SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- - - - - - - - - - - - -
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 1, 1998
Arch Coal, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-13105 43-0921172
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification No.)
incorporation)
CityPlace One, Suite 300, Creve Coeur, Missouri 63141
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(314) 994-2700
1
Item 7 of the Registrant's Current Report on Form 8-K dated June 1, 1998 is
hereby amended as set forth below. The exhibits referenced therein are not
amended hereby.
As previously reported on a Current Report on Form 8-K dated June 1, 1998, Arch
Coal, Inc. (the "Company" or "Arch Coal") acquired Atlantic Richfield Company's
("ARCO's") Colorado and Utah coal operations and simultaneously combined the
acquired ARCO operations and the Company's Wyoming operations with ARCO's
Wyoming operations in a new joint venture to be known as Arch Western Resources,
LLC ("Arch Western").
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
-----------------------------------------
(a) The following consolidated financial statements of ARCO Coal Company
are filed as part of this amendment to Current Report on Form 8-K:
ARCO Coal and subsidiaries
--------------------------
Report of Coopers & Lybrand LLP, Independent Auditors;
Consolidated Balance Sheet at December 31, 1997 and 1996;
Consolidated Statement of Income for the years ended December 31,
1997, 1996 and 1995;
Consolidated Statement of Cash Flows for the years ended December
31, 1997, 1996 and 1995;
Notes to Consolidated Financial Statements;
Consolidated Balance Sheet at March 31, 1998 (unaudited) and
December 31, 1997;
Consolidated Statement of Income for the three month periods ended
March 31, 1998 and 1997 (unaudited);
Consolidated Statement of Cash Flows for the three month periods
ended March 31, 1998 and 1997 (unaudited); and Notes to Consolidated
Financial Statements.
2
ARCO COAL AND SUBSIDIARIES
-------
FINANCIAL STATEMENTS
as December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997
3
Report of Independent Accountants
To the Stockholder of ARCO Coal:
We have audited the accompanying consolidated balance sheet of ARCO Coal and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ARCO Coal and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
April 7, 1998
4
ARCO COAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
DECEMBER 31,
1997 1996
ASSETS
Current assets:
Accounts receivable $ 37,769 $ 32,234
Mine supply inventory 28,303 25,354
Coal inventory 3,812 1,827
Prepaid expense and other current assets 3,987 1,583
--------- ---------
Total current assets 73,871 60,998
--------- ---------
Property, plant and equipment:
Plant and equipment 230,169 201,495
Land and mineral rights 80,217 79,769
Mine development 40,586 40,586
--------- ---------
Total 350,972 321,850
Less accumulated depreciation, depletion
and amortization (86,121) (89,681)
--------- ---------
Net property, plant and equipment 264,851 232,169
Investments 539,972 574,320
Other long-term assets 7,161 6,475
--------- ---------
Total assets $885,855 $873,962
========= =========
LIABILITIES AND EQUITY
Current liabilties:
Accounts payable $ 21,944 $ 10,203
Taxes payable other than income 25,351 27,847
taxes
Other accrued liabilities 22,816 17,243
--------- ---------
Total current liabilities 70,111 55,293
Deferred income taxes 92,030 89,383
Other deferred liabilities and 70,225 70,958
credits
--------- ---------
Total liabilities 232,366 215,634
ARCO equity investment 653,489 658,328
--------- ---------
Total liabilities and equity $885,855 $873,962
========= =========
The accompanying notes are an integral part of these financial statements.
5
ARCO COAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
1997 1996 1995
REVENUES
Coal sales $ 343,824 $ 391,290 $ 384,362
Income from equity investments 7,077 - -
Other revenues 37,361 4,219 3,247
---------- ---------- ----------
Total revenues 388,262 395,509 387,609
---------- ---------- ----------
COSTS AND EXPENSES
Cost of coal sales 254,473 227,664 212,107
Selling, general and administrative expenses 19,943 22,699 21,882
Depreciation, depletion and amortization 15,777 34,785 34,052
Taxes other than income taxes 55,139 63,360 63,309
---------- ---------- ----------
Total costs and expenses 345,332 348,508 331,350
---------- ---------- ----------
Income before income tax provision 42,930 47,001 56,259
Income tax provision 11,230 9,193 12,728
---------- ---------- ----------
Net income $ 31,700 $ 37,808 $ 43,531
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
6
ARCO COAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,700 $ 37,808 $ 43,531
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 15,777 34,785 34,052
Income from equity investments (7,077) - -
Elimination of intercompany profit (6,000) - -
Dividends from equity investments 13,824 - -
Gain on asset sales (4,024) (838) (493)
Cash payments less (greater) than
noncash provisions (733) 2,886 3,644
Deferred income taxes 2,647 (1,693) 1,543
Changes in working capital accounts (a) 1,945 5,205 3,058
Other 152 (613) (912)
--------- --------- ---------
Net cash provided by operating activities 48,211 77,540 84,423
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and (51,850) (21,445) (23,225)
equipment
Proceeds from sales of property, plant
and equipment 5,891 877 526
Investments 33,601 (412,642) (3,700)
Other 686 2,217 1,210
--------- --------- ---------
Net cash used by investing activities (11,672) (430,993) (25,189)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net settlement with ARCO 36,539 (353,453) 59,234
--------- --------- ---------
Net cash provided (used) by financing activities 36,539 (353,453) 59,234
--------- --------- ---------
Net change in cash - - -
Cash at beginning of year - - -
--------- --------- ---------
Cash at end of year $ - $ - $ -
========= ========= =========
(a) Changes in working capital - increase (decrease) to cash:
Accounts receivable ($5,535) $10,343 ($8,804)
Inventories (4,934) (678) 2,414
Accounts payable 11,741 (9,698) 4,367
Other working capital 673 5,238 5,081
--------- --------- ---------
$ 1,945 $ 5,205 $ 3,058
========= ========= =========
The accompanying notes are an integral part of these financial statements.
7
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
U.S. operations and related subsidiaries of Atlantic Richfield Company's
("ARCO") coal division. This division operates businesses engaged in the mining
of coal in Wyoming, Utah and Colorado. Coal is marketed throughout the United
States and into select export markets.
The consolidated entity as described above is referred to as ARCO
Coal and Subsidiaries, ("ARCO Coal" or the "Company") in the accompanying
consolidated financial statements and includes the assets and liabilities of the
U.S. operations of ARCO's coal division, as well as the assets and liabilities
of the following subsidiaries: ARCO Coal Sales Company, ARCO Coal Terminal, ARCO
Uinta Coal Company, Mountain Coal Company, Delta Housing, Inc. and Thunder Basin
Coal Company L.L.C., along with revenues and expenses attributable to those U.S.
operations and the subsidiaries recorded at ARCO's historical cost. The
consolidated entity also includes its equity investments in Canyon Fuel Company
L.L.C. ("Canyon Fuel") and CH-Twenty, Inc. ("CH-Twenty").
In addition, the consolidated financial statements include the
allocation from ARCO of direct and indirect corporate overhead costs
attributable to ARCO Coal. The methods by which such amounts are attributed or
allocated are deemed reasonable by management (See Note 4). All significant
transactions between these entities have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mine Supply Inventory
Mine supply inventory is valued using the average cost method and
is stated at the lower of cost or net realizable value.
Coal Inventory
Coal inventory is valued using the first-in-first-out ("FIFO")
cost method and is stated at the lower of cost or market. Coal inventory costs
include labor, equipment costs and operating overhead.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost.
Maintenance and repair costs are expensed as incurred. Mine development costs
are capitalized and amortized on the units-of production method. Depletion of
mineral properties is computed by the units-of-production method based on
estimated recoverable tonnage.
The Company pays royalties to certain landowners and holders of
mineral interests for the rights to perform mining activities. Funds advanced to
landowners are capitalized and expensed as a component of cost of coal sales
based on the terms of the underlying lease agreements as the coal is mined.
Depreciation and amortization of other property, plant and
equipment is computed by either the straight-line method (3 to 20 years) over
the expected life of the asset or the units-of-production method, depending upon
the type of asset. Fully depreciated assets are retained in property and
accumulated depreciation accounts until they are removed from service. At
December 31, 1997, and 1996, approximately $44 million of fully depreciated
plant and equipment remains in service and is reflected on the balance sheet.
Upon disposal of assets depreciated on an individual basis, residual cost less
salvage value is included in current income.
8
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The measurement and
recording of an impairment loss is based on the fair value of the asset, which
is computed using estimated future discounted cash flows.
Estimated future net cash flows from each mine are calculated
using estimates of proven and probable coal reserves, estimated future sales
prices (considering historical and current prices, price trends and related
factors), production costs, capital and reclamation costs.
The Company's estimates of future cash flows are subject to risks
and uncertainties. Therefore, it is possible that changes could occur which may
affect the recoverability of the Company's investments in plant and equipment,
land and mineral rights and other assets.
Income Taxes
The Company's results of operations are included in the
consolidated U.S. federal income tax return of ARCO. Federal and state income
tax expense is computed on a stand-alone return basis.
The Company has adopted SFAS No. 109, "Accounting for Income
Taxes," for all periods presented in these financial statements. Under the asset
and liability method prescribed by SFAS No. 109, deferred taxes are established
for the temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates expected to
be in effect when such amounts are realized or settled.
Reclamation and Mine Closing Costs
Accruals for the estimated cost of future mine closings of
currently active mines are established on the basis of a per-ton rate as part of
the production cost while coal is being mined. Ongoing reclamation costs of
surface mines are expensed as incurred.
Revenue Recognition
Coal sales are recognized at contract prices at the time of title
transfer. Revenue other than from coal sales is included in other revenues and
is recognized as services are performed or otherwise earned. Included in other
revenues in 1997 is approximately $22 million from a litigation settlement.
Earnings Per Share
Earnings per share has been omitted from the consolidated
statement of income because the Company was not a separate entity with its own
capital structure.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
9
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. INVESTMENTS
Canyon Fuel
Effective December 20, 1996, the Company acquired a 65% interest
in Canyon Fuel, which owns three coal mines in Utah, for approximately $411
million in cash. The Company's ownership interest does not allow it complete
control of Canyon Fuel because of certain provisions in the joint venture
agreement establishing Canyon Fuel. Therefore, the Company uses the equity
method of accounting for its investment in Canyon Fuel.
