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 June 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
August 14, 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.
Table of Contents
| Page | ||||||||
| 1 | ||||||||
| 1 | ||||||||
| 16 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| Certification | ||||||||
| Certification | ||||||||
| Section 1350 Certification | ||||||||
| Section 1350 Certification | ||||||||
i
Table of Contents
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 June 30 | Six Months Ended June 30 | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (unaudited) | ||||||||||||||||
REVENUES |
||||||||||||||||
Coal sales |
$ | 386,458 | $ | 386,405 | $ | 756,555 | $ | 748,601 | ||||||||
COSTS, EXPENSES AND OTHER
|
||||||||||||||||
Cost of coal sales |
308,067 | 251,276 | 591,338 | 503,406 | ||||||||||||
Depreciation, depletion and amortization |
32,939 | 26,853 | 65,458 | 50,429 | ||||||||||||
Selling, general and administrative
expenses |
6,786 | 6,529 | 12,938 | 12,018 | ||||||||||||
Other operating income, net |
(7,063 | ) | (1,391 | ) | (7,986 | ) | (1,866 | ) | ||||||||
| 340,729 | 283,267 | 661,748 | 563,987 | |||||||||||||
Income from operations |
45,729 | 103,138 | 94,807 | 184,614 | ||||||||||||
Interest income (expense), net: |
||||||||||||||||
Interest expense |
(18,078 | ) | (18,516 | ) | (35,699 | ) | (36,252 | ) | ||||||||
Interest income, primarily from Arch
Coal, Inc. |
24,390 | 20,642 | 47,211 | 36,964 | ||||||||||||
| 6,312 | 2,126 | 11,512 | 712 | |||||||||||||
Other non-operating expense: |
||||||||||||||||
Expenses resulting from early debt
extinguishment and termination of hedge
accounting for interest rate swaps |
(1,270 | ) | (2,305 | ) | (2,539 | ) | (5,023 | ) | ||||||||
Income before minority interest |
50,771 | 102,959 | 103,780 | 180,303 | ||||||||||||
Minority interest |
(4,832 | ) | (7,388 | ) | (9,564 | ) | (20,755 | ) | ||||||||
Net income |
$ | 45,939 | $ | 95,571 | $ | 94,216 | $ | 159,548 | ||||||||
Net income attributable to redeemable
membership interest |
$ | 230 | $ | 478 | $ | 471 | $ | 798 | ||||||||
Net income attributable to
non-redeemable membership interest |
$ | 45,709 | $ | 95,093 | $ | 93,745 | $ | 158,750 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
Table of Contents
Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
Condensed Consolidated Balance Sheets
(In thousands)
| June 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 90 | $ | 186 | ||||
Trade accounts receivable |
208 | 985 | ||||||
Other receivables |
3,113 | 14,733 | ||||||
Inventories |
103,811 | 94,828 | ||||||
Prepaid royalties |
480 | 2,945 | ||||||
Other |
23,767 | 24,458 | ||||||
Total current assets |
131,469 | 138,135 | ||||||
Property, plant and equipment, net |
1,223,868 | 1,233,846 | ||||||
Other assets: |
||||||||
Receivable from Arch Coal, Inc. |
1,273,761 | 1,152,102 | ||||||
Other |
28,306 | 33,689 | ||||||
Total other assets |
1,302,067 | 1,185,791 | ||||||
Total assets |
$ | 2,657,404 | $ | 2,557,772 | ||||
LIABILITIES AND MEMBERS’ INTERESTS |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 92,415 | $ | 110,725 | ||||
Accrued expenses |
131,831 | 129,495 | ||||||
Total current liabilities |
224,246 | 240,220 | ||||||
Long-term debt |
958,198 | 958,881 | ||||||
Accrued postretirement benefits other than pension |
32,922 | 31,036 | ||||||
Asset retirement obligations |
182,723 | 174,902 | ||||||
Accrued workers’ compensation |
10,674 | 10,027 | ||||||
Other noncurrent liabilities |
37,590 | 38,705 | ||||||
Total liabilities |
1,446,353 | 1,453,771 | ||||||
Redeemable membership interest |
7,420 | 6,934 | ||||||
Minority interest |
172,086 | 162,522 | ||||||
Non-redeemable membership interest |
1,031,545 | 934,545 | ||||||
Total liabilities and membership interests |
$ | 2,657,404 | $ | 2,557,772 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
Table of Contents
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 | ||||||||
