2008, was due to weaker market demand. In response to the weakened
demand, we reduced our production by slowing the rate of advance of equipment, by shortening or
eliminating shifts at several mining complexes, and by idling an underground mine and certain
surface mining equipment at our Cumberland River mining complex. Weak economic conditions have
adversely impacted demand and pricing for metallurgical coal, and lower per-ton realizations in
2009 compared to 2008 resulted from a decrease in our metallurgical coal sales volumes and pricing.
We sold 0.5 million tons into metallurgical markets in the third quarter of 2009 compared to 1.3
million tons in the third quarter of 2008. Because metallurgical coal generally commands a higher
price than steam coal, the decrease had a detrimental impact on our average realizations. In
addition to the lower per-ton realizations, our operating margins were impacted by a slight
increase in operating costs per ton from the third quarter of 2008. Despite substantial cost
reductions, our per-ton operating costs were higher due primarily to our lower production levels.
19
Net interest expense. The following table summarizes our net interest expense for the three
months ended September 30, 2009 and compares it with the information for the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Three Months Ended September 30 |
|
|
in Net Income |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(Amounts in thousands, except percentages) |
|
Interest expense |
|
$ |
(29,791 |
) |
|
$ |
(17,019 |
) |
|
$ |
(12,772 |
) |
|
|
(75.0 |
)% |
Interest income |
|
|
399 |
|
|
|
235 |
|
|
|
164 |
|
|
|
69.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(29,392 |
) |
|
$ |
(16,784 |
) |
|
$ |
(12,608 |
) |
|
|
(75.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net interest expense in the third quarter of 2009 compared to the third
quarter of 2008 is primarily due to the issuance of the 8.75% senior notes as discussed in the
Overview and a decrease in interest costs capitalized in the third quarter of 2009. Interest
costs capitalized were $0.3 million during the third quarter of 2009, compared with $3.6 million
during the third quarter of 2008.
Income taxes. Our effective income tax rate is sensitive to changes in estimates of annual
profitability and the deduction for percentage depletion. The following table summarizes our
income taxes for the three months ended September 30, 2009 and compares it with information for the
three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Decrease in Net Income |
|
|
2009 |
|
2008 |
|
$ |
|
% |
|
|
(Amounts in thousands, except percentages) |
Benefit from income taxes |
|
$ |
6,270 |
|
|
$ |
26,881 |
|
|
$ |
(20,611 |
) |
|
|
(76.7 |
)% |
The benefit from income taxes for the three months ended September 30, 2009 represents
the adjustment needed to reflect the benefit for the nine months ended September 30, 2009 at the
estimated annual effective tax rate for the year ended December 31, 2009. The benefit from income
taxes for the three months ended September 30, 2008 includes a $52.6 million reduction in our
valuation allowance against net operating loss and alternative minimum tax credit carryforwards.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Summary. Our results during the first nine months of 2009 when compared to the first nine
months of 2008 were influenced primarily by lower sales volumes due to weak market conditions, a
decrease in gains from our coal trading activities, a reduction in 2008 in our valuation allowance
against deferred tax assets and higher interest expense.
Revenues. The following table summarizes information about coal sales for the nine months
ended September 30, 2009 and compares it with the information for the nine months ended September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30 |
|
Decrease |
|
|
2009 |
|
2008 |
|
Amount |
|
% |
|
|
(Amounts in thousands, except per ton data and percentages) |
Coal sales |
|
$ |
1,850,609 |
|
|
$ |
2,253,925 |
|
|
$ |
(403,316 |
) |
|
|
(17.9 |
)% |
Tons sold |
|
|
87,888 |
|
|
|
104,887 |
|
|
|
(16,999 |
) |
|
|
(16.2 |
)% |
Coal sales realization per ton sold |
|
$ |
21.06 |
|
|
$ |
21.49 |
|
|
$ |
(0.43 |
) |
|
|
(2.0 |
)% |
Coal sales decreased in the nine months ended September 30, 2009 from the nine months
ended September 30, 2008 primarily due to lower sales volumes in all operating regions. Average
sales prices during the nine months ended September 30, 2009 were lower than during the nine months
ended September 30, 2008 due primarily to a decrease in metallurgical sales volumes in our Central
Appalachia region, which offset the impact of generally higher base pricing on steam coal. We have
provided more information about the tons sold and the coal sales realizations per ton by operating
segment under the heading Operating segment results beginning on page 22.
