UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-13105
ARCH COAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-0921172
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Address of principal executive offices)(Zip Code)
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 1, 2001, there were 52,346,873 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, 2001 and
December 31, 2000................................................................................1
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2001 and 2000 and the Nine Months
Ended September 30, 2001 and 2000................................................................2
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000....................................................3
Notes to Condensed Consolidated Financial Statements..................................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................22
Item 6. Exhibits and Reports on Form 8-K............................................................22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
2001 2000
-------------------- ----------------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 6,020 $ 6,028
Trade accounts receivable 144,929 141,727
Other receivables 33,567 38,540
Inventories 56,569 47,930
Prepaid royalties 2,640 2,262
Deferred income taxes 27,440 27,440
Other 12,936 13,963
-------------------- ----------------------
Total current assets 284,101 277,890
-------------------- ----------------------
Property, plant and equipment, net 1,408,145 1,430,053
-------------------- ----------------------
Other assets
Prepaid royalties 33,390 17,500
Coal supply agreements 87,506 108,884
Deferred income taxes 201,795 179,343
Investment in Canyon Fuel 160,361 188,700
Other 27,357 30,244
-------------------- ----------------------
Total other assets 510,409 524,671
-------------------- ----------------------
Total assets $ 2,202,655 $ 2,232,614
==================== ======================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 105,006 $ 103,014
Accrued expenses 146,524 152,303
Current portion of debt 90,372 60,129
-------------------- ----------------------
Total current liabilities 341,902 315,446
Long-term debt 675,000 1,090,666
Accrued postretirement benefits other than pension 326,526 336,663
Accrued reclamation and mine closure 118,600 118,928
Accrued workers' compensation 79,941 78,593
Accrued pension cost 23,074 19,287
Obligations under capital leases 8,997 11,348
Other noncurrent liabilities 61,178 41,809
-------------------- ----------------------
Total liabilities 1,635,218 2,012,740
-------------------- ----------------------
Stockholders' equity
Common stock 527 397
Paid-in-capital 835,325 473,428
Retained deficit (244,736) (234,980)
Treasury stock, at cost (5,048) (18,971)
Accumulated other comprehensive loss (18,631) -
-------------------- ----------------------
Total stockholders' equity 567,437 219,874
-------------------- ----------------------
Total liabilities and stockholders' equity $ 2,202,655 $ 2,232,614
==================== ======================
See notes to condensed consolidated financial statements.
1
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
---------------------------------- ---------------------------------
Revenues
Coal sales $ 337,246 $ 343,405 $ 1,047,502 $ 1,010,102
Income from equity investment 4,066 3,452 14,372 8,844
Other revenues 11,993 12,432 41,437 38,297
----------------- ------------- --------------- -------------
353,305 359,289 1,103,311 1,057,243
----------------- ------------- --------------- -------------
Costs and expenses
Cost of coal sales 330,196 319,500 992,297 946,617
Selling, general and administrative expenses 8,751 8,951 34,589 29,611
Amortization of coal supply agreements 6,217 11,087 21,378 30,790
Other expenses 4,097 3,900 12,621 11,510
----------------- ------------- --------------- -------------
349,261 343,438 1,060,885 1,018,528
----------------- ------------- --------------- -------------
Income from operations 4,044 15,851 42,426 38,715
Interest expense, net:
Interest expense (15,128) (23,172) (51,208) (69,287)
Interest income 244 423 3,881 1,122
----------------- ------------- --------------- -------------
(14,884) (22,749) (47,327) (68,165)
----------------- ------------- --------------- -------------
Loss before income taxes (10,840) (6,898) (4,901) (29,450)
Income tax benefit (2,700) (1,700) (3,700) (7,100)
----------------- ------------- --------------- -------------
Net loss $ (8,140) $ (5,198) $ (1,201) $ (22,350)
================= ============= =============== =============
Basic and diluted loss
per common share $ (0.15) $ (0.14) $ (0.03) $ (0.59)
----------------- ------------- --------------- -------------
Weighted average shares outstanding 52,681 38,164 47,404 38,164
================= ============= =============== =============
Dividends declared per share $ 0.0575 $ 0.0575 $ 0.1725 $ 0.1725
================= ============= =============== =============
See notes to condensed consolidated financial statements.
2
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
----------------------------------------------
2001 2000
-------------------- ----------------------
Operating activities
Net loss $ (1,201) $ (22,350)
Adjustments to reconcile to cash provided by operating activities:
Depreciation, depletion and amortization 132,298 153,286
Prepaid royalties expensed 5,406 5,479
Net gain on disposition of assets (7,334) (15,786)
Income from equity investment (14,372) (8,844)
Net distributions from equity investment 42,711 17,479
Changes in:
Receivables 1,771 8,789
Inventories (8,639) 7,836
Accounts payable and accrued expenses (3,787) 21,594
Income taxes (10,339) (5,771)
Accrued postretirement benefits other than pension (10,137) 1,104
Accrued reclamation and mine closure (328) (14,778)
Accrued workers' compensation benefits 1,348 (8,294)
Other (3,680) (12,487)
-------------------- ----------------------
Cash provided by operating activities 123,717 127,257
-------------------- ----------------------
Investing activities
Additions to property, plant and equipment (89,795) (103,121)
Proceeds from dispositions of property, plant and equipment 8,122 18,942
Additions to prepaid royalties (21,674) (22,799)
-------------------- ----------------------
Cash used in investing activities (103,347) (106,978)
-------------------- ----------------------
Financing activities
Net payments on revolver and lines of credit (250,423) (28,777)
Payments on term loan (135,000) -
Proceeds from sale and leaseback of equipment - 13,352
Reductions of obligations under capital lease (2,351) -
Dividends paid (8,554) (6,584)
Proceeds from sale of stock 380,998 -
Purchase of treasury stock (5,048) -
------------------- ----------------------
Cash used in financing activities (20,378) (22,009)
-------------------- ----------------------
Decrease in cash and cash equivalents (8) (1,730)
Cash and cash equivalents, beginning of period 6,028 3,283
-------------------- ----------------------
Cash and cash equivalents, end of period $ 6,020 $ 1,553
==================== ======================
See notes to condensed consolidated financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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, 2001 are not necessarily indicative of results
to be expected for the year ending December 31, 2001. Arch Coal, Inc. (the
"Company") operates one reportable segment: the production of steam and
metallurgical coal from surface and deep mines in the United States, for sale to
utility, industrial and export markets. The Company's mines are located in the
central Appalachian and western regions of the United States. All subsidiaries
(except as noted below) are wholly-owned. Significant intercompany transactions
and accounts have been eliminated in consolidation.
Arch Western Resources, LLC ("Arch Western"), a subsidiary of the Company, is
99% owned by the Company and 1% owned by Atlantic Richfield Company ("ARCO"),
which merged with a subsidiary of BP Amoco on April 18, 2000. The principal
operating units of Arch Western are Thunder Basin Coal Company, L.L.C., owned
100% by Arch Western, which operates one coal mine in the Southern Powder River
Basin in Wyoming; Mountain Coal Company, L.L.C., owned 100% by Arch Western,
which operates one coal mine in Colorado; Canyon Fuel Company, LLC ("Canyon
Fuel"), 65% owned by Arch Western and 35% by ITOCHU Coal International Inc., a
subsidiary of ITOCHU Corporation, which operates three coal mines in Utah; and
Arch of Wyoming, LLC, owned 100% by Arch Western, which operates two coal mines
in the Hanna Basin of Wyoming.
The Company's 65% ownership of Canyon Fuel is accounted for on the equity method
in the Condensed Consolidated Financial Statements as a result of certain
super-majority voting rights in the joint venture agreement. Income from Canyon
Fuel is reflected in the Condensed Consolidated Statements of Operations as
income from equity investment (see additional discussion in "Investment in
Canyon Fuel" in Note D).
Note B - Shareholders' Equity
On February 22, 2001, the Company completed a public offering of 9,927,765
shares of common stock, including the remaining 4,756,968 shares held by its
then largest stockholder, Ashland Inc., and 5,170,797 primary and treasury
shares issued directly by the Company. The proceeds realized by the Company from
the transaction of $92.9 million after the underwriters' discount and expenses,
were used to pay down debt.
On April 12, 2001, the Company filed a Universal Shelf Registration Statement on
Form S-3 with the Securities and Exchange Commission. The Universal Shelf allows
the Company to offer, from time to time, an aggregate of up to $750 million in
debt securities, preferred stock, depositary shares, common stock and related
rights and warrants. On May 8, 2001, the Company utilized the shelf registration
and completed a public offering of 8,500,000 primary shares of common stock. On
May 16, 2001, the underwriters involved in the offering purchased an additional
424,200 shares pursuant to an over-allotment option granted by the Company in
connection with the May 8, 2001 offering. The proceeds realized from these
transactions after the underwriting discount and expenses were $279.3 million.
These proceeds were used to pay down debt. The Company can still issue an
additional $455.5 million in debt and equity securities under the Universal
Shelf.