| 2007 | 2006 | |||||||
| (unaudited) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 94,216 | $ | 159,548 | ||||
Adjustments to reconcile net income to cash provided by
operating activities: |
||||||||
Depreciation, depletion and amortization |
65,458 | 50,429 | ||||||
Prepaid royalties expensed |
3,069 | 607 | ||||||
Net gain on disposition of assets |
(6,074 | ) | (89 | ) | ||||
Minority interest |
9,564 | 20,755 | ||||||
Other non-operating expense |
2,539 | 5,023 | ||||||
Changes in: |
||||||||
Receivables |
12,397 | 108,090 | ||||||
Inventories |
(8,983 | ) | (20,177 | ) | ||||
Accounts payable and accrued expenses |
(16,022 | ) | 17,083 | |||||
Other |
15,866 | 8,500 | ||||||
Cash provided by operating activities |
172,030 | 349,769 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(74,696 | ) | (133,186 | ) | ||||
Increase in receivable from Arch Coal, Inc. |
(122,082 | ) | (216,744 | ) | ||||
Proceeds from dispositions of property, plant and equipment |
6,327 | 93 | ||||||
Reimbursement of deposits on equipment |
18,325 | — | ||||||
Cash used in investing activities |
(172,126 | ) | (349,837 | ) | ||||
Decrease in cash and cash equivalents |
(96 | ) | (68 | ) | ||||
Cash and cash equivalents, beginning of period |
186 | 152 | ||||||
Cash and cash equivalents, end of period |
$ | 90 | $ | 84 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Table of Contents
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 of the three and six month periods ended
June 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. Inventories
Inventories consist of the following:
| June 30, | December 31, | |||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
Coal |
$ | 21,413 | $ | 31,350 | ||||
Repair parts and supplies |
82,398 | 63,478 | ||||||
| $ | 103,811 | $ | 94,828 | |||||
4. 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.
4
Table of Contents
The following table details the components of comprehensive income:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (In thousands) | ||||||||||||||||
Net income |
$ | 45,939 | $ | 95,571 | $ | 94,216 | $ | 159,548 | ||||||||
Other comprehensive income |
||||||||||||||||
Pension, postretirement and
other post-employment benefits
adjustment |
367 | 14,531 | 872 | 14,531 | ||||||||||||
Unrealized gains on derivatives |
1,270 | 2,305 | 2,539 | 5,023 | ||||||||||||
Total comprehensive income |
$ | 47,576 | $ | 112,407 | $ | 97,627 | $ | 179,102 | ||||||||
5. 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 June 30, 2007 and December 31, 2006, the receivable from Arch Coal was $1,273.8 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 $24.2 million and $20.5 million for the three
months ended June 30, 2007 and 2006, respectively, and $46.9 million and $36.6 million for the six
months ended June 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 $373.5
million and $414.9 million of trade accounts receivable to Arch Coal during the three months ended
June 30, 2007 and 2006, respectively, at a total discount of $2.6 million and $3.1 million,
respectively. During the six months ended June 30, 2007 and 2006, the Company sold $750.7 million
and $680.5 million, respectively, of trade accounts receivable to Arch Coal at a total discount of
$5.1 million and $5.1 million, respectively. These transactions are recorded through the Arch Coal
receivable account.
For the three months ended June 30, 2007 and 2006, the Company incurred production royalties
of $8.7 million and $11.0 million, respectively, payable to Arch Coal under sublease agreements.
For the six months ended June 30, 2007 and 2006, the Company incurred production royalties of $17.8
million and $21.1 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 $6.8 million and $6.5 million for the three
months ended June 30, 2007 and 2006, respectively, and $12.9 million and $12.0 million for the six
months ended June 30, 2007 and 2006, respectively.
6. 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.