The purchase price was allocated to assets and liabilities based
upon their fair market values with the remaining purchase price of $257 million
allocated to mineral rights. The purchase price allocated to the mineral rights
will be depleted under the units-of-production method over the lives of the coal
reserves that underlie those mineral rights.
Canyon Fuel's results of operations are reflected in the equity
investment account from the acquisition date. There is no material difference
between the amount of underlying net assets and the amount at which the equity
investment is carried at December 31, 1997, and 1996.
The following table presents the valuation of 100% of Canyon
Fuel's assets and liabilities on the effective date of the purchase transaction:
(Thousands of Dollars)
ASSETS ACQUIRED:
Current assets $ 81,545
Land 2,118
Mineral rights 256,993
Plant and equipment 138,268
Other noncurrent assets 190,646
-----------
Total 669,570
-----------
LIABILITIES ASSUMED:
Current liabilities 18,851
Federal lease payment 5,432
Accrued postretirement benefits 5,580
Accrued pneumoconiosis 5,892
Accrued mine closing costs 2,057
-----------
Total 37,812
Total cash paid $ 631,758
-----------
ARCO Coal's share of cash paid $ 410,644
===========
10
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents summarized financial information for
Canyon Fuel:
PERIOD FROM
INCEPTION
(DECEMBER 20,
1996, TO
DECEMBER 31,
1997)
---------------
(Thousands of
Dollars)
Revenues $ 254,956
Total costs and expenses 233,688
--------------
Net income $ 21,268
==============
ARCO Coal's equity in net income of Canyon Fuel $ 13,824
==============
Cash distributions received from Canyon Fuel $ 48,750
==============
AT DECEMBER 31,
1997
--------------
Current assets $ 70,213
Noncurrent assets 555,201
Current liabilities 30,058
Noncurrent liabilities 17,330
Stockholders' equity 578,026
Pro forma net income, prepared to give effect as if the
acquisition of the interest in Canyon Fuel had occurred on January 1, 1996, is
$37,710 (unaudited) for the year ended December 31, 1996. The pro forma
adjustments included in this amount are based on assumptions and estimates and
are not necessarily indicative of the results of operations of the Company as
they might have been or as they may be in the future.
CH-Twenty, Inc.
Effective December 27, 1996, in exchange for 100 shares of common
stock of CH-Twenty, a subsidiary of ARCO, the Company conveyed to CH-Twenty
certain assets associated with the operation of the Black Thunder Coal Mine. The
value of the CH-Twenty common stock recorded on the Company's books was the net
book value of the assets conveyed to CH-Twenty, of $164 million. The 100 shares
represent a 28.5% ownership interest in CH-Twenty and, accordingly, ARCO Coal is
accounting for its investment in CH-Twenty using the equity method. The
Company's share in the equity of CH-Twenty at December 31, 1997, was $244
million. The difference between the book value of the investment and the
Company's share in the equity is being amortized over 40 years.
The Company has entered into a ten-year lease agreement with
Little Thunder Leasing Company, a related party, for the use of the assets
conveyed to CH-Twenty. ARCO's equity loss in CH-Twenty has been adjusted to
reflect primarily the elimination of the intercompany profit related to the
lease.
11
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents summarized financial information for
CH-Twenty, Inc.:
YEAR ENDED
DECEMBER 31, 1997
------------------
(Thousands of
Dollars)
Revenues $ 252,543
Loss before income tax benefit (4,474)
Net loss (2,617)
ARCO Coal's equity in net loss of CH-Twenty, Inc. (747)
ARCO Coal's adjusted net loss in CH-Twenty, Inc. (6,747)
AT DECEMBER 31,
----------------------------
1997 1996
------------- -------------
Current assets........................... $ 1,095,647 $ 1,030,196
Noncurrent assets........................ 365,964 359,054
Current liabilities...................... 120,615 102,385
Long-term debt -- related party.......... 26,329 26,329
Noncurrent liabilities................... 310,418 243,306
Redeemable preferred stock............... 150,000 150,000
Stockholders' equity..................... 854,249 857,399
4. CHANGES IN ARCO EQUITY INVESTMENT, ALLOCATIONS AND RELATED PARTY
TRANSACTIONS
The ARCO equity investment reflects the historical activity
between ARCO and the Company. Transactions with ARCO are settled immediately
through the ARCO equity investment and there are no amounts due to or from ARCO
at the end of any period. An analysis of the changes in the ARCO equity
investment is as follows:
1997 1996 1995
----------- ----------- -----------
(Thousands of Dollars)
Beginning ARCO equity investment $ 658,328 $ 267,067 $ 282,770
----------- ----------- -----------
Net income 31,700 37,808 43,531
----------- ----------- -----------
Settlements with ARCO:
Purchase of Canyon Fuel (a) - 410,644 -
Cash distribution from Canyon Fuel (48,750) - -
ARCO allocations (b) 8,987 9,076 8,300
Tax settlements (c) 8,583 10,886 11,185
Other cash transactions, net (d) (5,359) (77,153) (78,719)
----------- ----------- -----------
Total settlements with ARCO (36,539) 353,453 (59,234)
----------- ----------- -----------
Ending ARCO equity investment $ 653,489 $ 658,328 $ 267,067
=========== =========== ===========
(a) The Company acquired a 65% interest in Canyon Fuel in December 1996.
12
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) ARCO provides services, including insurance, aviation, legal, financial,
internal audit and other functions. Charges for these services and benefits have
been allocated based on usage or other methods that management believes to be
reasonable.
(c) Current federal and state income taxes have been settled with ARCO.
(d) ARCO uses a centralized cash transfer system (noninterest bearing) for its
domestic operating divisions, under which cash receipts of the Company are
submitted to ARCO and cash disbursements are funded by ARCO.
5. CURRENT LIABILITIES
Taxes payable other than income taxes were as follows at December
31:
1997 1996
----------- -----------
(Thousands of Dollars)
Production/severance $ 17,796 $ 19,535
Federal reclamation/pneumoconiosis 4,585 5,276
Property 2,548 2,639
Other 422 397
----------- -----------
Total $ 25,351 $ 27,847
=========== ===========
Other accrued liabilities were as follows at December 31:
1997 1996
----------- -----------
(Thousands of Dollars)
Wages and related benefits $ 7,590 $ 8,604
Reduction in work force (see note 11) 9,943 3,607
Royalties 2,688 2,912
Postretirement benefits 2,000 2,000
Other 595 120
---------- -----------
Total $ 22,816 $ 17,243
========== ===========
6. OTHER DEFERRED LIABILITIES AND CREDITS
Other deferred liabilities and credits were as follows at December
31:
1997 1996
---------- ----------
(Thousands of Dollars)
Pension and postretirement benefits $ 28,588 $ 30,344
Reclamation and mine closure reserve 30,641 30,379
Other 10,996 10,235
========== ==========
Total $ 70,225 $ 70,958
========== ==========
13
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. TAXES
The components of the income tax provision were the following for
the years ended December 31:
1997 1996 1995
------------ ------------ ------------
(Thousands of Dollars)
Federal:
Current (parent) $ 8,862 $ 10,886 $ 11,185
Deferred 458 (1,620) 1,216
------------ ----------- -----------
Total federal 9,320 9,266 12,401
State:
Current (parent) (279) - -
Deferred 2,189 (73) 327
------------ ------------ ------------
Total state 1,910 (73) 327
------------ ------------ ------------
Total income tax provision $ 11,230 $ 9,193 $ 12,728
============ ============ ============
The state tax provision is net of state tax credits of $1,369,000,
$980,000 and $1,064,000 in the years 1997, 1996 and 1995, respectively.
The major components of the net deferred tax liability were as
follows at December 31:
1997 1996
------------ ------------
(Thousands of Dollars)
Depreciation, depletion and amortization $ (61,506) $ (63,290)
Investments (61,327) (43,615)
------------ ------------
Total deferred tax liabilities (122,833) (106,905)
Postretirement benefits 10,710 10,395
Alternative minimum tax credit 12,112 -
Other 7,981 7,127
------------ ------------
Total deferred tax assets 30,803 17,522
------------ ------------
Net deferred income tax liability $ (92,030) $ (89,383)
============ ============
Reconciliation of income tax expense with tax at the federal
statutory rate is as follows for the years ended December 31:
1997 1996 1995
----------- ----------- -----------
(Thousands of Dollars)
Income before income tax provision $ 42,930 $ 47,001 $ 56,259
----------- ----------- -----------
Tax at 35% $ 15,025 $ 16,450 $ 19,691
Increase (reduction) in taxes resulting from:
Depletion (5,468) (7,735) (7,700)
State income taxes (net of federal effect) 1,241 (47) 213
Other 432 525 524
----------- ----------- -----------
Provision for income taxes $ 11,230 $ 9,193 $ 12,728
=========== =========== ===========
14
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Taxes other than income taxes comprised the following for the
years ended December 31:
1997 1996 1995
---------- ----------- -----------
(Thousands of Dollars)
Federal reclamation fees $ 14,752 $ 16,545 $ 14,799
Pneumoconiosis 13,516 15,437 15,066
Severance 13,131 15,390 17,002
Production/ad valorem 10,206 12,326 12,977
Property and other 3,534 3,662 3,465
---------- ----------- -----------
Total $ 55,139 $ 63,360 $ 63,309
========== =========== ===========
8. COMMITMENTS AND CONTINGENCIES
The Company has certain commitments, including those related to
the acquisition, construction and development of facilities all made in the
normal course of business. The Company is also the subject of or party to a
number of pending or threatened legal actions for which the legal responsibility
and financial impact cannot presently be ascertained. On the basis of
management's best assessment of the ultimate amount and timing of these events,
such expenses or judgments arising from any of these suits, or from any of the
proceedings described above, are not expected to have a material adverse effect
on the Company's consolidated financial statements.
All of the Company's operations are subject to reclamation and
closure requirements. The Company monitors these requirements and evaluates its
accruals for reclamation and closure regularly. The accrued liability is
included in other deferred liabilities and credits on the balance sheet. At
December 31, 1997, the Company had $15 million of surety bonds issued by an
insurance company and an additional $108 million of surety bonds guaranteed by
ARCO to collateralize reclamation commitments.