4
On September 14, 2001, the Company's Board of Directors approved a stock
repurchase plan, under which the Company may repurchase up to 6.0 million of its
shares of common stock from time to time. Through September 30, 2001, the
Company repurchased 357,200 shares of its common stock pursuant to the plan at
an average price of $14.13 per share. The repurchased shares are being held in
the Company's treasury. Future repurchases under the plan will be made at
management's discretion and will depend on market conditions and other factors.
The Company also recognized proceeds of $8.8 million from sales of shares
through the Company's employee stock option plan during the nine months ended
September 30, 2001.
Note C - Adoption of FAS 133, Accounting for Derivative Instruments and Hedging
Activities
The Company adopted FAS 133, "Accounting for Derivative Instruments and Hedging
Activities", on January 1, 2001. The Company's interest rate swaps are affected
by the provisions of FAS 133. The Company enters into interest-rate swap
agreements to modify the interest characteristics of outstanding Company debt.
The swap agreements essentially convert variable-rate debt to fixed-rate debt.
These agreements require the exchange of amounts based on variable interest
rates for amounts based on fixed interest rates over the life of the agreement.
In accordance with FAS 133, these instruments qualify as a cash flow hedge and
are deemed to be effective for the variable-rate debt being hedged. Accordingly,
the Company recorded the fair value of the instruments on the balance sheet as
an other non-current liability. The Company recorded the unrealized loss, net of
tax, in accumulated other comprehensive loss. The adoption of FAS 133 had no
impact on the Company's results of operations or cash flows. The effects of
adopting FAS 133 and the comprehensive loss effect for the nine months ended
September 30, 2001 follow:
Interest Rate Tax Accumulated Other
Swaps Effect Comprehensive Loss
--------------- ------------- ----------------------
(in thousands)
Adoption (January 1, 2001) $ (7,910) $ 3,085 $ (4,825)
Other comprehensive loss (22,834) 9,028 (13,806)
--------------- ------------- ----------------------
September 30, 2001 $ (30,744) $ 12,113 $ (18,631)
=============== ============= ======================
The following table presents total comprehensive loss:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -- ------------- ------------ -- -------------
2001 2000 2001 2000
------------- ------------- ------------ -------------
(in thousands)
Net loss $ (8,140) $ (5,198) $ (1,201) $ (22,350)
Other comprehensive loss net of income tax
benefit (5,904) - (13,806) -
------------- ------------- ------------ -------------
Total comprehensive loss $ (14,044) $ (5,198) $ (15,007) $ (22,350)
============= ============= ============ =============
5
Note D - Investment in Canyon Fuel
The following table presents unaudited summarized financial information for
Canyon Fuel, which is accounted for on the equity method:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
Condensed Income Statement Information 2001 2000 2001 2000
-------------------------------------- ------------- ------------ ----------- ------------
(in thousands)
Revenues $ 77,060 $ 55,234 $ 218,581 $ 181,112
Total costs and expenses 70,220 50,894 197,052 170,774
------------- ------------ ----------- ------------
Net income $ 6,840 $ 4,340 $ 21,529 $ 10,338
============= ============ =========== ============
65% of Canyon Fuel net income $ 4,446 $ 2,821 $ 13,994 $ 6,720
Effect of purchase adjustments (380) 631 378 2,124
------------- ------------ ----------- ------------
Company's income from its equity
investment in Canyon Fuel $ 4,066 $ 3,452 $ 14,372 $ 8,844
============= ============ =========== ============
The Company's income from its equity investment in Canyon Fuel represents 65% of
Canyon Fuel's net income after adjusting for the effect of its investment in
Canyon Fuel. The Company's investment in Canyon Fuel reflects purchase
adjustments primarily related to the reduction in amounts assigned to sales
contracts, mineral reserves and other property, plant and equipment.
Note E - Inventories
Inventories consist of the following:
September 30, December 31,
2001 2000
----------------- ----------------
(in thousands)
Coal $ 25,487 $ 21,185
Repair parts and supplies 31,082 26,745
----------------- --------------
$ 56,569 $ 47,930
================= ==============
Note F - Debt
Debt consists of the following:
September 30, December 31,
2001 2000
----------------- ----------------
(in thousands)
Indebtedness to banks under revolving credit
agreement, expiring May 31, 2003 $ 85,000 $ 332,100
Variable rate term loan payable quarterly - 135,000
Variable rate term loan due May 31, 2003 675,000 675,000
Other 5,372 8,695
----------------- ----------------
$ 765,372 $ 1,150,795
Less current portion 90,372 60,129
----------------- ----------------
Long-term debt $ 675,000 $ 1,090,666
================= ================
6
The Company has two credit facilities: a $675.0 million, non-amortizing term
loan in the name of Arch Western and a revolving credit facility in the name of
the Company. The rate of interest on borrowings under both of the credit
facilities is based on LIBOR. The Arch Western loan is secured by Arch Western's
membership interests in its subsidiaries. It is not guaranteed by the Company.
The Company's credit facility initially included both a revolver and a fully
amortizing term loan. In February and May 2001, the Company used proceeds from
its public stock offerings (See Note B) to retire its term loan with the
remainder reducing the then outstanding borrowings under the revolver.
Subsequent to such repayments, the Company's revolving credit agreement provides
for borrowings of up to $547.0 million less any outstanding letters of credit.
At September 30, 2001, the Company had $34.5 million in letters of credit
outstanding which, when combined with outstanding borrowings under the revolver,
allowed for $427.5 million of additional borrowings under the revolver. The
Company also periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
September 30, 2001, there were $20.0 million of such agreements in effect, of
which no borrowings were outstanding. Aggregate required maturities of debt are
$0.3 million for the remainder of 2001, $0.5 million in 2002, $760.5 million in
2003, $0.6 million in 2004, $0.6 million in 2005 and $2.9 million thereafter.
Terms of the Company's credit facilities and leases contain financial and other
covenants that limit the ability of the Company to, among other things, effect
acquisitions or dispositions and borrow additional funds and require the Company
to, among other things, maintain various financial ratios and comply with
various other financial covenants. In addition, the covenants require the
pledging of assets to collateralize the term loan and the Company's revolving
credit facility. The assets pledged include equity interests in wholly-owned
subsidiaries, certain real property interests, accounts receivable and inventory
of the Company. Failure by the Company to comply with such covenants could
result in an event of default, which, if not cured or waived, could have a
material adverse effect on the Company. The Company was in compliance with these
financial covenants at September 30, 2001.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of the Company's outstanding debt. At September 30, 2001, the
Company had interest-rate swap agreements having a total notional value of
$425.0 million. These swap agreements are used to convert variable-rate debt to
fixed-rate debt. Under these swap agreements, the Company pays a
weighted-average fixed rate of 6.89% (before the credit spread over LIBOR) and
is receiving a weighted-average variable rate based upon 30-day and 90-day
LIBOR. At September 30, 2001, the remaining terms of the swap agreements ranged
from 11 to 45 months.
Note G - Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. After conferring with
counsel, it is the opinion of management that the ultimate resolution of these
claims, to the extent not previously provided for, will not have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of the Company.
Note H - Changes in Estimates and Other Non-Recurring Revenues and Expenses
The Company's operating results for the nine months ended September 30, 2001
reflect a $9.4 million insurance settlement as part of the Company's coverage
under its property and business interruption policy. The insurance settlement
represents the final settlement for losses incurred at the West Elk Mine in
Gunnison County, Colorado, which was idled from January 28, 2000 to July 12,
2000 following the detection of combustion-related gases. The nine month period
ended September 30, 2000 also reflect a $24.0 million partial insurance
settlement associated with this event, $12.0 million of which was received
during the three months ended September 30, 2000.
During the third quarter of 2001, as a result of estimate changes associated
with reclamation, the Company reduced its reclamation liability resulting in a
pre-tax gain of $1.9 million. During the nine months ended September 30, 2001,
the Company reduced its reclamation liability resulting in a pre-tax gain of
$5.4 million, of which $3.5 million was a result of permit revisions at its idle
mine properties in Illinois recorded in the first quarter of 2001. Also, as a
result of permit revisions at the same property during the nine months ended
September 30, 2000, the Company reduced its reclamation liability resulting in a
pre-tax gain of $7.8 million.
During the nine months ended September 30, 2001, as a result of progress in
processing claims associated with the recovery of certain previously paid excise
taxes on export sales, the Company recognized a pre-tax gain of $4.6 million. Of
the $4.6 million recognized, $3.1 million represents the interest component of
the claim and was recorded as interest income. The gain stems from an IRS notice
during the second quarter of 2000 outlining the procedures for obtaining tax
refunds on black lung excise taxes paid by the industry on export sales. The
notice was the result of a 1998 federal district court decision that found such
taxes to be unconstitutional. The Company recorded $12.7 million of pre-tax
income related to these excise tax recoveries during the nine months ended
September 30, 2000.