7. 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
5
Table of Contents
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 six month periods ended June 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 June 30, 2007 |
||||||||||||||||
Coal sales |
$ | 249,959 | $ | 136,499 | $ | — | $ | 386,458 | ||||||||
Income from operations |
25,603 | 19,706 | 420 | 45,729 | ||||||||||||
Total assets |
1,637,555 | 1,887,258 | (867,409 | ) | 2,657,404 | |||||||||||
Depreciation, depletion and amortization |
17,715 | 15,224 | — | 32,939 | ||||||||||||
Capital expenditures |
963 | 30,872 | — | 31,835 | ||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Three months ended June 30, 2006 |
||||||||||||||||
Coal sales |
$ | 276,054 | $ | 110,351 | $ | — | $ | 386,405 | ||||||||
Income (loss) 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 | ||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Six months ended June 30, 2007 |
||||||||||||||||
Coal sales |
$ | 489,416 | $ | 267,139 | $ | — | $ | 756,555 | ||||||||
Income (loss) from operations |
55,852 | 45,608 | (6,653 | ) | 94,807 | |||||||||||
Depreciation, depletion and amortization |
33,753 | 31,705 | — | 65,458 | ||||||||||||
Capital expenditures |
14,086 | 60,610 | — | 74,696 | ||||||||||||
| Corporate, | ||||||||||||||||
| Other and | ||||||||||||||||
| PRB | WBIT | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Six months ended June 30, 2006 |
||||||||||||||||
Coal sales |
$ | 528,443 | $ | 220,158 | $ | — | $ | 748,601 | ||||||||
Income (loss) 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 | ||||||||||||
6
Table of Contents
A reconciliation of segment income from operations to consolidated income before income taxes
follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (In thousands) | ||||||||||||||||
Income from operations |
$ | 45,729 | $ | 103,138 | $ | 94,807 | $ | 184,614 | ||||||||
Interest expense |
(18,078 | ) | (18,516 | ) | (35,699 | ) | (36,252 | ) | ||||||||
Interest income |
24,390 | 20,642 | 47,211 | 36,964 | ||||||||||||
Other non-operating expense |
(1,270 | ) | (2,305 | ) | (2,539 | ) | (5,023 | ) | ||||||||
Income before minority interest |
$ | 50,771 | $ | 102,959 | $ | 103,780 | $ | 180,303 | ||||||||
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:
7
Table of Contents
Statements of Operations
Three Months Ended June 30, 2007
(in thousands)
Three Months Ended June 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales revenues |
$ | — | $ | — | $ | 288,268 | $ | 98,190 | $ | — | $ | 386,458 | ||||||||||||
Cost of coal sales |
(1,166 | ) | — | 235,322 | 74,504 | (593 | ) | 308,067 | ||||||||||||||||
Depreciation, depletion and amortization |
— | — | 22,388 | 10,551 | — | 32,939 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
6,786 | — | — | — | — | 6,786 | ||||||||||||||||||
Other operating income |
(6,040 | ) | — | (736 | ) | (880 | ) | 593 | (7,063 | ) | ||||||||||||||
| (420 | ) | — | 256,974 | 84,175 | — | 340,729 | ||||||||||||||||||
Income from investment in subsidiaries |
45,712 | — | — | — | (45,712 | ) | — | |||||||||||||||||
Income from operations |
46,132 | — | 31,294 | 14,015 | (45,712 | ) | 45,729 | |||||||||||||||||
Interest expense |
(17,974 | ) | (15,423 | ) | (105 | ) | (607 | ) | 16,031 | (18,078 | ) | |||||||||||||
Interest income, primarily from Arch Coal |
23,883 | 16,031 | 103 | 404 | (16,031 | ) | 24,390 | |||||||||||||||||
| 5,909 | 608 | (2 | ) | (203 | ) | — | 6,312 | |||||||||||||||||
Other non-operating expense |
(1,270 | ) | — | — | — | — | (1,270 | ) | ||||||||||||||||
Minority interest |
(4,832 | ) | — | — | — | — | (4,832 | ) | ||||||||||||||||
Net income |
$ | 45,939 | $ | 608 | $ | 31,292 | $ | 13,812 | $ | (45,712 | ) | $ | 45,939 | |||||||||||
8
Table of Contents
Statements of Operations
Three Months Ended June 30, 2006
(in thousands)
Three Months Ended June 30, 2006
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
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 investment in subsidiaries |
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 | |||||||||||
9
Table of Contents
