SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-13105
ARCH COAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-0921172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Address of principal executive offices) (Zip Code)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (314) 994-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
At November 11, 1997, there were 39,657,898 shares of registrant's common stock
outstanding.
Index
PART I. FINANCIAL INFORMATION PAGE
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996.............3
Condensed Consolidated Statements of Income for the Three Months
Ended September 30, 1997 and 1996 and the Nine Months Ended
September 30, 1997 and 1996.........................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996......5
Notes to Condensed Consolidated Financial Statements...6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...10
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS...........................21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............21
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1997 1996
----------- -----------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 17,301 $13,716
Trade accounts receivable 139,660 75,657
Other receivables 4,700 5,143
Inventories 69,645 35,234
Prepaid royalties 17,772 2,624
Deferred income taxes 15,825 14,500
Prepaid expenses and other assets 9,757 6,738
----------- ----------
Total current assets 274,660 153,612
----------- ----------
Property, plant and equipment, net 1,131,008 567,067
Other assets
Prepaid royalties 23,346 3,723
Coal supply agreements less accumulated
amortization 194,665 83,369
Deferred income taxes 49,122 67,207
Receivables and other assets 13,183 10,543
----------- ----------
280,316 164,842
----------- ----------
Total assets $ 1,685,984 $ 885,521
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 94,467 $ 42,712
Accrued expenses 83,969 58,734
Income taxes payable 10,623 19,000
Current portion of long-term debt 26,000 -
----------- ----------
Total current liabilities 215,059 120,446
----------- ----------
Long-term debt 300,900 212,695
Accrued postretirement benefits other
than pensions 291,141 228,843
Accrued reclamation and mine closure 126,206 97,595
Accrued workers' compensation 100,795 70,849
Accrued pension cost 23,876 14,297
Other long-term liabilities 33,496 10,170
Stockholders' equity
Common stock 397 209
Paid-in capital 472,008 8,392
Retained earnings 122,106 122,025
----------- ----------
Total stockholders' equity 594,511 130,626
----------- ----------
Total liabilities and
stockholders'equity $1,685,984 $ 885,521
=========== ===========
See notes to condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
-----------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues
Coal sales $322,924 $184,193 $706,210 $554,807
Other revenues 6,225 11,248 16,515 20,642
-------- -------- -------- --------
329,149 195,441 722,725 575,449
Costs and Expenses
Cost of coal sales 288,740 161,766 629,665 492,757
Selling, general and
administrative expenses 10,054 6,167 18,251 15,426
Amortization of coal supply
agreements 6,504 2,792 10,704 8,626
Merger-related expenses 39,132 - 39,132 -
Other expenses 5,187 8,003 12,832 15,869
-------- -------- -------- --------
349,617 178,728 710,584 532,678
-------- -------- -------- --------
Income (loss) from operations (20,468) 16,713 12,141 42,771
Interest expense, net:
Interest expense (6,118) (4,607) (12,910) (14,425)
Interest income 285 223 820 915
-------- -------- -------- --------
(5,833) (4,384) (12,090) (13,510)
-------- -------- -------- --------
Income (loss) before income
taxes (26,301) 12,329 51 29,261
Provision (benefit) for
income taxes (13,300) 1,400 (9,100) 5,500
-------- -------- -------- --------
Net income (loss) $(13,001) $10,929 $ 9,151 $23,761
======== ======== ======== ========
Earnings (loss) per share $ (0.33) $ 0.52 $ 0.34 $ 1.13
======== ======== ======== ========
Weighted average shares
outstanding 39,712 20,948 27,271 20,948
======== ======== ======== ========
Dividends declared per share $ 0.115 - $ 0.33 -
======== ======== ======== ========
See notes to condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1997 1996
----------- -----------
Operating activities
Net income $ 9,151 $ 23,761
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion and amortization 100,962 76,570
Prepaid royalties expensed 4,989 3,628
Net gain on disposition of assets (400) (7,600)
Merger-related expenses 35,854 -
Changes in:
Receivables (9,367) (1,865)
Inventories (2,071) (1,341)
Accounts payable and accrued expenses 5,893 1,905
Income taxes (28,976) (7,844)
Accrued postretirement benefits 5,286 7,739
Accrued workers' compensation benefits (5,972) (4,912)
Accrued reclamation and mine closure (134) (2,050)
Other 6,933 4,182
----------- ----------
Cash provided by operating activities 122,148 92,173
----------- ----------
Investing activities
Additions to property, plant and equipment (36,341) (40,205)
Payments for acquisitions (16,990) (14,200)
Proceeds from dispositions of property,
plant and equipment 792 3,515
Additions to prepaid royalties (4,767) (4,573)
----------- ----------
Cash used in investing activities (57,306) (55,463)
----------- ----------
Financing activities
Net proceeds from (payments on) revolver and
lines of credit 127,873 (20,466)
Payments on senior notes (181,110) (18,000)
Dividends paid (9,070) -
Proceeds from sale of common stock 1,050 -
----------- ----------
Cash used in financing activities (61,257) (38,466)
----------- ----------
Increase (decrease) in cash and cash
equivalents 3,585 (1,756)
Cash and cash equivalents, beginning of
period 13,716 17,502
----------- -----------
Cash and cash equivalents, end of period $ 17,301 $ 15,746
=========== ==========
See notes to condensed consolidated financial statements.
