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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2006
| o | 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: 333-107569-03
Arch Western Resources, LLC
(Exact name of registrant as specified in its charter)
| Delaware | 43-1811130 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification Number | |
| One CityPlace Drive, Suite 300, St. Louis, Missouri | 63141 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (314) 994-2700
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No
þ
At August 11, 2006, the registrant’s common equity consisted solely of undenominated
membership interests, 99.5% of which were held by Arch Western Acquisition Corporation and 0.5% of
which were held by a subsidiary of BP p.l.c.
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| Section 1350 Certification | ||||||||
| Section 1350 Certification | ||||||||
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands)
Condensed Consolidated Statements of Income
(in thousands)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| (unaudited) | ||||||||||||||||
Revenues |
||||||||||||||||
Coal sales |
$ | 386,405 | $ | 274,700 | $ | 748,601 | $ | 552,116 | ||||||||
Costs, expenses and other |
||||||||||||||||
Cost of coal sales |
251,276 | 205,697 | 503,406 | 414,801 | ||||||||||||
Depreciation, depletion and amortization |
26,853 | 24,316 | 50,429 | 49,835 | ||||||||||||
Selling, general and administrative expenses allocated from
Arch Coal, Inc. |
6,529 | 5,192 | 12,018 | 10,883 | ||||||||||||
Other operating income, net |
(1,391 | ) | (442 | ) | (1,866 | ) | (2,735 | ) | ||||||||
| 283,267 | 234,763 | 563,987 | 472,784 | |||||||||||||
Income from operations |
103,138 | 39,937 | 184,614 | 79,332 | ||||||||||||
Interest income (expense), net |
||||||||||||||||
Interest expense |
(18,516 | ) | (17,323 | ) | (36,252 | ) | (33,312 | ) | ||||||||
Interest income primarily from Arch Coal, Inc. |
20,642 | 10,603 | 36,964 | 19,383 | ||||||||||||
| 2,126 | (6,720 | ) | 712 | (13,929 | ) | |||||||||||
Other non-operating expense |
||||||||||||||||
Expenses resulting from early debt extinguishment and
termination of hedge accounting for interest rate swaps |
(2,305 | ) | (3,388 | ) | (5,023 | ) | (6,775 | ) | ||||||||
Income before minority interest |
102,959 | 29,829 | 180,303 | 58,628 | ||||||||||||
Minority interest |
(7,388 | ) | (7,750 | ) | (20,755 | ) | (10,478 | ) | ||||||||
Net income |
$ | 95,571 | $ | 22,079 | $ | 159,548 | $ | 48,150 | ||||||||
Net income attributable to redeemable membership interests |
$ | 478 | $ | 110 | $ | 798 | $ | 240 | ||||||||
Net income attributable to non-redeemable membership interests |
$ | 95,093 | $ | 21,969 | $ | 158,750 | $ | 47,910 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
Condensed Consolidated Balance Sheets
(in thousands)
| June 30, | December 31, | |||||||
| 2006 | 2005 | |||||||
| (unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 84 | $ | 152 | ||||
Trade receivables |
379 | 111,948 | ||||||
Other receivables |
12,922 | 5,469 | ||||||
Inventories |
81,101 | 98,478 | ||||||
Prepaid royalties |
6,847 | — | ||||||
Other |
13,223 | 17,318 | ||||||
Total current assets |
114,556 | 233,365 | ||||||
Property, plant and equipment, net |
1,143,550 | 1,068,159 | ||||||
Other assets |
||||||||
Receivable from Arch Coal, Inc. |
1,089,741 | 869,056 | ||||||
Other |
35,020 | 44,796 | ||||||
Total other assets |
1,124,761 | 913,852 | ||||||
Total assets |
$ | 2,382,867 | $ | 2,215,376 | ||||
Liabilities and Membership Interests |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 93,464 | $ | 89,632 | ||||
Accrued expenses |
125,072 | 111,821 | ||||||
Total current liabilities |
218,536 | 201,453 | ||||||
Long-term debt |
959,564 | 960,247 | ||||||
Asset retirement obligations |
141,354 | 136,092 | ||||||
Accrued postretirement benefits other than pension |
28,261 | 27,016 | ||||||
Accrued workers’ compensation |
11,161 | 11,446 | ||||||
Other noncurrent liabilities |
46,647 | 62,060 | ||||||
Total liabilities |
1,405,523 | 1,398,314 | ||||||
Membership Interests |
||||||||
Minority interest |
154,375 | 133,620 | ||||||
Redeemable membership interests |
6,343 | 5,647 | ||||||
Non-redeemable membership interests |
816,626 | 677,795 | ||||||
Total liabilities and membership interests |
$ | 2,382,867 | $ | 2,215,376 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Condensed Consolidated Statements of Cash Flows
(in thousands)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2006 | 2005 | |||||||
| Restated | ||||||||
| (unaudited) | ||||||||
Operating activities |
||||||||
Net income |
$ | 159,548 | $ | 48,150 | ||||
Adjustments to reconcile to cash provided by operating activities |
||||||||
Depreciation, depletion and amortization |
50,429 | 49,835 | ||||||
Prepaid royalties expensed |
607 | 12,726 | ||||||
Net gain on disposition of assets |
(89 | ) | (1,687 | ) | ||||
Minority interest |
20,755 | 10,478 | ||||||
Other non-operating expense |
5,023 | 6,775 | ||||||
Increase (decrease) resulting from changes in: |
||||||||
Trade receivables |
108,090 | (30,885 | ) | |||||
Inventories |
(20,177 | ) | (4,458 | ) | ||||
Accounts payable and accrued expense |
17,083 | (604 | ) | |||||
Other |
8,500 | 7,544 | ||||||
Cash provided by operating activities |
349,769 | 97,874 | ||||||
Investing activities |
||||||||
Capital expenditures |
(133,186 | ) | (41,961 | ) | ||||
Increase in receivable from Arch Coal, Inc. |
(216,744 | ) | (46,249 | ) | ||||
Proceeds from dispositions of property, plant and equipment |
93 | 1,974 | ||||||
Additions to prepaid royalties |
— | (12,456 | ) | |||||
Cash used in investing activities |
(349,837 | ) | (98,692 | ) | ||||
Financing activities |
||||||||
Debt financing costs |
— | (51 | ) | |||||
Cash used in financing activities |
— | (51 | ) | |||||
Decrease in cash and cash equivalents |
(68 | ) | (869 | ) | ||||
Cash and cash equivalents, beginning of period |
152 | 1,351 | ||||||
Cash and cash equivalents, end of period |
$ | 84 | $ | 482 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Western Resources, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of Arch Western
Resources, LLC and its subsidiaries (the “Company”). Arch Coal, Inc. (“Arch Coal”) has a 99.5%
common membership interest in the Company, while BP p.l.c. has a 0.5% common membership interest
and a 0.5% preferred membership interest in the Company. Intercompany transactions and accounts
have been eliminated in consolidation. Certain amounts in the 2005 financial statements have been
reclassified to conform to the classifications in the 2006 financial statements with no effect on
previously reported net income or membership interests.
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 that
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 June 30, 2006 are not necessarily indicative of results to be expected for the
year ending December 31, 2006. These financial statements should be read in conjunction with the
audited financial statements and related notes thereto as of and for the year ended December 31,
2005 included in Arch Western Resources, LLC’s Form 10-K, as amended, as filed with the Securities
and Exchange Commission.