Statements of Operations
Six Months Ended June 30, 2007
(in thousands)
Six Months Ended June 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cost
sales revenues |
$ | — | $ | — | $ | 570,690 | $ | 185,865 | $ | — | $ | 756,555 | ||||||||||||
Cost of coal sales |
(220 | ) | — | 454,632 | 138,188 | (1,262 | ) | 591,338 | ||||||||||||||||
Depreciation, depletion and amortization |
— | — | 43,828 | 21,630 | — | 65,458 | ||||||||||||||||||
Selling, general and administrative
expenses allocated from Arch Coal |
12,938 | — | — | — | — | 12,938 | ||||||||||||||||||
Other operating income |
(6,065 | ) | — | (1,347 | ) | (1,836 | ) | 1,262 | (7,986 | ) | ||||||||||||||
| 6,653 | — | 497,113 | 157,982 | — | 661,748 | |||||||||||||||||||
Income from investment in subsidiaries |
102,699 | — | — | — | (102,699 | ) | — | |||||||||||||||||
Income from operations |
96,046 | — | 73,577 | 27,883 | (102,699 | ) | 94,807 | |||||||||||||||||
Interest expense |
(35,921 | ) | (30,436 | ) | (204 | ) | (1,189 | ) | 32,051 | (35,699 | ) | |||||||||||||
Interest income, primarily from Arch Coal |
46,194 | 32,051 | 236 | 781 | (32,051 | ) | 47,211 | |||||||||||||||||
| 10,273 | 1,615 | 32 | (408 | ) | — | 11,512 | ||||||||||||||||||
Other non-operating expense |
(2,539 | ) | — | — | — | — | (2,539 | ) | ||||||||||||||||
Minority interest |
(9,564 | ) | — | — | — | — | (9,564 | ) | ||||||||||||||||
Net income |
$ | 94,216 | $ | 1,615 | $ | 73,609 | $ | 27,475 | $ | (102,699 | ) | $ | 94,216 | |||||||||||
10
Table of Contents
Statements of Operations
Six Months Ended June 30, 2006
(in thousands)
Six Months Ended June 30, 2006
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
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 investment in subsidiaries |
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 | |||||||||||
11
Table of Contents
Balance Sheets
June 30, 2007
(in thousands)
June 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents |
$ | — | $ | — | $ | 75 | $ | 15 | $ | — | $ | 90 | ||||||||||||
Trade accounts receivable |
— | — | — | 208 | — | 208 | ||||||||||||||||||
Other receivables |
500 | — | 2,267 | 346 | — | 3,113 | ||||||||||||||||||
Inventories |
— | — | 73,443 | 30,368 | — | 103,811 | ||||||||||||||||||
Prepaid royalties |
— | — | — | 480 | — | 480 | ||||||||||||||||||
Other |
4,551 | 2,147 | 7,904 | 9,165 | — | 23,767 | ||||||||||||||||||
Total current assets |
5,051 | 2,147 | 83,689 | 40,582 | — | 131,469 | ||||||||||||||||||
Property, plant and equipment, net |
849,240 | 374,628 | — | 1,223,868 | ||||||||||||||||||||
Investment in subsidiaries |
2,022,001 | — | — | — | (2,022,001 | ) | — | |||||||||||||||||
Receivable from Arch Coal, Inc. |
1,237,137 | — | (2 | ) | 36,626 | — | 1,273,761 | |||||||||||||||||
Intercompanies |
(2,009,763 | ) | 979,108 | 1,009,674 | 20,981 | — | — | |||||||||||||||||
Other |
736 | 10,690 | 12,618 | 4,262 | 28,306 | |||||||||||||||||||
Total other assets |
1,250,111 | 989,798 | 1,022,290 | 61,869 | (2,022,001 | ) | 1,302,067 | |||||||||||||||||
Total assets |
$ | 1,255,162 | $ | 991,945 | $ | 1,955,219 | $ | 477,079 | $ | (2,022,001 | ) | $ | 2,657,404 | |||||||||||
Accounts payable |
9,490 | — | 61,691 | 21,234 | — | 92,415 | ||||||||||||||||||
Accrued expenses |
1,753 | 32,062 | 88,397 | 9,619 | — | 131,831 | ||||||||||||||||||
Total current liabilities |
11,243 | 32,062 | 150,088 | 30,853 | — | 224,246 | ||||||||||||||||||
Long-term debt |
— | 958,198 | — | — | — | 958,198 | ||||||||||||||||||
Accrued postretirement benefits
other than pension |
20,515 | — | 2,485 | 9,922 | — | 32,922 | ||||||||||||||||||
Asset retirement obligations |
— | — | 171,144 | 11,579 | — | 182,723 | ||||||||||||||||||
Accrued workers’ compensation |
5,642 | — | 1,188 | 3,844 | — | 10,674 | ||||||||||||||||||
Other noncurrent liabilities |
6,711 | — | 25,593 | 5,286 | — | 37,590 | ||||||||||||||||||
Total liabilities |
44,111 | 990,260 | 350,498 | 61,484 | — | 1,446,353 | ||||||||||||||||||
Redeemable equity interests |
7,420 | — | — | — | — | 7,420 | ||||||||||||||||||
Minority interest |