Arch Coal, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
Note A - GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations, but are
subject to any year-end adjustments which may be necessary. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Results of operations for
the periods ended September 30, 1997, are not necessarily indicative of results
to be expected for the year ending December 31, 1997. These financial statements
should be read in conjunction with the combined Proxy Statement of Ashland Coal,
Inc./Form S-4 Prospectus of Arch Mineral Corporation dated May 30, 1997. Arch
Mineral Corporation changed its name to Arch Coal, Inc. ("Arch Coal" or the
"Company") effective June 30, 1997. The Company produces steam and metallurgical
coal from surface and deep mines in Illinois, Kentucky, West Virginia, Virginia
and Wyoming for sale to utility, industrial and export markets. Some members of
the Company's workforce are represented by various labor organizations.
Significant intercompany transactions and accounts have been eliminated in
consolidation.
Note B - MERGER
On July 1, 1997, Ashland Coal, Inc. ("Ashland Coal") merged with a wholly-owned
subsidiary of the Company and became a wholly-owned subsidiary of the Company.
Under the terms of the merger, Ashland Coal's stockholders received one common
share of Arch Coal for each common share of Ashland Coal and 20,500 common
shares of Arch Coal for each share of Ashland Coal preferred stock. A total of
18,660,052 shares of Company common stock was issued in the merger, resulting in
a total purchase price of approximately $464.8 million. The merger was accounted
for under the purchase method of accounting. Accordingly, the cost to acquire
Ashland Coal has been preliminarily allocated to the assets acquired and
liabilities assumed according to their respective estimated fair values. Results
of operations of Ashland Coal are included in the condensed consolidated
statements of income effective July 1, 1997.
Summarized below are the unaudited pro forma combined results of operations for
the nine months ended September 30, 1997 and 1996 as though the merger had
occurred on January 1, 1997 and 1996, respectively.
Arch Coal, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
Note B-MERGER (cont'd)
Nine Months Ended September 30,
1997 1996
------------- -------------
(In thousands, except earnings per share)
Revenues $1,045,395 $1,000,310
Income before income taxes $ 24,637 $ 34,470
Net income $ 30,714 $ 29,948
Earnings per share $ 0.77 $ 0.76
These unaudited pro forma results of operations do not reflect any cost savings
or other synergies that may result from the merger. In the opinion of the
management of the Company, all adjustments necessary to present pro forma
results of operations have been made. The unaudited pro forma results of
operations do not purport to be indicative of the results that would have
occurred had the merger occurred at the beginning of these periods or results of
operations that may be achieved in the future.
In connection with the merger, the Company recorded a one-time charge of $39.1
million (before tax) or $23.8 million (after tax) comprised of termination
benefits and relocation costs of $8.1 million and costs of $3.1 million
associated with the idling of duplicate facilities, including a coal-loading
terminal on the Big Sandy River and the Pardee surface mine on the
Kentucky/Virginia border. The terminal's coal loading operations were
consolidated with the operations of another dock formerly operated by Ashland
Coal. The surface mine's sales commitments are expected to be sourced from
available capacity at other, lower-cost Arch Coal operations. The termination
benefits and relocation costs relate principally to corporate employees. During
the three months ended September 30, 1997, the Company paid approximately $3.2
million in termination and relocation benefits against the liability established
for such purposes.
Note C - INVENTORIES
Inventories are comprised of the following:
September 30, 1997 December 31, 1996
(In thousands)
Coal $43,521 $21,866
Repair parts and supplies 26,124 13,368
======== =======
$69,645 $35,234
Arch Coal, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
Note D - DEBT
Debt consists of the following:
September 30, 1997 December 31, 1996
(In thousands)
Indebtedness to banks under revolving
credit agreement, expiring in 2002 $240,000 $147,000
Indebtedness to banks under lines of credit 35,297 -
7.79% senior unsecured notes, payable
annually through January 31, 2003 42,860 50,000
9.85% senior unsecured notes, paid in 1997 - 8,000
Other 8,743 7,695
------- -------
326,900 212,695
Less current portion 26,000 -
-------- --------
Long-term debt $300,900 $212,695
======== ========
The Company had an unsecured revolving credit agreement with a group of banks
which provided for borrowings of up to $200 million. On July 1, 1997,
concurrently with the Ashland Coal merger, the Company entered into a new $500
million revolving credit agreement and, on July 2, 1997, the Company terminated
the $200 million facility. The new revolving credit agreement has a five year
term, and the rate of interest on borrowings under this agreement is, at the
Company's option, a money-market rate determined by a competitive bid process,
the PNC Bank base rate or a rate based on LIBOR. The Company is currently
borrowing under the LIBOR option.
Note E - CONTINGENCIES
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies, including
environmental matters, when a loss is probable and the amount is reasonably
determinable. The Company estimates that its probable aggregate loss as a result
of such claims is $4.8 million (included in Other Long-term Liabilities) and
believes that probable insurance recoveries of $1.1 million (included in Other
Assets) related to these claims will be realized. The Company estimates that its
reasonably possible aggregate losses from all material currently pending
litigation could be as much as $2 million (before taxes) in excess of the
probable loss previously recognized. After conferring with counsel, it is the
opinion of management that the ultimate resolution of these claims, to the
extent not previously provided for, will not have a material adverse effect on
the consolidated financial position, results of operations, or liquidity of the
Company.
Note F - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). The
Company is required to adopt SFAS 128 on December 31, 1997, and at that time,
will present recomputed earnings per share ("EPS") for all prior periods using
the methodology specified by SFAS 128. Although the Company has not yet
determined the full effect of SFAS 128, it believes that basic EPS as computed
under SFAS 128 will not be significantly different from primary EPS as computed
under the prior accounting rules.
