SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-13105
ARCH COAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-0921172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Address of principal executive offices) (Zip Code)
CityPlace One, Suite 300, St. Louis, Missouri 63141
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (314) 994-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
At May 11, 1998, there were 39,664,202 shares of registrant's common stock
outstanding.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997...........................................1
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997........................2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997..................3
Notes to Condensed Consolidated Financial Statements........4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..........................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................17
Item 4. Submission of Matters to a Vote of Security
Holders ........................................17
Item 6. Exhibits and Reports on Form 8-K.................18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
March December
31, 31,
1998 1997
--------- ---------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 12,605 $ 9,177
Trade accounts receivable 131,450 133,810
Other receivables 18,372 14,046
Inventories 60,226 50,419
Prepaid royalties 16,789 17,745
Deferred income taxes 8,506 8,506
Other 7,814 9,475
--------- ---------
Total current assets 255,762 243,178
--------- ---------
Property, plant and equipment, net 1,099,947 1,149,926
--------- ---------
Other assets
Prepaid royalties 36,269 20,826
Coal supply agreements 178,945 185,306
Deferred income taxes 46,123 44,023
Other 12,568 13,065
--------- ---------
Total other assets 273,905 263,220
--------- ---------
Total assets $1,629,614 $1,656,324
========= =========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 103,256 $ 84,692
Accrued expenses 94,575 88,082
Current portion of long-term debt 7,510 29,500
--------- ---------
Total current liabilities 205,341 202,274
Long-term debt 193,125 248,425
Accrued postretirement benefits other
than pension 325,586 323,115
Accrued reclamation and mine closure 117,202 116,199
Accrued workers' compensation 98,104 97,759
Accrued pension cost 22,829 21,730
Other noncurrent liabilities 44,560 35,324
--------- ---------
Total liabilities 1,006,747 1,044,826
--------- ---------
Stockholders' equity
Common stock 397 397
Paid-in capital 472,534 472,425
Retained earnings 149,936 138,676
--------- ---------
Total stockholders' equity 622,867 611,498
--------- ---------
Total liabilities and
stockholders' equity 1,629,614 1,656,324
========= =========
See notes to condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
-----------------
1998 1997
-------- --------
Revenues
Coal sales $298,964 $192,328
Other revenues 13,600 6,133
-------- --------
312,564 198,461
-------- --------
Costs and Expenses
Cost of coal sales 270,905 171,540
Selling, general and administrative expenses 7,510 4,898
Amortization of coal supply agreements 6,361 2,116
Other expenses 5,429 3,594
-------- --------
290,205 182,148
-------- --------
Income from operations 22,359 16,313
Interest expense, net:
Interest expense (3,804) (3,553)
Interest income 66 260
-------- -------
(3,738) (3,293)
-------- -------
Income before income taxes 18,621 13,020
Provision for income taxes 2,800 2,600
-------- -------
Net income $15,821 $10,420
======== =======
Basic and diluted earnings per common share $ 0.40 $ 0.50
======== =======
Weighted average shares outstanding 39,659 20,948
======== =======
Dividends declared per share $ 0.115 $ 0.108
======== =======
See notes to condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
----------------
1998 1997
------- -------
Operating activities
Net income $15,821 $10,420
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion and amortization 38,868 28,296
Prepaid royalties expensed 4,241 975
Net gain on disposition of assets (8,350) (377)
Changes in:
Receivables (1,976) (5,190)
Inventories (9,807) (2,188)
Accounts payable and accrued expenses 19,790 (1,902)
Income taxes 3,173 2,568
Accrued postretirement benefits 2,471 1,270
Accrued workers' compensation benefits 345 (1,908)
Accrued reclamation and mine closure 1,003 (2,043)
Other 1,789 5,258
------- -------
Cash provided by operating activities 67,368 35,179
------- -------
Investing activities
Additions to property, plant and equipment (17,340) (11,546)
Proceeds from dispositions of property, plant
and equipment 8,428 717
Additions to prepaid royalties (18,728) (2,248)
------- -------
Cash used in investing activities (27,640) (13,077)
------- -------
Financing activities
Payments on revolver and lines of credit (70,150) (15,018)
Payments on senior notes (7,140) (7,140)
Proceeds from sale and leaseback of equipment 45,442 -
Dividends paid (4,561) -
Proceeds from sale of common stock 109 -
------- -------
Cash used in financing activities (36,300) (22,158)
------- -------
Increase (decrease) in cash and cash equivalents 3,428 (56)
Cash and cash equivalents, beginning of period 9,177 13,716
------- -------
Cash and cash equivalents, end of period $12,605 $13,660
======= =======
See notes to condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
Note A - General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations, but are
subject to any year-end adjustments which may be necessary. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Results of operations for
the period ended March 31, 1998, are not necessarily indicative of results to be
expected for the year ending December 31, 1998. These financial statements
should be read in conjunction with the annual report of Arch Coal, Inc. ("Arch
Coal" or the "Company"), on Form 10-K for the year ended December 31, 1997. The
Company produces steam and metallurgical coal from surface and deep mines in
Illinois, Kentucky, West Virginia, Virginia and Wyoming for sale to utility,
industrial and export markets. Some members of the Company's workforce are
represented by various labor organizations. Significant intercompany
transactions and accounts have been eliminated in consolidation. Certain amounts
in the 1997 financial statements have been reclassified to conform with the
classifications in the 1998 financial statements with no effect on previously
reported net income or stockholders' equity.