172,086 | — | — | — | — | 172,086 | ||||||||||||||||||
Non-redeemable members’ equity |
1,031,545 | 1,685 | 1,604,721 | 415,595 | (2,022,001 | ) | 1,031,545 | |||||||||||||||||
Total liabilities, redeemable
membership
interests and non-redeemable
membership interests |
$ | 1,255,162 | $ | 991,945 | $ | 1,955,219 | $ | 477,079 | $ | (2,022,001 | ) | $ | 2,657,404 | |||||||||||
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 |
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 equity interests |
6,934 | — | — | — | — | 6,934 | ||||||||||||||||||
Minority interest |
162,522 | — | — | — | — | 162,522 | ||||||||||||||||||
Non-redeemable members’ equity |
934,545 | 70 | 1,529,148 | 388,074 | (1,917,292 | ) | 934,545 | |||||||||||||||||
Total liabilities, redeemable
membership interests and
non-redeemable 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
Six Months Ended June 30, 2007
(in thousands)
Six Months Ended June 30, 2007
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
Operating Activities |
||||||||||||||||||||
Cash provided by (used in) operating
activities |
$ | (258 | ) | $ | 2,012 | $ | 112,601 | $ | 57,675 | $ | 172,030 | |||||||||
Investing Activities |
||||||||||||||||||||
Capital expenditures |
— | — | (32,150 | ) | (42,546 | ) | (74,696 | ) | ||||||||||||
Increase in receivable from Arch Coal |
(112,227 | ) | — | (112 | ) | (9,743 | ) | (122,082 | ) | |||||||||||
Proceeds from dispositions of capital
assets |
6,000 | — | 248 | 79 | 6,327 | |||||||||||||||
Reimbursement of deposits on
equipment |
— | — | 18,325 | — | 18,325 | |||||||||||||||
Cash used in investing activities |
(106,227 | ) | — | (13,689 | ) | (52,210 | ) | (172,126 | ) | |||||||||||
Financing Activities |
||||||||||||||||||||
Transactions with affiliates, net |
106,485 | (2,012 | ) | (98,998 | ) | (5,475 | ) | — | ||||||||||||
Cash provided by (used in) financing
activities |
106,485 | (2,012 | ) | (98,998 | ) | (5,475 | ) | — | ||||||||||||
Decrease in cash and cash equivalents |
— | — | (86 | ) | (10 | ) | (96 | ) | ||||||||||||
Cash and cash equivalents, beginning
of
period |
— | — | 161 | 25 | 186 | |||||||||||||||
Cash and cash equivalents, end of
period |
$ | — | $ | — | $ | 75 | $ | 15 | $ | 90 | ||||||||||
14
Table of Contents
Statements of Cash Flows
Six Months Ended June 30, 2006
(in thousands)
Six Months Ended June 30, 2006
(in thousands)
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
Operating Activities |
||||||||||||||||||||
Cash provided by operating activities |
$ | 71,919 | $ | 1,654 | $ | 189,093 | $ | 87,103 | $ | 349,769 | ||||||||||
Investing Activities |
||||||||||||||||||||
Capital expenditures |
— | — | (75,730 | ) | (57,456 | ) | (133,186 | ) | ||||||||||||
Increase in receivable from Arch Coal |
(198,878 | ) | — | (13 | ) | (17,853 | ) | (216,744 | ) | |||||||||||
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 | ||||||||||
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 second quarter of 2007 than in
the year-ago period. At the end of 2006, we reduced our production volume targets in response to
the soft market conditions. These volume reductions affected both operating segments.
We believe market fundamentals are improving. Through mid-July, year-to-date electric
generation demand increased while coal production was down. Furthermore, we believe these trends
are moving coal supply and demand into balance. 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 costs during the second quarter of 2007 were affected by three planned longwall moves in
the Western Bituminous region, and we estimate that our production in that segment was lower by
approximately 10% during the quarter due to these moves. In addition, costs in the Powder River
Basin were affected by higher diesel fuel costs and planned maintenance on a dragline at our Black
Thunder mine.
Results of Operations
Items Affecting Comparability of Reported Results
The 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 second quarter of 2006 and $20.0
million during the first half of 2006. We reflected the insurance recoveries as a reduction of cost
of coal sales.
