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Annual Report: 2012 (Form 10-K)
ARCH RESOURCES, INC. - Annual Report: 2012 (Form 10-K)
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TABLE OF CONTENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
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ý |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012 |
or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 1-13105
Arch Coal, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization) |
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43-0921172
(I.R.S. Employer
Identification Number) |
One CityPlace Drive, Ste. 300, St. Louis, Missouri
(Address of principal executive offices) |
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63141
(Zip code) |
Registrant's
telephone number, including area code: (314) 994-2700
Securities
registered pursuant to Section 12(b) of the Act:
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| Title of Each Class |
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Name of Each Exchange on Which Registered |
| Common Stock, $.01 par value |
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New York Stock Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such filed). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer ý |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a
smaller reporting company) |
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Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The aggregate market value of the voting stock held by non-affiliates of the registrant (excluding outstanding shares beneficially owned by directors,
officers and treasury shares) as of June 30, 2012 was approximately $1.4 billion.
On
February 15, 2013, 212,246,799 shares of the company's common stock, par value $0.01 per share, were outstanding.
Portions
of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the 2013 annual stockholders' meeting to be held on
April 25, 2013 are incorporated by reference into Part III of this Form 10-K.
Table of Contents
TABLE OF CONTENTS
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Table of Contents
If you are not familiar with any of the mining terms used in this report, we have provided explanations of many of them under the caption
"Glossary of Selected Mining Terms" on page 32 of this report. Unless the context otherwise requires, all references in this report to "Arch," "we," "us," or "our" are to Arch Coal, Inc.
and its subsidiaries.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, such as our expected future business and financial performance, and are intended to come within the safe harbor protections
provided by those sections. The words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "predicts," "projects," "seeks," "should," "will" or other comparable words
and phrases identify forward-looking statements, which speak only as of the date of this report. Forward-looking statements by
their nature address matters that are, to different degrees, uncertain. Actual results may vary significantly from those anticipated due to many factors,
including:
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- market demand for coal and electricity;
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- geologic conditions, weather and other inherent risks of coal mining that are beyond our control;
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- competition, both within our industry and with producers of competing energy sources;
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- excess production and production capacity;
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- our ability to acquire or develop coal reserves in an economically feasible manner;
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- inaccuracies in our estimates of our coal reserves;
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- availability and price of mining and other industrial supplies;
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- availability of skilled employees and other workforce factors;
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- disruptions in the quantities of coal produced by our contract mine operators;
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- our ability to collect payments from our customers;
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- defects in title or the loss of a leasehold interest;
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- railroad, barge, truck and other transportation performance and costs;
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- our ability to successfully integrate the operations that we acquire;
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- our ability to secure new coal supply arrangements or to renew existing coal supply arrangements;
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- our relationships with, and other conditions affecting, our customers;
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- the deferral of contracted shipments of coal by our customers;
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- our ability to service our outstanding indebtedness;
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- our ability to comply with the restrictions imposed by our credit facility and other financing arrangements;
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- the availability and cost of surety bonds;
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- our ability to manage the market and other risks associated with certain trading and other asset optimization strategies;
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- terrorist attacks, military action or war;
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- our ability to obtain and renew various permits, including permits authorizing the disposition of certain mining waste;
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- existing and future legislation and regulations affecting both our coal mining operations and our customers' coal usage,
governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases;
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- the accuracy of our estimates of reclamation and other mine closure obligations;
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- the existence of hazardous substances or other environmental contamination on property owned or used by us; and
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- other factors, including those discussed in Legal Proceedings, set forth in Item 3 of this report and Risk Factors,
set forth in Item 1A of this report.
All
forward-looking statements in this report, as well as all other written and oral forward-looking statements attributable to us or persons acting on our behalf, are expressly
qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. These factors are not necessarily all of the important factors that could affect us.
These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than
those expressed in our forward-looking statements. These forward-looking statements speak only as of the date on which such statements were made, and 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 the federal securities law.
PART I
ITEM 1. BUSINESS.
Introduction
We are one of the world's largest coal producers. For the year ended December 31, 2012 we sold approximately
140.8 million tons of coal, including approximately 4.3 million tons of coal we purchased from third parties, representing roughly 14% of the 2012 U.S. coal supply. We sell substantially
all of
our coal to power plants, steel mills and industrial facilities. At December 31, 2012, we operated, or contracted out the operation of, 32 active mines located in each of the major
coal-producing regions of the United States. The locations of our mines and access to export facilities enable us to ship coal worldwide.
Our History
We were organized in Delaware in 1969 as Arch Mineral Corporation. In July 1997, we merged with Ashland Coal, Inc., a subsidiary
of Ashland Inc. that was formed in 1975. As a result of the merger, we became one of the largest producers of low-sulfur coal in the eastern United States.
In
June 1998, we expanded into the western United States when we acquired the coal assets of Atlantic Richfield Company, which we refer to as ARCO. This acquisition included the Black
Thunder and Coal Creek mines in the Powder River Basin of Wyoming, the West Elk mine in Colorado and a 65% interest in Canyon Fuel Company, which operated three mines in Utah. In October 1998, we
acquired a leasehold interest in the Thundercloud reserve, a 412-million-ton federal reserve tract adjacent to the Black Thunder mine.
In
July 2004, we acquired the remaining 35% interest in Canyon Fuel Company. In August 2004, we acquired Triton Coal Company's North Rochelle mine adjacent to our Black Thunder
operation. In September 2004, we acquired a leasehold interest in the Little Thunder reserve, a 719-million-ton federal reserve tract adjacent to the Black Thunder mine.
In
December 2005, we sold the stock of Hobet Mining, Inc., Apogee Coal Company and Catenary Coal Company and their four associated mining complexes (Hobet 21, Arch of West
Virginia, Samples and Campbells
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Creek)
and approximately 455.0 million tons of coal reserves in Central Appalachia to Magnum Coal Company, which was subsequently acquired by Patriot Coal Corporation.
On
October 1, 2009, we acquired Rio Tinto's Jacobs Ranch mine complex in the Powder River Basin of Wyoming, which included 345 million tons of low-cost,
low-sulfur coal reserves, and integrated it into the Black Thunder mine.
On
June 15, 2011, we acquired International Coal Group, Inc., which owned and operated mines primarily in the Appalachian Region of the United States.
Coal Characteristics
End users generally characterize coal as steam coal or metallurgical coal. Heat value, sulfur, ash, moisture content, and volatility,
in the case of metallurgical coal, are important variables in the marketing and transportation of coal. These characteristics help producers determine the best end use of a particular type of coal.
The following is a description of these general coal characteristics:
Heat Value. In general, the carbon content of coal supplies most of its heating value, but other factors also influence the amount of
energy it
contains per unit of weight. The heat value of coal is commonly measured in Btus. Coal is generally classified into four categories, lignite, subbituminous, bituminous and anthracite, reflecting the
progressive response of individual deposits of coal to increasing heat and pressure. Anthracite is coal with the highest carbon content and, therefore, the highest heat value, nearing 15,000 Btus per
pound. Bituminous coal, used primarily to generate electricity and to make coke for the steel industry, has a heat value ranging between 10,500 and 15,500 Btus per pound. Subbituminous coal ranges
from 8,300 to 13,000 Btus per pound and is generally used for electric power generation. Lignite coal is a geologically young coal which has the lowest carbon content and a heat value ranging between
4,000 and 8,300 Btus per pound.
Sulfur Content. Federal and state environmental regulations, including regulations that limit the amount of sulfur dioxide that may be
emitted as a
result of combustion, have affected and may continue to affect the demand for certain types of coal. The sulfur content of coal can vary from seam to seam and within a single seam. The chemical
composition and concentration of sulfur in coal affects the amount of sulfur dioxide produced in combustion. Coal-fueled power plants can comply with sulfur dioxide emission regulations by
burning coal with low sulfur content, blending coals with various sulfur contents, purchasing emission allowances on the open market and/or using sulfur-dioxide emission reduction technology.
Ash. Ash is the inorganic residue remaining after the combustion of coal. As with sulfur, ash content varies from seam to seam. Ash
content is an
important characteristic of coal because it impacts boiler performance and electric generating plants must handle and dispose of ash following combustion. The composition of the ash, including the
proportion of sodium oxide and fusion temperature, is also an important characteristic of coal , as it helps to
determine the suitability of the coal to end users. The absence of ash is also important to the process by which metallurgical coal is transformed into coke for use in steel production.
Moisture. Moisture content of coal varies by the type of coal, the region where it is mined and the location of the coal within a seam.
In general,
high moisture content decreases the heat value and increases the weight of the coal, thereby making it more expensive to transport. Moisture content in coal, on an as-sold basis, can range
from approximately 2% to over 30% of the coal's weight.
Other. Users of metallurgical coal measure certain other characteristics, including fluidity, swelling capacity and volatility to assess
the strength
of coke produced from a given coal or the amount of coke that certain types of coal will yield. These characteristics may be important elements in determining the value of the metallurgical coal we
produce and market.
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The Coal Industry
Background. Coal is traded globally and can be transported to demand centers by ship, rail, barge or truck. World coal production
reached a record
7.6 billion tonnes in 2011 according to The International Energy Agency (IEA) and the World Coal Association. Total hard coal production increased 8% to an estimated 6.7 billion tonnes
in 2011 from 2010 levels, while global production of brown coal was relatively flat at 1 billion tonnes. Also according to IEA estimates, China remained the largest producer of coal in the
world, producing over 3.4 billion tonnes in 2011. The United States and India follow China with hard coal production of over 1 billion tonnes and 580 million tonnes, respectively,
in 2011.
Cross-border
coal trade of hard coal was close to 1.2 billion tonnes in 2012 according to preliminary information. China remained the largest importer of globally traded coal in
2012, taking over 220 million tonnes of hard coal, having surpassed Japan in 2011. Japan imported more than 180 million tonnes in 2012, followed by South Korea with nearly 130 tonnes,
both exhibiting growth. OECD Europe was on pace throughout 2012 to surpass 2011 import levels of 226 million tonnes.
Among
the nations principally supplying coal to the global power and steel markets are Australia, historically the world's largest coal exporter, as well as Indonesia, Russia, the United
States, Columbia and South Africa. Australia has significant reserves, however growing environmental constraints, higher labor and capital costs, and the development of reserves farther from export
facilities are increasing development and production costs. Indonesia continues to exhibit substantial growth in its coal exports; however its growing domestic energy demand, together with recent
regulatory requirements, may result in a decrease in exports as it moves toward greater self-sufficiency. Increasing calls to bolster domestic power supply, together with pressure to
improve wages for miners, may also limit South African exports in the future.
Global Coal Supply and Demand. The supply and demand fundamentals in global coal markets were relatively challenged in 2012. Europe's
ongoing
sovereign debt problems continued to strain the global economy in 2012. Within Europe, this economic uncertainty lowered demand for imported finished goods, which led to reduced steel consumption and
therefore lower demand for metallurgical coal. In addition, inflation control measures enacted by China, which restricted lending and investment, combined with strong hydro-electric generation and
slower growth in the developed world reduced Chinese exports, which in turn had an impact on thermal and metallurgical coal demand in China.
In
addition to the strain on global demand, Australia's recovery from flooding in 2011, together with the increasing expansion of Indonesian coal production, created a situation in which
global coal supply growth outpaced demand growth in 2012. This was seen domestically as well, primarily as a result of the unseasonably warm winter that caused coal stockpiles to build at
coal-fueled power plants and low natural gas prices.
Despite
the challenges in 2012, there were some positive trends. Demand for thermal coal imports in Europe grew as coal-powered generation realized substantial cost
advantages to natural gas. That, combined with pressure to reduce subsidized domestic coal production in Europe, could indicate a growing demand for imported coal in Europe. Additionally, toward the
end of 2012, global production began to recede while China increased imports of both metallurgical and thermal coal, and total United States exports continued to grow in 2012, up approximately
17 million tons to 124 million tons, or 15% over 2011 levels, according to preliminary data. The IEA in its medium-term coal market report for 2012 indicates coal demand is
again expected to rise through 2017.
U.S. Coal Consumption. In the United States, coal is used primarily by power plants to generate electricity, by steel
companies to produce coke for use in blast furnaces and by a variety of industrial users to heat and power foundries, cement plants, paper mills, chemical plants and other manufacturing or processing
facilities. Although final data is not yet available, coal consumption in the United States is estimated to be approximately 894 million tons in 2012, according to the Energy Information
Administration's (EIA) Short Term Energy Outlook. Coal consumption has improved month on month after last year's warm winter decreased overall electricity generation requirements and impacted
generation fuels, including coal and natural gas.
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According
to the EIA, coal accounted for approximately 37% of U.S. electricity generation from January through November 2012. This is a decrease of approximately 5% from
full-year 2011, as increased competition between fuels and an unseasonably warm winter led to lower electricity demand and therefore lower consumption of fossil fuels. The warm winter also
pushed coal stockpiles higher at electric power plants. Inventories remained above the 5-year average through November 2012.
The
following chart shows the breakdown of U.S. electricity generation by energy source for January through November 2012, according to the EIA:
Source:
EIA Electricity Monthly Update (January 2013).
The
following chart shows historical and projected demand trends for U.S. coal by consuming sector for the periods indicated, according to the EIA:
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Annual Growth |
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Actual |
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Estimated |
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Forecast |
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2011 - 2040 |
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Sector
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2007 |
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2012 |
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2013 |
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2020 |
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2040 |
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(Tons, in millions)
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Electric power |
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1,045 |
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829 |
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847 |
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890 |
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984 |
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0.2 |
% |
Other industrial |
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57 |
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42 |
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42 |
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50 |
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52 |
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0.4 |
% |
Coke plants |
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23 |
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21 |
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21 |
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23 |
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18 |
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(0.7 |
)% |
Residential/commercial |
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3 |
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3 |
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3 |
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3 |
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3 |
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(0.3 |
)% |
Coal-to-liquids |
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— |
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— |
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14 |
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n/a |
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*Total U.S. coal consumption |
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1,128 |
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894 |
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912 |
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966 |
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1,071 |
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0.2 |
% |
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Source: EIA Annual Energy Outlook 2013
EIA Short Term Energy Outlook (January 2013)
EIA Monthly Energy Review (January 2013)
* Columns
may not total due to rounding.
Historically,
coal has been considerably less expensive than natural gas or oil. However the growth of hydraulic fracturing (fracking) combined with the warm winter resulted in record
high supplies and inventories of natural gas throughout most of 2012. This oversupply altered the competitive balance throughout much of the year and allowed natural gas to gain market share in the
power generation market compared to historical levels.
The
average wellhead price of natural gas in 2012 was $2.52 (EIA, Jan-Oct 2012) which compares to $4.48 and $3.95 in 2010 and 2011, respectively. The 2012 price represents
the lowest annual price since 1999. As prices dropped, drill rigs deployed for natural gas production also declined, ending 2012 at 429 rigs according to Baker Hughes. This compares to 919 and 809 at
the end of 2010 and 2011, respectively. The decline in prices along with
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less
development could be a sign that prices at this level do not provide enough incentive to expand drilling activity. Therefore, we believe that natural gas prices are at unsustainably low levels.
We believe that coal will regain market share in the domestic electric power market as natural gas prices climb to more sustainable levels.
U.S. Coal Production. The United States is the second largest coal producer in the world, exceeded only by China. According to the EIA,
there is over
200 billion tons of recoverable coal in the United States. The U.S. Department of Energy estimates that current domestic recoverable coal reserves could supply enough electricity to satisfy
domestic demand for over 150 years.
Coal
is mined from coal fields throughout the United States, with the major production centers located in the western United States, the Appalachian region and the Interior. According to
the EIA, U.S. coal production declined an estimated 75 million tons in 2012, to 1.02 billion tons, primarily due to the decline in domestic utility demand.
The
EIA subdivides United States coal production into three major areas: Western, Appalachia and Interior.
The
Western area includes the Powder River Basin and the Western Bituminous region. According to the EIA, coal produced in the western United States declined from an estimated
587 million tons in 2011 to 540 million tons in 2012 as reduced demand for power generation and lower natural gas prices negatively affected coal demand. The Powder River Basin is
located in northeastern Wyoming and southeastern Montana and is the largest producing region in the United States. Coal from this region is sub-bituminous coal with low sulfur content
ranging from 0.2% to 0.9% and heating values ranging from 8,000 to 9,500 Btu. The price of Powder River Basin coal is generally less than that of coal produced in other regions because Powder River
Basin coal exists in greater abundance and is easier to mine and, thus, has a lower cost of production. The Western Bituminous region includes Colorado, Utah and southern Wyoming. Coal from this
region typically has low sulfur content ranging from 0.4% to 0.8% and heating values ranging from 10,000 to 12,200 Btu.
The
Appalachia region is further dividend into north, central and southern regions. According to the EIA, coal produced in the Appalachian region decreased from 337 million tons
in 2011 to 304 million tons in 2012, primarily as a result of natural gas displacement but also because of the depletion of economically attractive reserves, permitting issues, and increasing
costs of production. Central Appalachia includes eastern Kentucky, Tennessee, Virginia and southern West Virginia. Coal mined from this region generally has a high heat value ranging from 11,400 to
13,200 Btu and a low sulfur content ranging from 0.2% to 2.0%. Northern Appalachia includes Maryland, Ohio, Pennsylvania and northern West Virginia. Coal from this region generally has a high heat
value ranging from 10,300 to 13,500 Btu and a high sulfur content ranging from 0.8% to 4.0%. Southern Appalachia primarily covers Alabama and generally has a heat content ranging from 11,300 to 12,300
Btu and a sulfur content ranging from 0.7% to 3.0%.
The
Interior region includes the Illinois Basin, Gulf Lignite production in Texas and Louisiana, and a small producing area in Kansas, Oklahoma, Missouri and Arkansas. The Illinois Basin
is the largest producing region in the Interior and consists of Illinois, Indiana and western Kentucky. According to the EIA, coal produced in the Interior region decreased from 180 million
tons in 1994 to approximately 171 and 176 million tons in 2011 and 2012, respectively. Coal from the Illinois Basin generally has a heat value ranging from 10,100 to 12,600 Btu and has a high
sulfur content ranging from 1.0% to 4.3%. Despite its high sulfur content, coal from the Illinois Basin can generally be used by electric power generation facilities that have installed pollution
control devices, such as scrubbers, to reduce emissions.
U.S. Coal Exports and Imports. Coal exports grew almost 17 million tons to 124 million in 2012, a record for the United
States.
Supporting this was demand growth in Europe on fuel-on-fuel competition. We expect this trend to continue as demand for United States coal grows in the seaborne market.
Interest in access to the coal markets overseas by domestic producers, along with increased international consumer interest in the United States coal, has fueled considerable growth in developing new
port capacity in the United States.
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Historically, coal imported from abroad has represented a relatively small share of total domestic coal consumption, and this remained the case in 2012. Imports
reached close to 36 million tons in 2007, but have fallen since then. According to the EIA, coal imports declined from 13.1 million tons in 2011 to 9.6 million in 2012. The
decline is mostly attributable to more competitive pricing for domestic coal and stronger demand from international markets for seaborne coal. The majority of the coal imported into the United States
originates from Columbia. We expect imports into the United States to continue to decrease in the near-term as more and more global coal will likely be directed to Asia.
Coal Mining Methods
The geological characteristics of our coal reserves largely determine the coal mining method we employ. We use two primary methods of
mining coal: surface mining and underground mining.
Surface Mining. We use surface mining when coal is found close to the surface. We have included the identity and location of our
surface mining
operations below under "Our Mining Operations—General." The majority of the coal we produce comes from surface mining operations.
Surface
mining involves removing the topsoil then drilling and blasting the overburden (earth and rock covering the coal) with explosives. We then remove the overburden with heavy
earth-moving equipment, such as draglines, power shovels, excavators and loaders. Once exposed, we drill, fracture and systematically remove the coal using haul trucks or conveyors to transport the
coal to a preparation plant or to a loadout facility. We reclaim disturbed areas as part of our normal mining activities. After final coal removal, we use draglines, power shovels, excavators or
loaders to backfill the remaining pits with the overburden removed at the beginning of the process. Once we have replaced the overburden and topsoil, we reestablish vegetation and plant life into the
natural habitat and make other improvements that have local community and environmental benefits.
The
following diagram illustrates a typical dragline surface mining operation:
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Underground Mining. We use underground mining methods when coal is located deep beneath the surface. We have included the
identity and location of
our underground mining operations below under "Our Mining Operations—General."
Our
underground mines are typically operated using one or both of two different mining techniques: longwall mining and room-and-pillar mining.
Longwall Mining. Longwall mining involves using a mechanical shearer to extract coal from long rectangular blocks of medium to thick
seams. Ultimate
seam recovery using longwall mining techniques can exceed 75%. In longwall mining, continuous miners are used to develop access to these long rectangular coal blocks. Hydraulically powered supports
temporarily hold up the roof of the mine while a rotating drum mechanically advances across the face of the coal seam, cutting the coal from the face. Chain conveyors then move the loosened coal to an
underground mine conveyor system for delivery to the surface. Once coal is extracted from an area, the roof is allowed to collapse in a controlled fashion. The following diagram illustrates a typical
underground mining operation using longwall mining techniques:
Room-and-Pillar Mining. Room-and-pillar mining is effective for small blocks of thin coal seams. In
room-and-pillar mining, a network of rooms is cut into the coal seam, leaving a series of pillars of coal to support the roof of the mine. Continuous miners are used to cut the
coal and shuttle cars are used to transport the coal to a conveyor belt for further transportation to the surface. The pillars generated as part of this mining method can constitute up to 40% of the
total coal in a seam. Higher seam recovery rates can be achieved if retreat mining is used. In retreat mining, coal is mined from the pillars as workers retreat. As retreat mining occurs, the roof is
allowed to collapse in a controlled fashion.
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The
following diagram illustrates our typical underground mining operation using room-and-pillar mining techniques:
Coal Preparation and Blending. We crush the coal mined from our Powder River Basin mining complexes and ship it directly from
our mines to the
customer. Typically, no additional preparation is required for a saleable product. Coal extracted from some of our underground mining operations contains impurities, such as rock, shale and clay
occupying in a wide range of particle sizes. The majority of our mining operations in the Appalachia region and a few of our mines in the Western Bituminous region use a coal preparation plant located
near the mine or connected to the mine by a conveyor. These coal preparation plants allow us to treat the coal we extract from those mines to ensure a consistent quality and to enhance its suitability
for particular end-users. In addition, depending on coal quality and customer requirements, we may blend coal mined from different locations, including coal produced by third parties, in
order to achieve a more suitable product.
The
treatments we employ at our preparation plants depend on the size of the raw coal. For coarse material, the separation process relies on the difference in the density between coal
and waste rock where, for the very fine fractions, the separation process relies on the difference in surface chemical properties between coal and the waste minerals. To remove impurities, we crush
raw coal and classify it into various sizes. For the largest size fractions, we use dense media vessel separation techniques in which we float coal in a tank containing a liquid of a
pre-determined specific gravity. Since coal is lighter than its impurities, it floats, and we can separate it from rock and shale. We treat intermediate sized particles with dense medium
cyclones, in which a liquid is spun at high speeds to separate coal from rock. Fine coal is treated in spirals, in which the differences in density between coal and rock allow them, when suspended in
water, to be separated. Ultra fine coal is recovered in column flotation cells utilizing the differences in surface chemistry between coal and rock. By injecting stable air bubbles through a
suspension of ultra fine coal and rock, the coal particles adhere to the bubbles and rise to the surface of the column where they are removed. To minimize the moisture content in coal, we process most
coal sizes through centrifuges. A centrifuge spins coal very quickly, causing water accompanying the coal to separate.
For
more information about the locations of our preparation plants, you should see the section entitled "Our Mining Operations" below.
11
Table of Contents
Our Mining Operations
General. At December 31, 2012, we operated, or contracted out the operation of, 32 mines in the United States. Our reportable
segments are
based on the major coal producing basins in which the Company operates. The Company's operating segments are the Powder River Basis (PRB) segment, with operations in Wyoming; the Western Bituminous
(WBIT) segment, with operations in Utah and Colorado; the Appalachia (APP) segment, with operations in West Virginia, Kentucky, Maryland and Virginia; and our Illinois segment, which includes our
operations in Illinois. Geology, coal transportation routes to consumers, regulatory environments and coal quality can vary from segment to segment. These regional distinctions have caused market and
contract pricing environments to develop by coal region and form the basis for the segmentation of our operations. We incorporate by reference the information about the operating results of each of
our segments for the years ended December 31, 2012, 2011 and 2010 contained in Note 24 beginning on page F-46.
In
general, we have developed our mining complexes and preparation plants at strategic locations in close proximity to rail or barge shipping facilities. Coal is transported from our
mining complexes to customers by means of railroads, trucks, barge lines, and ocean-going vessels from terminal facilities. We currently own or lease under long-term arrangements a
substantial portion of the equipment utilized in our mining operations. We employ sophisticated preventative maintenance and rebuild programs and upgrade our equipment to ensure that it is productive,
well-maintained and cost-competitive.
The
following map shows the locations of our active mining operations:
The
following table provides a summary of information regarding our active mining complexes as of December 31, 2012, including the total sales associated with these complexes for
the years ended December 31, 2010, 2011 and 2012 and the total reserves associated with these complexes at December 31, 2012. The amount disclosed below for the total cost of property,
plant and equipment of each mining complex does not include the costs of the coal
reserves that we have assigned to an individual complex. The table does not include those mining complexes that we have closed or idled during the 2012 calendar year. As indicated by the footnotes
included in
12
Table of Contents
the
table below, certain of the mining complexes listed below were acquired by us on June 15, 2011 as a result of our acquisition of International Coal Group, Inc.
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Total Cost of
Property,
Plant and
Equipment at
December 31,
2012 |
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Tons Sold(2)(3) |
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Captive
Mines(1) |
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Contract
Mines(1) |
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Mining
Equipment |
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Assigned
Reserves |
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Mining Complex
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Railroad |
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2010 |
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2011 |
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2012 |
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(Million tons)
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($ in millions)
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(Million tons)
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Powder River Basin: |
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Black Thunder |
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S |
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— |
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D, S |
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UP/BN |
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116.2 |
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104.9 |
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92.9 |
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$ |
1,164.0 |
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1,466.1 |
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Coal Creek |
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S |
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— |
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D, S |
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UP/BN |
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11.4 |
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10.0 |
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7.5 |
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158.8 |
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170.3 |
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Western Bituminous: |
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Dugout Canyon |
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U |
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— |
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LW, CM |
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UP |
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2.3 |
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2.2 |
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1.7 |
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99.7 |
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13.3 |
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Skyline |
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U |
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— |
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LW, CM |
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UP |
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2.9 |
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2.9 |
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1.6 |
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219.6 |
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18.1 |
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Sufco |
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U |
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— |
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LW, CM |
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UP |
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6.1 |
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6.1 |
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5.6 |
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261.3 |
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42.2 |
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West Elk |
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U |
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— |
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LW, CM |
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UP |
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4.8 |
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5.8 |
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6.7 |
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464.8 |
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80.4 |
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Appalachia: |
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Coal-Mac |
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S |
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U |
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L, E |
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NS/CSX |
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3.2 |
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3.3 |
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3.3 |
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205.3 |
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26.3 |
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Cumberland River |
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U(2) |
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U(3) |
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L, CM, HW |
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NS |
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1.5 |
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2.2 |
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1.5 |
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186.5 |
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25.0 |
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Lone Mountain |
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U(4) |
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— |
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CM |
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NS/CSX |
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2.1 |
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2.4 |
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2.0 |
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262.3 |
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25.4 |
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Mountain Laurel |
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U |
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S(2) |
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L, LW, CM |
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CSX |
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5.1 |
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4.1 |
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3.7 |
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510.0 |
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63.6 |
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Hazard* |
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S(4) |
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— |
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L, S |
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CSX |
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N/A |
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1.6 |
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2.1 |
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113.8 |
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44.4 |
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Beckley* |
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U |
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— |
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CM |
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CSX |
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N/A |
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0.6 |
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1.1 |
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103.3 |
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28.5 |
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Vindex* |
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S(3) |
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— |
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L, S |
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CSX |
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N/A |
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0.6 |
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1.0 |
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86.1 |
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18.5 |
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Sycamore No. 2* |
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— |
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U |
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CM |
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CSX |
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N/A |
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0.2 |
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0.4 |
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7.9 |
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7.7 |
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Sentinel* |
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U |
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— |
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CM |
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CSX |
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N/A |
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0.6 |
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1.2 |
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55.6 |
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15.0 |
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Leer* |
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U |
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— |
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CM, LW |
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CSX |
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— |
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— |
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— |
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280.1 |
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34.5 |
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Illinois: |
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Viper* |
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U |
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— |
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CM |
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— |
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N/A |
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1.1 |
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2.1 |
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81.2 |
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18.5 |
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Totals |
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155.6 |
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148.6 |
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134.4 |
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$ |
4,260.3 |
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2,097.8 |
(4) |
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| S = Surface mine |
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D = Dragline |
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UP = Union Pacific Railroad |
| U = Underground mine |
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L = Loader/truck |
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CSX = CSX Transportation |
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S = Shovel/truck |
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BN = Burlington Northern-Santa Fe Railway |
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E = Excavator/truck |
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NS = Norfolk Southern Railroad |
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LW = Longwall |
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CM = Continuous miner |
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HW = Highwall miner |
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- *
- Mining
complex acquired on June 15, 2011 in connection with our acquisition of International Coal Group, Inc. The above table only shows tons
sold from these mining complexes after June 14, 2011, and does not include tons sold by the prior owner in 2010 or 2011.
- (1)
- Amounts
in parentheses indicate the number of captive and contract mines, if more than one, at the mining complex as of December 31, 2012. Captive
mines are mines that we own and operate on land owned or leased by us. Contract mines are mines that other operators mine for us under contracts on land owned or leased by us.
- (2)
- Tons
of coal we purchased from third parties that were not processed through our loadout facilities are not included in the amounts shown in the table
above.
- (3)
- Does
not include tons of coal sold from the following mining complexes that were closed or idled during the 2012 calendar year: Arch of Wyoming, East
Kentucky, Eastern, Flint Ridge, Imperial, Knott County/Raven and Patriot. We sold 2.2 million tons of coal from these mining complexes in 2012.
13
Table of Contents
- (4)
- The
total for assigned reserves does not include 154.7 million tons of reserves that are assigned to non-active mining complexes.
Powder River Basin
Black Thunder. Black Thunder is a surface mining complex located on approximately 35,700 acres in Campbell County, Wyoming. The Black
Thunder complex
extracts steam coal from the Upper Wyodak and Main Wyodak seams.
We
control a significant portion of the coal reserves through federal and state leases. The Black Thunder mining complex had approximately 1.5 billion tons of proven and probable
reserves at December 31, 2012. The air quality permit for the Black Thunder mine allows for the mining of coal at a rate of 190 million tons per year. Without the addition of more coal
reserves, the current reserves could sustain current production levels until 2021 before annual output starts to significantly decline, although in practice production would drop in phases extending
the ultimate mine life. Several large tracts of coal adjacent to the Black Thunder mining complex have been nominated for lease, and other potential large areas of unleased coal remain available for
nomination by us or other mining operations. The U.S. Department of Interior Bureau of Land Management, which we refer to as the BLM, will determine if the tracts will be leased and, if so, the final
boundaries of, and the coal tonnage for, these tracts.
The
Black Thunder mining complex currently consists of seven active pit areas and three loadout facilities. We ship all of the coal raw to our customers via the Burlington Northern-Santa
Fe and Union Pacific railroads. We do not process the coal mined at this complex. Each of the loadout facilities can load a 15,000-ton train in less than two hours.
Coal Creek. Coal Creek is a surface mining complex located on approximately 7,400 acres in Campbell County, Wyoming. The Coal Creek
mining complex
extracts steam coal from the Wyodak-R1 and Wyodak-R3 seams.
We
control a significant portion of the coal reserves through federal and state leases. The Coal Creek mining complex had approximately 170.3 million tons of proven and probable
reserves at December 31, 2012. The air quality permit for the Coal Creek mine allows for the mining of coal at a rate of 50 million tons per year. Without the addition of more coal
reserves, the current reserves could sustain current production levels until 2025 before annual output starts to significantly decline. One tract of coal adjacent to the Coal Creek mining complex has
been nominated for lease, and other potential areas of unleased coal remain available for nomination by us or other mining operations. The BLM will determine if these tracts will be leased and, if so,
the final boundaries of, and the coal tonnage for, these tracts.
The
Coal Creek complex currently consists of two active pit areas and a loadout facility. We ship all of the coal raw to our customers via the Burlington Northern-Santa Fe and Union
Pacific railroads. We do not process the coal mined at this complex. The loadout facility can load a 15,000-ton train in less than three hours.
Western Bituminous
Dugout Canyon. Dugout Canyon mine is an underground mining complex located on approximately 18,600 acres in Carbon County, Utah. The
Dugout Canyon
mining complex has extracted steam coal from the Rock Canyon and Gilson seams.
We
control a significant portion of the coal reserves through federal and state leases. The Dugout Canyon mining complex had approximately 13.3 million tons of proven and probable
reserves at December 31, 2012. The coal seam currently being mined could sustain current production levels until approximately 2020, at which point we will need to transition to another area to
continue mining.
14
Table of Contents
The complex currently consists of one active continuous miner section and a truck loadout facility. We ship all of the coal to our customers via the Union Pacific
railroad or by highway trucks. We wash a portion of the coal we produce at a 400-ton-per-hour preparation plant. The loadout facility can load approximately 20,000
tons of coal per day into highway trucks. Coal shipped by rail is loaded through a third-party facility capable of loading an 11,000-ton train in less than three hours.
Skyline. Skyline is an underground mining complex located on approximately 14,300 acres in Carbon and Emery Counties, Utah. The Skyline
mining
complex extracts steam coal from the Lower O'Conner A seam.
We
control a significant portion of the coal reserves through federal leases and smaller portions through county and private leases. The Skyline mining complex had approximately
18.1 million tons of proven and probable reserves at December 31, 2012. The coal seam currently being mined could sustain current production levels until approximately 2019, at which
point we will need to transition to another area to continue mining.
The
Skyline complex currently consists of a longwall, two continuous miner sections and a loadout facility. We ship most of the coal raw to our customers via the Union Pacific railroad
or by highway trucks. We process a portion of the coal mined at this complex at a nearby preparation plant. The loadout facility can load a 12,000-ton train in less than four hours.
Sufco. Sufco is an underground mining complex located on approximately 23,800 acres in Sevier County, Utah. The Sufco mining complex
extracts steam
coal from the Upper Hiawatha seam.
We
control a significant portion of the coal reserves through federal and state leases. The Sufco mining complex had approximately 42.2 million tons of proven and probable
reserves at December 31, 2012. The coal seam currently being mined could sustain current production levels through 2020, at which point a new coal seam will have to be accessed in order to
continue mining.
The
Sufco complex currently consists of a longwall, three continuous miner sections and a loadout facility located approximately 80 miles from the mine. We ship all of the coal raw to
our customers via the Union Pacific railroad or by highway trucks. Processing at the mine site consists of crushing and sizing. The rail loadout facility is capable of loading an
11,000-ton train in less than three hours.
West Elk. West Elk is an underground mining complex located on approximately 17,800 acres in Gunnison County, Colorado. The West Elk
mining complex
extracts steam coal from the E seam.
We
control a significant portion of the coal reserves through federal and state leases. The West Elk mining complex had approximately 80.4 million tons of proven and probable
reserves at December 31, 2012. Without the addition of more coal reserves, the current reserves could sustain current production levels through 2025 before annual output starts to significantly
decline.
The
West Elk complex currently consists of a longwall, one continuous miner section and a loadout facility. We ship most of the coal raw to our customers via the Union Pacific railroad.
In 2010, we finished constructing a new coal preparation plant with supporting coal handling facilities at the West Elk mine site. The loadout facility can load an 11,000-ton train in less
than three hours.
Appalachia
Coal-Mac. Coal-Mac is a surface and underground mining complex located on approximately 46,800 acres in Logan and Mingo
Counties, West Virginia. Surface mining operations at the Coal-Mac mining complex extract steam coal primarily from the Coalburg and Stockton seams. Underground mining operations at the
Coal-Mac mining complex extract steam coal from the Coalburg seam.
We
control a significant portion of the coal reserves through private leases. The Coal-Mac mining complex had approximately 26.3 million tons of proven and probable
reserves at December 31, 2012. Without the addition of
15
Table of Contents
more
coal reserves, the current reserves could sustain current production levels until 2018 before annual output starts to significantly decline.
The
complex currently consists of one captive surface mine, one contract underground mine, a preparation plant and two loadout facilities, which we refer to as Holden 22 and Ragland. We
ship coal trucked to the Ragland loadout facility directly to our customers via the Norfolk Southern railroad. The Ragland loadout facility can load a 10,000-ton train in less than four
hours. We ship coal trucked to the Holden 22 loadout facility directly to our customers via the CSX railroad. We wash all of the coal transported to the Holden 22 loadout facility at an adjacent
600-ton-per-hour preparation plant. The Holden 22 loadout facility can load a 10,000-ton train in about four hours.
Cumberland River. Cumberland River is an underground mining complex located on approximately 33,400 acres in Wise County, Virginia and
Letcher
County, Kentucky. Underground mining operations at the Cumberland River mining complex extract steam and metallurgical coal from the Imboden, Taggart Marker, Middle Taggart, Upper Taggart, Owl, and
Parsons seams.
We
control a significant portion of the coal reserves through private leases. The Cumberland River mining complex had approximately 25.0 million tons of proven and probable
reserves at December 31, 2012. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2022 before annual output starts to significantly
decline.
As
of December 31, 2012, the complex consisted of five underground mines (two captive, three contract) operating seven continuous miner sections, a preparation plant and a loadout
facility. Since December 31, 2012 one contract mine has been shut down. We process the coal through a 750-ton-per-hour preparation plant before shipping it
to our customers via the Norfolk Southern railroad. The loadout facility can load a 12,000-ton train in about four hours.
Lone Mountain. Lone Mountain is an underground mining complex located on approximately 54,000 acres in Harlan County, Kentucky and Lee
County,
Virginia. The Lone Mountain mining complex extracts steam and metallurgical coal from the Kellioka, Darby and Owl seams.
We
control a significant portion of the coal reserves through private leases. The Lone Mountain mining complex had approximately 25.4 million tons of proven and probable reserves
at December 31, 2012. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2023 before annual output starts to significantly decline.
The
complex currently consists of four underground mines operating a total of nine continuous miner sections. We process coal through a
1,200-ton-per-hour preparation plant. We then ship the coal to our customers via the Norfolk Southern or CSX railroad. The loadout facility can load a
12,500-ton unit train in less than four hours.
Mountain Laurel. Mountain Laurel is an underground and surface mining complex located on approximately 38,400 acres in Logan County and
Boone County,
West Virginia. Underground mining operations at the Mountain Laurel mining complex extract steam and metallurgical coal from the Cedar Grove and Alma seams. Surface mining operations at the Mountain
Laurel mining complex extract coal from a number of different splits of the Five Block, Stockton and Coalburg seams.
We
control a significant portion of the coal reserves through private leases. The Mountain Laurel mining complex had approximately 63.6 million tons of proven and probable
reserves at December 31, 2012. The longwall mine is
expected to operate through at least 2018 and potentially longer. In addition, the existing reserve base should support continuous miner operations for many years beyond that date.
The
complex currently consists of one underground mine operating a longwall and a total of four continuous miner sections, two contract surface operations, a preparation plant and a
loadout facility. We process most of the
16
Table of Contents
coal
through a 2,100-ton-per-hour preparation plant before shipping the coal to our customers via the CSX railroad. The loadout facility can load a
15,000-ton train in less than four hours.
Hazard. Hazard is a mining complex that consists of four surface mines, a preparation plant, a unit train loadout and other support
facilities
located on approximately 122,000 acres in eastern Kentucky. The coal from Hazard's mines is being extracted from the Hazard 10, Hazard 9, Hazard 8, Hazard 7 and Hazard 5A seams. Nearly all of the
surface-mined coal is marketed as a blend of shipped direct product with the remainder being processed at the Flint Ridge preparation plant. Coal is transported by on-highway trucks from
the mines to the rail loadout, which is served by CSX. Some coal is direct shipped to the customer by truck.
A
majority of the coal reserves are owned; the remainder are held through private leases. The mining complex had approximately 44.4 million tons of proven and probable reserves at
December 31, 2012, which could sustain current production levels until at least 2030. The loadout facility can load a 12,500-ton train in less than 4 hours.
Beckley. The Beckley mining complex is located on approximately 23,400 acres in Raleigh County, West Virginia. Beckley is extracting
high quality,
low-volatile metallurgical coal in the Pocahontas No. 3 seam.
A
significant portion of the coal reserves are controlled through private leases. As of December 31, 2012, we had approximately 28.5 million tons of proven and probable
reserves. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2030. Coal is belted from the mine to a
600-ton-per-hour preparation plant before shipping the coal via the CSX railroad. The loadout facility can load a 10,000-ton train in less than four
hours.
Vindex. The Vindex mining complex consists of three surface mines located on approximately 43,200 acres in Garrett and Allegany
Counties, Maryland.
Mining operations at these surface mines extract coal from the Upper Freeport, Middle Kittanning, Pittsburgh, Little Pittsburgh and Redstone seams.
We
control all of the coal reserves through private leases. As of December 31, 2012, we had approximately 18.5 million tons of proven and probable reserves. Without the
addition of more coal reserves, the current reserves could sustain current production levels until at least 2025.
Sycamore No. 2. The Sycamore No. 2 mining complex is an active underground mine operated by a contract miner located on
approximately
8,900 acres in Harrison County, West Virginia. Mining operations extract coal from the Pittsburgh seam. The coal produced by this mining complex is sold on a raw basis and is transported to current
customers by truck.
As
of December 31, 2012, the Sycamore No. 2 mining complex had approximately 7.7 million tons of proven and probable reserves. Without the addition of more coal
reserves, the current reserves could sustain current production levels until 2028.
Sentinel. The Sentinel mining complex consists of one underground mine, a preparation plant and a loadout facility located on
approximately 25,200
acres in Barbour County, West Virginia. Mining operations currently extract coal from the Clarion coal seam. Coal from the Sentinel mining complex is processed through the preparation plant and
shipped by CSX rail to customers.
We
control a significant portion of the Clarion seam coal reserves through private leases. As of December 31, 2012, we had approximately 15.0 million tons of proven and
probable reserves. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2021.
Leer (formally Tygart Valley). The Leer Complex, located in Taylor County, West Virginia, includes approximately 34.5 million tons
of deep
coal reserves as of December 31, 2012 and has both steam and metallurgical quality coal in the Lower Kittanning seam, covering approximately 68,000 acres. Substantially all of the reserves at
Leer are owned rather than leased from third parties.
17
Table of Contents
Construction
of the Leer Complex began in June 2010 and initial coal production commenced in November 2011. At full output, the Leer Complex is designed to have 3.5 million tons
of capacity per year of high quality coal that is well suited to both the utility market and the high volatile metallurgical market. All the production is processed through a 1,400
ton-per-hour preparation plant and loaded on the CSX railroad. A 15,000-ton train can be loaded in less than 4 hours.
Illinois
Viper. The Viper mining complex consists of one underground coal mine and a preparation plant located on approximately 48,800 acres in
central
Illinois near the city of Springfield. Mining operations extract steam coal from the Illinois No. 5 seam, also referred to as the Springfield seam All coal is processed through an 800
ton-per-hour preparation plant and shipped to customers by on-highway trucks.
We
control a signification portion of the coal reserves through private leases. As of December 31, 2012, we had approximately 18.5 million tons of proven and probable
reserves. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2026.
Sales, Marketing and Trading
Overview. Coal prices are influenced by a number of factors and can vary materially by region. The price of coal within a region is
influenced by
market conditions, coal quality, transportation costs involved in moving coal from the mine to the point of use and mine operating costs. For example, higher carbon and lower ash content generally
result in higher prices, and higher sulfur and higher ash content generally result in lower prices within a given geographic region.
The
cost of coal at the mine is also influenced by geologic characteristics such as seam thickness, overburden ratios and depth of underground reserves. It is generally less expensive to
mine coal seams that are thick and located close to the surface than to mine thin underground seams. Within a particular geographic region, underground mining, which is the primary mining method we
use in the Western Bituminous region and for certain of our Appalachian mines, is generally more expensive than surface mining, which is the mining method we use in the Powder River Basin, and for
certain of our Appalachian mines and a Western Bituminous mine. This is the case because of the higher capital costs, including costs for construction of extensive ventilation systems, and higher per
unit labor costs due to lower productivity associated with underground mining.
Our
sales, marketing and trading functions are principally based in St. Louis, Missouri and consist of sales and trading, transportation and distribution, quality control and
contract administration personnel as well as revenue management. We also have smaller groups of sales personnel in our Singapore and London offices. In addition to selling coal produced in our mining
complexes, from time to time we purchase and sell coal mined by others, some of which we blend with coal produced from our mines. We focus on meeting the needs and specifications of our customers
rather than just selling our coal production.
Customers. The Company markets its steam and metallurgical coal to domestic and foreign utilities, steel producers and other industrial
facilities.
For the year ended December 31, 2012, we derived approximately 16% of our total coal revenues from sales to our three largest customers—U.S. Steel, Tennessee Valley Authority, and
Donau Brennstoffkontor GmbH—and approximately 36% of our total coal revenues from sales to our 10 largest customers.
In
2012, we sold coal to domestic customers located in 38 different states. The locations of our mines enable us to ship coal to most of the major coal-fueled power plants in
the United States.
In
addition, in 2012 we also exported coal to Europe, Asia, North America (outside the United States) and South America. Exports to foreign countries were $1.2 billion,
$920.0 million and $471.5 million for the years ended December 31, 2012, 2011, and 2010, respectively. As of December 31, 2012 and 2011, trade receivables
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related
to metallurgical-quality coal sales totaled $86.6 million and $117.4 million, respectively, or 35% and 31%, of total trade receivables, respectively. We do not have foreign
currency exposure for our international sales as all sales are denominated and settled in U.S. dollars.
The
Company's foreign revenues by coal destination for the year ended December 31, 2012, were as follows:
|
|
|
|
|
|
|
December 31,
2012 |
|
|
|
(In thousands)
|
|
Europe (including Morocco and Turkey) |
|
$ |
674,754 |
|
Asia |
|
|
203,193 |
|
North America |
|
|
72,542 |
|
South America |
|
|
57,184 |
|
Brokered sales |
|
|
145,438 |
|
| |
|
|
|
Total |
|
|
1,153,111 |
|
| |
|
|
|
Long-Term Coal Supply Arrangements
As is customary in the coal industry, we enter into fixed price, fixed volume long-term supply contracts, the terms of
which are more than one year, with many of our customers. Multiple year contracts usually have specific and possibly different volume and pricing arrangements for each year of the contract.
Long-term contracts allow customers to secure a supply for their future needs and provide us with greater predictability of sales volume and sales prices. In 2012 we sold approximately 70%
of our coal under long-term supply arrangements. The majority of our supply contracts include a fixed price for the term of the agreement or a pre-determined escalation in
price for each year. Some of our long-term supply agreements may include a variable pricing system. While most of our sales contracts are for terms of one to five years, some are as short
as one month and other contracts have terms up to nine years. At December 31, 2012, the average volume-weighted remaining term of our long-term contracts was approximately
2.77 years, with remaining terms ranging from one to eight years. At December 31, 2012, remaining tons under long-term supply agreements, including those subject to price
re-opener or extension provisions, were approximately 221 million tons.
We
typically sell coal to customers under long-term arrangements through a "request-for-proposal" process. The terms of our coal sales agreements
result from competitive bidding and negotiations with customers. Consequently, the terms of these contracts vary by customer, including base price adjustment features, price re-opener
terms, coal quality requirements, quantity parameters, permitted sources of supply, future regulatory changes, extension options, force majeure,
termination, damages and assignment provisions. Our long-term supply contracts typically contain provisions to adjust the base price due to new statutes, ordinances or regulations.
Additionally, some of our contracts contain provisions that allow for the recovery of costs affected by modifications or changes in the interpretations or application of any applicable statute by
local, state or federal government authorities. These provisions only apply to the base price of coal contained in these supply contracts. In some circumstances, a significant adjustment in base price
can lead to termination of the contract.
Certain
of our contracts contain index provisions that change the price based on changes in market based indices and or changes in economic indices. Certain of our contracts contain
price re-opener provisions that may allow a party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions may
automatically set a new price based on prevailing market price or, in some instances, require us to negotiate a new price, sometimes within a specified range of prices. In a limited number of
agreements, if the parties do not agree on a new price, either party has an option to terminate the contract. In addition, certain of our contracts contain clauses that may allow customers to
terminate the contract in the event of certain changes in environmental laws and regulations that impact their operations.
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Coal
quality and volumes are stipulated in coal sales agreements. In most cases, the annual pricing and volume obligations are fixed, although in some cases the volume specified may vary
depending on the customer consumption requirements. Most of our coal sales agreements contain provisions requiring us to deliver coal within certain ranges for specific coal characteristics such as
heat content (for thermal coal contracts), volatile matter (for metallurgical coal contracts), and for both types of contracts, sulfur, ash and moisture content. Failure to meet these specifications
can result in economic penalties, suspension or cancellation of shipments or termination of the contracts.
Our
coal sales agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our
customers, during the duration of events beyond the control of the affected party, including events such as strikes, adverse mining conditions, mine closures or serious transportation problems that
affect us or unanticipated plant outages that may affect the buyer. Our contracts also generally provide that in the event a force majeure circumstance
exceeds a certain time period, the unaffected party may have the option to terminate the purchase or sale in whole or in part. Some contracts stipulate that this tonnage can be made up by mutual
agreement or at the discretion of the buyer. Agreements between our customers and the railroads servicing our mines may also contain force majeure
provisions. Generally, our coal sales agreements allow our customer to suspend performance in the event that the railroad fails to provide its services due to circumstances that would constitute a force majeure.
In
most of our contracts, we have a right of substitution (unilateral or subject to counterparty approval), allowing us to provide coal from different mines, including third-party mines,
as long as the replacement coal meets quality specifications and will be sold at the same equivalent delivered cost.
In
some of our coal supply contracts, we agree to indemnify or reimburse our customers for damage to their or their rail carrier's equipment while on our property, which result from our
or our agents' negligence, and for damage to our customer's equipment due to non-coal materials being included with our coal while on our property.
Trading. In addition to marketing and selling coal to customers through traditional coal supply arrangements, we seek to optimize our
coal production
and leverage our knowledge of the coal industry through a variety of other marketing, trading and asset optimization strategies. From time to time, we may employ strategies to use coal and
coal-related commodities and contracts for those commodities in order to manage and hedge volumes and/or prices associated with our coal sales or purchase commitments, reduce our exposure
to the volatility of market prices or augment the value of our portfolio of traditional assets. These strategies may include physical coal contracts, as well as a variety of forward, futures or
options contracts, swap agreements or other financial instruments.
We
maintain a system of complementary processes and controls designed to monitor and manage our exposure to market and other risks that may arise as a consequence of these strategies.
These processes and controls seek to preserve our ability to profit from certain marketing, trading and asset optimization strategies while mitigating our exposure to potential losses. You should see
the section entitled "Quantitative and Qualitative Disclosures About Market Risk" for more information about the market risks associated with these strategies at December 31, 2012.
Transportation. We ship our coal to domestic customers by means of railcars, barges, vessels or trucks, or a combination of these means
of
transportation. We generally sell coal used for domestic consumption free on board (f.o.b.) at the mine or nearest loading facility. Our domestic customers normally bear the costs of transporting coal
by rail, barge or vessel.
Historically,
most domestic electricity generators have arranged long-term shipping contracts with rail or barge companies to assure stable delivery costs. Transportation can
be a large component of a purchaser's total cost. Although the purchaser pays the freight, transportation costs still are important to coal mining companies because the purchaser may choose a supplier
largely based on cost of transportation. Transportation costs borne by the customer vary greatly based on each customer's proximity to the mine and our proximity to the loadout facilities. Trucks and
overland conveyors haul coal over shorter distances, while barges, Great Lake carriers and ocean vessels
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move
coal to export markets and domestic markets requiring shipment over the Great Lakes and several river systems.