Note B - Acquisition Agreement
The Company has signed an agreement to acquire Atlantic Richfield's ("ARCO")
Colorado and Utah Coal operations and to simultaneously combine 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"). Arch Western will be 99% owned by Arch Coal and 1% owned by
ARCO. The transaction is valued at approximately $1.14 billion. Arch Coal will
manage the joint venture. Closing has been scheduled for June 1, 1998.
Note C - Inventories
Inventories are comprised of the following:
March 31, 1998 December 31, 1997
(In thousands)
Coal $34,695 $25,359
Repair parts and supplies 25,531 25,060
------ ------
$60,226 $50,419
======= =======
Note D - Debt
Debt consists of the following:
March 31, 1998 December 31, 1997
(In thousands)
Indebtedness to banks under revolving
credit agreement, expiring in 2002 $125,000 $ 190,000
Indebtedness to banks under lines of credit 31,872 36,302
7.79% senior unsecured notes, payable
annually through January 31, 2003 35,720 42,860
Other 8,043 8,763
----- -----
200,635 277,925
Less current portion 7,510 29,500
----- ------
Long-term debt $193,125 $248,425
======== ========
On July 1, 1997, concurrently with the Company's combination with Ashland Coal,
Inc. ("Ashland Coal"), the Company entered into a new $500 million revolving
credit agreement and, on July 2, 1997, the Company terminated the $200 million
facility. The new revolving credit agreement has a five year term, and the rate
of interest on borrowings under this agreement is, at the Company's option, a
money-market rate determined by a competitive bid process, the PNC Bank base
rate or a rate based on LIBOR. The Company is currently borrowing under the
LIBOR option.
In connection with the transactions referred to in Note B, the Company requested
PNC Markets, Inc. and J.P. Morgan Securities, Inc. (collectively the
"Arrangers") to arrange a $1.575 billion financing for Arch Coal and Arch
Western, in the aggregate. While the facilities for each company will be
structured to stand alone with no cross-guarantees, they will be structured to
allow for a substantially free flow of funds between Arch Western and Arch Coal.
In support of the transaction, PNC Bank, National Association and Morgan
Guaranty Trust Company of New York have committed $975 million and $600 million,
respectively, for a total commitment of $1.575 billion. The financing, which is
currently being negotiated, will consist of three 5-year facilities: a $675
million non-amortizing term loan to Arch Western, a $300 million fully
amortizing term loan to Arch Coal, and a $600 million revolver to Arch Coal.
Borrowings under the new Arch Coal credit facilities will be used to finance the
acquisition of ARCO's Colorado and Utah coal operations, to pay related fees and
expenses, to refinance existing corporate debt and for general corporate
purposes. Borrowings under the Arch Western credit facility will be used to fund
a portion of a $700 million cash distribution by Arch Western to ARCO, which
distribution will occur simultaneously with ARCO's contribution of its Wyoming
coal operations to Arch Western. The Arch Western credit facility is not
guaranteed by the Company.
Note E - Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies, including
environmental matters, when a loss is probable and the amount is reasonably
determinable. The Company estimates that its probable aggregate loss as a result
of such claims is $5.2 million (included in Other Nonconcurrent Liabilities) and
believes that probable insurance recoveries of $.8 million (included in Other
Assets) related to these claims will be realized. The Company estimates that its
reasonably possible aggregate losses from all material currently pending
litigation could be as much as $ .9 million (before taxes) in excess of the
probable loss previously recognized. After conferring with counsel, it is the
opinion of management that the ultimate resolution of these claims, to the
extent not previously provided for, will not have a material adverse effect on
the consolidated financial position, results of operations, or liquidity of the
Company.
A customer of the Company has informed the Company that one of its power plants
will no longer provide baseload capacity to a public utility and instead will be
used to provide peak demand only and, as a result, the plant will require
substantially less coal under the customer's existing above-market contract with
the Company. The Company has filed a civil action in Federal District court in
the Southern District of West Virginia alleging breach of contract and other
causes of action against the customer in respect of the customer's failure to
comply with the terms of this contract. As of March 31, 1998, the carrying
amount of acquisition costs allocated to this coal supply contract is
approximately $16.2 million. The Company's current estimates of undiscounted
cash flows indicate the carrying amount of this asset is expected to be
recovered.
Note F - Change in Estimate and Other Non-Recurring Revenues and Expenses
The Company's operating results for the three months ended March 31, 1998,
reflect pre-tax gains on the sale of surplus land totaling $7.9 million and a
$5.3 million operating loss (including termination benefits totaling $1.3
million ) at the Company's Mine No. 37 in eastern Kentucky which closed in
January 1998. The first quarter of 1997 results included a $3.3 million
reduction in the reclamation and mine closure reserve at the Company's Illinois
operation due to a change in permit requirements and $3.1 million in costs
associated with the October 1996 impoundment failure at Lone Mountain
Processing, Inc.