Costs, expenses and other. The following table summarizes costs, expenses and other
components of operating income for the nine months ended September 30, 2009 and compares them with
the information for the nine months ended September 30, 2008:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Nine Months Ended September 30 |
|
|
in Net Income |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(Amounts in thousands, except percentages) |
|
Cost of coal sales |
|
$ |
1,503,937 |
|
|
$ |
1,650,259 |
|
|
$ |
146,322 |
|
|
|
8.9 |
% |
Depreciation, depletion and amortization |
|
|
212,986 |
|
|
|
217,180 |
|
|
|
4,194 |
|
|
|
1.9 |
|
Selling, general and administrative expenses |
|
|
70,770 |
|
|
|
80,937 |
|
|
|
10,167 |
|
|
|
12.6 |
|
Change in fair value of coal derivatives
and coal trading activities, net |
|
|
(10,328 |
) |
|
|
(65,336 |
) |
|
|
(55,008 |
) |
|
|
(84.2 |
) |
Costs related to acquisition of Jacobs Ranch |
|
|
7,166 |
|
|
|
|
|
|
|
(7,166 |
) |
|
|
N/A |
|
Other operating income, net |
|
|
(28,141 |
) |
|
|
(2,993 |
) |
|
|
25,148 |
|
|
|
840.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,756,390 |
|
|
$ |
1,880,047 |
|
|
$ |
123,657 |
|
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales. Our cost of coal sales decreased in the nine months ended September
30, 2009 from the nine months ended September 30, 2008 due to the lower sales volumes across all
operating segments, partially offset by the impact of higher per-ton costs due to lower production
levels. We have provided more information about our operating segments under the heading
Operating segment results beginning on page 22.
Depreciation, depletion and amortization. When compared with the nine months ended September
30, 2008, lower depreciation and amortization costs in the nine months ended September 30, 2009
resulted from the impact of lower volume levels on depletion and amortization costs calculated on a
units-of-production method, partially offset by the amortization of development costs related to
the new seam at the West Elk mine where we commenced longwall production in the fourth quarter of
2008.
Selling, general and administrative expenses. The decrease in selling, general and
administrative expenses from the nine months ended September 30, 2008 to the nine months ended
September 30, 2009 is due primarily to a decrease in incentive compensation costs of $8.9 million
and a decrease of $4.4 million in costs associated with our deferred compensation plan, where
amounts recognized are impacted by changes in the value of our common stock and changes in the
value of the underlying investments. An increase in legal and other professional fees of $1.4
million and a $1.5 million contribution expense in 2009 to a company participating in the research
and development of technologies for capturing carbon dioxide emissions partially offset the effect
of the decrease in compensation-related costs.
Change in fair value of coal derivatives and coal trading activities, net. Net gains relate
to the net impact of our coal trading activities and the change in fair value of other coal
derivatives that have not been designated as hedge instruments in a hedging relationship. Our coal
trading function enabled us to take advantage of the significant price movements in the coal
markets during 2008.
Costs related to acquisition of Jacobs Ranch. These costs represent costs we incurred during
the nine months ended September 30, 2009 related to our announced acquisition of the Jacobs Ranch
mine. Under accounting rules we adopted in 2009, the costs of acquiring a business are expensed as
incurred.
Other operating income, net. The increase in net other operating income in 2009 from 2008 is
primarily the result of an increase in net income from bookouts (the offsetting of coal sales and
purchase contracts) and contract settlements. Income from equity
investments also increased $3.7 million in 2009, when compared with
2008, primarily from our interest in Knight Hawk Holdings, LLC.
21
Operating segment results. The following table shows results by operating segment for the
nine months ended September 30, 2009 and compares it with information for the nine months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
Increase (Decrease) |
|
|
2009 |
|
2008 |
|
$ |
|
% |
Powder River Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
65,964 |
|
|
|
76,726 |
|
|
|
(10,762 |
) |
|
|
(14.0 |
)% |
Coal sales realization per ton sold (3) |
|
$ |
12.70 |
|
|
$ |
11.25 |
|
|
$ |
1.45 |
|
|
|
12.9 |
% |
Operating margin per ton sold (4) |
|
$ |
1.00 |
|
|
$ |
0.99 |
|
|
$ |
0.01 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Bituminous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
11,987 |
|
|
|
15,909 |
|
|
|
(3,922 |
) |
|
|
(24.7 |
)% |
Coal sales realization per ton sold (3) |
|
$ |
29.00 |
|
|
$ |
27.89 |
|
|
$ |
1.11 |
|
|
|
4.0 |
% |
Operating margin per ton sold (4) |
|
$ |
0.14 |
|
|
$ |
6.12 |
|
|
$ |
(5.98 |
) |
|
|
(97.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Appalachia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
9,937 |
|
|
|
12,253 |
|
|
|
(2,316 |
) |
|
|
(18.9 |
)% |
Coal sales realization per ton sold (3) |
|
$ |
60.08 |
|
|
$ |
66.77 |
|
|
$ |
(6.69 |
) |
|
|
(10.0 |
)% |
Operating margin per ton sold (4) |
|
$ |
6.77 |
|
|
$ |
17.55 |
|
|
$ |
(10.78 |
) |
|
|
(61.4 |
)% |
|
|
|
(3) |
|
Coal sales prices per ton exclude certain transportation costs that we pass
through to our customers. We use these financial measures because we believe the amounts as
adjusted better represent the coal sales prices we achieved within our operating segments.
