Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2007
| 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 November 13, 2007, 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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| Certification | ||||||||
| Section 1350 Certification | ||||||||
| Section 1350 Certification | ||||||||
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PART I
FINANCIAL INFORMATION
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 September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (unaudited) | ||||||||||||||||
REVENUES |
||||||||||||||||
Coal sales |
$ | 405,055 | $ | 369,730 | $ | 1,161,610 | $ | 1,118,331 | ||||||||
COSTS, EXPENSES AND OTHER |
||||||||||||||||
Cost of coal sales |
317,541 | 270,178 | 908,879 | 773,584 | ||||||||||||
Depreciation, depletion and amortization |
35,200 | 27,860 | 100,658 | 78,289 | ||||||||||||
Selling, general and administrative expenses |
6,258 | 5,087 | 19,196 | 17,105 | ||||||||||||
Other operating income, net |
(808 | ) | (1,437 | ) | (8,794 | ) | (3,303 | ) | ||||||||
| 358,191 | 301,688 | 1,019,939 | 865,675 | |||||||||||||
Income from operations |
46,864 | 68,042 | 141,671 | 252,656 | ||||||||||||
Interest income (expense), net: |
||||||||||||||||
Interest expense |
(18,119 | ) | (18,197 | ) | (53,818 | ) | (54,449 | ) | ||||||||
Interest income, primarily from Arch Coal, Inc. |
26,429 | 22,108 | 73,640 | 59,072 | ||||||||||||
| 8,310 | 3,911 | 19,822 | 4,623 | |||||||||||||
Other non-operating expense: |
||||||||||||||||
Expenses resulting from early debt
extinguishment and termination of hedge
accounting for interest rate swaps |
(607 | ) | (1,635 | ) | (3,146 | ) | (6,658 | ) | ||||||||
Income before minority interest |
54,567 | 70,318 | 158,347 | 250,621 | ||||||||||||
Minority interest |
(4,460 | ) | (2,410 | ) | (14,024 | ) | (23,165 | ) | ||||||||
Net income |
$ | 50,107 | $ | 67,908 | $ | 144,323 | $ | 227,456 | ||||||||
Net income attributable to redeemable
membership interest |
$ | 251 | $ | 340 | $ | 722 | $ | 1,138 | ||||||||
Net income attributable to non-redeemable
membership interest |
$ | 49,856 | $ | 67,568 | $ | 143,601 | $ | 226,318 | ||||||||
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)
| September 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 245 | $ | 186 | ||||
Trade accounts receivable |
416 | 985 | ||||||
Other receivables |
2,629 | 14,733 | ||||||
Inventories |
104,679 | 94,828 | ||||||
Prepaid royalties |
805 | 2,945 | ||||||
Other |
21,228 | 24,458 | ||||||
Total current assets |
130,002 | 138,135 | ||||||
Property, plant and equipment, net |
1,213,439 | 1,233,846 | ||||||
Other assets: |
||||||||
Receivable from Arch Coal, Inc. |
1,389,976 | 1,152,102 | ||||||
Other |
26,738 | 33,689 | ||||||
Total other assets |
1,416,714 | 1,185,791 | ||||||
Total assets |
$ | 2,760,155 | $ | 2,557,772 | ||||
LIABILITIES AND MEMBERSHIP INTERESTS |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 88,098 | $ | 110,725 | ||||
Accrued expenses |
117,018 | 129,495 | ||||||
Short-term borrowings |
49,992 | — | ||||||
Total current liabilities |
255,108 | 240,220 | ||||||
Long-term debt |
957,856 | 958,881 | ||||||
Accrued postretirement benefits other than pension |
33,419 | 31,036 | ||||||
Asset retirement obligations |
186,609 | 174,902 | ||||||
Accrued workers’ compensation |
10,501 | 10,027 | ||||||
Other noncurrent liabilities |
50,090 | 38,705 | ||||||
Total liabilities |
1,493,583 | 1,453,771 | ||||||
Redeemable membership interest |
7,651 | 6,934 | ||||||
Minority interest |
176,546 | 162,522 | ||||||
Non-redeemable membership interest |
1,082,375 | 934,545 | ||||||
Total liabilities and membership interests |
$ | 2,760,155 | $ | 2,557,772 | ||||
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)
| Nine Months Ended September 30 | ||||||||
| 2007 | 2006 | |||||||
| (unaudited) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 144,323 | $ | 227,456 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Depreciation, depletion and amortization |
100,658 | 78,289 | ||||||
Minority interest |
14,024 | 23,165 | ||||||
Prepaid royalties expensed |
3,440 | 3,320 | ||||||
Net gain on disposition of assets |
(5,923 | ) | (89 | ) | ||||
Other non-operating expense |
3,146 | 6,658 | ||||||
Changes in: |
||||||||
Receivables |
12,673 | 103,442 | ||||||
Inventories |
(9,851 | ) | (29,111 | ) | ||||
Accounts payable and accrued expenses |
(35,176 | ) | 7,977 | |||||
Other |
36,556 | 4,040 | ||||||
Cash provided by operating activities |
263,870 | 425,147 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(99,830 | ) | (170,678 | ) | ||||
Increase in receivable from Arch Coal, Inc. |
(238,297 | ) | (254,640 | ) | ||||
Proceeds from dispositions of property, plant and equipment |
6,338 | 185 | ||||||
Additions to prepaid royalties |
(200 | ) | — | |||||
Reimbursement of deposits on equipment |
18,325 | — | ||||||
Cash used in investing activities |
(313,664 | ) | (425,133 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Proceeds from commercial paper |
49,992 | — | ||||||
Debt financing costs |
(139 | ) | (15 | ) | ||||
Cash provided by (used in) financing activities |
49,853 | (15 | ) | |||||
Increase (decrease) in cash and cash equivalents |
59 | (1 | ) | |||||
Cash and cash equivalents, beginning of period |
186 | 152 | ||||||
Cash and cash equivalents, end of period |
$ | 245 | $ | 151 | ||||
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 unaudited 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.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial
reporting and U.S. Securities and Exchange Commission regulations. 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 three and nine month periods ended
September 30, 2007 are not necessarily indicative of results to be expected for the year ending
December 31, 2007. These financial statements should be read in conjunction with the audited
financial statements and related notes as of and for the year ended December 31, 2006 included in
Arch Western Resources, LLC’s Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission.