Note G - Sale and Leaseback
On January 29, 1998, the Company sold mining equipment for approximately $74.2
million and leased back the equipment under an operating lease with a term of
three years. This included the sale and leaseback of equipment purchased under
an existing operating lease that expired on the same day. The proceeds of the
sale were used to purchase the equipment under the expired lease for $28.3
million and to pay down debt. The lease provides for annual rental payments of
approximately $9.1 million, $11.6 million, $11.2 million and $2.7 million in
1998, 1999, 2000 and 2001, respectively. At the end of the lease term, the
Company has the option to renew the lease for two additional one year periods or
purchase the equipment for approximately $51.1 million. Alternatively, the
equipment may be sold to a third party. In the event of such a sale, the Company
will be required to make payment to the lessor in the event, and to the extent,
that the sale proceeds are less than $40.0 million. The gain on the sale and
leaseback of $10.7 million was deferred and will be amortized over the base term
of the lease as a reduction of rental expense.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to the "Contingencies," "Certain Risk Factors" and "Impact of
Year 2000" and "Factors Routinely Affecting Results of Operations" sections
below for a discussion of factors that may cause actual results to differ
materially from the forward-looking statements (within the meaning of Section
27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934) in the "Outlook" and "Liquidity and Capital Resources"
sections below, and elsewhere herein.
Results of Operations
Merger With Ashland Coal
On July 1, 1997, Ashland Coal merged with a subsidiary of the Company, and
18,660,054 shares of Company common stock were issued in the merger. The merger
was accounted for as a purchase.
At the time of the merger, Ashland Coal was engaged in the mining, processing
and marketing of low-sulfur bituminous coal primarily in the eastern United
States, and Ashland Inc. ("Ashland") owned stock representing approximately 57%
of the voting power of Ashland Coal and 50% of the voting power of the Company.
Ashland currently owns approximately 55% of the Company's outstanding common
stock.
Comparisons of 1998 to 1997 have been materially affected by the merger with
Ashland Coal effective July 1, 1997.
Quarter Ended March 31, 1998, Compared
to Quarter Ended March 31, 1997
Net income for the quarter ended March 31, 1998, was $15.8 million, compared to
net income of $10.4 million for the quarter ended March 31, 1997. The results
for the first quarter of 1998 were impacted by the previously announced
expiration of the high margin contract with Georgia Power at the end of 1997 and
the depletion of the longwall reserves at the Company's Mine No. 37 in eastern
Kentucky in September 1997. The current quarter's results were also adversely
affected by the January closing of Mine No. 37 which had an operating loss of
approximately $5.3 million during the quarter, including termination benefits
totaling $1.3 million. The Company decided to close the mine primarily due to
poor geologic conditions. In addition, the current quarter's results were
negatively affected by reduced shipments on a high margin contract and severe
snow storms in West Virginia.
The reduced shipments on the high margin contract occurred upon the previously
announced change of a customer's plant from a base load to a peak demand plant.
This adversely effected net income by approximately $1.0 million for the
quarter. These negative effects were offset, in part, by pre-tax gains of $7.9
million on the sales of surplus land during the quarter.
Gross profit on coal sales (selling price less cost of sales) on a per-ton basis
decreased $.40 from the first quarter of 1997. The average selling price
decreased $.27 per ton from the same quarter a year ago primarily reflecting the
aforementioned Georgia Power contract expiration. The average cost per ton
increased $.13 when compared to the quarter ended March 31, 1997. Costs related
to closing Mine No. 37, the severe snow storms in West Virginia during the first
quarter of 1998 and the 1997 completion of amortization on a 1993 unrecognized
net gain related to pneumoconiosis (black lung) liabilities were the chief
factors in the higher average per-ton cost.
Other revenues were $7.5 million higher in 1998 than the same period in 1997 as
a result of the $7.9 million pre-tax gains from the sale of surplus land.
Selling, general and administrative expenses increased $2.6 million primarily
due to the effects of the Ashland Coal merger.
Amortization of coal supply agreements increased $4.2 million from the
comparable period in 1997. That increase was primarily attributable to the
amortization of the carrying value of the Ashland Coal sales contracts acquired
in the merger.
Other expenses increased $1.8 million from the quarter ended March 31, 1997.
This increase is principally attributable to higher expenses at the Company's
Ark Land subsidiary, resulting from the merger with Ashland Coal.
First quarter 1998 interest expense was $.3 million higher than the comparable
period in 1997. The increase is attributable to the debt acquired in the Ashland
Coal merger offset by substantial debt repayments since March 1997 and lower
interest rates since March 1997.
The estimated annual effective income tax rate for 1998 is 5% lower than the
first quarter 1997 rate. Changes in estimates of annual profitability and
percentage depletion are generally the primary factors in the Company's
effective income tax rate.
EBITDA (income from operations before net interest expense, income taxes,
depreciation, depletion and amortization) was $61.2 million for the quarter
ended March 31, 1998 compared to $44.6 million for the same quarter a year ago.
The increase in EBITDA is primarily attributable to the additional sales that
resulted from the merger with Ashland Coal. EBITDA is a widely accepted
financial indicator of a company's ability to incur and service debt, but EBITDA
should not be considered in isolation or as an alternative to net income,
operating income, or cash flows from operations, or as a measure of a company's
profitability, liquidity or performance under generally accepted accounting
principles. The Company's method of computing EBITDA also may not be the same
method used to compute similar measures reported by other companies, or may be
computed differently by the Company in different contexts (i.e., public
reporting versus computations under financing agreements).
Outlook
The Company has signed an agreement to acquire ARCO's Colorado and Utah coal
operations and to simultaneously combine 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 will be 99%
owned by Arch Coal and 1% owned by ARCO. The transaction is valued at
approximately $1.14 billion, and Arch Coal will manage the joint venture. The
transaction will be accounted for as a purchase. Closing has been scheduled for
June 1, 1998, and is subject to regulatory approvals and other customary closing
conditions.