Subsequent to the issuance of the Company’s December 31, 2005 financial statements, the
Company’s management determined that certain cash outflows in the Consolidated Statements of Cash
Flows should be restated for a reclassification between operating and investing activities for all
periods presented to comply with the guidance under Statement of Financial Accounting Standards
(“SFAS”) No. 95, “Statement of Cash Flows.” The change in presentation has no effect on previously
reported net income, net income attributable to membership interests, membership interests or net
change in cash. The change also has no effect on the consolidated financial statements of Arch
Coal.
Arch Coal manages the Company’s cash transactions. Cash paid to or from the Company that is
not considered a distribution or a contribution is recorded in a receivable account. In addition,
any amounts owed between the Company and Arch Coal are recorded in the account. The Company
previously reported changes in the account as operating cash outflows, and management has concluded
it is more appropriate to classify these amounts as investing cash outflows. As a result, cash
provided from operating activities and cash used in investing activities are both $46.2 million
higher than previously stated for the six months ended June 30, 2005.
2. Recent Accounting Pronouncements
On January 1, 2006, the Company adopted the Emerging Issues Task Force Issue No. 04-6,
Accounting for Stripping Costs in the Mining Industry (“EITF 04-6”). EITF 04-6 applies to
stripping costs incurred in the production phase of a mine for the removal of overburden or waste
materials for the purpose of obtaining access to coal that will be extracted. Under EITF 04-6,
stripping costs incurred during the production phase of the mine are variable production costs that
are included in the cost of inventory extracted during the period the stripping costs are incurred.
Historically, the Company had associated stripping costs at its surface mining operations with the
cost of tons of coal uncovered and classified such tons uncovered but not yet extracted as coal
inventory (pit inventory). The effect of adopting EITF 04-6 was a reduction of $37.6 million and
$2.0 million of inventory and deferred development cost, respectively, with a corresponding
decrease to membership interests of $39.6 million. In the future, it is expected that this
accounting change will introduce volatility into the Company’s results of operations, as cost
increases or decreases related to fluctuations in pit inventory will be attributed to tons
extracted from the pit. During the three and six months ended June 30, 2006, decreases in pit
inventory resulted in net income that was $3.5 million and $10.1 million higher, respectively, than
it would have been under the Company’s previous methodology of accounting for pit inventory.
3. Insurance Recovery
The West Elk mine in Colorado (in the Company’s Western Bituminous segment) was idled during
the first quarter of 2006 due to a combustion-related event. The Company recorded preliminary
insurance recoveries related to the event of $10.0 million and $20.0 million during the three
months and six months ended June 30, 2006,
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respectively. The insurance recoveries are reflected as a reduction of cost of coal sales
on the Condensed Consolidated Statement of Income.
4. Inventories
Inventories consist of the following:
| June 30, | December 31, | |||||||
| 2006 | 2005 | |||||||
| (in thousands) | ||||||||
Coal |
$ | 26,095 | $ | 49,144 | ||||
Repair parts and supplies |
55,006 | 49,334 | ||||||
| $ | 81,101 | $ | 98,478 | |||||
The decrease in coal inventories is primarily the result of the implementation of EITF
04-6 discussed in Note 2, “Recent Accounting Pronouncements” as of January 1, 2006.
5. Comprehensive Income
The following table presents comprehensive income:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| (in thousands) | ||||||||||||||||
Net income |
$ | 95,571 | $ | 22,079 | $ | 159,548 | $ | 48,150 | ||||||||
Other comprehensive income |
16,836 | 4,907 | 19,554 | 9,633 | ||||||||||||
Total comprehensive income |
$ | 112,407 | $ | 26,986 | $ | 179,102 | $ | 57,783 | ||||||||
Other comprehensive income items are transactions recorded in membership interests during
the year, excluding net income and transactions with members. Other comprehensive income for the
three and six month periods ended June 30, 2006 and 2005 consists of a reversal of the additional
minimum pension liability allocated by Arch Coal and losses previously deferred upon termination of
hedge accounting for certain interest rate swaps.
6. Related Party Transactions
Transactions with Arch Coal may not be at arms length. If the transactions were negotiated
with an unrelated party, the impact could be material to the Company’s results of operations.
On February 10, 2006, Arch Coal established an accounts receivable securitization program.
Under the program, the Company sells its receivables to Arch Coal at a 0.75% discount. The Company
retains the obligation for any potential loss related to uncollectible accounts or obligations
related to the receivables. Under the program, the Company sold $414.9 million of trade accounts
receivable to Arch Coal since inception, at a total discount of $3.2 million.
Arch Coal manages the Company’s cash transactions. Amounts owed between the Company and Arch
Coal that are not considered a distribution or a contribution are recorded in an Arch Coal
receivable account. At June 30, 2006 and December 31, 2005, the receivable from Arch Coal was $1.1
billion and $869.1 million, respectively. This amount earns interest from Arch Coal at the prime
interest rate. Interest earned for the three month periods ended June 30, 2006 and 2005 was $20.5
million and $10.6 million, respectively, and for the six month periods ended June 30, 2006 and 2005
was $36.6 million and $19.4 million, respectively. The receivable is payable on demand by the
Company; however, it is currently management’s intention to not demand payment of the receivable
within the next year. Therefore, the receivable is classified on the Condensed Consolidated
Balance Sheets as long-term.
For the three month periods ended June 30, 2006 and 2005, the Company incurred production
royalties of $11.0 million and $6.2 million, respectively, payable to Arch Coal under sublease
agreements. For the six month periods ended June 30, 2006 and 2005, the Company incurred
production royalties of $21.1 million and $8.6 million, respectively.
Arch Coal charges the Company selling, general and administrative services fees. Expenses are
allocated based on Arch Coal’s best estimates of proportional or incremental costs, whichever is
more representative of costs
incurred by Arch Coal on behalf of the Company. Amounts allocated to the Company by Arch Coal
were $6.5
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million and $5.2 million for the three month periods ended June 30, 2006 and 2005,
respectively, and $12.0 million and $10.9 million for the six month periods ended June 30, 2006 and
2005, respectively.
7. Segment Information
The Company produces coal from surface and underground mines for sale to utility, industrial
and export markets. The Company operates only in the United States, with mines in the major
low-sulfur coal basins. The Company has two reportable business segments, which are based on the
coal basins in which the Company operates. Geology, coal transportation routes to customers,
regulatory environments and coal quality are generally consistent within a basin. Accordingly,
market and contract pricing have developed by coal basin. The Company manages its coal sales by
coal basin, not by individual mine complex. Mine operations are evaluated based on their per-ton
operating costs (defined as including all mining costs but excluding pass-through transportation
expenses), as well as on other non-financial measures, such as safety and environmental
performance. The Company’s reportable segments are the Powder River Basin (PRB) segment, with
operations in Wyoming, and the Western Bituminous segment (WBIT), with operations in Colorado and
Utah.