Since other companies may calculate coal sales prices per ton differently, our calculation may
not be comparable to similarly titled measures used by those companies. For the nine months
ended September 30, 2009, transportation costs per ton were $0.14 for the Powder River Basin,
$2.94 for the Western Bituminous region and $2.36 for Central Appalachia. For the nine months
ended September 30, 2008, transportation costs per ton were $0.03 for the Powder River Basin,
$4.65 for the Western Bituminous region and $4.28 for Central Appalachia. |
|
(4) |
|
Operating margin per ton sold is calculated as coal sales revenues less cost of coal
sales and depreciation, depletion and amortization divided by tons sold. |
Powder River Basin The decrease in sales volume in the Powder River Basin in 2009 when
compared with 2008 is due to weak market conditions. At the Black Thunder mining complex, in
response to these conditions, we reduced production and idled one dragline in the fourth quarter of
2008 and another dragline in May 2009, along with the related support equipment. Increases in
sales prices during 2009 when compared with 2008, primarily reflect higher pricing from contracts
committed during 2008, when market conditions were more favorable, partially offset by the effect
of lower pricing on market-index priced tons and the effect of lower sulfur dioxide allowance
pricing. On a per-ton basis, operating margins in 2009 were flat compared to 2008 due to an
increase in per-ton costs. The increase in per-ton costs, despite our cost containment efforts,
resulted primarily from the effect of spreading fixed costs over lower volume levels.
Western Bituminous In the Western Bituminous region, we sold fewer tons in 2009 than in the
2008 due to the weak market conditions as well as quality issues at the West Elk mining complex.
We have encountered sandstone intrusions at the West Elk mining complex that have resulted in a
higher ash content in the coal produced, and declining coal demand has had an impact on our efforts
to market this coal. As a result of the weak market demand for this coal, we have reduced our
production levels at the mine. To address any ongoing quality issues, we plan to build a
preparation plant at the mine by mid-2010, with estimated capital costs of $25 million to $30
million. The detrimental impact on our per-ton realizations of selling coal with a higher ash
content offset the beneficial impact of the roll-off of lower-priced legacy contracts in 2008.
Lower per-ton operating margins during 2009 were the result of the West Elk quality issues and the
lower production levels.
Central Appalachia The decrease in sales volumes in 2009, when compared with 2008, is due to
weaker market demand. In response to the weakened demand, we reduced our production in Central
Appalachia by slowing the rate of advance of equipment, by shortening or eliminating shifts at
several mining complexes, and by idling an underground mine and certain surface mining equipment at
our Cumberland River mining complex in the second quarter of 2009. Economic conditions have also
adversely impacted demand and pricing for metallurgical coal, and lower per-ton realizations in
2009 compared to 2008 resulted from a decrease in our metallurgical coal sales volumes and pricing.
We sold 1.2 million tons into metallurgical markets in 2009 compared to 3.5 million tons in 2008.
Because metallurgical coal generally commands a higher price than steam coal, the decrease had a
detrimental impact on our average per-ton realizations. In addition to the lower per-ton
realizations in 2009, our operating margins were also impacted by an increase in operating costs
per ton in 2009 from 2008, due primarily to the lower production levels.
22
Net interest expense. The following table summarizes our net interest expense for the nine
months ended September 30, 2009 and compares it with the information for the nine months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in |
|
|
|
Nine Months Ended September 30 |
|
|
Net Income |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(Amounts in thousands, except percentages) |
|
Interest expense |
|
$ |
(70,466 |
) |
|
$ |
(56,228 |
) |
|
$ |
(14,238 |
) |
|
|
(25.3 |
)% |
Interest income |
|
|
7,284 |
|
|
|
1,128 |
|
|
|
6,156 |
|
|
|
545.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(63,182 |
) |
|
$ |
(55,100 |
) |
|
$ |
(8,082 |
) |
|
|
(14.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense in 2009 compared to 2008 is primarily due to higher
interest expense resulting from the issuance of the 8.75% senior notes and a decrease in
capitalized interest costs. Interest costs capitalized were $0.7 million during 2009, compared
with $8.7 million during 2008. The interest income recorded in 2009 relates primarily to an
adjustment to the recoverable amount of a black lung excise tax refund recorded in the fourth
quarter of 2008.
Income taxes. Our effective income tax rate is sensitive to changes in estimates of annual
profitability and percentage depletion. The following table summarizes our income taxes for the
nine months ended September 30, 2009 and compares it with information for the nine months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
Increase in Net Income |
|
|
2009 |
|
2008 |
|
$ |
|
% |
|
|
(Amounts in thousands, except percentages) |
Provision for (benefit from) income taxes |
|
$ |
(9,590 |
) |
|
$ |
26,059 |
|
|
$ |
35,649 |
|
|
|
136.8 |
% |
The benefit from income taxes in 2009 was the result of lower pre-tax income in 2009 when
compared with 2008 and the deduction for percentage depletion. In 2008, our income taxes were
impacted by higher profitability and a reduction of $52.6 million in our valuation allowance
against net operating loss and alternative minimum tax credit carryforwards.
Liquidity and Capital Resources
Credit crisis and economic environment
The crisis in domestic and international financial markets has had a significant adverse
impact on a number of financial institutions. Since the beginning of the crisis, our ability to
issue commercial paper up to the maximum amount allowed under the program has been constrained.