Assuming the completion of this acquisition, Arch Coal will become the nation's
second largest coal producer with annual sales of nearly 110 million tons, or
roughly 10% of the nation's total coal supply. In 1997, ARCO's U.S. coal
operations, including its 65% interest in Canyon Fuel, generated revenues of
$537 million and after-tax operating income of $51 million on the sale of 53.2
million tons of low-sulfur coal. On a pro forma basis assuming completion of the
ARCO transaction, Arch Coal would have had total 1997 revenues of approximately
$1.8 billion, total assets at December 31, 1997 of $2.8 billion and debt at
December 31, 1997 of approximately $1.4 billion. ARCO's domestic measured and
indicated coal reserves are currently estimated to be approximately 1.3 billion
tons. The Company believes this acquisition would place Arch Coal in an
excellent position to serve the changing needs of Arch Coal's primary customers
- - the nation's electric utilities - as they prepare for more stringent clean air
requirements and a deregulated market place.
All of ARCO's domestic coal production to be acquired is compliance coal, which
means that it meets the sulfur dioxide emissions requirements of Phase II of the
Clean Air Act. ARCO's U.S. coal operations include Thunder Basin Coal Company,
LLC ("Thunder Basin"); Mountain Coal Company, LLC ("Mountain Coal"); and a 65%
interest in Canyon Fuel Company, LLC ("Canyon Fuel"). Thunder Basin operates the
Black Thunder and Coal Creek mines in the Powder River Basin of Wyoming. Black
Thunder is one of the nation's largest coal mines with 1997 production of 37.7
million tons of low-sulfur compliance coal. Coal Creek produced 2.9 million tons
of coal in 1997. Mountain Coal operates the West Elk Mine in Colorado. With 1997
production of 5.6 million tons of low-sulfur compliance coal, West Elk is a
highly productive longwall mine in the Mountain Bituminous Region. During 1997,
Canyon Fuel produced 10.6 million tons of low-sulfur coal from three mines in
Utah.
In connection with the ARCO transactions referred to above, the Company
requested PNC Markets, Inc. and J.P. Morgan Securities, Inc. (collectively the
"Arrangers") to arrange a $1.575 billion financing for Arch Coal and Arch
Western, in the aggregate. While the facilities for each company will be
structured to stand alone with no cross-guarantees, they will be structured to
allow for a substantially free flow of funds between Arch Western and Arch Coal.
In support of the transaction, PNC Bank, National Association and Morgan
Guaranty Trust Company of New York have committed $975 million and $600 million,
respectively, for a total commitment of $1.575 billion. The financing, which is
currently being negotiated, will consist of three 5-year facilities: a $675
million non-amortizing term loan to Arch Western, a $300 million fully
amortizing term loan to Arch Coal, and a $600 million revolver to Arch Coal.
Borrowings under the new Arch Coal credit facilities will be used to finance the
acquisition of ARCO's Colorado and Utah coal operations, to pay related fees and
expenses, to refinance existing corporate debt and for general corporate
purposes. Borrowings under the Arch Western credit facility will be used to fund
a portion of a $700 million cash distribution by Arch Western to ARCO. The Arch
Western credit facility is not guaranteed by the Company.
With respect to existing operations, management has decided to substantially
scale back coal mining operations during 1998 at the Company's Wyoming
operations as a result of oversupply of competing coals in this market. In
addition, the Hobet 07 Complex and the Captain Mine are scheduled to close in
mid-1998 upon depletion of their economical dedicated reserves. Production
losses as a result of mine closures, scaled-back production and depletion are
expected to be offset to some degree by Mingo Logan's new surface mine in the
Phoenix reserves, and an additional unit at Lone Mountain's Darby Fork mine.
Liquidity and Capital Resources
The following is a summary of cash provided by or used in each of the indicated
types of activities during the three months ended March 31, 1998 and 1997:
1998 1997
---- ----
Cash provided by (used in): (In thousands)
Operating activities $67,368 $35,179
Investing activities (27,640) (13,077)
Financing activities (36,300) (22,158)
Cash provided by operating activities increased in the first three months of
1998 from the level in the same period of 1997 due primarily to additional sales
resulting from the Ashland Coal merger and a significant increase in the balance
of accounts payable in the first quarter of 1998. The increase in accounts
payable resulted from an annual royalty payment of $16 million due at the end of
March, 1998, that was included in accounts payable at March 31, 1998.
The increase in cash used for investing activities from the first quarter of
1997 primarily resulted from the $16 million annual royalty payment described
above. This royalty payment is on a lease that Ashland Coal acquired in its
Dal-Tex Coal Corporation acquisition in 1992.
Cash used in financing activities reflects a reduction in borrowings of $77.3
million in the first quarter of 1998 and $22.2 million in the same period in
1997. A large portion of the increased debt repayments was due to the previously
announced January 1998 sale and leaseback of equipment which resulted in net
proceeds of $45.4 million. The remaining increase resulted from a higher amount
of cash generated by operations in the first quarter of 1998 versus 1997.
The Company's capital expenditures in the three months ended March 31, 1998 were
$17.3 million. Approximately $3 million of these expenditures were to add a
third section to Lone Mountain's Darby Fork mine. Equipment purchased to start
up Mingo Logan's new surface mine in the Phoenix reserves totaled approximately
$3 million during the quarter. The total cost of the equipment to start up the
mine is estimated to be $12 million. The Company estimates that during the
remainder of 1998, capital expenditures will be approximately $94 million.