Other long-term assets consist of an approximate 5% investment in
Los Angeles Export Terminal, Inc. ("LAXT"). The Company's investment is recorded
at cost, which approximates its fair value of $7 million as of December 31,
1997. LAXT is currently experiencing issues with respect to its near term future
throughput volumes due to contemplated reductions in coal purchases by Japanese
utilities from western U.S. coal suppliers. Major reductions in LAXT's
throughput may result in negative cash flows, as well as the inability to obtain
the financing necessary to construct coke handling facilities which are required
in order to comply with LAXT's operating permit. If the throughput issues are
not satisfactorily resolved in a timely manner, there can be no assurance that
the Company's investment in LAXT will be recoverable. This recoverability issue
also applies to the Company's share of Canyon Fuel's nine percent interest in
LAXT.
9. RETIREMENT PLANS
Essentially all employees are covered by defined benefit pension
plans sponsored by ARCO, Thunder Basin Coal Company or Mountain Coal Company.
The benefits are based on years of service and the employee's compensation,
primarily during the last three years of service. The funding policy for each of
the pension plans is to make annual contributions as required by applicable
regulations. Qualified benefit plans are funded through contributions to trust
funds kept apart from Thunder Basin Coal Company, Mountain Coal Company, ARCO
Coal and ARCO funds; nonqualified benefit plans are not funded.
15
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1997, 1996 and 1995, ARCO charged allocated pension costs as
accrued, based on an actuarial valuation for its plans. The separation of plan
assets and accumulated benefit obligations was based primarily on actuarial
computations based upon specific identification of ARCO Coal employees and
retirees.
The following table sets forth the funded status of the Company's
allocated interest in the ARCO-sponsored retirement plans and the Thunder Basin
Coal Company and Mountain Coal Company plans which cover the Company's employees
and the amounts recognized in the Company's balance sheet at December 31:
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- --------------
(Thousands of Dollars)
1997
Actuarial present value of benefits:
Vested benefits $ (73,259) $ (6,606)
============== ==============
Accumulated benefits $ (73,259) $ (6,606)
Effect of future projected salary increases (10,247) (284)
-------------- --------------
Projected benefit obligation (PBO) (83,506) (6,890)
Plan assets at fair value, primarily stocks and bonds 94,989 -
-------------- --------------
PBO (greater) less than plan assets 11,483 (6,890)
Unrecognized net (gain) loss (3,441) 2,906
Prior service cost not yet recognized in net periodic pension cost 3,701 480
Remaining unrecognized (asset) obligation from transition (8,338) 143
-------------- --------------
Prepaid pension asset (liability) recognized in
ARCO Coal's balance sheet $ 3,405 $ (3,361)
============== ==============
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
-------------- --------------
(Thousands of Dollars)
1996
Actuarial present value of benefits:
Vested benefits $ (68,861) $ (6,098)
============== ==============
Accumulated benefits $ (68,861) $ (6,098)
Effect of future projected salary increases (12,523) (838)
-------------- --------------
Projected benefit obligation (PBO) 81,384 (6,936)
Plan assets at fair value, primarily stocks and bonds 85,218 -
-------------- --------------
PBO (greater) less than plan assets 3,834 (6,936)
Unrecognized net loss 2,099 3,137
Prior service cost not yet recognized in net periodic pension cost 3,897 528
Remaining unrecognized (asset) obligation from transition (9,341) 167
-------------- --------------
Prepaid pension asset (liability) recognized in
ARCO Coal's balance sheet $ 489 $ (3,104)
============== ==============
16
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of net periodic pension cost for ARCO Coal are as
follows for the years ended December 31:
1997 1996 1995
----------- ----------- ------------
(Thousands of Dollars)
Service cost-benefits earned during
the period $ 2,500 $ 2,525 $ 1,884
Interest cost on PBO 6,237 6,004 5,706
Actual return on plan assets (10,293) (9,928) (9,581)
Net amortization and deferral 1,011 2,246 3,049
----------- ----------- ------------
Net pension (income) cost $ (545) $ 847 $ 1,058
=========== =========== ============
The assumptions used in determining the pension costs and pension
liability shown above were as follows at December 31:
1997 1996 1995
---------- ---------- ----------
Discount rate 7.0% 7.25% 7.0%
Rate of salary progression 4.0% 5.0% 5.0%
Long-term rate of return on assets 10.5% 10.5% 10.5%
10. OTHER POSTRETIREMENT BENEFITS
ARCO Coal is a participant in certain ARCO postretirement benefit
plans. These plans provide postretirement benefits other than pensions to
substantially all employees who retire with the Company having rendered the
required years of service, along with their spouses and eligible dependents.
Health care benefits are provided primarily through comprehensive indemnity
plans or health maintenance organizations (HMO), as chosen by the employee.
Beginning January 1, 1997, ARCO began paying for the cost of the benchmark HMO
with employees responsible for the differential cost, if any, of their selected
option. Previously, ARCO paid approximately 80% of the cost of a comprehensive
indemnity plan. This change resulted in the unrecognized prior service benefit
reflected below. Life insurance benefits are based primarily on the employee's
final compensation and are also partially paid for by retiree contributions,
which vary based upon coverage chosen by the retiree. ARCO has the right to
modify the plans at any time. ARCO's current policy is to fund the cost of
postretirement health care and life insurance plans on a pay-as-you-go basis.
The actuarial calculations of the Company's expense for the years
ended December 31, 1997, 1996 and 1995, were based upon specific identification
of ARCO Coal employees and retirees.
17
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the Company's allocated other
postretirement benefit liability as of December 31:
LIFE
HEALTH CARE INSURANCE TOTAL
-------------- ----------- -----------
(Thousands of Dollars)
1997
Accumulated postretirement benefit obligation (APBO):
Retirees $ (16,341) $ (5,057) $ (21,398)
Employees fully eligible (1,868) (383) (2,251)
Other active participants (6,948) (1,398) (8,346)
----------- ----------- -----------
Total (25,157) (6,838) (31,995)
Unrecognized prior service benefit (2,003) - (2,003)
Unrecognized net (gain) loss 3,921 (555) 3,366
----------- ----------- -----------
Accrued postretirement benefit cost recognized
in ARCO Coal's balance sheet $ (23,239) $ (7,393) $ (30,632)
=========== =========== ===========
LIFE
HEALTH CARE INSURANCE TOTAL
----------- ----------- -----------
(Thousands of Dollars)
1996
APBO:
Retirees $ (16,957) $ (4,921) $ (21,878)
Employees fully eligible (2,013) (418) (2,431)
Other active participants (6,272) (1,373) (7,645)
----------- ----------- -----------
Total (25,242) (6,712) (31,954)
Unrecognized prior service benefit (2,140) - (2,140)
Unrecognized net (gain) loss 4,816 (451) 4,365
----------- ----------- -----------
Accrued postretirement benefit cost recognized
in ARCO Coal's balance sheet $ (22,566) $ (7,163) $ (29,729)
=========== =========== ===========
Net annual other postretirement benefit costs allocated to ARCO
Coal for the years ended December 31, 1997, 1996 and 1995 included the following
components:
LIFE
HEALTH CARE INSURANCE TOTAL
----------- ----------- -----------
(Thousands of Dollars)
1997
Service cost-benefits earned during the period $ 608 $ 134 $ 742
Interest cost on APBO 1,662 463 2,125
Net amortization (82) - (82)
----------- ----------- -----------
Net postretirement benefit cost $ 2,188 $ 597 $ 2,785
=========== =========== ===========
18
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LIFE
HEALTH CARE INSURANCE TOTAL
------------ ----------- -----------
(Thousands of Dollars)
1996
Service cost-benefits earned during the period $ 614 $ 127 $ 741
Interest cost on APBO 1,709 455 2,164
Net amortization 55 - 55
------------ ----------- -----------
Net postretirement benefit cost $ 2,378 $ 582 $ 2,960
============ =========== ===========
1995
Service cost-benefits earned during the period $ 482 $ 85 $ 567
Interest cost on APBO 1,836 443 2,279
Net amortization - (41) (41)
------------ ----------- -----------
Net postretirement benefit cost $ 2,318 $ 487 $ 2,805
============ =========== ===========
The significant assumptions used in determining postretirement
benefit cost and the APBO were as follows:
1997 1996 1995
----------- ----------- ------------
Discount rate 7.0% 7.25% 7.0%
Rate of salary progression 4.0% 5.0% 5.0%
The weighted average annual assumed rate of increase in the per
capita cost of covered benefits (e.g., health care trend rate) for the health
plans is 9% for 1995 and 1996, 7% for 1997 to 2001, and 5% thereafter. The
assumed trend rate for 1995 and 1996 was 10%; 8% for 1997 to 2001, and 6%
thereafter. The effect of a one-percentage-point increase in the assumed trend
rate would increase the APBO as of December 31, 1997, by approximately $3.4
million, and the aggregate of the service and interest cost components of net
annual postretirement benefit cost by approximately $350,000.
11. RESTRUCTURING PROGRAM
During 1996, the Company initiated a restructuring program under
which approximately 26 administrative positions were to be eliminated. The
Company incurred a charge of $3.6 million before tax, consisting of personnel
costs associated with the terminations. At December 31, 1997, 22 positions had
been eliminated and $2.3 million of the accrued benefits had been paid. During
1997, an additional $1.5 million was charged to expense to adjust the reserve
established in 1996. During 1997, the Company initiated another restructuring
program involving the elimination of an additional 54 administrative positions
and incurred a charge of $7.2 million before tax, primarily consisting of
severance and other ancillary costs associated with the terminations. At
December 31, 1997, none of the accrued benefits for the 1997 restructuring
program has been paid.
19
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SIGNIFICANT CUSTOMERS
Sales include transactions involving both produced coal and
purchased coal, and include direct sales under various long and short-term
contractual arrangements primarily to public utility companies. One customer
accounted for 24.7%, 22.1% and 21.7% of coal sales in 1997, 1996 and 1995,
respectively. This was the only customer who accounted for greater than 10% of
coal sales in each year. This same customer accounted for 14.5% and 18.1% of
accounts receivable at December 31, 1997, and 1996. The Company is in litigation
with this customer. Another customer accounted for 11.0% and 12.6% of accounts
receivable at December 31, 1997, and 1996.
13. FINANCIAL INSTRUMENTS
The Company does not hold or issue financial instruments for
trading purposes. The fair value of the Company's investments in Canyon Fuel and
CH-Twenty at December 31, 1997, approximate their carrying value of $376 million
and $164 million, respectively.
14. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the years
ended December 31:
1997 1996 1995
---------- ---------- ---------
(Thousands of Dollars)
Gross noncash provisions charged to income $ 2,225 $ 3,580 $ 3,985
Reversal of a prior period accrual (2,728) - -
Cash payments of previously accrued items (230) (694) (341)
---------- ---------- ----------
Cash payments (greater ) less than noncash provisions $ (733) $ 2,886 $ 3,644
========== ========== ==========
Total income taxes paid to ARCO in cash $ 8,583 $ 10,886 $ 11,185
========== ========== ==========
15. LEASE COMMITMENTS
The Company has operating lease commitments expiring at various
dates, primarily for certain assets associated with the Black Thunder coal mine,
office space and other equipment. The Black Thunder coal mine assets are leased
from Little Thunder Leasing Company, a related party. Future minimum rental
obligations under these leases at December 31, 1997 are summarized as follows in
thousands:
1998...................... $ 36,419
1999 ..................... 32,414
2000 ..................... 27,331
2001 ..................... 24,948
2002 ..................... 20,211
Thereafter................ 60,218
------------
Total $ 201,541
============
Rental expense relating to operating leases amounted to $38.3
million, $1.4 million and $1.5 million in 1997, 1996 and 1995, respectively.
20
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENT
In March 1998, ARCO signed an agreement to dispose of its U.S.
coal assets to Arch Coal. Operations to be disposed of include the Black Thunder
and Coal Creek mines in Wyoming, the West Elk mine in Colorado, and, through
Canyon Fuel Company L.L.C. with ITOCHU Corp. of Japan, three mines in Utah. In
the agreement, ARCO Uinta, a subsidiary of ARCO, will sell the Colorado and Utah
coal operations to Arch Coal. Simultaneously, Arch will combined these
operations with ARCO's Wyoming coal operations and its own Wyoming coal
operations in a new joint venture. The new company will be 99% owned by Arch and
1% owned by ARCO.
21
ARCO COAL AND SUBSIDIARIES
-------
INTERIM FINANCIAL STATEMENTS
as March 31, 1998 and December 31, 1997
and for the three months ended March 31, 1998 and 1997
22
ARCO COAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Current assets:
Accounts receivable ........................... $ 45,613 $ 37,769
Mine supply inventory ......................... 28,387 28,303
Coal inventory ................................ 1,198 3,812
Prepaid expense and other current
assets ........................................ 3,932 3,987
--------- ---------
Total current assets ........................ 79,130 73,871
--------- ---------
Property, plant and equipment:
Plant and equipment ........................... 236,890 230,169
Land and mineral rights ....................... 80,217 80,217
Mine development .............................. 40,586 40,586
--------- ---------
Total ....................................... 357,693 350,972
Less accumulated depreciation,
depletion and
amortization .............................. (86,386 (86,121)
--------- ---------
Net property, plant and equipment ................ 271,307 264,851
--------- ---------
Investments ...................................... 555,210 539,972
Other long-term assets ........................... -- 7,161
--------- ---------
Total assets................................. $ 905,647 $ 885,855
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable .............................. $ 18,397 $ 21,944
Taxes payable other than income
taxes ........................................ 28,563 25,351
Other accrued liabilities ..................... 22,054 22,816
--------- ---------
Total current liabilities ................... 69,014 70,111
Deferred income taxes ............................ 93,343 92,030
23
Other deferred liabilities
and credits ..................................... 70,941 70,225
--------- ---------
Total liabilities ........................... 233,298 232,366
ARCO equity investment ........................... 672,349 653,489
========= =========
Total liabilities and
equity ...................................... $ 905,647 $ 885,855
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
24
ARCO COAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Thousands of Dollars)
Three Months Ended
March 31,
--------------------------
1998 1997
--------- ---------
REVENUES:
Coal sales ................................ $ 93,311 $ 102,213
Income (loss) from equity
investments .............................. 1,642 (3,065)
Other revenues ............................ 2,841 3,416
--------- ---------
Total revenues ......................... 97,794 102,564
--------- ---------
COSTS AND EXPENSES:
Cost of coal sales ........................ 60,509 59,035
Selling, general and
administrative expenses ................. 4,174 5,920
Depreciation, depletion and
amortization ............................ 3,810 5,038
Taxes other than income taxes ............. 15,028 15,214
--------- ---------
Total costs and expenses ............... 83,521 85,207
--------- ---------
Income before income tax
provision ................................... 14,273 17,357
Income tax provision .......................... 2,946 6,422
--------- ---------
Net income .................................... $ 11,327 $ 10,935
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
25
ARCO COAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands of Dollars)
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income ...................................... $ 11,327 $ 10,935
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and ..................... 3,810 5,038
amortization
(Income) loss from equity investments ......... (1,642) 3,065
Elimination of intercompany profit .............. (4,712) (1,932)
Dividend from equity investment ................. -- 3,957
Cash payments less (greater) than ............... 716 (1,748)
noncash provisions
Deferred income taxes ........................... 1,313 3,394
Changes in working capital
accounts (a) .................................... (6,356) (16,774)
Other ........................................... 750 (149)
-------- --------
Net cash provided by operating
activities .................................. 5,206 5,786
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ...... (3,834) (11,677)
Investments ..................................... (8,905) 15,543
-------- --------
Net cash provided (used) by investing
activities .................................. (12,739) 3,866
-------- --------
Cash flows from financing activities:
Net settlement with ARCO ........................ 7,533 (9,652)
-------- --------
Net cash provided (used) by financing
activities .................................. 7,533 (9,652)
-------- --------
26
Net change in cash ................................. -- --
Cash at beginning of period ........................ -- --
-------- --------
Cash at end of period .............................. $ -- $ --
======== ========
(a) Changes in working capital -
increase (decrease) to cash:
Accounts receivable ............................. $ (7,844) $(24,366)
Inventories ..................................... 2,530 (1,341)
Accounts payable ................................ (3,547) 10,129
Other working capital ........................... 2,505 (1,196)
-------- --------
$ (6,356) $(16,774)
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
27
ARCO COAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summarized Financial Statements:
The accompanying consolidated balance sheet as of March 31, 1998, and the
consolidated statements of income and cash flows for the three months ended
March 31, 1998 and 1997, are unaudited; however, in the opinion of management
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the results of such periods have been
made. The results of operations for the three months ended March 31, 1998 and
1997 are not necessarily indicative of the results of operations to be
expected for the full year.
2. Basis of Presentation:
The accompanying consolidated financial statements include the U.S.
operations and related subsidiaries of Atlantic Richfield Company's ("ARCO")
coal division. This division operates businesses engaged in the mining of
coal in Wyoming, Utah and Colorado. Coal is marketed throughout the United
States and into select export markets.
The consolidated entity as described above is referred to as ARCO Coal and
Subsidiaries, ("ARCO Coal" or the "Company") in the accompanying consolidated
financial statements and includes the assets and liabilities of the U.S.
operations of ARCO's coal division, as well as the assets and liabilities of
the following subsidiaries: ARCO Coal Sales Company, ARCO Coal Terminal, ARCO
Uinta Coal Company, Mountain Coal Company, Delta Housing, Inc. and Thunder
Basin Coal Company L.L.C., along with revenues and expenses attributable to
those U.S. operations and the subsidiaries recorded at ARCO's historical
cost. The consolidated entity also includes its equity investments in Canyon
Fuel Company L.L.C. ("Canyon Fuel") and CH-Twenty, Inc. ("CH-Twenty").
In addition, the consolidated financial statements include the allocation
from ARCO of direct and indirect corporate overhead costs attributable to
ARCO Coal. The
28
methods by which such amounts are attributed or allocated are deemed
reasonable by management (See Note 5). All significant transactions between
these entities have been eliminated.
Earnings Per Share:
Earnings per share has been omitted from the consolidated statements of
income because the Company was not a separate entity with its own capital
structure.
3. Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. Investments:
Canyon Fuel:
The following table presents summarized financial information for Canyon
Fuel:
Three Months Ended
March 31,
---------------------
1998 1997
-------- --------
(Thousands of
Dollars)
Revenues ........................................ $ 80,672 $ 73,463
Total costs and expenses ........................ 75,312 67,375
-------- --------
Net income ............................. $ 5,360 $ 6,088
======== ========
ARCO Coal's equity in net income of
Canyon Fuel ................................... $ 3,484 $ 3,957
======== ========
Cash (call paid to) distributions
received from Canyon Fuel .................... $ (8,905) $ 19,500
======== ========
29
CH-Twenty, Inc.:
The following table presents summarized financial information for
CH-Twenty, Inc.:
Three Months Ended
March 31,
-----------------------
1998 1997
-------- --------
(Thousands of
Dollars)
Revenues ......................................... $ 52,976 $ 55,940
Income (loss) before taxes ....................... 17,563 (27,638)
======== ========
Net income (loss) ................................ 10,868 (17,013)
======== ========
ARCO Coal's equity in net income (loss)
of CH-Twenty, Inc. ........................... $ 3,105 $ (4,861)
======== ========
ARCO Coal's adjusted net loss
in CH-Twenty, Inc. (a) ........................ $ (1,842) $ (7,022)
======== ========
(a) The Company has entered into a 10-year lease agreement with Little
Thunder Leasing Company, a related party, for the use of the assets
conveyed to CH-Twenty. ARCO's equity loss in CH-Twenty has been
adjusted to reflect primarily the elimination of the intercompany
profit related to the lease.
30
5. Changes in ARCO Equity Investment, Allocations and Related Party
Transactions:
The ARCO equity investment reflects the historical activity between ARCO and
the Company. Transactions with ARCO are settled immediately through the ARCO
equity investment and there are no amounts due to or from ARCO at the end of
any period. An analysis of the changes in the ARCO equity investment is as
follows:
March 31, 1998
-----------------------------------------------------------
(Thousands of Dollars)
Beginning ARCO equity .................... $ 653,489
investment
Net income ............................... 11,327
Settlements with ARCO:
Cash call from Canyon Fuel ............... 8,905
ARCO allocations (a) ..................... 1,079
Tax settlements (b) ...................... 1,633
Other cash transactions, net
(c) ...................................... (4,084)
Total settlements with ARCO .............. 7,533
---------
Ending ARCO equity investment ............ $ 672,349
=========
(a) ARCO provides services, including insurance, aviation, legal,
financial, internal audit and other functions. Charges for these
services and benefits have been allocated based on usage or other
methods that management believes to be reasonable.