Most
coal mines are served by a single rail company, but much of the Powder River Basin is served by two rail carriers: the Burlington Northern-Santa Fe railroad and the Union Pacific
railroad. In the Western Bituminous region our customers are largely served by the Union Pacific railroad or by truck delivery. We generally transport coal produced at our Appalachian mining complexes
via the CSX railroad or the Norfolk Southern railroad. Besides rail deliveries, some customers in the eastern United States rely on a river barge system. Our Arch Coal Terminal is located in
Catlettsburg, Kentucky on a 111-acre site on the Big Sandy River above its confluence with the Ohio River. The terminal provides coal and other bulk material storage and can load and
offload river barges and trucks at the facility. The terminal can provide up to 500,000 tons of storage and can load up to six million tons of coal annually for shipment on the inland waterways.
We
generally sell coal to international customers at the export terminal, and we are usually responsible for the cost of transporting coal to the export terminals. In some cases we may
enter into long-term throughput agreements with export terminals that contain minimum throughput obligations. In the event we do not meet those minimum thresholds, we may be obligated to
pay liquidated damage amounts to such terminals. We transport our coal to Atlantic or Pacific coast terminals or terminals along the Gulf of Mexico for transportation to international customers. Our
international customers are generally responsible for paying the cost of ocean freight. We may also sell coal to international customers delivered to an unloading facility at the destination country.
We
own a 22% interest in Dominion Terminal Associates, a partnership that operates a ground storage-to-vessel coal transloading facility in Newport News,
Virginia. The facility has a rated throughput capacity of 20 million tons of coal per year and ground storage capacity of approximately 1.7 million tons. The facility serves
international customers, as well as domestic coal users located along the Atlantic coast of the United States.
We
also own a 38% interest in Millennium Bulk Terminals—Longview, LLC (MBT), the owner of a bulk commodity terminal on the Columbia River near Longview, Washington.
MBT is currently working to obtain the required approvals and necessary permits to complete upgrades to enable coal shipments through the brownfield terminal.
Competition
The coal industry is intensely competitive. The most important factors on which we compete are coal quality, delivered costs to the
customer and reliability of supply. Our principal domestic competitors include Alpha Natural Resources, Inc., Cloud Peak Energy, CONSOL Energy Inc., Patriot Coal Corporation, Peabody
Energy Corp. and Walter Energy, Inc. Some of these coal producers are larger than we are and have greater financial resources and larger reserve bases than we do. We also compete directly with
a number of smaller producers in each of the geographic regions in which we operate, as well as companies that produce coal from one or more foreign countries, such as Australia, Colombia, Indonesia,
South Africa and Venezuela.
Additionally,
coal competes with other fuels, such as natural gas, nuclear energy, hydropower, wind, solar and petroleum, for steam and electrical power generation. Costs and other
factors relating to these alternative fuels, such as safety and environmental considerations, affect the overall demand for coal as a fuel.
Suppliers
Principal supplies used in our business include petroleum-based fuels, explosives, tires, steel and other raw materials as well as
spare parts and other consumables used in the mining process. We use third-party suppliers for a significant portion of our equipment rebuilds and repairs, drilling services and construction. We use
sole source suppliers for certain parts of our business such as explosives and fuel, and preferred suppliers for other parts at our business such as dragline and shovel parts and related services. We
believe adequate substitute suppliers are available. For more information about our suppliers, you should see "Risk Factors—Increases in the costs of mining and other industrial supplies,
including steel-based supplies, diesel fuel and rubber tires, or the inability to obtain a sufficient quantity of those supplies, could negatively affect our operating costs or disrupt or delay our
production."
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Environmental and Other Regulatory Matters
Federal, state and local authorities regulate the U.S. coal mining industry with respect to matters such as employee health and safety
and the environment, including the protection of air quality, water quality, wetlands, special status species of plants and animals, land uses, cultural and historic properties and other environmental
resources identified during the permitting process. Reclamation is required during production and after mining has been completed. Materials used and generated by mining operations must also be
managed according to applicable regulations and law. These laws have, and will continue to have, a significant effect on our production costs and our competitive position.
We
endeavor to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. However, due in part to the extensive, comprehensive and
changing regulatory requirements, violations during mining operations occur from time to time. We cannot assure you that we have been or will be at all times in complete compliance with such laws and
regulations. While it is not possible to accurately quantify the expenditures we incur to maintain compliance with all applicable federal and state laws, those costs have been and
are expected to continue to be significant. Federal and state mining laws and regulations require us to obtain surety bonds to guarantee performance or payment of certain long-term
obligations, including mine closure and reclamation costs, federal and state workers' compensation benefits, coal leases and other miscellaneous obligations. Compliance with these laws has
substantially increased the cost of coal mining for domestic coal producers.
Future
laws, regulations or orders, as well as future interpretations and more rigorous enforcement of existing laws, regulations or orders, may require substantial increases in
equipment and operating costs and delays, interruptions or a termination of operations, the extent to which we cannot predict. Future laws, regulations or orders may also cause coal to become a less
attractive fuel source, thereby reducing coal's share of the market for fuels and other energy sources used to generate electricity. As a result, future laws, regulations or orders may adversely
affect our mining operations, cost structure or our customers' demand for coal.
The
following is a summary of the various federal and state environmental and similar regulations that have a material impact on our business:
Mining Permits and Approvals. Numerous governmental permits or approvals are required for mining operations. When we apply for these
permits and
approvals, we may be required to prepare and present to federal, state or local authorities' data pertaining to the effect or impact that any proposed production or processing of coal may have upon
the environment. For example, in order to obtain a federal coal lease, an environmental impact statement must be prepared to assist the BLM in determining the potential environmental impact of lease
issuance, including any collateral effects from the mining, transportation and burning of coal. The authorization, permitting and implementation requirements imposed by federal, state and local
authorities may be costly and time consuming and may delay commencement or continuation of mining operations. In the states where we operate, the applicable laws and regulations also provide that a
mining permit or modification can be delayed, refused or revoked if officers, directors, shareholders with specified interests or certain other affiliated entities with specified interests in the
applicant or permittee have, or are affiliated with another entity that has, outstanding permit violations. Thus, past or ongoing violations of applicable laws and regulations could provide a basis to
revoke existing permits and to deny the issuance of additional permits.
In
order to obtain mining permits and approvals from federal and state regulatory authorities, mine operators must submit a reclamation plan for restoring, upon the completion of mining
operations, the mined property to its prior condition or other authorized use. Typically, we submit the necessary permit applications several months or even years before we plan to begin mining a new
area. Some of our required permits are becoming increasingly more difficult and expensive to obtain, and the application review processes are taking longer to complete and becoming increasingly
subject to challenge, even after a permit has been issued.
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Under
some circumstances, substantial fines and penalties, including revocation or suspension of mining permits, may be imposed under the laws described above. Monetary sanctions and, in
severe circumstances, criminal sanctions may be imposed for failure to comply with these laws.
Surface Mining Control and Reclamation Act. The Surface Mining Control and Reclamation Act, which we refer to as SMCRA, establishes
mining,
environmental protection, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. Mining operators must obtain SMCRA permits and permit
renewals from the Office of Surface Mining, which we refer to as OSM, or from the applicable state agency if the state agency has obtained regulatory primacy. A state agency may achieve primacy if the
state regulatory agency develops a mining regulatory program that is no less stringent than the federal mining regulatory program under SMCRA. All states in which we conduct mining operations have
achieved primacy and issue permits in lieu of OSM.
In
1999, a federal court in West Virginia ruled that the stream buffer zone rule issued under SMCRA prohibited most excess spoil fills. While the decision was later reversed on
jurisdictional grounds, the extent to which the rule applied to fills was left unaddressed. On December 12, 2008, OSM finalized a rulemaking regarding the interpretation of the stream buffer
zone provisions of SMCRA which confirmed that excess spoil from mining and refuse from coal preparation could be placed in permitted areas of a mine site that constitute waters of the United States.
On November 30, 2009, OSM announced that it would re-examine and reinterpret the regulations finalized eleven months earlier. We cannot predict how the regulations may change or how
they may affect coal production, though there are reports that drafts of OSM's preferred alternative rule would, if finalized, curtail surface mining operations in and near
streams—especially in central Appalachia.
SMCRA
permit provisions include a complex set of requirements which include, among other things, coal prospecting; mine plan development; topsoil or growth medium removal and
replacement; selective handling of overburden materials; mine pit backfilling and grading; disposal of excess spoil; protection of the hydrologic balance; subsidence control for underground mines;
surface runoff and drainage control; establishment of suitable post mining land uses; and revegetation. We begin the process of preparing a mining permit application by collecting baseline data to
adequately characterize the pre-mining environmental conditions of the permit area. This work is typically conducted by third-party consultants with specialized expertise and includes
surveys and/or assessments of the following: cultural and historical resources; geology; soils; vegetation; aquatic organisms; wildlife; potential for threatened, endangered or other special status
species; surface and ground water hydrology; climatology; riverine and riparian habitat; and wetlands. The geologic data and information derived from the other surveys and/or assessments are used to
develop the mining and reclamation plans presented in the permit application. The mining and reclamation plans address the provisions and performance standards of the state's equivalent SMCRA
regulatory program, and are also used to support applications for other authorizations and/or
permits required to conduct coal mining activities. Also included in the permit application is information used for documenting surface and mineral ownership, variance requests, access roads, bonding
information, mining methods, mining phases, other agreements that may relate to coal, other minerals, oil and gas rights, water rights, permitted areas, and ownership and control information required
to determine compliance with OSM's Applicant Violator System, including the mining and compliance history of officers, directors and principal owners of the entity.
Once
a permit application is prepared and submitted to the regulatory agency, it goes through an administrative completeness review and a thorough technical review. Also, before a SMCRA
permit is issued, a mine operator must submit a bond or otherwise secure the performance of all reclamation obligations. After the application is submitted, a public notice or advertisement of the
proposed permit is required to be given, which begins a notice period that is followed by a public comment period before a permit can be issued. It is not uncommon for a SMCRA mine permit application
to take over a year to prepare, depending on the size and complexity of the mine, and anywhere from six months to two years or even longer for the permit to be issued. The variability in time frame
required to prepare the application and issue the permit can be attributed primarily to the various regulatory authorities' discretion in the handling of comments and objections relating to the
project
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received
from the general public and other agencies. Also, it is not uncommon for a permit to be delayed as a result of litigation related to the specific permit or another related company's permit.
In
addition to the bond requirement for an active or proposed permit, the Abandoned Mine Land Fund, which was created by SMCRA, requires a fee on all coal produced. The proceeds of the
fee are used to restore mines closed or abandoned prior to SMCRA's adoption in 1977. The current fee is $0.28 per ton of coal produced from surface mines and $0.12 per ton of coal produced from
underground mines. In 2012, we recorded $36.7 million of expense related to these reclamation fees.
Surety Bonds. Mine operators are often required by federal and/or state laws, including SMCRA, to assure, usually through the use of
surety bonds,
payment of certain long-term obligations including mine closure or reclamation costs, federal and state workers' compensation costs, coal leases and other miscellaneous obligations.
Although surety bonds are usually noncancelable during their term, many of these bonds are renewable on an annual basis.
The
costs of these bonds have fluctuated in recent years while the market terms of surety bonds have generally become more unfavorable to mine operators. These changes in the terms of
the bonds have been accompanied at times by a decrease in the number of companies willing to issue surety bonds. In order to address some of these
uncertainties, we use self-bonding to secure performance of certain obligations in Wyoming. As of December 31, 2012, we have self-bonded an aggregate of approximately
$388.4 million, posted an aggregate of approximately $262.9 million in surety bonds for reclamation purposes and secured $18.0 million in letters of credit for reclamation bonding
obligations. In addition, we had approximately $300.7 million of surety bonds and letters of credit outstanding at December 31, 2012 to secure workers' compensation, coal lease and other
obligations.
Mine Safety and Health. Stringent safety and health standards have been imposed by federal legislation since Congress adopted the Mine
Safety and
Health Act of 1969. The Mine Safety and Health Act of 1977 significantly expanded the enforcement of safety and health standards and imposed comprehensive safety and health standards on all aspects of
mining operations. In addition to federal regulatory programs, all of the states in which we operate also have programs aimed at improving mine safety and health. Collectively, federal and state
safety and health regulation in the coal mining industry is among the most comprehensive and pervasive systems for the protection of employee health and safety affecting any segment of U.S. industry.
In reaction to recent mine accidents, federal and state legislatures and regulatory authorities have increased scrutiny of mine safety matters and passed more stringent laws governing mining. For
example, in 2006, Congress enacted the MINER Act. The MINER Act imposes additional obligations on coal operators including, among other things, the following:
- •
- development of new emergency response plans that address post-accident communications, tracking of miners,
breathable air, lifelines, training and communication with local emergency response personnel;
- •
- establishment of additional requirements for mine rescue teams;
- •
- notification of federal authorities in the event of certain events;
- •
- increased penalties for violations of the applicable federal laws and regulations; and
- •
- requirement that standards be implemented regarding the manner in which closed areas of underground mines are sealed.
In
2008, the U.S. House of Representatives approved additional federal legislation which would have required new regulations on a variety of mine safety issues such as underground
refuges, mine ventilation and communication systems. Although the U.S. Senate failed to pass that legislation, it is possible that similar legislation may be proposed in the future. Various states,
including West Virginia, have also enacted laws to address many of the same subjects. The costs of implementing these safety and health regulations at the federal and state level have been, and will
continue to be, substantial. In addition to the cost of implementation, there are increased penalties
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for
violations which may also be substantial. Expanded enforcement has resulted in a proliferation of litigation regarding citations and orders issued as a result of the regulations.
Under
the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977, each coal mine operator must secure payment of federal black lung benefits to claimants
who are current and former employees and to a trust fund for the payment of benefits and medical expenses to claimants who last worked in the coal industry prior to July 1, 1973. The trust fund
is funded by an excise tax on production of up to $1.10 per ton for coal mined in underground operations and up to $0.55 per ton for coal mined in surface operations. These amounts may not exceed 4.4%
of the gross sales price. This excise tax does not apply to coal shipped outside the United States. In 2012, we recorded $72.9 million of expense related to this excise tax.
We
are committed to the safety of our employees. In 2012, we spent approximately $16.5 million on MINER Act compliance and other safety improvement matters. For the seventh year
in a row, we ranked first among our major diversified coal peers for our safety record and garnered 24 external awards for outstanding achievement in our core values. In addition, five of our
complexes completed 2012 without a single safety incident or environmental violation.
One
way we work towards meeting a zero injury rate is developing and maintaining strong safety programs. Our subsidiaries launched behavior-based safety programs in 2006, which expanded
our employees' involvement in our prevention process and in identifying at-risk behaviors before incidents occur. In addition, we routinely conduct regular safety drills and exercises with
state safety and MSHA officials.
Clean Air Act. The federal Clean Air Act and similar state and local laws that regulate air emissions affect coal mining directly and
indirectly.
Direct impacts on coal mining and processing operations include Clean Air Act permitting requirements and emissions control requirements relating to particulate matter which may include controlling
fugitive dust. The Clean Air Act also indirectly affects coal mining operations by extensively regulating the emissions of fine particulate matter measuring 2.5 micrometers in diameter or smaller,
sulfur dioxide, nitrogen oxides, mercury and other compounds emitted by coal-fueled power plants and industrial boilers, which are the largest end-users of our coal. Continued
tightening of the already stringent regulation of emissions is likely, such as the Mercury and Air Toxics Standard (MATS), finalized in 2011 and discussed in more detail below. In addition, regulation
of additional emissions, such as greenhouse gases, has been announced by the U.S. Environmental Protection Agency, which we refer to as EPA, and those regulations will apply to new
coal-fueled power plants. Other greenhouse gas regulations apply to industrial boilers (see discussion of Climate Change, below and this application could eventually reduce the demand for
coal.
Clean
Air Act requirements that may directly or indirectly affect our operations include the following:
- •
- Acid Rain. Title IV of the Clean Air Act, promulgated in
1990, imposed a two-phase reduction of sulfur dioxide emissions by electric utilities. Phase II became effective in 2000 and applies to all coal-fueled power plants with
a capacity of more than 25-megawatts. Generally, the affected power plants have sought to comply with these requirements by switching to lower sulfur fuels, installing pollution control
devices, reducing electricity generating levels or purchasing or trading sulfur dioxide emissions allowances. Although we cannot accurately predict the future effect of this Clean Air Act provision on
our operations, we believe that implementation of Phase II has been factored into the pricing of the coal market.
- •
- Particulate Matter. The Clean Air Act requires the EPA to
set national ambient air quality standards, which we refer to as NAAQS, for certain pollutants associated with the combustion of coal, including sulfur dioxide, particulate matter, nitrogen oxides and
ozone. Areas that are not in compliance with these standards, referred to as non-attainment areas, must take steps to reduce emissions levels. For example, NAAQS currently exist for
particulate matter measuring 10 micrometers in diameter or smaller (PM10) and for fine particulate matter measuring 2.5 micrometers in diameter or smaller (PM2.5), and the EPA revised the PM2.5 NAAQS
on December 14, 2012, making it more stringent. The states are required to make recommendations on nonattainment designations for the new NAAQS in late 2013. Once the EPA finalizes
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those
designations, individual states must identify the sources of emissions and develop emission reduction plans. These plans may be state-specific or regional in scope. Under the Clean Air Act,
individual states have up to 12 years from the date of designation to secure emissions reductions from sources contributing to the problem. Future regulation and enforcement of the new PM2.5
standard will affect many power plants, especially coal-fueled power plants, and all plants in non-attainment areas.
- •
- Ozone. The EPA is scheduled to propose a revision of their
existing NAAQS for ozone in 2013. Significant additional emission control expenditures will likely be required at coal-fueled power plants to meet the new NAAQS. Nitrogen oxides, which are
a byproduct of coal combustion, are classified as an ozone precursor. As a result, emissions control requirements for new and expanded coal-fueled power plants and industrial boilers will
continue to become more demanding in the years ahead.
- •
- NOx SIP Call. The Nitrogen Oxides State Implementation
Plan (NOx SIP) Call program was established by the EPA in October 1998 to reduce the transport of ozone on prevailing winds from the Midwest and South to states in the Northeast, which said that they
could not meet federal air quality standards because of migrating pollution. The program was designed to reduce nitrous oxide emissions by one million tons per year in 22 eastern states and the
District of Columbia. Phase II reductions were required by May 2007. As a result of the program, many power plants were required to install additional emission control measures, such as
selective catalytic reduction devices. Installation of additional emission control measures has made it more costly to operate coal-fueled power plants, which could make coal a less
attractive fuel.
- •
- Clean Air Interstate Rule. The EPA finalized the Clean Air
Interstate Rule, which we refer to as CAIR, in March 2005. CAIR called for power plants in 28 Eastern states and the District of Columbia to reduce emission levels of sulfur dioxide and nitrous oxide
pursuant to a cap and trade program similar to the system now in effect for acid deposition control and to that proposed by the Clean Skies Initiative.
In
July 2008, in State of North Carolina v. EPA and consolidated cases, the U.S. Court of Appeals for the District of Columbia Circuit disagreed with
the EPA's reading of the Clean Air Act and vacated CAIR in its entirety. In December 2008, the U.S. Court of Appeals for the District of Columbia Circuit revised its remedy and remanded the rule to
the EPA. The EPA proposed a revised transport rule on August 2, 2010 (75 Fed Reg 45209) and received thousands of comments on the proposal. The rule was finalized as the Cross State Air
Pollution Rule (CSAPR) on July 6, 2011, with compliance required for SO2 reductions beginning January 1, 2012 and compliance with NOx reductions required by May 1, 2012. Numerous
appeals of the rule were filed and, on August 21, 2012, the Federal Court of Appeals for the District of Columbia Circuit vacated the rule, leaving the EPA to continue implementation of the
CAIR Controls required under the CAIR may affect the market for coal inasmuch as multiple existing coal fired units are being retired rather than having required controls installed.
- •
- Mercury. In February 2008, the U.S. Court of Appeals for
the District of Columbia Circuit vacated the EPA's Clean Air Mercury Rule (CAMR) and remanded it to the EPA for reconsideration. In response to the vacatur, the EPA announced an EGU Mercury and Air
Toxics Standard (MATS) on December 16, 2011. The MATS was finalized April 16, 2012. In addition, before the court decision vacating the CAMR, some states had either adopted the CAMR or
adopted state-specific rules to regulate mercury emissions from power plants that are more stringent than the CAMR. The result of the EGU MATS and state mercury and air toxics controls is that these
rules may adversely affect the demand for coal.
- •
- Regional Haze. The EPA has initiated a regional haze
program designed to protect and improve visibility at and around national parks, national wilderness areas and international parks, particularly those located in the southwest and southeast United
States. Under the Regional Haze Rule, affected states were required to submit regional haze SIP's by December 17, 2007, that, among other things, was to identify facilities that would have to
reduce emissions and comply with stricter emission limitations. The vast majority of states failed to submit their plans by December 17, 2007, and the EPA issued a Finding of Failure to Submit
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plans
on January 15, 2009 (74 Fed. Reg. 2392). The EPA had taken no enforcement action against states to finalize implementation plans and was slowly dealing with the state Regional Haze SIPs
that were submitted, which resulted in the National Parks Conservation Association commencing litigation in the D. C. Circuit Court of Appeals on August 3, 2012, against the EPA
for failure to enforce the rule (National Parks Conservation Act v. EPA, D.C.Cir). Industry groups, including the Utility Air Regulatory Group have
intervened (Utility Air Regulatory Group v. EPA.
D.C. Cir 12-1342, 8/6/2012) This program may result in additional emissions restrictions from new coal-fueled power plants whose operations may impair
visibility at and around federally protected areas. This program may also require certain existing coal-fueled power plants to install additional control measures designed to limit
haze-causing emissions, such as sulfur dioxide, nitrogen oxides, volatile organic chemicals and particulate matter. These limitations could affect the future market for coal.
- •
- New Source Review. A number of pending regulatory changes
and court actions are affecting the scope of the EPA's new source review program, which under certain circumstances requires existing coal-fueled power plants to install the more stringent
air emissions control equipment required of new plants. The new source review program is continually revised and such revisions may impact demand for coal nationally, but we are unable to predict the
magnitude of the impact.
Climate Change. One by-product of burning coal is carbon dioxide, which is considered a greenhouse gas and is a major source of concern
with respect to global warming. In November 2004, Russia ratified the Kyoto Protocol to the 1992 Framework Convention on Global Climate Change, which establishes a binding set of emission targets for
greenhouse gases. With Russia's acceptance, the Kyoto Protocol became binding on all those countries that had ratified it in February 2005. The United States has refused to ratify the Kyoto Protocol.
Although the Kyoto Protocol targets varied from country to country, the United States Kyoto Protocol target reductions of greenhouse gas emissions would be to 93% of 1990 levels. Following the Kyoto
meeting, multiple Conferences of the Parties have been held. None to date, including the most recent Conference of the Parties in Abu Dhabi, in January 2013, have resulted in any mandatory reduction
requirements for the United States, but any such future conference may do so.
Future
regulation of greenhouse gases in the United States could occur pursuant to future U.S. treaty obligations, statutory or regulatory changes under the Clean Air Act, federal or
state adoption of a greenhouse gas regulatory scheme, or otherwise. The U.S. Congress has considered various proposals to reduce greenhouse gas emissions, but to date, none have become law. In April
2007, the U.S. Supreme Court rendered its decision in Massachusetts v. EPA, finding that the EPA has authority under the Clean Air Act to regulate
carbon dioxide emissions from automobiles and can decide against regulation only if the EPA determines that carbon dioxide does not significantly contribute to climate change and does not endanger
public health or the environment. On December 15, 2009, the EPA published a formal determination that six greenhouse gases, including carbon dioxide and methane, endanger both the public health
and welfare of current and future generations. In the same Federal Register rulemaking, the EPA found that emission of greenhouse gases from new motor vehicles and their engines contribute to
greenhouse gas pollution. Although Massachusetts v. EPA did not involve the EPA's authority to regulate greenhouse gas emissions from stationary
sources, such as coal-fueled power plants, the EPA has since proposed regulations of stationary source greenhouse gas emissions.
In
addition to the federal regulation, many states and regions have adopted greenhouse gas initiatives. These state and regional climate change rules will likely require additional
controls on coal-fueled power plants and industrial boilers and may even cause some users of coal to switch from coal to a lower carbon fuel. There can be no assurance at this time that a
carbon dioxide cap and trade program, a carbon tax or other regulatory regime, if implemented by the states in which our customers operate or at the federal level, will not affect the future market
for coal in those regions. Increased efforts to control greenhouse gas emissions could result in reduced demand for coal.
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Clean Water Act. The federal Clean Water Act (sometimes shortened to CWA) and corresponding state and local laws and regulations affect
coal mining
operations by restricting the discharge of pollutants, including dredged and fill materials, into waters of the United States. The Clean Water Act provisions and associated state and federal
regulations are complex and subject to amendments, legal challenges and changes in implementation. Recent court decisions and regulatory actions have created uncertainty over Clean Water Act
jurisdiction and permitting requirements that could variously increase or decrease the cost and time we expend on Clean Water Act compliance.
Clean
Water Act requirements that may directly or indirectly affect our operations include the following:
- •
- Water Discharge. Section 402 of the Clean Water Act
creates a process for establishing effluent limitations for discharges to streams that are protective of water quality standards through the National Pollutant Discharge Elimination System, which we
refer to as the NPDES, or an equally stringent program delegated to a state regulatory agency. Regular monitoring, reporting and compliance with performance standards are preconditions for the
issuance and renewal of NPDES permits that govern discharges into waters of the United States, especially on selenium, sulfate and specific conductance. Discharges that exceed the limits specified
under NPDES permits can lead to the imposition of penalties, and persistent non-compliance could lead to significant penalties, compliance costs and delays in coal production. In addition,
the imposition of future restrictions on the discharge of certain pollutants into waters of the United States could increase the difficulty of obtaining and complying with NPDES permits, which could
impose additional time and cost burdens on our operations. You should see Item 3—Legal Proceedings for more information about certain regulatory actions pertaining to our
operations.
Discharges
of pollutants into waters that states have designated as impaired (i.e., as not meeting present water quality standards) are subject to Total Maximum Daily Load, which we refer to as
TMDL, regulations. The TMDL
regulations establish a process for calculating the maximum amount of a pollutant that a water body can receive while maintaining state water quality standards. Pollutant loads are allocated among the
various sources that discharge pollutants into that water body. Mine operations that discharge into water bodies designated as impaired will be required to meet new TMDL allocations. The adoption of
more stringent TMDL-related allocations for our coal mines could require more costly water treatment and could adversely affect our coal production.
The
Clean Water Act also requires states to develop anti-degradation policies to ensure that non-impaired water bodies continue to meet water quality standards. The issuance
and renewal of permits for the discharge of pollutants to waters that have been designated as "high quality" are subject to anti-degradation review that may increase the costs, time and
difficulty associated with obtaining and complying with NPDES permits.
- •
- Dredge and Fill Permits. Many mining activities, such as
the development of refuse impoundments, fresh water impoundments, refuse fills, valley fills, and other similar structures, may result in impacts to waters of the United States, including wetlands,
streams and, in certain instances, man-made conveyances that have a hydrologic connection to such streams or wetlands. Under the Clean Water Act, coal companies are required to obtain a
Section 404 permit from the Army Corps of Engineers, which we refer to as the Corps, prior to conducting such mining activities. The Corps is authorized to issue general "nationwide" permits
for specific categories of activities that are similar in nature and that are determined to have minimal adverse effects on the environment. Permits issued pursuant to Nationwide Permit 21, which we
refer to as NWP 21, generally authorize the disposal of dredged and fill material from surface coal mining activities into waters of the United States, subject to certain restrictions. Since March
2007, permits under NWP 21 were reissued for a five-year period with new provisions intended to strengthen environmental protections. There must be appropriate mitigation in accordance
with nationwide general permit conditions rather than less restricted state-required mitigation requirements, and permitholders must receive explicit authorization from the Corps before proceeding
with proposed mining activities.
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Notwithstanding
the additional environmental protections designed in the NWP 21, on July 15, 2009, the Corps proposed to immediately suspend the use of NWP 21 in six Appalachian states,
including West Virginia, Kentucky and Virginia where the Company conducts operations.. On June 17, 2010, the Corps announced that it had suspended the use of NWP 21 in the same six states
although it remained for use elsewhere. In February 2012, the Corps proposed to reissue NWP 21, albeit with significant restrictions on the acreage and length of stream channel that can be filled in
the course of mining operations. The Corps' decisions regarding the use of NWP 21 does not prevent the Company's operations from seeking an individual permit under § 404 of the CWA,
nor does it restrict an operation from utilizing another version of the nationwide permit, NWP 50, authorized for small underground coal mines that must construct fills as part of their mining
operations.
The
use of nationwide permits to authorize stream impacts from mining activities has been the subject of significant litigation. Refer to Item 3—Legal Proceedings for more
information about certain litigation pertaining to our permits.
Resource Conservation and Recovery Act. The Resource Conservation and Recovery Act, which we refer to as RCRA, may affect coal mining
operations
through its requirements for the management, handling, transportation and disposal of hazardous wastes. Currently, certain coal mine wastes, such as overburden and coal cleaning wastes, are exempted
from hazardous waste management. In addition, Subtitle C of RCRA exempted fossil fuel combustion wastes from hazardous waste regulation until the EPA completed a report to Congress and made a
determination on whether the wastes should be regulated as hazardous. In its 1993 regulatory determination, the EPA addressed some high volume-low toxicity coal combustion products
generated at electric utility and independent power producing facilities, such as coal ash, and left the exemption in place. In May 2000, the EPA concluded that coal combustion products do not warrant
regulation as hazardous waste under RCRA and again retained the hazardous waste exemption for these wastes. The EPA also determined that national non-hazardous waste regulations under RCRA
Subtitle D are needed for coal combustion products disposed in surface impoundments and landfills and used as mine-fill. In March of 2007 the Office of Surface Mining and the EPA proposed
regulations regarding the management of coal combustion products. The EPA concluded that beneficial uses of these wastes, other than for mine-filling, pose no significant risk and no
additional national regulations are needed. As long as this exemption remains in effect, it is not anticipated that regulation of coal combustion waste will have any material effect on the amount of
coal used by electricity generators. A final rule has not been promulgated. Most state hazardous waste laws also exempt coal combustion products, and instead treat it as either a solid waste or a
special waste. Any costs associated with handling or disposal of hazardous wastes would increase our customers' operating costs and potentially reduce their ability to purchase coal. In addition,
contamination caused by the past disposal of ash can lead to material liability. In another development regarding coal combustion wastes, the EPA conducted an assessment of impoundments and other
units that manage residuals from coal combustion and that contain free liquids following a massive coal ash spill in Tennessee in 2008, the EPA contractors conducted site assessments at many
impoundments and is requiring appropriate remedial action at any facility that is found to have a unit posing a risk for potential failure. The EPA is posting utility responses to the assessment on
its web site as the responses are received. Future regulations resulting from the EPA coal combustion refuse assessments may impact the ability of the Company's utility customers to continue to use
coal in their power plants.
Comprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation and
Liability Act, which
we refer to as CERCLA, and similar state laws affect coal mining operations by, among other things, imposing cleanup requirements for threatened or actual releases of hazardous substances that may
endanger public health or welfare or the environment. Under CERCLA and similar state laws, joint and several liability may be imposed on waste generators, site owners and lessees and others regardless
of fault or the legality of the original disposal activity. Although the EPA excludes most wastes generated by coal mining and processing operations from the hazardous waste laws, such wastes can, in
certain circumstances, constitute hazardous substances for the purposes of CERCLA. In addition, the disposal, release or spilling of some products
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used
by coal companies in operations, such as chemicals, could trigger the liability provisions of the statute. Thus, coal mines that we currently own or have previously owned or operated, and sites
to which we sent waste materials, may be subject to liability under CERCLA and similar state laws. In particular, we may be liable under CERCLA or similar state laws for the cleanup of hazardous
substance contamination at sites where we own surface rights.
Endangered Species. The Endangered Species Act and other related federal and state statutes protect species threatened or endangered
with possible
extinction. Protection of threatened, endangered and other special status species may have the effect of prohibiting or delaying us from obtaining mining permits and may include restrictions on timber
harvesting, road building and other mining or agricultural activities in areas containing the affected species. A number of species indigenous to our properties are protected under the Endangered
Species Act or other related laws or regulations. Based on the species that have been identified to date and the current application of applicable laws and regulations, however, we do not believe
there are any species protected under the Endangered Species Act that would materially and adversely affect our ability to mine coal from our properties in accordance with current mining plans. We
have been able to continue our operations within the existing spatial, temporal and other restrictions associated with special status species. Should more stringent protective measures be applied to
threatened, endangered or other special status species or to their critical habitat, then we could experience increased operating costs or difficulty in obtaining future mining permits.
Use of Explosives. Our surface mining operations are subject to numerous regulations relating to blasting activities. Pursuant to these
regulations,
we incur costs to design and implement blast schedules and to conduct pre-blast surveys and blast monitoring. In addition, the storage of explosives is subject to strict regulatory
requirements established by four different federal regulatory agencies. For example, pursuant to a rule issued by the Department of Homeland Security in 2007, facilities in possession of chemicals of
interest, including ammonium nitrate at certain threshold levels, must complete a screening review in order to help determine whether there is a high level of security risk such that a security
vulnerability assessment and site security plan will be required.
Other Environmental Laws. We are required to comply with numerous other federal, state and local environmental laws in addition to those
previously
discussed. These additional laws include, for example, the Safe Drinking Water Act, the Toxic Substance Control Act and the Emergency Planning and Community Right-to-Know Act.
Employees
At February 15, 2013, we employed a total of approximately 6,424 full and part-time employees, approximately 184 of
whom are represented by the Scotia Employees Association. We believe that our relations with all employees are good.
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Executive Officers
The following is a list of our executive officers, their ages as of February 15, 2013 and their positions and offices during the
last five years:
|
|
|
|
|
|
Name
|
|
Age |
|
Position |
Kenneth D. Cochran |
|
|
52 |
|
Mr. Cochran has served as our Senior Vice President—Operations since August 2012. From May 2011 to August 2012, Mr. Cochran served as Group President of our western operations, which included Thunder Basin
Coal Company, the Arch Western Bituminous Group, Arch of Wyoming and the Otter Creek development, and served as President and General Manager of Thunder Basin Coal Company from 2005 to April 2011. Prior to joining Arch Coal in 2005, Mr. Cochran
spent 20 years with TXU Corporation. Mr. Cochran currently serves on the boards of Millennium Bulk Terminals-Longview, LLC, Knight Hawk Coal Company, and Tongue River Holding Company. |
John T. Drexler |
|
|
43 |
|
Mr. Drexler has served as our Senior Vice President and Chief Financial Officer since April 2008. Mr. Drexler served as
our Vice President—Finance and Accounting from 2006 to April 2008. From 2005 to 2006, Mr. Drexler served as our Director of Planning and Forecasting. Prior to March 2005, Mr. Drexler held several other positions within our finance and
accounting department. |
John W. Eaves |
|
|
55 |
|
Mr. Eaves currently serves as our President and Chief Executive Officer. Mr. Eaves served as our President and Chief
Operating Officer from 2006 until he was appointed as Chief Executive Officer in April 2012. From 2002 to 2006, Mr. Eaves served as our Executive Vice President and Chief Operating Officer. Mr. Eaves is currently the chairman of the
National Coal Council, and also serves on the boards of COALOGIX, National Mining Association, the Business Roundtable, the American Coalition for Clean Coal Electricity and the Business Council. |
Robert G. Jones |
|
|
56 |
|
Mr. Jones has served as our Senior Vice President—Law, General Counsel and Secretary since August 2008. Mr. Jones
served as Vice President—Law, General Counsel and Secretary from 2000 to August 2008. |
Paul A. Lang |
|
|
52 |
|
Mr. Lang has served as our Executive Vice President and Chief Operating Officer since April 2012 and as our Executive Vice
President—Operations from August 2011 to April 2012. Mr. Lang served as Senior Vice President—Operations from 2006 through August 2011, as President of Western Operations from 2005 through 2006 and President and General Manager of
Thunder Basin Coal Company from 1998 to 2005. |
Deck S. Slone |
|
|
49 |
|
Mr. Slone has served as our Senior Vice President—Strategy and Public Policy since June 2012. Mr. Slone served as
our Vice President—Government, Investor and Public Affairs from August 2008 to June 2012. Mr. Slone served as our Vice President—Investor Relations and Public Affairs from 2001 to August 2008. |
Jeffrey W. Strobel |
|
|
50 |
|
Mr. Strobel has served as our Vice President of Business Development and Strategy since October, 2011. Prior to joining Arch
Coal, Mr. Strobel held the following positions: Director of Energy Investment Banking for Wells Fargo Securities, LLC, from 2008 to 2011; Director of Energy Investment Banking for Wachovia Capital Markets, LLC, from 2007 to 2008; and
Director, Vice President and Associate for A.G. Edwards Capital Markets from 2000 to 2007. |
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|
|
|
|
|
|
Name
|
|
Age |
|
Position |
John A. Ziegler, Jr. |
|
|
46 |
|
Mr. Ziegler has served as our Vice President—Human Resources since April 2012. From October 2011 to April 2012, Mr. Ziegler served
as our Senior Director—Compensation and Benefits. From 2005 to October 2011 Mr. Ziegler served as Vice President—Contract Administration of Arch Coal Sales Company, as well as its Senior Vice President of Marketing Administration,
Senior Vice President, and President. Mr. Ziegler joined Arch Coal in 2002 as Director—Internal Audit. Prior to joining Arch Coal, Mr. Ziegler held various finance and accounting positions with bioMerieux and Ernst &
Young. |
Available Information
We file annual, quarterly and current reports, and amendments to those reports, proxy statements and other information with the
Securities and Exchange Commission. You may access and read our filings without charge through the SEC's website, at sec.gov. You may also read and copy any document we file at the SEC's public
reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room.
We
also make the documents listed above available without charge through our website, archcoal.com, as soon as practicable after we file
or furnish them with the SEC. You may also request copies of the documents, at no cost, by telephone at (314) 994-2700 or by mail at Arch Coal, Inc., One CityPlace Drive,
Suite 300, St. Louis, Missouri, 63141 Attention: Senior Vice President—Strategy and Public Policy. The information on our website is not part of this Annual Report on
Form 10-K.
GLOSSARY OF SELECTED MINING TERMS
Certain terms that we use in this document are specific to the coal mining industry and may be technical in nature. The following is a
list of selected mining terms and the definitions we attribute to them.
|
|
|
Assigned reserves |
|
Recoverable reserves designated for mining by a specific operation. |
Brown coal |
|
Coal of gross calorific value of less than 5700 kilocalories per kilogramme (kcal/kg), which includes lignite and sub-bituminous
coal where lignite has a gross calorific value of less than 4165 kcal/kg and sub-bituminous coal has a gross calorific value between 4165 kcal/kg and 5700 kcal/kg. |
Btu |
|
A measure of the energy required to raise the temperature of one pound of water one degree of Fahrenheit. |
Compliance coal |
|
Coal which, when burned, emits 1.2 pounds or less of sulfur dioxide per million Btus, requiring no blending or other sulfur
dioxide reduction technologies in order to comply with the requirements of the Clean Air Act. |
Continuous miner |
|
A machine used in underground mining to cut coal from the seam and load it onto conveyors or into shuttle cars in a continuous
operation. |
Dragline |
|
A large machine used in surface mining to remove the overburden, or layers of earth and rock, covering a coal seam. The dragline
has a large bucket, suspended by cables from the end of a long boom, which is able to scoop up large amounts of overburden as it is dragged across the excavation area and redeposit the overburden in another area. |
Hard coal |
|
Coal of gross calorific value greater than 5700 kcal/kg on an ashfree but moist basis and further disaggregated into anthracite,
coking coal and other bituminous coal. |
Longwall mining |
|
One of two major underground coal mining methods, generally employing two rotating drums pulled mechanically back and forth
across a long face of coal. |
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|
|
|
Low-sulfur coal |
|
Coal which, when burned, emits 1.6 pounds or less of sulfur dioxide per million Btus. |
Preparation plant |
|
A facility used for crushing, sizing and washing coal to remove impurities and to prepare it for use by a particular
customer. |
Probable reserves |
|
Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but
the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. |
Proven reserves |
|
Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade
and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of
reserves are well established. |
Reclamation |
|
The restoration of land and environmental values to a mining site after the coal is extracted. The process commonly includes
"recontouring" or shaping the land to its approximate original appearance, restoring topsoil and planting native grass and ground covers. |
Recoverable reserves |
|
The amount of proven and probable reserves that can actually be recovered from the reserve base taking into account all mining
and preparation losses involved in producing a saleable product using existing methods and under current law. |
Reserves |
|
That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve
determination. |
Room-and-pillar mining |
|
One of two major underground coal mining methods, utilizing continuous miners creating a network of "rooms" within a coal seam,
leaving behind "pillars" of coal used to support the roof of a mine. |
Unassigned reserves |
|
Recoverable reserves that have not yet been designated for mining by a specific operation. |
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ITEM 1A. RISK FACTORS.
Our business involves certain risks and uncertainties. In addition to the risks and uncertainties described below, we may face other
risks and uncertainties, some of which may be unknown to us and some of which we may deem immaterial. If one or more of these risks or uncertainties occur, our business, financial condition or results
of operations may be materially and adversely affected.
Risks Related to Our Operations
Coal prices are subject to change and a substantial or extended decline in prices could materially and adversely affect our profitability and the value of our coal reserves.
Our profitability and the value of our coal reserves depend upon the prices we receive for our coal. The contract prices we may receive
in the future for coal depend upon factors beyond our control, including the following:
- •
- the domestic and foreign supply and demand for coal;
- •
- the domestic and foreign demand for electricity and steel;
- •
- the quantity and quality of coal available from competitors;
- •
- competition for production of electricity from non-coal sources, including the price and availability of
alternative fuels;
- •
- domestic and foreign air emission standards for coal-fueled power plants and the ability of
coal-fueled power plants to meet these standards;
- •
- adverse weather, climatic or other natural conditions, including unseasonable weather patterns;
- •
- domestic and foreign economic conditions, including economic slowdowns;
- •
- domestic and foreign legislative, regulatory and judicial developments, environmental regulatory changes or changes in
energy policy and energy conservation measures that would adversely affect the coal industry, such as legislation limiting carbon emissions or providing for increased funding and incentives for
alternative energy sources;
- •
- the proximity to, capacity of and cost of transportation and port facilities; and
- •
- market price fluctuations for sulfur dioxide emission allowances.
A
substantial or extended decline in the prices we receive for our future coal sales contracts could materially and adversely affect us by decreasing our profitability and the value of
our coal reserves.
Our coal mining operations are subject to operating risks that are beyond our control, which could result in materially increased operating expenses and decreased production
levels and could materially and adversely affect our profitability.
We mine coal at underground and surface mining operations. Certain factors beyond our control, including those listed below, could
disrupt our coal mining operations, adversely affect production and shipments and increase our operating costs:
- •
- poor mining conditions resulting from geological, hydrologic or other conditions that may cause instability of highwalls
or spoil piles or cause damage to nearby infrastructure or mine personnel;
- •
- a major incident at the mine site that causes all or part of the operations of the mine to cease for some period of time;
- •
- mining, processing and plant equipment failures and unexpected maintenance problems;
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- •
- adverse weather and natural disasters, such as heavy rains or snow, flooding and other natural events affecting
operations, transportation or customers;
- •
- unexpected or accidental surface subsidence from underground mining;
- •
- accidental mine water discharges, fires, explosions or similar mining accidents; and
- •
- competition and/or conflicts with other natural resource extraction activities and production within our operating areas,
such as coalbed methane extraction or oil and gas development.
If
any of these conditions or events occurs, particularly at our Black Thunder mining complex, which accounted for approximately 70% of the coal volume we sold in 2012, our coal mining
operations may be disrupted and we could experience a delay or halt of production or shipments or our operating costs could increase significantly. In addition, if our insurance coverage is limited or
excludes certain of these conditions or events, then we may not be able to recover any of the losses we may incur as a result of such conditions or events, some of which may be substantial.
Competition could put downward pressure on coal prices and, as a result, materially and adversely affect our revenues and profitability.
We compete with numerous other domestic and foreign coal producers for domestic and international sales. Overcapacity and increased
production within the coal industry, both domestically and internationally, could materially reduce coal prices and therefore materially reduce our revenues and profitability. In addition, our ability
to ship our coal to international customers depends on port capacity, which is limited. Increased competition within the coal industry for international sales could result in us not being able to
obtain throughput capacity at port facilities, or the rates for such throughput capacity to increase to a point where it is not economically feasible to export our coal.
In
addition to competing with other coal producers, we compete generally with producers of other fuels, such as natural gas. A decline in the price of natural gas, or sustained low
natural gas prices, could cause demand for coal to decrease and adversely affect the price of our coal. For example, the average wellhead price of natural gas in 2012 was $2.52 (EIA,
Jan-Oct 2012), compared to $4.48 and $3.95 in 2010 and 2011, respectively, leading to, in some instances, fuel switching and decreased coal consumption by electricity-generating utilities.
Sustained low natural gas prices may also cause utilities to phase out or close existing coal-fired power plants or reduce construction of any new coal-fired power plants,
which could have a material adverse effect on demand and prices for our coal.
Unfavorable economic and market conditions could adversely affect our revenues and profitability.
The recent global economic recession and credit market tightening has had a negative impact on both the coal industry and on various
customers. If any of these conditions persist or worsen, or if there are downturns in economic conditions, our business, financial condition or results of operations could be adversely affected.
During unfavorable economic conditions we are focused on cost control and capital discipline, but there can be no assurance that these actions, or any other actions that we may take, will be
sufficient to offset any adverse affect these conditions may have on our business, financial condition or results of operations.
Any change in the coal consumption of electric power generators could result in less demand and lower prices for coal, which could materially and adversely affect our
revenues and results of operations.
Thermal coal accounted for the majority of our coal sales during 2012. The majority of these sales were to electric power generators.
The amount of coal consumed for electric power generation is affected primarily by the overall demand for electricity, the availability, quality and price of competing fuels for power generation and
governmental regulations. Gas-fueled generation has the potential to displace coal-fueled generation, particularly from older, less efficient coal-powered
generators. We expect that many of the new power plants needed in the
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United
States to meet increasing demand for electricity generation will be fueled by natural gas because gas-fired plants are cheaper to construct and permits to construct these plants are
easier to obtain as natural gas is seen as having a lower environmental impact than coal-fueled generators. In addition, state and federal mandates for increased use of electricity from
renewable energy sources could have an impact on the market for our coal. Several states have enacted legislative mandates requiring electricity suppliers to use renewable energy sources to generate a
certain percentage of power. There have been numerous proposals to establish a similar uniform, national standard although none of these proposals have been enacted to date. Possible advances in
technologies and incentives, such as tax credits, to enhance the economics of renewable energy sources could make these sources more competitive with coal. Any reduction in the amount of coal consumed
by electric power generators could reduce the price of coal that we mine and sell, thereby reducing our revenues and materially and adversely affecting our business and results of operations.
A decline in demand for metallurgical coal would limit our ability to sell our coal into higher-priced metallurgical markets and could substantially affect our business.
Portions of our coal reserves possess quality characteristics that enable us to mine, process and market them as either metallurgical
coal or high quality steam coal, depending on the prevailing conditions in the metallurgical and steam coal markets. We decide whether to mine, process and market these coals as metallurgical or steam
coal based on management's assessment as to which market is likely to provide us with a higher margin. We consider a number of factors when making this assessment, including the difference between the
current and anticipated future market prices of steam coal and metallurgical coal and the increased costs incurred in producing coal for sale in the metallurgical market instead of the steam market. A
decline in the metallurgical market relative to the steam market could cause us, as well as our competitors, to shift coal from the metallurgical market to the steam market, thereby reducing our
revenues and profitability and increasing the availability of coal to customers in the steam market.
Our inability to acquire additional coal reserves or our inability to develop coal reserves in an economically feasible manner may adversely affect our business.
Our profitability depends substantially on our ability to mine and process, in a cost-effective manner, coal reserves that
possess the quality characteristics desired by our customers. As we mine, our coal reserves decline. As a result, our future success depends upon our ability to acquire additional coal that is
economically recoverable. If we fail to acquire or develop additional coal reserves, our existing reserves will eventually be depleted. We may not be able to obtain replacement reserves when we
require them. If available, replacement reserves may not be available at favorable prices, or we may not be capable of mining those reserves at costs that are comparable with our existing coal
reserves. Our ability to obtain coal reserves in the future could also be limited by the availability of cash we generate from our operations or available financing, restrictions under our existing or
future financing arrangements, and competition from other coal producers, the lack of suitable acquisition or lease-by-application, or LBA, opportunities or the inability to
acquire coal properties or LBAs on commercially reasonable terms. If we are unable to acquire replacement reserves, our future production may decrease significantly and our operating results may be
negatively affected. In addition, we may not be able to mine future reserves as profitably as we do at our current operations.
Inaccuracies in our estimates of our coal reserves could result in decreased profitability from lower than expected revenues or higher than expected costs.
Our future performance depends on, among other things, the accuracy of our estimates of our proven and probable coal reserves. We base
our estimates of reserves on engineering, economic and geological data assembled, analyzed and reviewed by internal and third-party engineers and consultants. We update our estimates of the quantity
and quality of proven and probable coal reserves annually to reflect the production of coal from the reserves, updated geological models and mining recovery data, the tonnage contained in new lease
areas acquired
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and
estimated costs of production and sales prices. There are numerous factors and assumptions inherent in estimating the quantities and qualities of, and costs to mine, coal reserves, including many
factors beyond our control, including the following:
- •
- quality of the coal;
- •
- geological and mining conditions, which may not be fully identified by available exploration data and/or may differ from
our experiences in areas where we currently mine;
- •
- the percentage of coal ultimately recoverable;
- •
- the assumed effects of regulation, including the issuance of required permits, taxes, including severance and excise taxes
and royalties, and other payments to governmental agencies;
- •
- assumptions concerning the timing for the development of the reserves; and
- •
- assumptions concerning equipment and productivity, future coal prices, operating costs, including for critical supplies
such as fuel, tires and explosives, capital expenditures and development and reclamation costs.
As
a result, estimates of the quantities and qualities of economically recoverable coal attributable to any particular group of properties, classifications of reserves based on risk of
recovery, estimated cost of production, and estimates of future net cash flows expected from these properties as prepared by different engineers, or by the same engineers at different times, may vary
materially due to changes in the above factors and assumptions. Actual production recovered from identified reserve areas and properties, and revenues and expenditures associated with our mining
operations, may vary materially from estimates. Any inaccuracy in our estimates related to our reserves could result in decreased profitability from lower than expected revenues and/or higher than
expected costs.
Increases in the costs of mining and other industrial supplies, including steel-based supplies, diesel fuel and rubber tires, or the inability to obtain a sufficient
quantity of those supplies, could negatively affect our operating costs or disrupt or delay our production.
Our coal mining operations use significant amounts of steel, diesel fuel, explosives, rubber tires and other mining and industrial
supplies. The cost of roof bolts we use in our underground mining operations depend on the price of scrap steel. We also use significant amounts of diesel fuel and tires for the trucks and other heavy
machinery we use, particularly at our Black Thunder mining complex. If the prices of mining and other industrial supplies, particularly steel-based supplies, diesel fuel and rubber tires, increase,
our operating costs could be negatively affected. In addition, if we are unable to procure these supplies, our coal mining operations may be disrupted or we could experience a delay or halt in our
production.
Disruptions in the quantities of coal produced by our contract mine operators or purchased from other third parties could temporarily impair our ability to fill customer
orders or increase our operating costs.