7
The Company reduced its stock based benefit program accruals for awards that did
not meet minimum performance levels to qualify for a payout which resulted in an
increase in pre-tax income of $4.3 million during the three months ended
September 30, 2001. For the nine months ended September 30, 2001, the Company
recognized pre-tax charges of $4.0 million (which is net of the $4.3 million
accrual reduction included in the third quarter of 2001) for stock-based
compensation benefit programs that may be realized in future periods as a result
of improved stock performance. During the nine months ended September 30, 2001,
the Company also recognized reduced interest expense of $1.7 million primarily
associated with the termination of certain interest rate swaps, which did not
qualify as hedges under the accounting treatment prescribed by FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." During the nine
months ended September 30, 2001, Canyon Fuel, the Company's equity method
investment, recognized recoveries of previously paid property taxes. The
Company's share of these recoveries was $2.6 million and is reflected as income
from equity investment on the Condensed Consolidated Statements of Operations
for the nine months ending September 30, 2001. During the three and nine months
ended September 30, 2001, the Company sold surplus land resulting in a $2.9
million and $6.5 million pre-tax gain, respectively. The Company sold surplus
land resulting in a $3.0 million and $8.1 million pre-tax gain during the three
and nine months ended September 30, 2000, respectively.
Note I - Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted loss per
common share from continuing operations.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- ------------ --------------- -------------
(in thousands, except per share data)
Numerator:
Net loss $ (8,140) $ (5,198) $ (1,201) $ (22,350)
============== ============ =============== =============
Denominator:
Weighted average shares - denominator for basic 52,681 38,164 47,404 38,164
Dilutive effect of employee stock options - - - -
-------------- ------------ --------------- -------------
Adjusted weighted average shares - denominator
for diluted 52,681 38,164 47,404 38,164
============== ============ =============== =============
Basic and diluted loss per common share $ (.15) $ (.14) $ (.03) $ (.59)
============== ============ =============== =============
Note J - Subsequent Event
Subsequent to September 30, 2001, the Company sold its interest in mineral
reserves containing 16.1 million tons of coal in the Carbon Basin of Wyoming
resulting in a $5.1 million pre-tax gain. In addition, subsequent to September
30, 2001, the Company received a favorable state tax ruling resulting in a $9.1
million pre-tax gain.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements in this quarterly report which are not statements of historical fact
are forward-looking statements within the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on the information available to, and the expectations and assumptions
deemed reasonable by, the Company at the time the statements are made. Because
these forward-looking statements are subject to various risks and uncertainties,
actual results may differ materially from those projected in the statements.
These expectations, assumptions and uncertainties include: the Company's
expectation of continued growth in the demand for electricity; belief that
legislation and regulations relating to the Clean Air Act and the relatively
higher costs of competing fuels will increase demand for its compliance and
low-sulfur coal; expectation of continued improved market conditions for the
price of coal; expectation that the Company will continue to have adequate
liquidity from its cash flow from operations, together with available borrowings
under its credit facilities, to finance the Company's working capital needs; a
variety of operational, geologic, permitting, labor and weather related factors;
and the other risks and uncertainties which are described below under
"Contingencies" and "Certain Trends and Uncertainties."
8
RESULTS OF OPERATIONS
Quarter Ended September 30, 2001, Compared
to Quarter Ended September 30, 2000
Net Income (Loss). The net loss for the quarter ended September 30, 2001 was
$8.1 million compared to a net loss of $5.2 million for the quarter ended
September 30, 2000. Results for both quarters were adversely impacted by costs
associated with major maintenance projects undertaken while mines were idle or
operating on reduced schedules due to worker vacations. Results for the current
quarter were also negatively impacted by production difficulties and increased
costs at the Company's West Elk mine in Gunnison County, Colorado caused by high
methane levels and at the Samples surface operation in West Virginia caused by a
sandstone intrusion into the coal seam. Partially offsetting these negative
items was lower interest expense due to reduced debt levels. Results for the
quarter ended September 30, 2001 were positively impacted by the following other
items: (1) A $2.9 million pre-tax gain primarily from the sale of surplus land.
(2) An increase of pre-tax income of $1.9 million caused by a reduction in the
Company's reclamation liability due to changes in estimates. (3) A pre-tax $4.3
million gain from the partial reversal of previously recorded compensation
accruals resulting from certain stock based compensation plans not achieving
minimum performance targets required for awards. These accruals may fluctuate in
future periods based on the plan's future performance.
Results for the quarter ended September 30, 2000, were adversely affected by
operating losses incurred at the West Elk mine. The mine was idled on January
28, 2000 to July 12, 2000 following the detection of combustion gases in a
portion of the mine unrelated to the high methane levels described above. These
operating losses were to some extent offset by an associated partial pre-tax
insurance settlement of $12.0 million under the Company's business interruption
policy. Results for the quarter were positively impacted by the sale of surplus
land for a $3.0 million pre-tax gain.
The West Elk mine's coal sales of $17.5 million in the third quarter of 2001
were $3.3 million greater than its sales of $14.2 million in the third quarter
of 2000, although the mine experienced significant production difficulties in
both quarters as described above. During the third quarter of 1999, a comparable
quarter of uninterrupted production, the mine had coal sales of $25.7 million.
Excluding the third quarter of 2000 insurance recovery discussed above,
operating losses for the mine for the third quarter of 2001 and 2000 were $2.3
million and $4.5 million, respectively, compared to operating income of $1.2
million during the third quarter of 1999. At the Company's surface operation at
its Samples Mine, a sandstone intrusion caused the coal seam to thin which
resulted in lower production and higher associated costs. During the third
quarter of 2001, the Samples surface operation experienced an operating loss of
$5.6 million compared to operating income of $2.2 million during the third
quarter of 2000.
Income from operations.
The following table presents income from operations excluding unusual items:
Three Months Ended
September 30
(in millions)
----------------------------
2001 2000
------------ ------------
Income from operations (as reported) $ 4.0 $ 15.9
Losses at the West Elk Mine 2.3 4.5
West Elk mine insurance recoveries - (12.0)
Samples surface operation losses 5.6 -
Land sales (2.9) (3.0)
Reclamation adjustment (1.9) -
Stock based compensation accrual adjustment (4.3) -
------------ ------------
Adjusted income from operations $ 2.8 $ 5.4
============ ============
9
Amortization of Coal Supply Agreements. Amortization of coal supply agreements
decreased by $4.9 million primarily as a result of the expiration and buy-out of
above-market contracts that were valued as assets and amortized on the Company's
balance sheet in the prior year and by lower shipped volumes on other valued
contracts during the third quarter of 2001.
Interest Expense. Interest expense decreased by $8.0 million primarily due to
lower debt levels in the third quarter of 2001 compared to the same quarter of
2000. The net proceeds from two public stock offerings in the first half of 2001
were used to significantly reduce debt levels from the prior year (see
additional discussion in Liquidity and Capital Resources).
Income Taxes. The Company's effective tax rate is sensitive to changes in
estimates of annual profitability and percentage depletion. The income tax
benefit recorded in the three months ended September 30, 2001 is primarily the
result of the impact of percentage depletion.
Adjusted EBITDA. Adjusted EBITDA (income from operations before the effect of
net interest expense; income taxes; and depreciation, depletion and amortization
of the Company, its subsidiaries and its ownership percentage in its equity
investments) was $58.6 million for the current quarter compared to $76.1 million
for the third quarter of 2000. This decrease is primarily attributable to the
losses incurred at the Samples surface operation resulting from the sandstone
intrusion during 2001 and by insurance recoveries at the West Elk mine in the
third quarter of 2000 as described above. 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 U.S. generally accepted accounting
principles. This measure of EBITDA may not be comparable to similar measures
reported by other companies, or EBITDA may be computed differently by the
Company in different contexts (i.e., public reporting versus computations under
financing arrangements).
Nine Months Ended September 30, 2001, Compared
to Nine Months Ended September 30, 2000
Net Income (Loss). The net loss for the nine months ended September 30, 2001 was
$1.2 million compared to a net loss of $22.4 million for the nine months ended
September 30, 2000. Results for the current period were positively impacted by
continuing strong margins on the limited tonnage open to market-based pricing
during the early part of 2001 and by reduced interest expense associated with
lower debt levels. The current period results were negatively impacted by
production difficulties and increased costs at the Company's West Elk mine in
Gunnison County, Colorado caused by high methane levels and at the Samples
surface operation in West Virginia caused by a sandstone intrusion into the coal
seam. Results for the nine months ended September 30, 2001 were also positively
impacted by the following other items: (1) A $9.4 million pre-tax insurance
settlement as part of the Company's coverage under its property and business
interruption policy. The insurance settlement represents the final settlement
for losses incurred for the West Elk mine idling described below. (2) A $4.6
million pre-tax gain resulting from an IRS notice received during the second
quarter of 2000 which outlined the procedures necessary to obtain refunds on
black lung excise taxes previously paid on export sales. The notice followed a
1998 federal district court decision that found such taxes to be
unconstitutional. Of the $4.6 million recognized, $3.1 million represents the
interest component of the claim and was recorded as interest income. (3) An
increase of pre-tax income of $5.4 million primarily from a reduction in the
amount of expected reclamation work at the Company's idle Illinois properties
because of permit revisions. (4) A $6.5 million pre-tax gain on the sale of
surplus land. (5) A $1.7 million reduction in interest expense primarily
associated with the termination of certain interest rate swaps that did not
qualify as hedges under the accounting treatment prescribed by FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." These items were
partially offset by a pre-tax charge of $4.0 million for stock-based
compensation benefits that may be realized in future periods.