(b) Current federal and state income taxes have been settled with ARCO.
(c) ARCO uses a centralized cash transfer system (noninterest bearing) for
its domestic operating divisions, under which cash receipts of the
Company are submitted to ARCO and cash disbursements are funded by
ARCO.
31
6. Taxes
The components of the income tax provision were the following for the three
months ended March 31, 1998 and 1997:
1998 1997
------ ------
(Thousands of
Dollars)
Federal:
Current (parent) ........................ $1,633 $3,028
Deferred ................................ 1,102 922
------ ------
Total federal ........................ 2,735 3,950
------ ------
State:
Current (parent) ........................ -- --
Deferred ................................ 211 2,472
------ ------
Total state .......................... 211 2,472
------ ------
Total income tax
provision ................................. $2,946 $6,422
====== ======
The state tax provision is net of state tax credits of $206,000 and $480,000
in the first quarter of 1998 and 1997, respectively.
Reconciliation of income tax expense with tax at the federal statutory rate
is as follows for the three months ended March 31, 1998 and 1997:
1998 1997
-------- --------
(Thousands of
Dollars)
Income before income tax provision .............. $ 14,273 $ 17,357
-------- --------
Tax at 35% ...................................... 4,995 6,075
Increase (reduction) in taxes
resulting from:
Depletion ................................... (2,298 (1,367)
32
State income taxes (net of
federal effect) ........................... 137 1,607
Other ....................................... 112 107
-------- --------
Provision for income taxes ...................... $ 2,946 $ 6,422
======== ========
7. Commitments and Contingencies:
The Company has certain commitments, including those related to the
acquisition, construction and development of facilities all made in the
normal course of business. The Company is also the subject of or party to a
number of pending or threatened legal actions for which the legal
responsibility and financial impact cannot presently be ascertained. On the
basis of management's best assessment of the ultimate amount and timing of
these events, such expenses or judgments arising from any of these suits, or
from any of the proceedings described above, are not expected to have a
material adverse effect on the Company's consolidated financial statements.
All of the Company's operations are subject to reclamation and closure
requirements. The Company monitors these requirements and evaluates its
accruals for reclamation and closure regularly. The accrued liability is
included in other deferred liabilities and credits on the balance sheet. At
March 31, 1998, the Company had $15 million of surety bonds issued by an
insurance company and an additional $108 million of surety bonds guaranteed
by ARCO to collateralize reclamation commitments.
An approximate 5% investment in Los Angeles Export Terminal, Inc. ("LAXT")
was reclassified from other long-term assets to property, plant and equipment
in the first quarter of 1998. The Company's investment is recorded at cost,
which approximates its fair value of $7 million as of March 31, 1998. LAXT is
currently analyzing the potential for decreases in its future throughput
volumes due to contemplated reductions in coal purchases by Japanese
utilities from western U.S. coal suppliers. Major reductions in LAXT's
throughput may result in negative cash flows, as well as the inability to
obtain the financing necessary to construct coke handling facilities which
are required in order to comply with LAXT's operating permit. If the
throughput issues are not satisfactorily resolved in a timely manner, there
can be no assurance that the Company's investment in LAXT will be
recoverable.
33
8. Restructuring Program:
During 1996, the Company initiated a restructuring program under which
approximately 26 administrative positions were to be eliminated. The Company
incurred a charge of $3.6 million before tax, consisting of personnel costs
associated with the terminations. At December 31, 1997, 22 positions had been
eliminated and $2.3 million of the accrued benefits had been paid. During
1997, an additional $1.5 million was charged to expense to adjust the reserve
established in 1996. During 1997, the Company initiated another restructuring
program involving the elimination of an additional 54 administrative
positions and incurred a charge of $7.2 million before tax, primarily
consisting of severance and other ancillary costs associated with the
terminations. At March 31, 1998, a total of $970,000 was paid out of the
adjusted December 31, 1996 restructuring reserve. No payments were made
related to the 1997 restructuring reserve. During the first quarter of 1998,
no personnel were terminated under the 1996 or 1997 restructuring programs.
9. Disposition of Assets:
In March 1998, ARCO entered into an agreement with Arch Coal, Inc. ("Arch
Coal") to dispose of its U.S. coal assets. Operations to be disposed of
include the Black Thunder and Coal Creek mines in Wyoming, the West Elk mine
in Colorado, and, through Canyon Fuel with ITOCHU Corp. of Japan, three mines
in Utah. Under the terms of the agreement, ARCO Uinta, a subsidiary of ARCO,
will sell the Colorado and Utah operations to Arch Coal. Simultaneously, Arch
Coal will combine these operations with ARCO's Wyoming coal operations and
its own Wyoming coal operations in a new joint venture. The new company will
be 99% owned by Arch Coal and 1% owned by ARCO.
34
Canyon Fuel Company, LLC
- ------------------------
Report of Coopers & Lybrand, LLP, Independent Auditors;
Balance Sheet at December 31, 1997;
Statement of Operations for the period from December 20, 1996 (inception)
through December 31, 1997;
Statement of Members' Equity for the period from December 20, 1996
(inception) through December 31, 1997;
Statements of Cash Flows for the period from December 20, 1996 (inception)
through December 31, 1997; and
Notes to Financial Statements.
35
CANYON FUEL COMPANY, L.L.C.
--------
FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION) THROUGH DECEMBER 31, 1997
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of the
Canyon Fuel Company, L.L.C.:
We have audited the accompanying balance sheet of Canyon Fuel Company, L.L.C. (a
Delaware Limited Liability Company) (the "Company") as of December 31, 1997, and
the related statements of operations, members' equity and cash flows for the
period from December 20, 1996 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Canyon Fuel Company, L.L.C. as
of December 31, 1997, and the results of its operations and its cash flows for
the period from December 20, 1996 (inception) through December 31, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
March 20, 1998, except as to the information presented in
Note 13, for which the date is April 7, 1998.
37
CANYON FUEL COMPANY, L.L.C.
BALANCE SHEET
AS OF DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS OF DOLLARS)
-------
ASSETS
Current assets:
Cash and cash equivalents.................. $ 5,443
Accounts receivable........................ 24,485
Coal inventory............................. 27,952
Mine supply inventory...................... 11,903
Prepaid expense and other current assets... 430
-----------
Total current assets............................ 70,213
Property, plant and equipment, net ............. 384,104
Sales contracts, net............................ 131,390
Prepaid royalties............................... 27,533
Other long-term assets.......................... 12,174
-----------
Total assets.................................... $ 625,414
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable........................... $ 15,409
Accrued liabilities........................ 13,236
Federal lease payments, current portion.... 1,413
-----------
Total current liabilities....................... 30,058
Federal lease payments, net of current portion.. 2,552
Other noncurrent liabilities.................... 14,778
-----------
Total liabilities............................... 47,388
Commitments and contingencies (Note 9)..........
Members' equity................................. 578,026
-----------
Total liabilities and members' equity........... $ 625,414
===========
The accompanying notes are an integral part of these financial statements.
38
CANYON FUEL COMPANY, L.L.C.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION) THROUGH DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS OF DOLLARS)
-------
Revenues:
Coal sales....................................... $ 251,818
Other revenues .................................. 3,138
-----------
Total revenues....................................... 254,956
Costs and expenses:
Cost of coal sales............................... 162,063
Selling, general and administrative expenses..... 3,959
Depreciation, depletion and amortization......... 52,183
Taxes other than income taxes.................... 10,678
Fees to members.................................. 4,805
-----------
Total costs and expenses............................. 233,688
-----------
Net income........................................... $ 21,268
===========
The accompanying notes are an integral part of these financial statements.
39
CANYON FUEL COMPANY, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION) THROUGH DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS OF DOLLARS)
-------
ARCO UINTA ITOCHU
COAL COMPANY INTERNATIONAL TOTAL
------------ ------------- -----------
Contributions $ 410,643 $ 221,115 $ 631,758
Distributions (48,750) (26,250) (75,000)
Net income for the period from December 20,
1996 (inception) through December 31, 1997 13,824 7,444 21,268
--------- --------- ---------
Members' equity, December 31, 1997 $ 375,717 $ 202,309 $ 578,026
========= ========= =========
The accompanying notes are an integral part of these financial statements.
40
CANYON FUEL COMPANY, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION) THROUGH DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS OF DOLLARS)
-------
Cash flows from operating activities:
Net income .................................................. $ 21,268
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ................. 52,183
Royalties ................................................ 2,954
Reclamation .............................................. 332
Black lung ............................................... 397
Employee benefits ........................................ 2,160
Gain on sales contract buyout ............................ (611)
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable ......................................... 9,263
Inventories ................................................. (13,482)
Prepaids and other assets ................................... (170)
Accounts payable ............................................ 1,588
Accrued liabilities ......................................... 4,310
Other deferred liabilities .................................. (1,640)
---------
Net cash provided by operating activities ....................... 78,552
---------
Cash flows from investing activities:
Acquisition of coal operations, net of cash
acquired ............................................... (610,334)
Additions to property, plant and equipment .................. (20,819)
Other ....................................................... (1,143)
---------
Net cash used in investing activities ........................... (632,296)
---------
Cash flows from financing activities:
Members' contributions ...................................... 631,758
Federal lease payments ...................................... (1,467)
Members' distributions ...................................... (75,000)
Change in bank overdrafts ................................... 3,896
---------
Net cash provided by financing activities ....................... 559,187
---------
Net change in cash and cash equivalents ......................... 5,443
Cash and cash equivalents, beginning of period .................. --
---------
Cash and cash equivalents, end of period ........................ $ 5,443
=========
Supplemental cash flow information:
Cash paid for interest ...................................... $ 184
=========
The accompanying notes are an integral part of these financial statements.
41
CANYON FUEL COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
-------
1. FORMATION OF THE COMPANY:
Effective December 20, 1996, Canyon Fuel Company, L.L.C. (the "Company")
was formed as a joint venture between ARCO Uinta Coal Company (65%
ownership) and ITOCHU Coal International, Inc. (35% ownership)
(collectively, the "Members") for the purpose of acquiring certain Utah
coal operations and an approximate 9% interest in Los Angeles Export
Terminal, Inc. ("LAXT") from Coastal Coal, Inc. and The Coastal Corporation
(collectively, "Coastal").