We use independent contractors to mine coal at certain of our mining complexes, including select operations in our Appalachian segment.
In addition, we purchase coal from third parties that we sell to our customers. Operational difficulties at contractor-operated mines or mines operated by third parties from whom we purchase coal,
changes in demand for contract miners from other coal producers and other factors beyond our control could affect the availability, pricing, and quality of coal produced for or purchased by us.
Disruptions in the quantities of coal produced for or purchased by us could impair our ability to fill our customer orders or require us to purchase coal from other sources in order to satisfy those
orders. If we are unable to fill a customer order or if we are required to purchase coal from other sources in order to satisfy a customer order, we could lose existing customers and our operating
costs could increase.
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Our ability to collect payments from our customers could be impaired if their creditworthiness deteriorates.
Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers. If we determine
that a customer is not creditworthy, we may not be required to deliver coal under the customer's coal sales contract. If this occurs, we may decide to sell the customer's coal on the
spot market, which may be at prices lower than the contracted price, or we may be unable to sell the coal at all. Furthermore, the bankruptcy of any of our customers could materially and adversely
affect our financial position.
In
addition, our customer base may change with deregulation as utilities sell their power plants to their non-regulated affiliates or third parties that may be less
creditworthy, thereby increasing the risk we bear for customer payment default. Some power plant owners may have credit ratings that are below investment grade, or may become below investment grade
after we enter into contracts with them. In addition, competition with other coal suppliers could force us to extend credit to customers and on terms that could increase the risk of payment default.
Customers in other countries may also be subject to other pressures and uncertainties that may affect their ability to pay, including trade barriers, exchange controls and local economic and political
conditions.
A defect in title or the loss of a leasehold interest in certain property could limit our ability to mine our coal reserves or result in significant unanticipated costs.
We conduct a significant part of our coal mining operations on properties that we lease. A title defect or the loss of a lease could
adversely affect our ability to mine the associated coal reserves. We may not verify title to our leased properties or associated coal reserves until we have committed to developing those properties
or coal reserves. We may not commit to develop property or coal reserves until we have obtained necessary permits and completed exploration. As such, the title to property that we intend to lease or
coal reserves that we intend to mine may contain defects prohibiting our ability to conduct mining operations. Similarly, our leasehold interests may be subject to superior property rights of other
third parties. In order to conduct our mining operations on properties where these defects exist, we may incur unanticipated costs. In addition, some leases require us to produce a minimum quantity of
coal and require us to pay minimum production royalties. Our inability to satisfy those requirements may cause the leasehold interest to terminate.
The availability, reliability and cost-effectiveness of transportation facilities and fluctuations in transportation costs could affect the demand for our coal
or impair our ability to supply coal to our customers.
We depend upon barge, ship, rail, truck and belt transportation systems, as well as seaborne vessels and port facilities, to deliver
coal to our customers. Disruptions in transportation services due to weather-related problems, mechanical difficulties, strikes, lockouts, bottlenecks, and other events beyond our control could impair
our ability to supply coal to our customers. Since we do not have long-term contracts with all transportation providers we utilize, decreased performance levels over longer periods of time
could cause our customers to look to other sources for their coal needs. In addition, increases in transportation costs, including the price of gasoline and diesel fuel, could make coal a less
competitive source of energy when compared to alternative fuels or could make coal produced in one region of the United States less competitive than coal produced in other regions of the United States
or abroad. If we experience disruptions in our transportation services or if transportation costs increase significantly and we are unable to find alternative transportation providers, our coal
mining operations may be disrupted, we could experience a delay or halt of production or our profitability could decrease significantly.
In
addition, a growing portion of our coal sales in recent years has been into export markets, and we are actively seeking additional international customers. Our ability to maintain and
grow our export sales revenue and margins depends on a number of factors, including the existence of sufficient and cost-effective export terminal capacity for the shipment of coal to
foreign markets. At present, there is limited terminal capacity for the export of coal into foreign markets. Our access to existing and any future terminal capacity may be adversely affected by
regulatory and permit requirements, environmental and other legal challenges, public perceptions and resulting political pressures, operational issues at terminals and competition among domestic coal
producers for access to
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limited
terminal capacity, among other factors. If we are unable to maintain terminal capacity, or are unable to access additional future terminal capacity for the export of our coal on commercially
reasonable terms, or at all, our results could be materially and adversely affected.
From
time to time we enter into "take-or-pay" contracts for rail and port capacity related to our export sales. These contracts require us to pay for a minimum
quantity of coal to be transported on the railway or through the port regardless of whether we sell and ship any coal. If we fail to acquire sufficient export sales to meet our minimum obligations
under these contracts we are still obligated to make payments to the railway or port facility, which could have a negative impact on our cash flows, profitability and results of operations.
Our profitability depends upon the long-term coal supply agreements we have with our customers. Changes in purchasing patterns in the coal industry could make it
difficult for us to extend our existing long-term coal supply agreements or to enter into new agreements in the future.
We sell a portion of our coal under long-term coal supply agreements, which we define as contracts with terms greater than
one year. Under these arrangements, we fix the prices of coal shipped during the initial year and may adjust the prices in later years. As a result, at any given time the market prices for
similar-quality coal may exceed the prices for coal shipped under these arrangements. Changes in the coal industry may cause some of our customers not to renew, extend or enter into new
long-term coal supply agreements with us or to enter into agreements to purchase fewer tons of coal than in the past or on different terms or prices. In addition, uncertainty caused by
federal and state
regulations, including the Clean Air Act, could deter our customers from entering into long-term coal supply agreements.
Because
we sell a portion of our coal production under long-term coal supply agreements, our ability to capitalize on more favorable market prices may be limited. Conversely,
at any given time we are subject to fluctuations in market prices for the quantities of coal that we have produced or plan to produce but which we have not committed to sell. As described above under
"A substantial or extended decline in coal prices could negatively affect our profitability and the value of our coal reserves," the market prices for coal may be volatile and may depend upon factors
beyond our control. Our profitability may be adversely affected if we are unable to sell uncommitted production at favorable prices or at all.
Our
long-term coal supply agreements typically contain force majeure provisions allowing the parties to temporarily suspend
performance during specified events beyond their control. Most of our long-term coal supply agreements also contain provisions requiring us to deliver coal that satisfies certain quality
specifications, such as heat value, sulfur content, ash content, hardness and ash fusion temperature. These provisions in our long-term coal supply agreements could result in negative
economic consequences to us, including price adjustments, purchasing replacement coal in a higher-priced open market, the rejection of deliveries or, in the extreme, contract termination. Our
profitability may be negatively affected if we are unable to seek protection during adverse economic conditions or if we incur financial or other economic penalties as a result of these provisions of
our long-term supply agreements. For more information about our long-term coal supply agreements, you should see the section entitled "Long-Term Coal Supply
Arrangements."
The loss of, or significant reduction in, purchases by our largest customers could adversely affect our profitability.
For the year ended December 31, 2012, we derived approximately 16% of our total coal revenues from sales to our three largest
customers and approximately 36% of our total coal revenues from sales to our ten largest customers. We are currently discussing the extension of coal sales agreements with some of these customers.
However, we may be unsuccessful in obtaining coal supply agreements with those customers, and some or all of these customers could discontinue purchasing coal from us. If any of those customers,
particularly any of our three largest customers, was to significantly reduce the quantities of coal it purchases from us, or if we are unable to sell coal to those customers on terms as favorable to
us, it may have an adverse impact on the results of our business.
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Failure to obtain or renew surety bonds on acceptable terms could affect our ability to secure reclamation and coal lease obligations and, therefore, our ability to mine or
lease coal.
Federal and state laws require us to obtain surety bonds or post letters of credit to secure performance or payment of certain
long-term obligations, such as mine closure or reclamation costs, federal and state workers' compensation costs, coal leases and other obligations. We may have difficulty procuring or
maintaining our surety bonds. Our bond issuers may demand higher fees, additional collateral, including letters of credit or other terms less favorable to us upon renewal of bonds. Because we are
required by state and federal law to have these bonds in place before mining can commence or continue, our failure to maintain surety bonds, letters of credit or other guarantees or security
arrangements would materially and adversely affect our ability to mine or lease coal. That failure could result from a variety of factors, including lack of availability, higher expense or unfavorable
market terms, the exercise by third party surety bond issuers of their right to refuse to renew the surety and restrictions on availability of collateral for current and future third party surety bond
issuers under the terms of our financing arrangements.
Under certain circumstances, we could be responsible for certain retiree medical benefits assumed by Magnum Coal Company.
On December 31, 2005, Arch entered into a purchase and sale agreement with Magnum Coal Company to sell certain assets. On
July 23, 2008, Patriot Coal Corporation ("Patriot") acquired Magnum Coal Company. On July 9, 2012, Patriot and certain of its wholly owned subsidiaries, including Magnum Coal Company,
filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York. Should Patriot not emerge from bankruptcy, or
if it is incapable of paying retiree medical benefits pursuant to Section 9711 of the Coal Industry Retiree Health Benefit Act of 1992 to a certain subset of retirees, we could become
responsible for certain of their retiree medical obligations for retirees of Magnum who retired prior to October 1, 1994. We do not have the necessary information to perform an actuarial
estimate of the cost of such benefits.
We may incur losses as a result of certain marketing, trading and asset optimization strategies.
We seek to optimize our coal production and leverage our knowledge of the coal industry through a variety of marketing, trading and
other asset optimization strategies. We maintain a system of complementary processes and controls designed to monitor and control our exposure to market and other risks as a consequence of these
strategies. These processes and controls seek to balance our ability to profit from certain marketing, trading and asset optimization strategies with our exposure to potential losses. While we employ
a variety of risk monitoring and mitigation techniques, those techniques and accompanying judgments cannot anticipate every potential outcome or the timing of such outcomes. In addition, the processes
and controls that we
use to manage our exposure to market and other risks resulting from these strategies involve assumptions about the degrees of correlation or lack thereof among prices of various assets or other market
indicators. These correlations may change significantly in times of market turbulence or other unforeseen circumstances. As a result, we may experience volatility in our earnings as a result of our
marketing, trading and asset optimization strategies.
Recent international growth in our operations adds new and unique risks to our business.
We have recently opened offices in Singapore and the United Kingdom. The international expansion of our operations increases our
exposure to country and currency risks. In addition, our international offices are selling our coal to new customers and customers in new countries, whose business practices and reputations are not as
well known to us. We are also challenged by political risks by expanding internationally, including the potential for expropriation of assets and limits on the repatriation of earnings. In the event
that we are unable to effectively manage these new risks, our results of operations, financial position or cash flow could be adversely affected by these activities.
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Risks Related to Our Indebtedness
The amount of indebtedness we have incurred could significantly affect our business.
At December 31, 2012, we had consolidated indebtedness of approximately $5.1 billion. We also have significant lease and
royalty obligations. Our ability to satisfy our debt, lease and royalty obligations, and our ability to refinance our indebtedness, will depend upon our future operating performance. Our ability to
satisfy our financial obligations may be adversely affected if we incur additional indebtedness in the future. In addition, the amount of indebtedness we have incurred could have significant
consequences to us, such as:
- •
- limiting our ability to obtain additional financing to fund growth, such as new LBA acquisitions or other mergers and
acquisitions, working capital, capital expenditures, debt service requirements or other cash requirements;
- •
- exposing us to the risk of increased interest costs if the underlying interest rates rise;
- •
- limiting our ability to invest operating cash flow in our business due to existing debt service requirements;
- •
- making it more difficult to obtain surety bonds, letters of credit or other financing, particularly during weak credit
markets;
- •
- causing a decline in our credit ratings;
- •
- limiting our ability to compete with companies that are not as leveraged and that may be better positioned to withstand
economic downturns;
- •
- limiting our ability to acquire new coal reserves and/or plant and equipment needed to conduct operations; and
- •
- limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business,
the industry in which we compete and general economic and market conditions.
If
we further increase our indebtedness, the related risks that we now face, including those described above, could intensify. In addition to the principal repayments on our outstanding
debt, we have other demands on our cash resources, including capital expenditures and operating expenses. Our ability to pay our debt depends upon our operating performance. In particular, economic
conditions could cause our revenues to decline, and hamper our ability to repay our indebtedness. If we do not have enough cash to satisfy our debt service obligations, we may be required to refinance
all or part of our debt, sell assets or reduce our spending. We may not be able to, at any given time, refinance our debt or sell assets on terms acceptable to us or at all.
We may be unable to comply with restrictions imposed by our credit facilities and other financing arrangements.
The agreements governing our outstanding financing arrangements impose a number of restrictions on us. For example, the terms of our
credit facilities, leases and other financing arrangements contain financial and other covenants that create limitations on our ability to borrow the full amount under our credit facilities, effect
acquisitions or dispositions and incur additional debt and require us to maintain minimum levels of liquidity and various financial ratios and comply with various other financial covenants. Our
ability to comply with these restrictions may be affected by events beyond our control. A failure to comply with these restrictions could adversely affect our ability to borrow under our credit
facilities or result in an event of default under these agreements. In the event of a default, our lenders and the counterparties to our other financing arrangements could terminate their commitments
to us and declare all amounts borrowed, together with accrued interest and fees, immediately due and payable. If this were to occur, we might not be able to pay these amounts, or we might be forced to
seek an amendment to our financing arrangements which could make the terms of these arrangements more onerous for us. As a result, a default under one or more of our existing or future financing
arrangements could have significant consequences for us. For more information about some of the restrictions contained in our
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credit
facilities, leases and other financial arrangements, you should see the section entitled "Liquidity and Capital Resources."
Risks Related to Environmental, Other Regulations and Legislation
Extensive environmental regulations, including existing and potential future regulatory requirements relating to air emissions, affect our customers and could reduce the
demand for coal as a fuel source and cause coal prices and sales of our coal to materially decline.
Coal contains impurities, including but not limited to sulfur, mercury, chlorine and other elements or compounds, many of which are
released into the air when coal is burned. The operations of our customers are subject to extensive environmental regulation particularly with respect to air emissions. For example, the federal Clean
Air Act and similar state and local laws extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, and other compounds emitted into the air from electric power plants,
which are the largest end-users of our coal. A series of more stringent requirements relating to particulate matter, ozone, haze, mercury, sulfur dioxide, nitrogen oxide and other air
pollutants are expected to be proposed or become effective in coming years. In addition, concerted conservation efforts that result in reduced electricity consumption could cause coal prices and sales
of our coal to materially decline.
Considerable
uncertainty is associated with these air emissions initiatives. The content of regulatory requirements in the United States is in the process of being developed, and many
new regulatory initiatives remain subject to review by federal or state agencies or the courts. Stringent air emissions limitations are either in place or are likely to be imposed in the short to
medium term, and these limitations will likely require significant emissions control expenditures for many coal-fueled power plants. As a result, these power plants may switch to other
fuels that generate fewer of these emissions or may install more effective pollution control equipment that reduces the need for low sulfur coal, possibly reducing future demand for coal and a reduced
need to construct new coal-fueled power plants. The EIA's expectations for the coal industry assume there will be a significant number of as yet unplanned coal-fired plants
built in the future which may not occur. Any switching of fuel sources away from coal, closure of existing coal-fired plants, or reduced construction of new plants could have a material
adverse effect on demand for and prices received for our coal. Alternatively, less stringent air emissions limitations, particularly related to sulfur, to the extent enacted could make low sulfur coal
less attractive, which could also have a material adverse effect on the demand for and prices received for our coal.
You
should see "Environmental and Other Regulatory Matters" for more information about the various governmental regulations affecting us.
Our failure to obtain and renew permits necessary for our mining operations could negatively affect our business.
Mining companies must obtain numerous permits that impose strict regulations on various environmental and operational matters in
connection with coal mining. These include permits issued by various federal, state and local agencies and regulatory bodies. The permitting rules, and the interpretations of these rules, are complex,
change frequently and are often subject to discretionary interpretations by the regulators, all of which may make compliance more difficult or impractical, and may possibly preclude the continuance of
ongoing
operations or the development of future mining operations. The public, including non-governmental organizations, anti-mining groups and individuals, have certain statutory
rights to comment upon and submit objections to requested permits and environmental impact statements prepared in connection with applicable regulatory processes, and otherwise engage in the
permitting process, including bringing citizens' lawsuits to challenge the issuance of permits, the validity of environmental impact statements or performance of mining activities. Accordingly,
required permits may not be issued or renewed in a timely fashion or at all, or permits issued or renewed may be conditioned in a manner that may restrict our ability to efficiently and economically
conduct our mining activities, any of which would materially reduce our production, cash flow and profitability.
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Federal or state regulatory agencies have the authority to order certain of our mines to be temporarily or permanently closed under certain circumstances, which could
materially and adversely affect our ability to meet our customers' demands.
Federal or state regulatory agencies have the authority under certain circumstances following significant health and safety incidents,
such as fatalities, to order a mine to be temporarily or permanently closed. If this occurred, we may be required to incur capital expenditures to re-open the mine. In the event that these
agencies order the closing of our mines, our coal sales contracts generally permit us to issue force majeure notices which suspend our obligations to
deliver coal under these contracts. However, our customers may challenge our issuances of force majeure notices. If these challenges are successful, we
may have to purchase coal from third-party sources, if it is available, to fulfill these obligations, incur capital expenditures to re-open the mines and/or negotiate settlements with the
customers, which may include price reductions, the reduction of commitments or the extension of time for delivery or terminate customers' contracts. Any of these actions could have a material adverse
effect on our business and results of operations.
Extensive environmental regulations impose significant costs on our mining operations, and future regulations could materially increase those costs or limit our ability to
produce and sell coal.
The coal mining industry is subject to increasingly strict regulation by federal, state and local authorities with respect to
environmental matters such as:
- •
- limitations on land use;
- •
- mine permitting and licensing requirements;
- •
- reclamation and restoration of mining properties after mining is completed;
- •
- management of materials generated by mining operations;
- •
- the storage, treatment and disposal of wastes;
- •
- remediation of contaminated soil and groundwater;
- •
- air quality standards;
- •
- water pollution;
- •
- protection of human health, plant-life and wildlife, including endangered or threatened species;
- •
- protection of wetlands;
- •
- the discharge of materials into the environment;
- •
- the effects of mining on surface water and groundwater quality and availability; and
- •
- the management of electrical equipment containing polychlorinated biphenyls.
The
costs, liabilities and requirements associated with the laws and regulations related to these and other environmental matters may be costly and time-consuming and may
delay commencement or continuation of exploration or production operations. We cannot assure you that we have been or will be at all times in compliance with the applicable laws and regulations.
Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of cleanup and site restoration costs and liens, the
issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting production from our operations. We
may incur material costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. If we are pursued for sanctions, costs and liabilities in
respect of these matters, our mining operations and, as a result, our profitability could be materially and adversely affected.
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New
legislation or administrative regulations or new judicial interpretations or administrative enforcement of existing laws and regulations, including proposals related to the
protection of the environment that would further regulate and tax the coal industry, may also require us to change operations significantly or incur increased costs. Such changes could have a material
adverse effect on our financial condition and results of operations. You should see the section entitled "Environmental and Other Regulatory Matters" for more information about the various
governmental regulations affecting us.
If the assumptions underlying our estimates of reclamation and mine closure obligations are inaccurate, our costs could be greater than anticipated.
SMCRA and counterpart state laws and regulations establish operational, reclamation and closure standards for all aspects of surface
mining, as well as most aspects of underground mining. We base our estimates of reclamation and mine closure liabilities on permit requirements, engineering studies and our engineering expertise
related to these requirements. Our management and engineers periodically review these estimates. The estimates can change significantly if actual costs vary from our original assumptions or if
governmental regulations change significantly. We are required to record new obligations as liabilities at fair value under generally accepted accounting principles. In estimating fair value, we
considered the estimated current costs of reclamation and mine closure and applied inflation rates and a third-party profit, as required. The third-party profit is an estimate of the approximate
markup that would be charged by contractors for work performed on our behalf. The resulting estimated reclamation and mine closure obligations could change significantly if actual amounts change
significantly from our assumptions, which could have a material adverse effect on our results of operations and financial condition.
Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have environmental contamination, which could result in material
liabilities to us.
Our operations currently use hazardous materials and generate limited quantities of hazardous wastes from time to time. We could become
subject to claims for toxic torts, natural resource damages and other damages as well as for the investigation and cleanup of soil, surface water, groundwater, and other media. Such claims may arise,
for example, out of conditions at sites that we currently own or operate, as well as at sites that we previously owned or operated, or may acquire. Our liability for such claims may be joint and
several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.
We
maintain extensive coal refuse areas and slurry impoundments at a number of our mining complexes. Such areas and impoundments are subject to extensive regulation. Slurry impoundments
can fail, which could release large volumes of coal slurry into the surrounding environment. Structural failure of an impoundment can result in extensive damage to the environment and natural
resources, such as bodies of water that the coal slurry reaches, as well as liability for related personal injuries and property damages, and injuries to wildlife. Some of our impoundments overlie
mined out areas, which can pose a heightened risk of failure and of damages arising out of failure. If one of our impoundments were to fail, we could be subject to substantial claims for the resulting
environmental contamination and associated liability, as well as for fines and penalties.
Drainage
flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a condition referred to as "acid mine drainage," which we refer to as AMD.
The treating of AMD can be costly.
Although we do not currently face material costs associated with AMD, it is possible that we could incur significant costs in the future.
These
and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could
result in costs and liabilities that could materially and adversely affect us.
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Judicial rulings that restrict how we may dispose of mining wastes could significantly increase our operating costs, discourage customers from purchasing our coal and
materially harm our financial condition and operating results.
To dispose of mining overburden generated by our surface mining operations, we often need to obtain permits to construct and operate
valley fills and surface impoundments. Some of these permits are Clean Water Act § 404 permits issued by the Army Corps of Engineers. Two of our operating subsidiaries were
identified in an existing lawsuit, which challenged the issuance of such permits and asked that the Corps be ordered to rescind them. Two of our operating subsidiaries intervened in the suit to
protect their interests in being allowed to operate under the issued permits, and one of them thereafter was dismissed. On February 13, 2009, the U.S. Court of Appeals for the Fourth Circuit
ruled on appeals from decisions rendered prior to our intervention, which may have a favorable impact on our permits. The matter is pending before the U.S. District Court for the Southern District of
West Virginia on Mingo Logan's motion for summary judgment. If the matter is resolved ultimately in a manner that is adverse to the interests of our operating subsidiaries, their operating results may
be adversely impacted.
Changes in the legal and regulatory environment could complicate or limit our business activities, increase our operating costs or result in litigation.
The conduct of our businesses is subject to various laws and regulations administered by federal, state and local governmental agencies
in the United States. These laws and regulations may change, sometimes dramatically, as a result of political, economic or social events or in response to significant events. Certain recent
developments particularly may cause changes in the legal and regulatory environment in which we operate and may impact our results or increase our costs or liabilities. Such legal and regulatory
environment changes may include changes in: the processes for obtaining or renewing permits; costs associated with providing healthcare
benefits to employees; health and safety standards; accounting standards; taxation requirements; and competition laws.
For
example, in April 2010, the EPA issued comprehensive guidance regarding the water quality standards that EPA believes should apply to certain new and renewed Clean Water Act permit
applications for Appalachian surface coal mining operations. Under the EPA's guidance, applicants seeking to obtain state and federal Clean Water Act permits for surface coal mining in Appalachia must
perform an evaluation to determine if a reasonable potential exists that the proposed mining would cause a violation of water quality standards. According to the EPA Administrator, the water quality
standards set forth in the EPA's guidance may be difficult for most surface mining operations to meet. Additionally, the EPA's guidance contains requirements for the avoidance and minimization of
environmental and mining impacts, consideration of the full range of potential impacts on the environment, human health and local communities, including low-income or minority populations,
and provision of meaningful opportunities for public participation in the permit process. The EPA's guidance is subject to several pending legal challenges related to its legal effect and sufficiency
including consolidated challenges pending in the United States Court of Appeals for the District of Columbia Circuit led by the National Mining Association. We may be required to meet these
requirements in the future in order to obtain and maintain permits that are important to our Appalachian operations. We cannot give any assurance that we will be able to meet these or any other new
standards.
In
response to the April 2010 explosion at Massey Energy Company's Upper Big Branch Mine and the ensuing tragedy, we expect that safety matters pertaining to underground coal mining
operations will continue to be the topic of new legislation and regulation, as well as the subject of heightened enforcement efforts. For example, federal and West Virginia state authorities have
announced special inspections of coal mines to evaluate several safety concerns, including the accumulation of coal dust and the proper ventilation of gases such as methane. In addition, both federal
and West Virginia state authorities have announced that they are considering changes to mine safety rules and regulations which could potentially result in additional or enhanced required safety
equipment, more frequent mine inspections, stricter and more thorough enforcement practices and enhanced reporting requirements. Any new environmental, health and safety requirements may increase the
costs associated with obtaining or maintain permits necessary to perform our mining operations or otherwise may prevent, delay or
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reduce
our planned production, any of which could adversely affect our financial condition, results of operations and cash flows.
Further,
mining companies are entitled a tax deduction for percentage depletion, which may allow for depletion deductions in excess of the basis in the mineral reserves. The deduction is
currently being reviewed by the federal government for repeal. If repealed, the inability to take a tax deduction for percentage depletion could have a material impact on our financial condition,
results of operations, cash flows and future tax payments.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our Properties
At December 31, 2012, we owned or controlled primarily through long-term leases approximately 32,135 acres of coal
land in Ohio, 25,104 acres of coal land in Maryland, 46,716 acres of coal land in Virginia, 418,713 acres of coal land in West Virginia, 107,641 acres of coal land in Wyoming, 267,571 acres of coal
land in Illinois, 62,010 acres of coal land in Utah, 239,863 acres of coal land in Kentucky, 19,428 acres of coal land in Montana, 21,802 acres of coal land in New Mexico, and 18,443 acres of coal
land in Colorado. In addition, we also owned or controlled through long-term leases smaller parcels of property in Alabama, Indiana, Washington, Arkansas, California, and Texas. We lease
approximately 124,353 acres of our coal land from the federal government and approximately 36,364 acres of our coal land from various state governments. Certain of our preparation plants or loadout
facilities are located on properties held under leases which expire at varying dates over the next 30 years. Most of the leases contain options to renew. Our remaining preparation plants and
loadout facilities are located on property owned by us or for which we have a special use permit.
Our
executive headquarters occupy approximately 92,900 square feet of leased space at One CityPlace Drive, in St. Louis, Missouri. Our subsidiaries currently own or lease the
equipment utilized in their mining operations. You should see "Our Mining Operations" for more information about our mining operations, mining complexes and transportation facilities.
Our Coal Reserves
We estimate that we owned or controlled approximately 5.5 billion tons of proven and probable recoverable reserves at
December 31, 2012. Our coal reserve estimates at December 31, 2012 were prepared by our engineers and geologists and reviewed by Weir International, Inc., a mining and geological
consultant. Our coal reserve estimates are based on data obtained from our drilling activities and other available geologic data. Our coal reserve estimates are periodically updated to reflect past
coal production and other geologic and mining data. Acquisitions or sales of coal properties will also change these estimates. Changes in mining methods or the utilization of new technologies may
increase or decrease the recovery basis for a coal seam.
Our
coal reserve estimates include reserves that can be economically and legally extracted or produced at the time of their determination. In determining whether our reserves meet this
standard, we take into account, among other things, our potential inability to obtain a mining permit, the possible necessity of revising a mining plan, changes in estimated future costs, changes in
future cash flows caused by changes in costs required to be incurred to meet regulatory requirements and obtaining mining permits, variations in quantity and quality of coal, and varying levels of
demand and their effects on selling prices. We use various assumptions in preparing our estimates of our coal reserves. You should see "Inaccuracies in our estimates of our coal reserves could result
in decreased profitability from lower than expected revenues or higher than expected costs" contained under the heading "Risk Factors."
46
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The
following tables present our estimated assigned and unassigned recoverable coal reserves at December 31, 2012:
Total Assigned Reserves
(Tons in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur Content
(lbs. per million
Btus) |
|
|
|
|
|
|
|
Mining Method |
|
Past Reserve
Estimates(2) |
|
|
|
Total
Assigned
Recoverable
Reserves |
|
|
|
|
|
|
|
Reserve Control |
|
|
|
|
|
|
|
As Received
Btus per lb.(1) |
|
|
|
Under-
ground |
|
|
|
Proven |
|
Probable |
|
<1.2 |
|
1.2 - 2.5 |
|
>2.5 |
|
Leased |
|
Owned |
|
Surface |
|
2010 |
|
2011 |
|
Wyoming |
|
|
1,636 |
|
|
1,607 |
|
|
29 |
|
|
1,550 |
|
|
86 |
|
|
— |
|
|
8,869 |
|
|
1,636 |
|
|
— |
|
|
1,636 |
|
|
— |
|
|
1,605 |
|
|
1,474 |
|
Montana |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Utah |
|
|
74 |
|
|
49 |
|
|
25 |
|
|
65 |
|
|
8 |
|
|
1 |
|
|
11,412 |
|
|
73 |
|
|
1 |
|
|
— |
|
|
74 |
|
|
84 |
|
|
79 |
|
Colorado |
|
|
80 |
|
|
70 |
|
|
10 |
|
|
80 |
|
|
— |
|
|
— |
|
|
11,368 |
|
|
80 |
|
|
— |
|
|
— |
|
|
80 |
|
|
64 |
|
|
88 |
|
Central App. |
|
|
213 |
|
|
197 |
|
|
16 |
|
|
62 |
|
|
137 |
|
|
14 |
|
|
12,804 |
|
|
189 |
|
|
24 |
|
|
105 |
|
|
108 |
|
|
175 |
|
|
308 |
|
Northern App. |
|
|
231 |
|
|
121 |
|
|
110 |
|
|
— |
|
|
208 |
|
|
23 |
|
|
13,050 |
|
|
42 |
|
|
189 |
|
|
10 |
|
|
221 |
|
|
— |
|
|
238 |
|
Illinois |
|
|
18 |
|
|
10 |
|
|
8 |
|
|
— |
|
|
— |
|
|
18 |
|
|
10,835 |
|
|
17 |
|
|
1 |
|
|
— |
|
|
18 |
|
|
— |
|
|
30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total* |
|
|
2,252 |
|
|
2,054 |
|
|
198 |
|
|
1,757 |
|
|
439 |
|
|
56 |
|
|
9,858 |
|
|
2,037 |
|
|
215 |
|
|
1,751 |
|
|
501 |
|
|
1,928 |
|
|
2,217 |
|
- (1)
- As
received Btus per lb. includes the weight of moisture in the coal on an as sold basis.
- (2)
- 2010
Past Reserve Estimates does not include former International Coal Group, Inc. operations acquired on June 15, 2011.
- *
- Columns
may not add due to rounding.
Total Unassigned Reserves
(Tons in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur Content
(lbs. per million
Btus) |
|
|
|
|
|
|
|
Mining Method |
|
|
|
Total
Unassigned
Recoverable
Reserves |
|
|
|
|
|
|
|
Reserve Control |
|
|
|
|
|
|
|
As Received
Btus per lb.(1) |
|
|
|
Under-
ground |
|
|
|
Proven |
|
Probable |
|
<1.2 |
|
1.2 - 2.5 |
|
>2.5 |
|
Leased |
|
Owned |
|
Surface |
|
Wyoming |
|
|
481 |
|
|
397 |
|
|
84 |
|
|
429 |
|
|
52 |
|
|
— |
|
|
9,653 |
|
|
371 |
|
|
110 |
|
|
306 |
|
|
175 |
|
Montana |
|
|
1,387 |
|
|
1,129 |
|
|
258 |
|
|
1,387 |
|
|
— |
|
|
— |
|
|
8,603 |
|
|
1,387 |
|
|
— |
|
|
1,387 |
|
|
— |
|
Utah |
|
|
37 |
|
|
22 |
|
|
15 |
|
|
34 |
|
|
3 |
|
|
— |
|
|
11,175 |
|
|
36 |
|
|
1 |
|
|
— |
|
|
37 |
|
Colorado |
|
|
23 |
|
|
18 |
|
|
5 |
|
|
23 |
|
|
— |
|
|
— |
|
|
11,304 |
|
|
23 |
|
|
— |
|
|
— |
|
|
23 |
|
Central App. |
|
|
404 |
|
|
252 |
|
|
152 |
|
|
122 |
|
|
204 |
|
|
78 |
|
|
13,023 |
|
|
340 |
|
|
64 |
|
|
60 |
|
|
344 |
|
Northern App. |
|
|
199 |
|
|
98 |
|
|
101 |
|
|
3 |
|
|
94 |
|
|
102 |
|
|
12,896 |
|
|
42 |
|
|
157 |
|
|
7 |
|
|
192 |
|
Illinois |
|
|
707 |
|
|
344 |
|
|
363 |
|
|
— |
|
|
— |
|
|
707 |
|
|
10,955 |
|
|
84 |
|
|
623 |
|
|
2 |
|
|
705 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total* |
|
|
3,238 |
|
|
2,260 |
|
|
978 |
|
|
1,998 |
|
|
353 |
|
|
887 |
|
|
10,137 |
|
|
2,283 |
|
|
955 |
|
|
1,762 |
|
|
1,476 |
|
- (1)
- As
received Btus per lb. includes the weight of moisture in the coal on an as sold basis.
- *
- Columns
may not add due to rounding.
Federal and state legislation controlling air pollution affects the demand for certain types of coal by limiting the amount of sulfur dioxide
which may be emitted as a result of fuel combustion and encourages a greater demand for low-sulfur coal. All of our identified coal reserves have been subject to preliminary coal seam
analysis to test sulfur content. Of these reserves, approximately 68.4% consist of compliance coal, or coal which emits 1.2 pounds or less of sulfur dioxide per million Btus upon combustion, while an
additional 5.4% could be sold as low-sulfur coal. The balance is classified as high-sulfur coal. Most of our reserves are suitable for the domestic steam coal markets. A
substantial portion of the low-sulfur and compliance coal reserves at a number of our Appalachian mining complexes may also be used as metallurgical coal.
The
carrying cost of our coal reserves at December 31, 2012 was $5.2 billion, consisting of $99.2 million of prepaid royalties and a net book value of coal lands and
mineral rights of $5.1 billion.
47
Table of Contents
Reserve Acquisition Process
We acquire a significant portion of the coal we control in the western United States through the
lease-by-application (LBA) process. Under this process, before a mining company can obtain new coal reserves, the coal tract must be nominated for lease, and the company must
win the lease through a competitive bidding process. The LBA process can last anywhere from two to five years from the time the coal tract is nominated to the time a final bid is accepted by the BLM.
After the LBA is awarded, the company then conducts the necessary testing to determine what amount can be classified as reserves.
To
initiate the LBA process, companies wanting to acquire additional coal must file an application with the BLM's state office indicating interest in a specific coal tract. The BLM
reviews the initial application to determine whether the application conforms to existing land-use plans for that particular tract of land and that the application would provide for
maximum coal recovery. The application is further reviewed by a regional coal team at a public meeting. Based on a review of the available information and public comment, the regional coal team will
make a recommendation to the BLM whether to continue, modify or reject the application.
If
the BLM determines to continue the application, the company that submitted the application will pay for a BLM-directed environmental analysis or an environmental impact
statement to be completed. This analysis or impact statement is subject to publication and public comment. The BLM may consult with other governmental agencies during this process, including state and
federal agencies, surface management agencies, Native American tribes or bands, the U.S. Department of Justice or others as needed. The public comment period for an analysis or impact statement
typically occurs over a 60-day period.
After
the environmental analysis or environmental impact statement has been issued and a recommendation has been published that supports the lease sale of the LBA tract, the BLM
schedules a public competitive lease sale. The BLM prepares an internal estimate of the fair market value of the coal that is based on its economic analysis and comparable sales analysis. Prior
to the lease sale, companies interested in acquiring the lease must send sealed bids to the BLM. The bid amounts for the lease are payable in five annual installments, with the first 20% installment
due when the mining operator submits its initial bid for an LBA. Before the lease is approved by the BLM, the company must first furnish to the BLM an initial rental payment for the first year of rent
along with either a bond for the next 20% annual installment payment for the bid amount, or an application for history of timely payment, in which case the BLM may waive the bond requirement if the
company successfully meets all the qualifications of a timely payor. The bids are opened at the lease sale. If the BLM decides to grant a lease, the lease is awarded to the company that submitted the
highest total bid meeting or exceeding the BLM's fair market value estimate, which is not published. The BLM, however, is not required to grant a lease even if it determines that a bid meeting or
exceeding the fair market value of the coal has been submitted. The winning bidder must also submit a report setting forth the nature and extent of its coal holdings to the U.S. Department of Justice
for a 30-day antitrust review of the lease. If the successful bidder was not the initial applicant, the BLM will refund the initial applicant certain fees it paid in connection with the
application process, for example the fees associated with the environmental analysis or environmental impact statement, and the winning bidder will bear those costs. Coal won through the LBA process
and subject to federal leases are administered by the U.S. Department of Interior under the Federal Coal Leasing Amendment Act of 1976. In addition, we occasionally add small coal tracts adjacent to
our existing LBAs through an agreed upon lease modification with the BLM. Once the BLM has issued a lease, the company must also complete the permitting process before it can mine the coal. You should
see the section entitled "Environmental and Other Regulatory Matters."
Most
of our federal coal leases have an initial term of 20 years and are renewable for subsequent 10-year periods and for so long thereafter as coal is produced in
commercial quantities. These leases require diligent development within the first ten years of the lease award with a required coal extraction of 1.0% of the total coal under the lease by the end of
that 10-year period. At the end of the 10-year development period, the lessee is required to maintain continuous operations, as defined in the applicable leasing regulations.
In certain cases a lessee may combine contiguous leases into a logical mining unit, which we refer to as an LMU. This allows the production
48
Table of Contents
of
coal from any of the leases within the LMU to be used to meet the continuous operation requirements for the entire LMU. Some of our mines are also subject to coal leases with applicable state
regulatory agencies and have different terms and conditions that we must adhere to in a similar way to our federal leases. Under these federal and state leases, if the leased coal is not diligently
developed during the initial 10-year development period or if certain other terms of the leases are not complied with, including the requirement to produce a minimum quantity of coal or
pay a minimum production royalty, if applicable, the BLM or the applicable state regulatory agency can terminate the lease prior to the expiration of its term.
Title to Coal Property
Title to coal properties held by lessors or grantors to us and our subsidiaries and the boundaries of properties are normally verified
at the time of leasing or acquisition. However, in cases involving less significant properties and consistent with industry practices, title and boundaries are not completely verified until such time
as our independent operating subsidiaries prepare to mine such reserves. If defects in title or boundaries of undeveloped reserves are discovered in the future, control of and the right to mine such
reserves could be adversely affected. You should see "A defect in title or the loss of a leasehold interest in certain property could limit our ability to mine our coal reserves or result in
significant unanticipated costs" contained under the heading "Risk Factors" for more information.
At
December 31, 2012, approximately 21.3% of our coal reserves were held in fee, with the balance controlled by leases, most of which do not expire until the exhaustion of
mineable and merchantable coal. Under current mining plans, substantially all reported leased reserves will be mined out within the period of existing leases or within the time period of assured lease
renewals. Royalties are paid to lessors either as a fixed price per ton or as a percentage of the gross sales price of the mined coal. The majority of the significant leases are on a percentage
royalty basis. In some cases, a payment is required, payable either at the time of execution of the lease or in annual installments. In most cases, the prepaid royalty amount is applied to reduce
future production royalties.
From
time to time, lessors or sublessors of land leased by our subsidiaries have sought to terminate such leases on the basis that such subsidiaries have failed to comply with the
financial terms of the leases or that the mining and related operations conducted by such subsidiaries are not authorized by the leases. Some of these allegations relate to leases upon which we
conduct operations material to our consolidated financial position, results of operations and liquidity, but we do not believe any pending claims by such lessors or sublessors have merit or will
result in the termination of any material lease or sublease.
We
leased approximately 41,768 acres of property to other coal operators in 2012. We received royalty income of $10.0 million in 2012 from the mining of approximately
3.1 million tons, $8.2 million in 2011 from the mining of approximately 2.9 million tons and $4.1 million in 2010 from the mining of approximately 1.8 million tons
on those properties. We have included reserves at properties leased by us to other coal operators in the reserve figures set forth in this report.
ITEM 3. LEGAL PROCEEDINGS.
In addition to the following matters, we are involved in various claims and legal actions arising in the ordinary course of business,
including employee injury claims. 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.
Permit Litigation Matters
Surface mines at our Mingo Logan and Coal-Mac mining operations were identified in an existing lawsuit brought by the Ohio
Valley Environmental Coalition (OVEC) in the U.S. District Court for the Southern District of West Virginia as having been granted Clean Water Act § 404 permits by the Army Corps of
Engineers ("Corps"), allegedly in violation of the Clean Water Act and the National Environmental Policy Act. The lawsuit, brought by
49
Table of Contents
OVEC
in September 2005, originally was filed against the Corps for permits it had issued to four subsidiaries of a company unrelated to us or our operating subsidiaries. The suit claimed that the
Corps had issued permits to the subsidiaries of the unrelated company that did not comply with the National Environmental Policy Act and violated the Clean Water Act.
The
court ruled on the claims associated with those four permits in orders of March 23 and June 13, 2007. In the first of those orders, the court rescinded the four
permits, finding that the Corps had inadequately assessed the likely impact of valley fills on headwater streams and had relied on inadequate or unproven mitigation to offset
those impacts. In the second order, the court entered a declaratory judgment that discharges of sediment from the valley fills into sediment control ponds constructed in-stream to control
that sediment must themselves be permitted under a different provision of the Clean Water Act, § 402, and meet the effluent limits imposed on discharges from these ponds. Both of
the district court rulings were appealed to the U.S. Court of Appeals for the Fourth Circuit.
Before
the court entered its first order, the plaintiffs were permitted to amend their complaint to challenge the Coal-Mac and Mingo Logan permits. Plaintiffs sought
preliminary injunctions against both operations, but later reached agreements with our operating subsidiaries that have allowed mining to progress in limited areas while the district court's rulings
were on appeal. The claims against Coal-Mac were thereafter dismissed.
In
February 2009, the Fourth Circuit reversed the District Court. The Fourth Circuit held that the Corps' jurisdiction under Section 404 of the Clean Water Act is limited to the
narrow issue of the filling of jurisdictional waters. The court also held that the Corps' findings of no significant impact under the National Environmental Policy Act and no significant degradation
under the Clean Water Act are entitled to deference. Such findings entitle the Corps to avoid preparing an environmental impact statement, the absence of which was one issue on appeal. These holdings
also validated the type of mitigation projects proposed by our operations to minimize impacts and comply with the relevant statutes. Finally, the Fourth Circuit found that stream segments, together
with the sediment ponds to which they connect, are unitary "waste treatment systems," not "waters of the United States," and that the Corps had not exceeded its authority in permitting them.
OVEC
sought rehearing before the entire appellate court, which was denied in May 2009, and the decision was given legal effect in June 2009. An appeal to the U.S. Supreme Court was then
filed in August 2009. On August 3, 2010 OVEC withdrew its appeal.
Mingo
Logan filed a motion for summary judgment with the district court in July 2009, asking that judgment be entered in its favor because no outstanding legal issues remained for
decision as a result of the Fourth Circuit's February 2009 decision. By a series of motions, the United States obtained extensions and stays of the obligation to respond to the motion in the wake of
its letters to the Corps dated September 3 and October 16, 2009 (discussed below). By order dated April 22, 2010, the District Court stayed the case as to Mingo Logan for the
shorter of either six months or the completion of the U.S. Environmental Protection Agency's (the "EPA") proposed action to deny Mingo Logan the right to use its Corps' permit (as discussed below).
On
October 15, 2010, the United States moved to extend the existing stay for an additional 120 days (until February 22, 2011) while the EPA Administrator reviewed
the "Recommended Determination" issued by the EPA Region 3. By Memorandum Opinion and Order dated November 2, 2010, the court granted the United States' motion. On January 13, 2011, the
EPA issued its "Final Determination" to withdraw the specification of two of the three watersheds as a disposal site for dredged or fill material approved under the current Section 404 permit.
The court was notified of the Final Determination and by order dated March 21, 2011 stayed further proceedings in the case until further order of the court, in light of the challenge to the
EPA's "Final Determination" currently pending in federal court in Washington, DC. As described more fully below, the federal court in Washington, DC, by
Memorandum and Opinion and separate Order, each dated March 23, 2012, granted Mingo Logan's motion for summary judgment, vacated EPA's Final Determination and found valid and in full force
Mingo Logan's Section 404 permit. On April 5, 2012, Mingo Logan moved to lift the stay referenced above.
50
Table of Contents
On
June 5, 2012, the Court entered an order lifting the stay and allowing the case to proceed on Mingo Logan's Motion for Summary Judgment. Shortly thereafter, OVEC filed a motion
for leave to file a seventh amended and supplemental complaint seeking to update existing counts and raising two new claims (one, to enforce EPA's "Final Determination" and, the other, that the
Corps' refusal to prepare a Supplemental Environmental Impact Statement violates the APA and NEPA). By Memorandum, Opinion and Order dated July 25, 2012, the Court granted OVEC's motion and
directed the Clerk to file OVEC's Seventh Amended and Supplemental Complaint.
Mingo
Logan filed its Motion for Summary Judgment on August 31, 2012, along with its Answer to the Seventh Amended and Supplemental Complaint. All responses and replies to Mingo
Logan's Motion have been filed and the matter is pending before the Court.
EPA Actions Related to Water Discharges from the Spruce Permit
By letter of September 3, 2009, the EPA asked the Corps of Engineers to suspend, revoke or modify the existing permit it issued
in January 2007 to Mingo Logan under Section 404 of the Clean Water Act, claiming that "new information and circumstances have arisen which justify reconsideration of the permit." By letter of
September 30, 2009, the Corps of Engineers advised the EPA that it would not reconsider its decision to issue the permit. By letter of October 16, 2009, the EPA advised the Corps that it
has "reason to believe" that the Mingo Logan mine will have "unacceptable adverse impacts to fish and wildlife resources" and that it intends to issue a public notice of a proposed determination to
restrict or prohibit discharges of fill material that already are approved by the Corps' permit. By federal register publication dated April 2, 2010, the EPA issued its "Proposed Determination
to Prohibit, Restrict or Deny the Specification, or the Use for Specification of an Area as a Disposal Site: Spruce No. 1 Surface Mine, Logan County, WV" pursuant to Section 404(c) of
the Clean Water Act, the EPA accepted written comments on its proposed action (sometimes known as a "veto proceeding"), through June 4, 2010 and conducted a public hearing, as well, on
May 18, 2010. We submitted comments on the action during this period. On September 24, 2010, the EPA Region 3 issued a "Recommended Determination" to the EPA Administrator recommending
that the EPA prohibit the placement of fill material in two of the three watersheds for which filling is approved under the current Section 404 permit. Mingo Logan, along with the Corps, West
Virginia DEP and the mineral owner, engaged in a consultation with the EPA as required by the regulations, to discuss "corrective action" to address the "unacceptable adverse effects" identified. On
January 13, 2011, the EPA issued its "Final Determination" pursuant to Section 404(c) of the Clean Water Act to withdraw the specification of
two of the three watersheds approved in the current Section 404 permit as a disposal site for dredged or fill material. By separate action, Mingo Logan sued the EPA on April 2, 2010 in
federal court in Washington, D.C. seeking a ruling that the EPA has no authority under the Clean Water Act to veto a previously issued permit (Mingo Logan Coal Company, Inc. v. USEPA,
No. 1:10-cv-00541(D.D.C.)). The EPA moved to dismiss that action, and we responded to that motion.
Pursuant
to a scheduling order for summary disposition of the case, motions and cross-motions for summary judgment by both parties were filed. On November 30, 2011, the court
heard arguments from the parties limited only to the threshold issue of whether the EPA had the authority under Section 404(c) of the Clean Water Act to withdraw the specification of the
disposal site after the Corps had already issued a permit under Section 404(a). The court deferred consideration of the remaining issue (i.e. whether the EPA's "Final Determination" is
otherwise lawful) until after consideration of the threshold issue. On March 23, 2012, the court entered an Order and a Memorandum Opinion granting Mingo Logan's motion for summary judgment,
denying the EPA's cross-motion for summary judgment, vacating the Final Determination and ordering that Mingo Logan's Section 404 permit remains valid and in full force.
On
May 11, 2012, the EPA filed a notice of appeal to the United States Court of Appeals for the District of Columbia Circuit. The parties have fully briefed the case and the court
has scheduled oral arguments for March 14, 2013.
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Allegheny Energy Contract Matter
Allegheny Energy Supply ("Allegheny"), the sole customer of coal produced at our subsidiary Wolf Run Mining Company's ("Wolf Run")
Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. ("Hunter Ridge"), and ICG in state court in Allegheny County, Pennsylvania on December 28, 2006,
and amended its complaint on April 23, 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore
No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract. The Sycamore No. 2 mine was idled
after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped.
After
extensive searching for gas wells and rehabilitation of the mine, it was re-opened in 2007, but with notice to Allegheny that it would necessarily operate at reduced
volumes in order to safely and effectively
avoid the many gas wells within the reserve. The amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain
representations made upon entering into the contract in early 2005. Allegheny voluntarily dropped the breach of representation claims later. Allegheny claimed that it would incur costs in excess of
$100 million to purchase replacement coal over the life of the contract. ICG, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining
claims.
On
November 3, 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other
things, fraudulent inducement and conspiracy. On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend
contractual liability to ICG, which was not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract. No new substantive claims were asserted.
ICG answered the second amended complaint on October 13, 2009, denying all of the new claims. The Company's counterclaim was dismissed on motion for summary judgment entered on May 11,
2010. Allegheny's claims against ICG were also dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not. The court conducted a non-jury trial of this matter
beginning on January 10, 2011 and concluding on February 1, 2011.
At
the trial, Allegheny presented its evidence for breach of contract and claimed that it is entitled to past and future damages in the aggregate of between $228 million and
$377 million. Wolf Run and Hunter Ridge presented their defense of the claims, including evidence with respect to the existence of force majeure conditions and excuse under the contract and
applicable law. Wolf Run and Hunter Ridge presented evidence that Allegheny's damages calculations were significantly inflated because it did not seek to determine damages as of the time of the breach
and in some instances artificially assumed future nondelivery or did not take into account the apparent requirement to supply coal in the future. On May 2, 2011, the trial court entered a
Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. The trial court awarded total damages and
interest in the amount of $104.1 million. ICG and Allegheny filed post-verdict motions in the trial court and on August 23, 2011, the court denied the parties' motions. The
court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included pre-judgment interest. The parties appealed the lower court's decision to
the Superior Court of Pennsylvania. On August 13, 2012, the Superior Court of Pennsylvania ruled that the lower court should have calculated damages as of the date of breach, and remanded the
matter back to the lower court with instructions to recalculate the award. On November 19, 2012, Allegheny filed a Petition for Allowance of Appeal with the Supreme Court of Pennsylvania and
Wolf Run and Hunter Ridge filed an Answer. This Petition is pending.
ICG Hazard
The Sierra Club, on December 3, 2010, filed a Notice of Intent ("NOI") to sue ICG Hazard, LLC ("Hazard"), alleging
violations of the Clean Water Act and the Surface Mining Control and Reclamation Act of 1977 at
52
Table of Contents
Hazard's
Thunder Ridge surface mine. The NOI, which was supplemented by a revised filing on February 24, 2011, claims that Hazard is discharging selenium and contributing to conductivity levels
in the receiving streams in violation of state and federal regulations. On May 24, 2011, the Sierra Club sued Hazard in U.S. District Court for the Eastern District of Kentucky under the
Citizens Suit provisions of the Clean Water Act and the Surface Mining Control and Reclamation Act seeking civil penalties, injunctive relief and attorneys' fees. On February 17, 2012, ICG
Hazard filed a motion for summary judgment. Also on February 17, 2012, the Sierra Club filed a competing motion for summary judgment.