2. Accounting Policies
Accounting Standards Issued and Not Yet Adopted
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Liabilities – Including
an amendment of FASB Statement No. 115 (“Statement No. 159”). Statement No. 159 permits entities
to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. Statement No. 159 is effective
prospectively for fiscal years beginning after November 15, 2007. The Company is still analyzing
Statement No. 159 to determine what the impact of adoption will be.
3. Commercial Paper Placement Program
On August 15, 2007, the Company entered into a commercial paper placement program to provide
short-term financing at rates that are generally lower than the rates available under Arch Coal’s
revolving credit facility. Under the program, the Company may sell up to $50.0 million in
interest-bearing or discounted short-term unsecured debt obligations with maturities of no more
than 270 days. The commercial paper placement program is supported by a $50.0 million revolving
credit facility with a maturity date of June 7, 2008. As of September 30, 2007, the Company had
$50.0 million outstanding under the agreement with a weighted-average interest rate of 5.59% and
maturity dates ranging from 3 to 59 days.
4. Inventories
Inventories consist of the following:
| September 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
Coal |
$ | 15,706 | $ | 31,350 | ||||
Repair parts and supplies |
88,973 | 63,478 | ||||||
| $ | 104,679 | $ | 94,828 | |||||
5. Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income items under Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, are transactions recorded in membership interests during the year, excluding
net income and transactions with members.
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The following table details the components of comprehensive income:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (In thousands) | ||||||||||||||||
Net income |
$ | 50,107 | $ | 67,908 | $ | 144,323 | $ | 227,456 | ||||||||
Other comprehensive income: |
||||||||||||||||
Pension, postretirement and
other post-employment benefits
adjustment |
371 | — | 1,243 | 14,531 | ||||||||||||
Unrealized gains on derivatives |
607 | 1,635 | 3,146 | 6,658 | ||||||||||||
Total comprehensive income |
$ | 51,085 | $ | 69,543 | $ | 148,712 | $ | 248,645 | ||||||||
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.
The Company’s cash transactions are managed by Arch Coal. Cash paid to or from the Company
that is not considered a distribution or a contribution is recorded in an Arch Coal receivable
account. In addition, any amounts owed between the Company and Arch Coal are recorded in the
account. At September 30, 2007 and December 31, 2006, the receivable from Arch Coal was $1,390.0
million and $1,152.1 million, respectively. This amount earns interest from Arch Coal at the prime
interest rate. Interest earned on the note was $26.3 million and $21.9 million for the three
months ended September 30, 2007 and 2006, respectively, and $73.2 million and $58.5 million for the
nine months ended September 30, 2007 and 2006, 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 accompanying
Condensed Consolidated Balance Sheets as long-term.
Under the Arch Coal accounts receivable securitization program, the Company sold $374.8
million and $383.6 million of trade accounts receivable to Arch Coal during the three months ended
September 30, 2007 and 2006, respectively, at a total discount of $2.4 million and $2.8 million,
respectively. During the nine months ended September 30, 2007 and 2006, the Company sold $1,125.5
million and $1,064.1 million, respectively, of trade accounts receivable to Arch Coal at a total
discount of $7.5 million and $7.9 million, respectively. These transactions are recorded through
the Arch Coal receivable account.
For the three months ended September 30, 2007 and 2006, the Company incurred production
royalties of $8.7 million and $10.2 million, respectively, payable to Arch Coal under sublease
agreements. For the nine months ended September 30, 2007 and 2006, the Company incurred production
royalties of $26.5 million and $31.3 million, respectively, payable to Arch Coal under sublease
agreements.
The Company is charged selling, general and administrative services fees by Arch Coal.
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 $6.3 million and $5.1 million for the three months ended
September 30, 2007 and 2006, respectively, and $19.2 million and $17.1 million for the nine months
ended September 30, 2007 and 2006, respectively.
7. Contingencies
The Company is a party to numerous claims and lawsuits with respect to various matters. The
Company provides for costs related to contingencies when a loss is probable and the amount is
reasonably determinable. After conferring with counsel, it is the opinion of management that the
ultimate resolution of pending claims will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of the Company.
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8. Segment Information
The Company has two reportable business segments, which are based on the major low-sulfur 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 (WBIT) segment, with operations in Utah, Colorado and southern Wyoming.
Operating segment results for the three and nine month periods ended September 30, 2007 and
2006 are presented below. Results for the operating segments include all direct costs of mining.
Corporate, Other and Eliminations includes corporate overhead, other support functions and the
elimination of intercompany transactions.
