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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2007
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number: 333-107569-03
Arch Western Resources, LLC
(Exact name of registrant as specified in its charter)
Delaware | 43-1811130 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification Number) | |
One CityPlace Drive, Suite 300, St. Louis, Missouri | 63141 | |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (314) 994-2700
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filero Accelerated Filero Non-Accelerated Filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
At May 14, 2007, the registrant’s common equity consisted solely of undenominated membership interests, 99.5% of which were held by Arch Western Acquisition Corporation and 0.5% of which were held by a subsidiary of BP p.l.c.
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Section 1350 Certification |
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PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. Financial Statements.
Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands)
Condensed Consolidated Statements of Income
(In thousands)
Three Months Ended March 31 | ||||||||
2007 | 2006 | |||||||
(unaudited) | ||||||||
REVENUES | ||||||||
Coal sales | $ | 370,097 | $ | 362,196 | ||||
COSTS, EXPENSES AND OTHER | ||||||||
Cost of coal sales | 283,271 | 252,130 | ||||||
Depreciation, depletion and amortization | 32,519 | 23,576 | ||||||
Selling, general and administrative expenses | 6,152 | 5,489 | ||||||
Other operating income, net | (923 | ) | (475 | ) | ||||
321,019 | 280,720 | |||||||
Income from operations | 49,078 | 81,476 | ||||||
Interest income (expense), net: | ||||||||
Interest expense | (17,621 | ) | (17,736 | ) | ||||
Interest income, primarily from Arch Coal, Inc. | 22,821 | 16,322 | ||||||
5,200 | (1,414 | ) | ||||||
Other non-operating expense: | ||||||||
Expenses resulting from early debt extinguishment and termination of hedge accounting for interest rate swaps | (1,269 | ) | (2,718 | ) | ||||
Income before minority interest | 53,009 | 77,344 | ||||||
Minority interest | (4,732 | ) | (13,367 | ) | ||||
Net income | $ | 48,277 | $ | 63,977 | ||||
Net income attributable to redeemable membership interest | $ | 241 | $ | 320 | ||||
Net income attributable to non-redeemable membership interest | $ | 48,036 | �� | $ | 63,657 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
Condensed Consolidated Balance Sheets
(In thousands)
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 77 | $ | 186 | ||||
Trade accounts receivable | 41 | 985 | ||||||
Other receivables | 5,208 | 14,733 | ||||||
Inventories | 100,218 | 94,828 | ||||||
Prepaid royalties | 1,473 | 2,945 | ||||||
Other | 23,723 | 24,458 | ||||||
Total current assets | 130,740 | 138,135 | ||||||
Property, plant and equipment, net | 1,230,325 | 1,233,846 | ||||||
Other assets: | ||||||||
Receivable from Arch Coal, Inc. | 1,191,460 | 1,152,102 | ||||||
Other | 30,442 | 33,689 | ||||||
Total other assets | 1,221,902 | 1,185,791 | ||||||
Total assets | $ | 2,582,967 | $ | 2,557,772 | ||||
LIABILITIES AND MEMBERS’ INTERESTS | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 91,721 | $ | 110,725 | ||||
Accrued expenses | 105,601 | 129,495 | ||||||
Total current liabilities | 197,322 | 240,220 | ||||||
Long-term debt | 958,539 | 958,881 | ||||||
Accrued postretirement benefits other than pension | 31,161 | 31,036 | ||||||
Asset retirement obligations | 178,887 | 174,902 | ||||||
Accrued workers’ compensation | 10,170 | 10,027 | ||||||
Other noncurrent liabilities | 48,213 | 38,705 | ||||||
Total liabilities | 1,424,292 | 1,453,771 | ||||||
Redeemable membership interest | 7,183 | 6,934 | ||||||
Minority interest | 167,254 | 162,522 | ||||||
Non-redeemable membership interest | 984,238 | 934,545 | ||||||
Total liabilities and membership interests | $ | 2,582,967 | $ | 2,557,772 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31 | ||||||||
2007 | 2006 | |||||||
(unaudited) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 48,277 | $ | 63,977 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 32,519 | 23,576 | ||||||
Prepaid royalties expensed | 1,615 | 103 | ||||||
Minority interest | 4,732 | 13,367 | ||||||
Other non-operating expense | 1,269 | 2,718 | ||||||
Changes in: | ||||||||
Receivables | 10,469 | 112,854 | ||||||
Inventories | (5,390 | ) | 576 | |||||