Operating segment results for the three and six months ended June 30, 2006 and 2005 are
presented below. Results for the operating segments include all direct costs of mining. Corporate,
Other and Eliminations includes overhead, land management, other support functions, and the
elimination of intercompany transactions.
| Three Months Ended June 30, 2006 | ||||||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Coal sales |
$ | 276,054 | $ | 110,351 | $ | — | $ | 386,405 | ||||||||
Income from operations |
70,499 | 40,509 | (7,870 | ) | 103,138 | |||||||||||
Total assets |
1,454,686 | 1,784,718 | (856,537 | ) | 2,382,867 | |||||||||||
Depreciation, depletion and amortization |
15,666 | 11,187 | — | 26,853 | ||||||||||||
Capital expenditures |
30,052 | 42,038 | — | 72,090 | ||||||||||||
| Three Months Ended June 30, 2005 | ||||||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Coal sales |
$ | 169,666 | $ | 105,034 | $ | — | $ | 274,700 | ||||||||
Income from operations |
17,924 | 26,746 | (4,733 | ) | 39,937 | |||||||||||
Total assets |
1,182,995 | 1,701,858 | (808,338 | ) | 2,076,515 | |||||||||||
Depreciation, depletion and amortization |
15,626 | 8,690 | — | 24,316 | ||||||||||||
Capital expenditures |
8,507 | 11,541 | — | 20,048 | ||||||||||||
| Six Months Ended June 30, 2006 | ||||||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Coal sales |
$ | 528,443 | $ | 220,158 | $ | — | $ | 748,601 | ||||||||
Income from operations |
132,712 | 66,222 | (14,320 | ) | 184,614 | |||||||||||
Depreciation, depletion and amortization |
30,264 | 20,165 | — | 50,429 | ||||||||||||
Capital expenditures |
69,207 | 63,979 | — | 133,186 | ||||||||||||
| Six Months Ended June 30, 2005 | ||||||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Coal sales |
$ | 349,373 | $ | 202,743 | $ | — | $ | 552,116 | ||||||||
Income from operations |
51,584 | 39,106 | (11,358 | ) | 79,332 | |||||||||||
Depreciation, depletion and amortization |
32,815 | 17,020 | — | 49,835 | ||||||||||||
Capital expenditures |
16,998 | 24,963 | — | 41,961 | ||||||||||||
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Reconciliation of segment income from operations to consolidated income before minority
interest:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| (in thousands) | ||||||||||||||||
Income from operations |
$ | 103,138 | $ | 39,937 | $ | 184,614 | $ | 79,332 | ||||||||
Interest expense |
(18,516 | ) | (17,323 | ) | (36,252 | ) | (33,312 | ) | ||||||||
Interest income |
20,642 | 10,603 | 36,964 | 19,383 | ||||||||||||
Other non-operating expense |
(2,305 | ) | (3,388 | ) | (5,023 | ) | (6,775 | ) | ||||||||
Income before minority interest |
$ | 102,959 | $ | 29,829 | $ | 180,303 | $ | 58,628 | ||||||||
8. Supplemental Condensed Consolidating Financial Information
Pursuant to the indenture governing the Arch Western Finance senior notes, certain
wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes
on a joint and several basis. The following tables present unaudited condensed consolidating
financial information for (i) the Company, (ii) the issuer of the senior notes (Arch Western
Finance, LLC, a wholly-owned subsidiary of the Company), (iii) the Company’s wholly-owned
subsidiaries (Thunder Basin Coal Company, L.L.C., Mountain Coal Company, L.L.C., and Arch of
Wyoming, LLC), on a combined basis, which are guarantors under the Notes, and (iv) its majority
owned subsidiary (Canyon Fuel Company, LLC) which is not a guarantor under the Notes.
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Balance Sheets
June 30, 2006
(in thousands)
June 30, 2006
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
Cash and cash equivalents |
$ | — | $ | — | $ | 77 | $ | 7 | $ | — | $ | 84 | ||||||||||||
Trade accounts receivable |
— | — | — | 379 | — | 379 | ||||||||||||||||||
Other receivables |
528 | — | 10,912 | 1,482 | — | 12,922 | ||||||||||||||||||
Inventories |
— | — | 51,512 | 29,589 | — | 81,101 | ||||||||||||||||||
Prepaid royalties |
— | — | 2,032 | 4,815 | — | 6,847 | ||||||||||||||||||
Other current assets |
2,496 | 2,147 | 3,654 | 4,926 | — | 13,223 | ||||||||||||||||||
Total current assets |
3,024 | 2,147 | 68,187 | 41,198 | — | 114,556 | ||||||||||||||||||
Property, plant and equipment, net |
— | — | 814,455 | 329,095 | — | 1,143,550 | ||||||||||||||||||
Investment in subsidiaries |
1,772,047 | — | — | (1,772,047 | ) | — | ||||||||||||||||||
Receivable from Arch Coal |
1,071,875 | — | 13 | 17,853 | — | 1,089,741 | ||||||||||||||||||
Intercompanies |
(1,829,141 | ) | 975,212 | 801,384 | 52,545 | — | — | |||||||||||||||||
Other |
1,713 | 12,835 | 23,232 | (2,760 | ) | — | 35,020 | |||||||||||||||||
Total other assets |
1,016,494 | 988,047 | 824,629 | 67,638 | (1,772,047 | ) | 1,124,761 | |||||||||||||||||
Total assets |
$ | 1,019,518 | $ | 990,194 | $ | 1,707,271 | $ | 437,931 | $ | (1,772,047 | ) | $ | 2,382,867 | |||||||||||
Accounts payable |
11,612 | — | 60,411 | 21,441 | — | 93,464 | ||||||||||||||||||
Accrued expenses |
6,629 | 32,062 | 76,735 | 9,646 | — | 125,072 | ||||||||||||||||||
Total current liabilities |
18,241 | 32,062 | 137,146 | 31,087 | — | 218,536 | ||||||||||||||||||
Long-term debt |
— | 959,564 | — | — | — | 959,564 | ||||||||||||||||||
Asset retirement obligations |
— | — | 131,051 | 10,303 | — | 141,354 | ||||||||||||||||||
Accrued postretirement benefits
other than pension |
16,662 | — | 2,485 | 9,114 | — | 28,261 | ||||||||||||||||||
Accrued workers’ compensation |
6,120 | — | 1,345 | 3,696 | — | 11,161 | ||||||||||||||||||
Other noncurrent liabilities |
1,151 | — | 33,856 | 11,640 | — | 46,647 | ||||||||||||||||||
Total liabilities |
42,174 | 991,626 | 305,883 | 65,840 | — | 1,405,523 | ||||||||||||||||||
Minority interest |
154,375 | — | — | — | — | 154,375 | ||||||||||||||||||
Redeemable membership interests |
6,343 | — | — | — | 6,343 | |||||||||||||||||||
Non-redeemable membership interests |
816,626 | (1,432 | ) | 1,401,388 | 372,091 | (1,772,047 | ) | 816,626 | ||||||||||||||||
Total liabilities, redeemable
membership interests and
non-redeemable membership
interests |
$ | 1,019,518 | $ | 990,194 | $ | 1,707,271 | $ | 437,931 | $ | (1,772,047 | ) | $ | 2,382,867 | |||||||||||
Statements of Operations
Three Months Ended June 30, 2006
(in thousands)
Three Months Ended June 30, 2006
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
Coal sales revenues |
$ | — | $ | — | $ | 315,888 | $ | 70,517 | $ | — | $ | 386,405 | ||||||||||||
Cost of coal sales |
1,391 | — | 202,677 | 47,208 | — | 251,276 | ||||||||||||||||||