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Three months ended September 30, 2007 |
||||||||||||||||
Coal sales |
$ | 261,150 | $ | 143,905 | $ | — | $ | 405,055 | ||||||||
Income (loss) from operations |
29,226 | 23,228 | (5,590 | ) | 46,864 | |||||||||||
Total assets |
1,686,897 | 1,892,733 | (819,475 | ) | 2,760,155 | |||||||||||
Depreciation, depletion and amortization |
18,276 | 16,924 | — | 35,200 | ||||||||||||
Capital expenditures |
7,397 | 17,737 | — | 25,134 | ||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Three months ended September 30, 2006 |
||||||||||||||||
Coal sales |
$ | 256,759 | $ | 112,971 | $ | — | $ | 369,730 | ||||||||
Income (loss) from operations |
46,830 | 28,314 | (7,102 | ) | 68,042 | |||||||||||
Total assets |
1,522,347 | 1,789,082 | (857,594 | ) | 2,453,835 | |||||||||||
Depreciation, depletion and amortization |
15,628 | 12,232 | — | 27,860 | ||||||||||||
Capital expenditures |
6,852 | 30,640 | — | 37,492 | ||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Nine months ended September 30, 2007 |
||||||||||||||||
Coal sales |
$ | 750,566 | $ | 411,044 | $ | — | $ | 1,161,610 | ||||||||
Income (loss) from operations |
85,078 | 68,836 | (12,243 | ) | 141,671 | |||||||||||
Depreciation, depletion and amortization |
52,029 | 48,629 | — | 100,658 | ||||||||||||
Capital expenditures |
21,483 | 78,347 | — | 99,830 | ||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Nine months ended September 30, 2006 |
||||||||||||||||
Coal sales |
$ | 785,202 | $ | 333,129 | $ | — | $ | 1,118,331 | ||||||||
Income (loss) from operations |
179,542 | 94,536 | (21,422 | ) | 252,656 | |||||||||||
Depreciation, depletion and amortization |
45,892 | 32,397 | — | 78,289 | ||||||||||||
Capital expenditures |
76,059 | 94,619 | — | 170,678 | ||||||||||||
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A reconciliation of segment income from operations to consolidated income before income taxes
follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (In thousands) | ||||||||||||||||
Income from operations |
$ | 46,864 | $ | 68,042 | $ | 141,671 | $ | 252,656 | ||||||||
Interest expense |
(18,119 | ) | (18,197 | ) | (53,818 | ) | (54,449 | ) | ||||||||
Interest income |
26,429 | 22,108 | 73,640 | 59,072 | ||||||||||||
Other non-operating expense |
(607 | ) | (1,635 | ) | (3,146 | ) | (6,658 | ) | ||||||||
Income before minority interest |
$ | 54,567 | $ | 70,318 | $ | 158,347 | $ | 250,621 | ||||||||
9. 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:
7
Table of Contents
Statements of Operations
Three Months Ended September 30, 2007
(in thousands)
Three Months Ended September 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales |
$ | — | $ | — | $ | 299,503 | $ | 105,552 | $ | — | $ | 405,055 | ||||||||||||
Cost of coal sales |
(618 | ) | — | 238,234 | 80,558 | (633 | ) | 317,541 | ||||||||||||||||
Depreciation, depletion and amortization |
— | — | 23,534 | 11,666 | — | 35,200 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
6,258 | — | — | — | — | 6,258 | ||||||||||||||||||
Other operating income |
(50 | ) | — | (565 | ) | (826 | ) | 633 | (808 | ) | ||||||||||||||
| 5,590 | — | 261,203 | 91,398 | — | 358,191 | |||||||||||||||||||
Income from investment in subsidiaries |
53,022 | — | — | — | (53,022 | ) | — | |||||||||||||||||
Income from operations |
47,432 | — | 38,300 | 14,154 | (53,022 | ) | 46,864 | |||||||||||||||||
Interest expense |
(18,144 | ) | (15,311 | ) | (107 | ) | (587 | ) | 16,030 | (18,119 | ) | |||||||||||||
Interest income, primarily from Arch Coal |
25,886 | 16,030 | 115 | 428 | (16,030 | ) | 26,429 | |||||||||||||||||
| 7,742 | 719 | 8 | (159 | ) | — | 8,310 | ||||||||||||||||||
Other non-operating expense |
(607 | ) | — | — | — | — | (607 | ) | ||||||||||||||||
Minority interest |
(4,460 | ) | — | — | — | — | (4,460 | ) | ||||||||||||||||
Net income |
$ | 50,107 | $ | 719 | $ | 38,308 | $ | 13,995 | $ | (53,022 | ) | $ | 50,107 | |||||||||||
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Table of Contents
Statements of Operations
Three Months Ended September 30, 2006
(in thousands)
Three Months Ended September 30, 2006
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales |
$ | — | $ | — | $ | 299,278 | $ | 70,452 | $ | — | $ | 369,730 | ||||||||||||
Cost of coal sales |
— | — | 211,449 | 58,729 | — | 270,178 | ||||||||||||||||||
Depreciation, depletion and amortization |
— | — | 20,624 | 7,236 | — | 27,860 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
5,087 | — | — | — | — | 5,087 | ||||||||||||||||||
Other operating income |
— | — | (1,165 | ) | (272 | ) | — | (1,437 | ) | |||||||||||||||
| 5,087 | — | 230,908 | 65,693 | — | 301,688 | |||||||||||||||||||
Income from investment in subsidiaries |
73,708 | — | — | — | (73,708 | ) | — | |||||||||||||||||
Income from operations |
68,621 | — | 68,370 | 4,759 | (73,708 | ) | 68,042 | |||||||||||||||||
Interest expense |
(18,395 | ) | (15,366 | ) | (57 | ) | (388 | ) | 16,009 | (18,197 | ) | |||||||||||||
Interest income, primarily from Arch Coal |
21,727 | 16,009 | 147 | 234 | (16,009 | ) | 22,108 | |||||||||||||||||
| 3,332 | 643 | 90 | (154 | ) | — | 3,911 | ||||||||||||||||||
Other non-operating expense |
(1,635 | ) | — | — | — | — | (1,635 | ) | ||||||||||||||||
Minority interest |
(2,410 | ) | — | — | — | — | (2,410 | ) | ||||||||||||||||
Net income |
$ | 67,908 | $ | 643 | $ | 68,460 | $ | 4,605 | $ | (73,708 | ) | $ | 67,908 | |||||||||||
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Table of Contents
Statements of Operations
Nine Months Ended September 30, 2007
(in thousands)
Nine Months Ended September 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales |
$ | — | $ | — | $ | 870,193 | $ | 291,417 | $ | — | $ | 1,161,610 | ||||||||||||
Cost of coal sales |
(838 | ) | — | 692,866 | 218,746 | (1,895 | ) | 908,879 | ||||||||||||||||
Depreciation, depletion and amortization |
— | — | 67,362 | 33,296 | — | 100,658 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
19,196 | — | — | — | — | 19,196 | ||||||||||||||||||
Other operating (income) expense |
(6,115 | ) | — | (1,912 | ) | (2,662 | ) | 1,895 | (8,794 | ) | ||||||||||||||
| 12,243 | — | 758,316 | 249,380 | — | 1,019,939 | |||||||||||||||||||
Income from investment in subsidiaries |
155,721 | — | — | — | (155,721 | ) | — | |||||||||||||||||
Income from operations |
143,478 | — | 111,877 | 42,037 | (155,721 | ) | 141,671 | |||||||||||||||||
Interest expense |
(54,065 | ) | (45,747 | ) | (311 | ) | (1,776 | ) | 48,081 | (53,818 | ) | |||||||||||||
Interest income, primarily from Arch Coal |
72,080 | 48,081 | 351 | 1,209 | (48,081 | ) | 73,640 | |||||||||||||||||
| 18,015 | 2,334 | 40 | (567 | ) | — | 19,822 | ||||||||||||||||||
Other non-operating expense |
(3,146 | ) | — | — | — | — | (3,146 | ) | ||||||||||||||||
Minority interest |
(14,024 | ) | — | — | — | — | (14,024 | ) | ||||||||||||||||
Net income (loss) |
$ | 144,323 | $ | 2,334 | $ | 111,917 | $ | 41,470 | $ | (155,721 | ) | $ | 144,323 | |||||||||||
10
Table of Contents
Statements of Operations
Nine Months Ended September 30, 2006
(in thousands)
Nine Months Ended September 30, 2006
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales |
$ | — | $ | — | $ | 878,171 | $ | 240,160 | $ | — | $ | 1,118,331 | ||||||||||||
Cost of coal sales |
2,370 | — | 606,252 | 164,962 | — | 773,584 | ||||||||||||||||||
Depreciation, depletion and amortization |
— | — | 59,150 | 19,139 | — | 78,289 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
17,105 | — | — | — | — | 17,105 | ||||||||||||||||||
Other operating income |
(68 | ) | — | (2,175 | ) | (1,060 | ) | — | (3,303 | ) | ||||||||||||||
| 19,407 | — | 663,227 | 183,041 | — | 865,675 | |||||||||||||||||||
Income from investment in subsidiaries |
273,393 | — | — | — | (273,393 | ) | — | |||||||||||||||||
Income from operations |
253,986 | — | 214,944 | 57,119 | (273,393 | ) | 252,656 | |||||||||||||||||
Interest expense |
(54,544 | ) | (46,138 | ) | (406 | ) | (1,399 | ) | 48,038 | (54,449 | ) | |||||||||||||
Interest income, primarily from Arch Coal |
57,837 | 48,038 | 405 | 830 | (48,038 | ) | 59,072 | |||||||||||||||||
| 3,293 | 1,900 | (1 | ) | (569 | ) | — | 4,623 | |||||||||||||||||
Other non-operating expense |
(6,658 | ) | — | — | — | — | (6,658 | ) | ||||||||||||||||
Minority interest |
(23,165 | ) | — | — | — | — | (23,165 | ) | ||||||||||||||||
Net income (loss) |
$ | 227,456 | $ | 1,900 | $ | 214,943 | $ | 56,550 | $ | (273,393 | ) | $ | 227,456 | |||||||||||
11
Table of Contents
Balance Sheets
September 30, 2007
(in thousands)
September 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents |
$ | 138 | $ | — | $ | 34 | $ | 73 | $ | — | $ | 245 | ||||||||||||
Trade accounts receivable |
— | — | — | 416 | — | 416 | ||||||||||||||||||
Other receivables |
811 | — | 1,405 | 413 | — | 2,629 | ||||||||||||||||||
Inventories |
— | — | 83,499 | 21,180 | — | 104,679 | ||||||||||||||||||
Prepaid royalties |
— | — | — | 805 | — | 805 | ||||||||||||||||||
Other |
3,442 | 2,157 | 6,562 | 9,067 | — | 21,228 | ||||||||||||||||||
Total current assets |
4,391 | 2,157 | 91,500 | 31,954 | — | 130,002 | ||||||||||||||||||
Property, plant and equipment, net |
843,922 | 369,517 | — | 1,213,439 | ||||||||||||||||||||
Investment in subsidiaries |
2,076,149 | — | — | — | (2,076,149 | ) | — | |||||||||||||||||
Receivable from Arch Coal, Inc. |
1,362,585 | — | (112 | ) | 27,503 | — | 1,389,976 | |||||||||||||||||
Intercompanies |
(2,087,702 | ) | 963,982 | 1,068,292 | 55,428 | — | — | |||||||||||||||||
Other |
792 | 10,154 | 11,991 | 3,801 | — | 26,738 | ||||||||||||||||||
Total other assets |
1,351,824 | 974,136 | 1,080,171 | 86,732 | (2,076,149 | ) | 1,416,714 | |||||||||||||||||
Total assets |
$ | 1,356,215 | $ | 976,293 | $ | 2,015,593 | $ | 488,203 | $ | (2,076,149 | ) | $ | 2,760,155 | |||||||||||
Accounts payable |
2,783 | — | 68,361 | 16,954 | — | 88,098 | ||||||||||||||||||
Accrued expenses |
2,231 | 16,032 | 88,119 | 10,636 | — | 117,018 | ||||||||||||||||||
Short-term borrowings |
49,992 | — | — | — | — | 49,992 | ||||||||||||||||||
Total current liabilities |
55,006 | 16,032 | 156,480 | 27,590 | — | 255,108 | ||||||||||||||||||
Long-term debt |
— | 957,856 | — | — | — | 957,856 | ||||||||||||||||||
Accrued postretirement benefits
other than pension |
20,935 | — | 2,485 | 9,999 | — | 33,419 | ||||||||||||||||||
Asset retirement obligations |
— | — | 174,775 | 11,834 | — | 186,609 | ||||||||||||||||||
Accrued workers’ compensation |
5,832 | — | 1,138 | 3,531 | — | 10,501 | ||||||||||||||||||
Other noncurrent liabilities |
7,870 | — | 36,656 | 5,564 | — | 50,090 | ||||||||||||||||||
Total liabilities |
89,643 | 973,888 | 371,534 | 58,518 | — | 1,493,583 | ||||||||||||||||||
Redeemable
membership interest |
7,651 | — | — | — | — | 7,651 | ||||||||||||||||||
Minority interest |
176,546 | — | — | — | — | 176,546 | ||||||||||||||||||
Non-redeemable membership interest |
1,082,375 | 2,405 | 1,644,059 | 429,685 | (2,076,149 | ) | 1,082,375 | |||||||||||||||||
Total
liabilities and membership
interests |
$ | 1,356,215 | $ | 976,293 | $ | 2,015,593 | $ | 488,203 | $ | (2,076,149 | ) | $ | 2,760,155 | |||||||||||
12
Table of Contents
Balance Sheets
December 31, 2006
(in thousands)
December 31, 2006
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents |
$ | — | $ | — | $ | 161 | $ | 25 | $ | — | $ | 186 | ||||||||||||