The ongoing uncertainty in the financial markets may have an impact in the future on: the market
values of certain securities and commodities; the financial stability of our customers and
counterparties; availability under our lines of credit; the cost and availability of insurance and
financial surety programs, and pension plan funding requirements. We had available borrowing
capacity of $625.9 million under our lines of credit at September 30, 2009. We also had $840.3
million of cash on hand at September 30, 2009, or approximately $76 million of available cash,
after adjusting for the purchase price of the Jacobs Ranch mining complex paid on October 1, 2009.
Management will continue to closely monitor our liquidity, credit markets and counterparty credit
risk. Management cannot predict with any certainty the impact to our liquidity of any further
disruption in the credit environment.
Liquidity and capital resources
Our primary sources of cash include sales of our coal production to customers, borrowings
under our credit facilities or other financing arrangements, and debt and equity offerings related
to significant transactions. Excluding any significant mineral reserve acquisitions, we generally
satisfy our working capital requirements and fund capital expenditures and debt-service obligations
with cash generated from operations or borrowings under our credit facility, accounts receivable
securitization or commercial paper programs. The borrowings under these arrangements are
classified as current if the underlying credit facilities expire within one year or if, based on
cash projections and management plans, we do not have the intent to replace them on a long-term
basis. Such plans are subject to change based on our cash needs.
We believe that cash generated from operations and borrowings under our credit facilities or
other financing arrangements will be sufficient to meet working capital requirements, anticipated
capital expenditures and scheduled debt payments for at least the next several years. We manage our
exposure to changing commodity prices for our non-trading, long-term coal contract portfolio
through the use of long-term coal supply agreements. We enter into fixed price, fixed volume supply
contracts with terms greater than one year with customers with whom we have historically had
limited collection issues. Our ability to satisfy debt service obligations, to fund planned
capital expenditures, to make acquisitions, to repurchase our common shares and to pay dividends
will depend upon our future operating performance, which will be affected by prevailing economic
conditions in the coal industry and financial, business and other factors, some of which are beyond
our control. In response to the economic environment and weakening coal markets, we have decreased
our 2009 capital spending plans and have established other process improvement initiatives and cost
containment programs in order to
23
reduce costs. In fiscal 2009, we expect to spend approximately $177 million to $207 million
less on capital expenditures than we did during 2008.
On July 31, 2009, we sold 17
million shares of our common stock at a public offering price of $17.50 per share pursuant to an
automatically effective shelf registration statement on Form S-3 and prospectus previously filed
and issued $600 million in aggregate principal amount of 8.750% senior unsecured notes due 2016 at
an initial issue price of 97.464% of face amount in accordance with Rule 144A and Regulation S
under the Securities Act of 1933, as amended. On August 6, 2009, we issued an additional 2.55
million shares of our common stock under the same terms and conditions to cover underwriters
over-allotments. Total net proceeds from these transactions were $896.8 million. We used the net
proceeds from these transactions primarily to finance the purchase of the Jacobs Ranch mining
complex.
Interest is payable on the 8.750% senior notes on February 1 and August 1 of each year,
commencing February 1, 2010. At any time on or after August 1, 2013, we may redeem some or all of
the notes. The redemption price, reflected as a percentage of the principal amount, is: 104.375%
for notes redeemed between August 1, 2013 and July 31, 2014; 102.188% for notes redeemed between
August 1, 2014 and July 31, 2015; and 100% for notes redeemed on or after August 1, 2015. The notes
are guaranteed by most of our subsidiaries, except for Arch Western Resources, LLC and its
subsidiaries and Arch Receivable Company, LLC.
We have entered into a registration rights agreement in connection with the 8.75% senior
notes. Pursuant to the agreement, we have agreed to file a registration statement and with the
Securities and Exchange Commission to exchange a like aggregate principal amount of senior notes
identical in all material respects to the 8.75% senior notes. We must make reasonable efforts to
cause the registration statement to become effective by July 31, 2010 and complete the exchange by
September 14, 2010. Should those events not occur within the specified time frame, the interest
rate shall be increased by one-quarter or one percent per annum for the first 90 days following
such period. Such interest rate will increase by an additional one-quarter of one percent per annum
thereafter up to a maximum aggregate increase of one percent per annum. Once any of the required
events occur, the interest rate will revert to the rate specified in the indenture.
On August 27, 2009, we entered into an amendment to our secured revolving credit facility.
The amendment extended the maturity of the credit facility from June 23, 2011 to March 31, 2013 and
increased our borrowing capacity from $800.0 million to $860.0 million until June 23, 2011, when it
will then decrease to $762.5 million. New banks may join the credit facility after June 23, 2011,
subject to an aggregate maximum borrowing amount of $800.0 million. The amendment also increased
the required maximum leverage ratio. We had borrowings outstanding under the revolving credit
facility of $300.0 million at September 30, 2009 and $205.0 million at December 31, 2008. At
September 30, 2009, we had availability of $560.0 million under the revolving credit facility.