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
The following discussion summarizes our operating results for the three months ended June 30,
2007 and compares those results to our operating results for the three months ended June 30, 2006.
Revenues. The following table summarizes the number of tons we sold during the three months
ended June 30, 2007 and the sales associated with those tons and compares those results to the
comparable information for the three months ended June 30, 2006:
16
Table of Contents
| Three Months Ended June 30 | Increase (Decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales |
$ | 386,458 | $ | 386,405 | $ | 53 | 0.0 | % | ||||||||
Tons sold |
29,193 | 28,608 | 585 | 2.0 | ||||||||||||
Coal sales realization per ton sold |
$ | 13.24 | $ | 13.51 | $ | (0.27 | ) | (2.0 | ) | |||||||
Our coal sales were flat in the second quarter of 2007 when compared to the second
quarter of 2006 as slightly higher sales volumes were offset by lower overall average sales prices.
The lower overall average sales price was the result of lower realizations in the Powder River
Basin. See the regional sales volume and realization tables below for a more detailed discussion
of these regional variances.
The following table shows the number of tons sold by operating segment during the three months
ended June 30, 2007 and compares those amounts to the comparable information for the three months
ended June 30, 2006:
| Three Months Ended June 30 | Increase | |||||||||||||||
| 2007 | 2006 | Tons | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Powder River Basin |
24,237 | 24,107 | 130 | 0.5 | % | |||||||||||
Western Bituminous |
4,956 | 4,501 | 455 | 10.1 | ||||||||||||
Total |
29,193 | 28,608 | 585 | 2.0 | % | |||||||||||
Sales volume in the Powder River Basin increased slightly during the second quarter of
2007 when compared with the second quarter of 2006. The effect of the restart of the Coal Creek
mine during the second half of 2006 was partially offset by a decrease in sales volumes at the
Black Thunder mine due to the planned reductions discussed previously.
In the Western Bituminous region, sales volume increased during the second quarter of 2007
when compared with the second quarter of 2006, reflecting strong customer demand. Shipments
increased from the Skyline longwall mine, which commenced mining in a new reserve area in the
second quarter of 2006. Although production was affected by the three planned longwall moves
during the second quarter of 2007, we fulfilled customer requirements by shipping from our coal
inventories.
The following table shows the coal sales price per ton by operating segment during the three
months ended June 30, 2007 and compares those amounts to the comparable information for the three
months ended June 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 June 30, 2007 were $0.03 for the Powder River Basin
and $3.41 for the Western Bituminous region. For the three months ended June 30, 2006,
transportation costs per ton billed to customers were $0.01 for the Powder River Basin and $2.44
for the Western Bituminous region.
| Three Months Ended June 30 | Increase (decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 10.29 | $ | 11.44 | $ | (1.15 | ) | (10.1 | )% | |||||||
Western Bituminous |
24.13 | 22.08 | 2.05 | 9.3 | ||||||||||||
Decreases in sales prices in the Powder River Basin during the second quarter of 2007
when compared with the second quarter of 2006 reflect lower base pricing and lower sulfur dioxide
emission allowance adjustments. In the Western Bituminous region, higher sales prices during the
second quarter of 2007 when compared with the second quarter of 2006 reflect higher base pricing
resulting from the roll-off of lower-priced legacy contracts.
Expenses, costs and other. The following table summarizes our operating costs and expenses
for the three months ended June 30, 2007 and compares those results to the comparable information
for the three months ended June 30, 2006:
17
Table of Contents
| Increase (Decrease) | ||||||||||||||||
| Three Months Ended June 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Cost of coal sales |
$ | 308,067 | $ | 251,276 | $ | (56,791 | ) | (22.6 | )% | |||||||
Depreciation, depletion and amortization |
32,939 | 26,853 | (6,086 | ) | (22.7 | ) | ||||||||||
Selling, general and administrative expenses |
6,786 | 6,529 | (257 | ) | (3.9 | ) | ||||||||||
Other operating income, net |
(7,063 | ) | (1,391 | ) | 5,672 | 407.8 | ||||||||||
| $ | 340,729 | $ | 283,267 | $ | (57,462 | ) | (20.3 | )% | ||||||||
Cost of coal sales. Our cost of coal sales increased from the second quarter of 2006 to
the second 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 second quarter of 2006 to the second quarter of 2007 is due primarily to
ongoing capital improvement and development projects. For more information on our ongoing capital
improvement 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 second
quarter of 2007 compared to the second quarter of 2006 is primarily due to the impact of a $6.0
million gain 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.