Trade accounts receivable |
— | — | — | 985 | — | 985 | ||||||||||||||||||
Other receivables |
1,007 | — | 13,453 | 273 | — | 14,733 | ||||||||||||||||||
Inventories |
— | — | 58,796 | 36,032 | — | 94,828 | ||||||||||||||||||
Prepaid royalties |
— | — | 2,648 | 297 | — | 2,945 | ||||||||||||||||||
Other current assets |
11,439 | 2,154 | 6,235 | 4,630 | — | 24,458 | ||||||||||||||||||
Total current assets |
12,446 | 2,154 | 81,293 | 42,242 | — | 138,135 | ||||||||||||||||||
Property, plant and equipment, net |
— | — | 879,211 | 354,635 | — | 1,233,846 | ||||||||||||||||||
Investment in subsidiaries |
1,917,292 | — | — | — | (1,917,292 | ) | — | |||||||||||||||||
Receivable from Arch Coal, Inc. |
1,124,910 | — | (2 | ) | 27,194 | — | 1,152,102 | |||||||||||||||||
Intercompanies |
(1,903,278 | ) | 977,096 | 910,676 | 15,506 | — | — | |||||||||||||||||
Other |
639 | 11,764 | 15,829 | 5,457 | — | 33,689 | ||||||||||||||||||
Total other assets |
1,139,563 | 988,860 | 926,503 | 48,157 | (1,917,292 | ) | 1,185,791 | |||||||||||||||||
Total assets |
$ | 1,152,009 | $ | 991,014 | $ | 1,887,007 | $ | 445,034 | $ | (1,917,292 | ) | $ | 2,557,772 | |||||||||||
Accounts payable |
15,151 | — | 77,347 | 18,227 | — | 110,725 | ||||||||||||||||||
Accrued expenses |
3,360 | 32,063 | 85,202 | 8,870 | — | 129,495 | ||||||||||||||||||
Total current liabilities |
18,511 | 32,063 | 162,549 | 27,097 | — | 240,220 | ||||||||||||||||||
Long-term debt |
— | 958,881 | — | — | — | 958,881 | ||||||||||||||||||
Accrued postretirement benefits
other than pension |
18,981 | — | 2,485 | 9,570 | — | 31,036 | ||||||||||||||||||
Asset retirement obligations |
— | — | 163,832 | 11,070 | — | 174,902 | ||||||||||||||||||
Accrued workers’ compensation |
5,262 | — | 1,236 | 3,529 | — | 10,027 | ||||||||||||||||||
Other noncurrent liabilities |
5,254 | — | 27,757 | 5,694 | — | 38,705 | ||||||||||||||||||
Total liabilities |
48,008 | 990,944 | 357,859 | 56,960 | — | 1,453,771 | ||||||||||||||||||
Redeemable
membership interest |
6,934 | — | — | — | — | 6,934 | ||||||||||||||||||
Minority interest |
162,522 | — | — | — | — | 162,522 | ||||||||||||||||||
Non-redeemable membership interest |
934,545 | 70 | 1,529,148 | 388,074 | (1,917,292 | ) | 934,545 | |||||||||||||||||
Total
liabilities and membership
interests |
$ | 1,152,009 | $ | 991,014 | $ | 1,887,007 | $ | 445,034 | $ | (1,917,292 | ) | $ | 2,557,772 | |||||||||||
13
Table of Contents
Statements of Cash Flows
Nine Months Ended September 30, 2007
(in thousands)
Nine Months Ended September 30, 2007
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
OPERATING ACTIVITIES |
||||||||||||||||||||
Cash provided by (used in) operating
activities |
$ | (2,464 | ) | $ | (13,114 | ) | $ | 189,338 | $ | 90,110 | $ | 263,870 | ||||||||
INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
— | — | (50,431 | ) | (49,399 | ) | (99,830 | ) | ||||||||||||
Increase in receivable from Arch Coal |
(237,675 | ) | — | (2 | ) | (620 | ) | (238,297 | ) | |||||||||||
Proceeds
from dispositions of property, plant and equipment |
6,000 | — | 259 | 79 | 6,338 | |||||||||||||||
Additions to prepaid royalties |
— | — | — | (200 | ) | (200 | ) | |||||||||||||
Reimbursement of deposits on equipment |
— | — | 18,325 | — | 18,325 | |||||||||||||||
Cash used in investing activities |
(231,675 | ) | — | (31,849 | ) | (50,140 | ) | (313,664 | ) | |||||||||||
FINANCING ACTIVITIES |
||||||||||||||||||||
Proceeds from commercial paper |
49,992 | — | — | — | 49,992 | |||||||||||||||
Debt financing costs |
(139 | ) | — | — | — | (139 | ) | |||||||||||||
Transactions with affiliates, net |
184,424 | 13,114 | (157,616 | ) | (39,922 | ) | — | |||||||||||||
Cash provided by (used in) financing
activities |
234,277 | 13,114 | (157,616 | ) | (39,922 | ) | 49,853 | |||||||||||||
Increase (decrease) in cash and cash equivalents |
138 | — | (127 | ) | 48 | 59 | ||||||||||||||
Cash and cash equivalents, beginning of
period |
— | — | 161 | 25 | 186 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 138 | $ | — | $ | 34 | $ | 73 | $ | 245 | ||||||||||
14
Table of Contents
Statements of Cash Flows
Nine Months Ended September 30, 2006
(in thousands)
Nine Months Ended September 30, 2006
(in thousands)
| Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
| Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
OPERATING ACTIVITIES |
||||||||||||||||||||
Cash provided by (used in) operating
activities |
$ | 67,658 | $ | (13,537 | ) | $ | 290,047 | $ | 80,979 | $ | 425,147 | |||||||||
INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
— | — | (92,555 | ) | (78,123 | ) | (170,678 | ) | ||||||||||||
Increase in receivable from Arch Coal |
(236,677 | ) | — | (469 | ) | (17,494 | ) | (254,640 | ) | |||||||||||
Proceeds
from dispositions of property, plant and equipment |
— | — | 92 | 93 | 185 | |||||||||||||||
Cash used in investing activities |
(236,677 | ) | — | (92,932 | ) | (95,524 | ) | (425,133 | ) | |||||||||||
FINANCING ACTIVITIES |
||||||||||||||||||||
Debt financing costs |
— | (15 | ) | — | — | (15 | ) | |||||||||||||
Transactions with affiliates, net |
169,019 | 13,552 | (197,143 | ) | 14,572 | — | ||||||||||||||
Cash provided by (used in) financing
activities |
169,019 | 13,537 | (197,143 | ) | 14,572 | (15 | ) | |||||||||||||
Increase
(decrease) in cash and cash equivalents |
— | — | (28 | ) | 27 | (1 | ) | |||||||||||||
Cash and cash equivalents, beginning of
period |
— | — | 126 | 26 | 152 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | — | $ | — | $ | 98 | $ | 53 | $ | 151 | ||||||||||
15
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, 2006 and the Quarterly
Reports on form 10-Q that we filed during the interim period.