The Company mines and markets coal primarily to utility companies in the
United States. Net profits and/or losses are allocated equally to the
Members based on their ownership percentage. Distributions of the Company's
earnings are also allocated equally to the Members based on their ownership
percentage.
On December 20, 1996, the Company acquired the western operations of
Coastal for $631,758,000 in cash, plus assumed liabilities, for a total
purchase price of $669,570,000 (the "Acquisition"). These operations
primarily consist of three coal mines in central Utah and a corporate
office in Salt Lake City, Utah. The Acquisition was funded through cash
contributions by the Members in proportion to their ownership percentage.
The Acquisition has been accounted for using the purchase method of
accounting. The acquired assets and assumed liabilities have been recorded
by the Company at their fair values as of December 20, 1996 and are as
follows (thousands of dollars):
Assets acquired:
Cash ..................................................... $ 21,424
Accounts receivable ...................................... 33,748
Coal inventory ........................................... 14,680
Materials and supplies inventory ......................... 11,693
Prepaid royalties and expenses ........................... 30,747
Property, plant and equipment ............................ 140,386
Sales contracts .......................................... 150,068
Other long-term assets ................................... 9,831
--------
Total assets acquired ......................................... 412,577
--------
Liabilities assumed:
Accounts payable ......................................... 9,925
Accrued liabilities ...................................... 8,926
Federal lease payment .................................... 5,432
Black lung reserve ....................................... 5,892
Reclamation liability .................................... 2,057
Pension and post retirement benefits ..................... 5,580
--------
Total liabilities assumed ..................................... 37,812
--------
Net assets acquired ........................................... $374,765
========
1. FORMATION OF THE COMPANY, CONTINUED:
The excess of the purchase price paid over the fair value of the net assets
acquired has been allocated to coal reserves and access rights associated
with reserves located on properties which are adjacent to the properties
42
acquired in the amount of $179,210,000 and $77,783,000 respectively. In the
event the Company is not successful in acquiring the reserves located
adjacent to the properties acquired, the amount of the purchase price
allocated to such reserves will be written off in the period such
determination is made.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The statement of cash flows classifies changes in cash or cash
equivalents (short-term, highly liquid investments readily convertible
into cash with an original maturity of three months or less) according
to operating, investing, or financing activities. Financial instruments
which potentially subject the Company to concentrations of credit risk
consist principally of cash and temporary cash investments. At times,
cash balances held at financial institutions were in excess of Federal
Deposit Insurance Corporation insurance limits. The Company places its
temporary cash investments with high-credit quality financial
institutions. The Company believes no significant concentration of
credit risk exists with respect to these cash investments.
ACCOUNTS RECEIVABLE
The Company controls credit risk related to accounts receivable through
credit approvals, credit limits and monitoring procedures.
Concentrations of credit risk with respect to accounts receivable are
limited as a large number of geographically diverse customers comprise
the Company's customer base.
COAL INVENTORY
Coal inventory is valued using the first-in-first-out ("FIFO") cost
method and is stated at the lower of cost or market. Coal inventory
costs include labor, equipment costs and operating overhead.
MINE SUPPLY INVENTORY
Mine supply inventory is valued using the average cost method and is
stated at the lower of cost or net realizable value.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost.
Maintenance and repair costs are expensed as incurred. Mine development
costs are capitalized and amortized on the units-of-production method.
Depletion of mineral properties is computed on the units-of-production
method based on estimated recoverable tonnage.
Depreciation and amortization of other property, plant and equipment is
computed by either the straight-line method over the expected life of
the asset or on the units-of-production method, depending upon the type
of asset. Fully depreciated assets are retained in property and
depreciation accounts until they are removed from service. Upon disposal
of depreciated assets, residual cost less salvage value is included in
the determination of current income.
SALES CONTRACTS
As part of the Acquisition, the Company acquired sales contracts which
have selling prices in excess of the current spot prices for coal and
recorded such contracts at fair value. The sales contracts are amortized
as the remaining tons under these contracts are sold.
43
PREPAID ROYALTIES
The Company pays royalties to certain landowners and holders of mineral
interests for the rights to perform mining activities in advance of
production. Amounts paid to landowners are capitalized and expensed as a
component of cost of coal sales based on the terms of the underlying
lease agreements as the coal is sold.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates whether events and circumstances have
occurred that indicate that the remaining estimated useful life of
assets may warrant revision or that remaining asset values may not be
recoverable. When factors indicate that asset values should be evaluated
for possible impairment, the Company compares the expected future cash
flows to the carrying value of long-lived assets and identifiable
intangibles. If the anticipated undiscounted future cash flows are less
than the carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying amount of assets
and their estimated fair value.
Estimated future net cash flows from each mine are calculated using
estimates of proven and probable coal reserves, estimated future sales
prices (considering historical and current prices, price trends and
related factors), production costs, capital and reclamation costs.
IMPAIRMENT OF LONG-LIVED ASSETS, CONTINUED
The Company's estimates of future cash flows are subject to risks and
uncertainties. Therefore, it is possible that changes could occur which
may affect the recoverability of the Company's investments in plant and
equipment, land and mineral rights and other assets.
RECLAMATION AND MINE CLOSING COSTS
The Company charges current reclamation costs to expense as incurred.
Final reclamation costs, including dismantling and restoration, are
estimated based upon current federal and state regulatory requirements
and are accrued during operations. The final reclamation provision was
calculated using the units-of-production method on the basis of
estimated costs as of the balance sheet date. The effect of changes in
estimated costs and production is recognized on a prospective basis.
The Company is not aware of any events of noncompliance with
environmental laws and regulations. The exact nature of environmental
issues and costs, if any, which the Company may encounter in the future
cannot be predicted, primarily because of the changing character of
environmental requirements that may be enacted by governmental agencies.
REVENUE RECOGNITION
Coal sales are recognized at contract prices at the time of title
transfer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
INCOME TAXES
The financial statements do not include a provision for income taxes as
the Company is treated as a partnership for income tax purposes and does
not incur federal or state income taxes. Instead, its earnings and
losses are included in the Members' separate income tax returns.
44
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment as of December 31, 1997 were as follows
(thousands of dollars):
Land .............................................. $ 2,118
Buildings, machinery and equipment ................ 135,613
Construction in process ........................... 17,981
Mine development .................................. 5,493
Coal reserves ..................................... 256,993
---------
418,198
Less accumulated depreciation and depletion ....... (34,094)
---------
$ 384,104
=========
For the period from December 20, 1996 (inception) through December 31, 1997
depreciation and depletion expense was $25,237,000 and $8,857,000,
respectively.
4. SALES CONTRACTS:
Sales contracts as of December 31, 1997 were as follows (thousands of
dollars):
Sales contracts ....................................... $ 149,479
Less accumulated amortization ......................... (18,089)
---------
$ 131,390
=========
5. ACCOUNTS PAYABLE:
Accounts payable as of December 31, 1997 were as follows (thousands of
dollars):
Accounts payable, trade ............................... $ 11,513
Bank overdrafts ....................................... 3,896
---------
$ 15,409
=========
6. ACCRUED LIABILITIES:
Accrued liabilities as of December 31, 1997 were as follows (thousands of
dollars):
Wages and related benefits............................ $ 10,250
Royalties............................................. 1,469
Other................................................. 1,517
---------
$ 13,236
=========
45
7. FEDERAL LEASE PAYMENTS:
The Company has been awarded federal leases which require the bid price to
be paid over a number of years. Royalty payments will be required when
mining begins on the leases. Federal lease payments as of December 31, 1997
were as follows (thousands of dollars):
Alkali Creek lease payable; due in
annual installments of $533
through October 1, 1999, with
imputed interest at 5.67% ......................... $ 983
Winter Quarters lease payable; due in
annual installments of
$1,120 through June 20, 2000, with
imputed interest at 6.21% ......................... 2,982
-------
3,965
Less current portion .............................. (1,413)
-------
$ 2,552
=======
Annual long-term maturities under federal lease payments are as follows
(thousands of dollars):
1998 .............................................. $ 1,413
1999 .............................................. 1,497
2000 .............................................. 1,055
-------
3,965
Less current maturities ........................... (1,413)
-------
$ 2,552
=======
Interest expense recorded under federal leases was $294,000 for the period from
December 20, 1996 (inception) through December 31, 1997.
8. OTHER NONCURRENT LIABILITIES:
Other noncurrent liabilities as of December 31, 1997 were as follows
(thousands of dollars):
Pension and postretirement benefits ............... $ 7,620
Reclamation and mine closure reserve .............. 2,389
Black lung reserve ................................ 4,769
--------
$ 14,778
========
9. COMMITMENTS AND CONTINGENCIES:
The Company makes commitments in the normal course of business, including
those related to the purchase, construction and development of facilities.
In May 1997, the Company entered into agreements for the
46
purchase of long-wall equipment for approximately $28,110,000. As of
December 31, 1997, approximately $21,995,000 of purchase commitments were
remaining under the agreements.
In November 1997, the Company commenced a legal action in the State Court
of Utah against Skyline Partners, the assignor of a number of federal
leases at the Skyline Mine. The Company claims that under the lease
agreement between the Company and Skyline Partners, the Company has paid
more advance royalties than may be recouped against actual production and
inasmuch as the agreement contemplates full recoupment, payment of the last
$5,000,000 in advance royalty is inappropriate. In November 1997, Skyline
Partners commenced a legal action in the Federal District Court in Colorado
against the Company for the last $5,000,000 advance royalty payment and
damages as a result for not making that payment. The cases are in the
preliminary stages of discovery and the Company intends to defend its
position vigorously.
The Company is also the subject of or party to a number of other pending or
threatened legal actions. On the basis of management's best assessment of
the ultimate amount and timing of these events, such expenses or judgments
arising from any of these suits, or from any of the proceedings described
above, are not expected to have a material adverse effect on the Company's
operations, financial position, or cash flows.
Included in other assets of the Company is an approximate 9% investment in
LAXT. The Company's investment is recorded at cost, which approximates its
fair value of $12 million as of December 31, 1997. LAXT is currently
experiencing issues with respect to its future throughput volumes due to
contemplated reductions in coal purchases by the Japanese utilities from
western U.S. coal suppliers. Major reductions in LAXT's throughput may
result in negative cash flows, as well as the inability to obtain the
financing necessary to construct coke handling facilities which are
required in order to comply with LAXT's operating permit. If the throughput
issues are not satisfactorily resolved in a timely manner, there can be no
assurance that the Company's investment in LAXT will be recoverable.