Note G - CHANGE IN ESTIMATE AND OTHER NON-RECURRING REVENUES
AND EXPENSES
The Company's operating results for the nine month period ended September 30,
1997, reflect a $4.2 million reduction in workers' compensation reserves
(including $3.5 million in cost of coal sales and $.7 million in selling,
general and administrative expenses) due to better than anticipated safety
performance. This favorable adjustment was more than offset by a $4.6 million
charge to cost of coal sales for the impoundment failure in October 1996 at Lone
Mountain Processing and a $1.5 million charge to other expenses for a settlement
of a lawsuit with the Utah Division of State Lands and Forestry (the "Trail
Mountain lawsuit"). In addition, the results also reflect a $3.3 million
decrease in the reclamation and mine closure reserve at the Company's Illinois
operation due to a change in permit requirements. The third quarter of 1996
included a gain on sale of the Corbin preparation plant of $4.9 million included
in other revenues, and charges to other expenses of $1.7 million in connection
with the Trail Mountain lawsuit and $1.4 million in connection with the
redemption of debt.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to the "Contingencies," "Certain Risk Factors" and "Factors
Routinely Affecting Results of Operations" sections below in this Management's
Discussion and Analysis for discussion of important factors that could cause
actual results to differ from the projections, expectations, and other
non-historical information contained herein.
Results of Operations
Merger With Ashland Coal
On July 1, 1997, Arch Coal, Inc. ("Arch Coal" or the "Company") acquired Ashland
Coal, Inc. ("Ashland Coal") in a merger. The merger was accounted for as a
purchase, and resulted in Ashland Coal becoming a wholly-owned subsidiary of the
Company. A total of 18,660,052 shares of Company common stock was issued in the
merger.
At the time of the merger, Ashland Coal was engaged in the mining, processing
and marketing of low-sulfur bituminous coal primarily in the eastern United
States, and Ashland Inc. ("Ashland") owned 50% of the voting stock of the
Company and stock representing approximately 57% of the voting power of Ashland
Coal. Ashland currently owns approximately 54% of the Company's outstanding
common stock.
Period to period comparisons have been materially affected by the addition of
the results of operations of Ashland Coal effective July 1, 1997.
Quarter Ended September 30, 1997, Compared
to Quarter Ended September 30, 1996
For the third quarter ended September 30, 1997, Arch Coal lost $13.0 million.
This compares to net income of $10.9 million for the quarter ended September 30,
1996. The current quarter includes a one-time charge of $39.1 million ($23.8
million after tax) related to the Company's merger with Ashland Coal. Excluding
this charge, the Company had net income of $10.8 million for the period. The
merger-related charge taken in the third quarter is principally comprised of
termination benefits, relocation costs and costs associated with the idling of
duplicate facilities, including a coal-loading terminal on the eastern side of
the Big Sandy River and Pardee surface mine on the Kentucky/Virginia border.
Coal loading operations are now being conducted by Arch Coal Terminal, Inc. from
a terminal facility on the west side of the Big Sandy River that was operated by
Ashland Coal prior to the merger. The Pardee surface mine's sales commitments
are expected to be sourced from available capacity at other, lower-cost Arch
Coal operations. The quarter ended September 30, 1996 included a gain on sale of
the Corbin preparation plant of $4.9 million and charges of $1.7 million in
connection with the settlement of a lawsuit with the Utah Division of State
Lands and Forestry (the "Trail Mountain lawsuit") and $1.4 million in connection
with the redemption of debt.
Gross profit on coal sales (selling price less cost of sales) on a per ton basis
decreased $.44 per ton from the third quarter of 1996. The average selling price
decreased $.33 per ton from the same quarter a year ago reflecting a favorable
sales contract reopener settlement in 1996 and lower average selling prices in
1997. The average cost per ton increased $.11 per ton when compared to the
quarter ended September 30, 1996. That increase in costs was primarily due to
higher operating costs at the Pardee surface mining operation. The addition, as
a result of the merger, of production from the Hobet 21 mining complex, which
production was at high cost in the third quarter as a result of equipment
sequencing problems, as well as lower production from Arch of Illinois
operations, also contributed to the increase in costs. Largely offsetting those
effects was the addition, as a result of the merger, low-cost production from
the Mingo Logan and Dal-Tex mining complexes and excellent productivity at the
Ruffner Mine.
Other revenues were $5.0 million lower in 1997 than in 1996. The third quarter
of 1996 included a gain on sale of the Corbin preparation plant of $4.9 million.
Selling, general and administrative expenses increased $3.9 million primarily
due to the effects of the Ashland Coal merger.
Amortization of coal supply agreements increased $3.7 million from the
comparable period in 1996. That increase was primarily attributed to the
amortization of the carrying value of the Ashland Coal sales contracts acquired
in the merger.
Other expenses decreased $2.8 million from the quarter ended September 30, 1996.
This decrease resulted from charges of $1.7 million in connection with the Trail
Mountain lawsuit and $1.4 million in connection with the redemption of debt,
both recorded in the third quarter of 1996.
Earnings in the third quarter of 1997 were reduced by a $1.5 million increase in
interest expense. This increase is attributable to higher average debt levels
resulting from the merger with Ashland Coal.
The income tax benefit recorded in the third quarter was primarily attributed to
the $15.3 million tax benefit associated with the one-time merger-related charge
discussed above. The Company's effective tax rate is sensitive to changes in
profitability because of the effects of percentage depletion.
EBITDA (income from operations before the effects of changes in accounting
principles and extraordinary items, net interest expense, income taxes,
depreciation, depletion and amortization) was $61.8 million for the quarter
ended September 30, 1997 compared to $43.4 million for the same quarter a year
ago. The increase in EBITDA is primarily attributable to the additional third
quarter sales that resulted from the merger with Ashland Coal. EBITDA is a
widely accepted financial indicator of a company's ability to incur and service
debt, but EBITDA should not be considered in isolation or as an alternative to
net income, operating income, or cash flows from operations, or as a measure of
a company's profitability, liquidity or performance under generally accepted
accounting principles. The Company's method of computing EBITDA also may not be
the same method used to compute similar measures reported by other companies.