The Company entered into a five year, $500 million revolving credit facility,
effective July 1, 1997, with a group of banks. The rate of interest on
borrowings under the agreement is, at the Company's option, a money-market rate
determined by a competitive bid process, the PNC Bank base rate or a rate based
on LIBOR. At March 31, 1998, the Company had $125 million borrowed under the
revolving credit agreement. The Company is negotiating a new credit facility in
connection with the acquisition of ARCO's U.S. coal operations, as discussed
above in Outlook.
The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
March 31, 1998, there were $95 million of such agreements and borrowings of
$31.9 million outstanding under these agreements.
The Company also has indebtedness of $35.7 million at March 31, 1998, under
senior notes that were issued on January 29, 1993, with scheduled principal
payments of approximately $7.1 million that began on January 31, 1997, and
continue on each January 31 thereafter until final maturity on January 31, 2003.
The Company has historically satisfied its working capital requirements, its
capital expenditures (excluding major acquisitions) and scheduled debt
repayments from its operating cash flow. Cash requirements for the acquisition
of new business operations have generally been funded through a combination of
cash generated from operating activities, utilization of revolving credit
facilities and the issuance of long-term debt. The Company believes that cash
generated from operations will continue to be sufficient to meet its 1998
working capital requirements, anticipated 1998 capital expenditures (excluding
major acquisitions) and scheduled 1998 debt repayments.
Contingencies
Reclamation
The Federal Surface Mining Control and Reclamation Act of 1977 and similar state
statutes require that mine property be restored in accordance with specified
standards and an approved reclamation plan. The Company accrues for the costs of
final mine closure reclamation over the estimated useful mining life of the
property. These costs relate to reclaiming the pit and support acreage at
surface mines and sealing portals at deep mines. Other costs of final mine
closure common to both types of mining are related to reclaiming refuse and
slurry ponds. The Company also accrues for reclamation that is completed during
the mining process prior to final mine closure. The establishment of the final
mine closure reclamation liability and the other ongoing reclamation liability
is based upon permit requirements and requires various estimates and
assumptions, principally associated with costs and productivities.
The Company reviews its entire environmental liability annually and makes
necessary adjustments, including permit changes and revisions to costs and
productivities to reflect current experience. These recosting adjustments are
recorded to cost of coal sales. No adjustments were recorded in the three months
ended March 31, 1998. A favorable adjustment of $3.3 million was recorded in the
first quarter of 1997 at the Company's Illinois operation due to a change in
permit requirements. The Company's management believes it is making adequate
provisions for all expected reclamation and other associated costs.
Legal Contingencies
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies, including
environmental matters, when a loss is probable and the amount is reasonably
determinable. The Company estimates that at March 31, 1998 its probable
aggregate loss as a result of such claims is $5.2 million (included in Other
Noncurrent Liabilities) and believes that probable insurance recoveries of $.8
million (included in Other Assets) related to these claims will be realized. The
Company estimates that its reasonably possible aggregate losses from all
material currently pending litigation could be as much as $.9 million (before
taxes) in excess of the probable loss previously recognized. After conferring
with counsel, it is the opinion of management that the ultimate resolution of
these claims, to the extent not previously provided for, will not have a
material adverse effect on the consolidated financial position, results of
operations, or liquidity of the Company.
On October 24, 1996, the rock strata overlaying an old, abandoned underground
mine adjacent to the coal-refuse impoundment used by an Arch Coal subsidiary's
preparation plant failed, resulting in an accidental discharge of approximately
6.3 million gallons of water and fine coal slurry into a tributary of the Powell
River in Lee County, Virginia. At the request of the U.S. Environmental
Protection Agency and the U.S. Fish & Wildlife Service, the United States
Attorney for the Western District of Virginia has opened a criminal
investigation of the 1996 incident. Arch Coal is cooperating with the
investigation, the results of which are not expected until sometime later this
year.
Certain Risk Factors
Credit risk - The Company markets its coal principally to electric utilities in
the United States. As a group, electric utilities generally are stable, well
capitalized entities with favorable credit ratings. Credit is extended based on
an evaluation of each customer's financial condition, and collateral is not
generally required. Historically, the Company's credit losses have been minimal.
Price risk - Selling prices for the Company's products are determined by
long-term contracts and the spot market. Selling prices in many of the Company's
long-term contracts are subject to adjustment, including for changes in market
conditions. Falling market prices raise the price risk under these contracts.
Spot prices fluctuate primarily because of changes in demand for and supply of
coal. Demand for coal in the short term is primarily driven by changes in demand
for electricity in the areas serviced by the utilities purchasing the Company's
coal. Demand for electricity in turn depends on the level of economic activity
and other factors such as prolonged temperature extremes. The supply of coal in
the spot market has historically been most affected by excess productive
capacity in the industry and short-term disruptions, sometimes labor-related.
The coal industry is highly competitive, and Arch Coal competes with a large
number of other coal producers. Factors such as the availability of sulfur
dioxide emissions allowances issued by the EPA, utility deregulation, and new
clean air regulations have had, or will have, the effect of further intensifying
interregional and international competition between producers. Some competing
producers, because of geological conditions, local labor costs, or access to
inexpensive transportation modes, are able to produce and deliver coal into some
markets at a lower cost than the Company. These competitive factors have an
impact on the Company's pricing.