Depreciation, depletion and amortization |
— | — | 20,820 | 6,033 | — | 26,853 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
6,529 | — | — | — | — | 6,529 | ||||||||||||||||||
Other operating income |
(50 | ) | — | (722 | ) | (619 | ) | — | (1,391 | ) | ||||||||||||||
| 7,870 | — | 222,775 | 52,622 | — | 283,267 | |||||||||||||||||||
Income from equity investment |
111,681 | — | — | — | (111,681 | ) | — | |||||||||||||||||
Income from operations |
103,811 | — | 93,113 | 17,895 | (111,681 | ) | 103,138 | |||||||||||||||||
Interest expense |
(18,717 | ) | (15,271 | ) | (78 | ) | (481 | ) | 16,031 | (18,516 | ) | |||||||||||||
Interest income primarily from Arch Coal |
20,170 | 16,031 | 137 | 335 | (16,031 | ) | 20,642 | |||||||||||||||||
| 1,453 | 760 | 59 | (146 | ) | — | 2,126 | ||||||||||||||||||
Other non-operating expense |
(2,305 | ) | — | — | — | — | (2,305 | ) | ||||||||||||||||
Minority interest |
(7,388 | ) | — | — | — | — | (7,388 | ) | ||||||||||||||||
Net income |
$ | 95,571 | $ | 760 | $ | 93,172 | $ | 17,749 | $ | (111,681 | ) | $ | 95,571 | |||||||||||
8
Table of Contents
Statements of Operations
Six Months Ended June 30, 2006
(in thousands)
Six Months Ended June 30, 2006
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
Coal sales revenues |
$ | — | $ | — | $ | 578,893 | $ | 169,708 | $ | — | $ | 748,601 | ||||||||||||
Cost of coal sales |
2,370 | — | 394,803 | 106,233 | — | 503,406 | ||||||||||||||||||
Depreciation, depletion and amortization |
— | — | 38,526 | 11,903 | — | 50,429 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
12,018 | — | — | — | — | 12,018 | ||||||||||||||||||
Other operating income |
(68 | ) | — | (1,010 | ) | (788 | ) | — | (1,866 | ) | ||||||||||||||
| 14,320 | — | 432,319 | 117,348 | — | 563,987 | |||||||||||||||||||
Income from equity investment |
199,685 | — | — | — | (199,685 | ) | — | |||||||||||||||||
Income from operations |
185,365 | — | 146,574 | 52,360 | (199,685 | ) | 184,614 | |||||||||||||||||
Interest expense |
(36,149 | ) | (30,772 | ) | (349 | ) | (1,011 | ) | 32,029 | (36,252 | ) | |||||||||||||
Interest income primarily from Arch Coal |
36,110 | 32,029 | 258 | 596 | (32,029 | ) | 36,964 | |||||||||||||||||
| (39 | ) | 1,257 | (91 | ) | (415 | ) | — | 712 | ||||||||||||||||
Other non-operating expense |
(5,023 | ) | — | — | — | — | (5,023 | ) | ||||||||||||||||
Minority interest |
(20,755 | ) | — | — | — | — | (20,755 | ) | ||||||||||||||||
Net income |
$ | 159,548 | $ | 1,257 | $ | 146,483 | $ | 51,945 | $ | (199,685 | ) | $ | 159,548 | |||||||||||
Statements of Cash Flows
Six Months Ended June 30, 2006
(in thousands)
Six Months Ended June 30, 2006
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
Operating Activities |
||||||||||||||||||||
Cash provided by operating activities |
$ | 71,919 | $ | 1,654 | $ | 189,093 | $ | 87,103 | $ | 349,769 | ||||||||||
Investing Activities |
||||||||||||||||||||
Increase in receivable from Arch Coal |
(198,878 | ) | — | (13 | ) | (17,853 | ) | (216,744 | ) | |||||||||||
Capital expenditures |
— | — | (75,730 | ) | (57,456 | ) | (133,186 | ) | ||||||||||||
Proceeds from dispositions of capital
assets |
— | — | — | 93 | 93 | |||||||||||||||
Cash used in investing activities |
(198,878 | ) | — | (75,743 | ) | (75,216 | ) | (349,837 | ) | |||||||||||
Financing Activities |
||||||||||||||||||||
Transactions with affiliates, net |
126,959 | (1,654 | ) | (113,399 | ) | (11,906 | ) | — | ||||||||||||
Cash provided by (used in) financing
activities |
126,959 | (1,654 | ) | (113,399 | ) | (11,906 | ) | — | ||||||||||||
Decrease in cash and cash equivalents |
— | — | (49 | ) | (19 | ) | (68 | ) | ||||||||||||
Cash and cash equivalents, beginning of
period |
— | — | 126 | 26 | 152 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | — | $ | — | $ | 77 | $ | 7 | $ | 84 | ||||||||||
9
Table of Contents
Balance Sheets
December 31, 2005
(in thousands)
December 31, 2005
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents |
$ | — | $ | — | $ | 126 | $ | 26 | $ | — | $ | 152 | ||||||||||||
Trade accounts receivable |
87,012 | — | 31 | 24,905 | — | 111,948 | ||||||||||||||||||
Other receivables |
1,072 | — | 673 | 3,724 | — | 5,469 | ||||||||||||||||||
Inventories |
— | — | 78,993 | 19,485 | — | 98,478 | ||||||||||||||||||
Other current assets |
6,947 | 2,146 | 3,212 | 5,013 | — | 17,318 | ||||||||||||||||||
Total current assets |
95,031 | 2,146 | 83,035 | 53,153 | — | 233,365 | ||||||||||||||||||
Property, plant and equipment, net |
— | — | 778,945 | 289,214 | — | 1,068,159 | ||||||||||||||||||
Investment in subsidiaries |
1,604,489 | — | — | — | (1,604,489 | ) | — | |||||||||||||||||
Receivable from Arch Coal |
869,056 | — | — | — | — | 869,056 | ||||||||||||||||||
Intercompanies |
(1,702,182 | ) | 973,558 | 687,985 | 40,639 | — | — | |||||||||||||||||
Other |
1,865 | 13,916 | 25,210 | 3,805 | — | 44,796 | ||||||||||||||||||
Total other assets |
773,228 | 987,474 | 713,195 | 44,444 | (1,604,489 | ) | 913,852 | |||||||||||||||||
Total assets |
$ | 868,259 | $ | 989,620 | $ | 1,575,175 | $ | 386,811 | $ | (1,604,489 | ) | $ | 2,215,376 | |||||||||||
Accounts payable |
18,499 | — | 51,980 | 19,153 | — | 89,632 | ||||||||||||||||||
Accrued expenses |
3,862 | 32,063 | 67,919 | 7,977 | — | 111,821 | ||||||||||||||||||
Total current liabilities |
22,361 | 32,063 | 119,899 | 27,130 | — | 201,453 | ||||||||||||||||||
Long-term debt |
— | 960,247 | — | — | — | 960,247 | ||||||||||||||||||
Asset retirement obligations |
— | — | 126,255 | 9,837 | — | 136,092 | ||||||||||||||||||
Accrued postretirement benefits
other than pension |
15,826 | — | 2,486 | 8,704 | — | 27,016 | ||||||||||||||||||
Accrued workers’ compensation |
5,947 | — | 1,325 | 4,174 | — | 11,446 | ||||||||||||||||||
Other noncurrent liabilities |
7,063 | — | 35,748 | 19,249 | — | 62,060 | ||||||||||||||||||
Total liabilities |
51,197 | 992,310 | 285,713 | 69,094 | — | 1,398,314 | ||||||||||||||||||
Minority interest |
133,620 | — | — | — | — | 133,620 | ||||||||||||||||||
Redeemable membership interests |
5,647 | — | — | — | — | 5,647 | ||||||||||||||||||
Non-redeemable membership interests |
677,795 | (2,690 | ) | 1,289,462 | 317,717 | (1,604,489 | ) | 677,795 | ||||||||||||||||
Total liabilities, redeemable
membership interests and
non-redeemable membership
interests |
$ | 868,259 | $ | 989,620 | $ | 1,575,175 | $ | 386,811 | $ | (1,604,489 | ) | $ | 2,215,376 | |||||||||||
Statements of Operations
Three Months Ended June 30, 2005
(in thousands)