Nine Months Ended September 30, 1997 Compared
to Nine Months Ended September 30, 1996
Net income was $9.2 million for the nine months ended September 30, 1997 and
$23.8 million for the same period in 1996. The current nine month period
includes a one-time charge of $39.1 million ($23.8 million after tax) related to
the merger with Ashland Coal, as discussed above. Excluding this charge, the
Company had net income of $33.0 million for the first nine months of 1997. The
nine month period ending September 30, 1997 included several adjustments that
netted to a favorable pre-tax impact to earnings of $1.4 million. These
adjustments included a $4.2 million decrease to the workers' compensation
reserve due to better than anticipated safety performance, a $3.3 million
decrease in the accrual for reclamation and mine closure at the Company's
Illinois operations due to a change in permit requirements, largely offset by
non-recurring charges of $4.6 million associated with the impoundment discharge
at Lone Mountain and $1.5 million related to the Trail Mountain lawsuit. Net
income for the nine months ended September 30, 1996 included a gain on sale of
the Corbin preparation plant of $4.9 million.
Gross profit on coal sales (selling price less cost of sales) on a per ton basis
decreased $.11 per ton from 1996 to 1997. The average selling price decreased
$.14 per ton while cost of coal sold decreased $.03 per ton. The reduction in
costs was primarily attributed to higher production from the Arch of Illinois
operations and the addition, as a result of the merger, of low-cost production
from the Mingo Logan and Dal-Tex mining complexes. Largely offsetting those
effects were higher operating costs at the Pardee surface mine and the
merger-related addition of high cost production from the Hobet 21 surface mine.
Selling, general and administrative expenses increased $2.8 million in the
period primarily as a result of the merger with Ashland Coal.
Amortization of coal supply agreements increased $2.1 million. This increase is
primarily due to the amortization of the carrying value of the Ashland Coal
sales contracts partially offset by a decrease in amortization resulting from
the completion of amortization on certain other sales contracts at the end of
1996.
Interest expense in the period declined $1.5 million as a result of lower
average debt levels during 1997 and the payment of higher-cost fixed debt.
The income tax benefit recorded in the nine months ended September 30, 1997 was
primarily attributed to the $15.3 million tax benefit associated with the
one-time merger-related charge discussed above. The Company's effective tax rate
is sensitive to changes in profitability because of the effects of percentage
depletion.
EBITDA for the nine months ended September 30, 1997, was $152.2 million as
compared to $119.3 million for the nine months ended September 30, 1996. This
increase primarily reflects the additional third quarter sales volume that
resulted from the merger with Ashland Coal and lower costs in the first half of
1997 compared to the same period in 1996.
Outlook
Several anticipated events, together with the negative effect on operating
income resulting from the third quarter depletion of the longwall reserves at
Arch of Kentucky's Mine No. 37, will materially and adversely affect the
Company's results in the fourth quarter of 1997 and in 1998.
The most significant event is the expiration of one of the Company's long-term
coal supply contracts with Georgia Power in December 1997. The Company is
currently supplying 1.9 million tons of low-sulfur coal per year under this
contract from its Lone Mountain and Cumberland River operations and from third
parties. The prices for coal shipped under this contract are significantly above
the current open market price of such coal. For the nine months ended September
30, 1997, 5.6% of the Company's pro forma combined revenues and 16.9% of its pro
forma combined operating income (excluding the merger-related charge) related to
sales under this contract, and the impact of its expiration will be
disproportionate to the percentage of total production represented by the
tonnage delivered under the contract. After expiration of this Georgia Power
contract, the Company expects to continue to supply a significant amount of
similar quality coal to Georgia Power at less favorable prices.
It is also expected that Arch of Wyoming's operation will experience reduced
sales in the fourth quarter of 1997 and early 1998 due to continued
transportation problems. Poor rail service from the Union Pacific Railroad
("Union Pacific"), arising from integration problems associated with its merger
with the Southern Pacific Railroad, has resulted in reduced shipments, and
service problems are expected to continue in the immediate future.
The 45-day maintenance shutdown of the Hobet 21 dragline in the fourth quarter
of 1997 will result in lower production and higher per ton costs at the Hobet 21
complex in the fourth quarter.
In the fourth quarter of 1997, the last $2.7 million of the original $50 million
unrecognized net gain realized in 1993 upon changes in discount rates, black
lung benefit cost rates, rebates and other assumptions used in the calculation
of pneumoconiosis (black lung) liabilities will be credited against cost of coal
sales.
These negative developments will be mitigated to some degree by synergies from
the merger, increased income from the Company's Ark Land subsidiary's ongoing
third-party leasing efforts and sales of surplus property, and by reduced
interest expense as a result of lower debt levels in general and the refinancing
of long-term debt at more favorable rates. In addition, operational improvements
including improving geology at the Huff Creek and Darby Fork mines, deployment
of a second equipment section at the Band Mill underground mine, and improving
costs at the Wylo mine and Hobet 21 complex are expected to contribute
positively to 1998 results. There are a variety of factors, however, which could
cause the positive effect of these developments not to be realized. These
factors are set forth in "Factors Routinely Affecting Results of Operations"
below. For example, adverse geologic conditions could unexpectedly recur at the
Huff Creek and Darby Fork mines, or occur at other mines.
The Company continues to evaluate possible acquisitions of other coal producers
and properties in all the major U.S. coal producing regions and abroad. On
November 11, 1997, Arch Coal, Inc. reached a definitive agreement to acquire
low-sulfur coal reserves in Boone County, W.Va., from Oglebay Norton Company for
$6.0 million. Consummation of the transaction is subject to customary closing
conditions, and is scheduled for November 24, 1997. The reserves lie on a 12,000
acre tract of land adjacent to Arch Coal's Hobet 21 mining complex. The Hobet 21
Camp Creek deep mine is currently operating on a portion of the acquired
property under a lease with Oglebay Norton.