On
September 28, 2012, the court entered a Memorandum Opinion and Order granting Hazard summary judgment on both Clean Water Act ("CWA") and Surface Mining Control and Reclamation
Act ("SMCRA") claims finding that the CWA permit "shield" applies and that the SMCRA cannot be used to circumvent the CWA permit shield with respect to "point source" discharges. The court denied
summary judgment to the extent the facts showed there were "non-point source" discharges from areas disturbed by surface mining activities. On October 4, 2012, the Sierra Club filed
a Motion to Clarify Claims and Request Final Judgment Order notifying the court that all of its claims in the matter involved discharges from discrete "point sources" and that there remain no issues
of law or fact that require court resolution. The court entered a final judgment on January 11, 2013. On January 22, 2013, the Sierra Club filed a notice of appeal to the United States
Court of Appeals for the Sixth Circuit.
Patriot Coal Corporation Bankruptcy
On December 31, 2005, Arch entered into a purchase and sale agreement with Magnum Coal Company ("Magnum") to sell certain assets
to Magnum. On July 23, 2008, Patriot Coal Corporation acquired Magnum. On July 9, 2012, Patriot Coal Corporation and certain of its wholly owned subsidiaries, including Magnum
(collectively, "Patriot"), filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York.
On
September 20, 2012, Patriot filed a motion with the U.S. Bankruptcy Court for the Southern District of New York to reject a master coal sales agreement entered into on
December 31, 2005 between us and Magnum, which was established in order to meet obligations under a coal sales agreement with a customer who did not consent to the assignment of their contract
to Magnum. On December 18, 2012, the court accepted Patriot's motion to reject the master coal sales agreement. As a result of the court's decision, Arch has accrued $58.3 million, which
represents the discounted value of the remaining monthly buyout amounts under the underlying coal sales agreement.
ITEM 4. MINE SAFETY DISCLOSURES
The statement concerning mine safety violations or other regulatory matters required by Section 1503(a) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Annual Report on
Form 10-K for the period ended December 31, 2012.
53
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed and traded on the New York Stock Exchange under the symbol "ACI". On February 15, 2013, our common
stock closed at $5.92 on the New York Stock Exchange. On that date, there were approximately 6,300 holders of record of our common stock.
Holders
of our common stock are entitled to receive dividends when they are declared by our board of directors. When dividends are declared on common stock, they are usually paid in
mid-March, June, September and December. We paid dividends on our common stock totaling $42 million, or $0.20 per share, in 2012 and $80.7 million, or $0.43 per share, in
2011. There is no assurance as to the amount or payment of dividends in the future because they are dependent on our future earnings, capital requirements, financial condition, any limitations imposed
by our debt instruments and other factors deemed relevant by our Board of Directors. You should see Note 2, Debt and Financing Arrangements, beginning on Page F-15 for more
information about restrictions on our ability to declare dividends.
The
following table sets forth for each period indicated the dividends paid per common share, the high and low sale prices of our common stock for each of the quarterly periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
Dividends per common share |
|
$ |
0.11 |
|
$ |
0.03 |
|
$ |
0.03 |
|
$ |
0.03 |
|
High |
|
|
15.99 |
|
|
11.06 |
|
|
8.05 |
|
|
8.86 |
|
Low |
|
|
10.44 |
|
|
5.41 |
|
|
5.16 |
|
|
6.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
Dividends per common share |
|
$ |
0.10 |
|
$ |
0.11 |
|
$ |
0.11 |
|
$ |
0.11 |
|
High |
|
|
36.99 |
|
|
36.75 |
|
|
28.76 |
|
|
20.37 |
|
Low |
|
|
30.70 |
|
|
24.10 |
|
|
14.28 |
|
|
13.09 |
|
Stock Price Performance Graph
The following performance graph compares the cumulative total return to stockholders on our common stock with the cumulative total
return on two indices: a peer group, consisting of CONSOL Energy, Inc., Alpha Natural Resources, Inc. and Peabody Energy Corp., and the Standard & Poor's (S&P) 400 (Midcap) Index.
The graph assumes that:
- •
- you invested $100 in Arch Coal common stock and in each index at the closing price on December 31, 2007;
- •
- all dividends were reinvested;
- •
- annual reweighting of the peer groups; and
- •
- you continued to hold your investment through December 31, 2012.
You
are cautioned against drawing any conclusions from the data contained in this graph, as past results are not necessarily indicative of future performance. The indices used are
included for comparative purposes only and do not indicate an opinion of management that such indices are necessarily an appropriate measure of the relative performance of our common stock.
54
Table of Contents
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Arch Coal, Inc., the S&P Midcap 400 Index
and an Industry Peer Group
- *
- $100
invested on 12/31/07 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/07 |
|
12/08 |
|
12/09 |
|
12/10 |
|
12/11 |
|
12/12 |
|
Arch Coal, Inc. |
|
|
100.00 |
|
|
36.62 |
|
|
51.07 |
|
|
81.82 |
|
|
34.53 |
|
|
17.81 |
|
S&P Midcap 400 |
|
|
100.00 |
|
|
63.77 |
|
|
87.61 |
|
|
110.94 |
|
|
109.02 |
|
|
128.51 |
|
Industry Peer Group |
|
|
100.00 |
|
|
39.23 |
|
|
77.08 |
|
|
97.67 |
|
|
54.53 |
|
|
42.19 |
|
Issuer Purchases of Equity Securities
In September 2006, our board of directors authorized a share repurchase program for the purchase of up to 14,000,000 shares of our
common stock. There is no expiration date on the current authorization, and we have not made any decisions to suspend or cancel purchases under the program. We did not purchase any shares of our
common stock under this program during the fiscal year ended December 31, 2012. As of December 31, 2012, we have purchased 3,074,200 shares of our common stock under this program since
the board of directors authorized the program. Based on the closing price of our common stock as reported on the New York Stock Exchange on February 15, 2013, there is approximately
$64.7 million of our common stock that may yet be purchased under this program.
55
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
(In thousands, except per share data)
|
|
2012(1) |
|
2011(2) |
|
2010(3)(4) |
|
2009(5) |
|
2008 |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,159,038 |
|
$ |
4,285,895 |
|
$ |
3,186,268 |
|
$ |
2,576,081 |
|
$ |
2,983,806 |
|
Change in fair value of coal derivatives and trading activities, gains (losses) net |
|
|
16,590 |
|
|
2,907 |
|
|
(8,924 |
) |
|
12,056 |
|
|
55,093 |
|
Mine closure and asset impairment costs |
|
|
523,568 |
|
|
7,316 |
|
|
— |
|
|
— |
|
|
— |
|
Goodwill and other intangible asset impairment |
|
|
346,423 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Contract settlement resulting from Patriot Coal bankruptcy |
|
|
58,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and transition costs |
|
|
— |
|
|
47,360 |
|
|
— |
|
|
13,726 |
|
|
— |
|
Income (loss) from operations |
|
|
(681,588 |
) |
|
413,576 |
|
|
323,984 |
|
|
123,714 |
|
|
461,270 |
|
Non-operating expenses |
|
|
23,668 |
|
|
51,448 |
|
|
6,776 |
|
|
— |
|
|
— |
|
Net income (loss) attributable to Arch Coal |
|
|
(683,955 |
) |
|
141,683 |
|
|
158,857 |
|
|
42,169 |
|
|
354,330 |
|
Basic earnings per common share |
|
$ |
(3.24 |
) |
$ |
0.75 |
|
$ |
0.98 |
|
$ |
0.28 |
|
$ |
2.47 |
|
Diluted earnings per common share |
|
$ |
(3.24 |
) |
$ |
0.74 |
|
$ |
0.97 |
|
$ |
0.28 |
|
$ |
2.45 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,006,777 |
|
$ |
10,213,959 |
|
$ |
4,880,769 |
|
$ |
4,840,596 |
|
$ |
3,978,964 |
|
Working capital |
|
|
1,337,035 |
|
|
162,106 |
|
|
207,568 |
|
|
55,055 |
|
|
46,631 |
|
Long-term debt, less current maturities |
|
|
5,085,879 |
|
|
3,762,297 |
|
|
1,538,744 |
|
|
1,540,223 |
|
|
1,098,948 |
|
Other long-term obligations |
|
|
825,080 |
|
|
864,667 |
|
|
566,728 |
|
|
544,578 |
|
|
482,651 |
|
Noncurrent deferred income tax liability |
|
|
664,182 |
|
|
976,753 |
|
|
— |
|
|
— |
|
|
— |
|
Arch Coal stockholders' equity |
|
|
2,854,567 |
|
|
3,578,040 |
|
|
2,237,507 |
|
|
2,115,106 |
|
|
1,728,733 |
|
Common Stock Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.20 |
|
$ |
0.43 |
|
$ |
0.39 |
|
$ |
0.36 |
|
$ |
0.34 |
|
Shares outstanding at year-end |
|
|
212,247 |
|
|
211,671 |
|
|
162,605 |
|
|
162,441 |
|
|
142,833 |
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
332,804 |
|
$ |
642,242 |
|
$ |
697,147 |
|
$ |
382,980 |
|
$ |
679,137 |
|
Depreciation, depletion and amortization, including amortization of acquired sales contracts, net |
|
|
500,319 |
|
|
444,518 |
|
|
400,672 |
|
|
321,231 |
|
|
292,848 |
|
Capital expenditures |
|
|
395,225 |
|
|
540,936 |
|
|
314,657 |
|
|
323,150 |
|
|
497,347 |
|
Acquisitions of businesses, net of cash acquired |
|
|
— |
|
|
2,894,339 |
|
|
— |
|
|
768,819 |
|
|
— |
|
Net proceeds from the issuance of long term debt |
|
|
1,942,685 |
|
|
1,906,306 |
|
|
500,000 |
|
|
570,322 |
|
|
— |
|
Net proceeds from the sale of common stock |
|
|
— |
|
|
1,267,933 |
|
|
— |
|
|
326,452 |
|
|
— |
|
Payments to retire debt, including redemption premium |
|
|
452,934 |
|
|
605,178 |
|
|
505,627 |
|
|
— |
|
|
— |
|
Net increase (decrease) in borrowings under lines of credit and commercial paper program |
|
|
(481,300 |
) |
|
424,396 |
|
|
(196,549 |
) |
|
(85,815 |
) |
|
13,493 |
|
Dividend payments |
|
|
42,440 |
|
|
80,748 |
|
|
63,373 |
|
|
54,969 |
|
|
48,847 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold |
|
|
140,820 |
|
|
156,897 |
|
|
162,763 |
|
|
126,116 |
|
|
139,595 |
|
Tons produced |
|
|
135,934 |
|
|
151,829 |
|
|
156,282 |
|
|
119,568 |
|
|
133,107 |
|
Tons purchased from third parties |
|
|
4,327 |
|
|
5,557 |
|
|
6,825 |
|
|
7,477 |
|
|
6,037 |
|
- (1)
- Our
results in 2012 were impacted by challenging market conditions. In response to these conditions, we idled 10 mines in Appalachia and curtailed
production at other thermal mines. We incurred $523.6 million of closure and impairment costs relating to the closures, and recognized goodwill and other intangible asset impairment charges
$346.4 million. In addition, we refinanced our debt, increasing our average borrowing level to build cash and highly liquid investments on the balance sheet as well as to decrease
near-term maturities of debt. See further description of these transactions in the "Overview" in Item 7. Management's Discussion and Analysis.
56
Table of Contents
- (2)
- On
June 15, 2011, we completed our acquisition of ICG, a leading coal producer, adding 12 mining complexes in Appalachia, one complex in the Illinois
Basin and one mine under development in Appalachia, along with other coal reserves not currently in development. To finance the acquisition, we sold 48.7 million shares of our common stock and
issued $2.0 billion in aggregate principal amount of senior unsecured notes. We directly expensed costs related to the financing and acquisition of $104.2 million.
- (3)
- In
the second quarter of 2010, we exchanged 68.4 million tons of coal reserves in the Illinois Basin for an additional 9% ownership interest in
Knight Hawk Holdings, LLC (Knight Hawk), increasing our ownership to 42%. We recognized a pre-tax gain of $41.6 million on the transaction, representing the difference
between the fair value and net book value of the coal reserves, adjusted for our retained ownership interest in the reserves through the investment in Knight Hawk.
- (4)
- On
August 9, 2010, we issued $500.0 million in aggregate principal amount of 7.25% senior unsecured notes due in 2020 at par. We used the net
proceeds from the offering and cash on hand to fund the redemption on September 8, 2010 of $500.0 million aggregate principal amount of our outstanding 6.75% senior notes due in 2013 at
a redemption price of 101.125%. We recognized a loss on the redemption of $6.8 million.
- (5)
- On
October 1, 2009, we purchased the Jacobs Ranch mining complex in the Powder River Basin from Rio Tinto Energy America for a purchase price of
$768.8 million. To finance the acquisition, we sold 19.55 million shares of our common stock and $600.0 million in aggregate principal amount of senior unsecured notes. The net
proceeds received from the issuance of common stock were $326.5 million and the net proceeds received from the issuance of the 8.75% senior unsecured notes were $570.3 million.
57
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Challenging coal markets significantly impacted our results in 2012. Global benchmark metallurgical prices declined 50% since their
peak in mid-2011, while U.S. thermal coal consumption declined to levels not seen since the mid-1990s.
Driving
the weakness in the domestic demand for thermal coal during 2012 was reduced coal-fired generation resulting from an unseasonably warm 2011/2012 winter coupled with
low natural gas prices, which resulted in the substitution of natural gas for coal by power generators. As a result, coal stockpiles at generators remain at higher than normal levels, though levels
declined during the second half of 2012. A rise in natural gas prices relative to the last year should increase output at coal-fueled power plants.
Thermal
coal exports somewhat offset the weakness in domestic markets in 2012. We exported 13.6 million tons of both thermal and metallurgical coal in 2012, shipping into Europe
and South America, as well as new markets in the Middle East and Asia. We expect continued strength in the seaborne coal markets in 2013, though perhaps not at 2012 levels. Colder winter temperatures
in major coal-burning regions of Asia, as well as coal's competitive advantage versus other power generation fuels in Europe, should help support U.S. coal exports in 2013.
Metallurgical
coal demand has been affected by weakening in the global steel mill capacity utilization, due to slowing economic growth. Constraints resulting from the recession in Europe
and slower-than-expected growth in China affected consumer demand and reduced steel production and raw material consumption in 2012. We expect infrastructure spending in China
and Brazil and stimulus spending in developed economies, when combined with global production curtailments, to benefit metallurgical markets in the future.
In
response to these market conditions, we, along with many other domestic producers, curtailed production and took steps to control costs in a reduced-volume environment. In the Powder
River Basin, up to three draglines and related support equipment have been idled at various times during 2012. We redeployed other idle assets by performing reclamation activities. We limited railcar
loadings at the Black Thunder mine and we reduced labor costs through scheduling changes and attrition.
In
Appalachia, we closed or idled ten higher-cost operations and curtailed production at other mines. We have controlled costs by eliminating discretionary spending, reducing
headcount, consolidating operations and managing maintenance costs.
In
the Western Bituminous region, we reduced cash costs by reducing headcount and shifting volumes to lower cost mines. We idled the longwall at our Dugout Canyon mine in the fourth
quarter.
While
controlling capital spending at thermal coal mines, we have proceeded with metallurgical coal development projects, namely the Leer mine, and the expansion of our coal exporting
network.
These
efforts will help position us for expected market recovery in the metallurgical and thermal export markets. Due to the uncertain timing of such recovery, we undertook financing
transactions to maintain a strong liquidity position. During 2012, we increased our cash on hand by $646 million, invested $237 million in highly liquid investments and decreased our
short-term borrowings by $248 million. At the end of 2012, we had cash and short-term investments of just over $1.0 billion, and no borrowings under our credit
facilities. Our available liquidity totaled $1.4 billion at December 31, 2012. See discussion in "Liquidity" for the details of our financing transactions.
58
Table of Contents
Items Affecting Comparability of Reported Results
Acquisition of ICG—On June 15, 2011, we completed our acquisition of ICG, a leading coal producer, adding 12 mining complexes in Appalachia,
one complex in the Illinois Basin and one mine under development in Appalachia, along with other coal reserves not currently in development. To finance the acquisition, we received net proceeds of
$1.3 billion from the sale of our common stock and issued $2.0 billion in aggregate principal amount of senior unsecured notes. We directly expensed costs related to the financing and
acquisition of $104.2 million.
Mine closures—As mentioned in the "Overview", in response to decreasing demand for thermal coal, we made the decision to close or idle 10 mining
complexes during 2012. We incurred costs relating to these closures and idlings of approximately $524 million. See further discussion of the impacts of these closures in "Results of
Operations".
Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Summary. Our results during 2012 when compared to 2011 were impacted substantially by weak market conditions which led us to rationalize
supply
through mine closures, idlings and production curtailments.
Revenues. Our revenues consist of coal sales and revenues from our ADDCAR subsidiary acquired with ICG.
The
following table summarizes information about coal sales during the year ended December 31, 2012 and compares it with the information for the year ended December 31,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
|
|
|
2012 |
|
2011 |
|
Amount |
|
% |
|
|
|
(Amounts in thousands,
except per ton data and percentages)
|
|
Coal sales |
|
$ |
4,138,882 |
|
$ |
4,280,605 |
|
$ |
(141,723 |
) |
|
(3.3 |
)% |
Tons sold |
|
|
140,820 |
|
|
156,897 |
|
|
(16,077 |
) |
|
(10.2 |
)% |
Coal sales realization per ton sold |
|
$ |
29.39 |
|
$ |
27.28 |
|
$ |
2.11 |
|
|
7.7 |
% |
Coal sales decreased 3% in 2012 from 2011, as we reduced production and closed mines in response to the weak market conditions. The impact of
lower volumes was partially offset by higher coal sales realizations per ton, as increased export activity resulted in higher selling prices. Transportation and other delivery costs also increased,
however, as discussed in "Cost of Coal Sales". We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading "Operating segment
results".
59
Table of Contents
Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the year ended
December 31, 2012 and compares it with the information for the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease)
in Net Income |
|
|
|
2012 |
|
2011 |
|
Amount |
|
|
|
(Amounts in thousands, except percentages)
|
|
Cost of sales |
|
$ |
3,438,013 |
|
$ |
3,267,910 |
|
$ |
(170,103 |
) |
Depreciation, depletion and amortization |
|
|
525,508 |
|
|
466,587 |
|
|
(58,921 |
) |
Amortization of acquired sales contracts, net |
|
|
(25,189 |
) |
|
(22,069 |
) |
|
3,120 |
|
Change in fair value of coal derivatives and coal trading activities, net |
|
|
(16,590 |
) |
|
(2,907 |
) |
|
13,683 |
|
Coal derivative settlements, non-hedging |
|
|
(43,990 |
) |
|
7 |
|
|
43,997 |
|
Selling, general and administrative expenses |
|
|
134,299 |
|
|
119,056 |
|
|
(15,243 |
) |
Contract settlement resulting from Patriot Coal bankruptcy |
|
|
58,335 |
|
|
— |
|
|
(58,335 |
) |
Legal contingencies |
|
|
(79,532 |
) |
|
— |
|
|
79,532 |
|
Mine closure and asset impairment costs |
|
|
523,568 |
|
|
7,316 |
|
|
(516,252 |
) |
Goodwill and other intangible asset impairment |
|
|
346,423 |
|
|
— |
|
|
(346,423 |
) |
Acquisition and transition costs |
|
|
— |
|
|
47,360 |
|
|
47,360 |
|
Other operating income, net |
|
|
(20,219 |
) |
|
(10,941 |
) |
|
9,278 |
|
| |
|
|
|
|
|
|
|
Total costs, expenses and other |
|
$ |
4,840,626 |
|
$ |
3,872,319 |
|
$ |
(968,307 |
) |
| |
|
|
|
|
|
|
|
Cost of coal sales. Our cost of sales increased in 2012 from 2011 primarily from the impact of the acquisition of the ICG operations
and an increase
in transportation costs as a result of the increase in export shipments. These factors were partially offset by the impact of lower thermal coal demand in all operating segments which resulted in our
decision to close or idle mining operations and curtail production. We have provided more information about the performance and profitability of our operating segments under the heading "Operating
segment results".
Depreciation, depletion and amortization. When compared with 2011, higher depreciation, depletion and amortization
costs in 2012 resulted primarily from the acquired ICG operations, partially offset by the impact of lower depreciation and amortization on assets amortized or depleted on the basis of tons produced,
processed, or sold.
Amortization of acquired sales contracts, net. The fair values of acquired sales contracts are amortized over the tons of coal shipped
during the
term of the contracts. In 2011, amortization income of $41.5 million related to the contracts we acquired with the ICG operations was higher than what we recognized in 2012 due to the
amortization of contracts whose term ended in 2011. Offsetting the amortization of the ICG contracts in 2011 was expense of $19.5 million related to contracts acquired with the Jacobs Ranch
operations in the Powder River Basin in 2009.
Change in fair value of coal derivatives and coal trading activities, net. The gains reflected in 2012 relate primarily to positions in
the API-2
market, the derivatives market for coal delivered into Europe. We entered into these positions to manage price risk on physical export sales into Europe. These positions are not accounted for as
hedges, so the change in the positions' fair value prior to settlement is reflected in this line on the consolidated statement of operations, and then reclassified when the positions settle.
Coal derivative settlements, non-hedging. The gains in 2012 reflect settlements at the termination date of the API-2
positions described above.
Selling, general and administrative expenses. Selling, general and administrative expenses in 2012 increased when compared with 2011
primarily due to
an increase in employee compensation costs and an increase in fees for professional and legal services of approximately $5.0 million. Costs increased due to the ICG acquisition in 2011,
60
Table of Contents
the
staffing of our sales offices in Singapore and London, higher sales and marketing headcount to handle increased export activity, and an increase in costs under our long-term incentive
plan in 2012. Additionally, the impact in 2011 of a decrease in our deferred compensation liability in 2011 due to the drop in our stock price caused selling general and administrative expenses to
increase in 2012, when compared with 2011. These costs were in part offset by a decrease in annual management incentive compensation.
Contract settlement resulting from Patriot Coal bankruptcy. In the fourth quarter of 2012, Patriot Coal's rejection of their supply
agreement with us
was approved by the bankruptcy court. We then agreed to a settlement of a contract that had been supplied by Patriot Coal. We will make annual payments through 2017 under this obligation.
Legal contingencies. As a result of an appellate court ruling in a lawsuit against former ICG subsidiaries, we changed our estimate of
the probable
loss related to the lawsuit. The suit is discussed in detail in Note 23 to the consolidated financial statements included in this Form 10-K.
Mine closure and asset impairment costs and goodwill impairment. The following costs related to closed operations, primarily in
Appalachia, for the
year ended December 31, 2012 :
|
|
|
|
|
|
|
In millions |
|
Parts and supplies inventory writedown |
|
$ |
2.6 |
|
Impairment of property, plant and equipment |
|
|
95.6 |
|
Impairment of coal properties and deferred development costs |
|
|
403.3 |
|
Royalty obligations |
|
|
11.5 |
|
Employee termination benefits |
|
|
12.3 |
|
Pension, postretirement and occupational disease curtailment gain, net (see notes 17 and 18) |
|
|
(1.8 |
) |
| |
|
|
|
|
|
$ |
523.5 |
|
| |
|
|
|
Goodwill Impairment. We recognized an impairment charge of $115.8 million, the entire balance of goodwill allocated to our Black
Thunder
mining complex, during the second quarter of 2012 due to expectations of lower thermal coal demand and its impact on near-term sales volumes and pricing. In the fourth quarter of 2012, we
recorded an impairment charge of $214.9 million representing the goodwill related to two of four operating units that were allocated goodwill in the acquisition of ICG. See further discussion
in "Critical Accounting Policies".
Other operating income, net. When compared with the year ended December 31, 2011, the increase in other operating income, net for
the year
ended December 31, 2012 was primarily the result of an increase in net commercial-related income of $7.7 million and gains on the sale of non-core assets of
$10.3 million. These were partially offset by unrealized mark to market losses of $13.8 million on our diesel fuel risk management program. Because we do not apply hedge accounting to
these positions, accounting rules do not allow the gains and losses from these activities to be recorded with the underlying purchases in the statement of operations as if they qualified for hedge
accounting.
61
Table of Contents
Operating segment results. The following table shows results by operating segment for the year ended December 31, 2012 and
compares it with
the information for the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
|
|
|
2012 |
|
2011 |
|
$ |
|
% |
|
Powder River Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
104,394 |
|
|
117,846 |
|
|
(13,452 |
) |
|
(11.4 |
)% |
Coal sales realization per ton sold(1) |
|
$ |
13.61 |
|
$ |
13.62 |
|
$ |
(0.01 |
) |
|
(0.1 |
)% |
Cost per ton sold |
|
$ |
12.77 |
|
$ |
12.11 |
|
$ |
0.66 |
|
|
5.5 |
% |
Operating margin per ton sold(2) |
|
$ |
0.84 |
|
$ |
1.51 |
|
$ |
(0.67 |
) |
|
(44.4 |
)% |
Adjusted EBITDA(3) (in thousands) |
|
$ |
265,231 |
|
$ |
370,423 |
|
$ |
(105,192 |
) |
|
(28.4 |
)% |
Appalachia |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
18,717 |
|
|
20,874 |
|
|
(2,157 |
) |
|
(10.3 |
)% |
Coal sales realization per ton sold(1) |
|
$ |
85.42 |
|
$ |
84.52 |
|
$ |
0.90 |
|
|
1.1 |
% |
Cost per ton sold |
|
$ |
83.17 |
|
$ |
70.88 |
|
$ |
12.29 |
|
|
17.3 |
% |
Operating margin per ton sold(2) |
|
$ |
2.25 |
|
$ |
13.64 |
|
$ |
(11.39 |
) |
|
(83.5 |
)% |
Adjusted EBITDA(3) (in thousands) |
|
$ |
395,806 |
|
$ |
468,806 |
|
$ |
(73,000 |
) |
|
(15.6 |
)% |
Western Bituminous |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
15,586 |
|
|
17,041 |
|
|
(1,455 |
) |
|
(8.5 |
)% |
Coal sales realization per ton sold(1) |
|
$ |
35.67 |
|
$ |
35.72 |
|
$ |
(0.05 |
) |
|
(0.1 |
)% |
Cost per ton sold |
|
$ |
26.80 |
|
$ |
28.77 |
|
$ |
(1.97 |
) |
|
(6.8 |
)% |
Operating margin per ton sold(2) |
|
$ |
8.87 |
|
$ |
6.95 |
|
$ |
1.92 |
|
|
27.6 |
% |
Adjusted EBITDA(3) (in thousands) |
|
$ |
216,246 |
|
$ |
200,900 |
|
$ |
15,346 |
|
|
7.6 |
% |
- (1)
- These
per-ton measurements reflect adjustments to numbers reported under U.S. GAAP to reflect the complete results we achieved within our
operating segments. Since other companies may calculate these per ton amounts differently, our calculation may not be comparable to similarly titled measures used by those companies.
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
|
|
2012 |
|
2011 |
|
Transportation costs netted against per-ton realizations to reflect netback price to the region |
|
|
|
|
|
|
|
Powder River Basin |
|
$ |
1.00 |
|
$ |
0.36 |
|
Appalachia |
|
$ |
9.82 |
|
$ |
6.73 |
|
Western Bituminous |
|
$ |
12.54 |
|
$ |
3.76 |
|
API-2 risk management position settlements included in per-ton realizations not classified as coal sales revenues in statement of operations |
|
|
|
|
|
|
|
Appalachia |
|
$ |
0.78 |
|
|
— |
|
Western Bituminous |
|
$ |
1.50 |
|
|
— |
|
Diesel risk management position settlements not classified as cost of coal sales in statement of operations |
|
|
|
|
|
|
|
Powder River Basin |
|
$ |
0.09 |
|
|
— |
|
Appalachia |
|
$ |
0.10 |
|
|
— |
|
- (2)
- Operating
margin per ton sold is calculated as coal sales revenues less cost of coal sales, depreciation, depletion and amortization and sales contract
amortization divided by tons sold.
- (3)
- Adjusted
EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and
amortization and the amortization of acquired sales contracts. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results. Segment Adjusted EBITDA is reconciled to
net income at the end of this "Results of Operations" section.
62
Table of Contents
Powder River Basin—Segment Adjusted EBITDA decreased in 2012 when compared to 2011, due to the lower sales volumes in the Powder River Basin from the
production curtailments in response to market conditions. Per-ton margins were also lower due to the higher per-unit cash costs, resulting from the lower production levels.
Appalachia—Operating margins decreased in 2012 when compared with 2011 due to the impacts of lower production levels as a result of mine closures and
other production rationalization, including an extended longwall move at the Mountain Laurel complex. The extended longwall move at the Mountain Laurel complex reflected our move to a new seam. The
new seam is thinner than the previous seam, resulting in a loss of yield at the mine, translating into slightly higher costs; however, we anticipate more consistent quality in the new seam. We sold
7.5 million tons of metallurgical-quality coal in 2012 compared to 7.4 million tons in 2011.
Reduced
operating margins were offset by a benefit in Adjusted EBITDA of the $79.5 million decrease in a legal contingency liability acquired with ICG. Mine closure and asset
impairment costs are excluded from the per-ton costs and operating margins above, though the ongoing maintenance costs of those operations is included.
Western Bituminous—Segment Adjusted EBITDA increased from 2011 due to lower production costs stemming from improved cost control, higher sales volumes
from lower-cost mines in the region and reductions to accruals for sales-sensitive costs.
Net interest expense. The following table summarizes our net interest expense for the year ended December 31, 2012 and compares it
with the
information for the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
Increase (Decrease)
in Net Income |
|
|
|
2012 |
|
2011 |
|
$ |
|
% |
|
|
|
(Amounts in thousands, except percentages)
|
|
Interest expense |
|
$ |
(317,626 |
) |
$ |
(230,186 |
) |
$ |
(87,440 |
) |
|
(38.0 |
)% |
Interest income |
|
|
5,478 |
|
|
3,309 |
|
|
2,169 |
|
|
65.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
(312,148 |
) |
$ |
(226,877 |
) |
$ |
(85,271 |
) |
|
(37.6 |
)% |
| |
|
|
|
|
|
|
|
|
|
The increase in interest expense is due to an increase in our outstanding debt in 2012 when compared with 2011, as a result of the financing
transactions discussed in "Liquidity".
Other nonoperating expense. Amounts reported as nonoperating consist of expenses resulting from financing activities, other than
interest costs.
During 2012, nonoperating expense consists primarily of the write-off of financing fees relating to decreases in our revolving credit facility capacity. During 2011, nonoperating expense
represents financing related costs of the ICG acquisition, including the cost to maintain a bridge financing facility, which was not utilized.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
Increase (Decrease)
In Net Income |
|
|
|
2012 |
|
2011 |
|
$ |
|
|
|
(In thousands)
|
|
Net loss resulting from early retirement and refinancing of debt |
|
$ |
(23,668 |
) |
$ |
(1,958 |
) |
$ |
(21,710 |
) |
Bridge financing costs related to ICG |
|
|
— |
|
|
(49,490 |
) |
|
49,490 |
|
| |
|
|
|
|
|
|
|
|
|
$ |
(23,668 |
) |
$ |
(51,448 |
) |
$ |
27,780 |
|
| |
|
|
|
|
|
|
|
Income taxes. Our effective income tax rate is sensitive to changes in and the relationship between annual profitability and the
deduction for
percentage depletion. The income tax benefit in 2012 reflects our pretax loss
63
Table of Contents
combined
with percentage depletion deductions, offset by a $56.9 million non-deductible goodwill adjustment and $31.8 million to increase our valuation allowance against
state tax carryforwards.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31 |
|
Increase
In Net Income |
|
|
|
2012 |
|
2011 |
|
$ |
|
|
|
(In thousands)
|
|
Benefit from income taxes |
|
|
(333,717 |
) |
|
(7,589 |
) |
|
326,128 |
|
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Summary. Our results during 2011 when compared to 2010 were impacted positively by the contribution from the acquired ICG operations on
June 15, 2011 and higher average sales realizations as a result of improved market conditions, but these factors were offset by the acquisition, transition and financing costs necessary to
complete the acquisition, as well as the impact of lower volumes from our Mountain Laurel complex and the Powder River Basin.
Revenues. Our revenues consist of coal sales and revenues from our ADDCAR subsidiary acquired with ICG. The
following table summarizes information about coal sales during the year ended December 31, 2011 and compares it with the information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
|
|
|
2011 |
|
2010 |
|
Amount |
|
% |
|
|
|
(Amounts in thousands,
except per ton data and percentages)
|
|
Coal sales |
|
$ |
4,280,605 |
|
$ |
3,186,268 |
|
$ |
1,094,337 |
|
|
34.3 |
% |
Tons sold |
|
|
156,897 |
|
|
162,763 |
|
|
(5,866 |
) |
|
(3.6 |
)% |
Coal sales realization per ton sold |
|
$ |
27.28 |
|
$ |
19.58 |
|
$ |
7.70 |
|
|
39.3 |
% |
Coal sales increased in 2011 from 2010, due to an increase in the overall average price per ton sold, the result of improved pricing on
metallurgical-quality coal sold, the contribution from the ICG operations, including higher-priced metallurgical coal sales volumes, and higher steam pricing in all regions, as well as the impact of
changes in regional mix on our average coal sales realization. Coal sales revenues attributed to acquired ICG operations were $601.6 million in 2011. Overall sales volumes decreased as lower
sales volumes in the Powder River Basin offset the increases in the Appalachia and Western Bituminous regions. We have provided more information about the tons sold and the coal sales realizations per
ton by operating segment under the heading "Operating segment results".
Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the year ended
December 31, 2011 and compares it with the information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease)
in Net Income |
|
|
|
2011 |
|
2010 |
|
Amount |
|
|
|
(Amounts in thousands, except percentages)
|
|
Cost of sales |
|
$ |
3,267,910 |
|
$ |
2,395,812 |
|
$ |
(872,098 |
) |
Depreciation, depletion and amortization |
|
|
466,587 |
|
|
365,066 |
|
|
(101,521 |
) |
Amortization of acquired sales contracts, net |
|
|
(22,069 |
) |
|
35,606 |
|
|
57,675 |
|
Change in fair value of coal derivatives and coal trading activities, net |
|
|
(2,907 |
) |
|
8,924 |
|
|
11,831 |
|
Coal derivative settlements, non-hedging |
|
|
7 |
|
|
(4,542 |
) |
|
(4,549 |
) |
Selling, general and administrative expenses |
|
|
119,056 |
|
|
118,177 |
|
|
(879 |
) |
Mine closure and asset impairment costs |
|
|
7,316 |
|
|
— |
|
|
(7,316 |
) |
Acquisition and transition costs |
|
|
47,360 |
|
|
— |
|
|
(47,360 |
) |
Gain on Knight Hawk transaction |
|
|
— |
|
|
(41,577 |
) |
|
(41,577 |
) |
Other operating income, net |
|
|
(10,941 |
) |
|
(15,182 |
) |
|
(4,241 |
) |
| |
|
|
|
|
|
|
|
|
|
$ |
3,872,319 |
|
$ |
2,862,284 |
|
$ |
(1,010,035 |
) |
| |
|
|
|
|
|
|
|
64
Table of Contents
Cost of coal sales. Our cost of sales increased in 2011 from 2010 primarily from the impact of the acquisition of the ICG operations, an
increase in
transportation costs as a result of the increase in export shipments, and an increase in sales-sensitive costs. We have provided more information about the performance and profitability of our
operating segments under the heading "Operating segment results".
Depreciation, depletion and amortization. When compared with 2010, higher depreciation, depletion and amortization costs in 2011
resulted primarily
from the acquired ICG operations, partially offset by the impact of lower depreciation and amortization on assets amortized or depleted on the basis of tons produced.
Amortization of acquired sales contracts, net. The fair values of acquired sales contracts are amortized over the tons of coal shipped
during the
term of the contracts. In 2011, amortization expense related to contracts we acquired in
2009 with the Jacobs Ranch operations in the Powder River Basin was offset by amortization income related to the contracts we acquired with the ICG operations.
Selling, general and administrative expenses. Selling, general and administrative expenses were essentially flat over 2010. Our growth
in 2011
resulted in an increase in salaries, travel costs, and other professional service fees, and permitting, reserve acquisitions and environmental compliance resulted in higher legal costs. These were
offset by a decrease in the net obligation under the deferred compensation plan of $7.7 million and a decrease in costs related to incentive compensation plans of $2.2 million. Amounts
recognized under our deferred compensation plan are impacted by changes in the value of our common stock and changes in the value of the underlying investments. In addition, in 2010 we recognized the
cost of a contribution to the Arch Coal Foundation of $5.0 million. We made no contributions in 2011.
Change in fair value of coal derivatives and coal trading activities, net. Net (gains) losses relate to the net impact of our coal
trading activities
and the change in fair value of other coal derivatives that have not been designated as hedge instruments in a hedging relationship. In 2011, we entered into economic hedging strategies relating to
export sales that did not qualify for hedge accounting treatment, resulting in unrealized gains of approximately $12 million.
Gain on Knight Hawk Transaction. The gain was recognized on our 2010 exchange of Illinois Basin reserves for an additional ownership
interest in
Knight Hawk, an equity method investee operating in the Illinois Basin.
Other operating income, net. When compared with 2010, other operating income, net decreased in 2011 due to an increase in
commercial-related expenses
and unrealized losses on heating oil contracts entered into as economic hedges of fuel surcharges on freight agreements of $2.9 million, partially offset by approximately $9.5 million of
other income generated by acquired ICG operations, primarily royalties and ash disposal income.
65
Table of Contents
Operating segment results. The following table shows results by operating segment for the year ended December 31, 2011 and
compares it with
the information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
Increase (Decrease) |
|
|
|
2011 |
|
2010 |
|
$ |
|
% |
|
Powder River Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
117,846 |
|
|
132,350 |
|
|
(14,504 |
) |
|
(11.0 |
)% |
Coal sales realization per ton sold(1) |
|
$ |
13.62 |
|
$ |
12.06 |
|
$ |
1.56 |
|
|
12.9 |
% |
Cost of sales per ton sold |
|
$ |
12.11 |
|
$ |
10.97 |
|
$ |
1.14 |
|
|
10.4 |
% |
Operating margin per ton sold(2) |
|
$ |
1.51 |
|
$ |
1.09 |
|
$ |
0.42 |
|
|
38.5 |
% |
Adjusted EBITDA(3) (in thousands) |
|
$ |
370,423 |
|
$ |
366,375 |
|
$ |
4,048 |
|
|
1.1 |
% |
Appalachia |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
20,874 |
|
|
14,102 |
|
|
6,772 |
|
|
48.0 |
% |
Coal sales realization per ton sold(1) |
|
$ |
84.52 |
|
$ |
68.93 |
|
$ |
15.59 |
|
|
22.6 |
% |
Cost of sales per ton sold |
|
$ |
70.88 |
|
$ |
55.68 |
|
$ |
15.20 |
|
|
27.3 |
% |
Operating margin per ton sold(2) |
|
$ |
13.64 |
|
$ |
13.25 |
|
$ |
0.39 |
|
|
2.9 |
% |
Adjusted EBITDA(3) (in thousands) |
|
$ |
468,806 |
|
$ |
283,787 |
|
$ |
185,019 |
|
|
65.2 |
% |
Western Bituminous |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in thousands) |
|
|
17,041 |
|
|
16,311 |
|
|
730 |
|
|
4.5 |
% |
Coal sales realization per ton sold(1) |
|
$ |
35.72 |
|
$ |
32.76 |
|
$ |
2.96 |
|
|
9.0 |
% |
Cost of sales per ton sold |
|
$ |
28.77 |
|
$ |
29.44 |
|
$ |
(0.67 |
) |
|
(2.3 |
)% |
Operating margin per ton sold(2) |
|
$ |
6.95 |
|
$ |
3.32 |
|
$ |
3.63 |
|
|
109.3 |
% |
Adjusted EBITDA(3) (in thousands) |
|
$ |
200,900 |
|
$ |
138,579 |
|
$ |
62,321 |
|
|
45.0 |
% |
- (1)
- These
per-ton coal sales realizations reflect adjustments to exclude or include certain amounts to better represent the results we achieved
within our operating segments. Since other companies may calculate these per ton amounts differently, our calculation may not be comparable to similarly titled measures used by those companies.
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
|
|
2011 |
|
2010 |
|
Transportation costs netted against per-ton realizations to reflect netback price to the region |
|
|
|
|
|
|
|
Powder River Basin |
|
$ |
0.36 |
|
$ |
0.08 |
|
Appalachia |
|
$ |
6.73 |
|
$ |
4.99 |
|
Western Bituminous |
|
$ |
3.76 |
|
$ |
0.19 |
|
- (2)
- Operating
margin per ton sold is calculated as coal sales revenues less cost of coal sales, depreciation, depletion and amortization and sales contract
amortization divided by tons sold.
- (3)
- Adjusted
EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and
amortization and the amortization of acquired sales contracts. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results. Segment Adjusted EBITDA is reconciled to
net income at the end of this "Results of Operations" section.
Powder River Basin—Segment Adjusted EBITDA increased in 2011 when compared to 2010, due to higher average sales prices, reflecting the improved coal
markets. Partially offsetting the impact of higher selling prices were lower sales volumes in the Powder River Basin in 2011 when compared with 2010, due to the flooding in the Midwest and a
market-driven approach to sales commitments earlier in the year, as well as higher per-ton production costs. Higher production costs reflected an increase in labor, maintenance and diesel
costs and an increase in sales-sensitive costs, due to the increased realizations. Per-ton costs were also higher due to the lower production levels.
66
Table of Contents
Appalachia—Segment Adjusted EBITDA increased from 2010 primarily from an increase in the volumes and pricing of metallurgical-quality coal sold and
the acquisition of ICG. Geology issues at the Mountain Laurel mine partially offset the volume contributions from the acquired ICG operations. We sold 7.5 million tons of metallurgical-quality
coal in 2011 compared to 5.5 million tons in 2010. The benefit from higher per-ton realizations in 2011, net of sales sensitive costs, drove the improvement in our operating margins
over 2010, partially offset by the impacts of the Mountain Laurel geology issues, and an increase in production at higher cost mines on our average per-ton production costs.
Western Bituminous—Improved Segment Adjusted EBITDA reflects higher sales volumes and improved pricing resulting from increased export shipments for
coal from our Colorado operations. Effective cost control in the region and slightly higher production levels reduced our per-ton operating costs, which also contributed to the improved
results in 2011, when compared with 2010, when two outages affected production at the Dugout Canyon mine.
Net interest expense. The following table summarizes our net interest expense for the year ended December 31, 2011 and compares it
with the
information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
Increase (Decrease)
in Net Income |
|
|
|
2011 |
|
2010 |
|
$ |
|
% |
|
|
|
(Amounts in thousands, except percentages)
|
|
Interest expense |
|
$ |
(230,186 |
) |
$ |
(142,549 |
) |
$ |
(87,637 |
) |
|
(61.5 |
)% |
Interest income |
|
|
3,309 |
|
|
2,449 |
|
|
860 |
|
|
35.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
(226,877 |
) |
$ |
(140,100 |
) |
$ |
(86,777 |
) |
|
(61.9 |
)% |
| |
|
|
|
|
|
|
|
|
|
The increase in interest expense during 2011 when compared with 2010 is the result of the ICG acquisition financing. See further discussion of the
related transactions in "Liquidity and Capital Resources."
Other non-operating expense. The following table summarizes other non-operating expense for year ended December 31,
2011 and compares it with the information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31 |
|
Increase
(Decrease)
In Net Income |
|
|
|
2011 |
|
2010 |
|
$ |
|
|
|
(In thousands)
|
|
Net loss resulting from early retirement and refinancing of debt |
|
$ |
(1,958 |
) |
$ |
(6,776 |
) |
$ |
4,818 |
|
Bridge financing costs related to ICG |
|
|
(49,490 |
) |
|
— |
|
|
(49,490 |
) |
| |
|
|
|
|
|
|
|
|
|
$ |
(51,448 |
) |
$ |
(6,776 |
) |
$ |
(44,672 |
) |
| |
|
|
|
|
|
|
|
Amounts reported as non-operating consist of income or expense resulting from our financing activities, other than interest costs.
Other non-operating expenses during 2011 represent financing-related costs of the ICG acquisition, including the cost to maintain a bridge financing facility, which was not used. The loss
in 2010 relates to the redemption of $500 million in principal amount of the 6.75% senior notes, including the payment of the $5.6 million redemption premium, the write-off
of $3.3 million of unamortized debt financing costs, partially offset by the write-off of $2.1 million of the original issue premium on the 6.75% senior notes.
67
Table of Contents
Income taxes. Our effective income tax rate is sensitive to changes in and the relationship between annual profitability and the
deduction for
percentage depletion. The following table summarizes our income taxes for the year ended December 31, 2011 and compares it with the information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31 |
|
Increase
In Net Income |
|
|
|
2011 |
|
2010 |
|
$ |
|
|
|
(In thousands)
|
|
Provision for (benefit from) income taxes |
|
|
(7,589 |
) |
|
17,714 |
|
|
25,303 |
|
The income tax provision in 2010 includes a tax benefit of $4.0 million related to the recognition of tax benefits based on settlements
with taxing authorities.
The discussion in "Results of Operations" includes references to our Adjusted EBITDA results. Adjusted EBITDA is defined as net income
attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization and the amortization of acquired sales contracts. Adjusted EBITDA may also
be adjusted for items that may not reflect the trend of future results. We believe that Adjusted EBITDA presents a useful measure of our ability to service and incur debt based on ongoing operations.
Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. The table below shows how we calculate Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
2011 |
|
2010 |
|
Reported Segment Adjusted EBITDA |
|
$ |
877,283 |
|
$ |
1,044,688 |
|
$ |
788,741 |
|
Corporate and other(1) |
|
|
(188,829 |
) |
|
(123,550 |
) |
|
(64,622 |
) |
| |
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
688,454 |
|
|
921,138 |
|
|
724,119 |
|
Income tax expense (benefit) |
|
|
333,717 |
|
|
7,589 |
|
|
(17,714 |
) |
Interest expense, net |
|
|
(312,148 |
) |
|
(226,877 |
) |
|
(140,100 |
) |
Depreciation, depletion and amortization |
|
|
(525,508 |
) |
|
(466,587 |
) |
|
(365,066 |
) |
Amortization of acquired sales contracts, net |
|
|
25,189 |
|
|
22,069 |
|
|
(35,606 |
) |
Mine closure and asset impairment costs |
|
|
(523,568 |
) |
|
(7,316 |
) |
|
— |
|
Goodwill impairment |
|
|
(346,423 |
) |
|
— |
|
|
— |
|
Acquisition and transition costs |
|
|
— |
|
|
(56,885 |
) |
|
— |
|
Other nonoperating expenses |
|
|
(23,668 |
) |
|
(51,448 |
) |
|
(6,776 |
) |
| |
|
|
|
|
|
|
|
Net income (loss) attributable to Arch Coal |
|
$ |
(683,955 |
) |
$ |
141,683 |
|
$ |
158,857 |
|
| |
|
|
|
|
|
|
|
- (1)
- Corporate
and other Adjusted EBITDA includes primarily selling, general and administrative expenses, income from our equity investments, certain changes in
fair value of coal derivatives and coal trading activities, and net gains on asset sales.
Liquidity and Capital Resources
Our primary sources of cash are coal sales to customers, borrowings under our credit facilities and other financing arrangements, and
debt and equity 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 or borrowings under our lines of credit. The borrowings under these arrangements are classified as current if
the underlying credit facilities expire within one year or if, based on cash projections and management plans, we do not have the intent to replace them on a long-term basis. Such plans
are subject to change based on our cash needs.
68
Table of Contents
On May 16, 2012, we entered into an amendment to our senior secured revolving credit facility that amended certain financial
maintenance covenants, suspending our compliance with the debt-to-EBITDA ratio, easing other financial covenants through September 2014 and adding defined minimum EBITDA
targets. The amendment also reduced the quarterly dividend we may pay on our common stock to $0.03 per share. The maximum borrowing capacity of the revolving credit facility was reduced from
$2 billion to $600 million. In conjunction with the amendment, we borrowed $1.4 billion under a six-year secured term loan facility, issued at a 1% discount. The term
loan contains no financial maintenance covenants, is prepayable and is secured by the same assets as borrowings under the revolving credit facility. Quarterly principal payments of $3.5 million
began in September 2012, plus interest at a rate of the greater of a LIBOR-based rate or 1.25%, plus 450 basis points. The proceeds of the term loan were used to retire all outstanding borrowings
under the revolving credit facility and the outstanding $450.0 million principal amount of 6.75% Senior Notes due 2013 issued by Arch Western Finance, LLC ("Arch Western Finance"), our
indirect subsidiary.
On
May 16, 2012, Arch Western Finance accepted for purchase approximately $304.0 million in aggregate principal amount of its 6.75% Senior Notes due 2013 (the "Arch Western
Notes) in an initial settlement pursuant to the terms of its tender offer and consent solicitation, which commenced on May 1, 2012, and called for redemption all of the remaining Arch Western
Notes outstanding after the completion of the tender offer. The consideration for each $1,000 of principal purchased under the tender offer and consent solicitation was $1,002.50, for a total
purchase consideration of $304.8 million. On May 30, 2012, the remaining Arch Western Notes with an outstanding principal amount of $146.0 million were redeemed at par value.
On
November 21, 2012, we issued $375.0 million aggregate principal amount of 9.875% senior unsecured notes due 2019 (the "9.875% Notes") at an issue price of 95.934% of the
face amount. Also on November 21, 2012, we borrowed an incremental $250.0 million under our term loan facility at a 1% discount at the same rate of interest as the initial borrowing
discussed previously. The principal payments on the term loan increased to $4.125 million per quarter as a result of the incremental borrowing. Under the terms of the credit agreement, the
incremental term loan reduced the size of our revolving credit facility to $350 million from $600 million.
In
entering these transactions, we preserved our liquidity by exchanging availability under credit lines for a greater cash position on the balance sheet to be used for general corporate
purposes. At the same time, we amended its senior secured revolving credit facility to relax financial maintenance covenants and eliminate the minimum EBITDA targets until December 31, 2015.
In
June 2011, we issued equity and debt securities to finance the ICG acquisition. On June 8, 2011, we sold 48 million shares of our common stock at a public offering price
of $27.00 per share pursuant to an automatically effective shelf registration statement on Form S-3, a prospectus previously filed and a related prospectus supplement filed in June
2011. On July 8, 2011, we issued an additional 0.7 million shares of our common stock under the same terms and conditions to cover underwriters' over-allotments for net
proceeds of $18.4 million. On June 14, 2011, we issued $1.0 billion in aggregate principal amount of 7.0% senior unsecured notes due in 2019 at par ("2019 Notes") and
$1.0 billion in aggregate principal amount of 7.25% senior unsecured notes due in 2021 at par ("2021 Notes"). We secured bridge financing to ensure that funds would be available to us, if
needed, to close the transaction. While we did not draw on the line of credit, we incurred costs of $49.9 million related to the bridge financing.
We
believe that cash on hand, highly liquid investments, cash generated from operations, and borrowings under our credit facilities or other financing arrangements will be sufficient to
meet our working capital requirements and anticipated capital expenditures in 2013 and for the foreseeable future. As a result of the refinancing activities discussed previously, we have no financial
maintenance covenants until the end of 2015 and we have no significant debt maturities until 2016. Our ability to satisfy debt service obligations, to fund planned capital expenditures, to make
acquisitions, to repurchase our common shares and to pay dividends in the future 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.