10
Results for the nine months ended September 30, 2000, were adversely impacted by
operating losses incurred at the West Elk mine offset to some extent by an
associated partial pre-tax insurance settlement of $24.0 million under the
Company's business interruption policy. The mine was idled from January 28, 2000
to July 12, 2000 following the detection of combustion gases in a portion of the
mine. These combustion gases are unrelated to the high methane levels
experienced at the mine in 2001. Also, as a result of permit revisions at its
idle mine properties in Illinois, the Company reduced its reclamation liability
which resulted in a pre-tax gain of $7.8 million. The Company sold surplus land
resulting in a $8.1 million pre-tax gain during the nine months ended September
30, 2000. In addition, the Company recorded a pre-tax gain of $12.7 million
related to excise tax recoveries on export shipments in connection with the IRS
notice described above.
The West Elk mine's coal sales for the nine months ended September 30, 2001 of
$51.8 million were $28.7 million greater than its sales of $23.1 million in the
same period of 2000, although the mine experienced significant production
difficulties during both periods as described above. This compares to $80.1
million of coal sales during the nine months ended September 30, 1999, a period
of uninterrupted production. Excluding the impact of the related insurance
recoveries, operating losses for the mine for the nine months ended September
30, 2001 and 2000 were $13.1 million and $38.6 million, respectively, compared
to operating income of $7.6 million during the nine months ended September 30,
1999. At the Samples surface operation, a sandstone intrusion caused the coal
seam to thin which has resulted in lower production and higher associated costs.
During the nine months ended September 30, 2001, the Samples surface operation
experienced an operating loss of $9.2 million compared to operating income of
$4.1 million during the same period of 2000.
Revenues. Total revenues for the nine months ended September 30, 2001 were
$1,103.3 million, an increase of $46.1 million from the nine months ended
September 30, 2000. This increase was the result of several factors including
the increase in sales at West Elk when compared to the same period in the prior
year, improved pricing on the limited tonnage that was open to market-based
pricing during the current period, and increased pass through transportation
revenues (offset by increased transportation costs in cost of sales).
Income From Equity Investment. During the nine months ended September 30, 2001,
Canyon Fuel, the Company's equity method investment, recognized recoveries of
previously paid property taxes. The Company's share of these recoveries is $2.6
million, which is reflected as income from equity investment in the Condensed
Consolidated Statements of Operations.
Income from Operations.
The following table presents income from operations excluding unusual items
discussed above.
Nine Months Ended
September 30
(in millions)
----------------------------
2001 2000
------------ ------------
Income from operations (as reported) $ 42.4 $ 38.7
Losses at the West Elk Mine 13.1 38.6
West Elk mine insurance recoveries (9.4) (24.0)
Samples surface operation losses 9.2 -
Land sales (6.5) (8.1)
Reclamation adjustment (5.4) (7.8)
Stock based compensation accrual adjustment 4.0 -
Black lung excise tax recoveries (1.5) (12.7)
Canyon Fuel Company property tax recoveries (2.6) -
------------ ------------
Adjusted income from operations $ 43.3 $ 24.7
============ ============
The increase in income from operations is primarily attributable to improved
pricing on the limited coal tonnage that was open to market-based pricing during
the current period.
11
Amortization of Coal Supply Agreements. Amortization of coal supply agreements
decreased by $9.4 million primarily as a result of the expiration and buy-out of
above-market contracts that were valued as assets and amortized on the Company's
balance sheet in the prior year.
Interest Expense. Interest expense decreased by $18.1 million primarily as a
result of lower debt levels in the nine months ended September 30, 2001 compared
to the same period of 2000 and a $1.7 million reduction in interest expense
associated with the termination of certain interest-rate swaps which did not
qualify as hedges under the accounting treatment prescribed by FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The net proceeds
from two public stock offerings in the first half of 2001 were used to
significantly reduce debt levels from the prior year (see additional discussion
in Liquidity and Capital Resources).
Interest Income. The increase in interest income of $2.8 million was primarily
due to recognition of the interest component of the black lung excise tax
recovery recorded in the second quarter of 2001.
Income Taxes. The Company's effective tax rate is sensitive to changes in
estimates of annual profitability and percentage depletion. The income tax
benefit recorded for the nine months ended September 30, 2001 is primarily the
result of the impact of percentage depletion.
Adjusted EBITDA. Adjusted EBITDA (income from operations before the effect of
net interest expense; income taxes; and depreciation, depletion and amortization
of the Company, its subsidiaries and its ownership percentage in its equity
investments) was $207.2 million for the nine months ended September 30, 2001
compared to $220.5 million for the nine months ended September 30, 2000. This
decrease is primarily attributable to the losses incurred at the Samples surface
operation resulting from the sandstone intrusion during the nine months ended
September 30, 2001 and by higher insurance recoveries during the nine months
ended September 30, 2000 compared to the same period in 2001 as described above.
OUTLOOK
West Elk Mine. The Company's West Elk mine encountered higher-than-expected
methane levels following the relocation of its longwall mining system to the
eastern section of the mine in late February 2001. The higher methane levels
have led to a reduction of planned shipments from the West Elk mine. The mine's
performance has steadily improved as the mine has implemented a series of
methane control procedures. However, if the Company is unable to continue to
adequately control methane levels at the mine, it may be forced to continue to
operate the mine at lower levels of production than planned or to idle the mine.
West Virginia Operations. On October 20, 1999, the U.S. District Court for the
Southern District of West Virginia permanently enjoined the West Virginia
Department of Environmental Protection (DEP) from issuing any permits that
authorize the construction of valley fills as part of coal mining operations.
The West Virginia DEP complied with the injunction by issuing an order banning
the issuance of permits for the construction of nearly all new valley fills and
the expansion of nearly all existing valley fills. The district court then
granted a stay of its injunction, pending the outcome of an appeal of the
court's decision filed by the West Virginia DEP with the U.S. Court of Appeals
for the Fourth Circuit. On April 24, 2001, the Court of Appeals vacated the
judgment of the district court with respect to the injunction and in October
2001, the plaintiffs in this action filed an appeal of the Court of Appeal's
decision with the United States Supreme Court.
The injunction discussed above was entered as part of the litigation that caused
a delay in obtaining mining permits for the Company's Dal-Tex operation
described under "Contingencies-Legal Contingencies-Dal-Tex Litigation." As a
result of the delay, the Company idled its Dal-Tex mining operation on July 23,
1999. If all necessary permits are obtained, the Company may reopen the mine
subject to then-existing market conditions.
Previously, the Company had disclosed that longwall mineable reserves at Mingo
Logan were likely to be exhausted during 2002. As a result of improvements to
the mine plan, the mine is not expected to exhaust its longwall mineable
reserves until 2004.
12
During the second quarter of 2001, the Company's Samples surface mine in
southern West Virginia encountered a larger-than-expected sandstone intrusion.
The intrusion has resulted in the thinning of the principal coal seam in the
ridge that the mine is currently mining. The thinning of the seam has reduced
recoverable coal available and driven up mining costs on a per-ton basis. The
Company expects the Samples operation to be impacted by the sandstone intrusion
through the beginning of 2002. In early 2002, the Samples mine expects to begin
development work on a new reserve area with more favorable geology. However,
although the Company expects to receive the necessary permits for these reserves
before the end of 2001, there can be no assurance that they will be received on
a timely basis.
Coal Markets. Although the Company continues to be adversely affected by coal
contracts priced during weak market conditions, there have been developments
that have translated into improved market conditions for coal. More normal U.S.
weather temperatures since late 2000 and continued growth of the "digital"
economy have created an increased demand for electricity. The nuclear power
system is operating at near its effective limits and no new domestic nuclear
plants are currently in the permitting stage. Meanwhile, power generators have
announced plans to construct a substantial amount of new coal-fired generating
capacity and coal stockpiles remain at low levels. Also, over the course of the
last year, quoted and spot prices for coal produced in the regions in which the
Company operates have risen. Consequently, the Company has been able to commit
much of its previously uncommitted 2002 and 2003 production at higher prices
than in the recent past. All of the Company's estimated 2002 production has now
been committed.
Low-Sulfur Coal Producer. The Company continues to believe that it is well
positioned to capitalize on the continuing growth in demand for low-sulfur coal
to produce electricity. With Phase II of the Clean Air Act in effect, compliance
coal has captured a growing share of United States coal demand and commands a
higher price in the marketplace than high-sulfur coal. Compliance coal is coal
that meets the requirements of Phase II of the Clean Air Act without the use of
expensive scrubbing technology. One hundred percent of the Company's current
coal production is low sulfur. Approximately 68% of the Company's coal reserves
are compliance quality while an additional 22% is low sulfur, or coal that when
burned emits between 1.2 and 2.5 pounds of sulfur dioxide per million BTU's of
heat content.