Liquidity and Capital Resources
The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 1997 and 1996:
1997 1996
---- ----
(In thousands)
Cash provided by (used in):
Operating activities $122,148 $ 92,173
Investing activities (57,306) (55,463)
Financing activities (61,257) (38,466)
Cash provided by operating activities increased in the first nine months of 1997
from the level in the same period of 1996 due primarily to the additional third
quarter merger-related sales. An increase in the balance of trade receivables
and tax payments related to prior year audits partially offset the cash
generated by the additional third quarter sales.
The increase in cash used for investing activities in 1997 from the 1996 level
principally reflects a higher amount of acquisition expenditures and lower
proceeds from the sale of property, plant, and equipment. 1997 acquisition
expenditures include the $17 million Kayford James reserve acquisition, while
1996 expenditures include the $14.2 million Carbon Basin reserve acquisition.
Cash used in financing activities reflects a reduction in borrowings of $53.2
million in 1997 and $38.5 million in 1996. The increase in debt repayments is a
result of the higher amount of cash generated by operations in 1997. In addition
to the increased debt repayments, dividend payments increased by $9.1 million
compared to the same period in 1996.
Certain mining equipment that was sold and leased back under an operating lease
may be repurchased at the Company's option for approximately $28.3 million when
the lease expires in January 1998. Arch Coal anticipates that such purchase, if
it should occur, would be funded under the Company's revolving credit agreement
or lines of credit. The Company is also considering other lease alternatives to
the January 1998 repurchase.
The Company's capital expenditures in the nine months ended September 30, 1997,
were $36.3 million. Approximately $4.8 million of the third quarter's $17.9
million in capital expenditures were related to the recently completed
construction of improvements and an extension to the Hobet 21 conveyor system.
The total cost of this project that began in late 1996 was $11.3 million. The
Company estimates that during the remainder of 1997, capital expenditures will
be approximately $23 million.
The Company has historically satisfied its working capital requirements, its
capital expenditures (excluding major acquisitions) and scheduled debt
repayments from its operating cash flow. Cash requirements for the acquisition
of new business operations have generally been funded through a combination of
cash generated from operating activities, utilization of the Company's revolving
credit facility and the issuance of long-term obligations. The Company believes
that cash generated from operations will continue to be sufficient to meet its
working capital requirements, planned or anticipated capital expenditures
(excluding major acquisitions) and scheduled debt repayments. The Company has a
$500 million revolving credit agreement with a five year term with a group of
banks. At September 30, 1997, the Company had borrowings of $240 million under
this agreement.
On August 1, 1997, the Company redeemed previously issued senior notes by
Ashland Coal with a principal balance of $152.9 million for $170.7 million
including accrued interest. The redemption amount included a make-whole
provision based upon current market rates with similar maturities. The note
redemptions were financed with proceeds from the Company's $500 million
revolving credit facility. The Company also has $42.9 million of indebtedness at
September 30, 1997 under senior unsecured notes payable annually through January
2003.
Arch Coal periodically establishes uncommitted lines of credit with banks. These
agreements generally provide for short-term borrowings at market rates. At
September 30, 1997, there were $70 million of such agreements in effect with
borrowings outstanding of $35.3 million.
Contingencies
Reclamation
The Federal Surface Mining Control and Reclamation Act of 1977 and similar state
statutes require that mine property be restored in accordance with specified
standards and an approved reclamation plan. The Company accrues for the costs of
final mine closure reclamation over the estimated useful mining life of the
property. These costs relate to reclaiming the pit and support acreage at
surface mines and sealing portals at deep mines. Other costs of final mine
closure common to both types of mining are related to reclaiming refuse and
slurry ponds. The Company also accrues for reclamation that is completed during
the mining process prior to final mine closure. The establishment of the final
mine closure reclamation liability and the other ongoing reclamation liability
is based upon permit requirements and requires various estimates and
assumptions, principally associated with costs and productivities.
The Company reviews its entire environmental liability annually and makes
necessary adjustments, including permit changes and revisions to costs and
productivities to reflect current experience. These recosting adjustments are
recorded to cost of coal sales. Favorable adjustments total $3.3 million and
$4.5 million for the nine months ended September 30, 1997 and for the twelve
months ended December 31, 1996, respectively. The Company's management believes
it is making adequate provisions for all expected reclamation and other
associated costs.
Mine closing costs for operations as of September 30, 1997, in the aggregate,
are estimated to be approximately $131.9 million. At September 30, 1997 and
December 31, 1996, the accrual for closing costs, which is included in accrued
reclamation and mine closure was $119.6 million and $90.3 million, respectively.
Legal Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies, including
environmental matters, when a loss is probable and the amount is reasonably
determinable. The Company estimates that at September 30, 1997 its probable
aggregate loss as a result of such claims is $4.8 million (included in Other
Noncurrent Liabilities) and believes that probable insurance recoveries of $1.1
million (included in Other Assets) related to these claims will be realized. The
Company estimates that its reasonably possible aggregate losses from all
material currently pending litigation could be as much as $2 million (before
taxes) in excess of the probable loss previously recognized. After conferring
with counsel, it is the opinion of management that the ultimate resolution of
these claims, to the extent not previously provided for, will not have a
material adverse effect on the consolidated financial position, results of
operations, or liquidity of the Company.