69
Table of Contents
Our indebtedness consisted of the following at December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Indebtedness to banks under credit facilities |
|
$ |
— |
|
$ |
481,300 |
|
Term loan ($1.65 billion face value) due 2018 |
|
|
1,627,384 |
|
|
— |
|
6.75% senior notes ($450.0 million face value) due 2013 |
|
|
— |
|
|
450,971 |
|
8.75% senior notes ($600.0 million face value) due 2016 |
|
|
590,999 |
|
|
588,974 |
|
7.00% senior notes due 2019 at par |
|
|
1,000,000 |
|
|
1,000,000 |
|
9.875% senior notes ($375.0 million face value) due 2019 |
|
|
360,042 |
|
|
— |
|
7.25% senior notes due 2020 at par |
|
|
500,000 |
|
|
500,000 |
|
7.25% senior notes due 2021 at par |
|
|
1,000,000 |
|
|
1,000,000 |
|
Other |
|
|
40,350 |
|
|
21,903 |
|
| |
|
|
|
|
|
|
|
|
5,118,775 |
|
|
4,043,148 |
|
Less current maturities of debt and short-term borrowings |
|
|
32,896 |
|
|
280,851 |
|
| |
|
|
|
|
|
Long-term debt |
|
$ |
5,085,879 |
|
$ |
3,762,297 |
|
| |
|
|
|
|
|
Borrowings under our senior secured revolving credit facility bear interest at a floating rate based on LIBOR determined by reference
to our senior secured leverage ratio, as calculated in accordance with the underlying credit agreement. The credit facility has a five-year term that expires on June 14, 2016 and is
secured by substantially all of our assets as well as its ownership interests in substantially all of its subsidiaries. Commitment fees of 0.50% to 0.75% per annum are payable on the average unused
daily balance of the revolving credit facility.
We
also maintain an accounts receivable securitization program under which eligible trade receivables are sold, without recourse, to a multiseller, assetbacked commercial paper conduit.
The entity through which these receivables are sold is consolidated into our consolidated financial statements. We may borrow and draw letters of credit against the facility, and pays facility fees,
program fees and letter of credit fees (based on amounts of outstanding letters of credit). The total aggregate borrowings and letters of credit are limited by eligible accounts receivable, as defined
under the terms of the agreement. The credit facility supporting the borrowings under the program is subject to renewal annually, and expires on December 10, 2013.
Financial
covenant requirements relating to our senior notes may restrict the amount of unused capacity available to us for borrowings and letters of credit.
Our
average borrowing level under these programs was approximately $199 million and $183 million for the years ended December 31, 2012 and 2011, respectively. On
June 14, 2011, we terminated our commercial paper placement program and the supporting credit facility.
We have outstanding an aggregate principal amount of $600.0 million of 8.75% senior notes due 2016 (the "2016 Notes") that were
issued at an initial issue price of 97.464% of face amount. Interest is payable on the 2016 Notes on February 1 and August 1 of each year. At any time on or after August 1, 2013,
we may redeem some or all of the notes. The redemption price, reflected as a percentage of the principal amount, is: 104.375% for notes redeemed between August 1, 2013 and July 31, 2014;
102.188% for notes redeemed between August 1, 2014 and July 31, 2015; and 100% for notes redeemed on or after August 1, 2015. In addition, prior to August 1, 2012, at any
time and on one or more occasions, we may redeem an aggregate principal amount of the 2016 Notes not to exceed 35% of the original aggregate principal amount of the notes outstanding with the proceeds
of one or more public equity offerings, at a redemption price equal to 108.750%.
70
Table of Contents
On
August 9, 2010, we issued $500.0 million in aggregate principal amount of 7.25% senior unsecured notes due in 2020 (the "2020 Notes") at par. Interest is payable on the
2020 Notes on April 1 and October 1 of each year. At any time on or after October 1, 2015, we may redeem some or all of the notes. The redemption price reflected as a percentage
of the principal amount is: 103.625% for notes redeemed between October 1, 2015 and September 30, 2016; 102.417% for notes redeemed between October 1, 2016 and
September 30, 2017; 101.208% for notes redeemed between October 1, 2017 and September 30, 2018; and 100% for notes redeemed on or after October 1, 2018. In addition, at any
time and on one or more occasions prior to October 1, 2013, we may redeem an aggregate principal amount of 2016 Notes not to exceed 35% of the original aggregate principal amount of the notes
outstanding with the proceeds of one or more public equity offerings, at a redemption price equal to 107.250%.
Interest
is payable on the 2019 Notes and 2021 Notes on June 15 and December 15 of each year. At any time prior to June 15, 2014, we may redeem up to 35% of the
aggregate principal amount of each of the 2019 Notes and 2021 Notes, plus accrued and unpaid interest, with the net proceeds from certain equity offerings. We may redeem the 2019 Notes prior to
June 15, 2015 and the 2021 Notes prior to June 15, 2016 at the respective make-whole prices set forth in the indenture. On or after June 15, 2015, we may redeem the
2019 Notes for cash at redemption prices, reflected as a percentage of the principal amount, of: 103.5% from June 15, 2015 through June 14, 2016; 101.75% from June 15, 2016
through June 14, 2017; and 100% beginning on June 15, 2017. On or after June 15, 2016, we may redeem the 2021 Notes for cash at redemption prices, reflected as a percentage of the
principal amount, of: 103.625% from June 15, 2016 through June 14, 2017; 102.417% from June 15, 2017 through June 14, 2018; 101.208% from June 15, 2018 through
June 14, 2019; and 100% beginning on June 15, 2019. In each case, accrued and unpaid interest at the redemption date is due upon redemption.
Interest
is payable annually on the 9.875% Notes on June 15 and December 15 beginning on June 15, 2013. At any time on or after December 15, 2016, we may
redeem some or all of the notes. The redemption price, reflected as a percentage of the principal amount, is: 104.938% for notes redeemed between December 15, 2016 and December 14, 2017;
102.469% for notes redeemed between December 15, 2017 and December 14, 2018; and 100% for notes redeemed on or after December 15, 2018. In addition, at any time and on one or more
occasions prior to December 15, 2015, we may redeem an aggregate principal amount of senior notes not to exceed 35% of the original aggregate principal amount of the senior notes outstanding
with the proceeds of one or more public equity offerings, at a redemption price equal to 109.875%.
The
senior unsecured notes are guaranteed by substantially all of our subsidiaries, excluding Arch Receivable Company, LLC, which is the conduit for our accounts receivable
securitizaton program, and our subsidiaries outside the U.S.
We legally discharged our obligation under ICG's 9.125% senior notes by depositing funds with the Trustee to redeem the debt. On
July 14, 2011, all of the outstanding 9.125% senior notes were redeemed at an aggregate price of $251.4 million, including the required make-whole premium, plus accrued
interest of $5.2 million, and the remainder of the deposit was returned to us.
At
the acquisition date, ICG's 4.00% convertible senior notes with a fair value of $298.5 million and 9.00% convertible senior notes with a fair value of $1.7 million
("convertible notes") became convertible into cash, pursuant to the amended indentures governing the convertible notes, at a calculated conversion rate of $2,614.6848 for each $1,000 in principal
amount surrendered for conversion for the 4.00% convertible notes and $2,392.73414 for the 9.00% convertible notes for conversions occurring prior to August 17, 2011.
At
the acquisition date, other ICG debt had a fair value of approximately $54.0 million and consisted mainly of equipment notes and insurance notes payable. Any remaining amounts
are included in "other debt".
71
Table of Contents
At December 31, 2012, we had cash on hand of $784.6 million, $234.3 million invested in highly liquid,
interest-bearing securities and additional liquidity of $364 million, consisting primarily of available borrowing capacity under lines of credit.
We
have filed a universal shelf registration statement on Form S-3 with the SEC that allows us to offer and sell from time to time an unlimited amount of unsecured
debt securities consisting of notes, debentures, and other debt securities, common stock, preferred stock, warrants, or units. Related proceeds could be used for general corporate purposes, including
repayment of debt, capital expenditures, possible acquisitions and any other purposes that may be stated in any related prospectus supplement.
The
following is a summary of cash provided by or used in each of the indicated types of activities during the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(Dollars in thousands)
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
332,804 |
|
$ |
642,242 |
|
$ |
697,147 |
|
Investing activities |
|
|
(649,166 |
) |
|
(3,496,916 |
) |
|
(389,129 |
) |
Financing activities |
|
|
962,835 |
|
|
2,899,230 |
|
|
(275,563 |
) |
Cash provided by operating activities decreased in the year ended December 31, 2012 compared to 2011, driven by the decrease in our
profitability resulting from poor market conditions. Cash provided by operating activities decreased in 2011 compared to 2010, despite higher operating income adjusted for non-cash items,
driven largely by an increase in inventory costs, as well as a benefit in 2010 from the timing of payments on accounts and production taxes payable.
We
used less cash in investing activities in the year ended December 31, 2012 compared to the amount used in 2011, primarily due to the acquisition of ICG in 2011, as well as a
decrease in investments in affiliates and prepaid royalties in 2012. There was also a decrease in capital expenditures of approximately $145.7 million during year ended December 31, 2012
when compared with 2011, due to cash management efforts, however, we have continued with certain development projects. We spent approximately $73 million in 2011 and $195 million during
2012 on the development of the Leer mine, and we expect to spend approximately $100 million during 2013 on its completion. During 2010, we made payments of $118.2 million for coal
reserves in Montana and spent $26.0 million on a preparation plant at the West Elk mine.
In
addition, during 2012, we invested approximately $237 million of cash proceeds from the term loan in highly liquid marketable debt securities and we purchased the
noncontrolling interest in Arch Western for $17.5 million.
Cash
provided by financing activities was approximately $963 million in the year ended December 31, 2012, compared to approximately $2.9 billion in 2011. In 2012,
the proceeds from the $1.6 billion term loan facility were used, in part, to retire the remaining outstanding senior secured notes due in 2013 and outstanding borrowings under lines of credit,
with the remainder, along with the proceeds from the sale of the 9.875% Notes, to be used for general corporate purposes. In 2011, the proceeds from the issuance of $2.0 billion in senior notes
in 2011 and shares issued in 2011 were used to finance the ICG acquisition. In 2010 we used the net proceeds from the offering of the 2020 notes and cash on hand to fund the redemption of
$500.0 million aggregate principal amount of our outstanding. Arch Western Notes at a redemption price of 101.125%. We paid financing costs of $50.6 million in 2012,
$114.8 million in 2011 and $12.8 million in 2010 relating to these transactions.
We
paid dividends of $42.4 million in 2012, $80.7 million in 2011 and $63.4 million in 2010.
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Ratio of Earnings to Fixed Charges
The following table sets forth our ratios of earnings to combined fixed charges and preference dividends for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
Ratio of earnings to combined fixed charges and preference dividends(1) |
|
N/A(2) |
|
|
1.49x |
|
|
2.17x |
|
|
1.26x |
|
|
4.91x |
|
- (1)
- Earnings
consist of income from operations before income taxes and are adjusted to include only distributed income from affiliates accounted for on the
equity method and fixed charges (excluding capitalized interest). Fixed charges consist of interest incurred on indebtedness, the portion of operating lease rentals deemed representative of the
interest factor and the amortization of debt expense.
- (2)
- Total
losses for ratio calculation were $658.9 million and total fixed charges were $344.0 million for the year ended December 31, 2012
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
2013 |
|
2014 - 2015 |
|
2016 - 2017 |
|
After 2017 |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Long-term debt, including related interest |
|
$ |
397,067 |
|
$ |
764,574 |
|
$ |
1,286,404 |
|
$ |
5,054,079 |
|
$ |
7,502,124 |
|
Operating leases |
|
|
26,837 |
|
|
42,857 |
|
|
17,013 |
|
|
5,334 |
|
|
92,041 |
|
Coal lease rights |
|
|
109,695 |
|
|
200,989 |
|
|
126,524 |
|
|
147,103 |
|
|
584,311 |
|
Coal purchase obligations |
|
|
15,073 |
|
|
24,073 |
|
|
26,677 |
|
|
— |
|
|
65,823 |
|
Unconditional purchase obligations |
|
|
201,122 |
|
|
246,297 |
|
|
174,351 |
|
|
445,599 |
|
|
1,067,369 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
749,794 |
|
$ |
1,278,790 |
|
$ |
1,630,969 |
|
$ |
5,652,115 |
|
$ |
9,311,668 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
The related interest on long-term debt was calculated using rates in effect at December 31, 2012 for the remaining term of
outstanding borrowings.
Coal
lease rights represent non-cancelable royalty lease agreements, as well as lease bonus payments due.
Our
coal purchase obligations include purchase obligations in the over-the-counter market, as well as unconditional purchase obligations with coal suppliers.
Unconditional
purchase obligations include open purchase orders and other purchase commitments, which have not been recognized as a liability. The commitments in the table above relate
to contractual commitments for the purchase of materials and supplies, payments for services and capital expenditures.
The
table above excludes our asset retirement obligations. Our consolidated balance sheet reflects a liability of $448.6 million for asset retirement obligations that arise from
SMCRA and similar state statutes, which require that mine property be restored in accordance with specified standards and an approved reclamation plan. Asset retirement obligations are recorded at
fair value when incurred and accretion expense is recognized through the expected date of settlement. Determining the fair value of asset retirement obligations involves a number of estimates, as
discussed in the section entitled "Critical Accounting Policies", including the timing of payments to satisfy the obligations. The timing of payments to satisfy asset retirement obligations is based
on numerous factors, including mine closure dates. You should see the notes to our consolidated financial statements for more information about our asset retirement obligations.
The
table above also excludes certain other obligations reflected in our consolidated balance sheet, including estimated funding for pension and postretirement benefit plans and worker's
compensation obligations. The timing of contributions to our pension plans varies based on a number of factors, including changes in the fair value of plan assets and actuarial assumptions. You should
see the section entitled "Critical Accounting Policies" for more
73
Table of Contents
information
about these assumptions. We expect to make contributions of $0.9 million to our pension plans in 2013, which is impacted by the Moving Ahead for Progress in the 21st Century
Act (MAP-21) enacted July 6, 2012. MAP-21 does not reduce our obligations under the plan, but redistributes the timing of required payments by providing near term
funding relief for sponsors under the Pension Protection Act.
You
should see the notes to our consolidated financial statements for more information about the amounts we have recorded for workers' compensation and pension and postretirement benefit
obligations.
The
table above excludes future contingent payments of up to $72.9 million related to development financing for certain of our equity investees. Our obligation to make these
payments, as well as the timing of any payments required, is contingent upon a number of factors, including project development progress, receipt of permits and the obtaining of construction
financing.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include
guarantees, indemnifications, financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements
are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these
off-balance sheet arrangements.
We
use a combination of surety bonds, corporate guarantees (e.g., self bonds) and letters of credit to secure our financial obligations for reclamation, workers' compensation,
coal lease obligations and other obligations as follows as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation
Obligations |
|
Lease
Obligations |
|
Workers'
Compensation
Obligations |
|
Other |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Self bonding |
|
$ |
388,445 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
388,445 |
|
Surety bonds |
|
|
262,852 |
|
|
60,742 |
|
|
12,450 |
|
|
146,693 |
|
|
482,737 |
|
Letters of credit |
|
|
18,000 |
|
|
— |
|
|
48,697 |
|
|
32,167 |
|
|
98,864 |
|
In addition, we have agreed to continue to provide surety bonds for certain Magnum obligations, primarily reclamation. The surety bonding amounts
are mandated by the state and are not directly related to the estimated cost to reclaim the properties. At December 31, 2012, we had $35.3 million of surety bonds remaining related to
Magnum properties, however Patriot Coal has posted letters of credit of $16.7 million in our favor.
Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure
of contingent assets and liabilities. Management bases our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Additionally,
these estimates and judgments are discussed with our audit committee on a periodic basis. Actual results may differ from the estimates used under different assumptions or conditions. We have provided
a description of all significant accounting policies in the notes to our consolidated financial statements. We believe that of these significant accounting policies, the following may involve a higher
degree of judgment or complexity:
We utilize derivative instruments to manage exposures to commodity prices. Additionally, we may hold certain coal derivative
instruments for trading purposes. Derivative financial instruments are recognized in the balance sheet at fair value. Certain coal contracts may meet the definition of a derivative instrument, but
because they provide for
74
Table of Contents
the
physical purchase or sale of coal in quantities expected to be used or sold by us over a reasonable period in the normal course of business, they are not recognized on the balance sheet.
Certain
derivative instruments are designated as the hedge instrument in a hedging relationship. In a fair value hedge, we hedge the risk of changes in the fair value of a firm
commitment, typically a fixed-price coal sales contract. Changes in both the hedged firm commitment and the fair value of a derivative used as a hedge instrument in a fair value hedge are recorded in
earnings. In a cash flow hedge, we hedge the risk of changes in future cash flows related to a forecasted purchase or sale. Changes in the fair value of the derivative instrument used as a hedge
instrument in a cash flow hedge are recorded in other comprehensive income. Amounts in other comprehensive income are reclassified to earnings when the hedged transaction affects earnings and are
classified in a manner consistent with the transaction being hedged.
Any
ineffective portion of a hedge is recognized immediately in earnings. Ineffectiveness was insignificant for the years ended December 31, 2012, 2011 and 2010.
We
formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives for undertaking various hedge transactions. We evaluate the
effectiveness of our hedging relationships both at the hedge inception and on an ongoing basis.
Our asset retirement obligations arise from SMCRA and similar state statutes, which require that mine property be restored in
accordance with specified standards and an approved reclamation plan. Significant reclamation activities include reclaiming refuse and slurry ponds, reclaiming the pit and support acreage at surface
mines, and sealing portals at deep mines. Our asset retirement obligations are initially recorded at fair value, or the amount at which the obligations could be settled in a current transaction
between willing parties. This involves determining the present value of estimated future cash flows on a mine-by-mine basis based upon current permit requirements and various
estimates and assumptions, including estimates of disturbed acreage, reclamation costs and assumptions regarding equipment productivity. We estimate disturbed acreage based on approved mining plans
and related engineering data. Since we plan to use internal resources to perform the majority of our reclamation activities, our estimate of reclamation costs involves estimating third-party profit
margins, which we base on our historical experience with contractors that perform certain types of reclamation activities. We base productivity assumptions on historical experience with the equipment
that we expect to utilize in the reclamation activities. In order to determine fair value, we discount our estimates of cash flows to their present value. We base our discount rate on the rates of
treasury bonds with maturities similar to expected mine lives, adjusted for our credit standing.
Accretion
expense is recognized on the obligation through the expected settlement date. On at least an annual basis, we review our entire reclamation liability and make necessary
adjustments for permit changes as granted by state authorities, changes in the timing and extent of reclamation activities, and revisions to cost estimates and productivity assumptions, to reflect
current experience. Any difference between the recorded amount of the liability and the actual cost of reclamation will be recognized as a gain or loss when the obligation is settled. We expect our
actual cost to reclaim our properties will be less than the expected cash flows used to determine the asset retirement obligation. At December 31, 2012, our balance sheet reflected asset
retirement obligation liabilities of $448.6 million, including amounts classified as a current liability. As of December 31, 2012, we estimate the aggregate undiscounted cost of final
mine closures to be approximately $1.0 billion.
See
the rollforward of the asset retirement obligation liability in "Financial Statements and Supplementary Data, Note 14 to the consolidated financial statements."
In a business combination, goodwill represents the excess of the purchase price over the fair value assigned to the net tangible and
identifiable intangible assets acquired. We test goodwill for impairment annually as of the
75
Table of Contents
beginning
of the fourth quarter, or when circumstances indicate a possible impairment may exist. If the results of the testing indicate that the carrying amount of a reporting unit exceeds the fair
value of the reporting unit, the fair value of goodwill must be calculated. An impairment loss generally would be recognized when the carrying amount of goodwill exceeds the implied fair value of
goodwill, determined by subtracting the fair value of the other assets and liabilities associated with the reporting unit from the total fair value of the reporting unit. The fair value of a reporting
unit is determined using a discounted cash flow ("DCF") technique. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash
flows, including the discount rate and projections of sales volumes and prices and costs to produce. We apply a probability weighting to different scenarios that are developed in this estimation
process. This income approach is compared to a market approach for reasonableness of the estimates used.
Our
estimates of selling prices at the valuation date reflect assumptions about coal consumption and supply for the respective coal market. These prices are compared to market pricing
information from third party forecasts for reasonableness, taking into account for the impact of coal quality on pricing. Our estimates of sales and production volumes are also based on the
assumptions about coal consumption and supply discussed previously.
As
discussed in the consolidated financial statements Note 7, "Goodwill", we recognized goodwill impairment charges in 2012. In the second quarter of 2012, weak demand for thermal
coal and our production cuts in response to market conditions, indicated that the fair value of our goodwill could be less than its carrying value and we performed step one of the goodwill impairment
test. The impact of lower demand on near term sales volumes and pricing significantly impacted the fair value of the Black Thunder reporting unit, which did not exceed the carrying value. We made
estimates of the fair value of assets and liabilities of the Black Thunder reporting unit and determined that the allocated goodwill was fully impaired, and recognized an impairment charge of
$115.8 million in the second quarter of 2012. A subsequent valuation of the assets and liabilities supported that the goodwill allocated to Black Thunder had no implied fair value.
The
goodwill amounts allocated to certain reporting units in our Appalachia segment are sensitive to volatility in the demand for metallurgical coal. During the 2012, metallurgical
prices fell 50% from the peaks reached during 2011, when the reporting units were acquired with our purchase of ICG. This caused the fair value of two of these reporting units to fall below their
carrying value. The allocated goodwill of $214.9 million for those reporting units was determined to be fully impaired, based on current market conditions and tax benefits assumed to accrue to
market participants. We recognized this impairment charge in the fourth quarter of 2012.
The
remaining two reporting units in the Appalachia segment are in the development stage at this time, and as such, their fair values are less sensitive to changes in
near-term metallurgical coal pricing. Changes in the long-term outlook in the global demand for metallurgical coal from the U.S. could have a negative effect on the value of
these reporting units in the future.
We have non-contributory defined benefit pension plans covering certain of our salaried and hourly employees. Benefits are
generally based on the employee's age and compensation. The actuarially-determined funded status of the defined benefit plans is reflected in the balance sheet.
The
calculation of our net periodic benefit costs (pension expense) and benefit obligation (pension liability) associated with our defined benefit pension plans requires the use of a
number of assumptions. Changes in these assumptions can result in different pension expense and liability amounts, and actual experience can differ from the assumptions.
- •
- The expected long-term rate of return on plan assets is an assumption reflecting the average rate of earnings
expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. We establish the expected long-term rate of return at the
beginning of each fiscal year based upon historical returns and projected returns on the underlying mix of invested assets. The pension plan's
76
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investment
targets are 65% equity, 30% fixed income securities and 5% cash. Investments are rebalanced on a periodic basis to approximate these targeted guidelines. The long-term rate of
return assumption used to determine pension expense was 7.75% and 8.5% for 2012 and 2011, respectively. The long-term rate of return assumptions are less than the plan's actual
life-to-date returns. Any difference between the actual experience and the assumed experience is recorded in other comprehensive income and amortized into earnings in the
future. The impact of lowering the expected long-term rate of return on plan assets 0.5% for 2012 would have been an increase in expense of approximately $1.4 million.
- •
- The discount rate represents our estimate of the interest rate at which pension benefits could be effectively settled.
Assumed discount rates are used in the measurement of the projected, accumulated and vested benefit obligations and the service and interest cost components of the net periodic pension cost. In
estimating that rate, rates of return on high-quality fixed-income debt instruments are required. We utilize a bond portfolio model that includes bonds that are rated "AA" or higher with
maturities that match the expected benefit payments under the plan. The discount rate used to determine pension expense was 4.91% for 2012 and 5.71% for 2011. The impact of lowering the discount rate
0.5% for 2012 would have been an increase in expense of approximately $4.5 million.
The
differences generated from changes in assumed discount rates and returns on plan assets are amortized into earnings over a five-year period, which represents the average
amount of time before participants vest in their benefits.
For
the measurement of our 2012 year-end pension obligation and pension expense for 2013, we used a discount rate of 4.13%.
We
also currently provide certain postretirement medical and life insurance coverage for eligible employees. Generally, covered employees who terminate employment after meeting
eligibility requirements are eligible for postretirement coverage for themselves and their dependents. The salaried employee postretirement benefit plans are contributory, with retiree contributions
adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance.
Actuarial
assumptions are required to determine the amounts reported as obligations and costs related to the postretirement benefit plan. The discount rate assumption reflects the rates
available on high-quality fixed-income debt instruments at year-end and is calculated in the same manner as discussed above for the pension plan. The discount rate used to
calculate the postretirement benefit expense was 4.52% and 5.23% for 2012 and 2011, respectively.
Had
the discount rate been lowered by 0.5% in 2012, we would have incurred additional expense of $0.3 million.
For
the measurement of our 2012 year-end other postretirement benefits obligation and postretirement expense for 2013, we used a discount rate of 3.64%.
We provide for deferred income taxes for temporary differences arising from differences between the financial statement and tax basis
of assets and liabilities existing at each balance sheet date using enacted tax rates expected to be in effect when the related taxes are expected to be paid or recovered. We initially recognize the
effects of a tax position when it is more than 50 percent likely, based on the technical merits, that the position will be sustained upon examination, including resolution of the related
appeals or litigation processes, if any. Our determination of whether or not a tax position has met the recognition threshold considers the facts, circumstances, and information available at the
reporting date. A valuation allowance may be recorded to reflect the amount of future tax benefits that management believes are not likely to be realized. We reassess our ability to realize our
deferred tax assets annually in the fourth quarter or when circumstances indicate that the ability to realize deferred
77
Table of Contents
tax
assets has changed. In determining the appropriate valuation allowance, we take into account expected future taxable income, available tax planning strategies and the reversal of temporary
differences. If future taxable income is lower than expected or if expected tax planning strategies are not available as anticipated, we may record additional valuation allowance through income tax
expense in the period such determination is made.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We manage our commodity price risk for our non-trading, thermal coal sales through the use of long-term coal
supply agreements, and to a limited extent, through the use of derivative instruments. Sales commitments in the metallurgical coal market are typically not long-term in nature, and we are
therefore subject to the fluctuations in the market pricing.
At
December 31, 2012, our commitments for 2013 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
2014 |
|
|
|
Tons |
|
$ per ton |
|
Tons |
|
$ per ton |
|
Powder River Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed, Priced |
|
|
86.3 |
|
$ |
13.37 |
|
|
51.1 |
|
$ |
14.22 |
|
Committed, Unpriced |
|
|
9.1 |
|
|
|
|
|
13.6 |
|
|
|
|
Western Bituminous |
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed, Priced |
|
|
11.4 |
|
$ |
38.74 |
|
|
7.4 |
|
$ |
40.86 |
|
Committed, Unpriced |
|
|
1.7 |
|
|
|
|
|
0.2 |
|
|
|
|
Appalachia |
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed, Priced Thermal |
|
|
5.2 |
|
$ |
64.72 |
|
|
1.7 |
|
$ |
53.98 |
|
Committed, Unpriced Thermal |
|
|
0.4 |
|
|
|
|
|
0.3 |
|
|
|
|
Committed, Priced Metallurgical |
|
|
3.9 |
|
$ |
93.37 |
|
|
— |
|
$ |
— |
|
Committed, Unpriced Metallurgical |
|
|
0.2 |
|
|
|
|
|
— |
|
|
|
|
Illinois Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed, Priced |
|
|
2.1 |
|
$ |
42.50 |
|
|
1.7 |
|
$ |
42.33 |
|
We are also exposed to commodity price risk in our coal trading activities, which represents the potential future loss that could be caused by an
adverse change in the market value of coal. Our coal trading portfolio included forward, swap and put and call option contracts at December 31, 2012. The estimated future realization of the
value of the trading portfolio is $1.1 million of losses in the remainder of 2013 and $1.5 million of gains in 2014.
We
monitor and manage market price risk for our trading activities with a variety of tools, including Value at Risk (VaR), position limits, management alerts for mark to market
monitoring and loss limits, scenario analysis, sensitivity analysis and review of daily changes in market dynamics. Management believes that presenting high, low, end of year and average VaR is the
best available method to give investors insight into the level of commodity risk of our trading positions. Illiquid positions, such as long-dated trades that are not quoted by brokers or
exchanges, are not included in VaR.
VaR
is a statistical one-tail confidence interval and down side risk estimate that relies on recent history to estimate how the value of the portfolio of positions will
change if markets behave in the same way as they have in the recent past. While presenting VaR will provide a similar framework for discussing risk across companies, VaR estimates from two independent
sources are rarely calculated in the same way. Without a thorough understanding of how each VaR model was calculated, it would be difficult to compare two different VaR
calculations from different sources. The level of confidence is 95%. The time across which these possible value changes are being estimated is through the end of the next business day. A
closed-form delta-neutral method used throughout the finance and energy sectors is employed to calculate this VaR. VaR is back tested to verify usefulness.
On
average, portfolio value should not fall more than VaR on 95 out of 100 business days. Conversely, portfolio value declines of more than VaR should be expected, on average, 5 out of
100 business days. When more
78
Table of Contents
value
than VaR is lost due to market price changes, VaR is not representative of how much value beyond VaR will be lost.
During
the year ended December 31, 2012, VaR for our coal trading positions that are recorded at fair value through earnings ranged from under $0.1 million to
$1.0 million The linear mean of each daily VaR was $0.4 million. The final VaR at December 31, 2012 was $0.5 million.
We
are exposed to fluctuations in the fair value of coal derivatives that we enter into to manage the price risk related to future coal sales, but for which we do not elect hedge
accounting. Any gains or losses on these derivative instruments would be offset in the pricing of the physical coal sale. During the year ended December 31, 2012 VaR for our risk management
positions that are recorded at fair value through earnings ranged from under $0.8 million to $4.2 million. The linear mean of each daily VaR was $2.2 million. The final VaR at
December 31, 2012 was $0.8 million.
We
are also exposed to the risk of fluctuations in cash flows related to our purchase of diesel fuel. We expect to use approximately 57 to 67 million gallons of diesel fuel for
use in our operations during 2013. We enter into forward physical purchase contracts, as well as purchased heating oil options, to reduce volatility in the price of diesel fuel for our operations. At
December 31, 2012, we had protected the price of substantially all of our 2013 purchases. A $0.25 per gallon decrease in the price of heating oil would not result in an increase in our expense
related to the heating oil derivatives.
We
are exposed to market risk associated with interest rates due to our existing level of indebtedness. At December 31, 2012, of our $5.1 billion principal amount of debt
outstanding, approximately $1.7 billion of outstanding borrowings have interest rates that fluctuate based on changes in the market rates. An increase in the interest rates related to these
borrowings of 25 basis points would not result in an annualized increase in interest expense based on interest rates in effect at December 31, 2012.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and consolidated financial statement schedule of Arch Coal, Inc. and subsidiaries are
included in this Annual Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 December 31, 2012. 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 our internal control
over financial reporting during the three months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
We
incorporate by reference the report of independent registered public accounting firm and management's report on internal control over financial reporting included on
pages F-3 and F-4, respectively, of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 401 of Regulation S-K is included under the caption "Director
Qualifications, Diversity and Biographies" in our 2013 Proxy Statement and in Part I of this report under the caption "Executive Officers." The information required by Items 405, 406 and
407(c)(3), (d)(4) and (d)(5) of Regulation S-K is included under the captions "Section 16(a) Beneficial Ownership
Reporting Compliance," "Corporate Governance Guidelines and Code of Business Conduct," "Nominating Process for Election of Directors" and "Board Meetings and Committees" in our 2013 Proxy Statement.
Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is included under the
captions "Executive Compensation," "Director Compensation," "Compensation Committee Interlocks and Insider Participation" and "Personnel and Compensation Committee Report" (which is furnished) in our
2013 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Items 201(d) and 403 of Regulation S-K is included under the captions "Equity
Compensation Plan Information," "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in our 2013 Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by Items 404 and 407(a) of Regulation S-K is included under the caption "Directors
and Corporate Governance Practices" in our 2013 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 9(e) of Schedule 14A is included under the caption "Fees Paid to Auditors" in our 2013
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Financial Statements
Reference is made to the index set forth on page F-1 of this report.
Financial Statement Schedules
The following financial statement schedule of Arch Coal, Inc. is at the page indicated:
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Schedule
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Page |
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Valuation and Qualifying Accounts
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F-58 |
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All other financial statement schedules listed under SEC rules but not included in this report are omitted because they are not applicable or the
required information is provided in the notes to our consolidated financial statements.
Exhibits
Reference is made to the Exhibit Index beginning on page 83 of this report.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
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Arch Coal, Inc. |
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John W. Eaves
President and Chief Executive Officer |
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March 1, 2013 |
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Signatures
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Capacity
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Date
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John W. Eaves |
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President and Chief Executive Officer, Director (Principal Executive Officer) |
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March 1, 2013 |
John T. Drexler |
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Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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March 1, 2013 |
John W. Lorson |
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Vice President and Chief Accounting Officer (Principal Accounting Officer) |
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March 1, 2013 |
Steven F. Leer |
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Chairman of the Board of Directors |
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March 1, 2013 |
*
David D. Freudenthal |
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Director |
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March 1, 2013 |
*
Patricia F. Godley |
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Director |
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March 1, 2013 |
*
Paul T. Hanrahan |
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Director |
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March 1, 2013 |
81
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Signatures
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Capacity
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Date
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*
Douglas H. Hunt |
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Director |
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March 1, 2013 |
*
J. Thomas Jones |
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Director |
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March 1, 2013 |
*
George C. Morris III |
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Director |
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March 1, 2013 |
*
A. Michael Perry |
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Director |
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March 1, 2013 |
*
Theodore D. Sands |
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Director |
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March 1, 2013 |
*
Wesley M. Taylor |
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Director |
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March 1, 2013 |
*
Peter I. Wold |
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Director |
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March 1, 2013 |
*By: |
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Robert G. Jones,
Attorney-in-Fact |
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82
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Exhibit Index
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| Exhibit |
|
Description |
| |
2.1 |
|
Purchase and Sale Agreement, dated as of December 31, 2005, by and between Arch Coal, Inc. and Magnum Coal Company (incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on
Form 8-K filed on January 6, 2006). |
|
2.2 |
|
Amendment No. 1 to the Purchase and Sale Agreement, dated as of February 7, 2006, by and between Arch Coal, Inc. and Magnum Coal Company (incorporated by reference to Exhibit 2.1 to the
registrant's Annual Report on Form 10-K for the year ended December 31, 2005). |
|
2.3 |
|
Amendment No. 2 to the Purchase and Sale Agreement, dated as of April 27, 2006, by and between Arch Coal, Inc. and Magnum Coal Company (incorporated herein by reference to Exhibit 2.1 to the
registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2006). |
|
2.4 |
|
Amendment No. 3 to the Purchase and Sale Agreement, dated as of August 29, 2007, by and between Arch Coal, Inc. and Magnum Coal Company (incorporated herein by reference to Exhibit 2.1 to the
registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2007). |
|
2.5 |
|
Agreement, dated as of March 27, 2008, by and between Arch Coal, Inc. and Magnum Coal Company (incorporated herein by reference to Exhibit 2.1 to the registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 2008). |
|
2.6 |
|
Amendment No. 1 to Agreement, dated as of February 5, 2009, by and between Arch Coal, Inc. and Magnum Coal Company (incorporated herein by reference to Exhibit 2.6 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 2008). |
|
2.7 |
|
Agreement and Plan of Merger, dated as of May 2, 2011, by and among Arch Coal, Inc., Atlas Acquisition Corp. and International Coal Group, Inc. (incorporated herein by reference to Exhibit 2.1 to
the registrant's Current Report on Form 8-K filed on May 3, 2011). |
|
2.8 |
|
Amendment to Agreement and Plan of Merger, dated as of May 26, 2011 among Arch Coal, Inc., Atlas Acquisition Corp. and International Coal Group, Inc. (incorporated herein by reference to
Exhibit 2.8 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
3.1 |
|
Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated herein by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K filed on May 5, 2006). |
|
3.2 |
|
Arch Coal, Inc. Bylaws, as amended effective as of December 5, 2008 (incorporated herein by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K filed on December 10,
2008). |
|
4.1 |
|
Indenture, dated as of July 31, 2009 by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1
to the registrant's Current Report on Form 8-K filed on July 31, 2009). |
|
4.2 |
|
First Supplemental Indenture, dated as of February 8, 2010, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.1 to the registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2010). |
|
4.3 |
|
Second Supplemental Indenture, dated as of March 12, 2010, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.5 to the registrant's Registration Statement on Form S-4 filed on April 7, 2010) |
|
4.4 |
|
Third Supplemental Indenture, dated as of May 7, 2010, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference
to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2010) |
|
4.5 |
|
Fourth Supplemental Indenture, dated December 16, 2010, by and among Arch Coal West, LLC, Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee
(incorporated by reference to Exhibit 4.7 to the registrant's Annual Report on Form 10-K for the period ended December 31, 2010). |
83
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|
|
|
| Exhibit |
|
Description |
| |
4.6 |
|
Fifth Supplemental Indenture, dated as of June 24, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference to
Exhibit 4.8 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
4.7 |
|
Sixth Supplemental Indenture, dated as of October 7, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to
Exhibit 4.9 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
4.8 |
|
Seventh Supplemental Indenture, dated as of July 2, 2012, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.1 to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). |
|
4.9 |
|
Eighth Supplemental Indenture, dated as of July 31, 2012, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.4 to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). |
|
4.10 |
|
Indenture, dated as of August 9, 2010, by and between Arch Coal, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the registrant's Current Report
on Form 8-K filed on August 9, 2010) |
|
4.11 |
|
First Supplemental Indenture, dated as of August 9, 2010, by and among Arch Coal, Inc., the subsidiary guarantors named therein, and U.S. Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.2 to the registrant's Current Report on Form 8-K filed on August 9, 2010) |
|
4.12 |
|
Second Supplemental Indenture, dated as of December 16, 2010, by and among Arch Coal West, LLC, Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee
(incorporated herein by reference to Exhibit 4.7 to the registrant's Annual Report on Form 10-K for the period ended December 31, 2010). |
|
4.13 |
|
Third Supplemental Indenture, dated as of June 24, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference
to Exhibit 4.13 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
4.14 |
|
Fourth Supplemental Indenture, dated as of October 7, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.14 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
4.15 |
|
Fifth Supplemental Indenture, dated as of July 2, 2012, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference
to Exhibit 4.2 to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). |
|
4.16 |
|
Sixth Supplemental Indenture, dated as of July 31, 2012, by and among Arch Coal, Inc., the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (incorporated herein by reference
to Exhibit 4.5 to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). |
|
4.17 |
|
Indenture, dated as of June 14, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and UMB Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1
to the registrant's Current Report on Form 8-K filed on June 14, 2011). |
|
4.18 |
|
First Supplemental Indenture, dated as of July 5, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and UMB Bank National Association, as trustee (incorporated herein by reference
to Exhibit 4.16 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
4.19 |
|
Second Supplemental Indenture, dated as of October 7, 2011, by and among Arch Coal, Inc., the subsidiary guarantors named therein and UMB Bank National Association, as trustee (incorporated herein by
reference to Exhibit 4.17 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
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| Exhibit |
|
Description |
| |
4.20 |
|
Third Supplemental Indenture, dated as of July 2, 2012, by and among Arch Coal, Inc., the subsidiary guarantors named therein and UMB Bank National Association, as trustee (incorporated herein by reference to
Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). |
|
4.21 |
|
Fourth Supplemental Indenture, dated as of July 31, 2012, by and among Arch Coal, Inc., the subsidiary guarantors named therein and UMB Bank National Association, as trustee (incorporated herein by reference
to Exhibit 4.6 to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2012). |
|
4.22 |
|
Indenture, dated as of November 21, 2012, among Arch Coal, Inc., the subsidiary guarantors named therein and UMB Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to
the registrant's Current Report on Form 8-K filed on November 26, 2012). |
|
4.23 |
|
Registration Rights Agreement, dated as of November 21, 2012, by and among Arch Coal, Inc., the guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of
the initial purchasers named therein (incorporated herein by reference to Exhibit 4.3 to the registrant's Current Report on Form 8-K filed on November 26, 2012). |
|
10.1 |
|
Amended and Restated Credit Agreement, dated as of June 14, 2011, by and among the Company, the lenders party thereto, PNC Bank, National Association, as administrative agent and Bank of America, N.A., The Royal
Bank of Scotland PLC and Citibank, N.A., as co-documentation agents (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on June 17, 2011). |
|
10.2 |
|
Incremental Amendment, dated as of November 21, 2012, by and among Arch Coal, Inc., as Borrower, the guarantors party thereto, the incremental term loan lenders party thereto, Bank of America, N.A., as Term
Loan Administrative Agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, PNC Capital Markets LLC, Morgan Stanley Senior Funding, Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, BBVA
Securities Inc., RBS Securities Inc. and Union Bank, N.A., as Lead Arrangers, as Lead Arrangers (incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on November 26,
2012). |
|
10.3 |
|
Second Amendment to Amended and Restated Credit Agreement, dated as of November 21, 2012, by and among Arch Coal, Inc., as Borrower, the guarantors party thereto, the lenders party thereto, Bank of America,
N.A., as Term Loan Administrative Agent, and PNC Bank, National Association, as Revolver Administrative Agent (incorporated herein by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on November 26,
2012). |
|
10.4 |
|
Third Amendment to Amended and Restated Credit Agreement, dated as of November 21, 2012, by and among Arch Coal, Inc., as Borrower, the guarantors party thereto, the revolver lenders party thereto and PNC
Bank, National Association, as Revolver Administrative Agent (incorporated herein by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K filed on November 26, 2012). |
|
10.5 |
* |
Form of Employment Agreement for Chairman and Executive Officers of Arch Coal, Inc. (incorporated herein by reference to Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the year ended
December 31, 2011). |
|
10.6 |
|
Coal Lease Agreement dated as of March 31, 1992, among Allegheny Land Company, as lessee, and UAC and Phoenix Coal Corporation, as lessors, and related guarantee (incorporated herein by reference to the Current
Report on Form 8-K filed by Ashland Coal, Inc. on April 6, 1992). |
|
10.7 |
|
Federal Coal Lease dated as of June 24, 1993 between the U.S. Department of the Interior and Southern Utah Fuel Company (incorporated herein by reference to Exhibit 10.17 to the registrant's Annual Report on
Form 10-K for the year ended December 31, 1998). |
|
10.8 |
|
Federal Coal Lease between the U.S. Department of the Interior and Utah Fuel Company (incorporated herein by reference to Exhibit 10.18 to the registrant's Annual Report on Form 10-K for the year ended
December 31, 1998). |
|
10.9 |
|
Federal Coal Lease dated as of July 19, 1997 between the U.S. Department of the Interior and Canyon Fuel Company, LLC (incorporated herein by reference to Exhibit 10.19 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 1998). |
85
Table of Contents
|
|
|
|
| Exhibit |
|
Description |
| |
10.10 |
|
Federal Coal Lease dated as of January 24, 1996 between the U.S. Department of the Interior and the Thunder Basin Coal Company (incorporated herein by reference to Exhibit 10.20 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 1998). |
|
10.11 |
|
Federal Coal Lease Readjustment dated as of November 1, 1967 between the U.S. Department of the Interior and the Thunder Basin Coal Company (incorporated herein by reference to Exhibit 10.21 to the
registrant's Annual Report on Form 10-K for the year ended December 31, 1998). |
|
10.12 |
|
Federal Coal Lease effective as of May 1, 1995 between the U.S. Department of the Interior and Mountain Coal Company (incorporated herein by reference to Exhibit 10.22 to the registrant's Annual Report on
Form 10-K for the year ended December 31, 1998). |
|
10.13 |
|
Federal Coal Lease dated as of January 1, 1999 between the Department of the Interior and Ark Land Company (incorporated herein by reference to Exhibit 10.23 to the registrant's Annual Report on
Form 10-K for the year ended December 31, 1998). |
|
10.14 |
|
Federal Coal Lease dated as of October 1, 1999 between the U.S. Department of the Interior and Canyon Fuel Company, LLC (incorporated herein by reference to Exhibit 10 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999). |
|
10.15 |
|
Federal Coal Lease effective as of March 1, 2005 by and between the United States of America and Ark Land LT, Inc. covering the tract of land known as "Little Thunder" in Campbell County, Wyoming
(incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by the registrant on February 10, 2005). |
|
10.16 |
|
Modified Coal Lease (WYW71692) executed January 1, 2003 by and between the United States of America, through the Bureau of Land Management, as lessor, and Triton Coal Company, LLC, as lessee, covering a
tract of land known as "North Rochelle" in Campbell County, Wyoming (incorporated by reference to Exhibit 10.24 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2004). |
|
10.17 |
|
Coal Lease (WYW127221) executed January 1, 1998 by and between the United States of America, through the Bureau of Land Management, as lessor, and Triton Coal Company, LLC, as lessee, covering a tract of
land known as "North Roundup" in Campbell County, Wyoming (incorporated by reference to Exhibit 10.24 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2004). |
|
10.18 |
|
State Coal Lease executed October 1, 2004 by and between The State of Utah, Thru School & Institutional Trust Lands Admin, as lessor, and Ark Land Company and Arch Coal, Inc., as lessees, covering a
tract of land located in Seiever County, Utah (incorporated by reference to Exhibit 10.20 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006). |
|
10.19 |
|
State Coal Lease executed September 1, 2000 by and between The State of Utah, Thru School & Institutional Trust Lands Admin, as lessor, and Canyon Fuel Company, LLC, as lessee, for lands located in
Carbon County, Utah (incorporated by reference to Exhibit 10.21 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006). |
|
10.20 |
|
Federal Coal Lease executed September 1, 1996 by and between the Bureau of Land Management, as lessor, and Canyon Fuel Company, LLC, as lessee, covering a tract of land known as "The North Lease" in Carbon
County, Utah (incorporated by reference to Exhibit 10.22 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006). |
|
10.21 |
|
State Coal Lease executed January 18, 2008 by and between The State of Utah, Thru School & Institutional Trust Lands Admin, as lessor, and Ark Land Company, as lessee, for lands located in Emery County,
Utah (incorporated by reference to Exhibit 10.21 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2008). |
|
10.22 |
|
Form of Indemnity Agreement between Arch Coal, Inc. and Indemnitee (as defined therein) (incorporated herein by reference to Exhibit 10.15 to the Registration Statement on Form S-4 (Registration
No. 333-28149) filed by the registrant on May 30, 1997). |
|
10.23 |
* |
Arch Coal, Inc. Incentive Compensation Plan For Executive Officers (incorporated herein by reference to Appendix B to the proxy statement on Schedule 14A filed by the registrant on March 22,
2010). |
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|
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| Exhibit |
|
Description |
| |
10.24 |
* |
Arch Coal, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K filed on December 11, 2008). |
|
10.25 |
* |
Arch Coal, Inc. 1997 Stock Incentive Plan (as amended and restated on October 21, 2010) (incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on
October 27, 2010). |
|
10.26 |
* |
Arch Mineral Corporation 1996 ERISA Forfeiture Plan (incorporated herein by reference to Exhibit 10.20 to the Registration Statement on Form S-4 (Registration No. 333-28149) filed by the registrant on
May 30, 1997). |
|
10.27 |
* |
Arch Coal, Inc. Outside Directors' Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.4 of the registrant's Current Report on Form 8-K filed on December 11,
2008). |
|
10.28 |
* |
Arch Coal, Inc. Supplemental Retirement Plan (as amended on December 5, 2008) (incorporated herein by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on
December 11, 2008). |
|
10.29 |
* |
Form of Restricted Stock Unit Contract (incorporated herein by reference to Exhibit 10.5 to the registrant's Current Report on Form 8-K filed on February 24, 2006). |
|
10.30 |
* |
Form of Non-Qualified Stock Option Agreement (for stock options granted prior to February 21, 2008) (incorporated herein by reference to Exhibit 10.35 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2006). |
|
10.31 |
* |
Form of 2008 Restricted Stock Unit Contract for Messrs. Leer and Eaves (incorporated herein by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K filed on February 27,
2008). |
|
10.32 |
* |
Form of 2008 Non-Qualified Stock Option Agreement for Messrs. Leer and Eaves (incorporated herein by reference to Exhibit 10.4 to the registrant's Current Report on Form 8-K filed on February 27,
2008). |
|
10.33 |
* |
Form of Non-Qualified Stock Option Agreement (for stock options granted on or after February 21, 2008) (incorporated herein by reference to Exhibit 10.5 to the registrant's Current Report on Form 8-K
filed on February 27, 2008). |
|
10.34 |
* |
Form of Performance Unit Contract (incorporated herein by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on February 23, 2009). |
|
10.35 |
* |
Form of 2011 Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2012). |
|
10.36 |
* |
Form of 2011 Restricted Stock Unit Contract (incorporated herein by reference to Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2012). |
|
10.37 |
* |
Form of 2011 Restricted Stock Unit Contract for Non-Employee Directors (incorporated herein by reference to Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the period ended March 31,
2012). |
|
10.38 |
* |
Form of 2011 Performance Unit Contract (incorporated herein by reference to Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2012). |
|
10.39 |
* |
Form of Director Indemnity Agreement (incorporated herein by reference to Exhibit 10.40 to the registrant's Annual Report on Form 10-K for the period ended December 31, 2010). |
|
10.40 |
|
Amended and Restated Receivables Purchase Agreement, dated as of February 24, 2020, among Arch Receivable Company, LLC, Arch Coal Sales Company, Inc., Market Street Funding LLC, as issuer, the
financial institutions from time to time party thereto, as LC Participants, and PNC Bank, National Association, as Administrator on behalf of the Purchasers and as LC Bank (incorporated herein by reference to Exhibit 10.2 to the registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 2010). |
|
10.41 |
|
First Amendment to Amended and Restated Receivables Purchase Agreement, dated January 31, 2011, among Arch Receivable Company, LLC, Arch Coal Sales Company, Inc. and the other parties thereto
(incorporated by reference to Exhibit 10.41 to the registrant's Annual Report on Form 10-K for the period ended December 31, 2010). |
87
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|
|
|
| Exhibit |
|
Description |
| |
10.42 |
|
Second Amendment to Amended and Restated Receivables Purchase Agreement dated June 15, 2011 (incorporated by reference to Exhibit 10.5 to the registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2011). |
|
10.43 |
|
Third Amendment to Amended and Restated Receivables Purchase Agreement dated November 21, 2011, among Arch Receivable Company, LLC, Arch Coal Sales Company, Inc. and the other parties thereto
(incorporated herein by reference to Exhibit 10.38 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
10.44 |
|
Fourth Amendment to Amended and Restated Receivables Purchase Agreement dated December 13, 2011, among Arch Receivable Company, LLC, Arch Coal Sales Company, Inc. and the other parties thereto
(incorporated herein by reference to Exhibit 10.39 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011). |
|
10.45 |
|
Fifth Amendment to Amended and Restated Receivables Purchase Agreement dated December 11, 2012, among Arch Receivable Company, LLC, Arch Coal Sales Company, Inc. and the other parties
thereto. |
|
12.1 |
|
Computation of ratio of earnings to combined fixed charges and preference dividends. |
|
21.1 |
|
Subsidiaries of the registrant. |
|
23.1 |
|
Consent of Ernst & Young LLP. |
|
23.2 |
|
Consent of Weir International, Inc. |
|
24.1 |
|
Power of Attorney. |
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of John W. Eaves. |
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of John T. Drexler. |
|
32.1 |
|
Section 1350 Certification of John W. Eaves. |
|
32.2 |
|
Section 1350 Certification of John T. Drexler. |
|
95 |
|
Mine Safety Disclosure Exhibit. |
|
101 |
|
Interactive Data File (Form 10-K for the year ended December 31, 2012 filed in XBRL). The financial information contained in the XBRL-related documents is "unaudited" and "unreviewed." |
- *
- Denotes
management contract or compensatory plan arrangements.
88
Table of Contents
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Arch Coal, Inc. and subsidiaries and reports of independent registered public
accounting firm follow.
Index to Consolidated Financial Statements
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders of Arch Coal, Inc.
We
have audited the accompanying consolidated balance sheets of Arch Coal, Inc. (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of
operations and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arch Coal, Inc. at December 31,
2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted
accounting principles.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Arch Coal Inc.'s internal control over financial reporting
as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 1, 2013, expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
St. Louis,
Missouri
March 1, 2013
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders of Arch Coal, Inc.