Chief Objectives. The Company continues to focus on realizing the potential of
its assets and to maximize stockholder value. Its first financial objective in
recent quarters has been to aggressively reduce debt and strengthen its balance
sheet. Through September 30, 2001, the Company reduced its total debt by $385.4
million principally through the use of proceeds raised in the February and May
2001 equity offerings described in the "Liquidity and Capital Resources" section
below. In total, the Company has paid down more than $600 million in debt since
December 31, 1998. The Company's debt-to-capitalization ratio, which was 84% at
December 31, 2000, improved to 57% at September 30, 2001.
In addition to continuing its efforts to pay down, restructure and diversify its
remaining debt, the Company will focus on taking steps designed to improve
earnings, strengthen cash generation, improve productivity and reduce costs at
its large-scale mines, and build on its leading position in its target
coal-producing basins.
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, 2001 and 2000:
2001 2000
---------------- ----------------
(in thousands)
Cash provided by (used in):
Operating activities $ 123,717 $ 127,257
Investing activities (103,347) (106,978)
Financing activities (20,378) (22,009)
13
Cash provided by operating activities decreased in the nine months ended
September 30, 2001 compared to the same period in 2000 despite a $21.1 million
decrease of the net loss period over period and increased distributions from its
investment in Canyon Fuel. Other items contributing to the decrease were reduced
depreciation, depletion and amortization expense resulting from reduced sales
contract amortization and increased working capital requirements in the current
period when compared to the prior period.
Cash used in investing activities during the nine months ended September 30,
2001 decreased compared to the same period in 2000 due to lower capital
expenditures. During the nine months ended September 30, 2000, the Company
purchased all remaining assets under a 1998 sale and leaseback arrangement for
$45.0 million. This was partially offset by higher capital expenditures at other
Company operations in 2001.
Cash used in financing activities was $20.4 million in the first nine months of
2001 compared to $22.0 million during the same period of 2000. The net cash used
in financing activities reflects the cash generated by the February 2001 and May
2001 issuances of common stock resulting in proceeds of $372.2 million, the
pay-down of $385.4 million of debt and the repurchase of the Company's common
stock at a cost of $5.0 million. During the nine months ended September 30,
2000, the Company entered into a sale and leaseback of certain equipment, which
resulted in net proceeds of $13.4 million.
On February 22, 2001, the Company completed a public offering of 9,927,765
shares of common stock, including the remaining 4,756,968 shares held by its
then largest stockholder, Ashland Inc., and 5,170,797 primary and treasury
shares issued directly by the Company. Proceeds realized from the transaction,
which totaled $92.9 million net of the underwriters' discount and expenses, were
used to pay down debt.
On April 12, 2001, the Company filed a Universal Shelf Registration Statement on
Form S-3 with the Securities and Exchange Commission. The Universal Shelf allows
the Company to offer, from time to time, an aggregate of up to $750 million in
debt securities, preferred stock, depositary shares, common stock and related
rights and warrants. On May 8, 2001, the Company utilized the shelf registration
and completed a public offering of 8,500,000 primary shares of common stock. On
May 16, 2001, the underwriters involved in the offering purchased an additional
424,200 shares pursuant to an over-allotment option granted by the Company in
connection with the May 8, 2001 offering. The proceeds realized from these
transactions after the underwriting discount and expenses were $279.3 million.
The proceeds were used to retire the Company's term loan with the remainder
reducing the borrowings under the Company's revolving credit facility.
On September 14, 2001, the Company's Board of Directors approved a stock
repurchase plan, under which the Company may repurchase up to 6.0 million of its
shares of common stock from time to time. Through September 30, 2001, the
Company repurchased 357,200 shares of its common stock pursuant to the plan at
an average purchase price of $14.13 per share. The repurchased shares are being
held in the Company's treasury. Future repurchases under the plan will be made
at management's discretion and will depend on market conditions and other
factors.
The Company generally satisfies its working capital requirements and funds its
capital expenditures with cash generated from operations. The Company believes
that cash generated from operations and its borrowing capacity will be
sufficient to meet its working capital requirements and anticipated capital
expenditures for at least the next several years. The Company's ability to fund
planned capital expenditures, to make acquisitions and to pay dividends will
depend upon its 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 the Company's control.
14
Expenditures for property, plant and equipment were $89.8 million for the nine
months ended September 30, 2001, compared to $103.1 million for the nine months
ended September 30, 2000. Capital expenditures are made to improve and replace
existing mining equipment, expand existing mines, develop new mines and improve
the overall efficiency of mining operations. The Company estimates that its
capital expenditures will be approximately $35.0 million to $40.0 million for
the remainder of 2001. It is anticipated that these capital expenditures will be
funded by available cash and existing credit facilities.
At September 30, 2001, the Company had $34.5 million in letters of credit
outstanding which, when combined with outstanding borrowings under the revolver,
allowed for $427.5 million of available borrowings under the Company's revolving
credit facility. Financial covenants contained in the Company's credit
facilities consist of a maximum leverage ratio, a minimum fixed charge coverage
ratio and a minimum net worth test. The leverage ratio requires that the Company
not permit the ratio of total indebtedness at the end of any calendar quarter to
adjusted EBITDA for the four quarters then ended exceed a specified amount. The
fixed charge coverage ratio requires that the Company not permit the ratio of
the Company's adjusted EBITDA plus lease expense to interest expense plus lease
expense for the four quarters then ended to be less than a specified amount. The
net worth test requires that the Company not permit its net worth to be less
than a specified amount plus 50% of cumulative net income. In addition, the
covenants require the pledging of assets to collateralize the Company's
revolving credit facility. The assets pledged include equity interests in wholly
owned subsidiaries, certain real property interests, accounts receivable and
inventory of the Company. The Company was in compliance with these financial
covenants at September 30, 2001.
The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
September 30, 2001, there were $20.0 million of such agreements in effect, of
which none were outstanding. The Company can also issue an additional $455.5
million in public debt and equity securities under a shelf registration
statement.
The Company is exposed to market risk associated with interest rates. At
September 30, 2001, debt included $335.0 million of floating-rate debt after
taking into consideration interest rate swap agreements, with a rate of interest
based on LIBOR and current market rates for bank lines of credit. To manage this
exposure, the Company enters into interest-rate swap agreements to modify the
interest-rate characteristics of outstanding Company debt. At September 30,
2001, the Company had interest-rate swap agreements having a total notional
value of $425.0 million. These swap agreements are used to convert variable-rate
debt to fixed-rate debt. Under these swap agreements, the Company pays a
weighted average fixed rate of 6.89% (before the credit spread over LIBOR) and
receives a weighted average variable rate based upon 30-day and 90-day LIBOR.
The Company accrues amounts to be paid or received under interest-rate swap
agreements over the lives of the agreements. These amounts are recognized as
adjustments to interest expense over the lives of the agreements, thereby
adjusting the effective interest rate on the Company's debt. Gains and losses on
terminations of interest-rate swap agreements are deferred on the balance sheet
(in other long-term liabilities) and amortized as an adjustment to interest
expense over the remaining term of the terminated swap agreement. The remaining
terms of the swap agreements at September 30, 2001 ranged from 11 to 45 months.
The discussion below presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates and prices.
The range of changes reflects the Company's view of changes that are reasonably
possible over a one-year period. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
major accounting policies for these instruments are described previously in Note
C to the condensed consolidated financial statements of the Company as of
September 30, 2001.
Changes in interest rates have different impacts on the fixed-rate and
variable-rate portions of the Company's debt portfolio. A change in interest
rates on the fixed portion of the debt portfolio impacts the net financial
instrument position but has no impact on interest incurred or cash flows. A
change in interest rates on the variable portion of the debt portfolio impacts
the interest incurred and cash flows but does not impact the net financial
instrument position.
The sensitivity analysis related to the fixed portion of the Company's debt
portfolio assumes an instantaneous 100-basis-point move in interest rates from
their levels at September 30, 2001 with all other variables held constant. A
100-basis-point decrease in market interest rates would result in a $8.0 million
increase in the fair value of the fixed portion of debt at September 30, 2001.
Based on the variable-rate debt included in the Company's debt portfolio as of
September 30, 2001, after considering the effect of the swap agreements, a
100-basis-point increase in interest rates would result in an annualized
additional $3.4 million of interest expense incurred based on September 30, 2001
debt levels.
15
CONTINGENCIES
Reclamation.
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA") and
similar state statutes require that mine property be restored in accordance with
specified standards and an approved reclamation plan. The Company accrues for
the costs of final mine closure reclamation over the estimated useful mining
life of the property. These costs relate to reclaiming the pit and support
acreage at surface mines and sealing portals at deep mines. Other costs of final
mine closure common to surface and underground mining are related to reclaiming
refuse and slurry ponds, eliminating sedimentation and drainage control
structures and dismantling or demolishing equipment or buildings used in mining
operations. The Company also accrues for significant reclamation that is
completed during the mining process prior to final mine closure. The
establishment of the final mine closure reclamation liability and the other
ongoing reclamation liabilities are based upon permit requirements and require
various estimates and assumptions, principally associated with costs and
productivities.