Arch Coal's operating subsidiaries purchase substantial amounts of power, fuel,
and supplies, generally under purchase orders at current market prices or
purchase agreements of relatively short duration.
The Company's Apogee Coal Company ("Apogee") and Hobet Mining, Inc. ("Hobet")
subsidiaries are covered by the National Bituminous Coal Wage Agreement of 1998
("Wage Agreement"), which provides for certain wage rates and benefits.
Employees of two other operating subsidiaries are covered by other collective
bargaining organizations, and employees at the Company's other operating
subsidiaries are not covered by a union contract but are compensated at rates
representative of prevailing wage rates in the local area. Among factors
influencing such wage rates are the wage rates paid under the Wage Agreement.
Although the Company cannot predict changes in its costs of production and coal
prices with certainty, Arch Coal believes that in the current economic
environment of low to moderate inflation, the price adjustment provisions in its
older long-term contracts will largely offset changes in the costs of providing
coal under those contracts, except for those costs related to changes in
productivity. However, the increasingly shorter terms of sales contracts and the
consequent absence of price adjustment provisions in such shorter long-term
contracts also makes it more likely that increases in mining costs during the
contract term will not be recovered by the Company through a later price
adjustment. Further, because levels of general price inflation are closely
linked to levels of economic activity, it is expected that changes in costs of
producing coal for the spot market may be offset in part by changes in spot coal
prices. The Company attempts to limit exposure to depressed spot market prices
which result from industry overcapacity by entering into long-term coal supply
agreements, which ordinarily provide for prices in excess of spot market prices.
In the event of a disruption of supply, the Company might, depending on the
level of its sales commitments, benefit from higher spot prices if its own mines
were not affected by the disruption.
Interest rate risk - Arch Coal has significant debt which is linked to
short-term interest rates. If interest rates rise, Arch Coal's costs relative to
those obligations would also rise. Because an increase in interest rates is
usually an outgrowth of a higher level of economic activity and because
increased economic activity would likely lead to a higher demand for electricity
and consequently to higher spot prices for coal, Arch Coal believes that the
negative effects of higher interest rates on Arch Coal's earnings could be
partially offset, depending on the level of its sales commitments at the time,
by higher spot prices.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Arch Coal debt. At March 31, 1998, the Company
had one interest-rate swap agreement having a total notional value of $25
million. This agreement was used to convert variable-rate debt to fixed-rate
debt. Under this agreement, the Company pays a weighted average fixed rate of
6.03% and is receiving a weighted average variable rate based upon 30-day LIBOR.
The remaining life on the swap at March 31, 1998, was approximately 55 months.
Impact of Year 2000
At the time of the merger of Ashland Coal into the Company, the entities
utilized different computer systems. In order to standardize key financial,
informational and operational computer systems, the Company is currently in the
process of replacing its key systems. The new systems, including associated
software, will be Year 2000 compliant. The system replacement project is
estimated to be completed not later than the third quarter of 1999, which is
prior to any anticipated impact of year 2000 on the Company's operating systems.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions at the Company's principal operations are not made, or are not
completed on a timely basis, the current system's inability to properly process
year 2000 data could have a material adverse effect on the operations of the
Company.
The total cost of these new systems is estimated at approximately $5 million,
which includes the purchase of new software and consulting services. All such
costs will be capitalized. As of March 31, 1998, the Company has incurred
approximately $2.2 million in software and consulting costs. The Company
believes that the total costs associated with replacing and modifying its
current systems will not have a material adverse effect on its results of
operations. Additional systematic efforts are being made to identify and
evaluate within the Company, and with respect to the Company's vendors,
suppliers, and other entities with which it exchanges electronic information,
Year 2000 risk and appropriate steps to eliminate such risk at a reasonable
cost.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated.
Factors Routinely Affecting Results of Operations
The Company sells a substantial portion of its coal production pursuant to
long-term coal supply agreements, and as a consequence may experience
fluctuations in operating results in the future, both on an annual and quarterly
basis, as a result of expiration or termination of, or sales price
redeterminations or suspensions of deliveries under, such coal supply
agreements. Other short and long-term contracts define base or optional tonnage
requirements by reference to the customer's requirements, which are subject to
change as a result of factors beyond the Company's (and sometimes the
customer's) control, including utility deregulation. In addition, price
adjustment provisions permit a periodic increase or decrease in the contract
price to reflect increases and decreases in production costs, changes in
specified price indices or items such as taxes or royalties. Price reopener
provisions provide for an upward or downward adjustment in the contract price
based on market factors, and from time to time the Company has renegotiated
contracts after execution to extend contract term or to accommodate changing
market conditions. The contracts also typically include stringent minimum and
maximum coal quality specifications and penalty or termination provisions for
failure to meet such specifications, force majeure provisions allowing
suspension of performance or termination by the parties during the duration of
certain events beyond the control of the affected party, and occasionally
include provisions that permit the utility to terminate the contract if changes
in the law make it illegal or uneconomic for the utility to consume the
Company's coal or if the utility has unexpected difficulties in utilizing the
Company's coal. Imposition of new nitrous oxide emissions limits in connection
with Phase II of the Clean Air Act in 2000 could result in price adjustments, or
in affected utilities seeking to terminate or modify long-term contracts in
reliance on such termination provisions. If the parties to any long-term
contracts with the Company were to modify, suspend or terminate those contracts,
the Company could be adversely affected to the extent that it is unable to find
alternative customers at the same or better level of profitability.