We
audited Arch Coal Inc.'s (the Company's) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, Arch Coal, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO
criteria.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arch Coal, Inc. as of
December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2012, and our report dated March 1, 2013, expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
St. Louis,
Missouri
March 1, 2013
F-3
Table of Contents
REPORT OF MANAGEMENT
The management of Arch Coal, Inc. (the "Company") is responsible for the preparation of the consolidated financial statements
and related financial information in this annual report. The financial statements are prepared in accordance with accounting principles generally accepted in the United States and necessarily include
some amounts that are based on management's informed estimates and judgments, with appropriate consideration given to materiality.
The
Company maintains a system of internal accounting controls designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements
and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting controls should not exceed
the value of the benefits derived. The Company has a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the system of internal accounting controls.
The
Audit Committee of the Board of Directors, comprised of independent directors, meets regularly with management, the internal auditors, and the independent auditors to discuss matters
relating to financial reporting, internal accounting control, and the nature, extent and results of the audit effort. The independent auditors and internal auditors have full and free access to the
Audit Committee, with and without management present.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Arch Coal, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, including its principal
executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria set forth in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its
evaluation, management concluded that the Company's internal control over financial reporting is effective as of December 31, 2012.
The
Company's independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company's internal control over financial reporting.
|
|
|
John W. Eaves
Chairman and Chief Executive Officer |
|
John T. Drexler
Senior Vice President and Chief Financial Officer |
F-4
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands, except per share data)
|
|
REVENUES |
|
$ |
4,159,038 |
|
$ |
4,285,895 |
|
$ |
3,186,268 |
|
COSTS, EXPENSES AND OTHER OPERATING |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
3,438,013 |
|
|
3,267,910 |
|
|
2,395,812 |
|
Depreciation, depletion and amortization |
|
|
525,508 |
|
|
466,587 |
|
|
365,066 |
|
Amortization of acquired sales contracts, net |
|
|
(25,189 |
) |
|
(22,069 |
) |
|
35,606 |
|
Change in fair value of coal derivatives and coal trading activities, net |
|
|
(16,590 |
) |
|
(2,907 |
) |
|
8,924 |
|
Coal derivative settlements, non-hedging |
|
|
(43,990 |
) |
|
7 |
|
|
(4,542 |
) |
Selling, general and administrative expenses |
|
|
134,299 |
|
|
119,056 |
|
|
118,177 |
|
Contract settlement resulting from Patriot Coal bankruptcy |
|
|
58,335 |
|
|
— |
|
|
— |
|
Legal contingencies |
|
|
(79,532 |
) |
|
— |
|
|
— |
|
Mine closure and asset impairment costs |
|
|
523,568 |
|
|
7,316 |
|
|
— |
|
Goodwill and other intangible asset impairment |
|
|
346,423 |
|
|
— |
|
|
— |
|
Acquisition and transition costs |
|
|
— |
|
|
47,360 |
|
|
— |
|
Gain on Knight Hawk transaction |
|
|
— |
|
|
— |
|
|
(41,577 |
) |
Other operating income, net |
|
|
(20,219 |
) |
|
(10,941 |
) |
|
(15,182 |
) |
| |
|
|
|
|
|
|
|
|
|
|
4,840,626 |
|
|
3,872,319 |
|
|
2,862,284 |
|
| |
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(681,588 |
) |
|
413,576 |
|
|
323,984 |
|
Interest expense, net: |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(317,626 |
) |
|
(230,186 |
) |
|
(142,549 |
) |
Interest income |
|
|
5,478 |
|
|
3,309 |
|
|
2,449 |
|
| |
|
|
|
|
|
|
|
|
|
|
(312,148 |
) |
|
(226,877 |
) |
|
(140,100 |
) |
| |
|
|
|
|
|
|
|
Other nonoperating expense |
|
|
|
|
|
|
|
|
|
|
Net loss resulting from early retirement and refinancing of debt |
|
|
(23,668 |
) |
|
(1,958 |
) |
|
(6,776 |
) |
Bridge financing costs related to ICG |
|
|
— |
|
|
(49,490 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
(23,668 |
) |
|
(51,448 |
) |
|
(6,776 |
) |
| |
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,017,404 |
) |
|
135,251 |
|
|
177,108 |
|
Provision for (benefit from) income taxes |
|
|
(333,717 |
) |
|
(7,589 |
) |
|
17,714 |
|
| |
|
|
|
|
|
|
|
Net income (loss) |
|
|
(683,687 |
) |
|
142,840 |
|
|
159,394 |
|
Less: Net income attributable to noncontrolling interest |
|
|
(268 |
) |
|
(1,157 |
) |
|
(537 |
) |
| |
|
|
|
|
|
|
|
Net income (loss) attributable to Arch Coal, Inc. |
|
$ |
(683,955 |
) |
$ |
141,683 |
|
$ |
158,857 |
|
| |
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(3.24 |
) |
$ |
0.75 |
|
$ |
0.98 |
|
| |
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
(3.24 |
) |
$ |
0.74 |
|
$ |
0.97 |
|
| |
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
211,381 |
|
|
190,086 |
|
|
162,398 |
|
| |
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
211,381 |
|
|
190,905 |
|
|
163,210 |
|
| |
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.20 |
|
$ |
0.43 |
|
$ |
0.39 |
|
| |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Table of Contents
Arch Coal, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
2011 |
|
2010 |
|
Net income (loss) |
|
$ |
(683,687 |
) |
$ |
142,840 |
|
$ |
159,394 |
|
Other comprehensive income (loss), net of income taxes: |
|
|
|
|
|
|
|
|
|
|
Pension, postretirement and other post-employment benefits |
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) |
|
|
(14,523 |
) |
|
4,271 |
|
|
9,814 |
|
Net loss reclassified to income |
|
|
918 |
|
|
1,665 |
|
|
101 |
|
| |
|
|
|
|
|
|
|
|
|
|
(13,605 |
) |
|
5,936 |
|
|
9,915 |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) |
|
|
(1,924 |
) |
|
114 |
|
|
1,841 |
|
Net loss reclassified to income |
|
|
4 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
(1,920 |
) |
|
114 |
|
|
1,841 |
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
Unrealized gains |
|
|
4,320 |
|
|
2,913 |
|
|
221 |
|
Net (gains) losses reclassified to income |
|
|
2,653 |
|
|
(10,563 |
) |
|
1,514 |
|
| |
|
|
|
|
|
|
|
|
|
|
6,973 |
|
|
(7,650 |
) |
|
1,735 |
|
| |
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(8,552 |
) |
|
(1,600 |
) |
|
13,491 |
|
| |
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(692,239 |
) |
$ |
141,240 |
|
$ |
172,885 |
|
| |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
F-6
Table of Contents
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands, except
per share data)
|
|
ASSETS |
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
784,622 |
|
$ |
138,149 |
|
Restricted cash |
|
|
3,453 |
|
|
10,322 |
|
Short term investments |
|
|
234,305 |
|
|
— |
|
Trade accounts receivable |
|
|
247,539 |
|
|
380,595 |
|
Other receivables |
|
|
84,541 |
|
|
88,584 |
|
Inventories |
|
|
365,424 |
|
|
377,490 |
|
Prepaid royalties |
|
|
11,416 |
|
|
21,944 |
|
Deferred income taxes |
|
|
67,360 |
|
|
42,051 |
|
Coal derivative assets |
|
|
22,975 |
|
|
13,335 |
|
Other |
|
|
92,469 |
|
|
110,304 |
|
| |
|
|
|
|
|
Total current assets |
|
|
1,914,104 |
|
|
1,182,774 |
|
Property, plant and equipment: |
|
|
|
|
|
|
|
Coal lands and mineral rights |
|
|
6,218,776 |
|
|
6,578,430 |
|
Plant and equipment |
|
|
3,391,265 |
|
|
3,225,985 |
|
Deferred mine development |
|
|
1,079,856 |
|
|
1,064,279 |
|
| |
|
|
|
|
|
|
|
|
10,689,897 |
|
|
10,868,694 |
|
Less accumulated depreciation, depletion and amortization |
|
|
(3,352,799 |
) |
|
(2,919,544 |
) |
Property, plant and equipment, net |
|
|
7,337,098 |
|
|
7,949,150 |
|
Other assets: |
|
|
|
|
|
|
|
Prepaid royalties |
|
|
87,773 |
|
|
86,626 |
|
Goodwill |
|
|
265,423 |
|
|
596,103 |
|
Equity investments |
|
|
242,215 |
|
|
225,605 |
|
Other |
|
|
160,164 |
|
|
173,701 |
|
| |
|
|
|
|
|
Total other assets |
|
|
755,575 |
|
|
1,082,035 |
|
| |
|
|
|
|
|
Total assets |
|
$ |
10,006,777 |
|
$ |
10,213,959 |
|
| |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
224,418 |
|
$ |
383,782 |
|
Coal derivative liabilities |
|
|
1,737 |
|
|
7,828 |
|
Accrued expenses and other current liabilities |
|
|
318,018 |
|
|
348,207 |
|
Current maturities of debt and short-term borrowings |
|
|
32,896 |
|
|
280,851 |
|
| |
|
|
|
|
|
Total current liabilities |
|
|
577,069 |
|
|
1,020,668 |
|
Long-term debt |
|
|
5,085,879 |
|
|
3,762,297 |
|
Asset retirement obligations |
|
|
409,705 |
|
|
446,784 |
|
Accrued pension benefits |
|
|
67,630 |
|
|
48,244 |
|
Accrued postretirement benefits other than pension |
|
|
45,086 |
|
|
42,309 |
|
Accrued workers' compensation |
|
|
81,629 |
|
|
71,948 |
|
Deferred income taxes |
|
|
664,182 |
|
|
976,753 |
|
Other noncurrent liabilities |
|
|
221,030 |
|
|
255,382 |
|
| |
|
|
|
|
|
Total liabilities |
|
|
7,152,210 |
|
|
6,624,385 |
|
Redeemable noncontrolling interest |
|
|
— |
|
|
11,534 |
|
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, $0.01 par value, authorized 260,000 shares, issued 213,759 and 213,183 shares at December 31, 2012 and December 31, 2011,
respectively |
|
|
2,141 |
|
|
2,136 |
|
Paid-in capital |
|
|
3,026,823 |
|
|
3,015,349 |
|
Treasury stock, 1,512 shares at December 31, 2012 and 2011, at cost |
|
|
(53,848 |
) |
|
(53,848 |
) |
Retained earnings (accumulated deficit) |
|
|
(104,042 |
) |
|
622,353 |
|
Accumulated other comprehensive loss |
|
|
(16,507 |
) |
|
(7,950 |
) |
| |
|
|
|
|
|
Total stockholders' equity |
|
|
2,854,567 |
|
|
3,578,040 |
|
| |
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
10,006,777 |
|
$ |
10,213,959 |
|
| |
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Table of Contents
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Years Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
Paid-In
Capital |
|
Treasury
Stock, at
Cost |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Loss |
|
Total |
|
|
|
(In thousands, except per share data)
|
|
BALANCE AT JANUARY 1, 2010 |
|
$ |
1,643 |
|
$ |
1,721,230 |
|
$ |
(53,848 |
) |
$ |
465,934 |
|
$ |
(19,853 |
) |
$ |
2,115,106 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
158,857 |
|
|
13,436 |
|
|
172,293 |
|
Dividends on common shares ($0.39 per share) |
|
|
|
|
|
|
|
|
|
|
|
(63,373 |
) |
|
|
|
|
(63,373 |
) |
Issuance of 9 shares of common stock under the stock incentive plan — restricted stock and restricted stock units, net of forfeitures |
|
|
0 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
Issuance of 155 shares of common stock under the stock incentive plan — stock options including income tax benefits |
|
|
2 |
|
|
1,762 |
|
|
|
|
|
|
|
|
|
|
|
1,764 |
|
Employee stock-based compensation expense |
|
|
|
|
|
11,717 |
|
|
|
|
|
|
|
|
|
|
|
11,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2010 |
|
|
1,645 |
|
|
1,734,709 |
|
|
(53,848 |
) |
|
561,418 |
|
|
(6,417 |
) |
|
2,237,507 |
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
141,683 |
|
|
(1,533 |
) |
|
140,150 |
|
Dividends on common shares ($0.43 per share) |
|
|
|
|
|
|
|
|
|
|
|
(80,748 |
) |
|
|
|
|
(80,748 |
) |
Issuance of 48,705 common shares |
|
|
487 |
|
|
1,267,446 |
|
|
|
|
|
|
|
|
|
|
|
1,267,933 |
|
Issuance of 162 shares of common stock under the stock incentive plan — restricted stock and restricted stock units, net of forfeitures |
|
|
2 |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
Issuance of 199 shares of common stock under the stock incentive plan — stock options including income tax benefits |
|
|
2 |
|
|
2,314 |
|
|
|
|
|
|
|
|
|
|
|
2,316 |
|
Employee stock-based compensation expense |
|
|
|
|
|
10,882 |
|
|
|
|
|
|
|
|
|
|
|
10,882 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2011 |
|
|
2,136 |
|
|
3,015,349 |
|
|
(53,848 |
) |
|
622,353 |
|
|
(7,950 |
) |
|
3,578,040 |
|
Total comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
(683,955 |
) |
|
(8,557 |
) |
|
(692,512 |
) |
Dividends on common shares ($0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
(42,440 |
) |
|
|
|
|
(42,440 |
) |
Redemption of noncontrolling interest |
|
|
|
|
|
(5,474 |
) |
|
|
|
|
|
|
|
|
|
|
(5,474 |
) |
Issuance of 49 shares of common stock under the stock incentive plan — restricted stock and restricted stock units, net of forfeitures |
|
|
0 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
Issuance of 526 shares of common stock under the stock incentive plan — stock options including income tax benefits |
|
|
5 |
|
|
5,126 |
|
|
|
|
|
|
|
|
|
|
|
5,131 |
|
Employee stock-based compensation expense |
|
|
|
|
|
11,822 |
|
|
|
|
|
|
|
|
|
|
|
11,822 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2012 |
|
$ |
2,141 |
|
$ |
3,026,823 |
|
$ |
(53,848 |
) |
$ |
(104,042 |
) |
$ |
(16,507 |
) |
$ |
2,854,567 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-8
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(683,687 |
) |
$ |
142,840 |
|
$ |
159,394 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
525,508 |
|
|
466,587 |
|
|
365,066 |
|
Amortization of acquired sales contracts, net |
|
|
(25,189 |
) |
|
(22,069 |
) |
|
35,606 |
|
Noncash mine closure and asset impairment costs |
|
|
515,491 |
|
|
7,316 |
|
|
— |
|
Goodwill and other intangible asset impairment |
|
|
346,423 |
|
|
— |
|
|
— |
|
Bridge financing costs related to ICG |
|
|
— |
|
|
49,490 |
|
|
— |
|
Amortization relating to financing activities |
|
|
20,238 |
|
|
14,067 |
|
|
10,398 |
|
Net loss resulting from early retirement and refinancing of debt |
|
|
23,668 |
|
|
1,958 |
|
|
6,776 |
|
Prepaid royalties expensed |
|
|
22,650 |
|
|
34,842 |
|
|
34,605 |
|
Employee stock-based compensation expense |
|
|
11,822 |
|
|
10,882 |
|
|
11,717 |
|
Gain on Knight Hawk transaction |
|
|
— |
|
|
— |
|
|
(41,577 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
113,531 |
|
|
(74,914 |
) |
|
(7,287 |
) |
Inventories |
|
|
9,468 |
|
|
(50,900 |
) |
|
5,160 |
|
Coal derivative assets and liabilities |
|
|
(13,158 |
) |
|
6,079 |
|
|
9,554 |
|
Accounts payable, accrued expenses and other current liabilities |
|
|
(171,580 |
) |
|
52,191 |
|
|
87,807 |
|
Income taxes, net |
|
|
27,545 |
|
|
(21,759 |
) |
|
(1,364 |
) |
Deferred income taxes |
|
|
(336,036 |
) |
|
10,519 |
|
|
(12,405 |
) |
Asset retirement obligations |
|
|
(42,531 |
) |
|
3,868 |
|
|
23,997 |
|
Other |
|
|
(11,359 |
) |
|
11,245 |
|
|
9,700 |
|
| |
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
332,804 |
|
|
642,242 |
|
|
697,147 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
— |
|
|
(2,894,339 |
) |
|
— |
|
Capital expenditures |
|
|
(395,225 |
) |
|
(540,936 |
) |
|
(314,657 |
) |
Additions to prepaid royalties |
|
|
(13,269 |
) |
|
(29,957 |
) |
|
(27,355 |
) |
Proceeds from dispositions of property, plant and equipment |
|
|
22,825 |
|
|
25,887 |
|
|
330 |
|
Purchases of short term investments |
|
|
(236,862 |
) |
|
— |
|
|
— |
|
Proceeds from sales of short term investments |
|
|
1,754 |
|
|
— |
|
|
— |
|
Investments in and advances to affiliates |
|
|
(17,758 |
) |
|
(61,909 |
) |
|
(46,185 |
) |
Purchase of noncontrolling interest |
|
|
(17,500 |
) |
|
— |
|
|
— |
|
Change in restricted cash |
|
|
6,869 |
|
|
5,167 |
|
|
— |
|
Consideration paid related to prior business acquisitions |
|
|
— |
|
|
(829 |
) |
|
(1,262 |
) |
| |
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(649,166 |
) |
|
(3,496,916 |
) |
|
(389,129 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of senior notes |
|
|
359,753 |
|
|
2,000,000 |
|
|
500,000 |
|
Proceeds from term note |
|
|
1,633,500 |
|
|
— |
|
|
— |
|
Proceeds from the issuance of common stock, net |
|
|
— |
|
|
1,267,933 |
|
|
— |
|
Payments to retire debt |
|
|
(452,934 |
) |
|
(605,178 |
) |
|
(505,627 |
) |
Net increase (decrease) in borrowings under lines of credit and commercial paper program |
|
|
(481,300 |
) |
|
424,396 |
|
|
(196,549 |
) |
Payments on term note |
|
|
(7,625 |
) |
|
— |
|
|
|
|
Net payments on other debt |
|
|
(682 |
) |
|
5,334 |
|
|
82 |
|
Debt financing costs |
|
|
(50,568 |
) |
|
(114,823 |
) |
|
(12,751 |
) |
Dividends paid |
|
|
(42,440 |
) |
|
(80,748 |
) |
|
(63,373 |
) |
Issuance of common stock under incentive plans |
|
|
5,131 |
|
|
2,316 |
|
|
1,764 |
|
Contribution from noncontrolling interest |
|
|
— |
|
|
— |
|
|
891 |
|
| |
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
962,835 |
|
|
2,899,230 |
|
|
(275,563 |
) |
| |
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
646,473 |
|
|
44,556 |
|
|
32,455 |
|
Cash and cash equivalents, beginning of period |
|
|
138,149 |
|
|
93,593 |
|
|
61,138 |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
784,622 |
|
$ |
138,149 |
|
$ |
93,593 |
|
| |
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
310,241 |
|
$ |
213,697 |
|
$ |
134,866 |
|
Cash refunded (paid) during the year for income taxes, net |
|
$ |
28,057 |
|
$ |
(7,094 |
) |
$ |
(36,765 |
) |
The accompanying notes are an integral part of the consolidated financial statements.
F-9
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Accounting Policies
The consolidated financial statements include the accounts of Arch Coal, Inc. and its subsidiaries and controlled entities (the
"Company"). The Company's primary business is the production of thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial
and export markets. On June 15, 2011, the Company acquired International Coal Group, Inc. ("ICG"). The Company currently operates 15 mining complexes in West Virginia, Kentucky,
Maryland, Virginia, Illinois, Wyoming, Colorado and Utah. In addition, the Company has a metallurgical coal mine in development in West Virginia. All subsidiaries are wholly-owned. Intercompany
transactions and accounts have been eliminated in consolidation.
The
Company's subsidiary Arch Western Resources, LLC ("Arch Western") operates coal mines in Wyoming, Colorado and Utah. On April 9, 2012, Delta Housing, Inc., a
subsidiary of BP p.l.c. and a joint venture partner in Arch Western, exercised their contractual right to require the Company to purchase their 0.5% common and their preferred membership interests in
Arch Western. With the payment of the negotiated purchase amount of $17.5 million on July 2, 2012, Arch Western became a wholly-owned subsidiary.
There are no accounting pronouncements whose adoption had, or is expected to have, a material impact on the Company's consolidated
financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses in the accompanying consolidated financial statements and the
disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Cash and cash equivalents are stated at cost. Cash equivalents consist of highly-liquid investments with an original maturity of three
months or less when purchased. At December 31, 2012 and 2011, the carrying amounts of cash and cash equivalents approximate their fair value.
The Company establishes an allowance for uncollectible receivables for the amounts of trade accounts receivable and other receivables
that are not expected to be collected, based on past collection history, the economic environment and specified risks identified in the receivables portfolio. Receivables are considered past due if
the full payment is not received by the contractual due date. At December 31, 2012 and 2011, there was either no allowance or an insignificant allowance for uncollectible receivables.
Coal and supplies inventories are valued at the lower of average cost or market. Coal inventory costs include labor, supplies,
equipment costs, transportation costs incurred prior to the transfer of title to customers and operating overhead. The costs of removing overburden, called stripping costs, incurred during the
production phase
F-10
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of
the mine are considered variable production costs and are included in the cost of the coal extracted during the period the stripping costs are incurred.
Investments and membership interests in joint ventures are accounted for under the equity method of accounting if the Company has the
ability to exercise significant influence, but not control, over the entity. The Company's share of the entity's income or loss is reflected in other operating income, net in the consolidated
statements of operations. Information about investment activity is provided in Note 8, "Equity Investments and Membership Interests in Joint Ventures."
Marketable
equity and debt securities held by the Company that do not qualify for equity method accounting are classified as available-for-sale and are recorded
at their fair value on the balance sheet. Unrealized gains and losses on these investments are recorded in other comprehensive income or loss. A decline in the value of an investment that is
considered other-than-temporary would be recognized in operating expenses.
Leased mineral rights are often acquired through royalty payments. When royalty payments represent prepayments recoupable against
future production, they are recorded as a prepaid asset, with amounts expected to be recouped within one year classified as current. When the coal is mined under these leases the royalties are
recouped and the prepayment is charged to cost of sales.
Coal supply agreements (sales contracts) acquired in a business combination are capitalized at their fair value and amortized over the
tons of coal shipped during the term of the contract. The fair value of a sales contract is determined by discounting the cash flows attributable to the difference between the contract price and the
prevailing forward prices for the tons under contract at the date of acquisition. See Note 4, "Acquired Sales Contracts" for further information related to the Company's acquired sales
contracts.
Costs to acquire permits for exploration activities are capitalized. Drilling and other costs related to locating coal deposits and
evaluating the economic viability of such deposits are expensed as incurred.
Property, Plant and Equipment
Plant and Equipment
Plant and equipment are recorded at cost. Interest costs incurred during the construction period for major asset additions are
capitalized. We capitalized $15.6 million of interests costs during the year ended December 31, 2012, while the amounts capitalized in the years ended December 31, 2011 and 2010
were insignificant. Expenditures that extend the useful lives of existing plant and equipment or increase the productivity of the asset are capitalized. The cost of maintenance and repairs that do not
extend the useful life or increase the productivity of the asset are expensed as incurred.
Preparation
plants and loadouts are depreciated using the units-of-production method over the estimated recoverable reserves, subject to a minimum level of
depreciation. Other plant and
equipment are depreciated principally using the straight-line method over the estimated useful lives of the assets, limited by the remaining life
F-11
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of
the mine. The useful lives of mining equipment, including longwalls, draglines and shovels, range from 5 to 32 years. The useful lives of buildings and leasehold improvements generally range
from 10 to 30 years.
Costs of developing new mines or significantly expanding the capacity of existing mines are capitalized and amortized using the
units-of-production method over the estimated recoverable reserves that are associated with the property being benefited. Costs may include construction permits and licenses;
mine design; construction of access roads, shafts, slopes and main entries; and removing overburden to access reserves in a new pit. Additionally, deferred mine development includes the asset cost
associated with asset retirement obligations.
Rights to coal reserves may be acquired directly through governmental or private entities. A significant portion of the Company's coal
reserves are controlled through leasing arrangements. Lease agreements are generally long-term in nature (original terms range from 10 to 50 years), and substantially all of the
leases contain provisions that allow for automatic extension of the lease term providing certain requirements are met.
The
net book value of the Company's coal interests was $5.1 billion and $5.6 billion at December 31, 2012 and 2011. Payments to acquire royalty lease agreements and
lease bonus payments are capitalized as a cost of the underlying mineral reserves and depleted over the life of proven and probable reserves. Coal lease rights are depleted using the
units-of-production method, and the rights are assumed to have no residual value.
Future
lease bonus payments total $83.4 million in 2013, $67.3 million in 2014, $60.0 million in 2015, and $60.0 million in 2016.
Depreciation, depletion and amortization.
The depreciation, depletion and amortization related to long-lived assets is reflected in the statement of operations as a
separate line item. No depreciation, depletion or amortization is included in any other operating cost categories.
If facts and circumstances suggest that the carrying value of a long-lived asset or asset group may not be recoverable, the
asset or asset group is reviewed for potential impairment. If this review indicates that the carrying amount of the asset will not be recoverable through projected undiscounted cash flows generated by
the asset and its related asset group over its remaining life, then an impairment loss is recognized by reducing the carrying value of the asset to its fair value. The Company may, under certain
circumstances, idle mining operations in response to market conditions or other factors. Because an idling is not a permanent closure, it is not considered an automatic indicator of impairment.
In a business combination, goodwill represents the excess of the purchase price over the fair value assigned to the net tangible and
identifiable intangible assets acquired. The Company tests goodwill for impairment annually as of the beginning of the fourth quarter, or when circumstances indicate a possible impairment may exist.
If the results of the testing indicate that the carrying amount of a reporting unit exceeds the fair value of the reporting unit, the fair value of goodwill must be calculated. An impairment loss
generally would be recognized when the carrying amount of goodwill exceeds the implied fair value of goodwill, determined by subtracting the fair value of
F-12
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
the
other assets and liabilities associated with the reporting unit from the total fair value of the reporting unit. The fair value of a reporting unit is determined using a discounted cash flow
("DCF") technique. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate and projections
of selling prices and costs to produce. See additional discussion in Note 7, "Goodwill."
The Company capitalizes costs incurred in connection with new borrowings, the establishment or enhancement of credit facilities and the
issuance of debt securities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or term of the credit facility using the interest method. The unamortized
balance of deferred financing costs was $101.5 million and $90.5 million at December 31, 2012 and 2011, respectively. Amounts classified as current were $17.3 million and
$15.8 million at December 31, 2012 and 2011, respectively. Current amounts are recorded in other current assets and noncurrent amounts are recorded in other assets in the accompanying
consolidated balance sheets.
Revenues include sales to customers of coal produced at Company operations and coal purchased from third parties. The Company
recognizes revenue at the time risk of loss passes to the customer at contracted amounts. Transportation costs are included in cost of sales and amounts billed by the Company to its customers for
transportation are included in revenues.
Other Operating Income, Net
Other operating income, net in the accompanying consolidated statements of operations reflects income and expense from sources other
than physical coal sales, including: bookouts, the practice of offsetting purchase and sale contracts for shipping convenience purposes, and contract settlements; royalties earned from properties
leased to third parties; income from equity investments; gains and losses from dispositions of
assets; and realized gains and losses on heating oil derivatives that do not qualify for hedge accounting and are not held for trading purposes.
The Company's legal obligations associated with the retirement of long-lived assets are recognized at fair value at the
time the obligations are incurred. Accretion expense is recognized through the expected settlement date of the obligation. Obligations are incurred at the time development of a mine commences for
underground and surface mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation's fair value is determined using a DCF technique and is based upon permit
requirements and various estimates and assumptions that would be used by market participants, including estimates of disturbed acreage, reclamation costs and assumptions regarding equipment
productivity. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying value of the related long-lived asset.
The
Company reviews its asset retirement obligation at least annually and makes necessary adjustments for permit changes as granted by state authorities and for revisions of estimates of
the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding asset. For idle operations, adjustments to the liability are
recognized as income or expense in the period the adjustment is recorded. Any difference between the recorded obligation and the actual cost of reclamation is recorded in profit or loss in the period
the obligation is settled. See additional discussion in Note 14, "Asset Retirement Obligations."
F-13
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company generally utilizes derivative instruments to manage exposures to commodity prices. Additionally, the Company may hold
certain coal derivative instruments for trading purposes. Derivative financial instruments are recognized in the balance sheet at fair value. Certain coal contracts may meet the definition of a
derivative instrument, but because they provide for the physical purchase or sale of coal in quantities expected to be used or sold by the Company over a reasonable period in the normal course of
business, they are not recognized on the balance sheet.
Certain
derivative instruments are designated as the hedge instrument in a hedging relationship. In a fair value hedge, the Company hedges the risk of changes in the fair value of a firm
commitment, typically a fixed-price coal sales contract. Changes in both the hedged firm commitment and the fair value of a derivative used as a hedge instrument in a fair value hedge are recorded in
earnings. In a cash flow hedge, the Company hedges the risk of changes in future cash flows related to a forecasted purchase or sale. Changes in the fair value of the derivative instrument used as a
hedge instrument in a cash flow hedge are recorded in other comprehensive income or loss. Amounts in other comprehensive income or loss are reclassified to earnings when the hedged transaction affects
earnings and are classified in a manner consistent with the transaction being hedged. The Company formally documents the relationships between hedging instruments and the respective hedged items, as
well as its risk management objectives for hedge transactions.
The
Company evaluates the effectiveness of its hedging relationships both at the hedge's inception and on an ongoing basis. Any ineffective portion of the change in fair value of a
derivative instrument used as a hedge instrument in a fair value or cash flow hedge is recognized immediately in earnings. The ineffective portion is based on the extent to which exact offset is not
achieved between the change in fair value of the hedge instrument and the cumulative change in expected future cash flows on the hedged transaction from inception of the hedge in a cash flow hedge or
the change in the fair value. Ineffectiveness was insignificant for the years ended December 31, 2012, 2011 and 2010. See Note 9, "Derivatives" for further disclosures related to the
Company's derivative instruments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly hypothetical
transaction between market participants at a given measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs. See
Note 11, "Fair Values Measurements" for further disclosures related to the Company's recurring fair value estimates.
Deferred income taxes are provided for temporary differences arising from differences between the financial statement amount and tax
basis of assets and liabilities existing at each balance sheet date using enacted tax rates anticipated to be in effect when the related taxes are expected to be paid or recovered. A valuation
allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the need for a valuation allowance, the Company considers projected realization of
tax benefits based on expected levels of future taxable income, available tax planning strategies and the reversal of temporary differences.
The
benefit from tax positions that are uncertain is not recognized unless the Company concludes that it is more likely than not that the position would sustain in a dispute with taxing
authorities, should the dispute be taken to the court of last resort. The Company would measure any such benefit at the largest amount of benefit that is greater than 50 percent likely of being
realized upon settlement with taxing authorities.
F-14
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
See
Note 13, "Taxes" for further disclosures about income taxes.
The Company has non-contributory defined benefit pension plans covering most of its salaried and hourly employees. Benefits
are generally based on the employee's age and compensation. The Company also currently provides certain postretirement medical and life insurance coverage for eligible employees. The cost of providing
these benefits are determined on an actuarial basis and accrued over the employee's period of active service.
The
Company recognizes the overfunded or underfunded status of these plans as determined on an actuarial basis on the balance sheet and the changes in the funded status are recognized in
other comprehensive income. See Note 18, "Employee Benefit Plans" for additional disclosures relating to these obligations.
The compensation cost of all stock-based awards is determined based on the grant-date fair value of the award, and is
recognized over the requisite service period. The grant-date fair value of option awards is determined using a Black-Scholes option pricing model. Compensation cost for an award with
performance conditions is accrued if it is probable that the conditions will be met. See further discussion in Note 16, "Stock Based Compensation and Other Incentive Plans."
2. Debt and Financing Arrangements
|
|
|
|
|
|
|
|
|
|
December 31,
2012 |
|
December 31,
2011 |
|
|
|
(In thousands)
|
|
Indebtedness to banks under credit facilities |
|
$ |
— |
|
$ |
481,300 |
|
Term loan ($1.65 billion face value) due 2018 |
|
|
1,627,384 |
|
|
— |
|
6.75% senior notes ($450.0 million face value) due 2013 |
|
|
— |
|
|
450,971 |
|
8.75% senior notes ($600.0 million face value) due 2016 |
|
|
590,999 |
|
|
588,974 |
|
7.00% senior notes due 2019 at par |
|
|
1,000,000 |
|
|
1,000,000 |
|
9.875% senior notes ($375.0 million face value) due 2019 |
|
|
360,042 |
|
|
— |
|
7.25% senior notes due 2020 at par |
|
|
500,000 |
|
|
500,000 |
|
7.25% senior notes due 2021 at par |
|
|
1,000,000 |
|
|
1,000,000 |
|
Other |
|
|
40,350 |
|
|
21,903 |
|
| |
|
|
|
|
|
|
|
|
5,118,775 |
|
|
4,043,148 |
|
Less current maturities of debt and short-term borrowings |
|
|
32,896 |
|
|
280,851 |
|
| |
|
|
|
|
|
Long-term debt |
|
$ |
5,085,879 |
|
$ |
3,762,297 |
|
| |
|
|
|
|
|
The current maturities of debt include contractual maturities and amounts borrowed under our revolving credit facility and accounts receivable
securitization program that the Company does not intend to refinance on a long-term basis, based on cash projections and management's plans.
On
May 16, 2012, the Company entered into an amendment to its senior secured revolving credit facility that amended certain financial maintenance covenants, suspending the
Company's compliance with the debt-to-EBITDA ratio, easing other financial covenants through September 2014 and adding defined minimum EBITDA targets. The maximum borrowing
capacity of the revolving credit facility was reduced from $2 billion to $600 million. In conjunction with the amendment, the Company borrowed $1.4 billion under a
six-year secured term loan facility, issued at a 1% discount. The term loan contains no financial maintenance covenants, is prepayable and is secured by the same assets as borrowings under
the revolving credit facility. The amendment reduced the quarterly dividend
F-15
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
the
Company may pay on its common stock to $0.03 per share. Quarterly principal payments of $3.5 million began in September 2012, plus interest at a rate of the greater of a LIBOR-based rate or
1.25%, plus 450 basis points. The proceeds of the term loan were used to retire all outstanding borrowings under the revolving credit facility and the outstanding $450.0 million principal
amount of 6.75% Senior Notes due 2013 issued by Arch Western Finance, LLC ("Arch Western Finance"), the Company's indirect subsidiary.
On
May 16, 2012, Arch Western Finance accepted for purchase an aggregate of approximately $304.0 million principal amount of its 6.75% Senior Notes due 2013 in an initial
settlement pursuant to the terms of its tender offer and consent solicitation, which commenced on May 1, 2012, and called for redemption all of the remaining notes outstanding after the
completion of the tender offer. The consideration for each $1,000 of principal purchased under the tender offer and consent solicitation was $1,002.50, for a total purchase consideration of
$304.8 million. On May 30, 2012, the remaining notes with an outstanding principal amount of $146.0 million were redeemed at par value.
On
November 21, 2012, the Company issued $375.0 million aggregate principal amount of 9.875% senior unsecured notes due 2019 (the "9.875% Notes") at an issue price of
95.934% of the face amount. Also on November 21, 2012, the Company borrowed an incremental $250.0 million on the term loan facility at a 1% discount at the same rate as the initial
borrowing discussed previously. The principal payments on the loan increased to $4.125 million per quarter as a result of the incremental borrowing. Under the terms of the credit agreement, the
incremental term loan reduced the size of Arch's revolving credit facility to $350 million from $600 million.
At
the same time, the Company amended its senior secured revolving credit facility to relax financial maintenance covenants and eliminate the minimum EBITDA targets until
December 31, 2015.
The
Company wrote off $23.4 million of deferred financing costs relating to the reduction in capacity of the senior secured revolving credit facility and $1.1 million
related to the redemption of the 6.75% Senior Notes due 2013, offset by $(0.8) million of unamortized issue premium on the notes. The write-off of deferred financing fees, along with other
transaction fees associated with these transactions, is reflected in "Loss on extinguishment and refinancing of debt" in the consolidated statements of operations.
The
Company paid financing costs of $50.6 million, $114.8 million and $12.8 million in conjunction with its financing activities during the years ended
December 31, 2012, 2011 and 2010, respectively. The Company's financing fees are generally deferred, however, the Company incurred a fee of $49.5 million in 2011 in conjunction with the
acquisition of ICG that was expensed, as the related bridge financing facility was not used.
Borrowings under the Company's senior secured revolving credit facility bear interest at a floating rate based on LIBOR determined by
reference to the Company's leverage ratio, as calculated in accordance with the underlying credit agreement. The credit facility has a five-year term that expires on June 14, 2016
and is secured by substantially all of the Company's assets as well as its ownership interests in substantially all of its subsidiaries. Commitment fees of 0.50% to 0.75% per annum are payable on the
average unused daily balance of the revolving credit facility.
The
Company maintains an accounts receivable securitization program under which eligible trade receivables are sold, without recourse, to a multi-seller, asset-backed commercial paper
conduit. The entity through which these receivables are sold is consolidated into the Company's financial statements. The Company may borrow and draw letters of credit against the facility, and pays
facility fees, program fees and letter of credit fees (based on amounts of outstanding letters of credit). The total aggregate borrowings and letters of credit are limited by eligible accounts
F-16
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
receivable,
as defined under the terms of the agreement. The credit facility supporting the borrowings under the program is subject to renewal annually, and expires on December 10, 2013.
Financial
covenant requirements may restrict the amount of unused capacity available to the Company for borrowings and letters of credit.
On
June 14, 2011, the Company terminated its commercial paper placement program and the supporting credit facility.
Since
May, when borrowings under the revolving credit facility were retired with the proceeds of the term loan, we have borrowed only under the accounts receivable securitization
program. At December 31, 2012, the available borrowing capacity under our lines of credit with financial institutions was approximately $333 million.
The Company has outstanding $600.0 million in aggregate principal amount of 8.75% senior unsecured notes due 2016 ("2016
Notes"). The 2016 Notes were issued at an initial issue price of 97.464% of the face amount. Interest is payable on the notes on February 1 and August 1 of each year. At any time on or
after August 1, 2013, the Company may redeem some or all of the notes. The redemption price, reflected as a percentage of the principal amount, is: 104.375% for notes redeemed between
August 1, 2013 and July 31, 2014; 102.188% for notes redeemed between August 1, 2014 and July 31, 2015; and 100% for notes redeemed on or after August 1, 2015.
On August 9, 2010, the Company issued $500.0 million in aggregate principal amount of 7.25% senior unsecured notes due in
2020 ("2020 Notes") at par. Interest is payable on the 2020 Notes
on April 1 and October 1 of each year. At any time on or after October 1, 2015, the Company may redeem some or all of the notes. The redemption price reflected as a percentage of
the principal amount is: 103.625% for notes redeemed between October 1, 2015 and September 30, 2016; 102.417% for notes redeemed between October 1, 2016 and September 30,
2017; 101.208% for notes redeemed between October 1, 2017 and September 30, 2018; and 100% for notes redeemed on or after October 1, 2018. In addition, at any time and on one or
more occasions prior to October 1, 2013, the Company may redeem an aggregate principal amount of senior notes not to exceed 35% of the original aggregate principal amount of the senior notes
outstanding with the proceeds of one or more public equity offerings, at a redemption price equal to 107.250%.
On June 14, 2011, the Company issued $1.0 billion of 7.00% unsecured senior notes due 2019 ("2019 Notes") and
$1.0 billion of 7.25% unsecured senior notes due 2021 ("2021 Notes") at their face amount. These notes were used to finance, along with an issuance of common stock discussed in Note 15,
"Capital Stock", the acquisition of ICG. Interest is payable on the 2019 Notes and 2021 Notes on June 15 and December 15 of each year.
At
any time prior to June 15, 2014, the Company may redeem up to 35% of the original aggregate principal amount of each of the 2019 Notes and 2021 Notes, plus accrued and unpaid
interest, with the net proceeds from certain equity offerings, at a redemption price, reflected as a percentage of the principal amount, equal to 107.0% and 107.25%, respectively. The Company may
redeem the 2019 Notes prior to June 15, 2015 and the 2021 Notes prior to June 15, 2016 at the respective make-whole prices set forth in the indenture. On or after
June 15, 2015, the Company may redeem the 2019 Notes at redemption prices, reflected as a percentage of the principal amount, of: 103.5% from June 15, 2015 through June 14, 2016;
101.75% from June 15, 2016 through June 14, 2017;
F-17
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
and
100% beginning on June 15, 2017. On or after June 15, 2016, the Company may redeem the 2021 Notes at redemption prices, reflected as a percentage of the principal amount, of:
103.625% from June 15, 2016 through June 14, 2017; 102.417% from June 15, 2017 through June 14, 2018; 101.208% from June 15, 2018 through June 14, 2019 and
100% beginning on June 15, 2019. In each case, accrued and unpaid interest at the redemption date is due upon redemption.
Interest is payable on the 9.875% Notes annually on June 15 and December 15, beginning on June 15, 2013. At any
time on or after December 15, 2016, the Company may redeem some or all of the notes. The redemption price, reflected as a percentage of the principal amount, is: 104.938% for notes redeemed
between December 15, 2016 and December 14, 2017; 102.469% for notes redeemed between December 15, 2017 and December 14, 2018; and 100% for notes redeemed on or after
December 15, 2018. In addition, at any time and on one or more occasions prior to December 15, 2015, the Company may redeem an aggregate principal amount of senior notes not to exceed
35% of the original aggregate principal amount of the senior notes outstanding with the proceeds of one or more public equity offerings, at a redemption price equal to 109.875%.
The
unsecured senior notes are guaranteed by substantially all of the Company's subsidiaries, except for Arch Receivable Company, LLC, which is the conduit for the accounts
receivable securitization program, and the Company's subsidiaries outside the U.S.
Upon the closing of the ICG acquisition, the Company gave a 30-day redemption notice to the Trustee of ICG's 9.125% senior
notes and legally discharged its obligation under the 9.125% senior notes by depositing the required funds with the Trustee to redeem the debt. On July 14, 2011, all of the outstanding 9.125%
senior notes were redeemed at an aggregate price of $251.4 million, including the required make-whole premium, plus accrued interest of $5.2 million.
At
the acquisition date, ICG's 4.00% convertible senior notes with a fair value of $298.5 million and 9.00% convertible senior notes with a fair value of $1.7 million
("convertible notes") became convertible into cash, pursuant to the amended indentures governing the convertible notes, at a calculated conversion rate of $2,614.6848 for each $1,000 in principal
amount surrendered for conversion for the 4.00% convertible notes and $2,392.73414 for the 9.00% convertible notes for conversions occurring prior to August 17, 2011.
At
the acquisition date, other ICG debt had a fair value of approximately $54.0 million and consisted mainly of equipment notes and insurance notes payable.
The
Company recognized a net loss of $2.0 million during the year ended December 31, 2011 on the early extinguishment of ICG's debt, including the conversions of the 4.00%
and 9.00% convertible notes described above. Any remaining amounts outstanding under the convertible notes and other ICG debt is included in "other" in the debt table above.
The
Company redeemed $500.0 million aggregate principal amount of the 6.75% Senior Notes due 2013 on September 8, 2010. The Company recognized a loss on the redemption of
$6.8 million, including the payment of the $5.6 million redemption premium and the write-off of $3.3 million of unamortized debt financing costs, partially offset by
the write-off of $2.1 million of the original issue premium.
Expected aggregate maturities of debt for the next five years are $34.7 million in 2013, $20.6 million in 2014,
$20.8 million in 2015, $620.9 million in 2016 and $21.1 million in 2017.
F-18
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Terms of the Company's credit facilities and leases contain financial and other covenants that limit the ability of the Company to, among other things, acquire,
dispose, merge or consolidate assets; incur additional debt; pay dividends and make distributions or repurchase stock; make investments; create liens; issue and sell capital stock of subsidiaries;
enter into restrictions affecting the ability of restricted subsidiaries to make distributions, loans or advances to the Company; engage in transactions with affiliates and enter into sale and
leaseback transactions. In addition, the covenants require the Company to pledge assets to collateralize the revolving credit and term loan facilities. The assets pledged include equity interests in
wholly-owned subsidiaries, certain real property interests, accounts receivable and inventory of the Company. Failure by the Company to comply with such covenants could result in an event of default,
which, if not cured or waived, could have a material adverse effect on the Company.
3. Mine Closure and Asset Impairment Costs
In response to decreasing demand for thermal coal, the Company made the decision in the second quarter of 2012 to close four thermal
coal mining complexes and to temporarily idle a fifth complex, all acquired with ICG. The company also curtailed production at other Appalachia mines. These actions resulted in a total workforce
reduction of approximately 750 positions. The Company will incur customary annual maintenance costs related to these properties in the future. The terms of customer contracts will be fulfilled by
other operations.
The
following costs are reflected in the line "Mine closure and asset impairment costs" on the consolidated statements of operations for the year ended December 31, 2012:
|
|
|
|
|
Parts and supplies inventory writedown |
|
$ |
2,598 |
|
Impairment of property, plant and equipment |
|
|
95,641 |
|
Impairment of coal properties and deferred development costs |
|
|
403,279 |
|
Royalty obligations |
|
|
11,546 |
|
Employee termination benefits |
|
|
12,274 |
|
Pension, postretirement and occupational disease curtailment gain, net (see notes 17 and 18) |
|
|
(1,770 |
) |
| |
|
|
|
|
|
$ |
523,568 |
|
| |
|
|
|
The Company determined that assets of the closed operations with a net book value of $51 million could be redeployed to other operations.
The remainder of the assets were determined to be completely impaired, based on an analysis of the marketability of thermal coal properties in the current market environment.
The
majority of the employee termination benefits were paid in the third quarter of 2012. The royalty obligations represent minimum payments on various leases and will be paid over the
remaining term of the leases, through 2016.
The
$7.3 million in asset impairment costs for the year ended December 31, 2011 related to a preparation plant and loadout of an acquired ICG mining operation that would
not be used in ongoing operations.
F-19
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Acquired Sales Contracts
The acquired sales contracts reflected in the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 |
|
December 31, 2011 |
|
|
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Acquired fair value |
|
$ |
131,819 |
|
$ |
166,697 |
|
$ |
149,457 |
|
$ |
166,697 |
|
Accumulated amortization |
|
|
(123,776 |
) |
|
(105,237 |
) |
|
(115,322 |
) |
|
(69,699 |
) |
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,043 |
|
$ |
61,460 |
|
$ |
34,135 |
|
$ |
96,998 |
|
| |
|
|
|
|
|
|
|
|
|
Net total |
|
|
|
|
$ |
(53,417 |
) |
|
|
|
$ |
(62,863 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current |
|
$ |
5,651 |
|
$ |
14,038 |
|
$ |
18,929 |
|
$ |
38,441 |
|
Other noncurrent |
|
$ |
2,392 |
|
$ |
47,422 |
|
$ |
15,206 |
|
$ |
58,557 |
|
In 2012 the Company recognized an impairment loss of $15.7 million to write off a contract acquired with the ICG acquisition with an
original acquired fair value of $17.5 million.
The
Company anticipates amortization of acquired sales contracts, based upon expected shipments in the next five years, to be income of approximately $8.1 million in 2013,
$11.6 million in 2014, $10.8 million in 2015, $9.3 million in 2016 and $3.2 million in 2017.
5. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes transactions recorded in stockholders' equity during the year, excluding net income and
transactions with stockholders. Following are the items included in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments |
|
Pension,
Postretirement
and Other
Post-
Employment
Benefits |
|
Available-for-
Sale Securities |
|
Accumulated
Other
Comprehensive
Loss |
|
|
|
(In thousands)
|
|
Balance at January 1, 2010 |
|
$ |
1,186 |
|
$ |
(20,539 |
) |
$ |
(500 |
) |
$ |
(19,853 |
) |
2010 activity, before tax |
|
|
2,711 |
|
|
15,406 |
|
|
2,877 |
|
|
20,994 |
|
2010 activity, tax effect |
|
|
(976 |
) |
|
(5,546 |
) |
|
(1,036 |
) |
|
(7,558 |
) |
| |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
2,921 |
|
|
(10,679 |
) |
|
1,341 |
|
|
(6,417 |
) |
2011 activity, before tax |
|
|
(11,951 |
) |
|
9,345 |
|
|
176 |
|
|
(2,430 |
) |
2011 activity, tax effect |
|
|
4,301 |
|
|
(3,342 |
) |
|
(62 |
) |
|
897 |
|
| |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
|
(4,729 |
) |
|
(4,676 |
) |
|
1,455 |
|
|
(7,950 |
) |
2012 activity, before tax |
|
|
10,895 |
|
|
(21,265 |
) |
|
(3,000 |
) |
|
(13,370 |
) |
2012 activity, tax effect |
|
|
(3,922 |
) |
|
7,655 |
|
|
1,080 |
|
|
4,813 |
|
| |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
$ |
2,244 |
|
$ |
(18,286 |
) |
$ |
(465 |
) |
$ |
(16,507 |
) |
| |
|
|
|
|
|
|
|
|
|
6. Investments in Available-for-Sale Securities
The Company has invested in marketable debt securities, primarily highly liquid AA—rated corporate bonds, U.S. government
and government agency securities. These investments are held in the custody of a major financial institution. These securities, along with the Company's investments in marketable equity securities,
are classified as
F-20
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
available-for-sale
securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.
The
Company's investments in available-for-sale marketable securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification |
|
|
|
Cost
Basis |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
Short-Term
Investments |
|
Other
Assets |
|
|
|
(In thousands)
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
146,993 |
|
$ |
2 |
|
$ |
(412 |
) |
$ |
146,583 |
|
$ |
146,583 |
|
$ |
— |
|
Corporate notes and bonds |
|
|
88,118 |
|
|
— |
|
|
(396 |
) |
|
87,722 |
|
|
87,722 |
|
|
— |
|
Equity securities |
|
|
5,271 |
|
|
2,704 |
|
|
(2,628 |
) |
|
5,347 |
|
|
— |
|
|
5,347 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
240,382 |
|
$ |
2,706 |
|
$ |
(3,436 |
) |
$ |
239,652 |
|
$ |
234,305 |
|
$ |
5,347 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate fair value of investments with unrealized losses was $223.3 million at December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification |
|
|
|
Cost Basis |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
Short-Term
Investments |
|
Other Assets |
|
|
|
(In thousands)
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
5,268 |
|
$ |
4,394 |
|
$ |
(2,122 |
) |
$ |
7,540 |
|
$ |
— |
|
$ |
7,540 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
5,268 |
|
$ |
4,394 |
|
$ |
(2,122 |
) |
$ |
7,540 |
|
$ |
— |
|
$ |
7,540 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The debt securities outstanding at December 31, 2012 have maturity dates ranging from the first quarter of 2013 through the second quarter
of 2014. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
7. Goodwill
Changes in the carrying value of goodwill for the years ended December 31, 2012, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
(In thousands) |
|
Balance at January 1, 2010 |
|
$ |
113,701 |
|
Consideration paid related to prior business acquisitions |
|
|
1,262 |
|
| |
|
|
|
Balance at December 31, 2010 |
|
|
114,963 |
|
Consideration paid related to prior business acquisitions |
|
|
829 |
|
Acquisition of ICG |
|
|
480,311 |
|
| |
|
|
|
Balance at December 31, 2011 |
|
|
596,103 |
|
Impairment |
|
|
(330,680 |
) |
| |
|
|
|
Balance at December 31, 2012 |
|
$ |
265,423 |
|
| |
|
|
|
During the second quarter of 2012, a significant drop in the Company's stock price, combined with continuing weak demand for thermal coal during
the quarter and the Company's resulting production cuts, indicated that the fair value of the Company's goodwill could be less than its carrying value. Accordingly, the Company performed the
F-21
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
first
step of the two-step goodwill impairment test as of June 30, 2012. The value of the Company's Black Thunder reporting unit in the Powder River Basin, where
$115.8 million of goodwill had been allocated, is sensitive to market demand for thermal coal. The further weakening in thermal coal markets had significantly impacted the projected demand for
and pricing of coal produced at Black Thunder. In step one of the goodwill impairment testing, the fair value of the Black Thunder reporting unit did not exceed its carrying value, primarily
due to the impact of lower demand on near term sales volumes and pricing. Based on initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to
the related book values, the Company recorded a preliminary impairment charge for the entire $115.8 million carrying value of Black Thunder's goodwill during the second quarter of 2012. We
subsequently performed a valuation of Black Thunder's assets and liabilities to determine the fair value of the reporting unit's goodwill, which supported the estimation that the goodwill allocated to
the Black Thunder reporting unit had no value.