| Three Months Ended June 30 | Decrease | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 1.03 | $ | 2.90 | $ | (1.87 | ) | (64.5 | )% | |||||||
Western Bituminous Region |
3.77 | 8.85 | (5.08 | ) | (57.4 | ) | ||||||||||
Powder River Basin — On a per-ton basis, operating margins for the second quarter of 2007
decreased from the second quarter of 2006 due to the decrease in per-ton coal sales prices and an
increase in per-ton costs. The increase in per-ton costs resulted from higher labor, diesel fuel
and dragline maintenance and repair costs, partially offset by lower explosives and sales-sensitive
costs.
Western Bituminous — Operating margins per ton for the second quarter of 2007 decreased from
the second quarter of 2006 primarily due to the impact of the three planned longwall moves during
the second quarter of 2007 compared to one longwall move in the second quarter of 2006.
Additionally, the insurance recovery of $10.0 million in the second quarter of 2006 related to the
West Elk outage in late 2005 and early 2006 lowered our operating costs in the second quarter of
2006.
Net interest expense. The following table summarizes our net interest expense for the three
months ended June 30, 2007 and compares that information to the comparable information for the
three months ended June 30, 2006:
| Increase | ||||||||||||||||
| Three Months Ended June 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Interest expense |
$ | (18,078 | ) | $ | (18,516 | ) | $ | 438 | 2.4 | % | ||||||
Interest income |
24,390 | 20,642 | 3,748 | 18.2 | ||||||||||||
| $ | 6,312 | $ | 2,126 | $ | 4,186 | 196.9 | % | |||||||||
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, 2007 as compared to the same period in 2006.
18
Table of Contents
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
The following discussion summarizes our operating results for the six months ended June 30,
2007 and compares those results to our operating results for the six months ended June 30, 2006.
Revenues. The following table summarizes the number of tons we sold during the six months
ended June 30, 2007 and the sales associated with those tons and compares those results to the
comparable information for the six months ended June 30, 2006:
| Six Months Ended June 30 | Increase (Decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales |
$ | 756,555 | $ | 748,601 | $ | 7,954 | 1.1 | % | ||||||||
Tons sold |
56,899 | 54,842 | 2,057 | 3.8 | ||||||||||||
Coal sales realization per ton sold |
$ | 13.30 | $ | 13.65 | $ | (0.35 | ) | (2.6 | ) | |||||||
The increase in our coal sales from the first half of 2006 to the first half of 2007
resulted from higher sales volumes, partially offset by a lower overall average price per ton sold.
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 six months
ended June 30, 2007 and compares those amounts to the comparable information for the six months
ended June 30, 2006:
| Six Months Ended June 30 | Increase | |||||||||||||||
| 2007 | 2006 | Tons | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Powder River Basin |
47,179 | 46,281 | 898 | 1.9 | % | |||||||||||
Western Bituminous Region |
9,720 | 8,561 | 1,159 | 13.5 | ||||||||||||
Total |
56,899 | 54,842 | 2,057 | 3.8 | % | |||||||||||
Sales volume in the Powder River Basin increased from the first half of 2006 to the first
half of 2007 due to the restart of the Coal Creek mine during the second half of 2006. This
increase in sales volumes was partially offset by a decrease in production 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.
In the Western Bituminous region, sales volume increased during the first half of 2007 when
compared with the first half of 2006, due to strong customer demand. The first half of 2007
reflects full six 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. These increases were
partially offset by the lower volumes from the planned reductions discussed previously.
The following table shows the coal sales price per ton by operating segment during the six
months ended June 30, 2007 and compares those amounts to the comparable information for the six
months ended June 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 six months ended June 30, 2007 were $0.05 for the Powder River Basin
and $3.04 for the Western Bituminous region. For the six months ended June 30, 2006,
transportation costs per ton billed to customers were $0.03 for the Powder River Basin and $3.05
for the Western Bituminous region.
| Six Months Ended June 30 | Increase (Decrease) | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 10.33 | $ | 11.39 | $ | (1.06 | ) | (9.3 | )% | |||||||
Western Bituminous Region |
24.44 | 22.66 | 1.78 | 7.9 | ||||||||||||
Decreases in sales prices in the Powder River Basin during the first half of 2007 when
compared with the first half of 2006 primarily reflect lower base pricing and lower sulfur dioxide
emission allowance adjustments. In the Western Bituminous region, higher sales prices during the
first half of 2007 represent higher base pricing resulting from the roll-off of lower-priced legacy
contracts.