The Company reviews its entire environmental liability periodically and makes
necessary adjustments, including permit changes and revisions to costs and
productivities to reflect current experience. The Company's management believes
it is making adequate provisions for all expected reclamation and other
associated costs.
Legal Contingencies.
The Company is a party to numerous claims and lawsuits with respect to various
matters, including those discussed below. The Company provides for costs related
to contingencies, including environmental matters, when a loss is probable and
the amount is reasonably determinable. After conferring with counsel, it is the
opinion of management that the ultimate resolution of these claims, to the
extent not previously provided for, will not have a material adverse effect on
the consolidated financial condition, results of operations or liquidity of the
Company.
Dal-Tex Litigation. A federal court injunction that prohibited the West Virginia
Department of Environmental Protection (DEP) from issuing permits for the
Company's Dal-Tex mine to use valley fill mining techniques resulted in the
shutdown of this mine in July 1999. A subsequent order prohibited the
construction or expansion of valley fills in West Virginia. Valley fills are
created by mountaintop mining and other techniques used in central Appalachia,
and involve the creation of large, engineered works into which excess earth and
rock extracted during surface mining are placed. The plaintiffs in the
litigation allege, among other things, that the construction of valley fills
violates a regulation arising from SMCRA that the plaintiffs allege prohibits
placing overburden or other obstructions in stream channels. The Company
appealed the order specific to its Dal-Tex operations, and the company, the West
Virginia DEP and other interested parties appealed the broader order concerning
valley fills. On April 24, 2001, the United States Court of Appeals for the
Fourth Circuit vacated the judgment of the district court with respect to the
injunction that prohibited the West Virginia DEP from issuing permits to use
valley fill mining techniques. The plaintiffs have appealed the decision of the
Fourth Circuit to the United States Supreme Court and may also pursue remedies
in state court. Because it is not financially viable for coal producers to
operate some mining properties without valley fills, if the decision of the
Fourth Circuit is overturned or state court remedies similar to those obtained
in the federal district court are available to the plaintiffs, the Company and
other coal producers in West Virginia may be forced to close all or a portion of
its mining operations in West Virginia, to the extent those operations are
dependent on the use of valley fills. A settlement agreement entered into
between the parties will require the preparation of an EIS prior to the issuance
of permits for the construction of valley fills. The preparation of these
statements is time-consuming and is sometimes the subject of litigation. As a
result, even though the district court decision has been overturned, the Company
cannot reopen the Dal-Tex mine until the EIS is completed and all necessary
permits are obtained. At that time, the decision to commence mining operations
will be subject to then-existing market conditions.
Cumulative Hydrologic Impact Assessment ("CHIA") Litigation. On January 20,
2000, two environmental organizations, the Ohio Valley Environmental Coalition
and the Hominy Creek Watershed Association, filed suit against the West Virginia
DEP in U.S. District Court in Huntington, West Virginia. In addition to
allegations that the West Virginia DEP violated state law and provisions of the
Clean Water Act, the plaintiffs allege that the West Virginia DEP's issuance of
permits for surface and underground coal mining has violated certain
non-discretionary duties mandated by SMCRA. Specifically, the plaintiffs allege
that the West Virginia DEP has failed to require coal operators seeking permits
to conduct water monitoring to verify stream flows and ascertain water quality,
to always include certain water quality information in their permit applications
and to analyze the probable hydrologic consequences of their operations. The
plaintiffs also allege that the West Virginia DEP has failed to analyze the
cumulative hydrologic impact of mining operations on specific watersheds.
16
The plaintiffs sought an injunction to prohibit the West Virginia DEP from
issuing any new permits which fail to comply with all of the elements identified
in their complaint. The complaint identifies, and sought to enjoin, three
pending permits sought by the Company in connection with its Mingo Logan
operations in order to continue existing surface mining operations at the
Phoenix reserve. On January 15, 2001, the West Virginia DEP notified the
plaintiffs that the Company has completed all steps necessary to obtain the
permits. On March 8, 2001, the Court denied the plaintiffs' motion for a
preliminary injunction seeking to enjoin the DEP's decision to issue the
permits. The Company subsequently has received some of the permits necessary to
continue operating the surface mine. If the plaintiffs ultimately prevail in
this litigation, the Company's ability to mine surface coal at Mingo Logan could
be adversely affected and, depending upon the length of the suspension, the
effect could be material. This matter does not affect Mingo Logan's existing
permits related to its underground operations.
CERTAIN TRENDS AND UNCERTAINTIES
Substantial Leverage - Variable Interest Rate - Covenants.
As of September 30, 2001, the Company had outstanding consolidated indebtedness
of $765.4 million, representing approximately 57% of the Company's capital
employed. Despite making substantial progress in reducing debt, the Company
continues to have significant debt service obligations, and the terms of its
credit agreements limit its flexibility and result in a number of limitations on
the Company. The Company also has significant lease and royalty obligations. The
Company's ability to satisfy debt service, lease and royalty obligations and to
effect any refinancing of its indebtedness will depend upon future operating
performance, which will be affected by prevailing economic conditions in the
markets that the Company serves as well as financial, business and other
factors, many of which are beyond the Company's control. The Company may be
unable to generate sufficient cash flow from operations and future borrowings or
other financings may be unavailable in an amount sufficient to enable it to fund
its debt service, lease and royalty payment obligations or its other liquidity
needs.
The Company's relative amount of debt and the terms of its credit agreements
could have material consequences to its business, including, but not limited to:
(i) making it more difficult to satisfy debt covenants and debt service, lease
payment and other obligations; (ii) making it more difficult to pay quarterly
dividends as the Company has in the past; (iii) increasing the Company's
vulnerability to general adverse economic and industry conditions; (iv) limiting
the Company's ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures or other general corporate
requirements; (v) reducing the availability of cash flow from operations to fund
acquisitions, working capital, capital expenditures or other general corporate
purposes; (vi) limiting the Company's flexibility in planning for, or reacting
to, changes in the Company's business and the industry in which the Company
competes; or (vii) placing the Company at a competitive disadvantage when
compared to competitors with less relative amounts of debt.
A significant portion of the Company's indebtedness bears interest at variable
rates that are linked to short-term interest rates. If interest rates rise, the
Company's costs relative to those obligations would also rise.
Terms of the Company's credit facilities and leases contain financial and other
covenants that create limitations on the Company's ability to, among other
things, effect acquisitions or dispositions and borrow additional funds and
require the Company to, among other things, maintain various financial ratios
and comply with various other financial covenants. Failure by the Company to
comply with such covenants could result in an event of default under these
agreements which, if not cured or waived, would enable the Company's lenders to
declare amounts borrowed due and payable or otherwise result in unanticipated
costs.
Losses.
The Company has reported a net loss of $1.2 million during the nine months
ending September 30, 2001 and a net loss of $12.7 million for the full year
ended December 31, 2000. The losses during the nine months ended September 30,
2001, were primarily attributable to production difficulties at the West Elk
mine in Colorado in 2001 caused by high methane levels (which are unrelated to
the combustion gases experienced by the West Elk mine in 2000) and by lower
production and higher cost at the Samples surface operation in West Virginia
caused by a sandstone intrusion into the coal seam. The losses in 2000 were
primarily attributable to the temporary idling of the West Elk mine in Colorado
following the detection of combustion-related gases in a portion of the mine.
17
Because the coal mining industry is subject to significant regulatory oversight
and due to the possibility of adverse pricing trends or other industry trends
beyond the Company's control, the Company may suffer losses in the future if
legal and regulatory rulings, mine idlings and closures, adverse pricing trends
or other factors affect the Company's ability to mine and sell coal profitably.
Environmental And Regulatory Factors.
Federal, state and local governmental authorities regulate the coal mining
industry on matters as diverse as employee health and safety, air quality
standards, water pollution, groundwater quality and availability, plant and
wildlife protection, the reclamation and restoration of mining properties, the
discharge of materials into the environment and surface subsidence from
underground mining. In addition, federal legislation mandates certain benefits
for various retired coal miners represented by the United Mine Workers of
America ("UMWA"). These regulations and legislation have had and will continue
to have a significant effect on the Company's costs of production and
competitive position. Future regulations, legislation or orders may also cause
the Company's sales or profitability to decline by hindering its ability to
continue its mining operations or by increasing its costs or by causing coal to
become a less attractive fuel source.
Permits. Mining companies must obtain numerous permits that strictly regulate
environmental and health and safety matters in connection with coal mining, some
of which have significant bonding requirements. Regulatory authorities exercise
considerable discretion in the timing of permit issuance. Also, private
individuals and the public at large possess rights to comment on and otherwise
engage in the permitting process, including through intervention in the courts.
Accordingly, the permits necessary for mining operations may not be issued or,
if issued, may not be issued in a timely fashion or may involve requirements
that may be changed or interpreted in a manner that restricts the Company's
ability to conduct its mining operation or to do so profitably.