On October 24, 1996, the rock strata overlaying an old, abandoned underground
mine adjacent to the coal-refuse impoundment used by an Arch Coal subsidiary's
preparation plant failed, resulting in an accidental discharge of approximately
6.3 million gallons of water and fine coal slurry into a tributary of the Powell
River in Lee County, Virginia. As a consequence, the Director of the State Water
Control Board and the Department of Mines, Minerals and Energy of the
Commonwealth of Virginia filed suit in Lee County Virginia Circuit Court against
Arch Coal's Lone Mountain Processing, Inc. subsidiary alleging violations of
effluent limitations and reporting violations under Lone Mountain's National
Pollutant Discharge Elimination System permits under the Clean Water Act. The
Commonwealth of Virginia agreed to vacate two notices of violation and a show
cause order in exchange for Lone Mountain's payment to the Commonwealth of
approximately $1.4 million. A final order effectuating the settlement of all
claims of the Commonwealth in respect of the discharge was entered as a judgment
by the court on October 29, 1997. At the request of the U.S. Environmental
Protection Agency and the U.S. Fish & Wildlife Service, the United States
Attorney for the Western District of Virginia also has opened a criminal
investigation of the 1996 incident. The results of this investigation are not
expected until sometime in 1998.
On November 6, 1997, the Company's Apogee Coal Company ("Apogee") subsidiary was
identified as "potentially responsible party" (a "PRP") under the Comprehensive
Environmental Response Compensation and Liability Act and the Superfund
Amendment and Reauthorization Act of 1996 (collectively referred to as
"Superfund") for potential joint and several liability for clean up costs in
connection with alleged releases of hazardous chemicals (polychlorinated
biphenyls) at commercial waste disposal sites in Kansas City, Missouri and
Kansas City, Kansas operated by a third party waste disposal company. These
sites are currently subject to ongoing investigation, overseen by the U.S.
Environmental Protection Agency. Generally, the type of relief sought includes
remediation of contaminated soil and/or groundwater, reimbursement for the cost
of sight cleanup or oversight expended, and/or long-term monitoring of
environmental conditions at the affected site. Based on its familiarity with
current environmental laws and regulations, its analysis of the specific
environmental substance at issue, the existence of other financially viable PRPs
and the quantity of hazardous chemicals it shipped for disposal, the Company
believes that any liability it may incur with respect to these sites will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
The Company's federal income tax returns for periods ending December 31, 1992,
December 31, 1993 and December 31, 1994 are currently under review by the
Internal Revenue Service ("IRS"). The IRS has completed two separate
examinations of the Company's federal income tax returns one for the periods
ending June 30, 1987, June 30, 1988 and June 30, 1989, and a second one for the
periods ending June 30, 1990, December 31, 1990 (short period) and December 31,
1991. The IRS has proposed additional taxes of $50 million plus interest and $8
million plus interest, respectively. A partial agreement was reached regarding
the latter years for which additional tax of $4 million plus $2 million in
interest was paid. The proposed adjustments remaining in dispute relate
principally to business acquisitions, asset dispositions, corporate
reorganizations, percentage depletion and investment tax credits. The Company
filed protests contesting all the disputed adjustments. In order to avoid future
potential interest charges, deposits were made totaling $16 million. Management
believes that the Company has adequately provided for any income taxes and
related interest which may ultimately be paid.
Certain Risk Factors
Credit risk - The Company markets its coal principally to electric utilities in
the United States. As a group, electric utilities generally are stable, well
capitalized entities with favorable credit ratings. Credit is extended based on
an evaluation of each customer's financial condition, and collateral is not
generally required. Credit losses have consistently been minimal.
Price risk - Selling prices for the Company's products are determined by
long-term contracts and the spot market. Selling prices in many of the Company's
long-term contracts are subject to adjustment, including for changes in market
conditions. Falling market prices raise the price risk under these contracts.
Spot prices fluctuate primarily because of changes in demand for and supply of
coal. Demand for coal in the short term is primarily driven by changes in demand
for electricity in the areas serviced by the utilities purchasing the Company's
coal. Demand for electricity in turn depends on the level of economic activity
and other factors such as prolonged temperature extremes. The supply of coal in
the spot market has historically been most affected by excess productive
capacity in the industry and short-term disruptions, sometimes labor-related.
The coal industry is highly competitive, and Arch Coal competes with a large
number of other coal producers. Factors such as the availability of sulfur
dioxide emissions allowances issued by the EPA, utility deregulation, and new
clean air regulations have had, or will have, the effect of further intensifying
competition between producers in the eastern United States, and producers in
other regions, including other countries. Producers in some of those regions,
because of geological conditions, local labor costs, or access to inexpensive
transportation modes, are able to produce and deliver coal into some markets at
a lower cost than the Company. These competitive factors have an impact on the
Company's pricing.
Arch Coal's operating subsidiaries purchase substantial amounts of power, fuel,
and supplies, generally under purchase orders at current market prices or
purchase agreements of relatively short duration.
The employees of Apogee and the Company's Hobet Mining, Inc. ("Hobet")
subsidiary are covered by the National Bituminous Coal Wage Agreement of 1993
("Wage Agreement"), which provides for certain wage rates and benefits.
Employees of two other operating subsidiaries are covered by other collective
bargaining organizations, and employees at the Company's other operating
subsidiaries are not covered by a union contract but are compensated at rates
representative of prevailing wage rates in the local area. Among factors
influencing such wage rates are the wage rates paid under the Wage Agreement.
Although the Company cannot predict changes in its costs of production and coal
prices with certainty, Arch Coal believes that in the current economic
environment of low to moderate inflation, the price adjustment provisions in its
long-term contracts will largely offset changes in the costs of providing coal
under those contracts, except for those costs related to changes in
productivity. Further, because levels of general price inflation are closely
linked to levels of economic activity, it is expected that changes in costs of
producing coal for the spot market may be offset in part by changes in spot coal
prices. The Company attempts to limit exposure to depressed spot market prices
which result from industry over capacity by entering into long-term coal supply
agreements, which ordinarily provide for prices in excess of spot market prices.