The
goodwill amounts allocated to certain reporting units in the Company's Appalachia segment acquired with the ICG acquisition are sensitive to volatility in the demand for
metallurgical coal. During the 2012, metallurgical prices fell substantially from the peaks reached during 2011, when the reporting units were acquired with the Company's purchase of ICG. This caused
the fair value of two of these reporting units to fall below their carrying value. The allocated goodwill of $214.9 million for those reporting units was determined to be fully impaired, based
on the discounted cash flows used in the ICG acquisition valuation, adjusted for current market conditions and estimates of production levels. The Company recognized the impairment charge in the
fourth quarter of 2012.
8. Equity Investments and Membership Interests in Joint Ventures
Below are the equity method investments reflected in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knight Hawk |
|
DKRW |
|
DTA |
|
Tenaska |
|
Millennium |
|
Tongue River |
|
Total |
|
|
|
(In thousands)
|
|
Balance at January 1, 2010 |
|
$ |
49,603 |
|
$ |
23,589 |
|
$ |
14,076 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
87,268 |
|
Investments in affiliates |
|
|
77,637 |
|
|
— |
|
|
— |
|
|
9,768 |
|
|
— |
|
|
— |
|
|
87,405 |
|
Advances to (distributions from) affiliates, net |
|
|
(12,639 |
) |
|
— |
|
|
4,264 |
|
|
— |
|
|
— |
|
|
— |
|
|
(8,375 |
) |
Equity in comprehensive income (loss) |
|
|
16,649 |
|
|
(1,628 |
) |
|
(3,868 |
) |
|
— |
|
|
— |
|
|
— |
|
|
11,153 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
131,250 |
|
$ |
21,961 |
|
$ |
14,472 |
|
$ |
9,768 |
|
$ |
— |
|
$ |
— |
|
$ |
177,451 |
|
Investments in affiliates |
|
|
— |
|
|
— |
|
|
— |
|
|
5,500 |
|
|
25,000 |
|
|
12,989 |
|
|
43,489 |
|
Advances to (distributions from) affiliates, net |
|
|
(16,621 |
) |
|
— |
|
|
6,498 |
|
|
— |
|
|
3,477 |
|
|
— |
|
|
(6,646 |
) |
Equity in comprehensive income (loss) |
|
|
20,596 |
|
|
(2,246 |
) |
|
(4,884 |
) |
|
(2 |
) |
|
(2,153 |
) |
|
— |
|
|
11,311 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
$ |
135,225 |
|
$ |
19,715 |
|
$ |
16,086 |
|
$ |
15,266 |
|
$ |
26,324 |
|
$ |
12,989 |
|
$ |
225,605 |
|
Investments in affiliates |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Advances to (distributions from) affiliates, net |
|
|
(7,151 |
) |
|
— |
|
|
4,335 |
|
|
— |
|
|
8,798 |
|
|
1,708 |
|
|
7,690 |
|
Equity in comprehensive income (loss) |
|
|
20,989 |
|
|
(4,200 |
) |
|
(4,959 |
) |
|
(2 |
) |
|
(2,908 |
) |
|
— |
|
|
8,920 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
$ |
149,063 |
|
$ |
15,515 |
|
$ |
15,462 |
|
$ |
15,264 |
|
$ |
32,214 |
|
$ |
14,697 |
|
$ |
242,215 |
|
Notes receivable from investees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
$ |
— |
|
$ |
30,751 |
|
$ |
— |
|
$ |
5,059 |
|
$ |
— |
|
$ |
— |
|
$ |
35,810 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
$ |
— |
|
$ |
38,680 |
|
$ |
— |
|
$ |
5,148 |
|
$ |
— |
|
$ |
— |
|
$ |
43,828 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company holds an equity interest in Knight Hawk Holdings, LLC ("Knight Hawk"), a coal producer in the Illinois Basin. In June 2010, the
Company exchanged 68.4 million tons of coal reserves in the Illinois Basin for an additional 9% ownership interest, increasing the Company's ownership in Knight Hawk to 42% from 33.33%. The
Company recognized a gain of $41.6 million on the transaction, representing the difference between the fair value and the $12.1 million net book value of the coal reserves, adjusted for
the Company's retained ownership
F-22
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
interest
in the reserves through its investment in Knight Hawk. In December 2010, the Company increased its ownership interest in Knight Hawk to 49% for $26.6 million in cash.
The
Company holds a 24% equity interest in DKRW Advanced Fuels LLC ("DKRW"), a company engaged in developing coal-to-liquids facilities. DKRW may borrow
funds from the Company under a convertible secured promissory note. Amounts borrowed are due and payable in cash or in additional equity interests on the earlier of June 30, 2013 or upon the
closing of DKRW's next financing, bear interest at the rate of 15% per annum, and are secured by DKRW's equity interests in Medicine Bow Fuel & Power LLC. The note balances above are
reflected in other receivables on the consolidated balance sheets.
The
Company holds a general partnership interest of 21.875% in Dominion Terminal Associates ("DTA"), which is accounted for under the equity method. DTA operates a ground
storage-to-vessel
coal transloading facility in Newport News, Virginia for use by the partners. Under the terms of a throughput and handling agreement with DTA, each partner is charged its share of cash operating and
debt-service costs in exchange for the right to use the facility's loading capacity and is required to make periodic cash advances to DTA to fund such costs.
The
Company holds a 35% ownership interest in Tenaska Trailblazer Partners, LLC ("Tenaska"), the developer of the Trailblazer Energy Center, a
fossil-fuel-based electric power plant near Sweetwater, Texas. The plant, fueled by low sulfur coal, will capture and store carbon dioxide for enhanced oil recovery
applications. Additional future payments are due upon the achievement of project milestones to maintain the Company's interest. The Company made a milestone payment of $5.5 million in 2011. The
Company will also pay 35% of the future development costs of the project, not to exceed $12.5 million without prior approval from the Company. The receivables for these development costs, shown
above, are reflected in the consolidated balance sheets in other noncurrent assets, as the development costs will either be reimbursed when the project receives construction financing, or they will be
considered an additional capital contribution, with ownership percentages adjusted accordingly.
In
January 2011, the Company purchased a 38% ownership interest in Millennium Bulk Terminals-Longview, LLC ("Millennium"), the owner of a brownfield bulk commodity terminal on the
Columbia River near Longview, Washington, for $25.0 million, plus additional future consideration upon the completion of certain project milestones. Millennium continues to work on obtaining
the required approvals and necessary permits to complete dredging and other upgrades to enable coal, alumina and cementitious material shipments through the terminal. The Company will control 38% of
the terminal's throughput and storage capacity, in order to facilitate export shipments of coal off the west coast of the United States.
In
July 2011, the Company purchased a 35% membership interest in the Tongue River Holding Company, LLC ("Tongue River") joint venture. Tongue River will develop and construct a
railway line near Miles City, Montana and the Company's Otter Creek reserves. The Company has the right, upon the receipt of permits and approval for construction or under other prescribed
circumstances, to require the other investors to purchase all of the Company's units in the venture at an amount equal to the capital contributions made by the Company at that time, less any
distributions received.
The
Company may be required to make future contingent payments of up to $72.9 million related to development financing for certain of its equity investees. The Company's
obligation to make these payments, as well as the timing of any payments required, is contingent upon a number of factors, including project development progress, receipt of permits and construction
financing.
F-23
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Summarized
financial information of the Company's equity method investees follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Condensed combined income statement information: |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
190,661 |
|
$ |
184,358 |
|
$ |
172,933 |
|
Gross profit |
|
|
15,308 |
|
|
19,495 |
|
|
25,203 |
|
Income from operations |
|
|
8,898 |
|
|
13,180 |
|
|
20,243 |
|
Net income |
|
|
641 |
|
|
6,788 |
|
|
16,015 |
|
Condensed combined balance sheet information: |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
78,961 |
|
$ |
94,644 |
|
|
|
|
Noncurrent assets |
|
|
387,884 |
|
|
331,848 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
466,845 |
|
$ |
426,492 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
57,403 |
|
$ |
51,674 |
|
|
|
|
Noncurrent liabilities |
|
|
128,489 |
|
|
120,494 |
|
|
|
|
Equity |
|
|
280,690 |
|
|
254,163 |
|
|
|
|
Noncontrolling interest |
|
|
263 |
|
|
161 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
466,845 |
|
$ |
426,492 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
9. Derivatives
Diesel fuel price risk management
The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates
purchasing approximately 57 to 67 million gallons of diesel fuel for use in its operations during 2013. To protect the Company's cash flows from increases in the price of diesel fuel for its
operations, the Company uses forward physical diesel purchase contracts and purchased heating oil call options, and in the past, heating oil swaps. At December 31, 2012, the Company had
protected the price of substantially all of its 2013 purchases. At December 31, 2012, the Company had purchased heating oil call options for approximately 60 million gallons for the
purpose of managing the price risk associated with future diesel purchases.
The
Company also purchased heating oil call options to hedge the fuel surcharges on its barge and rail shipments that cover increases in diesel fuel prices. These positions reduce the
Company's risk of cash flow fluctuations related to these surcharges but the positions are not accounted for as hedges. At December 31, 2012, the Company held purchased call options for
approximately 15 million gallons for the purpose of managing the fluctuations in cash flows associated with fuel surcharges on future shipments.
Coal risk management positions
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in
order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair
value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.
F-24
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
At
December 31, 2012, the Company held derivatives for risk management purposes that are expected to settle in the following years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Tons in thousands)
|
|
2013 |
|
2014 |
|
2015 |
|
Total |
|
Coal sales |
|
|
6,704 |
|
|
4,260 |
|
|
780 |
|
|
11,744 |
|
Coal purchases |
|
|
1,410 |
|
|
1,260 |
|
|
— |
|
|
2,670 |
|
Coal trading positions
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for
trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The estimated future realization of the value of the trading portfolio is
$1.1 million of losses in 2013 and $1.5 million of gains in 2014.
F-25
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Tabular derivatives disclosures
The Company's contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in
a liability position in the event of default or termination. Such netting arrangements reduce the Company's credit exposure related to these counterparties. For classification purposes, the Company
records the net fair value of all the positions with a given counterparty as a net asset or liability in the consolidated balance sheets. The amounts shown in the table below represent the fair value
position of individual contracts, and not the net position presented in the accompanying consolidated balance sheets. The fair value and location of derivatives reflected in the accompanying
consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 |
|
|
|
December 31, 2011 |
|
|
|
Fair Value of Derivatives
(In thousands)
|
|
Asset
Derivative |
|
Liability
Derivative |
|
|
|
Asset
Derivative |
|
Liability
Derivative |
|
|
|
Derivatives Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating oil — diesel purchases |
|
$ |
— |
|
$ |
— |
|
|
|
|
$ |
8,997 |
|
$ |
— |
|
|
|
|
Coal |
|
|
3,277 |
|
|
(10 |
) |
|
|
|
|
1,109 |
|
|
— |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,277 |
|
|
(10 |
) |
|
|
|
|
10,106 |
|
|
— |
|
|
|
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating oil — diesel purchases |
|
|
7,379 |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
Heating oil — fuel surcharges |
|
|
1,961 |
|
|
— |
|
|
|
|
|
1,797 |
|
|
— |
|
|
|
|
Coal — held for trading purposes |
|
|
17,403 |
|
|
(16,933 |
) |
|
|
|
|
15,505 |
|
|
(19,927 |
) |
|
|
|
Coal — risk management |
|
|
24,843 |
|
|
(7,342 |
) |
|
|
|
|
14,855 |
|
|
(6,035 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
51,586 |
|
|
(24,275 |
) |
|
|
|
|
32,157 |
|
|
(25,962 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
54,863 |
|
|
(24,285 |
) |
|
|
|
|
42,263 |
|
|
(25,962 |
) |
|
|
|
Effect of counterparty netting |
|
|
(22,548 |
) |
|
22,548 |
|
|
|
|
|
(18,134 |
) |
|
18,134 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivatives as classified in the balance sheets |
|
$ |
32,315 |
|
$ |
(1,737 |
) |
$ |
30,578 |
|
$ |
24,129 |
|
$ |
(7,828 |
) |
$ |
16,301 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012 |
|
December 31,
2011 |
|
Net derivatives as reflected on the balance sheets |
|
|
|
|
|
|
|
Heating oil |
|
Other current assets |
|
$ |
9,340 |
|
$ |
10,794 |
|
Coal |
|
Coal derivative assets |
|
|
22,975 |
|
|
13,335 |
|
|
|
Coal derivative liabilities |
|
|
(1,737 |
) |
|
(7,828 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
30,578 |
|
$ |
16,301 |
|
| |
|
|
|
|
|
|
|
The
Company had a current asset for the right to reclaim cash collateral of $16.2 million and $12.4 million at December 31, 2012 and December 31, 2011,
respectively. These amounts are not included with the derivatives presented in the table above and are included in "other current assets" in the accompanying consolidated balance sheets.
During
the first quarter of 2012, the Company determined the effectiveness of the heating oil options could not be established as of December 31, 2011 and on an ongoing basis. As
a result, the amount remaining in
F-26
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
accumulated
other comprehensive income of $8.2 million was recorded in the "other operating income, net" line on the consolidated statement of operations, or $5.2 million net of income
taxes,.
The
effects of derivatives on measures of financial performance are as follows:
Derivatives Used in Cash Flow Hedging Relationships (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other
Comprehensive
Income(Effective Portion) |
|
Gains (Losses) Reclassified from
Other Comprehensive Income into
Income
(Effective Portion) |
|
For the year ended December 31,
|
|
2012 |
|
2011 |
|
2010 |
|
2012 |
|
2011 |
|
2010 |
|
Heating oil — diesel purchases(2) |
|
$ |
— |
|
$ |
1,294 |
|
$ |
(149 |
) |
$ |
— |
|
$ |
14,866 |
|
$ |
437 |
|
Coal sales(1) |
|
|
7,690 |
|
|
4,923 |
|
|
(4,714 |
) |
|
2,675 |
|
|
1,572 |
|
|
(1,602 |
) |
Coal purchases(2) |
|
|
(2,440 |
) |
|
(2,009 |
) |
|
5,145 |
|
|
— |
|
|
— |
|
|
(1,202 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
5,250 |
|
$ |
4,208 |
|
$ |
282 |
|
$ |
2,675 |
|
$ |
16,438 |
|
$ |
(2,367 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company's cash flow hedging relationships were recognized in the
results of operations in the twelve month periods ended December 31, 2012 and 2011.
Derivatives Not Designated as Hedging Instruments (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized |
|
For the year ended December 31
|
|
2012 |
|
2011 |
|
2010 |
|
Coal — unrealized(3) |
|
$ |
8,272 |
|
$ |
6,438 |
|
$ |
(10,991 |
) |
| |
|
|
|
|
|
|
|
Coal — realized(4) |
|
$ |
43,990 |
|
$ |
(7 |
) |
$ |
4,542 |
|
| |
|
|
|
|
|
|
|
Heating oil — diesel purchases(4) |
|
$ |
(22,281 |
) |
$ |
(2,906 |
) |
$ |
— |
|
| |
|
|
|
|
|
|
|
Heating oil — fuel surcharges(4) |
|
$ |
(2,209 |
) |
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating income, net
The
Company recognized net unrealized and realized gains of $8.3 million, losses of $3.5 million, and gains of $2.1 million during the year ended December 31,
2012, 2011, and 2010, respectively, related to its trading portfolio, which are included in the caption "Change in fair value of coal derivatives and coal trading activities, net" in the accompanying
consolidated statements of operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.
Based
on fair values at December 31, 2012, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $2.2 million are expected to
be reclassified from other comprehensive income into earnings during the next twelve months.
F-27
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands) |
|
Coal |
|
$ |
180,917 |
|
$ |
206,517 |
|
Repair parts and supplies |
|
|
172,139 |
|
|
163,527 |
|
Work-in-process |
|
|
12,368 |
|
|
7,446 |
|
| |
|
|
|
|
|
|
|
$ |
365,424 |
|
$ |
377,490 |
|
| |
|
|
|
|
|
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $13.6 million at
December 31, 2012, and $13.1 million at December 31, 2011.
11. Fair Value Measurements
The hierarchy of fair value measurements prioritizes the inputs to valuation techniques used to measure fair value. The levels of the
hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
- •
- Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets.
Level 1 assets include available-for-sale equity securities, U.S. Treasury securities, and coal futures that are submitted for clearing on the New York Mercantile
Exchange.
- •
- Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar
assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. The Company's level 2 assets and liabilities include U.S. government agency securities and commodity contracts (coal
and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.
- •
- Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity
to develop its own assumptions. These include the Company's commodity option contracts (coal and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs,
particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at December 31, 2012.
F-28
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The
table below sets forth, by level, the Company's financial assets and liabilities that are recorded at fair value in the accompanying consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2012 |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(In thousands)
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities |
|
$ |
239,652 |
|
$ |
103,439 |
|
$ |
136,213 |
|
$ |
— |
|
Derivatives |
|
|
32,315 |
|
|
22,465 |
|
|
510 |
|
|
9,340 |
|
| |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
271,967 |
|
$ |
125,904 |
|
$ |
136,723 |
|
$ |
9,340 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
1,737 |
|
$ |
— |
|
$ |
571 |
|
$ |
1,166 |
|
| |
|
|
|
|
|
|
|
|
|
The Company's contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in a
liability position in the event of default or termination. For classification purposes, the Company
records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification
in the accompanying consolidated balance sheet, based on this counterparty netting.
The
following table summarizes the change in the fair values of financial instruments categorized as level 3.
|
|
|
|
|
|
|
Year Ended
December 31, 2012 |
|
Balance, beginning of period |
|
$ |
6,211 |
|
Realized and unrealized losses recognized in earnings, net |
|
|
(13,399 |
) |
Realized and unrealized losses recognized in other comprehensive income, net |
|
|
— |
|
Purchases |
|
|
17,312 |
|
Issuances |
|
|
— |
|
Settlements |
|
|
(1,950 |
) |
| |
|
|
|
Ending balance |
|
$ |
8,174 |
|
| |
|
|
|
Net unrealized losses during the twelve month period ended December 31, 2012 related to level 3 financial instruments held on
December 31, 2012 were $5.4 million.
Fair Value of Long-Term Debt
At December 31, 2012 and December 31, 2011, the fair value of the Company's debt, including amounts classified as
current, was $5.0 billion and $4.2 billion, respectively. Fair values are based upon observed prices in an active market when available or from valuation models using market information,
which fall into Level 2 in the fair value hierarchy.
F-29
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Payroll and employee benefits |
|
$ |
72,405 |
|
$ |
65,323 |
|
Taxes other than income taxes |
|
|
121,029 |
|
|
133,331 |
|
Interest |
|
|
42,413 |
|
|
55,266 |
|
Acquired sales contracts (See Note 4) |
|
|
14,038 |
|
|
38,441 |
|
Workers' compensation (See Note 17) |
|
|
10,371 |
|
|
11,666 |
|
Asset retirement obligations (See Note 14) |
|
|
38,920 |
|
|
27,119 |
|
Other |
|
|
18,842 |
|
|
17,061 |
|
| |
|
|
|
|
|
|
|
$ |
318,018 |
|
$ |
348,207 |
|
| |
|
|
|
|
|
13. Taxes
The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. The tax years 2006 through
2012 remain open to examination for U.S. federal income tax matters and 1998 through 2012 remain open to examination for various state income tax matters.
Significant
components of the provision for (benefit from) income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(20,022 |
) |
$ |
(20,164 |
) |
$ |
34,304 |
|
State |
|
|
575 |
|
|
1,212 |
|
|
2,283 |
|
| |
|
|
|
|
|
|
|
Total current |
|
|
(19,447 |
) |
|
(18,952 |
) |
|
36,587 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(322,104 |
) |
|
13,214 |
|
|
(18,506 |
) |
State |
|
|
7,834 |
|
|
(1,851 |
) |
|
(367 |
) |
| |
|
|
|
|
|
|
|
Total deferred |
|
|
(314,270 |
) |
|
11,363 |
|
|
(18,873 |
) |
| |
|
|
|
|
|
|
|
|
|
$ |
(333,717 |
) |
$ |
(7,589 |
) |
$ |
17,714 |
|
| |
|
|
|
|
|
|
|
F-30
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual provision for (benefit from) income
taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Income tax provision (benefit) at statutory rate |
|
$ |
(356,185 |
) |
$ |
46,933 |
|
$ |
61,800 |
|
Percentage depletion allowance |
|
|
(40,698 |
) |
|
(61,971 |
) |
|
(49,152 |
) |
Goodwill |
|
|
56,916 |
|
|
— |
|
|
— |
|
State taxes, net of effect of federal taxes |
|
|
(23,423 |
) |
|
(3,055 |
) |
|
2,299 |
|
Change in valuation allowance |
|
|
31,832 |
|
|
2,416 |
|
|
(383 |
) |
Other, net |
|
|
(2,159 |
) |
|
8,088 |
|
|
3,150 |
|
| |
|
|
|
|
|
|
|
|
|
$ |
(333,717 |
) |
$ |
(7,589 |
) |
$ |
17,714 |
|
| |
|
|
|
|
|
|
|
In 2012, 2011 and 2010, compensatory stock options and other equity based compensation awards were exercised resulting in a tax expense (benefit)
of $0.3 million, $(0.4) million and $(0.8) million, respectively. The tax benefit will be recorded in paid-in capital at such point in time when a cash tax benefit is recognized.
Significant
components of the Company's deferred tax assets and liabilities that result from carryforwards and temporary differences between the financial statement basis and tax basis
of assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
496,330 |
|
$ |
324,393 |
|
Alternative minimum tax credit carryforwards |
|
|
150,014 |
|
|
151,404 |
|
Reclamation and mine closure |
|
|
104,570 |
|
|
93,914 |
|
Goodwill |
|
|
43,839 |
|
|
— |
|
Acquired sales contracts |
|
|
38,735 |
|
|
44,717 |
|
Workers' compensation |
|
|
32,241 |
|
|
26,266 |
|
Retiree benefit plans |
|
|
32,087 |
|
|
24,456 |
|
Other, primarily accrued liabilities |
|
|
113,777 |
|
|
120,993 |
|
| |
|
|
|
|
|
Gross deferred tax assets |
|
|
1,011,593 |
|
|
786,143 |
|
Valuation allowance |
|
|
(34,663 |
) |
|
(2,831 |
) |
| |
|
|
|
|
|
Total deferred tax assets |
|
|
976,930 |
|
|
783,312 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Plant and equipment |
|
|
1,411,446 |
|
|
1,566,769 |
|
Deferred development |
|
|
77,013 |
|
|
67,728 |
|
Investment in tax partnerships |
|
|
72,513 |
|
|
66,502 |
|
Other |
|
|
12,780 |
|
|
17,015 |
|
| |
|
|
|
|
|
Total deferred tax liabilities |
|
|
1,573,752 |
|
|
1,718,014 |
|
| |
|
|
|
|
|
Net deferred tax asset (liability) |
|
|
(596,822 |
) |
|
(934,702 |
) |
Current asset (liability) |
|
|
67,360 |
|
|
42,051 |
|
| |
|
|
|
|
|
Non-current deferred tax asset (liability) |
|
$ |
(664,182 |
) |
$ |
(976,753 |
) |
| |
|
|
|
|
|
F-31
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company has federal net operating loss carryforwards for regular income tax purposes of $1.3 billion at December 31, 2012 that
will expire between 2024 and 2032. The Company has an alternative minimum tax credit carryforward of $150.0 million at December 31, 2012, which has no expiration date and can be used to
offset future regular tax in excess of the alternative minimum tax.
During
2008, the Company reached a settlement with the IRS regarding the Company's treatment of the acquisition of the coal operations of Atlantic Richfield Company ("ARCO") and the
simultaneous combination of the acquired ARCO operations and the Company's Wyoming operations into the Arch Western joint venture. The settlement did not result in a net change in deferred tax assets,
but involved a re-characterization of deferred tax assets, including an increase in net operating loss carryforwards of $145.1 million and other amortizable assets which will
provide additional tax deductions through 2013. A portion of these cash tax benefits accrued to ARCO pursuant to the original purchase agreement, including $0.8 million and $1.3 million
paid in 2011 and 2010, respectively, that was recorded as goodwill.
The
Company has recorded a valuation allowance for a portion of its deferred tax assets that management believes, more likely than not, will not be realized. Management reassesses the
ability to realize its deferred tax assets annually in the fourth quarter or when circumstances indicate that the ability to realize deferred tax assets has changed. This review resulted in increases
(decreases) in the valuation allowance of $31.8 million, $2.1 million and $(0.4) million in 2012, 2011 and 2010, respectively. The valuation allowance relates to certain state and
foreign net operating loss benefits.
A
reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
|
|
|
|
|
|
|
(In thousands) |
|
Balance at January 1, 2010 |
|
$ |
6,670 |
|
Additions based on tax positions related to the current year |
|
|
1,493 |
|
Additions for tax positions of prior years |
|
|
85 |
|
Reductions for tax positions of prior years |
|
|
(3,830 |
) |
| |
|
|
|
Balance at December 31, 2010 |
|
|
4,418 |
|
Additions based on tax positions related to the current year |
|
|
1,626 |
|
Additions for tax positions of prior years |
|
|
2,754 |
|
| |
|
|
|
Balance at December 31, 2011 |
|
|
8,798 |
|
Additions based on tax positions related to the current year |
|
|
409 |
|
Additions for tax positions of prior years |
|
|
21,943 |
|
| |
|
|
|
Balance at December 31, 2012 |
|
$ |
31,150 |
|
| |
|
|
|
If recognized, the entire amount of the gross unrecognized tax benefits at December 31, 2012 would affect the effective tax rate.
The
Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $1.0 million and
$0.8 million at December 31, 2012 and 2011, respectively, of which $0.2 million was recognized as expense during 2012 and 2011. No gross unrecognized tax benefits are expected to
be reduced in the next 12 months due to the expiration of the statute of limitations.
14. Asset Retirement Obligations
The Company's asset retirement obligations arise from the Federal Surface Mining Control and Reclamation Act of 1977 and similar state
statutes, which require that mine property be restored in accordance with specified standards and an approved reclamation plan. The required reclamation activities to be performed are outlined in the
F-32
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Company's
mining permits. These activities include reclaiming the pit and support acreage at surface mines, sealing portals at underground mines, and reclaiming refuse areas and slurry ponds.
The
following table describes the changes to the Company's asset retirement obligation liability:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Balance at January 1 (including current portion) |
|
$ |
473,903 |
|
$ |
343,119 |
|
Accretion expense |
|
|
39,020 |
|
|
33,601 |
|
Obligations incurred or acquired |
|
|
— |
|
|
115,019 |
|
Adjustments to the liability from changes in estimates |
|
|
4,400 |
|
|
11,176 |
|
Liabilities settled |
|
|
(68,698 |
) |
|
(29,012 |
) |
| |
|
|
|
|
|
Balance at December 31 |
|
$ |
448,625 |
|
$ |
473,903 |
|
Current portion included in accrued expenses |
|
|
(38,920 |
) |
|
(27,119 |
) |
| |
|
|
|
|
|
Noncurrent liability |
|
$ |
409,705 |
|
$ |
446,784 |
|
| |
|
|
|
|
|
The liabilities settled in 2012 were the result of the acceleration of reclamation activities, primarily at the Black Thunder mining complex, as
employees and equipment impacted by mine production cutbacks in response to market conditions were redirected to reclamation activities. Liabilities settled of $29.0 million in 2011 related to
reclamation activities at the Black Thunder mining complex related to a pit acquired with the Jacobs Ranch operations in 2009.
As
of December 31, 2012, the Company had $262.9 million in surety bonds outstanding, $388.4 million in self-bonding, and $18.0 million in letters
of credit to secure reclamation bonding obligations.
15. Capital Stock
On March 1, 2012, the Company filed a registration statement on Form S-3 with the SEC. The registration
statement allows the Company to offer, from time to time, an unlimited amount of debt securities, preferred stock, depositary shares, purchase contracts, purchase units, common stock and related
rights and warrants.
On June 8, 2011, the Company sold 48 million shares of its common stock at a public offering price of $27.00 per share.
The $1.25 billion in net proceeds from the issuance were used to finance the acquisition of ICG. On July 8, 2011, the Company issued an additional 0.7 million shares of its common
stock under the same terms and conditions to cover underwriters' over-allotments for net proceeds of $18.4 million.
The Company's share repurchase program allows for the purchase of up to 14,000,000 shares of the Company's common stock. At
December 31, 2012, 10,925,800 shares of common stock were available for repurchase under the plan. There were no purchases made under the plan during 2012, 2011 or 2010. There is no expiration
date on the program. Any future repurchases under the plan will be made at management's discretion and will depend on market conditions and other factors.
F-33
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. Stock-Based Compensation and Other Incentive Plans
Under the Company's Stock Incentive Plan (the "Incentive Plan"), 18,000,000 shares of the Company's common stock are reserved for
awards to officers and other selected key management employees of the Company. The Incentive Plan provides the Board of Directors with the flexibility to grant stock options, stock appreciation
rights, restricted stock awards, restricted stock units, performance stock or units, merit awards, phantom stock awards and rights to acquire stock through purchase under a stock purchase program
("Awards"). Awards the Board of Directors elects to pay out in cash do not count against the 18,000,000 shares authorized in the Incentive Plan. The Incentive Plan calls for the adjustment of shares
awarded under the plan in the event of a split.
As
of December 31, 2012, the Company had stock options, restricted stock and restricted stock units outstanding under the Incentive Plan.
Stock options are granted at a price equal to the closing market price of the Company's common stock on the date of grant and are
generally subject to vesting provisions of at least one year
from the date of grant. Information regarding stock option activity under the Incentive Plan follows for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares |
|
Weighted Average
Exercise
Price |
|
Aggregate
Intrinsic
Value |
|
Average
Contract
Life |
|
|
|
(In thousands)
|
|
(In thousands)
|
|
(In thousands)
|
|
|
|
Options outstanding at January 1 |
|
|
4,953 |
|
$ |
26.72 |
|
|
|
|
|
|
|
Granted |
|
|
1,311 |
|
|
13.28 |
|
|
|
|
|
|
|
Exercised |
|
|
(527 |
) |
|
9.79 |
|
|
|
|
|
|
|
Canceled |
|
|
(73 |
) |
|
31.17 |
|
|
|
|
|
|
|
Expired |
|
|
(449 |
) |
|
13.89 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31 |
|
|
5,215 |
|
|
25.99 |
|
$ |
4 |
|
|
6.67 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31 |
|
|
2,847 |
|
|
32.26 |
|
|
— |
|
|
5.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $1.8 million,
$2.6 million and $3.0 million, respectively.
Information
regarding changes in stock options outstanding and not yet vested and the related grant-date fair value under the Incentive Plan follows for the year ended
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
Weighted Average
Grant-Date Fair Value |
|
|
|
(In thousands)
|
|
|
|
Unvested options at January 1 |
|
|
1,796 |
|
$ |
10.96 |
|
Granted |
|
|
1,311 |
|
|
5.27 |
|
Vested |
|
|
(721 |
) |
|
11.13 |
|
Canceled |
|
|
(17 |
) |
|
9.81 |
|
| |
|
|
|
|
|
|
Unvested options at December 31 |
|
|
2,369 |
|
|
7.77 |
|
| |
|
|
|
|
|
|
Compensation expense related to stock options for the years ended December 31, 2012, 2011 and 2010 was $8.0 million,
$8.8 million and $10.6 million, respectively. As of December 31, 2012, there was $7.0 million of unrecognized compensation cost related to the unvested stock options. The
total grant-date fair value of options
F-34
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
vested
during the years ended December 31, 2012, 2011 and 2010 was $8.0 million, $9.9 million and $10.6 million, respectively. The options provide for the continuation of
vesting for retirement-eligible recipients that meet certain criteria. The expense for these options is recognized through the date that the employee first becomes eligible to retire and is no longer
required to provide service to earn part or all of the award. The majority of the cost relating
to the stock-based compensation plans is included primarily in selling, general and administrative expenses in the accompanying consolidated statements of income.
Weighted
average assumptions used in the Black-Scholes option pricing model for granted options follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
Weighted average grant-date fair value per share of options granted |
|
$ |
5.27 |
|
$ |
14.18 |
|
$ |
9.43 |
|
Assumptions (weighted average): |
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
0.76 |
% |
|
1.92 |
% |
|
2.16 |
% |
Expected dividend yield |
|
|
2.92 |
% |
|
1.25 |
% |
|
1.99 |
% |
Expected volatility |
|
|
60.72 |
% |
|
57.4 |
% |
|
57.1 |
% |
Expected life (in years) |
|
|
4.5 |
|
|
4.5 |
|
|
4.5 |
|
Expected volatilities are based on historical stock price movement and implied volatility from traded options on the Company's stock. The expected
life of the option was determined based on historical exercise activity. Most options granted vest over a period of three to four years.
The Company may issue restricted stock and restricted stock units, which require no payment from the employee. Restricted stock
cliff-vests at various dates and restricted stock units typically vest ratably over three years. Compensation expense is based on the fair value on the grant date and is recorded ratably over the
vesting period. During the vesting period, the employee receives cash compensation equal to the amount of dividends that would have been paid on the underlying shares.
Information
regarding restricted stock and restricted stock unit activity and weighted average grant-date fair value follows for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
Restricted Stock Units |
|
|
|
Common
Shares |
|
Weighted Average
Grant-Date
Fair Value |
|
Common
Shares |
|
Weighted Average
Grant-Date
Fair Value |
|
|
|
(In thousands)
|
|
|
|
(In thousands)
|
|
|
|
Outstanding at January 1 |
|
|
182 |
|
$ |
26.68 |
|
|
27 |
|
$ |
52.69 |
|
Granted |
|
|
22 |
|
|
13.44 |
|
|
547 |
|
|
13.31 |
|
Vested |
|
|
(10 |
) |
|
22.89 |
|
|
(27 |
) |
|
52.69 |
|
Canceled |
|
|
(6 |
) |
|
32.49 |
|
|
(36 |
) |
|
13.93 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31 |
|
|
188 |
|
|
25.14 |
|
|
511 |
|
|
13.26 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of restricted stock granted during 2011 and 2010 was $30.42 and $22.03, respectively. There were no restricted
stock units granted during 2011 or 2010. The total grant-date fair value of restricted stock that vested during 2012, 2011 and 2010 was $0.2 million, $1.1 million and
$0.4 million, respectively. The total grant-date fair value of restricted stock units that vested during 2012 and 2011 was $1.4 million in each year. There were no restricted
stock units that vested during 2010.
F-35
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Unearned
compensation of $6.9 million will be recognized over the remaining vesting period of the outstanding restricted stock and restricted stock units. The Company recognized
expense of approximately $3.5 million, $2.1 million and $1.1 million related to restricted stock and restricted stock units for the years ended December 31, 2012, 2011 and
2010, respectively, primarily in selling, general and administrative expenses.
The Company has a long-term incentive program that allows for the award of performance units. The total number of units
earned by a participant is based on financial and operational performance measures, and may be paid out in cash or in shares of the Company's common stock. The Company recognizes compensation expense
over the three year term of the grant. The liabilities are remeasured quarterly. The Company recognized $8.1 million, $2.7 million and $3.8 million for the years ended
December 31, 2012, 2011 and 2010, respectively. The expense is included primarily in selling, general and administrative expenses in the accompanying consolidated statements of income. Amounts
accrued under the plan were $13.1 million and $9.6 million at December 31, 2012 and 2011, respectively.
The Company maintains a deferred compensation plan that allows eligible employees to defer receipt of compensation until the dates
elected by the participant. Participants in the plan may defer up to 85% of their base salaries and up to 100% of their annual incentive awards. The plan also allows participants to defer receipt of
up to 100% of the shares under any restricted stock unit or performance-contingent stock awards. The amounts deferred are invested in accounts that mirror the gains and losses of a number of different
investment funds, including a hypothetical investment in shares of the Company's common stock. Participants are always vested in their deferrals to the plan and any related earnings. The Company has
established a grantor trust to fund the obligations under the plan. The trust has purchased corporate-owned life insurance to offset these obligations. The net cash surrender values of the policies of
$35.4 million and $35.8 million at December 31, 2012 and 2011, respectively, are included in other noncurrent assets in the accompanying consolidated balance sheets. The
participants have an unsecured contractual commitment by the Company to pay the amounts due under the plan. Any assets placed in trust by the Company to fund future obligations of the plan are subject
to the claims of creditors in the event of insolvency or bankruptcy, and participants are general creditors of the company as to their deferred compensation in the plans.
Under
the plan, the Company credits each participant's account with the number of units equal to the number of shares or units that the participant could purchase or receive with the
amount of compensation deferred, based upon the fair market value of the underlying investment on that date. The amount the employee will receive from the plan will be based on the number of units
credited to each participant's account, valued on the basis of the fair market value of an equivalent number of shares or units of the underlying investment on that date. The liability under the plan
was $31.3 million at December 31, 2012 and $32.7 million at December 31, 2011.
The
Company's net income (expense) related to the deferred compensation plan for the years ended December 31, 2012, 2011 and 2010 was $3.3 million, $6.2 million and
$(2.8) million, respectively, most of which is included in selling, general and administrative expenses in the accompanying consolidated statements of income.
F-36
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
17. Accrued Workers' Compensation
The Company is liable under the Federal Mine Safety and Health Act of 1969, as subsequently amended, to provide for pneumoconiosis
(occupational disease) benefits to eligible employees, former employees, and dependents. The Company is also liable under various states' statutes for occupational disease benefits. The Company
currently provides for federal and state claims principally through a self-insurance program. The occupational disease benefit obligation represents the present value of the actuarially
computed present and future liabilities for such benefits over the employees' applicable years of service.
In
addition, the Company is liable for workers' compensation benefits for traumatic injuries that are accrued as injuries are incurred. Traumatic claims are either covered through
self-insured programs or through state-sponsored workers' compensation programs.
Workers'
compensation expense consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Self-insured occupational disease benefits: |
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,993 |
|
$ |
2,059 |
|
$ |
727 |
|
Interest cost |
|
|
2,400 |
|
|
1,799 |
|
|
675 |
|
Net amortization |
|
|
(453 |
) |
|
(493 |
) |
|
(1,860 |
) |
Curtailments |
|
|
3,022 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
Total occupational disease |
|
|
6,962 |
|
|
3,365 |
|
|
(458 |
) |
Traumatic injury claims and assessments |
|
|
26,565 |
|
|
16,979 |
|
|
9,263 |
|
| |
|
|
|
|
|
|
|
Total workers' compensation expense |
|
$ |
33,527 |
|
$ |
20,344 |
|
$ |
8,805 |
|
| |
|
|
|
|
|
|
|
The reconciliation of changes in the benefit obligation of the occupational disease liability is as follows:
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Beginning of year obligation |
|
$ |
54,184 |
|
$ |
17,412 |
|
Service cost |
|
|
1,993 |
|
|
2,059 |
|
Interest cost |
|
|
2,400 |
|
|
1,799 |
|
Actuarial loss (gain) |
|
|
(5,373 |
) |
|
7,081 |
|
Benefit and administrative payments |
|
|
(1,873 |
) |
|
(1,097 |
) |
Curtailments |
|
|
7,100 |
|
|
— |
|
Acquisition of ICG |
|
|
— |
|
|
26,930 |
|
| |
|
|
|
|
|
Net obligation at end of year |
|
$ |
58,431 |
|
$ |
54,184 |
|
| |
|
|
|
|
|
At December 31, 2012 and 2011, accumulated losses of $4.7 million and $5.5 million, respectively, were not yet recognized in
occupational disease cost and were recorded in accumulated other comprehensive income. The expected accumulated loss that will be amortized from accumulated other comprehensive income into
occupational disease cost in 2013 is $0.9 million.
F-37
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The
following table provides the assumptions used to determine the projected occupational disease obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
Weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.54 |
% |
|
5.10 |
% |
|
5.96 |
% |
Cost escalation rate |
|
|
3.00 |
% |
|
3.00 |
% |
|
3.00 |
% |
Summarized below is information about the amounts recognized in the accompanying consolidated balance sheets for workers' compensation benefits:
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Occupational disease costs |
|
$ |
58,431 |
|
$ |
54,184 |
|
Traumatic and other workers' compensation claims |
|
|
33,569 |
|
|
29,430 |
|
| |
|
|
|
|
|
Total obligations |
|
|
92,000 |
|
|
83,614 |
|
Less amount included in accrued expenses |
|
|
10,371 |
|
|
11,666 |
|
| |
|
|
|
|
|
Noncurrent obligations |
|
$ |
81,629 |
|
$ |
71,948 |
|
| |
|
|
|
|
|
As of December 31, 2012, the Company had $61.1 million in surety bonds and letters of credit outstanding to secure workers'
compensation obligations.
18. Employee Benefit Plans
The Company provides funded and unfunded non-contributory defined benefit pension plans covering certain of its salaried
and hourly employees. Benefits are generally based on the employee's age and compensation. The Company funds the plans in an amount not less than the minimum statutory funding requirements or more
than the maximum amount that can be deducted for U.S. federal income tax purposes.
The
Company also currently provides certain postretirement medical and life insurance coverage for eligible employees. Generally, covered employees who terminate employment after meeting
eligibility requirements are eligible for postretirement coverage for themselves and their dependents. The salaried employee postretirement benefit plans are contributory, with retiree contributions
adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. The Company's current funding policy is to fund the cost of all postretirement benefits as
they are paid.
Employees
acquired with the ICG acquisition were brought over in their existing plan. Subsequently, the terms of the plan were amended to change vesting periods, coverage caps, and
eligible ages, resulting in a reduction of the benefit obligation of $55.5 million.
F-38
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Obligations and Funded Status.
Summaries of the changes in the benefit obligations, plan assets and funded status of the plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement
Benefits |
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
CHANGE IN BENEFIT OBLIGATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at January 1 |
|
$ |
333,951 |
|
$ |
297,707 |
|
$ |
45,129 |
|
$ |
39,633 |
|
Service cost |
|
|
27,466 |
|
|
16,490 |
|
|
2,142 |
|
|
3,917 |
|
Interest cost |
|
|
15,668 |
|
|
16,253 |
|
|
2,020 |
|
|
3,279 |
|
Plan amendments |
|
|
— |
|
|
(3,235 |
) |
|
2,183 |
|
|
(55,542 |
) |
Benefits paid |
|
|
(23,624 |
) |
|
(18,848 |
) |
|
(4,244 |
) |
|
(1,669 |
) |
Curtailments |
|
|
(687 |
) |
|
— |
|
|
(708 |
) |
|
— |
|
Acquisition of ICG |
|
|
— |
|
|
— |
|
|
— |
|
|
48,441 |
|
Other-primarily actuarial loss (gain) |
|
|
38,120 |
|
|
25,584 |
|
|
2,804 |
|
|
7,070 |
|
| |
|
|
|
|
|
|
|
|
|
Benefit obligations at December 31 |
|
$ |
390,894 |
|
$ |
333,951 |
|
$ |
49,326 |
|
$ |
45,129 |
|
| |
|
|
|
|
|
|
|
|
|
CHANGE IN PLAN ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of plan assets at January 1 |
|
$ |
285,074 |
|
$ |
247,713 |
|
$ |
— |
|
$ |
— |
|
Actual return on plan assets |
|
|
42,396 |
|
|
9,443 |
|
|
— |
|
|
— |
|
Employer contributions |
|
|
19,028 |
|
|
46,766 |
|
|
4,244 |
|
|
1,669 |
|
Benefits paid |
|
|
(23,624 |
) |
|
(18,848 |
) |
|
(4,244 |
) |
|
(1,669 |
) |
| |
|
|
|
|
|
|
|
|
|
Value of plan assets at December 31 |
|
$ |
322,874 |
|
$ |
285,074 |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
Accrued benefit cost |
|
|
(68,020 |
) |
|
(48,877 |
) |
|
(49,326 |
) |
|
(45,129 |
) |
| |
|
|
|
|
|
|
|
|
|
ITEMS NOT YET RECOGNIZED AS A COMPONENT OF NET PERIODIC BENEFIT COST |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit (cost) |
|
$ |
1,890 |
|
$ |
1,736 |
|
$ |
45,938 |
|
$ |
62,920 |
|
Accumulated gain (loss) |
|
|
(68,915 |
) |
|
(68,302 |
) |
|
(1,531 |
) |
|
1,795 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
(67,025 |
) |
$ |
(66,566 |
) |
$ |
44,407 |
|
$ |
64,715 |
|
| |
|
|
|
|
|
|
|
|
|
BALANCE SHEET AMOUNTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability |
|
$ |
(390 |
) |
$ |
(633 |
) |
$ |
(4,240 |
) |
$ |
(2,820 |
) |
Noncurrent liability |
|
$ |
(67,630 |
) |
$ |
(48,244 |
) |
$ |
(45,086 |
) |
$ |
(42,309 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
(68,020 |
) |
$ |
(48,877 |
) |
$ |
(49,326 |
) |
$ |
(45,129 |
) |
| |
|
|
|
|
|
|
|
|
|
Pension Benefits
The accumulated benefit obligation for all pension plans was $366.1 million and $314.7 million at December 31,
2012 and 2011, respectively. The accumulated benefit obligation differs from the benefit obligation in that it includes no assumption about future compensation levels.
The
benefit obligation and the accumulated benefit obligation for the Company's unfunded pension plan were $10.6 million and $9.4 million, respectively, at
December 31, 2012.
The
prior service credit and net loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2013 are $0.2 million and
$16.2 million, respectively.
F-39
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Other Postretirement Benefits
The prior service credit and net gain that will be amortized from accumulated other comprehensive income into net periodic benefit cost
in 2013 is $11.0 million and $0.3 million, respectively.
Components of Net Periodic Benefit Cost. The following table details the components of pension benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement Benefits |
|
Year Ended December 31,
|
|
2012 |
|
2011 |
|
2010 |
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Service cost |
|
$ |
27,466 |
|
$ |
16,490 |
|
$ |
15,870 |
|
$ |
2,142 |
|
$ |
3,917 |
|
$ |
1,509 |
|
Interest cost |
|
|
15,668 |
|
|
16,253 |
|
|
15,822 |
|
|
2,020 |
|
|
3,279 |
|
|
2,083 |
|
Curtailments |
|
|
324 |
|
|
— |
|
|
— |
|
|
(4,049 |
) |
|
— |
|
|
— |
|
Expected return on plan assets* |
|
|
(22,030 |
) |
|
(21,812 |
) |
|
(19,392 |
) |
|
— |
|
|
— |
|
|
— |
|
Amortization of prior service cost (credit) |
|
|
259 |
|
|
(189 |
) |
|
173 |
|
|
(11,458 |
) |
|
(2,364 |
) |
|
(2,364 |
) |
Amortization of other actuarial losses (gains) |
|
|
14,666 |
|
|
8,748 |
|
|
7,130 |
|
|
(522 |
) |
|
(3,100 |
) |
|
(2,918 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost |
|
$ |
36,353 |
|
$ |
19,490 |
|
$ |
19,603 |
|
$ |
(11,867 |
) |
$ |
1,732 |
|
$ |
(1,690 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- The
Company does not fund its other postretirement benefit obligations.
The differences generated from changes in assumed discount rates and returns on plan assets are amortized into earnings over a
five-year period.
Assumptions. The following table provides the assumptions used to determine the actuarial present value of projected benefit
obligations at
December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other
Postretirement
Benefits |
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
Weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.13 |
% |
|
4.91 |
% |
|
3.64 |
% |
|
4.52 |
% |
Rate of compensation increase |
|
|
3.39 |
% |
|
3.39 |
% |
|
N/A |
|
|
N/A |
|
The following table provides the assumptions used to determine net periodic benefit cost for years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement
Benefits |
|
|
|
2012 |
|
2011 |
|
2010 |
|
2012 |
|
2011 |
|
2010 |
|
Weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.91 |
% |
|
5.71 |
% |
|
5.97 |
% |
|
4.52 |
% |
|
5.23 |
% |
|
5.67 |
% |
Rate of compensation increase |
|
|
3.39 |
% |
|
3.39 |
% |
|
3.39 |
% |
|
N/A |
|
|
N/A |
|
|
N/A |
|
Expected return on plan assets |
|
|
7.75 |
% |
|
8.50 |
% |
|
8.50 |
% |
|
N/A |
|
|
N/A |
|
|
N/A |
|
The Company establishes the expected long-term rate of return at the beginning of each fiscal year based upon historical returns and
projected returns on the underlying mix of invested assets. The Company utilizes modern portfolio theory modeling techniques in the development of its return assumptions. This technique projects rates
of return that can be generated through various asset allocations that lie within the risk tolerance set forth by members of the Company's pension committee (the "Pension Committee"). The risk
assessment provides a link between a pension's risk capacity, management's willingness to accept investment risk and the asset allocation process, which ultimately leads to the return generated by the
invested assets.
F-40
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The health care cost trend rate assumed for 2013 is 7.5% and is expected to reach an ultimate trend rate of 4.5% by 2028. A one-percentage-point
increase in the health care cost trend rate would have increased the postretirement benefit obligation at December 31, 2012 by $1.0 million. A one-percentage-point decrease
in the health care cost trend rate would have decreased the postretirement benefit obligation at December 31, 2012 by $0.8 million. The effect of these changes would have had an
insignificant impact on the net periodic postretirement benefit costs.
Plan Assets
The Pension Committee is responsible for overseeing the investment of pension plan assets. The Pension Committee is responsible for
determining and monitoring appropriate asset allocations and for selecting or replacing investment managers, trustees and custodians. The pension plan's current investment targets are 65% equity, 30%
fixed income securities and 5% cash. The Pension Committee reviews the actual asset allocation in light of these targets on a periodic basis and rebalances among investments as necessary. The Pension
Committee evaluates the performance of investment managers as compared to the performance of specified benchmarks and peers and monitors the investment managers to ensure adherence to their stated
investment style and to the plan's investment guidelines.