Three Months Ended June 30, 2005
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
Coal sales revenues |
$ | — | $ | — | $ | 209,479 | $ | 65,221 | $ | — | $ | 274,700 | ||||||||||||
Cost of coal sales |
42 | — | 163,729 | 41,926 | — | 205,697 | ||||||||||||||||||
Depreciation, depletion and amortization |
— | — | 19,774 | 4,542 | — | 24,316 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
5,192 | — | — | — | — | 5,192 | ||||||||||||||||||
Other operating income |
(25 | ) | — | (357 | ) | (60 | ) | — | (442 | ) | ||||||||||||||
| 5,209 | — | 183,146 | 46,408 | — | 234,763 | |||||||||||||||||||
Income from equity investment |
43,859 | — | — | — | (43,859 | ) | — | |||||||||||||||||
Income from operations |
38,650 | — | 26,333 | 18,813 | (43,859 | ) | 39,937 | |||||||||||||||||
Interest expense |
(16,036 | ) | (15,873 | ) | (1,446 | ) | — | 16,032 | (17,323 | ) | ||||||||||||||
Interest income primarily from Arch Coal |
10,603 | 16,032 | — | — | (16,032 | ) | 10,603 | |||||||||||||||||
| (5,433 | ) | 159 | (1,446 | ) | — | — | (6,720 | ) | ||||||||||||||||
Other non-operating expense |
(3,388 | ) | — | — | — | — | (3,388 | ) | ||||||||||||||||
Minority interest |
(7,750 | ) | — | — | — | — | (7,750 | ) | ||||||||||||||||
Net income |
$ | 22,079 | $ | 159 | $ | 24,887 | $ | 18,813 | $ | (43,859 | ) | $ | 22,079 | |||||||||||
10
Table of Contents
Statements of Operations
Six Months Ended June 30, 2005
(in thousands)
Six Months Ended June 30, 2005
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
Coal sales revenues |
$ | — | $ | — | $ | 428,253 | $ | 123,863 | $ | — | $ | 552,116 | ||||||||||||
Cost of coal sales |
980 | — | 321,385 | 92,436 | — | 414,801 | ||||||||||||||||||
Depreciation, depletion and amortization |
— | — | 41,064 | 8,771 | — | 49,835 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
10,883 | — | — | — | — | 10,883 | ||||||||||||||||||
Other operating income |
(30 | ) | — | (2,308 | ) | (397 | ) | — | (2,735 | ) | ||||||||||||||
| 11,833 | — | 360,141 | 100,810 | — | 472,784 | |||||||||||||||||||
Income from equity investment |
89,865 | — | — | — | (89,865 | ) | — | |||||||||||||||||
Income from operations |
78,032 | — | 68,112 | 23,053 | (89,865 | ) | 79,332 | |||||||||||||||||
Interest expense |
(32,012 | ) | (31,866 | ) | (1,446 | ) | — | 32,012 | (33,312 | ) | ||||||||||||||
Interest income primarily from Arch Coal |
19,383 | 32,012 | — | — | (32,012 | ) | 19,383 | |||||||||||||||||
| (12,629 | ) | 146 | (1,446 | ) | — | — | (13,929 | ) | ||||||||||||||||
Other non-operating expense |
(6,775 | ) | — | — | — | — | (6,775 | ) | ||||||||||||||||
Minority interest |
(10,478 | ) | — | — | — | — | (10,478 | ) | ||||||||||||||||
Net income |
$ | 48,150 | $ | 146 | $ | 66,666 | $ | 23,053 | $ | (89,865 | ) | $ | 48,150 | |||||||||||
Statements of Cash Flows (Restated)
Six Months Ended June 30, 2005
(in thousands)
Six Months Ended June 30, 2005
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
Operating Activities |
||||||||||||||||||||
Cash provided by (used in) operating
activities |
$ | (47,015 | ) | $ | (721 | ) | $ | 121,110 | $ | 24,500 | $ | 97,874 | ||||||||
Investing Activities
|
— | |||||||||||||||||||
Increase in receivable from Arch Coal |
(46,249 | ) | — | (46,249 | ) | |||||||||||||||
Capital expenditures |
— | — | (26,514 | ) | (15,447 | ) | (41,961 | ) | ||||||||||||
Proceeds from dispositions of capital
assets |
— | — | 1,971 | 3 | 1,974 | |||||||||||||||
Additions to prepaid royalties |
— | — | (12,456 | ) | — | (12,456 | ) | |||||||||||||
Cash used in investing activities |
(46,249 | ) | — | (36,999 | ) | (15,444 | ) | (98,692 | ) | |||||||||||
Financing Activities |
||||||||||||||||||||
Debt financing costs |
(51 | ) | — | — | — | (51 | ) | |||||||||||||
Transactions with affiliates, net |
93,315 | 721 | (84,835 | ) | (9,201 | ) | — | |||||||||||||
Cash provided by (used in) financing
activities |
93,264 | 721 | (84,835 | ) | (9,201 | ) | (51 | ) | ||||||||||||
Decrease in cash and cash equivalents |
— | — | (724 | ) | (145 | ) | (869 | ) | ||||||||||||
Cash and cash equivalents, beginning of
period |
— | — | 1,185 | 166 | 1,351 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | — | $ | — | $ | 461 | $ | 21 | $ | 482 | ||||||||||
11
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This document contains “forward-looking statements” ¯ that is, statements related to
future, not past, events. In this context, forward-looking statements often address our expected
future business and financial performance, and often contain words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” or “will.” Forward-looking statements by
their nature address matters that are, to different degrees, uncertain. For us, particular
uncertainties arise from changes in the demand for our coal by the domestic electric generation
industry; from legislation and regulations relating to the Clean Air Act and other environmental
initiatives; from operational, geological, permit, labor and weather-related factors; from
fluctuations in the amount of cash we generate from operations; from future integration of acquired
businesses; and from numerous other matters of national, regional and global scale, including those
of a political, economic, business, competitive or regulatory nature. These uncertainties may
cause our actual future results to be materially different than those expressed in our
forward-looking statements. We do not undertake to update our forward-looking statements, whether
as a result of new information, future events or otherwise, except as may be required by law. For
a description of some of the risks and uncertainties that may affect our future results, see “Risk
Factors” under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005 and
Part II, Item 1A of the Quarterly Reports on Form 10-Q that we have filed during the interim
period.
Executive Overview
Increased price realizations in both segments resulted in improved operating results during the
three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005.
We achieved those results despite rail bottlenecks and weak near-term market conditions. See
further discussion of realizations in “Results of Operations.” During the second quarter of 2006,
we began production at our Coal Creek surface mine in Wyoming and our Skyline longwall mine in Utah
and took steps to manage our ongoing operating costs. See further discussions of our capital
spending program in “Liquidity and Capital Resources” and our operating margins in “Results of
Operations.”