In the event of a disruption of supply, the Company might, depending on the
level of its sales commitments, benefit from higher spot prices if its own mines
were not affected by the disruption.
Interest rate risk - Arch Coal has significant debt which is linked to
short-term interest rates. If interest rates rise, Arch Coal's costs relative to
those obligations would also rise. Because an increase in interest rates is
usually an outgrowth of a higher level of economic activity and because
increased economic activity would likely lead to a higher demand for electricity
and consequently to higher spot prices for coal, Arch Coal believes that the
negative effects of higher interest rates on Arch Coal's earnings could be
partially offset, depending on the level of its sales commitments at the time,
by higher spot prices.
The Company has entered into an interest-rate swap agreement to modify the
interest characteristics of outstanding Arch Coal debt. On November 3, 1997, the
Company entered into an interest-rate swap agreement with a total notional value
of $25 million. This swap amount was used to convert variable-rate debt to
fixed-rate debt. Under this agreement, the Company pays a weighted average fixed
rate of 6.03% and is receiving a weighted average variable rate at November 3,
1997 of 5.64%. The remaining life on the swap at November 3, 1997, was
approximately 60 months. The variable rates are adjusted using one month LIBOR.
Factors Routinely Affecting Results of Operations
The Company sells a substantial portion of its coal production pursuant to
long-term coal supply agreements, and as a consequence may experience
fluctuations in operating results in the future, both on an annual and quarterly
basis, as a result of expiration or termination of, or sales price
redeterminations or suspensions of deliveries under, such coal supply
agreements. In addition, price adjustment provisions permit a periodic increase
or decrease in the contract price to reflect increases and decreases in
production costs, changes in specified price indices or items such as taxes or
royalties. Price reopener provisions provide for an upward or downward
adjustment in the contract price based on market factors, and from time to time
the Company has renegotiated contracts after execution to extend contract term
or to accommodate changing market conditions. The contracts also typically
include stringent minimum and maximum coal quality specifications and penalty or
termination provisions for failure to meet such specifications, force majeure
provisions allowing suspension of performance or termination by the parties
during the duration of certain events beyond the control of the affected party,
and some long-term contracts contain provisions that permit the utility to
terminate the contract if changes in the law make it illegal or uneconomic for
the utility to consume the Company's coal. Imposition of new nitrous oxide
emissions limits in connection with Phase II of the Clean Air Act in 2000 could
result in price adjustments, or in affected utilities seeking to terminate or
modify long-term contracts in reliance on such termination provisions. If the
parties to any long-term contracts with the Company were to modify, suspend or
terminate those contracts, the Company could be adversely affected to the extent
that it is unable to find alternative customers at the same or better level of
profitability.
From time to time, disputes with customers may arise under long-term contracts
relating to, among other things, coal quality, pricing and quantity. The Company
may thus become involved in arbitration and legal proceedings regarding its
long-term contracts. There can be no assurance that the Company will be able to
resolve such disputes in a satisfactory manner.
The Company's customers frequently combine various qualities of coal, nuclear,
natural gas and other energy sources in their generating operations, and,
accordingly, their demand for coal of the kind produced by the Company varies
depending on price and transportation, regulatory, and other factors.
The Company's coal production and sales are subject to a variety of operational,
geologic, transportation, and weather-related factors that routinely cause
production to fluctuate. Operational factors affecting production include
anticipated and unanticipated events. For example, at Mingo Logan's Mountaineer
Mine, the longwall equipment must be dismantled and moved to a new area of the
mine whenever the coal reserves in a segment of the mine, called a panel, are
exhausted. The size of a panel varies, and therefore, the frequency of moves can
also vary. Unanticipated events, such as the unavailability of essential
equipment because of breakdown or unscheduled maintenance, could adversely
affect production.
Permits are sometimes delayed by unanticipated regulatory requests or processing
delays. Timely completion of improvement projects and equipment relocation's
depend to a large degree on availability of labor and equipment, timely issuance
of permits, and the weather. Sales can be adversely affected by fluctuations in
production and by transportation delays arising from equipment unavailability
and weather-related events, such as flooding.
Changes in transportation rates and service also significantly influence the
Company's results. CSX Corporation ("CSX") and Norfolk Southern Corporation
("NS") are major railroads in the eastern United States which together transport
most of the coal sold by the Company. CSX and NS agreed to acquire Conrail Inc.
("Conrail"), another major railroad, whose primary service area is the
Northeastern United States, and have divided Conrail's assets between them.
Costs of the reconstituted CSX and NS may be somewhat lower than the costs of
those railroads prior to the acquisition. If lower costs are realized and
freight rates are lowered as a consequence, the coal of some producers could
become less costly on a delivered basis and therefore gain competitive advantage
in some markets. It is not possible to predict with certainty the effects of the
division of Conrail on interregional competition and, specifically, the effects
on the Company. Further, continuing service disruptions from Union Pacific will
adversely affect the operational results from Arch Coal's western operations,
although such problems would likely have a greater effect on the Company's
competitors who have a greater percentage of their revenues and profits
dependent on western coal.
Geologic conditions within mines are not uniform. Overburden ratios at the
surface mines vary, as do roof and floor conditions and seam thickness in
underground mines. These variations can be either positive or negative for
production. Weather conditions can also have a significant effect on the
Company's production, depending on the severity and duration of the condition.