Executive Overview
Market conditions were considerably less favorable in the third quarter of 2007 than in the
year-ago period. At the end of 2006, we announced reductions in production volume targets in
response to the soft market conditions. These volume reductions affected both our Powder River
Basin and Western Bituminous operating segments.
We believe market fundamentals are improving, as indicated by key trends. We estimate that
domestic coal consumption increased approximately 22.0 million tons during the first nine months of
2007 and that domestic coal production declined 13 million tons during the same period. We believe
these trends are moving coal supply and demand into balance. Furthermore, we anticipate that strong
domestic and global demand growth for coal along with supply pressures will positively influence
future coal prices. Increased electricity demand, the relatively high cost of competing fossil
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.
Our results during the third quarter of 2007 when compared to the third quarter of 2006 were
affected by our regional sales mix as well as higher costs in both the Powder River Basin and the
Western Bituminous region.
Results of Operations
Items Affecting Comparability of Reported Results
A combustion-related event at our West Elk mine in Colorado in the fourth quarter of 2005
caused the idling of the mine into the first quarter of 2006. We estimate that the idling resulted
in $30.0 million in lost profits during the first quarter of 2006. We recognized insurance
recoveries related to the event of $10.0 million during the third quarter of 2006 and $30.0 million
during the first nine months of 2006. We reflected the insurance recoveries as a reduction of cost
of coal sales.
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
The following discussion summarizes our operating results for the three months ended September
30, 2007 and compares those results to our operating results for the three months ended September
30, 2006.
Revenues. The following table compares the number of tons we sold during the three months
ended September 30, 2007 and the sales associated with those tons with the comparable information
for the three months ended September 30, 2006:
16
Table of Contents
| Three Months Ended September 30 | Increase | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales |
$ | 405,055 | $ | 369,730 | $ | 35,325 | 9.6 | % | ||||||||
Tons sold |
30,128 | 28,729 | 1,399 | 4.9 | ||||||||||||
Coal sales realization per ton sold |
$ | 13.44 | $ | 12.87 | $ | 0.57 | 4.4 | |||||||||
Coal sales increased from the third quarter of 2006 to the third quarter of 2007 due to higher
sales volume along with changes in our segment mix. An increase in Western Bituminous sales
volumes resulted in a higher average sales price. See the regional sales volume and realization
tables below for a more detailed discussion of these regional variances.
The following table compares the number of tons sold by operating segment during the three
months ended September 30, 2007 with the comparable information for the three months ended
September 30, 2006:
| Three Months Ended September 30 | Increase | |||||||||||||||
| 2007 | 2006 | Tons | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Powder River Basin |
25,071 | 24,533 | 538 | 2.2 | % | |||||||||||
Western Bituminous |
5,057 | 4,196 | 861 | 20.5 | ||||||||||||
Total |
30,128 | 28,729 | 1,399 | 4.9 | ||||||||||||
Sales volume in the Powder River Basin increased during the third quarter of 2007 when
compared with the third quarter of 2006 due to increased sales from the Coal Creek mine, partially
offset by a decrease in sales from the Black Thunder mine due to the planned reductions discussed
previously.
In the Western Bituminous region, sales volume increased during the third quarter of 2007 when
compared with the third quarter of 2006 reflecting an increase in sales volume from the Skyline
mine and from the Dugout mine, which experienced the effects of an extended longwall move in the
third quarter of 2006.
The following table compares the coal sales price per ton by operating segment during the
three months ended September 30, 2007 with the comparable information for the three months ended
September 30, 2006. 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 amounts, as
adjusted, 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 September 30, 2007 were $0.02 for the Powder River
Basin and $3.30 for the Western Bituminous region. For the three months ended September 30, 2006,
transportation costs per ton billed to customers were $0.01 for the Powder River Basin and $2.71
for the Western Bituminous region.
| Three Months Ended September 30 | Increase (Decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 10.40 | $ | 10.46 | $ | (0.06 | ) | (0.6 | )% | |||||||
Western Bituminous |
25.16 | 24.21 | 0.95 | 3.9 | ||||||||||||
Decreases in sales prices in the Powder River Basin during the third quarter of 2007 when
compared with the third quarter of 2006 reflect lower base pricing, partially offset by favorable
quality adjustments. In the Western Bituminous region, higher sales prices during the third
quarter of 2007 when compared with the third quarter of 2006 reflect higher base pricing resulting
from the roll-off of lower-priced legacy contracts.
Expenses, costs and other. The following table compares expenses, costs and other operating
income, net for the three months ended September 30, 2007 with the comparable information for the
three months ended September 30, 2006:
17
Table of Contents
| Decrease | ||||||||||||||||
| Three Months Ended September 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Cost of coal sales |
$ | 317,541 | $ | 270,178 | $ | (47,363 | ) | (17.5 | )% | |||||||
Depreciation, depletion and amortization |
35,200 | 27,860 | (7,340 | ) | (26.3 | ) | ||||||||||
Selling, general and administrative expenses |
6,258 | 5,087 | (1,171 | ) | (23.0 | ) | ||||||||||
Other operating income, net |
(808 | ) | (1,437 | ) | (629 | ) | (43.8 | ) | ||||||||
| $ | 358,191 | $ | 301,688 | $ | (56,503 | ) | (18.7 | )% | ||||||||
Cost of coal sales. Cost of coal sales increased from the third quarter of 2006 to the third
quarter of 2007 primarily due to higher costs in both of our operating regions. See the analysis
of regional operating margins below for a more detailed discussion of these regional variances.