We have a significant percentage of our coal under sales contracts signed in earlier periods, when
market conditions were weaker than those existing at the end of the second quarter of 2006. Within
the next several years, a majority of these commitments will expire, and we expect to reprice
volumes based on market conditions existing at that time. Although a mild winter and spring have
weakened near-term market conditions in 2006, we believe strong domestic and global demand growth
for coal will positively influence future coal prices. We believe that increased electricity
demand, the relatively high cost of competing fuels, planned new coal-fueled electric generation
facilities and geopolitical risks associated with global oil and natural gas resources suggest that
the long-term fundamentals of the domestic coal industry remain strong.
Overall, we expect the continuing expiration of below-market contracts, the impact of starting our
Coal Creek and Skyline mines to have a favorable impact on our 2006 annual financial results.
Results of Operations
Items Affecting Comparability of Reported Results
The idling of our West Elk mine in Colorado during the first quarter of 2006 due to a
combustion-related event cost us approximately $30.0 million in lost profits during the first
quarter of 2006. We recorded preliminary insurance recoveries related to the event of $10.0 million
and $20.0 million during the three months and six months ended June 30, 2006, respectively. The
insurance recoveries are reflected as a reduction of cost of coal sales in our Condensed
Consolidated Statement of Income.
On January 1, 2006, we adopted the provisions of Emerging Issues Task Force Issue No. 04-6,
“Accounting for Stripping Costs in the Mining Industry” (“EITF 04-6”). EITF 04-6 applies to
stripping costs incurred in the production phase of a mine for the removal of overburden or waste
materials for the purpose of obtaining access to coal that will be extracted. Under EITF 04-6,
stripping costs incurred during the production phase of the mine are variable production costs that
are included in the cost of inventory produced and extracted during the period the stripping costs
are incurred. Historically, we had associated stripping costs at our surface mining operations
with the cost of tons of coal uncovered and classified such tons uncovered but not yet extracted as
coal inventory. The cumulative effect of adoption was to reduce inventory by $37.6 million and
deferred development cost by $2.0 million with a corresponding decrease to membership interests of
$39.6 million. In the future, we expect that this
12
Table of Contents
accounting change will introduce volatility into our results of operations, as cost
increases or decreases related to fluctuations in pit inventory will be attributed to tons
extracted from the pit. During the three and six months ended June 30, 2006, decreases in pit
inventory resulted in net income that was $3.5 million and $10.1 million higher than it would have
been under our previous methodology of accounting for pit inventory.
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
The following discussion summarizes our operating results for the three months ended June 30,
2006 and compares those results to our operating results for the three months ended June 30, 2005.
Revenues. The following table summarizes the number of tons we sold during the three months
ended June 30, 2006 and the sales associated with those tons and compares those results to the
comparable information for the three months ended June 30, 2005:
| Three months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
| (Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales |
$ | 386,405 | $ | 274,700 | $ | 111,705 | 40.7 | % | ||||||||
Tons sold |
28,608 | 25,718 | 2,890 | 11.2 | % | |||||||||||
Coal sales realization per ton sold |
$ | 13.51 | $ | 10.68 | $ | 2.83 | 26.5 | % | ||||||||
The increase in our coal sales from the second quarter of 2005 to the second quarter of
2006 resulted from significantly higher pricing and higher volumes during the second quarter of
2006.
The following table shows the number of tons sold by operating segment during the three months
ended June 30, 2006 and compares those amounts to the comparable information for the three months
ended June 30, 2005:
| Three months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | Tons | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Powder River Basin |
24,107 | 21,040 | 3,067 | 14.6 | % | |||||||||||
Western Bituminous Region |
4,501 | 4,678 | (177 | ) | (3.8 | )% | ||||||||||
Total |
28,608 | 25,718 | 2,890 | 11.2 | % | |||||||||||
Volume increases in the Powder River Basin are primarily the result of improved rail
service experienced during the second quarter of 2006 compared to the second quarter of 2005 and
the restart of the Coal Creek mine, which contributed 0.6 million tons to the quarter. At the
Western Bituminous Region, the impact of the start-up of the Skyline mine during the second quarter
of 2006 was offset by the timing of shipments and a longwall move at another Western Bituminous
operation resulting in a slight decrease in tons during the second quarter of 2006 when compared to
the second quarter of 2005.
The following table shows the coal sales price per ton by operating segment during the three
months ended June 30, 2006 and compares those amounts to the comparable information for the three
months ended June 30, 2005. Coal sales prices per ton exclude certain transportation costs that we
pass through to our customers. We use these financial measures because we believe the adjusted
amounts better represent the coal sales prices we achieved within our operating segments. Since
other companies may calculate coal sales prices per ton differently, our calculation may not be
comparable to similarly titled measures used by those companies. Transportation costs per ton
billed to customers for the three months ended June 30, 2006 were $0.01 for the Powder River Basin
and $2.44 for the Western Bituminous region. For the three months ended June 30, 2005,
transportation costs per ton billed to customers were $0.02 for the Powder River Basin and $3.10
for the Western Bituminous region.
| Three months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
Powder River Basin |
$ | 11.44 | $ | 8.04 | $ | 3.40 | 42.3 | % | ||||||||
Western Bituminous Region |
22.08 | 19.36 | 2.72 | 14.1 | % | |||||||||||
The increase in our coal sales prices resulted from significantly higher base pricing
during the second quarter of 2006 when compared to the second quarter of 2005. Improved base
pricing is due primarily to the expiration of legacy contracts. As part of the renegotiation of a
long-term Powder River Basin contract in the second quarter of 2006, retroactive price adjustments
were made related to shipments during the first quarter of 2006. Approximately $10.0 million of the
Powder River Basin’s second quarter 2006 coal revenues, or $0.41 per ton, related to these first
quarter shipments.
13
Table of Contents
Operating costs and expenses. The following table summarizes our operating costs and expenses
for the three months ended June 30, 2006 and compares those results to the comparable information
for the three months ended June 30, 2005:
| Increase (decrease) | ||||||||||||||||
| Three months ended June 30, | in Net Income | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Cost of coal sales |
$ | 251,276 | $ | 205,697 | $ | (45,579 | ) | (22.2 | )% | |||||||
Depreciation, depletion and amortization |
26,853 | 24,316 | (2,537 | ) | (10.4 | )% | ||||||||||
Selling, general and administrative expenses |
6,529 | 5,192 | (1,337 | ) | (25.8 | )% | ||||||||||
Other operating income, net |
(1,391 | ) | (442 | ) | 949 | 214.7 | % | |||||||||
| $ | 283,267 | $ | 234,763 | $ | (48,504 | ) | (20.7 | )% | ||||||||
Operating margins. Our operating margins (reflected below on a per-ton basis) include
all mining costs, which consist of all amounts classified as cost of coal sales (except
pass-through transportation costs discussed in “Revenues” above) and all depreciation, depletion
and amortization attributable to mining operations.
| Three months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
Powder River Basin |
$ | 2.90 | $ | 0.84 | $ | 2.06 | 245.2 | % | ||||||||
Western Bituminous Region |
8.85 | 5.78 | 3.07 | 53.1 | % | |||||||||||
Powder River Basin — On a per-ton basis, operating margins for the second quarter of 2006
increased significantly from the second quarter of 2005 due to the increase in per-ton coal sales
realizations described above. The effect of the higher realizations were partially offset by
increased production taxes and coal royalties which we pay as a percentage of coal sales
realizations, higher repair and maintenance activity and higher diesel and explosive costs during
the second quarter of 2006 compared to the second quarter of 2005.