For example, extremely cold weather combined with substantial snow and ice
accumulations may impede surface operations directly and all operations
indirectly by making it difficult for workers and suppliers to reach the mine
sites.
The results of the third quarter of each year are normally adversely affected by
lower production and resultant higher costs because of scheduled vacation
periods. In addition, costs are typically somewhat higher during vacation
periods because of maintenance activity carried on during those periods. These
adverse effects on the third quarter may make the third quarter not comparable
to the other quarters and not indicative of results to be expected for the full
year.
Apogee and Hobet operations are parties to the Wage Agreement. From time to time
in the past, strikes and work stoppages have adversely affected production at
Apogee's and Hobet's mining complexes. Any future strike or work stoppage that
affected these operations for a prolonged period would have a significant
adverse effect on the Company's results of operations.
Any one or a combination of changing demand; fluctuating selling prices; routine
operational, geologic, transportation and weather-related factors; unexpected
regulatory changes; changes in transportation rates and service; results of
litigation; or labor disruptions may occur at times or in a manner that causes
current and projected results of operations to deviate from projections and
expectations. Any event disrupting substantially all production at any of the
Company's principal mines for a prolonged period would have a significant
adverse effect on the Company's current and projected results of operations.
Decreases in production from anticipated levels usually lead to increased mining
costs and decreased net income.
Part II - Other Information
Item 1. LEGAL PROCEEDINGS
The second and third paragraphs of the Legal Contingencies subsection of the
Contingencies section of Management's Discussion and Analysis of Financial
Condition and Results of Operations in this report are incorporated herein by
reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
2.1 Agreement and Plan of Merger dated as of April 4, 1997, among the
Company, Ashland Coal and AMC Merger Corporation (incorporated herein
by reference to Exhibit 2.1 to the Registration Statement of Arch
Mineral Corporation on Form S-4, registration 333-28149 ("S-4")).
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.1 to the S-4).
3.2 Restated and Amended By Laws of Arch Coal, Inc. (incorporated herein
by reference to Exhibit 3.4 to the S-4).
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Mineral Corporation
(incorporated herein as reference to Exhibit 4.1 to the S-4).
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch
Mineral Corporation, Ashland Inc., Carboex International, Ltd. and the
entities listed on Schedules I and II thereto (incorporated herein by
reference to Exhibit 4.2 to the S-4).
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4,
1997, among Carboex International, Ltd., Ashland Inc., Ashland Coal,
Inc. and Arch Mineral Corporation (incorporated herein by reference to
Exhibit 4.3 to the S-4).
4.4 Agreement for Termination of the Arch Mineral Corporation Voting
Agreement and for Nomination of Directors, dated as of April 4, 1997,
among Hunt Coal Corporation, Petro-Hunt Corporation, each of the
trusts listed on Schedule I thereto, Ashland Inc. and Arch Mineral
Corporation (incorporated herein by reference to Exhibit 4.4 to the
S-4).
4.5 Credit Agreement dated as of July 1, 1997, by and among Arch Coal,
Inc., the banks party thereto, PNC Bank, National Association, as
Administrative and Syndication Agent and Morgan Guaranty Trust Company
of New York, as Documentation and Syndication Agent (incorporated
herein by Reference to Exhibit 4.1 to the Current Report of Arch Coal,
Inc. on Form 8-K filed July 15, 1997).
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARCH COAL, INC.
(Registrant)
Date: November 13, 1997 /s/ James P. Pye
--------------------
James P. Pye
Controller (Chief Accounting Officer)
Date: November 13, 1997 /s/ Jeffry N. Quinn
------------------------
Jeffry N. Quinn
Senior Vice President, General Counsel
and Secretary
Arch Coal, Inc.
Form 10-Q for Quarter Ended September 30, 1997
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated as of April 4, 1997, among the
Company, Ashland Coal and AMC Merger Corporation (incorporated herein
by reference to Exhibit 2.1 to the Registration Statement of Arch
Mineral Corporation on Form S-4, registration 333-28149 ("S-4")).
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.1 to the S-4).
3.2 Restated and Amended By Laws of Arch Coal, Inc. (incorporated herein
by reference to Exhibit 3.4 to the S-4).
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Mineral Corporation
(incorporated herein as reference to Exhibit 4.1 to the S-4).
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch
Mineral Corporation, Ashland Inc., Carboex International, Ltd. and the
entities listed on Schedules I and II thereto (incorporated herein by
reference to Exhibit 4.2 to the S-4).
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4,
1997, among Carboex International, Ltd., Ashland Inc., Ashland Coal,
Inc. and Arch Mineral Corporation (incorporated herein by reference to
Exhibit 4.3 to the S-4).
4.4 Agreement for Termination of the Arch Mineral Corporation Voting
Agreement and for Nomination of Directors, dated as of April 4, 1997,
among Hunt Coal Corporation, Petro-Hunt Corporation, each of the
trusts listed on Schedule I thereto, Ashland Inc. and Arch Mineral
Corporation (incorporated herein by reference to Exhibit 4.4 to the
S-4).
4.5 Credit Agreement dated as of July 1, 1997, by and among Arch Coal,
Inc., the banks party thereto, PNC Bank, National Association, as
Administrative and Syndication Agent and Morgan Guaranty Trust Company
of New York, as Documentation and Syndication Agent (incorporated
herein by Reference to Exhibit 4.1 to the Current Report of Arch Coal,
Inc. on Form 8-K filed July 15, 1997).
27 Financial Data Schedule
5
1,000
9-MOS
DEC-31-1997
SEP-30-1997
17301
0
144360
0
69645
274660
1821734
690726
1685984
215059
0
0
0
397
594114
1685984
706210
722725
629665
710584
0
0
12910
51
9100
9151
0
0
0
9151
.34
.34