As indicated by the legal action involving the Company's Dal-Tex operation which
is discussed in "Contingencies - Legal Contingencies - Dal-Tex Litigation"
above, the regulatory environment in West Virginia is uncertain with respect to
coal mining. No assurance can be made that the Fourth Circuit's decision will
not be overturned by the U.S. Supreme Court and the district court's decision
reinstated or that the plaintiffs will not obtain similar relief in a state
court action. In such event, there could be a material adverse effect on the
Company's financial condition or results of operations.
New Environmental Regulations. Several new environmental regulations require a
reduction in nitrogen oxide ("NOx") emissions generated by coal-fired electric
generating plants. Substantially all of the Company's revenues from sales of
coal in the first half of 2001 were from sales to generators operating these
types of plants. Enforcement actions against a number of these generators, which
include some of our customers, and proposed legislation ultimately may require
additional reductions in nitrogen oxide emissions. The Environmental Protection
Agency is also considering regulations that would require reductions in mercury
emissions from coal-fired electric generating plants. To comply with these
regulations and enforcement actions, these generators may choose to switch to
other fuels that generate less of these emissions, such as natural gas or oil.
Kyoto Protocol. On December 11, 1997, the U.S. government representatives at the
climate change negotiations in Kyoto, Japan, agreed to reduce the emissions of
greenhouse gases (including carbon dioxide and other gas emissions that are
believed by some scientists to be trapping heat in the atmosphere and warming
the earth's climate) in the United States. The U.S. adoption of the requirements
of the Kyoto protocol is subject to conditions which may not occur and is also
subject to the protocol's ratification by the U.S. Senate. The U.S. Senate has
indicated that it will not ratify an agreement unless certain conditions, not
currently provided for in the Kyoto protocol, are met. In addition, President
Bush has stated that he does not support the Kyoto Protocol as written. At
present, it is not possible to predict whether the Kyoto protocol will attain
the force of law in the United States or what its impact would be on the
Company.
18
Customers. In July 1997, the EPA proposed that 22 eastern states, including
states in which many of the Company's customers are located, make substantial
reductions in NOx emissions. The EPA expects the states to achieve these
reductions by requiring power plants to reduce their NOx emissions to a level of
0.15 pounds of NOx per million Btu's of energy consumed. Many of the states sued
the EPA in the U.S. Court of Appeals for the District of Columbia Circuit to
challenge the new standard. In March 2000, the court upheld the standard and set
a May 2004 deadline for compliance with the new rules. The states appealed to
the U.S. Supreme Court and, in March 2001, the Court declined to hear the
appeal. To achieve the proposed reductions, power plants may be required to
install reasonably available control technology and additional control measures.
The installation of these measures would make it more costly to operate
coal-fired utility power plants and, depending on the requirements of individual
state implementation plans, could make coal a less attractive fuel alternative
in the planning and building of utility power plants in the future.
The EPA has also proposed the implementation of stricter ozone standards by
2003. If these standards are implemented they could require some of the
Company's customers to reduce NOx emissions, which are a precursor to ozone
formation, or even prevent the construction of new facilities that contribute to
the non-attainment of the new ozone standard.
The U.S. Department of Justice, on behalf of the EPA, has filed a lawsuit
against seven investor-owned utilities and brought an administrative action
against one government-owned utility for alleged violations of the Clean Air
Act. The EPA claims that over 30 of these utilities' power stations have failed
to obtain permits required under the Clean Air Act for major improvements which
have extended the useful service of the stations or increased their generating
capacity. The Company supplies coal to seven of the eight utilities. It is
impossible to predict the outcome of this legal action. Any outcome that
adversely affects the Company's customers or makes coal a less attractive fuel
source could, however, have an adverse effect on the Company's coal sales
revenues and profitability.
Competition and Excess Industry Capacity.
The coal industry is intensely competitive, primarily as a result of the
existence of numerous producers in the coal-producing regions in which the
Company operates, and a number of the Company's competitors have greater
financial resources. The Company competes with several major coal producers in
the central Appalachian and Powder River Basin areas. The Company also competes
with a number of smaller producers in those and other market regions. The
Company is also subject to the risk of reduced profitability as a result of
excess industry capacity, which has occurred in the past and which results in
reduced coal prices.
Electric Industry Factors.
Demand for coal and the prices that the Company will be able to obtain for its
coal are closely linked to coal consumption patterns of the domestic electric
generation industry, which has accounted for approximately 90% of domestic coal
consumption in recent years. These coal consumption patterns are influenced by
factors beyond the Company's control, including the demand for electricity
(which is dependent to a significant extent on summer and winter temperatures);
government regulation; technological developments and the location,
availability, quality and price of competing sources of coal; the use of
competing fuels such as natural gas, oil and nuclear; and alternative energy
sources such as hydroelectric power. Demand for the Company's low-sulfur coal
and the prices that the Company will be able to obtain for it will also be
affected by the price and availability of high-sulfur coal, which can be
marketed in tandem with emissions allowances in order to meet federal Clean Air
Act requirements. Any reduction in the demand for the Company's coal by the
domestic electric generation industry may cause a decline in profitability.
Electric utility deregulation is expected to provide incentives to generators of
electricity to minimize their fuel costs and is believed to have caused electric
generators to be more aggressive in negotiating prices with coal suppliers.
Deregulation may have a negative effect on the Company's profitability to the
extent it causes the Company's customers to be more cost-sensitive.
Reliance On And Terms Of Long-Term Coal Supply Contracts.
During 2000, sales of coal under long-term contracts, which are contracts with a
term greater than 12 months, accounted for 78% of the Company's total revenues.
The prices for coal shipped under these contracts are generally below the
current market price for similar type coal. As a consequence of the substantial
volume of its sales that are subject to these long-term agreements, the Company
has less coal available with which to capitalize on stronger coal prices. In
addition, because long-term contracts typically allow the customer to elect
volume flexibility, in the current rising price environment, the Company's
ability to realize the higher prices available in the spot market may be
restricted when customers elect to purchase higher volumes under such contracts.
19
The increasingly short terms of sales contracts and the consequent absence of
price adjustment provisions in such contracts also make it more likely that
inflation-related increases in mining costs during the contract term will not be
recovered by the Company.
Reserve Degradation And Depletion.
The Company's profitability depends substantially on its ability to mine coal
reserves that have the geological characteristics that enable them to be mined
at competitive costs. Replacement reserves may not be available when required
or, if available, may not be capable of being mined at costs comparable to those
characteristic of the depleting mines. The Company has in the past acquired and
will in the future acquire, coal reserves for its mine portfolio from third
parties. The Company may not be able to accurately assess the geological
characteristics of any reserves that it acquires, which may adversely affect the
profitability and financial condition of the Company. Exhaustion of reserves at
particular mines can also have an adverse effect on operating results that is
disproportionate to the percentage of overall production represented by such
mines. Mingo Logan's Mountaineer Mine is estimated to exhaust its longwall
mineable reserves in 2004. The Mountaineer Mine generated $28.8 million and
$32.1 million of the Company's total operating income in the nine months ended
September 30, 2001 and 2000, respectively.
Potential Fluctuations In Operating Results-Factors Routinely Affecting Results
Of Operations.
The Company's mining operations are inherently subject to changing conditions
that can affect levels of production and production costs at particular mines
for varying lengths of time and can result in decreases in profitability.
Weather conditions, equipment replacement or repair, fuel prices, fires,
variations in coal seam thickness, amounts of overburden rock and other natural
materials and other geological conditions have had, and can be expected in the
future to have, a significant impact on operating results. A prolonged
disruption of production at any of the Company's principal mines, particularly
its Mingo Logan operation in West Virginia, would result in a decrease, which
could be material, in the Company's revenues and profitability. Other factors
affecting the production and sale of the Company's coal that could result in
decreases in its profitability include: (i) expiration or termination of, or
sales price redeterminations or suspension of deliveries under, coal supply
agreements; (ii) disruption or increases in the cost of transportation services;
(iii) changes in laws or regulations, including permitting requirements; (iv)
litigation; (v) the timing and amount of insurance recoveries; (vi) work
stoppages or other labor difficulties; (vii) mine worker vacation schedules and
related maintenance activities; and (viii) changes in coal market and general
economic conditions.
Decreases in the Company's profitability as a result of the factors described
above could adversely impact quarterly or annual results materially. Any such
adverse impact on the Company's operating results could cause its stock price to
decline substantially, particularly if the results are below research analyst or
investor expectations.
Transportation.
The coal industry depends on rail, trucking and barge transportation to deliver
shipments of coal to customers, and transportation costs are a significant
component of the total cost of supplying coal. Disruption of these
transportation services could temporarily impair the Company's ability to supply
coal to its customers and thus adversely affect the Company's business and
operating results. Increases in transportation costs, or changes in such costs
relative to transportation costs for coal produced by its competitors or of
other fuels, could have an adverse effect on the Company's business and results
of operations.