Depreciation, depletion and amortization. The increase in depreciation, depletion and
amortization from the third quarter of 2006 to the third quarter of 2007 is primarily due to
ongoing capital improvement and development projects. For more information on our ongoing capital
improvement and development projects, see “Liquidity and Capital Resources.”
Selling, general and administrative expenses. Selling, general and administrative expenses
represent expenses allocated to us from Arch Coal.
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 September 30 | Decrease | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 1.15 | $ | 1.86 | $ | (0.71 | ) | (38.2 | )% | |||||||
Western Bituminous Region |
4.42 | 6.21 | (1.79 | ) | (28.8 | ) | ||||||||||
Powder River Basin — On a per-ton basis, operating margins for the third quarter of 2007
decreased from the third quarter of 2006 primarily due to an increase in per-ton costs. The
increase in per-ton costs resulted from higher diesel fuel prices and tire costs, partially offset
by lower explosives costs.
Western Bituminous — Operating margins per ton for the third quarter of 2007 decreased from
the third quarter of 2006 primarily due to the impact of the insurance recovery of $10.0 million in
the third quarter of 2006 related to the West Elk mine’s combustion-related event and related
idling in late 2005 and early 2006 and higher depreciation, depletion and amortization costs.
Net interest income. The following table compares our net interest income for the three
months ended September 30, 2007 with the comparable information for the three months ended
September 30, 2006:
| Increase | ||||||||||||||||
| Three Months Ended September 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Interest expense |
$ | (18,119 | ) | $ | (18,197 | ) | $ | 78 | 0.4 | % | ||||||
Interest income |
26,429 | 22,108 | 4,321 | 19.5 | ||||||||||||
| $ | 8,310 | $ | 3,911 | $ | 4,399 | 112.5 | % | |||||||||
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 during the three months
ended September 30, 2007 as compared to the same period in 2006.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
The following discussion summarizes our operating results for the nine months ended September
30, 2007 and compares those results to our operating results for the nine months ended September
30, 2006.
Revenues. The following table summarizes the number of tons we sold during the nine months
ended September
18
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30, 2007 and the sales associated with those tons and compares those results to the comparable
information for the nine months ended September 30, 2006:
| Nine Months Ended September 30 | Increase (Decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales |
$ | 1,161,610 | $ | 1,118,331 | $ | 43,279 | 3.9 | % | ||||||||
Tons sold |
87,027 | 83,571 | 3,456 | 4.1 | ||||||||||||
Coal sales realization per ton sold |
$ | 13.35 | $ | 13.38 | $ | (0.03 | ) | (0.2 | ) | |||||||
The increase in our coal sales from the first nine months of 2006 to the first nine months of
2007 primarily resulted from higher sales volumes. See the regional realization tables below for a
discussion of changes in regional sales volumes and prices.
The following table shows the number of tons sold by operating segment during the nine months
ended September 30, 2007 and compares those amounts to the comparable information for the nine
months ended September 30, 2006:
| Nine Months Ended September 30 | Increase | |||||||||||||||
| 2007 | 2006 | Tons | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Powder River Basin |
72,250 | 70,814 | 1,436 | 2.0 | % | |||||||||||
Western Bituminous Region |
14,777 | 12,757 | 2,020 | 15.8 | ||||||||||||
Total |
87,027 | 83,571 | 3,456 | 4.1 | % | |||||||||||
Sales volume in the Powder River Basin increased from the first nine months of 2006 to the
first nine months of 2007 due to increased sales from the Coal Creek mine, partially offset by a
decrease at the Black Thunder mine due to the planned reductions discussed previously, as well as
weather-related shipment challenges and an unplanned belt outage in the first quarter of 2007. The
Coal Creek mine was restarted during 2006.
In the Western Bituminous region, sales volume increased during the first nine months of 2007
when compared with the first nine months of 2006, reflecting a full nine months of production at
the West Elk mine, which was idle during the first quarter of 2006 after the combustion-related
event, and at the Skyline longwall mine, which commenced mining in a new reserve area in the second
quarter of 2006.
The following table shows the coal sales price per ton by operating segment during the nine
months ended September 30, 2007 and compares those amounts to the comparable information for the
nine months ended September 30, 2006. 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 amounts, as adjusted, 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 nine months ended September 30, 2007 were
$0.04 for the Powder River Basin and $3.13 for the Western Bituminous region. For the nine months
ended September 30, 2006, transportation costs per ton billed to customers were $0.02 for the
Powder River Basin and $2.94 for the Western Bituminous region.
| Nine Months Ended September 30 | Increase (Decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 10.35 | $ | 11.07 | $ | (0.72 | ) | (6.5 | )% | |||||||
Western Bituminous Region |
24.69 | 23.17 | 1.52 | 6.6 | ||||||||||||
Decreases in sales prices in the Powder River Basin during the first nine months of 2007 when
compared with the first nine months of 2006 primarily reflect the higher volumes from the Coal
Creek mine, which has a lower price due to its lower heat content, and lower sulfur dioxide
emission allowance adjustments, primarily in the first quarter of 2007. In the Western Bituminous
region, higher sales prices during the first nine months of 2007 represent higher base pricing
resulting from the roll-off of lower-priced legacy contracts.