Western Bituminous Region — Operating margins per ton for the second quarter of 2006 increased
from the second quarter of 2005 due to higher per-ton coal sales realizations described above and a
$10.0 million partial insurance recovery related to the West Elk combustion-related event.
Net interest income (expense). The following table summarizes our net interest expense for
the three months ended June 30, 2006 and compares that information to the comparable information
for the three months ended June 30, 2005:
| Increase (decrease) | ||||||||||||||||
| Three months ended June 30, | in Net Income | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Interest expense |
$ | (18,516 | ) | $ | (17,323 | ) | $ | (1,193 | ) | (6.9 | )% | |||||
Interest income |
20,642 | 10,603 | 10,039 | 94.7 | % | |||||||||||
| $ | 2,126 | $ | (6,720 | ) | $ | 8,846 | 131.6 | % | ||||||||
Interest expense. The increase in interest expense in the three months ended June 30,
2006 compared to the three months ended June 30, 2005 results from the discount on trade accounts
receivable sold to Arch Coal, pursuant to Arch Coal’s accounts receivable securitization program,
beginning in the first quarter of 2006. See further discussion in “Liquidity and Capital
Resources.”
Interest income. Our cash transactions are managed by Arch Coal. Cash paid to or from us
that is not considered a distribution or a contribution is recorded as a receivable from Arch Coal.
The receivable balance earns interest from Arch Coal at the prime interest rate. The increase in
interest income results primarily from a higher average receivable balance in the three months
ended June 30, 2006 as compared to the same period in 2005, including the effect of amounts related
to the sale of trade accounts receivable to Arch Coal.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
The following discussion summarizes our operating results for the six months ended June 30,
2006 and compares those results to our operating results for the six months ended June 30, 2005.
Revenues. The following table summarizes the number of tons we sold during the six months
ended June 30, 2006 and the sales associated with those tons and compares those results to the
comparable information for the six months ended June 30, 2005:
14
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| Six months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
| (Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales |
$ | 748,601 | $ | 552,116 | $ | 196,485 | 35.6 | % | ||||||||
Tons sold |
54,842 | 53,634 | 1,208 | 2.3 | % | |||||||||||
Coal sales realization per ton sold |
$ | 13.65 | $ | 10.29 | $ | 3.36 | 32.7 | % | ||||||||
The increase in our coal sales from the first half of 2005 to the first half of 2006
resulted primarily from significantly higher base pricing received during the first half of 2006 .
The following table shows the number of tons sold by operating segment during the six months
ended June 30, 2006 and compares those amounts to the comparable information for the six months
ended June 30, 2005:
| Six months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | Tons | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Powder River Basin |
46,281 | 44,157 | 2,124 | 4.81 | % | |||||||||||
Western Bituminous Region |
8,561 | 9,477 | (916 | ) | (9.7 | )% | ||||||||||
Total |
54,842 | 53,634 | 1,208 | 2.3 | % | |||||||||||
The volume increase in the Powder River Basin due to improved railroad transportation
during the six months ended June 30, 2006 compared to June 30, 2005. The decrease in Western
Bituminous volumes during the first six months of 2006 compared to the first six months of 2005 is
primarily the result of the impact of the idling of our West Elk longwall mine due to the
combustion-related event discussed previously. The longwall restarted in March 2006 and the mine
operated normally during the second quarter of 2006.
The following table shows the coal sales price per ton by operating segment during the six
months ended June 30, 2006 and compares those amounts to the comparable information for the six
months ended June 30, 2005. Coal sales prices per ton exclude certain transportation costs that we
pass through to our customers. We use these financial measures because we believe the adjusted
amounts better represent the coal sales prices we achieved within our operating segments. Since
other companies may calculate coal sales prices per ton differently, our calculation may not be
comparable to similarly titled measures used by those companies. Transportation costs per ton
billed to customers for the six months ended June 30, 2006 were $0.03 for the Powder River Basin
and $3.05 for the Western Bituminous region. For the six months ended June 30, 2005,
transportation costs per ton billed to customers were $0.03 for the Powder River Basin and $3.19
for the Western Bituminous region.
| Six months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
Powder River Basin |
$ | 11.39 | $ | 7.88 | $ | 3.51 | 44.5 | % | ||||||||
Western Bituminous Region |
22.66 | 18.21 | 4.45 | 24.4 | % | |||||||||||
The increase in our coal sales prices resulted from significantly higher base pricing
during the first half of 2006 when compared to the first half of 2005. Improved base pricing is due
primarily to the expiration of legacy contracts.
Operating costs and expenses. The following table summarizes our operating costs and expenses
for the six months ended June 30, 2006 and compares those results to the comparable information for
the six months ended June 30, 2005:
| Increase (decrease) | ||||||||||||||||
| Six months ended June 30, | in Net Income | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Cost of coal sales |
$ | 503,406 | $ | 414,801 | $ | (88,605 | ) | (21.4 | )% | |||||||
Depreciation, depletion and amortization |
50,429 | 49,835 | (594 | ) | (1.2 | )% | ||||||||||
Selling, general and administrative expenses |
12,018 | 10,883 | (1,135 | ) | (10.4 | )% | ||||||||||
Other operating income, net |
(1,866 | ) | (2,735 | ) | (869 | ) | (31.8 | )% | ||||||||
| $ | 563,987 | $ | 472,784 | $ | (91,203 | ) | (19.3 | )% | ||||||||
Operating margins. Our operating margins (reflected below on a per-ton basis) include
all mining costs, which consist of all amounts classified as cost of coal sales (except
pass-through transportation costs discussed in “Revenues” above) and all depreciation, depletion
and amortization attributable to mining operations.
15
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| Six months ended June 30, | Increase (decrease) | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
Powder River Basin |
$ | 2.85 | $ | 1.12 | $ | 1.73 | 154.5 | % | ||||||||
Western Bituminous Region |
7.64 | 4.12 | 3.52 | 85.4 | % | |||||||||||
Powder River Basin — On a per-ton basis, operating margins for the first six months of
2006 increased significantly from the first six months of 2005 primarily due to the increase in
per-ton coal sales realizations described above. The effect of the higher realizations were
partially offset by increased production taxes and coal royalties which we pay as a percentage of
coal sales realizations, higher repair and maintenance activity and higher diesel and explosive
costs during the first six months of 2006 compared to the first six months of 2005.
Western Bituminous Region —Operating margins per ton for the first half of 2006 increased from
the first half of 2005 due to higher per-ton coal sales realizations described above partially
offset by the impact during the first quarter of the West Elk idling due to the combustion-related
event, net of the partial insurance recoveries of $20.0 million.
Net interest income (expense). The following table summarizes our net interest expense for
the six months ended June 30, 2006 and compares that information to the comparable information for
the six months ended June 30, 2005:
| Increase (decrease) | ||||||||||||||||
| Six months ended June 30, | in Net Income | |||||||||||||||
| 2006 | 2005 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Interest expense |
$ | (36,252 | ) | $ | (33,312 | ) | $ | (2,940 | ) | (8.8 | )% | |||||
Interest income |
36,964 | 19,383 | 17,581 | 90.7 | % | |||||||||||
| $ | 712 | $ | (13,929 | ) | $ | 14,641 | 105.1 | % | ||||||||
Interest expense. The increase in interest expense in the six months ended June 30, 2006
compared to the six months ended June 30, 2005 results from the discount on trade accounts
receivable sold to Arch Coal.