From time to time, disputes with customers may arise under long-term contracts
relating to, among other things, coal quality, pricing and quantity. The Company
may thus become involved in arbitration and legal proceedings regarding its
long-term contracts. There can be no assurance that the Company will be able to
resolve such disputes in a satisfactory manner.
The Company's customers frequently combine various qualities of coal, nuclear,
natural gas and other energy sources in their generating operations, and,
accordingly, their demand for coal of the kind produced by the Company varies
depending on price and transportation, regulatory, and other factors.
The Company's coal production and sales are subject to a variety of regulatory,
operational, geologic, transportation, and weather-related factors that
routinely cause production to fluctuate.
Coal mining is subject to strict regulation by federal, state, and local
authorities. The scope of the regulation includes environmental and health and
safety matters, and permits are required to be obtained by mining companies, the
terms of which permits strictly regulate the environmental effects of coal
mining by the permittee. Numerous permits are required for mining operations.
The Company believes all permits required to conduct present mining operations
have been obtained. The Company believes that, upon the filing of the required
information with the appropriate regulatory agencies, all permits necessary for
continuing operations will be obtained. Nevertheless, the regulatory authorities
exercise considerable discretion in the timing of permit issuance. Because both
private individuals and the public at large possess rights to comment on and
otherwise engage in the permitting process, including through intervention in
the courts, no assurance can be made that all permits will be issued in a timely
manner or that permitting requirements will not be changed in a manner adversely
affecting the Company.
Geologic conditions within mines are not uniform. Overburden ratios at the
surface mines vary, as do roof and floor conditions and seam thickness in
underground mines. These variations can be either positive or negative for
production.
Operational factors affecting production include anticipated and unanticipated
events. For example, at Mingo Logan's Mountaineer Mine, the longwall equipment
must be dismantled and moved to a new area of the mine whenever the coal
reserves in a segment of the mine, called a panel, are exhausted. The size of a
panel varies, and therefore, the frequency of moves can also vary. Unanticipated
events, such as the unavailability of essential equipment because of breakdown
or unscheduled maintenance, could adversely affect production. Permits are
sometimes delayed by unanticipated regulatory requests or processing delays.
Timely completion of improvement projects and equipment relocation depend to a
large degree on availability of labor and equipment, timely issuance of permits,
and the weather. Sales can be adversely affected by fluctuations in production
and by transportation delays arising from equipment unavailability and
weather-related events, such as flooding.
Changes in transportation rates and service also significantly influence the
Company's results. If lower costs are realized and freight rates are lowered as
a consequence of mergers among railroads, operational changes or other factors,
the coal of some producers could become less costly on a delivered basis and
therefore gain competitive advantage over the Company's coal in some markets.
Service disruptions and railcar shortages also may have an adverse effect on the
Company's sales and production.
Weather conditions can also have a significant effect on the Company's
production, depending on the severity and duration of the condition. For
example, extremely cold weather combined with substantial snow and ice
accumulations may impede surface operations directly and all operations
indirectly by making it difficult for workers and suppliers to reach the mine
sites.
The results of the third quarter of each year are normally adversely affected by
lower production and resultant higher costs because of scheduled vacation
periods. In addition, costs are typically somewhat higher during vacation
periods because of maintenance activity carried on during those periods. These
adverse effects on the third quarter may make the third quarter not comparable
to the other quarters and not indicative of results to be expected for the full
year.
Apogee and Hobet operations are parties to the Wage Agreement. From time to time
in the past, strikes and work stoppages have adversely affected production at
Apogee's and Hobet's mining complexes. Any future strike or work stoppage that
affected these operations for a prolonged period would have a significant
adverse effect on the Company's results of operations.
Any one or a combination of changing demand; fluctuating selling prices;
contract terminations; unexpected regulatory changes; routine operational,
geologic, transportation and weather-related factors; results of litigation; or
labor disruptions may occur at times or in a manner that causes current and
projected results of operations to deviate from projections and expectations.
Any event disrupting substantially all production at any of the Company's
principal mines or preventing expansion of existing mines or development of new
mines for a prolonged period would have a significant adverse effect on the
Company's current and projected results of operations. Decreases in production
from anticipated levels usually lead to increased mining costs and decreased net
income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The quantitative and qualitative disclosures of market risk under SEC Regulation
S-K, Item 305, will be provided, in accordance with the SEC's requirements, for
the Company's fiscal periods ending after June 15, 1998. Reference is made to
the second paragraph under the Interest rate risk subsection of the Certain Risk
Factors discussion beginning at page 11 of this report for information about the
Company's current derivatives positions. The Company accrues amounts to be paid
or received under its interest rate swap agreements over the lives of the
agreements, thereby adjusting the effective interest rate on the Company's debt.
The Company's accounting policies with respect to its current derivatives
positions do not materially affect the Company's determination of financial
position, cash flows or results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The second paragraph of the Legal Contingencies subsection of the Contingencies
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations in this report is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on April 22, 1998,
at the Company's headquarters at CityPlace One, Suite 300, St. Louis,
Missouri, at 10:00 a.m.