10. RETIREMENT PLAN:
Essentially all of the Company's employees are covered by a defined benefit
pension plan sponsored by the Company. The benefits are based on years of
service and the employee's compensation, primarily during the last five
years of service. The funding policy for the pension plan is to make annual
contributions as required by applicable regulations. Qualified benefit
plans are funded through contributions to trust funds kept apart from
Company funds; nonqualified benefit plans are not funded.
In 1997, the Company charged allocated pension costs as accrued, based on
an actuarial valuation for its plan. The separation of plan assets and
accumulated benefit obligations was based primarily on actuarial
computation based upon specific identification of Company employees and
retirees.
47
The following table sets forth the funded status of the Company's
retirement plan which cover the Company's employees and the amounts
recognized in the Company's balance sheet at December 31, 1997 (thousands
of dollars):
ACCUMULATED
BENEFITS
EXCEED ASSETS
Actuarial present value of benefit obligations:
Vested benefits .................................. $ 1,130
=======
Accumulated benefits .................................. $ 1,130
Effect of future projected salary increases ........... 1,335
-------
Projected benefit obligation ("PBO") .................. 2,465
Plan assets at fair value, primarily stocks and bonds . 54
-------
PBO greater than plan assets .......................... 2,411
Unrecognized net loss ................................. 230
-------
Pension liability recognized in the Company's
balance sheet ......................................... $ 2,181
=======
Components of net pension cost for the Company are as follows for the
period from December 20, 1996 (inception) through December 31, 1997
(thousands of dollars):
Service cost-benefits earned during the period ........ $ 1,451
Interest cost on PBO .................................. 58
Actual return on plan assets .......................... (13)
Net amortization and deferral ......................... 13
-------
Net pension cost ...................................... $ 1,509
=======
10. RETIREMENT PLAN, CONTINUED:
The assumptions used in determining the pension costs and pension liability
shown above were as follows at December 31, 1997:
Discount rate ......................................... 7.0%
Rate of salary progression ............................ 5.0%
Long-term rate of return .............................. 10.5%
11. OTHER POSTRETIREMENT BENEFITS:
The Company provides certain postretirement medical and life insurance
benefits to substantially all employees who retire with the Company. The
Company has the right to modify the plans at any time. The Company's
current policy is to fund the cost of postretirement health care and life
insurance plans on a pay-as-you-go basis.
The actuarial calculations of the Company's expense for the period from
December 20, 1996 (inception) through December 31, 1997, was based upon
specific identification of Company employees and retirees.
48
The following table sets forth the Company's allocated other postretirement
benefit liability as of December 31, 1997 (thousands of dollars):
HEALTH CARE LIFE TOTAL
INSURANCE
----------- --------- ------
Accumulated postretirement benefit obligation:
Active not eligible ................................. $4,333 $ 59 $4,392
Active eligible ..................................... 1,277 34 1,311
------ ------ ------
Total ............................................... 5,610 93 5,703
Unrecognized net loss ............................... 259 5 264
------ ------ ------
Accrued postretirement benefit cost
recognized in the Company's balance sheet ........... $5,351 $ 88 $5,439
====== ====== ======
11. OTHER POSTRETIREMENT BENEFITS, CONTINUED:
Net annual other postretirement benefit costs allocated to the Company for
the period from December 20, 1996 (inception) through December 31, 1997
included the following components (thousands of dollars):
LIFE
HEALTH CARE INSURANCE TOTAL
------------ --------- ------
Service cost-benefits earned during the year ........ $ 309 $ 4 $ 313
Interest cost on the accumulated
postretirement benefit obligation ................... 341 6 347
------ ------ ------
Net post retirement benefit cost .................... $ 650 $ 10 $ 660
====== ====== ======
The significant assumptions used in determining 1997 other postretirement
benefit cost and the accumulated other postretirement benefit obligation
were as follows:
Discount rate................ 7%
Rate of salary progression... 5%
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care trend rate) for the health plans is
7% for 1997, 7% for 1998 through 2001, and 5% thereafter. The assumed trend
rate for 1997 was 8%, 8% for 1998 to 2001, and 6% thereafter. The effect of
a one-percentage-point increase in the assumed trend rate would increase
the accumulated other postretirement benefit obligation as of December 31,
1997, by approximately $1,300,000, and the aggregate of the service and
interest cost components of net annual other postretirement benefit cost by
approximately $158,000.
12. SIGNIFICANT CUSTOMERS:
One customer accounted for approximately 34% of coal sales in 1997. This
same customer accounted for 35% of accounts receivable at December 31,
1997. The Company is involved in litigation with this customer.
Approximately 15% of coal sales in 1997 were to ITOCHU Coal International,
Inc. and one other customer accounted for approximately 10% of coal sales
in 1997.
13. SUBSEQUENT EVENT:
In March 1998, Atlantic Richfield Company ("ARCO") signed an agreement to
dispose of its U.S. coal assets to Arch Coal ("Arch"). Operations to be
disposed of include the Black Thunder and Coal Creek mines in
49
Wyoming, the West Elk mine in Colorado, and, through its 65% LLC interest
in the Company, three mines in Utah. In the agreement, ARCO Uinta, a
subsidiary of ARCO, will sell the Colorado and Utah coal operations to
Arch. Simultaneously, Arch will combine these operations with ARCO's
Wyoming coal operations and its own Wyoming coal operations in a new joint
venture. The new company will be 99% owned by Arch and 1% owned by ARCO.
50
The following unaudited pro forma financial information is filed as part of this
amendment to Current Report on Form 8-K:
Unaudited Pro Forma Financial Information;
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1998;
Notes to Unaudited Pro Forma Combined Balance Sheet as of March 31, 1998;
Unaudited Pro Forma Combined Statement of Income for the year ended
December 31, 1997;
Unaudited Pro Forma Combined Statement of Income for the three months ended
March 31, 1998; and
Notes to Unaudited Pro Forma Combined Statement of Income for the year
ended December 31, 1997 and the three months ended March 31, 1998.
51
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial statements give effect to the
acquisition of ARCO's U.S. coal operations ("ARCO Coal") on June 1, 1998 (the
"Acquisition") and the related financing thereof, as well as the Company's
merger with Ashland Coal, Inc. ("Ashland Coal") which occurred on July 1, 1997
(the "Merger"). The unaudited pro forma combined balance sheet is based on the
respective unaudited historical balance sheets of the Company and ARCO Coal and
has been prepared to reflect the Acquisition as of March 31, 1998. The unaudited
pro forma combined statements of income are based upon the respective historical
statements of income of the Company, ARCO Coal and Ashland Coal and combine the
results of operations of the Company, ARCO Coal and Ashland Coal for the year
ended December 31, 1997, as if the Acquisition and Merger had occurred on
January 1, 1997, and combine the results of operations of the Company and ARCO
Coal for the three months ended March 31, 1998 as if the Acquisition occurred on
January 1, 1998. The unaudited pro forma financial statements do not reflect any
cost savings or other synergies that may result from the Acquisition. In the
opinion of the management of the Company, all adjustments necessary to present
pro forma financial statements have been made.
The unaudited pro forma financial statements should be read in conjunction
with the historical consolidated financial statements and related notes thereto
of the Company included in its Annual Report on Form 10-K for the year ended
December 31, 1997 and its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 filed with the Securities and Exchange Commission, and of ARCO
Coal included in Item 7.(a) herein. The unaudited pro forma financial statements
do not purport to be indicative of the results of operations or financial
position that would have occurred had the Acquisition or the Merger occurred as
of the beginning of the periods or as of the date indicated or of the financial
position or results of operations that may be obtained in the future.
The Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the cost to acquire ARCO Coal has been allocated to the
assets acquired and liabilities assumed according to their respective estimated
fair values. The final allocation of such cost is dependent upon certain
valuations that have not progressed to a stage where there is sufficient
information to make a final allocation in the accompanying pro forma financial
statements. Accordingly, the cost allocation adjustments
52
are preliminary and have been made solely for the purpose of preparing such pro
forma financial statements.
Adjustments to the preliminary allocation likely would result in changes
to amounts assigned to coal reserves, plant and equipment and coal supply
agreements and, accordingly, could impact depletion, depreciation and
amortization charged to future periods. Although not expected to be material,
the full impact of the final allocation is not known.
The unaudited pro forma combined financial statements reflect the
Acquisition at a purchase price of approximately $1.1 billion. The Acquisition
was financed with a new five-year credit facility consisting of a $675 million
non-amortizing term loan, a $300 million fully amortizing term loan and a $600
million revolving credit facility.
53
ARCH COAL, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
PUCHASE
COMPANY ARCO COAL ACCOUNTING
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 12,605 $ - $ - $ 12,605
Trade accounts receivable 131,450 38,422 - 169,872
Other receivables 18,372 7,191 25,563
Inventories 60,226 29,585 (3,877) (1) 85,934
Prepaid royalties 16,789 - - 16,789
Deferred income taxes 8,506 - - 8,506
Other 7,814 3,932 - 11,746
--------- --------- ---------- ---------
Total current assets 255,762 79,130 (3,877) 331,015
--------- --------- ---------- ---------
Property, plant and equipment, net 1,099,947 271,307 592,575 (2) 1,963,829
--------- --------- ---------- ---------
Other assets
Prepaid royalties 36,269 - - 36,269
Coal supply agreements 178,945 - 23,099 (2) 202,044
Deferred income taxes 46,123 - - 46,123
Investment in Canyon Fuel - 388,108 (98,857) (3) 289,251
Other 12,568 167,530 (142,788) (4) 37,310
--------- --------- ---------- ---------
Total other assets 273,905 555,638 (218,546) 610,997
--------- --------- ---------- ---------
Total assets $1,629,614 $ 906,075 $ 370,152 $2,905,841
========= ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 103,256 $ 18,397 $ - $ 121,653
Accrued expenses 94,575 50,617 21,380 (5) 166,572
Current portion of long-term debt 7,510 - 95,490 (6) 103,000
--------- --------- ---------- ---------
Total current liabilities 205,341 69,014 116,870 391,225
Long-term debt 193,125 - 1,014,510 (6) 1,207,635
Accrued postretirement benefits
other than pension 325,586 28,896 - 354,482
Deferred income taxes - 93,343 (93,343) (7) -
Accrued reclamation and mine closure 117,202 31,433 - 148,635
Accrued workers' compensation 98,104 1,301 - 99,405
Accrued pension cost 22,829 - - 22,829
Other noncurrent liabilities 44,560 9,739 4,464 (8) 58,763
--------- --------- ---------- ---------
Total liabilities 1,006,747 233,726 1,042,501 2,282,974
--------- --------- ---------- ---------
Stockholders' equity
Common stock 397 - - 397
Paid-in capital 472,534 - - 472,534
Retained earnings 149,936 - - 149,936
ARCO Coal equity - 672,349 (672,349) (9) -
--------- --------- ---------- ---------
Total stockholders' equity 622,867 672,349 (672,349) 622,867
--------- --------- ---------- ---------
Total liabilities and
stockholders' equity $1,629,614 $ 906,075 $ 370,152 $2,905,841
========== ========= ========== ==========
54
Notes To Unaudited Pro Forma Combined Balance Sheet
March 31, 1998
1) To adjust coal inventory and parts and supplies inventory to their estimated
fair values.