Interest income. The increase in interest income results primarily from a higher average
receivable balance in the six months ended June 30, 2006 as compared to the same period in 2005,
including the effect of amounts related to the sale of trade accounts receivable to Arch Coal.
Liquidity and Capital Resources
Our primary sources of cash include sales of our coal production to customers, sales of assets
and debt offerings related to significant transactions. Excluding any significant mineral reserve
acquisitions, we generally satisfy our working capital requirements and fund capital expenditures
and debt-service obligations with cash generated from operations. Our ability to satisfy debt
service obligations, to fund planned capital expenditures and to make acquisitions will depend upon
our future operating performance, which will be affected by prevailing economic conditions in the
coal industry and financial, business and other factors, some of which are beyond our control.
On February 10, 2006, Arch Coal established an accounts receivable securitization program.
Under the program, we sell our receivables to Arch Coal at a 0.75% discount. We retain the
obligation for any potential loss related to uncollectible accounts or obligations related to the
receivables. Under the program, we sold $414.9 million of trade accounts receivable to Arch Coal
in the first six months of 2006, at a total discount of $3.2 million.
The following is a summary of cash provided by or used in each of the indicated types of
activities:
| Six months ended June 30, | ||||||||
| 2006 | 2005 | |||||||
| Restated | ||||||||
| (in thousands) | ||||||||
Cash provided by (used in): |
||||||||
Operating activities |
$ | 349,769 | $ | 97,874 | ||||
Investing activities |
(349,837 | ) | (98,692 | ) | ||||
Financing activities |
— | (51 | ) | |||||
We have restated our Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 2005 to reclassify changes in the Receivable from Arch Coal, Inc. from “operating
activities” to “investing activities”. See further discussion in Note 1 to the Condensed
Consolidated Financial Statements for further discussion.
16
Table of Contents
Cash provided by operating activities increased $251.9 million in the 2006 quarter compared to
the 2005 quarter primarily as a result of the sale of our trade accounts receivable to Arch Coal,
and our improved operating results.
Cash used in investing activities in 2006 was $251.1 million higher in the 2006 quarter than
in 2005 quarter, primarily due to the sale of our trade accounts receivable and increased capital
expenditures. We make capital expenditures to improve and replace existing mining equipment,
expand existing mines, develop new mines and improve the overall efficiency of mining operations.
Higher spending at our Powder River Basin operations related to the restarting of the Coal Creek
mine and costs relating to the purchase of a replacement longwall at the Canyon Fuel operations in
the Western Bituminous Region resulted in the majority of the increase in capital expenditures in
the first half of 2006 compared to the first half of 2005. Offsetting the capital expenditure
increase is an advance lease payment to Arch Coal of $10.0 million in 2005, which is no longer
required under a renegotiated lease agreement.
We believe that cash generated from operations and our borrowing capacity will be sufficient
to meet working capital requirements, anticipated capital expenditures and scheduled debt payments
for at least the next several years.
Contingencies
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. We accrue for the costs of reclamation in accordance with the provisions of
Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,”
adopted as of January 1, 2003. These costs relate to reclaiming the pit and support acreage at
surface mines and sealing portals at deep mines. Other costs of reclamation common to surface and
underground mining are related to reclaiming refuse and slurry ponds, eliminating sedimentation and
drainage control structures, and dismantling or demolishing equipment or buildings used in mining
operations. The establishment of the asset retirement obligation liability is based upon permit
requirements and requires various estimates and assumptions, principally associated with costs and
productivities.
We review our entire environmental liability periodically and make necessary adjustments,
including permit changes and revisions to costs and productivities to reflect current experience.
Our management believes it is making adequate provisions for all expected reclamation and other
associated costs.
We are a party to numerous other claims and lawsuits and are subject to numerous other
contingencies with respect to various matters. We provide for costs related to contingencies,
including environmental, legal and indemnification matters, when a loss is probable and the amount
is reasonably determinable. After conferring with counsel, it is the opinion of management that
the ultimate resolution of these claims, to the extent not previously provided for, will not have a
material adverse effect on our consolidated financial condition,
results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In addition to the other quantitative and qualitative disclosures about market risk contained
in this report, you should see Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2005.
Item 4. Controls and Procedures.
We performed an evaluation under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of June 30, 2006. Based on that
evaluation, our management, including our chief executive officer and chief financial officer,
concluded that the disclosure controls and procedures were effective as of such date. There were
no changes in internal control over financial reporting that occurred during the quarter ended June
30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
17
Table of Contents
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There is hereby incorporated by reference the information under the caption “Contingencies”
appearing in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors.
Our business inherently involves certain risks and uncertainties. The risks and uncertainties
described in this report and in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2005 and in Part II, Item 1A of the Quarterly Reports on From 10-Q that we have filed
during the interim period are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our business operations.
Should one or more of any of these risks materialize, our business, financial condition or results
of operations could be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibits filed as part of this Quarterly Report on Form 10-Q are as follows:
| Exhibit | Description | |
3.1
|
Certificate of Formation (incorporated herein by reference to Exhibit 3.3 to the Form S-4 (File No. 333-107569) filed on August 1, 2003 by Arch Western Finance, LLC, Arch Western Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., and Thunder Basin Coal Company, L.L.C.). | |
3.2
|
Limited Liability Company Agreement (incorporated herein by reference to Exhibit 3.4 to the Form S-4 (File No. 333-107569) filed on August 1, 2003 by Arch Western Finance, LLC, Arch Western Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., and Thunder BasinCoal Company, L.L.C.). | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Paul A. Lang. | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Robert J. Messey. | |
32.1
|
Section 1350 Certification of Paul A. Lang. | |
32.2
|
Section 1350 Certification of Robert J. Messey. |
18
Table of Contents
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Arch Coal, Inc. | ||||||
| By: | /s/ Robert J. Messey
|
|||||
| Vice President | ||||||
| August 11, 2006 | ||||||
19
Exhibit 31.1
Certification
I, Paul A. Lang, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arch Western Resources, LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | [Reserved.] | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Paul A. Lang | ||||
| Paul A. Lang | ||||
| President | ||||
Date: August 11, 2006
Exhibit 31.2
Certification
I, Robert J. Messey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arch Western Resources, LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | [Reserved.] | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Robert J. Messey | ||||
| Robert J. Messey | ||||
| Vice President | ||||
Date: August 11, 2006
Exhibit 32.1
Certification of Periodic Financial Reports
I, Paul A. Lang, President of Arch Western Resources, LLC, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (the
“Periodic Report”) which this statement accompanies fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) information contained in the Periodic Report fairly presents, in all material respects,
the financial condition and results of operations of Arch Western Resources, LLC.
| /s/ Paul A. Lang | ||||
| Paul A. Lang | ||||
| President | ||||
Date: August 11, 2006
Exhibit 32.2
Certification of Periodic Financial Reports
I, Robert J. Messey, Vice President of Arch Western Resources, LLC, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (the
“Periodic Report”) which this statement accompanies fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) information contained in the Periodic Report fairly presents, in all material respects,
the financial condition and results of operations of Arch Western Resources, LLC.
| /s/ Robert J. Messey | ||||
| Robert J. Messey | ||||
| Vice President | ||||
Date: August 11, 2006