Borrowings under the credit facility bear interest at a floating rate based on LIBOR determined by
reference to our leverage ratio, as calculated in accordance with the credit agreement, as amended.
Our revolving credit facility is secured by substantially all of our assets, as well as our
ownership interests in substantially all of our subsidiaries, except our ownership interests in
Arch Western Resources, LLC and its subsidiaries. Financial covenants contained in our revolving
credit facility, as amended, consist of a maximum leverage ratio, a maximum senior secured leverage
ratio and a minimum interest coverage ratio. The leverage ratio requires that we not permit the
ratio of total net debt (as defined in the facility) at the end of any calendar quarter to EBITDA
(as defined in the facility) for the four quarters then ended to exceed a specified amount. The
interest coverage ratio requires that we not permit the ratio of EBITDA (as defined in the
facility) at the end of any calendar quarter to interest expense for the four quarters then ended
to be less than a specified amount. The senior secured leverage ratio requires that we not permit
the ratio of total net senior secured debt (as defined in the facility) at the end of any calendar
quarter to EBITDA (as defined in the facility) for the four quarters then ended to exceed a
specified amount. We were in compliance with all financial covenants at September 30, 2009.
We are party to a $175.0 million accounts receivable securitization program whereby eligible
trade receivables are sold, without recourse, to a multi-seller, asset-backed commercial paper
conduit. The credit facility supporting the borrowings under the program is subject to renewal
annually and expires March 31, 2010. Under the terms of the program, eligible trade receivables
consist of trade receivables generated by our operating subsidiaries. Actual borrowing capacity is
based on the allowable amounts of accounts receivable as defined under the terms of the agreement.
We had no borrowings outstanding under the program at September 30, 2009 and $68.6 million
outstanding at December 31, 2008. We also had letters of credit outstanding under the
securitization program of $62.2 million as of September 30, 2009. At September 30, 2009 we had
$65.9 million of availability under the accounts receivable securitization program. Although the
participants in the program bear the risk of non-payment of purchased receivables, we have agreed
to indemnify the participants with respect to various matters. The participants under the program
will be entitled to receive payments reflecting a specified discount on amounts funded under the
program, including drawings under letters of credit, calculated on the basis of the
24
base rate or commercial paper rate, as applicable. We pay facility fees, program fees and
letter of credit fees (based on amounts of outstanding letters of credit) at rates that vary with
our leverage ratio. Under the program, we are subject to certain affirmative, negative and
financial covenants customary for financings of this type, including restrictions related to, among
other things, liens, payments, merger or consolidation and amendments to the agreements underlying
the receivables pool. A termination event would permit the administrator to terminate the program
and enforce any and all rights, subject to cure provisions, where applicable. Additionally, the
program contains cross-default provisions, which would allow the administrator to terminate the
program in the event of non-payment of other material indebtedness when due and any other event
which results in the acceleration of the maturity of material indebtedness.
We had commercial paper outstanding of $43.6 million at September 30, 2009 and $65.7 million
at December 31, 2008. Our commercial paper placement program provides short-term financing at
rates that are generally lower than the rates available under our revolving credit facility. Under
the program, as amended, we may sell up to $100.0 million in interest-bearing or discounted
short-term unsecured debt obligations with maturities of no more than 270 days. The commercial
paper placement program is supported by a line of credit that is subject to renewal annually and
expires April 30, 2010. The current credit market has affected our ability to issue commercial
paper up to the maximum amount allowed under the program, but we believe that the availability
under our credit facilities is sufficient to satisfy our liquidity needs.
Our subsidiary, Arch Western Finance LLC, has outstanding an aggregate principal amount of
$950.0 million of 6.75% senior notes due on July 1, 2013. The senior notes are guaranteed by Arch
Western Resources, LLC and certain of its subsidiaries and are secured by an intercompany note from
Arch Western Resources, LLC to Arch Coal, Inc. The indenture under which the senior notes were
issued contains certain restrictive covenants that limit Arch Western Resources, LLCs ability to,
among other things, incur additional debt, sell or transfer assets and make certain investments.
We have filed a universal shelf registration statement on Form S-3 with the SEC that allows us
to offer and sell from time to time an unlimited amount of unsecured debt securities consisting of
notes, debentures, and other debt securities, common stock, preferred stock, warrants, and/or
units. Related proceeds could be used for general corporate purposes, including repayment of other
debt, capital expenditures, possible acquisitions and any other purposes that may be stated in any
related prospectus supplement.
The following is a summary of cash provided by or used in each of the indicated types of
activities:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
246,443 |
|
|
$ |
508,094 |
|
Investing activities |
|
|
(309,245 |
) |
|
|
(434,147 |
) |
Financing activities |
|
|
832,446 |
|
|
|
(37,961 |
) |
Cash provided by operating activities decreased in the first nine months of 2009 compared to
the first nine months of 2008, primarily as a result of a decrease in our profitability in 2009
from the weak coal markets, as discussed in Results of Operations.