19
Table of Contents
Expenses, costs and other. The following table summarizes our operating costs and expenses
for the six months ended June 30, 2007 and compares those results to the comparable information for
the six months ended June 30, 2006:
| Increase (Decrease) | ||||||||||||||||
| Six Months Ended June 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Cost of coal sales |
$ | 591,338 | $ | 503,406 | $ | (87,932 | ) | (17.5 | )% | |||||||
Depreciation, depletion and amortization |
65,458 | 50,429 | (15,029 | ) | (29.8 | ) | ||||||||||
Selling, general and administrative expenses |
12,938 | 12,018 | (920 | ) | (7.7 | ) | ||||||||||
Other operating income, net |
(7,986 | ) | (1,866 | ) | 6,120 | 328.0 | ||||||||||
| $ | 661,748 | $ | 563,987 | $ | (97,761 | ) | (17.3 | )% | ||||||||
Cost of coal sales. Our cost of coal sales increased from the first half of 2006 to the
first half 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 half of 2006 to the first half of 2007 is due primarily 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 half of
2007 compared to the first half of 2006 is due mainly to the impact of the asset sale noted in the
discussion of the three months ended June 30, 2007.
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.
| Six Months Ended June 30 | Decrease | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
Powder River Basin |
$ | 1.16 | $ | 2.85 | $ | (1.69 | ) | (59.3 | )% | |||||||
Western Bituminous Region |
4.49 | 7.64 | (3.15 | ) | (41.2 | ) | ||||||||||
Powder River Basin — On a per-ton basis, operating margins for the first half of 2007
decreased from the first half of 2006 due in part to the decrease in per-ton coal sales prices and
increase in per-ton costs. The increase in per-ton costs resulted primarily from higher labor,
diesel fuel and dragline maintenance and repair costs, offset by lower explosives and
sales-sensitive costs.
Western Bituminous region — Operating margins per ton for the first half of 2007 decreased
from the first half of 2006 primarily due to the impact of the three planned longwall moves during
the first half of 2007 compared to one longwall move in the first half of 2006, higher
depreciation, depletion and amortization costs and the impact of the start up issues associated
with the installation of the new longwall at the Sufco mine. These factors offset the impact of
improved per-ton coal sales prices and the impact of the West Elk idling in 2006, net of insurance
recoveries.
Net interest expense. The following table summarizes our net interest expense for the six
months ended June 30, 2007 and compares that information to the comparable information for the six
months ended June 30, 2006:
| Increase | ||||||||||||||||
| Six Months Ended June 30 | in Net Income | |||||||||||||||
| 2007 | 2006 | $ | % | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
Interest expense |
$ | (35,699 | ) | $ | (36,252 | ) | $ | 553 | 1.5 | % | ||||||
Interest income |
47,211 | 36,964 | 10,247 | 27.7 | ||||||||||||
| $ | 11,512 | $ | 712 | $ | 10,800 | 1,516.9 | % | |||||||||
20
Table of Contents
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 six months ended
June 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 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:
| Six Months Ended | ||||||||
| June 30 | ||||||||
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
Cash provided by (used in): |
||||||||
Operating activities |
$ | 172,030 | $ | 349,769 | ||||
Investing activities |
(172,126 | ) | (349,837 | ) | ||||
Cash provided by operating activities decreased $177.7 million in the first half of 2007
compared to the first half 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 half of 2007 was $177.7 million less than in
the first half of 2006, primarily 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 $220.7 million in the first half of 2006, compared with $121.7 million in the first half
of 2007. In addition, cash used in investing activities decreased due to a decrease in capital
spending of $58.5 million in the first half of 2007 when compared with the first half of 2006 and
the reimbursement of deposits on equipment in the first half 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
included $6.0 million from the sale of non-core reserves in the Powder River Basin.
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
21
Table of Contents
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 June 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 June 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.
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 |
22
Table of Contents
| Exhibit | Description | |
| 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. |
23
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 Western Resources, LLC |
||||
| By: | /s/ Robert J. Messey | |||
| Robert J. Messey | ||||
| Vice President | ||||
August 14, 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:
August 14, 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:
August 14, 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 June 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:
August 14, 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 June 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:
August 14, 2007