20
Reserves - Title.
There are numerous uncertainties inherent in estimating quantities of
recoverable reserves, including many factors beyond the control of the Company.
Estimates of economically recoverable coal reserves and net cash flows
necessarily depend upon the number of variable factors and assumptions, such as
geological and mining conditions which may not be fully identified by available
exploration data or may differ from experience in current operations, historical
production from the area compared with production from other producing areas,
the assumed effects of regulation by governmental agencies and assumptions
concerning coal prices, operating costs, severance and excise taxes, development
costs and reclamation costs, all of which may cause estimates to vary
considerably from actual results.
For these reasons, estimates of the economically recoverable quantities
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of net cash flows expected
therefrom, prepared by different engineers or by the same engineers at different
times, may vary substantially. Actual coal tonnage recovered from identified
reserve areas or properties and revenues and expenditures with respect to the
Company's reserves may vary from estimates, and such variances may be material.
These estimates thus may not accurately reflect the Company's actual reserves.
A significant part of the Company's mining operations are conducted on
properties leased by the Company. The loss of any lease could adversely affect
the Company's ability to develop the associated reserves. Because title to most
of the Company's leased properties and mineral rights is not usually verified
until a commitment is made by the Company to develop a property, which may not
occur until after the Company has obtained necessary permits and completed
exploration of the property, the Company's right to mine certain of its reserves
may be adversely affected if defects in title or boundaries exist. In order to
obtain leases or mining contracts to conduct mining operations on property where
these defects exist, the Company has had to, and may in the future have to,
incur unanticipated costs. In addition, the Company may not be able to
successfully negotiate new leases or mining contracts for properties containing
additional reserves or maintain its leasehold interests in properties on which
mining operations are not commenced during the term of the lease.
Certain Contractual Arrangements.
The Company's affiliate, Arch Western Resources, LLC, is the owner of Company
reserves and mining facilities in the western United States. The agreement under
which Arch Western was formed provides that a subsidiary of the Company, as the
managing member of Arch Western, generally has exclusive power and authority to
conduct, manage and control the business of Arch Western. However, consent of
ARCO, the other member of Arch Western, would generally be required in the event
that Arch Western proposes to make a distribution, incur indebtedness, sell
properties or merge or consolidate with any other entity if, at such time, Arch
Western has a debt rating less favorable than specified ratings with Moody's
Investors Service or Standard & Poor's or fails to meet specified indebtedness
and interest ratios.
In connection with the Company's June 1, 1998 acquisition of ARCO's coal
operations, the Company entered into an agreement under which it agreed to
indemnify ARCO against specified tax liabilities in the event that these
liabilities arise as a result of certain actions taken prior to June 1, 2013,
including the sale or other disposition of certain properties of Arch Western,
the repurchase of certain equity interests in Arch Western by Arch Western or
the reduction under certain circumstances of indebtedness incurred by Arch
Western in connection with the acquisition. Depending on the time at which any
such indemnification obligation were to arise, it could impact the Company's
profitability for the period in which it arises.
The membership interests in Canyon Fuel, which operates three coal mines in
Utah, are owned 65% by Arch Western and 35% by a subsidiary of ITOCHU
Corporation of Japan. The agreement which governs the management and operations
of Canyon Fuel provides for a management board to manage its business and
affairs. Some major business decisions concerning Canyon Fuel require the vote
of 70% of the membership interests and therefore limit the Company's ability to
make these decisions. These decisions include admission of additional members;
approval of annual business plans; the making of significant capital
expenditures; sales of coal below specified prices; agreements between Canyon
Fuel and any member; the institution or settlement of litigation; a material
change in the nature of Canyon Fuel's business or a material acquisition; the
sale or other disposition, including by merger, of assets other than in the
ordinary course of business; incurrence of indebtedness; entering into leases;
and the selection and removal of officers. The Canyon Fuel agreement also
contains various restrictions on the transfer of membership interests in Canyon
Fuel.
21
The Company's Amended and Restated Certificate of Incorporation requires the
affirmative vote of the holders of at least two-thirds of outstanding common
stock voting thereon to approve a merger or consolidation and certain other
fundamental actions involving or affecting control of the Company. The Company's
Bylaws require the affirmative vote of at least two-thirds of the members of the
Board of Directors of the Company in order to declare dividends and to authorize
certain other actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report and is incorporated herein by reference.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is contained in the "Contingencies - Legal
Contingencies" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this report and is incorporated herein
by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
2.1 Purchase and Sale Agreement dated as of March 22, 1998 among Atlantic
Richfield Company, ARCO Uinta Coal Company, Arch Coal, Inc. and Arch
Western Acquisition Corporation (incorporated herein by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed June 15,
1998)
2.2 Contribution Agreement among Arch Coal, Inc., Arch Western Acquisition
Corporation, Atlantic Richfield Company, Delta Housing, Inc., and Arch
Western Resources LLC, dated as of March 22, 1998 (incorporated herein by
reference to Exhibit 2.2 of the Company's Current Report on Form 8-K filed
June 15, 1998)
3.1 Amended and Restated Certificate of Incorporation of Arch Coal, Inc.
(incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended [June 30, 1999])
3.2 Amended and Restated Bylaws of Arch Coal, Inc. (incorporated herein by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 2000)
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd. Ashland Inc. and Arch Coal, Inc. (formerly Arch Mineral
Corporation) (incorporated herein by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-4 (Registration No. 333-28149)
filed on May 30, 1997)
4.2 Assignment of Rights, Obligations and Liabilities under the Stockholders
Agreement between Carboex International, Limited and Carboex, S.A.
effective as of October 15, 1998 (incorporated herein by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1998)
4.3 Registration Rights Agreement, dated as of April 4, 1997, among Arch Coal,
Inc. (formerly Arch Mineral Corporation), Ashland Inc., Carboex
International, Ltd. and the entities listed on Schedules I and II thereto
(incorporated herein by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-4 (Registration No. 333-28149) filed on
May 30, 1997, except for amended Schedule I thereto, incorporated herein by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1998)
4.4 Assignment of Registration Rights between Carboex International, Limited
and Carboex, S.A. effective as of October 15, 1998 (incorporated herein by
reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1998)
4.5 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997,
among Carboex International, Ltd., Ashland Inc., Ashland Coal, Inc. and
Arch Coal, Inc. (formerly Arch Mineral Corporation) (incorporated herein by
reference to Exhibit 4.3 of the Company's Registration Statement on Form
S-4 (Registration No. 333-28149) filed on May 30, 1997)
4.6 Assignment of Right to Maintain a Non-Voting Observer at Meetings of the
Board of Directors of Arch Coal, Inc. between Carboex International,
Limited and Carboex, S.A. effective as of October 15, 1998 (incorporated
herein by referenced to Exhibit 4.6 of the Company's Annual Report on Form
10-K for the Year Ended December 31, 1998)
23
4.7 $600,000,000 Revolving Credit Facility, $300,000,000 Term Loan Credit
Agreement by and among Arch Coal, Inc., the Lenders party thereto, PNC
Bank, National Association, as Administrative Agent, Morgan Guaranty Trust
Company of New York, as Syndication Agent, and First Union National Bank,
as Documentation Agent, dated as of June 1, 1998 (incorporated herein by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed
June 15, 1998)
4.8 Amendment 1 to Credit Agreement by and among Arch Coal, Inc., the Lenders
party thereto, PNC Bank, National Association, as Administrative Agent,
Morgan Guaranty Trust Company of New York, as Syndication Agent, and First
Union National Bank, as Documentation Agent, dated as of January 21, 2000
(incorporated herein by reference to Exhibit 4.9 of the Company's Annual
Report on Form 10-K for the Year Ended December 31, 2000)
4.9 $675,000,000 Term Loan Credit Agreement by and among Arch Western
Resources, LLC, the Banks party thereto, PNC Bank, National Association, as
Administrative Agent, Morgan Guaranty Trust Company of New York, as
Syndication Agent, and NationsBank N.A., as Documentation Agent dated as of
June 1, 1998 (incorporated herein by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K filed June 15, 1998)
4.10 Form of Rights Agreement, dated March 3, 2000, between Arch Coal, Inc. and
First Chicago Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 1 to a Current Report on Form 8-A filed on
March 9, 2000)
18 Preferability Letter of Ernst & Young LLP dated May 11, 2000 (incorporated
herein by reference to Exhibit 18 of the Company's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 2000)
(b) Reports on Form 8-K:
A Report on Form 8-K dated July 24, 2001 announcing the Company's
second quarter 2001 earnings was filed by the Company in the quarter
ended September 30, 2001.
A Report on Form 8-K dated September 6, 2001 incorporating the text of
slides shown at a management presentation to members of the business
and investment community was filed by the Company in the quarter ended
September 30, 2001.
SIGNATURE
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, 2001 /s/ John W. Lorson
--------------------------
John W. Lorson
Controller
(Chief Accounting Officer)
24
Arch Coal, Inc.
Form 10-Q for Quarter Ended September 30, 2001
INDEX TO EXHIBITS
None.
25