Cash used in investing activities for the first nine months of 2009 was $124.9 million less
than the amount used for the first nine months of 2008, primarily due to a $134.1 million reduction
in capital expenditures. During the first nine months of 2009, in addition to the last payment of
$122.0 million on the Little Thunder federal coal lease, we spent approximately $19.0 million on
additional longwall equipment at the West Elk mining complex in Colorado and approximately $38.0
million on a new shovel and haul trucks at the Black Thunder mine in Wyoming. During the first
nine months of 2008, in addition to a payment of $122.0 million on the Little Thunder lease, we
spent approximately $78.4 million on the construction of the loadout facility at our Black Thunder
mine in Wyoming and approximately $101.2 million for the transition to the new reserve area at our
West Elk mining complex. We completed the work on the loadout facility and transitioned to the new
seam at West Elk in the fourth quarter of 2008.
Cash provided by financing activities was $832.4 million during the first nine months of 2009
compared to cash used in financing activities of $38.0 million during the first nine months of
2008, as a result of the proceeds from the sale of common stock and issuance of debt that we
discussed previously. As a result of these transactions, we were able reduce outstanding borrowings
under our revolving credit facility. We also paid financing costs of $29.6 million in conjunction
with the 8.75% senior notes, as well as the amendments to our credit facilities discussed
previously.
In 2008, we repurchased 1.5 million shares of common stock under our share repurchase program
at an average price of $35.62. We paid $47.9 million during the third quarter of 2008, with the
remaining $5.9 million paid in the fourth quarter.
25
Ratio of Earnings to Fixed Charges
The following table sets forth our ratios of earnings to combined fixed charges and preference
dividends for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30 |
|
|
2009 |
|
2008 |
Ratio of earnings to combined fixed charges and preference dividends |
|
|
1.41 |
x |
|
|
5.27 |
x |
Critical Accounting Policies
In 2009, we adopted new accounting guidance that requires that a noncontrolling interest
(minority interest) in a consolidated subsidiary be displayed in the consolidated balance sheet as
a separate component of equity. Our net income on the face of the consolidated statement of income
for all periods presented now includes income attributable to the noncontrolling interest in our
subsidiary, Arch Western Resources, LLC. Earnings per share will continue to be calculated based
on income attributable to the controlling interest only. Equity attributable to the noncontrolling
interest is presented in the mezzanine between liabilities and equity, because it is redeemable.
Other than the adoption of this guidance, there have been no significant changes to our
critical accounting policies during the nine months ended September 30, 2009.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
We manage our commodity price risk for our non-trading, long-term coal contract portfolio
through the use of long-term coal supply agreements, and to a limited extent, through the use of
derivative instruments. Including the forecasted effects of the Jacobs Ranch acquisition, at
September 30, 2009, our expected remaining 2009 production is committed and priced. At current
production levels, we have expected uncommitted volumes of 15 million to 25 million tons in 2010,
with an additional 10 million tons committed but not yet priced. In 2011, we have expected
uncommitted volumes of 80 million to 90 million tons, with an additional 15 million tons committed
but not yet priced.
We are exposed to commodity price risk in our coal trading activities, which represents the
potential future loss that could be caused by an adverse change in the market value of coal. Our
coal trading portfolio included forward, swap and put and call option contracts at September 30,
2009. With respect to our coal trading portfolio at September 30, 2009, the potential for loss of
future earnings resulting from changing coal prices was insignificant. The timing of the estimated
future realization of the value of our trading portfolio is 47% in the remainder of 2009, 32% in
2010 and 21% in 2011.
We are also exposed to the risk of fluctuations in cash flows related to our purchase of
diesel fuel. We use approximately 50 to 60 million gallons of diesel fuel annually in our
operations, including the effect of the Jacobs Ranch transaction. We enter into forward physical
purchase contracts, as well as heating oil swaps and options, to reduce volatility in the price of
diesel fuel for our operations. At September 30, 2009, the Company had protected the price of
approximately 50% of its expected purchases for the remainder of fiscal year 2009 and for fiscal
year 2010. The swap agreements essentially fix the price paid for diesel fuel by requiring us to
pay a fixed heating oil price and receive a floating heating oil price. The call options protect
against increases in diesel fuel prices. Since the changes in the floating heating oil price
highly correlate to changes in diesel fuel prices, the derivatives qualify for hedge accounting and
the changes in the fair value of the derivatives are recorded through other comprehensive income,
with any ineffectiveness recognized immediately in income. At September 30, 2009, a $0.25 per
gallon decrease in the price of heating oil would result in an approximate $8.3 million loss
related to the heating oil derivatives, which, if realized, would be offset by a decrease in the
cost of our physical diesel purchases.