2) To adjust property, plant, and equipment, coal supply agreements and other
long-term assets to their estimated fair value. A substantial portion of the
excess purchase price has been allocated to coal reserves principally because
of higher productivities and technological advances that occurred since ARCO
Coal's acquisition of the coal reserves combined with the expectation of
increased values of compliance and low-sulfur coal due to the Clean Air Act
amendments. The value assigned to coal supply agreements is associated with
contracts signed in earlier years when spot market prices were higher versus
the current spot market prices.
3) To adjust the investment in Canyon Fuel to its estimated fair value based on
a fair value analysis of the underlying assets and liabilities of Canyon
Fuel.
4) To eliminate ARCO Coal's $166 million equity investment in a subsidiary of
Atlantic Richfield Company which was not acquired in the Acquisition, to
adjust ARCO Coal's pension assets to their estimated fair value and to record
deferred financing costs related to the Acquisition financing.
5) To accrue severance and lease costs related principally to the closure of
ARCO Coal's corporate offices and to accrue estimated financing and
transaction costs of approximately $17 million.
6) To record the financing for the Acquisition including a $675 million
non-amortizing term loan, a $300 million fully amortizing term loan and $135
million in borrowings under the Company's $600 million revolving credit
facility. The rate of interest on the borrowings is, at the Company's option,
the PNC Bank base rate or a rate based on LIBOR.
7) To eliminate ARCO Coal's deferred income taxes.
8) To record Atlantic Richfield Company's one percent minority interest in Arch
Western Resources.
9) To eliminate ARCO Coal's historical stockholder's equity.
55
ARCH COAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
ASHLAND
COAL
HISTORICAL PURCHASE PURCHASE
(SIX MONTHS ACCOUNTING ACCOUNTING
COMPANY ARCO COAL ENDED ADJUSTMENTS - ADJUSTMENTS -
HISTORICAL HISTORICAL JUNE 30, 1997) ARCO COAL ASHLAND CO PRO FORMA
---------- ---------- -------------- ----------- ------------- ------------
REVENUES
Coal sales $1,034,813 $343,824 $315,801 $ - $ - $1,694,438
Income from equity investments - 7,077 - 9,409 (1) - 16,486
Other revenues 32,060 37,361 7,038 - - 76,459
---------- ------- ------- ------- -------- ---------
1,066,873 388,262 322,839 9,409 - 1,787,383
---------- ------- ------- ------- -------- ---------
COSTS AND EXPENSES
Cost of coal sales 918,862 270,250 268,850 30,416 (2) (3,554) (2) 1,484,824
Selling, general and administrative
expenses 28,882 19,943 12,423 - - 61,248
Amortization of coal supply agreements 18,063 - 2,139 3,800 (3) 7,150 (3) 31,152
Merger-related expenses 39,132 - - - - 39,132
Other expenses 20,052 55,139 5,831 - - 81,022
--------- ------- ------- ------- -------- --------
1,024,991 345,332 289,243 34,216 3,596 1,697,378
--------- ------- ------- ------- -------- --------
Income from operations 41,882 42,930 33,596 (24,807) (3,596) 90,005
--------- ------- ------- ------- -------- --------
Interest expense, net:
Interest expense (17,822) (2) (8,168) (77,269) (4) 2,240 (6) (101,021)
Interest income 721 - 166 - - 887
--------- ------- ------- ------- -------- --------
(17,101) (2) (8,002) (77,269) 2,240 (100,134)
--------- ------- ------- ------- -------- --------
Income (loss) before income taxes 24,781 42,928 25,594 (102,076) (1,356) (10,129)
Provision (benefit) for income taxes (5,500) 11,230 3,416 (34,298) (5) (529) (5) (25,681) (7)
--------- ------- ------- ------- -------- --------
NET INCOME $ 30,281 $ 31,698 $ 22,178 (67,778) $ (827) $ 15,552
========= ======== ======== ======== ======== =========
Basic and fully diluted earnings per
common share $ 1.00 $ 0.39
======== =========
Average common shares outstanding 30,374 39,774 (8)
======== =========
56
ARCH COAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS)
PURCHASE
ACCOUNTING
COMPANY ARCO COAL ADJUSTMENTS -
HISTORICAL HISTORICAL ARCO COAL PRO FORMA
--------- --------- ------------- -----------
REVENUES
Coal sales $ 298,964 $ 93,311 $ - $ 392,275
Income from equity investments - 1,642 2,508 (1) 4,150
Other revenues 13,600 2,841 - 16,441
--------- --------- ---------- ---------
312,564 97,794 2,508 412,866
--------- --------- ---------- ---------
COSTS AND EXPENSES
Cost of coal sales 270,905 64,319 10,980 (2) 346,204
Selling, general and
administrative expenses 7,510 4,174 - 11,684
Amortization of coal supply
agreements 6,361 - 950 (3) 7,311
Other expenses 5,429 15,028 - 20,457
--------- --------- ---------- ---------
290,205 83,521 11,930 385,656
--------- --------- ---------- ---------
Income from operations 22,359 14,273 (9,422) 27,210
--------- --------- ---------- ---------
Interest expense, net:
Interest expense (3,804) (1) (19,317)(4) (23,122)
Interest income 66 - - 66
--------- --------- ---------- ---------
(3,738) (1) (19,317) (23,056)
--------- --------- ---------- ---------
Income before income taxes 18,621 14,272 (28,739) 4,154
Provision (benefit) for income taxes 2,800 2,946 (20,151)(5) (2,842)(7)
--------- --------- ---------- ---------
NET INCOME $ 15,821 $ 11,326 $ (8,588) $ 6,996
========= ========= ========== =========
Basic and fully diluted earnings per
common share $0.40 $ 0.18
========= =========
Average shares outstanding 39,659 39,659
========= =========
57
Notes To Unaudited Pro Forma Combined Statements Of Income
Year Ended December 31, 1997 And Three Months Ended March 31, 1998
1) To eliminate losses of $6.7 million and $1.8 million for the year ended
December 31, 1997 and the quarter ended March 31, 1998, respectively, on an
ARCO Coal equity investment not acquired by the Company and to adjust equity
income from the investment in Canyon Fuel for amortization of the difference
between the estimated fair value assigned to the investment and ARCO Coal's
historical cost basis in such investment.
2) To record amounts associated with adjusting property, plant and equipment to
its estimated fair value. Additions to property, plant and equipment,
excluding coal reserves, are depreciated over their estimated useful
remaining life which approximates 13 years for ARCO Coal assets and 15 years
for Ashland Coal assets. Coal reserves are depleted using the
units-of-production method over the estimated recoverable reserves.
3) To record net charges associated with adjusting the estimated fair value of
coal supply agreements with an average life of 6 years for ARCO Coal and
Ashland Coal Agreements.
4) To record the interest expense associated with the Acquisition financing
based on a current weighted average interest rate of 7.4%, including
amortization of related deferred debt issuance costs. A one quarter percent
increase or decrease in the weighted average interest rate on the
Acquisition's financing would change the annual pro forma interest expense
for 1997 by approximately $2.6 million.
5) To record the tax effect of the pro forma adjustments. The tax benefit rate
of 34% for ARCO Coal for the year ended December 31, 1997 and 30% for the
quarter ended March 31, 1998 represent the combined federal and state
statutory rates reduced by the effect of percentage depletion. The combined
federal and state statutory rate for Ashland Coal is 39%.
6) To record the reduction of interest expense on $152.9 million of fixed rate
long-term debt to reflect market interest rates (6.75% market rate versus
9.75% stated rate) and a reduction in amortization of deferred debt issuance
cost.
7) The pro forma benefit for income taxes differs from the amount computed
utilizing the combined federal and state
58
statutory rate of 39% primarily due to benefits derived from percentage
depletion.
8) Pro forma average common shares outstanding assumes the 18,660,054 shares of
Company common stock issued in the Merger were outstanding beginning on
January 1, 1997.
59
(c) The following Exhibit is filed as part of this amendment to Current
Report on Form 8-K:
Exhibit No. Description
----------- -----------
23.1 Consent of Coopers & Lybrand LLP
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: August 14, 1998 ARCH COAL, INC.
By: /s/Jeffry N. Quinn
-----------------------------
Jeffry N. Quinn
Senior Vice President -
Law & Human Resources,
General Counsel and
Secretary
61
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
23.1 Consent of Coopers & Lybrand LLP
62
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-8 (File No.'s 333-32777 and 333-30565) of our report dated April 7, 1998,
on our audits of the consolidated financial statements of ARCO Coal and
Subsidiaries as of December 31, 1997 and 1996, and for the years ended December
31, 1997, 1996 and 1995, which report is included in this Form 8-K.
Pricewaterhouse Coopers LLP
Denver, Colorado
August 14, 1998
63
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-8 (File No.'s 333-32777 and 333-30565) of our report dated March 20,
1998, except as to the information presented in Note 13, for which the date is
April 7, 1998 on our audit of the financial statements of Canyon Fuel Company,
L.L.C. as of December 31, 1997 and for the period from December 20, 1996
(inception) through December 31, 1997 which report is included in this Form 8-K.
Pricewaterhouse Coopers LLP
Denver, Colorado
August 14, 1998
64