(b) At such Annual Meeting, the holders of the Company's Common Stock elected
the following nominees for director:
Nominee Votes
------- -----
James R. Boyd 38,252,770
Paul W. Chellgren 38,252,798
Thomas L. Feazell 38,251,647
Juan Antonio Ferrando 38,254,694
John R. Hall 38,253,316
Robert L. Hintz 38,255,201
Douglas L. Hunt 38,253,816
Steven F. Leer 38,252,790
James L. Parker 38,255,869
J. Marvin Quin 38,251,067
At such Annual Meeting, the Company's stockholders, by a vote of 34,181,086 for
and 2,399,978 against, with 83,273 abstentions and 1,623,474 broker non-votes,
ratified by the requisite 51% majority the adoption of the Company's 1997 Stock
Incentive Plan. The Company's stockholders, by a vote of 38,282,167 for and
3,373 against, with 2,271 abstentions, also ratified the appointment of Ernst &
Young LLP as the Company's independent auditors for 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
2.1 Agreement and Plan of Merger dated as of April 4, 1997, among the
Company, Ashland Coal and AMC Merger Corporation (incorporated herein
by reference to Exhibit 2.1 to the Registration Statement of Arch
Mineral Corporation on Form S-4, registration 333-28149 (AS-4@)).
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.1 to the S-4).
3.2 Restated and Amended By-Laws of Arch Coal, Inc. (incorporated herein
by reference to Exhibit 3.4 to the S-4).
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Mineral Corporation
(incorporated herein as reference to Exhibit 4.1 to the S-4).
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch
Mineral Corporation, Ashland Inc., Carboex International, Ltd. and the
entities listed on Schedules I and II thereto (incorporated herein by
reference to Exhibit 4.2 to the S-4).
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4,
1997, among Carboex International, Ltd., Ashland Inc., Ashland Coal,
Inc. and Arch Mineral Corporation (incorporated herein by reference to
Exhibit 4.3 to the S-4).
4.4 Agreement for Termination of the Arch Mineral Corporation Voting
Agreement and for Nomination of Directors, dated as of April 4, 1997,
among Hunt Coal Corporation, Petro-Hunt Corporation, each of the
trusts listed on Schedule I thereto, Ashland Inc. and Arch Mineral
Corporation (incorporated herein by reference to Exhibit 4.4 to the
S-4).
4.5 Credit Agreement dated as of July 1, 1997, by and among Arch Coal,
Inc., the banks party thereto, PNC Bank, National Association, as
Administrative and Syndication Agent and Morgan Guaranty Trust Company
of New York, as Documentation and Syndication Agent (incorporated
herein by Reference to Exhibit 4.1 to the Current Report of Arch Coal,
Inc. on Form 8-K filed July 15, 1997).
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated March 23, 1998, reporting the definitive
agreements, subject to customary closing conditions, among the Company,
ARCO and certain of their subsidiaries pursuant to which the Company
would acquire ARCO's U.S. coal operations, was filed during the period
covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARCH COAL, INC.
(Registrant)
Date: May 15, 1998 /s/-------------------------
Patrick A. Kriegshauser
Senior Vice President,
Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: May 15, 1998 /s/------------------------
Jeffry N. Quinn
Senior Vice President,
General Counsel
and Secretary
(Duly Authorized Officer)
Arch Coal, Inc.
Form 10-Q for Quarter Ended March 31, 1998
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated as of April 4, 1997, among the
Company, Ashland Coal and AMC Merger Corporation (incorporated herein
by reference to Exhibit 2.1 to the Registration Statement of Arch
Mineral Corporation on Form S-4, registration 333-28149 (AS-4@)).
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated
herein by reference to Exhibit 3.1 to the S-4).
3.2 Restated and Amended By Laws of Arch Coal, Inc. (incorporated herein
by reference to Exhibit 3.4 to the S-4).
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex
International, Ltd., Ashland Inc. and Arch Mineral Corporation
(incorporated herein as reference to Exhibit 4.1 to the S-4).
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch
Mineral Corporation, Ashland Inc., Carboex International, Ltd. and the
entities listed on Schedules I and II thereto (incorporated herein by
reference to Exhibit 4.2 to the S-4).
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4,
1997, among Carboex International, Ltd., Ashland Inc., Ashland Coal,
Inc. and Arch Mineral Corporation (incorporated herein by reference to
Exhibit 4.3 to the S-4).
4.4 Agreement for Termination of the Arch Mineral Corporation Voting
Agreement and for Nomination of Directors, dated as of April 4, 1997,
among Hunt Coal Corporation, Petro-Hunt Corporation, each of the
trusts listed on Schedule I thereto, Ashland Inc. and Arch Mineral
Corporation (incorporated herein by reference to Exhibit 4.4 to the
S-4).
4.5 Credit Agreement dated as of July 1, 1997, by and among Arch Coal,
Inc., the banks party thereto, PNC Bank, National Association, as
Administrative and Syndication Agent and Morgan Guaranty Trust Company
of New York, as Documentation and Syndication Agent (incorporated
herein by Reference to Exhibit 4.1 to the Current Report of Arch Coal,
Inc. on Form 8-K filed July 15, 1997).
27 Financial Data Schedule
5
1,000
3-MOS
DEC-31-1998
MAR-31-1998
12605
0
149822
0
60226
255762
1800805
700858
1629614
205341
0
0
0
397
622867
1629614
298964
312564
270905
290205
0
0
3804
18621
2800
15821
0
0
0
15821
0.4
0.4