We are exposed to market risk associated with interest rates due to our existing level of
indebtedness. At September 30, 2009, of our $1.89 billion principal amount of debt outstanding,
$343.6 million of outstanding borrowings have interest rates that fluctuate based on changes in the
respective market rates. A one percentage point increase in the interest rates related to these
borrowings would result in an annualized increase in interest expense of $3.4 million, based on
borrowing levels at September 30, 2009.
|
|
|
Item 4. |
|
Controls and Procedures. |
We performed an evaluation under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of September 30, 2009. Based on
that evaluation, our management, including our chief executive officer and chief financial officer,
concluded that the disclosure controls and procedures were effective as of such date. There were
no
26
changes in internal control over financial reporting that occurred during our fiscal quarter
ended September 30, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings. |
We are involved in various claims and legal actions in the ordinary course of business. In
the opinion of management, the outcome of such ordinary course of business proceedings and
litigation currently pending will not have a material adverse effect on our results of operations
or financial results.
As described in our Annual Report on Form 10-K for the year ended December 31, 2008, surface
mines at our Mingo Logan and Coal-Mac mining operations were identified in an existing lawsuit
brought by the Ohio Valley Environmental Coalition (OVEC) in the U.S. District Court for the
Southern District of West Virginia as having been granted Clean Water Act §404 permits by the Army
Corps of Engineers, allegedly in violation of the Clean Water Act and the National Environmental
Policy Act. On June 24, 2009, the Fourth Circuit issued its mandate, making final its decision that
the Corps jurisdiction under Section 404 of the Clean Water Act is narrowly limited to the filling
of jurisdictional waters, and not to the broader environmental effects of a mining operation. The
Fourth Circuit also upheld the Corps decision not to require an environmental impact statement
before it approved the permits, which also was an issue on appeal. The courts decision pertained
to coal operations unrelated to us. Following remand of the case to the district court by the
Fourth Circuit, Mingo Logan moved for summary judgment. Mingo Logans motion for summary judgment
is currently pending before the district court.
The lawsuit, brought by the Ohio Valley Environmental Coalition in September 2005 in the U.S.
District Court for the Southern District of West Virginia, originally was filed against the Corps
for permits it had issued to four subsidiaries of a company unrelated to us or our operating
subsidiaries. The suit claimed that the Corps had issued permits to the subsidiaries of the
unrelated company that did not comply with the National Environmental Policy Act and violate the
Clean Water Act.
The court ruled on the claims associated with those four permits in orders of March 23 and
June 13, 2007. In the first of those orders, the court rescinded the four permits, finding that the
Corps had inadequately assessed the likely impact of valley fills on headwater streams and had
relied on inadequate or unproven mitigation to offset those impacts. In the second order, the court
entered a declaratory judgment that discharges of sediment from the valley fills into sediment
control ponds constructed in-stream to control that sediment must themselves be permitted under a
different provision of the Clean Water Act, § 402, and meet the effluent limits imposed on
discharges from these ponds. Both of the district court rulings were appealed to the U.S. Court of
Appeals for the Fourth Circuit.
Before the court entered its first order, the plaintiffs were permitted to amend their
complaint to challenge the Coal-Mac and Mingo Logan permits. Plaintiffs sought preliminary
injunctions against both operations, but later reached agreements with our operating subsidiaries
that have allowed mining to progress in limited areas while the district courts rulings are on
appeal. The claims against Coal-Mac were thereafter dismissed.
On February, 13, 2009, the Fourth Circuit reversed the District Court. The Fourth Circuit held
that the Corps jurisdiction under Section 404 of the Clean Water Act is limited to the narrow
issue of the filling of jurisdictional waters. The court also held that the Corps findings of no
significant impact under the National Environmental Policy Act and no significant degradation under
the Clean Water Act are entitled to deference. Such findings entitle the Corps to avoid preparing
an environmental impact statement, the absence of which was one issue on appeal. These holdings
also validated the type of mitigation projects proposed by our operations to minimize impacts and
comply with the relevant statutes. Finally, the Fourth Circuit found that stream segments, together
with the sediment ponds to which they connect, are unitary waste treatment systems, not waters
of the United States, and that the Corps had not exceeded its authority in permitting them.
The Ohio Valley Environmental Coalition sought rehearing before the entire appellate court
which was denied on May 29, and the decision was given legal effect on June 24. An appeal to the
U.S. Supreme Court was then filed on August 26, 2009, The Supreme Courts acceptance of such
appeal is discretionary, and a decision by the Court whether it will accept the case is expected in
2009.
Mingo Logan filed a motion for summary judgment with the district court on July 17, 2009,
asking that judgment be entered in its favor because no outstanding legal issues remained for
decision as a result of the Fourth Circuits February decision. The Corps has twice sought
extensions of its deadline to reply. We are aware that the US EPA is considering whether it has a
legal basis to veto the Corps issued permit under § 404(c) of the Clean Water Act. This action, if
taken and upheld by a court following challenge, could prevent the use of the site by Mingo Logan
for construction of the valley fill previously authorized by the Corps permit.
27
You should see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December
31, 2008 for more information about some of the proceedings and litigation in which we are
involved.
Our business inherently involves certain risks and uncertainties. The risks and uncertainties
described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 are not
the only ones we face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations. Should one or more of any of
these risks materialize, our business, financial condition, results of operations or liquidity
could be materially adversely affected.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
In September 2006, our board of directors authorized a share repurchase program for the
purchase of up to 14,000,000 shares of our common stock. There is no expiration date on the current
authorization, and we have not made any decisions to suspend or cancel purchases under the program.