Expenses, costs and other. The following table summarizes expenses, costs and other operating
income, net for the nine months ended September 30, 2007 and compares those results to the
comparable information for the nine months ended September 30, 2006:
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| Increase (Decrease) | ||||||||||||||||
| Nine Months Ended September 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Cost of coal sales |
$ | 908,879 | $ | 773,584 | $ | (135,295 | ) | (17.5 | )% | |||||||
Depreciation, depletion and amortization |
100,658 | 78,289 | (22,369 | ) | (28.6 | ) | ||||||||||
Selling, general and administrative expenses |
19,196 | 17,105 | (2,091 | ) | (12.2 | ) | ||||||||||
Other operating income, net |
(8,794 | ) | (3,303 | ) | 5,491 | 166.2 | ||||||||||
| $ | 1,019,939 | $ | 865,675 | $ | (154,264 | ) | (17.8 | )% | ||||||||
Cost of coal sales. Our cost of coal sales increased from the first nine months of 2006 to the
first nine months of 2007 primarily due to higher sales volumes and higher unit costs in both of
our operating segments. See the analysis of regional operating margins below for a more detailed
discussion of these regional variances.
Depreciation, depletion and amortization. The increase in depreciation, depletion and
amortization from the first nine months of 2006 to the first nine months of 2007 is primarily due
to ongoing capital improvement and development projects. For more information on our ongoing
capital improvement and development projects, see “Liquidity and Capital Resources.”
Selling, general and administrative expenses. Selling, general and administrative expenses
represent expenses allocated to us from Arch Coal.
Other operating income, net. The increase in other operating income, net in the first nine
months of 2007 compared to the first nine months of 2006 is due mainly to the impact of a $6.0
million gain in 2007 on the sale of non-core reserves in the Powder River Basin.
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.
| Nine Months Ended September 30 | Decrease | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 1.15 | $ | 2.51 | $ | (1.36 | ) | (54.2 | )% | |||||||
Western Bituminous Region |
4.46 | 7.17 | (2.71 | ) | (37.8 | ) | ||||||||||
Powder River Basin — On a per-ton basis, operating margins for the first nine months of 2007
decreased from the first nine months of 2006 due to an increase in per-ton costs. The increase in
per-ton costs resulted primarily from higher diesel fuel prices and maintenance, repair and tire
costs, partially offset by lower explosives costs.
Western Bituminous region — Operating margins per ton for the first nine months of 2007
decreased from the first nine months of 2006 primarily due to the impact of higher depreciation,
depletion and amortization costs and the impact of the installation of the new longwall at the
Sufco mine. These factors offset the impact of improved per-ton coal sales prices. The $30.0
million of insurance proceeds we recognized during the nine months ended September 30, 2006 related
to the combustion-related event at the West Elk mine in the fourth quarter of 2005 offset the
estimated $30.0 million adverse effect of the idling of the mine in the first quarter of 2006.
Net interest income. The following table summarizes our net interest income for the nine
months ended September 30, 2007 and compares that information to the comparable information for the
nine months ended September 30, 2006:
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| Increase | ||||||||||||||||
| Nine Months Ended September 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Interest expense |
$ | (53,818 | ) | $ | (54,449 | ) | $ | 631 | 1.2 | % | ||||||
Interest income |
73,640 | 59,072 | 14,568 | 24.7 | ||||||||||||
| $ | 19,822 | $ | 4,623 | $ | 15,199 | 328.8 | % | |||||||||
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 during the nine months
ended September 30, 2007 as compared to the same period in 2006.
Liquidity and Capital Resources
Our primary sources of cash include sales of our coal production to customers, sales of
assets, our new commercial paper program 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 and, if necessary, cash from Arch Coal. 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.
The following is a summary of cash provided by or used in each of the indicated types of
activities:
| Nine Months Ended | ||||||||
| September 30 | ||||||||
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
Cash provided by (used in): |
||||||||
Operating activities |
$ | 263,870 | $ | 425,147 | ||||
Investing activities |
(313,664 | ) | (425,133 | ) | ||||
Financing activities |
49,853 | (15 | ) | |||||
Cash provided by operating activities decreased $161.3 million in the first nine months of
2007 compared to the first nine months of 2006 primarily as a result of the commencement of Arch
Coal’s accounts securitization program in the first quarter of 2006, which resulted in a
substantial decrease in our trade receivables in the first half of 2006.
Cash used in investing activities in the first nine months of 2007 was $111.5 million less
than in the first nine months of 2006, primarily due to a decrease in capital spending of $70.8
million in the first nine months of 2007 when compared with the first nine months of 2006. In
addition, cash used in investing activities decreased due to the commencement of Arch Coal’s
accounts receivable securitization program in the first quarter of 2006, which caused the
receivable from Arch Coal to increase $254.6 million in the first nine months of 2006, compared
with $238.3 million in the first nine months of 2007. Capital expenditures are made to improve and
replace existing mining equipment, expand existing mines, develop new mines and improve the overall
efficiency of mining operations. In the prior year, we incurred costs related to the restart of the
Coal Creek mine in the Powder River Basin and the commencement of mining in a new reserve area at
the Skyline mine in the Western Bituminous Region. In 2007, we recovered $18.3 million of deposits
we made primarily in the fourth quarter of 2006 to purchase equipment in the Powder River Basin
that we subsequently leased. In addition, our proceeds from asset sales in 2007 included $6.0
million from the sale of non-core reserves in the Powder River Basin.
On August 15, 2007, we entered into a commercial paper placement program to provide short-term
financing at rates that are generally lower than the rates available under Arch Coal’s revolving
credit facility. Under the program, we may sell up to $50.0 million in interest-bearing or
discounted short-term unsecured debt obligations with maturities of no more than 270 days. The
commercial paper placement program is supported by an unsecured $50.0 million revolving credit
facility with a maturity date of June 7, 2008. As of September 30, 2007, we had $50.0 million
outstanding under the agreement with a weighted-average interest rate of 5.59% and maturity dates
ranging from 3 to 59 days.
21
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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. 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 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, 2006.
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 September 30, 2007. 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
September 30, 2007 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II
OTHER INFORMATION
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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006 and in
Part II, Item 1A in the Quarterly Reports on Form 10-Q that we 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, results of operations or liquidity
could be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
22
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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 Basin Coal 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. |
23
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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 Western Resources, LLC |
||||
| By: | /s/ Robert J. Messey | |||
| Robert J. Messey | ||||
| Vice President |
||||
| November 13, 2007 | ||||
24
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: November 13, 2007
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: November 13, 2007
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 September 30, 2007 (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: November 13, 2007
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 September 30, 2007 (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: November 13, 2007