The
Company's pension plan assets at December 31, 2012 and 2011, respectively, are categorized below according to the fair value hierarchy as defined in Note 11, "Fair
Value Measurements":
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
|
(In thousands)
|
|
Equity Securities:(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. small-cap |
|
$ |
13,099 |
|
$ |
11,178 |
|
$ |
13,099 |
|
$ |
11,178 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
U.S. mid-cap |
|
|
43,946 |
|
|
50,264 |
|
|
12,717 |
|
|
23,474 |
|
|
31,229 |
|
|
26,790 |
|
|
— |
|
|
— |
|
U.S. large-cap |
|
|
102,922 |
|
|
91,561 |
|
|
48,536 |
|
|
44,820 |
|
|
54,386 |
|
|
46,741 |
|
|
— |
|
|
— |
|
Non-U.S. |
|
|
27,251 |
|
|
22,509 |
|
|
— |
|
|
— |
|
|
27,251 |
|
|
22,509 |
|
|
— |
|
|
— |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities(B) |
|
|
24,202 |
|
|
13,454 |
|
|
23,483 |
|
|
12,738 |
|
|
719 |
|
|
716 |
|
|
— |
|
|
— |
|
Non-U.S. government securities(C) |
|
|
3,681 |
|
|
2,968 |
|
|
— |
|
|
— |
|
|
3,681 |
|
|
2,968 |
|
|
— |
|
|
— |
|
U.S. government asset and mortgage backed securities(D) |
|
|
781 |
|
|
800 |
|
|
— |
|
|
— |
|
|
781 |
|
|
800 |
|
|
— |
|
|
— |
|
Corporate fixed income(E) |
|
|
14,016 |
|
|
14,004 |
|
|
— |
|
|
— |
|
|
14,016 |
|
|
14,004 |
|
|
— |
|
|
— |
|
State and local government securities(F) |
|
|
9,903 |
|
|
18,416 |
|
|
— |
|
|
— |
|
|
9,903 |
|
|
18,416 |
|
|
— |
|
|
— |
|
Other fixed income(G) |
|
|
61,765 |
|
|
51,470 |
|
|
— |
|
|
— |
|
|
61,765 |
|
|
51,470 |
|
|
— |
|
|
— |
|
Short-term investments(H) |
|
|
20,894 |
|
|
8,029 |
|
|
— |
|
|
— |
|
|
20,894 |
|
|
8,029 |
|
|
— |
|
|
— |
|
Other investments(I) |
|
|
414 |
|
|
421 |
|
|
— |
|
|
— |
|
|
414 |
|
|
421 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
322,874 |
|
$ |
285,074 |
|
$ |
97,835 |
|
$ |
92,210 |
|
$ |
225,039 |
|
$ |
192,864 |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (A)
- Equity
securities includes investments in 1) common stock, 2) preferred stock and 3) mutual funds. Investments in common and preferred
stocks are valued using quoted market prices multiplied by the number of shares owned. Investments in mutual funds are valued at the net asset value per share multiplied by the number of shares held
as of the measurement date and are traded on listed exchanges.
- (B)
- U.S.
government securities includes agency and treasury debt. These investments are valued using dealer quotes in an active market.
F-41
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- (C)
- Non-U.S.
government securities includes debt securities issued by foreign governments and are valued utilizing a price spread basis valuation
technique with observable sources from investment dealers and research vendors.
- (D)
- U.S.
government asset and mortgage backed securities includes government-backed mortgage funds which are valued utilizing an income approach that includes
various valuation techniques and sources such as discounted cash flows models, benchmark yields and securities, reported trades, issuer trades and/or other applicable data.
- (E)
- Corporate
fixed income is primarily comprised of corporate bonds and certain corporate asset-backed securities that are denominated in the U.S. dollar and
are investment-grade securities. These investments are valued using dealer quotes.
- (F)
- State
and local government securities include different U.S. state and local municipal bonds and asset backed securities, these investments are valued
utilizing a market approach that includes various valuation techniques and sources such as value generation models, broker quotes, benchmark yields and securities, reported trades, issuer trades
and/or other applicable data.
- (G)
- Other
fixed income investments are actively managed fixed income vehicles that are valued at the net asset value per share multiplied by the number of
shares held as of the measurement date.
- (H)
- Short-term
investments include governmental agency funds, government repurchase agreements, commingled funds, and pooled funds and mutual funds.
Governmental agency funds are valued utilizing an option adjusted spread valuation technique and sources such as interest rate generation processes, benchmark yields and broker quotes. Investments in
governmental repurchase agreements, commingled funds and pooled funds and mutual funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.
- (I)
- Other
investments includes cash, forward contracts, derivative instruments, credit default swaps, interest rate swaps and mutual funds. Investments in
interest rate swaps are valued utilizing a market approach that includes various valuation techniques and sources such as value generation models, broker quotes in active and non-active
markets, benchmark yields and securities, reported trades, issuer trades and/or other applicable data. Forward contracts and derivative instruments are valued at their exchange listed price or broker
quote in an active market. The mutual funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date and are traded on listed exchanges.
Cash Flows. The Company expects to make contributions of $0.9 million to the pension plans in 2013, which is impacted by the
Moving Ahead for
Progress in the 21st Century Act (MAP-21) enacted July 6, 2012. MAP-21 does not reduce the Company's obligations under the plan, but redistributes the timing of
required payments by providing near term funding relief for sponsors under the Pension Protection Act.
The
following represents expected future benefit payments from the plan, which reflect expected future service, as appropriate:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits |
|
Other
Postretirement
Benefits |
|
|
|
(In thousands)
|
|
2013 |
|
$ |
21,275 |
|
$ |
3,987 |
|
2014 |
|
|
23,674 |
|
|
4,204 |
|
2015 |
|
|
24,210 |
|
|
4,430 |
|
2016 |
|
|
28,464 |
|
|
4,720 |
|
2017 |
|
|
32,124 |
|
|
4,893 |
|
Years 2018-2022 |
|
|
190,016 |
|
|
24,895 |
|
| |
|
|
|
|
|
|
|
$ |
319,763 |
|
$ |
47,129 |
|
| |
|
|
|
|
|
F-42
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company sponsors savings plans which were established to assist eligible employees provide for their future retirement needs. The
Company's expense, representing its contributions to the plans, was $27.2 million, $25.9 million and $18.1 million for the years ended December 31, 2012, 2011 and 2010,
respectively.
19. Risk Concentrations
The Company has a formal written credit policy that establishes procedures to determine creditworthiness and credit limits for trade
customers and counterparties in the over-the-counter coal market. Generally, credit is extended based on an evaluation of the customer's financial condition. Collateral is not
generally required, unless credit cannot be established. Credit losses are provided for in the financial statements and historically have been minimal.
The
Company markets its steam coal principally to domestic and foreign electric utilities and its metallurgical coal to domestic and foreign steel producers. Revenues from export sales
were $1.2 billion, $920.0 million and $471.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012 and 2011, accounts
receivable from electric utilities totaled $159.5 million and $261.2 million, respectively, or 65% and 69% of total trade receivables, respectively. As of December 31, 2012 and
2011, accounts receivable from sales of metallurgical-quality coal totaled $86.6 million and $117.4 million, respectively, or 35% and 31%, of total trade receivables, respectively.
The
Company uses shipping destination as the basis for attributing revenue to individual countries. The Company's foreign revenues by geographical location for the year ended
December 31, 2012, follows:
|
|
|
|
|
|
|
December 31, 2012 |
|
|
|
(In thousands)
|
|
Europe (including Morocco and Turkey) |
|
$ |
674,754 |
|
Asia |
|
|
203,193 |
|
North America |
|
|
72,542 |
|
South America |
|
|
57,184 |
|
Brokered sales |
|
|
145,438 |
|
| |
|
|
|
Total |
|
$ |
1,153,111 |
|
| |
|
|
|
The Company is committed under long-term contracts to supply steam coal that meets certain quality requirements at specified prices.
These prices are generally adjusted based on indices. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer. The Company sold
approximately 140.8 million tons of coal in 2012. Approximately 70% of this tonnage (representing approximately 50% of the Company's revenue) was sold under long-term contracts
(contracts having a term of greater than one year). Long-term contracts range in remaining life from one to eight years.
The Company uses independent contractors to mine coal at certain mining complexes. The Company also purchases coal from third parties
that it sells to customers. Factors beyond the Company's control could affect the availability of coal produced for or purchased by the Company. Disruptions in the quantities of coal produced for or
purchased by the Company could impair its ability to fill customer orders or require it to purchase coal from other sources at prevailing market prices in order to satisfy those orders.
F-43
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company depends upon barge, rail, truck and belt transportation systems to deliver coal to its customers. Disruption of these
transportation services due to weather-related problems, mechanical difficulties, strikes, lockouts, bottlenecks, and other events could temporarily impair the Company's ability to supply coal to its
customers, resulting in decreased shipments. In the past, disruptions in rail service have resulted in missed shipments and production interruptions.
20. Earnings (Loss) Per Common Share
The following table provides the basis for earnings (loss) per share calculations by reconciling basic and diluted weighted average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
211,381 |
|
|
190,086 |
|
|
162,398 |
|
Effect of common stock equivalents under incentive plans |
|
|
— |
|
|
819 |
|
|
812 |
|
| |
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
211,381 |
|
|
190,905 |
|
|
163,210 |
|
| |
|
|
|
|
|
|
|
The effect of options to purchase 4.9 million, 2.6 million and 2.5 million shares of common stock were excluded from the
calculation of diluted weighted average shares outstanding for the years ended December 31, 2012, 2011 and 2010, respectively, because the exercise price of these options exceeded the average
market price of the Company's common stock for this period. The weighted average share impact of options, restricted stock and restricted stock units that were excluded from the calculation of
weighted average shares for the year ended December 31, 2012 due to the Company's net loss were not significant.
21. Leases
The Company leases equipment, land and various other properties under non-cancelable long-term leases, expiring
at various dates. Certain leases contain options that would allow the Company to extend the lease or purchase the leased asset at the end of the base lease
term. In addition, the Company enters into various non-cancelable royalty lease agreements under which future minimum payments are due.
Minimum
payments due in future years under these agreements in effect at December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
Operating
Leases |
|
Royalties |
|
|
|
(In thousands)
|
|
2013 |
|
$ |
26,837 |
|
$ |
26,303 |
|
2014 |
|
|
25,109 |
|
|
35,954 |
|
2015 |
|
|
17,748 |
|
|
37,725 |
|
2016 |
|
|
9,708 |
|
|
33,833 |
|
2017 |
|
|
7,306 |
|
|
32,690 |
|
Thereafter |
|
|
5,334 |
|
|
147,103 |
|
| |
|
|
|
|
|
|
|
$ |
92,042 |
|
$ |
313,608 |
|
| |
|
|
|
|
|
Rental expense, including amounts related to these operating leases and other shorter-term arrangements, amounted to
$41.2 million in 2012, $43.9 million in 2011 and $41.6 million in 2010.
F-44
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Royalties
are paid to lessors either as a fixed price per ton or as a percentage of the gross selling price of the mined coal. Royalties under the majority of the Company's significant
leases are paid on the percentage of gross selling price basis. Royalty expense, including production royalties, was $302.0 million in 2012, $349.0 million in 2011 and
$286.8 million in 2010.
As
of December 31, 2012, certain of the Company's lease obligations were secured by outstanding surety bonds totaling $60.7 million.
22. Transactions with Patriot Coal Corporation
On December 31, 2005, Arch entered into a purchase and sale agreement to sell mining complexes to Magnum Coal Company
("Magnum"). On July 23, 2008, Patriot Coal Corporation acquired Magnum from Arc Light Capital Partners. On July 9, 2012, Patriot Coal Corporation and certain of its wholly owned
subsidiaries, including Magnum, (collectively, "Patriot") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District
of New York ("Bankruptcy Court").
The
Company has agreed to continue to provide surety bonds and letters of credit for certain Magnum obligations, primarily reclamation. The surety bonding amounts are mandated by the
state and are not directly related to the estimated cost to reclaim the properties. At December 31, 2012, the Company had $34.4 million of surety bonds remaining related to Magnum
properties, however Patriot Coal has posted letters of credit of $16.7 million in the Company's favor.
On
September 20, 2012, Patriot filed a motion with the Bankruptcy Court to reject a master coal sales agreement entered into on December 31, 2005 between the Company and
Magnum, which was established in order to meet obligations under a coal sales agreement with a customer who did not consent to the assignment of their contract to Magnum. On December 18, 2012,
the court accepted Patriot's motion to reject the master coal sales agreement. As a result of the court's decision, the Company accrued $58.3 million, which represents the discounted cash flows
of the remaining monthly buyout amounts under the underlying coal sales agreement. The current liability for this obligation was $7.6 million at December 31, 2012.
23. Commitments and Contingencies
Allegheny Energy Supply ("Allegheny"), the sole customer of coal produced at the Company's subsidiary Wolf Run Mining Company's ("Wolf
Run") Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. ("Hunter Ridge"), and ICG in state court in Allegheny County, Pennsylvania on December 28,
2006, and amended its complaint on April 23, 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore
No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract. The Sycamore No. 2 mine was idled
after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped. After extensive searching for gas wells and rehabilitation of the mine, it was
re-opened in 2007, but with notice to Allegheny that it would necessarily operate at reduced volumes in order to safely and effectively avoid the many gas wells within the reserve. The
amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract
in early 2005. Allegheny voluntarily dropped the breach of representation claims later. Allegheny claimed that it would incur costs in excess of $100 million to purchase replacement coal over
the life of the contract. ICG, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining claims.
On
November 3, 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other
things, fraudulent inducement and
F-45
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
conspiracy.
On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to ICG, which was
not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract. No new substantive claims were asserted. ICG answered the second amended complaint
on October 13, 2009, denying all of the new claims. ICG's counterclaim was dismissed on motion for summary judgment entered on May 11, 2010. Allegheny's claims against ICG were also
dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not. The court conducted a non-jury trial of this matter beginning on January 10, 2011 and
concluding on February 1, 2011. At the trial, Allegheny presented its evidence for breach of contract and claimed that it is entitled to past and future damages in the aggregate of between
$228.0 million and $377.0 million. Wolf Run and Hunter Ridge presented their defense of the claims, including evidence with respect to the existence of force majeure conditions and
excuse under the contract and applicable law. Wolf Run and Hunter Ridge presented evidence that Allegheny's damage calculations were significantly inflated because they were not determined as of the
time of the breach and, in some instances, artificially assumed future non-delivery or did not take into account the apparent requirement to supply coal in the future. On May 2,
2011, the trial court entered a Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. ICG and
Allegheny filed post-verdict motions in the trial court and
on August 23, 2011, the court denied the parties' motions. The court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included
pre-judgment interest. The parties appealed the lower court's decision to the Superior Court of Pennsylvania. Wolf Run and Hunter Ridge have filed an appeal bond in the amount of
$124.9 million. On August 13, 2012, the Superior Court of Pennsylvania ruled that the lower court should have calculated damages as of the date of breach, and remanded the matter back to
the lower court with instructions to recalculate the award. This ruling resulted in a reduction of the Company's best estimate of the probable loss related to this lawsuit. On November 19,
2012, Allegheny filed a Petition for Allowance of Appeal with the Supreme Court of Pennsylvania and Wolf Run and Hunter Ridge filed an Answer. This Petition is pending.
In
addition, 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. As of December 31, 2012 and December 31, 2011, the Company had accrued $32.8 million and $117.2 million, respectively, for all legal
matters, including $4.4 million and $6.3 million classified as current. The ultimate resolution of any such legal matter could result in outcomes which may be materially different from
amounts the Company has accrued for such matters.
The
Company has unconditional purchase obligations relating to purchases of coal, materials and supplies and capital commitments, other than reserve acquisitions, and is also a party to
transportation capacity commitments. The future commitments under these agreements total $216.2 million in 2013, $135.3 million in 2014, $135.1 million in 2015,
$102.5 million in 2016, $98.6 million in 2017 and $445.6 million thereafter. During the years ended December 31, 2012, 2011 and 2010, the Company fulfilled its commitments
under agreements containing unconditional obligations.
24. Segment Information
The Company has three reportable business segments, which are based on the major coal producing basins in which the Company operates.
Each of these reportable business segments includes a number of mine complexes. The Company manages its coal sales by coal basin, not by individual mine complex. Geology, coal transportation routes to
customers, regulatory environments and coal quality are characteristic to a basin. Accordingly, market and contract pricing have developed by coal basin. 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
F-46
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Powder
River Basin (PRB) segment, with operations in Wyoming; the Western Bituminous (WBIT) segment, with operations in Utah, Colorado and southern Wyoming; the Appalachia (APP) segment, with
operations in West Virginia, Kentucky, Maryland and Virginia. The "Other" operating segment represents primarily the Company's Illinois operations and ADDCAR subsidiary, which manufactures and sells
its patented highwall mining system.
Operating
segment results for the years ended December 31, 2012, 2011 and 2010 are presented below. Results for the reportable segments include all direct costs of mining,
including all depreciation, depletion and amortization related to the mining operations, even if the assets are not recorded at the operating segment level. These reportable segments results do not
reflect mine closure or impairment costs, since those are not reflected in the operating income reviewed by management. Corporate, Other and Eliminations includes these charges, as well as the change
in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management; other support functions; and the elimination of intercompany transactions.
The
asset amounts below represent an allocation of assets consistent with the basis used for the Company's incentive compensation plans. The amounts in Corporate, Other and Eliminations
represent primarily corporate assets (cash, receivables, investments, plant, property and equipment) as well as unassigned coal reserves, above-market acquired sales contracts and other unassigned
assets. Goodwill is allocated to the respective reporting units, even though it may not be reflected in the subsidiaries' financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRB |
|
APP |
|
WBIT |
|
Other
Operating
Segments |
|
Corporate,
Other and
Eliminations |
|
Consolidated |
|
|
|
(in thousands)
|
|
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,524,537 |
|
$ |
1,793,575 |
|
$ |
728,089 |
|
$ |
112,837 |
|
$ |
— |
|
$ |
4,159,038 |
|
Income (loss) from operations |
|
|
100,679 |
|
|
(606,235 |
) |
|
144,421 |
|
|
5,145 |
|
|
(325,598 |
) |
|
(681,588 |
) |
Depreciation, depletion and amortization |
|
|
166,539 |
|
|
271,220 |
|
|
71,696 |
|
|
11,512 |
|
|
4,541 |
|
|
525,508 |
|
Amortization of acquired sales contracts, net |
|
|
(1,987 |
) |
|
(23,925 |
) |
|
— |
|
|
723 |
|
|
— |
|
|
(25,189 |
) |
Total assets |
|
|
1,972,522 |
|
|
3,875,105 |
|
|
658,255 |
|
|
176,032 |
|
|
3,324,863 |
|
|
10,006,777 |
|
Capital expenditures |
|
|
23,410 |
|
|
275,476 |
|
|
58,465 |
|
|
9,928 |
|
|
27,946 |
|
|
395,225 |
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,646,947 |
|
$ |
1,915,090 |
|
$ |
672,766 |
|
$ |
51,092 |
|
$ |
— |
|
$ |
4,285,895 |
|
Income (loss) from operations |
|
|
180,730 |
|
|
283,404 |
|
|
119,665 |
|
|
(4,685 |
) |
|
(165,538 |
) |
|
413,576 |
|
Depreciation, depletion and amortization |
|
|
171,693 |
|
|
203,759 |
|
|
81,235 |
|
|
7,876 |
|
|
2,024 |
|
|
466,587 |
|
Amortization of acquired sales contracts, net |
|
|
19,458 |
|
|
(39,988 |
) |
|
— |
|
|
(1,539 |
) |
|
— |
|
|
(22,069 |
) |
Total assets |
|
|
2,307,783 |
|
|
4,740,723 |
|
|
681,393 |
|
|
581,040 |
|
|
1,903,020 |
|
|
10,213,959 |
|
Capital expenditures |
|
|
110,999 |
|
|
217,435 |
|
|
66,356 |
|
|
28,243 |
|
|
117,903 |
|
|
540,936 |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,606,236 |
|
$ |
1,042,490 |
|
$ |
537,542 |
|
$ |
— |
|
$ |
— |
|
$ |
3,186,268 |
|
Income (loss) from operations |
|
|
146,555 |
|
|
193,943 |
|
|
58,082 |
|
|
— |
|
|
(74,596 |
) |
|
323,984 |
|
Depreciation, depletion and amortization |
|
|
185,218 |
|
|
97,764 |
|
|
80,497 |
|
|
— |
|
|
1,587 |
|
|
365,066 |
|
Amortization of acquired sales contracts, net |
|
|
35,606 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
35,606 |
|
Total assets |
|
|
2,295,786 |
|
|
706,624 |
|
|
677,611 |
|
|
— |
|
|
1,200,748 |
|
|
4,880,769 |
|
Capital expenditures |
|
|
38,142 |
|
|
70,839 |
|
|
65,470 |
|
|
— |
|
|
140,206 |
|
|
314,657 |
|
F-47
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A reconciliation of segment income from operations to consolidated income before income taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2012 |
|
2011 |
|
2010 |
|
|
|
(In thousands)
|
|
Income (loss) from operations |
|
$ |
(681,588 |
) |
$ |
413,576 |
|
$ |
323,984 |
|
Interest expense |
|
|
(317,626 |
) |
|
(230,186 |
) |
|
(142,549 |
) |
Interest income |
|
|
5,478 |
|
|
3,309 |
|
|
2,449 |
|
Other nonoperating expense |
|
|
(23,668 |
) |
|
(51,448 |
) |
|
(6,776 |
) |
| |
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(1,017,404 |
) |
$ |
135,251 |
|
$ |
177,108 |
|
| |
|
|
|
|
|
|
|
25. Quarterly Financial Information (Unaudited)
Quarterly financial data for the years ended December 31, 2012 and 2011 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
|
|
|
|
(a)(b)
|
|
(a)
|
|
(b)
|
|
|
|
(In thousands, except per share data)
|
|
2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
1,039,651 |
|
|
1,063,538 |
|
|
1,087,618 |
|
|
968,231 |
|
Gross profit |
|
|
63,704 |
|
|
54,984 |
|
|
69,249 |
|
|
37,176 |
|
Mine closure and asset impairment costs |
|
|
— |
|
|
525,762 |
|
|
(2,194 |
) |
|
— |
|
Goodwill and other intangible asset impairment |
|
|
— |
|
|
115,791 |
|
|
— |
|
|
230,632 |
|
Income from operations |
|
|
54,081 |
|
|
(588,984 |
) |
|
135,960 |
|
|
(282,645 |
) |
Net income (loss) |
|
|
1,409 |
|
|
(435,424 |
) |
|
45,751 |
|
|
(295,423 |
) |
Basic earnings (loss) per common share |
|
$ |
0.01 |
|
$ |
(2.05 |
) |
$ |
0.22 |
|
$ |
(1.39 |
) |
Diluted earnings (loss) per common share |
|
$ |
0.01 |
|
$ |
(2.05 |
) |
$ |
0.22 |
|
$ |
(1.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
|
|
|
|
(c)
|
|
(c)
|
|
(c)
|
|
|
|
(In thousands, except per share data)
|
|
2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
872,938 |
|
$ |
985,528 |
|
$ |
1,198,673 |
|
$ |
1,228,756 |
|
Gross profit |
|
|
130,523 |
|
|
172,234 |
|
|
120,085 |
|
|
154,388 |
|
Income from operations |
|
|
102,238 |
|
|
95,354 |
|
|
76,256 |
|
|
139,728 |
|
Net income |
|
|
55,874 |
|
|
6,630 |
|
|
9,121 |
|
|
71,215 |
|
Basic earnings per common share |
|
$ |
0.34 |
|
$ |
0.04 |
|
$ |
0.04 |
|
$ |
0.34 |
|
Diluted earnings per common share |
|
$ |
0.34 |
|
$ |
0.04 |
|
$ |
0.04 |
|
$ |
0.33 |
|
- (a)
- The
Company's results in 2012 were impacted by challenging market conditions. In response to these conditions, the Company made the decision to close or
idle 10 mines in Appalachia and curtailed production at other thermal mines. See Note 3, "Mine Closure and Asset Impairment Costs".
- (b)
- Challenging
markets also resulted in impairment charges to goodwill relating to the Black Thunder mining complex in the second quarter of 2012 and two mines
in Appalachia in the fourth quarter of 2012. See Note 7, "Goodwill".
- (c)
- The
Company expensed costs related to the June 2011 acquisition of ICG $98.2 million, $4.7 million and $1.3 million in the second,
third and fourth quarters of 2011, respectively.
F-48
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
26. Supplemental Condensed Consolidating Financial Information
Pursuant to the indentures governing Arch Coal, Inc.'s 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 condensed consolidating financial information for (i) the Company, (ii) the
issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors under the senior notes (Arch Receivable Company, LLC and
the Company's subsidiaries outside the U.S.):
F-49
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statements of Operations
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Revenues |
|
$ |
— |
|
$ |
4,159,038 |
|
$ |
— |
|
$ |
— |
|
$ |
4,159,038 |
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
10,918 |
|
|
3,427,095 |
|
|
— |
|
|
— |
|
|
3,438,013 |
|
Depreciation, depletion and amortization |
|
|
5,392 |
|
|
520,083 |
|
|
33 |
|
|
— |
|
|
525,508 |
|
Amortization of acquired sales contracts, net |
|
|
— |
|
|
(25,189 |
) |
|
— |
|
|
— |
|
|
(25,189 |
) |
Change in fair value of coal derivatives and coal trading activities, net |
|
|
— |
|
|
(16,590 |
) |
|
— |
|
|
— |
|
|
(16,590 |
) |
Coal derivative settlements, non-hedging |
|
|
— |
|
|
(43,990 |
) |
|
— |
|
|
— |
|
|
(43,990 |
) |
Selling, general and administrative expenses |
|
|
84,198 |
|
|
41,316 |
|
|
8,785 |
|
|
— |
|
|
134,299 |
|
Contract settlement resulting from Patriot Coal bankruptcy |
|
|
— |
|
|
58,335 |
|
|
— |
|
|
— |
|
|
58,335 |
|
Legal contingencies |
|
|
— |
|
|
(79,532 |
) |
|
— |
|
|
— |
|
|
(79,532 |
) |
Mine closure and asset impairment costs |
|
|
— |
|
|
523,568 |
|
|
— |
|
|
— |
|
|
523,568 |
|
Goodwill and other intangible asset impairment |
|
|
— |
|
|
346,423 |
|
|
— |
|
|
— |
|
|
346,423 |
|
Other operating income, net |
|
|
(13,391 |
) |
|
9,559 |
|
|
(16,387 |
) |
|
— |
|
|
(20,219 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,117 |
|
|
4,761,078 |
|
|
(7,569 |
) |
|
— |
|
|
4,840,626 |
|
Income from investment in subsidiaries |
|
|
(569,795 |
) |
|
— |
|
|
— |
|
|
569,795 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(656,912 |
) |
|
(602,040 |
) |
|
7,569 |
|
|
569,795 |
|
|
(681,588 |
) |
Interest expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(366,614 |
) |
|
(35,207 |
) |
|
(3,221 |
) |
|
87,416 |
|
|
(317,626 |
) |
Interest income |
|
|
28,097 |
|
|
57,303 |
|
|
7,494 |
|
|
(87,416 |
) |
|
5,478 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338,517 |
) |
|
22,096 |
|
|
4,273 |
|
|
— |
|
|
(312,148 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Other nonoperating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss resulting from early retirement and refinancing of debt |
|
|
(21,975 |
) |
|
(1,693 |
) |
|
— |
|
|
— |
|
|
(23,668 |
) |
Bridge financing costs related to ICG |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,975 |
) |
|
(1,693 |
) |
|
— |
|
|
— |
|
|
(23,668 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,017,404 |
) |
|
(581,637 |
) |
|
11,842 |
|
|
569,795 |
|
|
(1,017,404 |
) |
Provision for (benefit from) income taxes |
|
|
(333,717 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(333,717 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(683,687 |
) |
|
(581,637 |
) |
|
11,842 |
|
|
569,795 |
|
|
(683,687 |
) |
Less: Net income attributable to noncontrolling interest |
|
|
(268 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(268 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Arch Coal, Inc. |
|
$ |
(683,955 |
) |
$ |
(581,637 |
) |
$ |
11,842 |
|
$ |
569,795 |
|
$ |
(683,955 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(692,239 |
) |
$ |
(585,033 |
) |
$ |
9,259 |
|
$ |
575,774 |
|
$ |
(692,239 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
F-50
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statements of Operations
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Revenues |
|
$ |
— |
|
$ |
4,285,895 |
|
$ |
— |
|
$ |
— |
|
$ |
4,285,895 |
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
22,926 |
|
|
3,244,984 |
|
|
— |
|
|
— |
|
|
3,267,910 |
|
Depreciation, depletion and amortization |
|
|
2,876 |
|
|
463,711 |
|
|
— |
|
|
— |
|
|
466,587 |
|
Amortization of acquired sales contracts, net |
|
|
— |
|
|
(22,069 |
) |
|
— |
|
|
— |
|
|
(22,069 |
) |
Change in fair value of coal derivatives and coal trading activities, net |
|
|
— |
|
|
(2,907 |
) |
|
— |
|
|
— |
|
|
(2,907 |
) |
Coal derivative settlements, non-hedging |
|
|
— |
|
|
7 |
|
|
— |
|
|
— |
|
|
7 |
|
Selling, general and administrative expenses |
|
|
74,589 |
|
|
40,940 |
|
|
3,527 |
|
|
— |
|
|
119,056 |
|
Mine closure and asset impairment costs |
|
|
7,316 |
|
|
— |
|
|
— |
|
|
— |
|
|
7,316 |
|
Acquisition and transition costs |
|
|
47,360 |
|
|
— |
|
|
— |
|
|
— |
|
|
47,360 |
|
Other operating income, net |
|
|
(23,306 |
) |
|
12,615 |
|
|
(250 |
) |
|
— |
|
|
(10,941 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,761 |
|
|
3,737,281 |
|
|
3,277 |
|
|
— |
|
|
3,872,319 |
|
Income from investment in subsidiaries |
|
|
556,442 |
|
|
— |
|
|
— |
|
|
(556,442 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
424,681 |
|
|
548,614 |
|
|
(3,277 |
) |
|
(556,442 |
) |
|
413,576 |
|
Interest expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(256,221 |
) |
|
(46,565 |
) |
|
(2,224 |
) |
|
74,824 |
|
|
(230,186 |
) |
Interest income |
|
|
16,281 |
|
|
55,072 |
|
|
6,780 |
|
|
(74,824 |
) |
|
3,309 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(239,940 |
) |
|
8,507 |
|
|
4,556 |
|
|
— |
|
|
(226,877 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Other nonoperating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss resulting from early retirement and refinancing of debt |
|
|
— |
|
|
(1,958 |
) |
|
— |
|
|
— |
|
|
(1,958 |
) |
Bridge financing costs related to ICG |
|
|
(49,490 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(49,490 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,490 |
) |
|
(1,958 |
) |
|
— |
|
|
— |
|
|
(51,448 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
135,251 |
|
|
555,163 |
|
|
1,279 |
|
|
(556,442 |
) |
|
135,251 |
|
Provision for (benefit from) income taxes |
|
|
(7,589 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(7,589 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
142,840 |
|
|
555,163 |
|
|
1,279 |
|
|
(556,442 |
) |
|
142,840 |
|
Less: Net income attributable to noncontrolling interest |
|
|
(1,157 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(1,157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Arch Coal, Inc. |
|
$ |
141,683 |
|
$ |
555,163 |
|
$ |
1,279 |
|
$ |
(556,442 |
) |
$ |
141,683 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
141,240 |
|
$ |
552,663 |
|
$ |
1,279 |
|
$ |
(553,942 |
) |
$ |
141,240 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-51
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statements of Operations
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Revenues |
|
$ |
— |
|
$ |
3,186,268 |
|
$ |
— |
|
$ |
— |
|
$ |
3,186,268 |
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
11,523 |
|
|
2,384,289 |
|
|
— |
|
|
— |
|
|
2,395,812 |
|
Depreciation, depletion and amortization |
|
|
2,933 |
|
|
362,133 |
|
|
— |
|
|
— |
|
|
365,066 |
|
Amortization of acquired sales contracts, net |
|
|
— |
|
|
35,606 |
|
|
— |
|
|
— |
|
|
35,606 |
|
Change in fair value of coal derivatives and coal trading activities, net |
|
|
— |
|
|
8,924 |
|
|
— |
|
|
— |
|
|
8,924 |
|
Coal derivative settlements, non-hedging |
|
|
— |
|
|
(4,542 |
) |
|
— |
|
|
— |
|
|
(4,542 |
) |
Selling, general and administrative expenses |
|
|
79,580 |
|
|
36,091 |
|
|
2,506 |
|
|
— |
|
|
118,177 |
|
Gain on Knight Hawk transaction |
|
|
— |
|
|
(41,577 |
) |
|
— |
|
|
— |
|
|
(41,577 |
) |
Other operating income, net |
|
|
(10,258 |
) |
|
(4,924 |
) |
|
— |
|
|
— |
|
|
(15,182 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,778 |
|
|
2,776,000 |
|
|
2,506 |
|
|
— |
|
|
2,862,284 |
|
Income from investment in subsidiaries |
|
|
393,363 |
|
|
— |
|
|
— |
|
|
(393,363 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
309,585 |
|
|
410,268 |
|
|
(2,506 |
) |
|
(393,363 |
) |
|
323,984 |
|
Interest expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(143,606 |
) |
|
(64,377 |
) |
|
(2,849 |
) |
|
68,283 |
|
|
(142,549 |
) |
Interest income |
|
|
11,129 |
|
|
52,899 |
|
|
6,704 |
|
|
(68,283 |
) |
|
2,449 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132,477 |
) |
|
(11,478 |
) |
|
3,855 |
|
|
— |
|
|
(140,100 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Other nonoperating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss resulting from early retirement and refinancing of debt |
|
|
— |
|
|
(6,776 |
) |
|
— |
|
|
— |
|
|
(6,776 |
) |
Bridge financing costs related to ICG |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
(6,776 |
) |
|
— |
|
|
— |
|
|
(6,776 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
177,108 |
|
|
392,014 |
|
|
1,349 |
|
|
(393,363 |
) |
|
177,108 |
|
Provision for (benefit from) income taxes |
|
|
17,714 |
|
|
— |
|
|
— |
|
|
— |
|
|
17,714 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
159,394 |
|
|
392,014 |
|
|
1,349 |
|
|
(393,363 |
) |
|
159,394 |
|
Less: Net income attributable to noncontrolling interest |
|
|
(537 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(537 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Arch Coal, Inc. |
|
$ |
158,857 |
|
$ |
392,014 |
|
$ |
1,349 |
|
$ |
(393,363 |
) |
$ |
158,857 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
172,885 |
|
$ |
400,664 |
|
$ |
1,349 |
|
$ |
(402,013 |
) |
$ |
172,885 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-52
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheets
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
671,313 |
|
$ |
100,468 |
|
$ |
12,841 |
|
$ |
— |
|
$ |
784,622 |
|
Restricted cash |
|
|
3,453 |
|
|
— |
|
|
— |
|
|
— |
|
|
3,453 |
|
Short term investments |
|
|
234,305 |
|
|
— |
|
|
— |
|
|
— |
|
|
234,305 |
|
Receivables |
|
|
49,281 |
|
|
40,452 |
|
|
247,171 |
|
|
(4,824 |
) |
|
332,080 |
|
Inventories |
|
|
— |
|
|
365,424 |
|
|
— |
|
|
— |
|
|
365,424 |
|
Other |
|
|
106,786 |
|
|
86,877 |
|
|
557 |
|
|
— |
|
|
194,220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,065,138 |
|
|
593,221 |
|
|
260,569 |
|
|
(4,824 |
) |
|
1,914,104 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
27,476 |
|
|
7,309,550 |
|
|
72 |
|
|
— |
|
|
7,337,098 |
|
Investment in subsidiaries |
|
|
8,254,508 |
|
|
— |
|
|
— |
|
|
(8,254,508 |
) |
|
— |
|
Intercompany receivables |
|
|
(1,367,739 |
) |
|
1,600,311 |
|
|
(232,572 |
) |
|
— |
|
|
— |
|
Note receivable from Arch Western |
|
|
675,000 |
|
|
— |
|
|
— |
|
|
(675,000 |
) |
|
— |
|
Other |
|
|
187,171 |
|
|
568,314 |
|
|
90 |
|
|
— |
|
|
755,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
7,748,940 |
|
|
2,168,625 |
|
|
(232,482 |
) |
|
(8,929,508 |
) |
|
755,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,841,554 |
|
$ |
10,071,396 |
|
$ |
28,159 |
|
$ |
(8,934,332 |
) |
$ |
10,006,777 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
19,859 |
|
$ |
204,370 |
|
$ |
189 |
|
$ |
— |
|
$ |
224,418 |
|
Accrued expenses and other current liabilities |
|
|
65,293 |
|
|
259,162 |
|
|
124 |
|
|
(4,824 |
) |
|
319,755 |
|
Current maturities of debt and short-term borrowings |
|
|
32,054 |
|
|
842 |
|
|
— |
|
|
— |
|
|
32,896 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
117,206 |
|
|
464,374 |
|
|
313 |
|
|
(4,824 |
) |
|
577,069 |
|
Long-term debt |
|
|
5,061,925 |
|
|
23,954 |
|
|
— |
|
|
— |
|
|
5,085,879 |
|
Note payable to Arch Coal |
|
|
— |
|
|
675,000 |
|
|
— |
|
|
(675,000 |
) |
|
— |
|
Asset retirement obligations |
|
|
1,646 |
|
|
408,059 |
|
|
— |
|
|
— |
|
|
409,705 |
|
Accrued pension benefits |
|
|
33,456 |
|
|
34,174 |
|
|
— |
|
|
— |
|
|
67,630 |
|
Accrued postretirement benefits other than pension |
|
|
13,953 |
|
|
31,133 |
|
|
— |
|
|
— |
|
|
45,086 |
|
Accrued workers' compensation |
|
|
25,323 |
|
|
56,306 |
|
|
— |
|
|
— |
|
|
81,629 |
|
Deferred income taxes |
|
|
664,182 |
|
|
— |
|
|
— |
|
|
— |
|
|
664,182 |
|
Other noncurrent liabilities |
|
|
69,296 |
|
|
151,360 |
|
|
374 |
|
|
— |
|
|
221,030 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,986,987 |
|
|
1,844,360 |
|
|
687 |
|
|
(679,824 |
) |
|
7,152,210 |
|
Stockholders' equity |
|
|
2,854,567 |
|
|
8,227,036 |
|
|
27,472 |
|
|
(8,254,508 |
) |
|
2,854,567 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
8,841,554 |
|
$ |
10,071,396 |
|
$ |
28,159 |
|
$ |
(8,934,332 |
) |
$ |
10,006,777 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-53
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheets
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
61,375 |
|
$ |
75,425 |
|
$ |
1,349 |
|
$ |
— |
|
$ |
138,149 |
|
Restricted cash |
|
|
10,322 |
|
|
— |
|
|
— |
|
|
— |
|
|
10,322 |
|
Short term investments |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Receivables |
|
|
65,187 |
|
|
27,001 |
|
|
378,608 |
|
|
(1,617 |
) |
|
469,179 |
|
Inventories |
|
|
— |
|
|
377,490 |
|
|
— |
|
|
— |
|
|
377,490 |
|
Other |
|
|
81,732 |
|
|
105,282 |
|
|
620 |
|
|
— |
|
|
187,634 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
218,616 |
|
|
585,198 |
|
|
380,577 |
|
|
(1,617 |
) |
|
1,182,774 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
21,241 |
|
|
7,918,816 |
|
|
9,093 |
|
|
— |
|
|
7,949,150 |
|
Investment in subsidiaries |
|
|
8,813,080 |
|
|
— |
|
|
— |
|
|
(8,813,080 |
) |
|
— |
|
Intercompany receivables |
|
|
(1,190,342 |
) |
|
1,448,902 |
|
|
(258,560 |
) |
|
— |
|
|
— |
|
Note receivable from Arch Western |
|
|
225,000 |
|
|
— |
|
|
— |
|
|
(225,000 |
) |
|
— |
|
Other |
|
|
(85,668 |
) |
|
1,167,501 |
|
|
202 |
|
|
— |
|
|
1,082,035 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
7,762,070 |
|
|
2,616,403 |
|
|
(258,358 |
) |
|
(9,038,080 |
) |
|
1,082,035 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,001,927 |
|
$ |
11,120,417 |
|
$ |
131,312 |
|
$ |
(9,039,697 |
) |
$ |
10,213,959 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
30,576 |
|
$ |
353,180 |
|
$ |
26 |
|
$ |
— |
|
$ |
383,782 |
|
Accrued expenses and other current liabilities |
|
|
75,121 |
|
|
282,446 |
|
|
85 |
|
|
(1,617 |
) |
|
356,035 |
|
Current maturities of debt and short-term borrowings |
|
|
172,564 |
|
|
1,987 |
|
|
106,300 |
|
|
— |
|
|
280,851 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
278,261 |
|
|
637,613 |
|
|
106,411 |
|
|
(1,617 |
) |
|
1,020,668 |
|
Long-term debt |
|
|
3,308,674 |
|
|
453,623 |
|
|
— |
|
|
— |
|
|
3,762,297 |
|
Note payable to Arch Coal |
|
|
— |
|
|
225,000 |
|
|
— |
|
|
(225,000 |
) |
|
— |
|
Asset retirement obligations |
|
|
877 |
|
|
445,907 |
|
|
— |
|
|
— |
|
|
446,784 |
|
Accrued pension benefits |
|
|
19,198 |
|
|
29,046 |
|
|
— |
|
|
— |
|
|
48,244 |
|
Accrued postretirement benefits other than pension |
|
|
13,843 |
|
|
28,466 |
|
|
— |
|
|
— |
|
|
42,309 |
|
Accrued workers' compensation |
|
|
17,272 |
|
|
54,676 |
|
|
— |
|
|
— |
|
|
71,948 |
|
Deferred income taxes |
|
|
621,483 |
|
|
355,270 |
|
|
— |
|
|
— |
|
|
976,753 |
|
Other noncurrent liabilities |
|
|
152,745 |
|
|
102,553 |
|
|
84 |
|
|
— |
|
|
255,382 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
4,412,353 |
|
|
2,332,154 |
|
|
106,495 |
|
|
(226,617 |
) |
|
6,624,385 |
|
Redeemable noncontrolling interest |
|
|
11,534 |
|
|
— |
|
|
— |
|
|
— |
|
|
11,534 |
|
Stockholders' equity |
|
|
3,578,040 |
|
|
8,788,263 |
|
|
24,817 |
|
|
(8,813,080 |
) |
|
3,578,040 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
8,001,927 |
|
$ |
11,120,417 |
|
$ |
131,312 |
|
$ |
(9,039,697 |
) |
$ |
10,213,959 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-54
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Cash provided by (used in) operating activities |
|
$ |
(571,576 |
) |
$ |
781,551 |
|
$ |
122,829 |
|
$ |
— |
|
$ |
332,804 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash |
|
|
6,869 |
|
|
— |
|
|
— |
|
|
— |
|
|
6,869 |
|
Capital expenditures |
|
|
(4,424 |
) |
|
(390,801 |
) |
|
— |
|
|
— |
|
|
(395,225 |
) |
Proceeds from dispositions of property, plant and equipment |
|
|
— |
|
|
1,328 |
|
|
21,497 |
|
|
— |
|
|
22,825 |
|
Investments in and advances to affiliates |
|
|
(6,287 |
) |
|
(13,134 |
) |
|
— |
|
|
1,663 |
|
|
(17,758 |
) |
Purchases of short term investments |
|
|
(236,862 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(236,862 |
) |
Proceeds from sales of short term investments |
|
|
1,754 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,754 |
|
Purchase of noncontrolling interest |
|
|
(17,500 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(17,500 |
) |
Additions to prepaid royalties |
|
|
— |
|
|
(13,269 |
) |
|
— |
|
|
— |
|
|
(13,269 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
(256,450 |
) |
|
(415,876 |
) |
|
21,497 |
|
|
1,663 |
|
|
(649,166 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from parent |
|
|
— |
|
|
1,663 |
|
|
— |
|
|
(1,663 |
) |
|
— |
|
Proceeds from the issuance of senior notes |
|
|
359,753 |
|
|
— |
|
|
— |
|
|
— |
|
|
359,753 |
|
Proceeds from term note issuance |
|
|
1,633,500 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,633,500 |
|
Payments to retire debt |
|
|
— |
|
|
(452,934 |
) |
|
— |
|
|
— |
|
|
(452,934 |
) |
Net decrease in borrowings under lines of credit and commercial paper program |
|
|
(375,000 |
) |
|
— |
|
|
(106,300 |
) |
|
— |
|
|
(481,300 |
) |
Payments on term note |
|
|
(7,625 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(7,625 |
) |
Net payments on other debt |
|
|
(682 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(682 |
) |
Debt financing costs |
|
|
(50,022 |
) |
|
— |
|
|
(546 |
) |
|
— |
|
|
(50,568 |
) |
Dividends paid |
|
|
(42,440 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(42,440 |
) |
Issuance of common stock under incentive plans |
|
|
5,131 |
|
|
— |
|
|
— |
|
|
— |
|
|
5,131 |
|
Transactions with affiliates, net |
|
|
(84,651 |
) |
|
110,639 |
|
|
(25,988 |
) |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
1,437,964 |
|
|
(340,632 |
) |
|
(132,834 |
) |
|
(1,663 |
) |
|
962,835 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
609,938 |
|
|
25,043 |
|
|
11,492 |
|
|
— |
|
|
646,473 |
|
Cash and cash equivalents, beginning of period |
|
|
61,375 |
|
|
75,425 |
|
|
1,349 |
|
|
— |
|
|
138,149 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
671,313 |
|
$ |
100,468 |
|
$ |
12,841 |
|
$ |
— |
|
$ |
784,622 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-55
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Cash provided by (used in) operating activities |
|
$ |
(187,039 |
) |
$ |
998,082 |
|
$ |
(168,801 |
) |
$ |
— |
|
$ |
642,242 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of ICG, net of cash acquired |
|
|
(2,894,339 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(2,894,339 |
) |
Change in restricted cash |
|
|
5,167 |
|
|
— |
|
|
— |
|
|
— |
|
|
5,167 |
|
Capital expenditures |
|
|
(12,809 |
) |
|
(528,021 |
) |
|
(106 |
) |
|
— |
|
|
(540,936 |
) |
Proceeds from dispositions of property, plant and equipment |
|
|
— |
|
|
25,887 |
|
|
— |
|
|
— |
|
|
25,887 |
|
Investments in and advances to affiliates |
|
|
(633,534 |
) |
|
(33,553 |
) |
|
— |
|
|
605,178 |
|
|
(61,909 |
) |
Additions to prepaid royalties |
|
|
— |
|
|
(29,957 |
) |
|
— |
|
|
— |
|
|
(29,957 |
) |
Consideration paid related to prior business acquisition |
|
|
(829 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(829 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
(3,536,344 |
) |
|
(565,644 |
) |
|
(106 |
) |
|
605,178 |
|
|
(3,496,916 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from parent |
|
|
— |
|
|
605,178 |
|
|
— |
|
|
(605,178 |
) |
|
— |
|
Proceeds from the issuance of senior notes |
|
|
2,000,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,000,000 |
|
Proceeds from the issuance of common stock, net |
|
|
1,267,933 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,267,933 |
|
Payments to retire debt |
|
|
— |
|
|
(605,178 |
) |
|
— |
|
|
— |
|
|
(605,178 |
) |
Net decrease in borrowings under lines of credit and commercial paper program |
|
|
375,000 |
|
|
(56,904 |
) |
|
106,300 |
|
|
— |
|
|
424,396 |
|
Net proceeds from other debt |
|
|
5,334 |
|
|
— |
|
|
— |
|
|
— |
|
|
5,334 |
|
Debt financing costs |
|
|
(114,799 |
) |
|
(16 |
) |
|
(8 |
) |
|
— |
|
|
(114,823 |
) |
Dividends paid |
|
|
(80,748 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(80,748 |
) |
Issuance of common stock under incentive plans |
|
|
2,316 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,316 |
|
Transactions with affiliates, net |
|
|
316,009 |
|
|
(379,973 |
) |
|
63,964 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
3,771,045 |
|
|
(436,893 |
) |
|
170,256 |
|
|
(605,178 |
) |
|
2,899,230 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
47,662 |
|
|
(4,455 |
) |
|
1,349 |
|
|
— |
|
|
44,556 |
|
Cash and cash equivalents, beginning of period |
|
|
13,713 |
|
|
79,880 |
|
|
— |
|
|
— |
|
|
93,593 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
61,375 |
|
$ |
75,425 |
|
$ |
1,349 |
|
$ |
— |
|
$ |
138,149 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-56
Table of Contents
Arch Coal, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent/Issuer |
|
Guarantor
Subsidiaries |
|
Non-
Guarantor
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
(In thousands)
|
|
Cash provided by (used in) operating activities |
|
$ |
(230,966 |
) |
$ |
943,361 |
|
$ |
(15,248 |
) |
$ |
— |
|
$ |
697,147 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(4,814 |
) |
|
(309,843 |
) |
|
— |
|
|
— |
|
|
(314,657 |
) |
Proceeds from dispositions of property, plant and equipment |
|
|
— |
|
|
330 |
|
|
— |
|
|
— |
|
|
330 |
|
Investments in and advances to affiliates |
|
|
(13,821 |
) |
|
(32,364 |
) |
|
— |
|
|
— |
|
|
(46,185 |
) |
Additions to prepaid royalties |
|
|
— |
|
|
(27,355 |
) |
|
— |
|
|
— |
|
|
(27,355 |
) |
Consideration paid related to prior business acquisition |
|
|
(1,262 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(1,262 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(19,897 |
) |
|
(369,232 |
) |
|
— |
|
|
— |
|
|
(389,129 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of senior notes |
|
|
500,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
500,000 |
|
Payments to retire debt |
|
|
— |
|
|
(505,627 |
) |
|
— |
|
|
— |
|
|
(505,627 |
) |
Net decrease in borrowings under lines of credit and commercial paper program |
|
|
(120,000 |
) |
|
7,451 |
|
|
(84,000 |
) |
|
— |
|
|
(196,549 |
) |
Net proceeds from other debt |
|
|
82 |
|
|
— |
|
|
— |
|
|
— |
|
|
82 |
|
Debt financing costs |
|
|
(12,022 |
) |
|
(390 |
) |
|
(339 |
) |
|
— |
|
|
(12,751 |
) |
Dividends paid |
|
|
(63,373 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(63,373 |
) |
Issuance of common stock under incentive plans |
|
|
1,764 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,764 |
|
Contribution from non-controlling interest |
|
|
891 |
|
|
— |
|
|
— |
|
|
— |
|
|
891 |
|
Transactions with affiliates, net |
|
|
(97,021 |
) |
|
(2,566 |
) |
|
99,587 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
210,321 |
|
|
(501,132 |
) |
|
15,248 |
|
|
— |
|
|
(275,563 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(40,542 |
) |
|
72,997 |
|
|
— |
|
|
— |
|
|
32,455 |
|
Cash and cash equivalents, beginning of period |
|
|
54,255 |
|
|
6,883 |
|
|
— |
|
|
— |
|
|
61,138 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
13,713 |
|
$ |
79,880 |
|
$ |
— |
|
$ |
— |
|
$ |
93,593 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
F-57
Table of Contents
Schedule II
Arch Coal, Inc. and Subsidiaries
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Year |
|
Additions
(Reductions)
Charged to
Costs and
Expenses |
|
Charged to
Other
Accounts |
|
Deductions(a) |
|
Balance at
End of
Year |
|
|
|
(In thousands)
|
|
Year ended December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets — other notes and accounts receivable |
|
$ |
17 |
|
$ |
1,039 |
|
$ |
— |
|
$ |
13 |
|
$ |
1,043 |
|
Current assets — supplies and inventory |
|
|
13,107 |
|
|
1,961 |
|
|
— |
|
|
2,479 |
|
|
12,589 |
|
Deferred income taxes |
|
|
2,831 |
|
|
31,832 |
|
|
— |
|
|
— |
|
|
34,663 |
|
Year ended December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets — other notes and accounts receivable |
|
$ |
— |
|
$ |
17 |
|
$ |
— |
|
$ |
— |
|
$ |
17 |
|
Current assets — supplies and inventory |
|
|
12,701 |
|
|
1,755 |
|
|
— |
|
|
1,349 |
|
|
13,107 |
|
Deferred income taxes |
|
|
737 |
|
|
2,416 |
|
|
— |
|
|
322 |
|
|
2,831 |
|
Year ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets — other notes and accounts receivable |
|
$ |
109 |
|
$ |
— |
|
$ |
— |
|
$ |
109 |
|
$ |
— |
|
Current assets — supplies and inventory |
|
|
13,406 |
|
|
1,962 |
|
|
— |
|
|
2,667 |
|
|
12,701 |
|
Deferred income taxes |
|
|
1,120 |
|
|
(383 |
) |
|
— |
|
|
— |
|
|
737 |
|
- (a)
- Reserves
utilized, unless otherwise indicated.
F-58