As of September 30, 2009, there were 10,925,800 shares of our common stock available for purchase
under this program. We did not purchase any shares of our common stock under this program during
the quarter ended September 30, 2009. Based on the closing price of our common stock as reported on
the New York Stock Exchange on November 5, 2009, the approximate dollar value of our common stock
that may yet be purchased under this program was $247.8 million.
|
|
|
Item 3. |
|
Defaults Upon Senior Securities. |
None.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders. |
None
|
|
|
Item 5. |
|
Other Information. |
None.
28
|
|
|
|
|
Exhibit |
|
Description |
1.1
|
|
|
|
Underwriting Agreement, dated July 27, 2009, by and among Arch Coal, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as
representatives of the several underwriters named therein. (incorporated by
reference to Exhibit 1.1 of the registrants Current Report on Form 8-K filed on
July 31, 2009). |
|
|
|
|
|
1.2
|
|
|
|
Purchase Agreement, dated July 28, 2009, by and among Arch Coal, Inc., the
subsidiary guarantors named therein and Banc of America Securities LLC, Citigroup
Global Markets Inc., Morgan Stanley & Co. Incorporated and J.P. Morgan Securities
Inc., as representatives of the initial purchasers named therein. (incorporated by
reference to Exhibit 1.2 of the registrants Current Report on Form 8-K filed on
July 31, 2009). |
|
|
|
|
|
2.1
|
|
|
|
Second Amendment to Membership Interest Purchase Agreement dated as of September
30, 2009, by and between Rio Tinto Sage LLC and Arch Coal, Inc. (incorporated by
reference to Exhibit 2.1 of the registrants Current Report on Form 8-K filed on
October 1, 2009). |
|
|
|
|
|
3.1
|
|
|
|
Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated by reference
to Exhibit 3.1 of the registrants Current Report on Form 8-K filed on May 5,
2006). |
|
|
|
|
|
3.2
|
|
|
|
Arch Coal, Inc. Bylaws, as amended effective as of December 5, 2008 (incorporated
by reference to Exhibit 3.1 of the registrants Current Report on Form 8-K filed on
December 10, 2008). |
|
|
|
|
|
4.1
|
|
|
|
Indenture, dated July 31, 2009, by and among Arch Coal, Inc., the subsidiary
guarantors named therein and U.S. Bank National Association, as trustee.
(incorporated by reference to Exhibit 4.1 of the registrants Current Report on
Form 8-K filed on July 31, 2009). |
|
|
|
|
|
4.2
|
|
|
|
Form of 8.750% Senior Note due 2016 (included in Exhibit 4.1, incorporated by
reference to Exhibit 4.2 of the registrants Current Report on Form 8-K filed on
July 31, 2009). |
|
|
|
|
|
4.3
|
|
|
|
Registration Rights Agreement, dated July 31, 2009, by and among Arch Coal, Inc.,
the subsidiary guarantors named therein, and Banc of America Securities LLC,
Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and J.P. Morgan
Securities Inc., as representatives of the initial purchasers named therein.
(incorporated by reference to Exhibit 4.3 of the registrants Current Report on
Form 8-K filed on July 31, 2009). |
|
|
|
|
|
5.1
|
|
|
|
Opinion of Robert G. Jones, Esq. with respect to the legality of the common stock.
(incorporated by reference to Exhibit 5.1 of the registrants Current Report on
Form 8-K filed on July 31, 2009). |
|
|
|
|
|
10.1
|
|
|
|
Fourth Amendment to Credit Agreement, dated as of August 27, 2009, by and among
Arch Coal, Inc., the banks party thereto, Citicorp USA, Inc., JPMorgan Chase Bank,
N.A. and Wachovia Bank, National Association, each in its capacity as syndication
agent, Bank of America, N.A. (as successor-by-merger to Fleet National Bank), as
documentation agent, and PNC Bank, National Association, as administrative agent
for the banks. (incorporated by reference to Exhibit 10.1 of the registrants
Current Report on Form 8-K filed on August 28, 2009). |
|
|
|
|
|
12.1
|
|
|
|
Computation of ratio of earnings to combined fixed charges and preference dividends. |
|
|
|
|
|
31.1
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Steven F. Leer. |
|
|
|
|
|
31.2
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of John T. Drexler. |
|
|
|
|
|
32.1
|
|
|
|
Section 1350 Certification of Steven F. Leer. |
|
|
|
|
|
32.2
|
|
|
|
Section 1350 Certification of John T. Drexler. |
|
|
|
* |
|
Certain appendices, exhibits and/or similar attachments to this agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-K. The registrant will supplementally furnish a
copy of any omitted appendix, exhibit or similar attachment to the SEC upon request. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
Arch Coal, Inc.
|
|
|
By: |
/s/ John T. Drexler
|
|
|
|
John T. Drexler |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
November 9, 2009 |
|
29