Accounts payable and accrued expenses | (43,444 | ) | (25,171 | ) | ||||
Other | 18,769 | 13,021 | ||||||
Cash provided by operating activities | 68,816 | 205,021 | ||||||
INVESTING ACTIVITIES | ||||||||
Capital expenditures | (42,861 | ) | (61,096 | ) | ||||
Increase in receivable from Arch Coal, Inc. | (39,788 | ) | (144,027 | ) | ||||
Proceeds from dispositions of property, plant and equipment | 232 | — | ||||||
Reimbursement of deposits on equipment | 13,492 | — | ||||||
Cash used in investing activities | (68,925 | ) | (205,123 | ) | ||||
Decrease in cash and cash equivalents | (109 | ) | (102 | ) | ||||
Cash and cash equivalents, beginning of period | 186 | 152 | ||||||
Cash and cash equivalents, end of period | $ | 77 | $ | 50 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Western Resources, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of Arch Western Resources, LLC and its subsidiaries (the “Company”). Arch Coal, Inc. (“Arch Coal”) has a 99.5% common membership interest in the Company, while BP p.l.c. has a 0.5% common membership interest and a 0.5% preferred membership interest in the Company. Intercompany transactions and accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations of the period ended March 31, 2007 are not necessarily indicative of results to be expected for the year ending December 31, 2007. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2006 included in Arch Western Resources, LLC’s Form 10-K as filed with the U.S. Securities and Exchange Commission.
2. Accounting Policies
Accounting Standards Issued and Not Yet Adopted
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Liabilities – Including an amendment of FASB Statement No. 115(“Statement No. 159”). Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Statement No. 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Company is still analyzing Statement No. 159 to determine what the impact of adoption will be.
3. Inventories
Inventories consist of the following:
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Coal | $ | 31,133 | $ | 31,350 | ||||
Repair parts and supplies | 69,085 | 63,478 | ||||||
$ | 100,218 | $ | 94,828 | |||||
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4. Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income items under Statement of Financial Accounting Standards No. 130,Reporting Comprehensive Income, are transactions recorded in membership interests during the year, excluding net income and transactions with members.
The following table details the components of comprehensive income:
Three Months Ended March 31 | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Net income | $ | 48,277 | $ | 63,977 | ||||
Other comprehensive income, net of income taxes: | ||||||||
Pension, postretirement and other post-employment benefits adjustment | 505 | — | ||||||
Unrealized gains on derivatives | 1,269 | 2,718 | ||||||
Total comprehensive income | $ | 50,051 | $ | 66,695 | ||||
5. Related Party Transactions
Transactions with Arch Coal may not be at arms length. If the transactions were negotiated with an unrelated party, the impact could be material to the Company’s results of operations.
The Company’s cash transactions are managed by Arch Coal. Cash paid to or from the Company that is not considered a distribution or a contribution is recorded in an Arch Coal receivable account. In addition, any amounts owed between the Company and Arch Coal are recorded in the account. At March 31, 2007 and December 31, 2006, the receivable from Arch Coal was $1,191.5 million and $1,152.1 million, respectively. This amount earns interest from Arch Coal at the prime interest rate. Interest earned for the three month periods ended March 31, 2007 and 2006 was $22.7 million and $16.1 million, respectively. The receivable is payable on demand by the Company; however, it is currently management’s intention to not demand payment of the receivable within the next year. Therefore, the receivable is classified on the accompanying Condensed Consolidated Balance Sheets as long-term.
Under the Arch Coal accounts receivable securitization program, the Company sold $377.2 million and $265.5 million of trade accounts receivable to Arch Coal during the three months ended March 31, 2007 and 2006, respectively, at a total discount of $2.5 million and $2.0 million, respectively. These transactions are recorded through the Arch Coal receivable account
For the three month periods ended March 31, 2007 and 2006, the Company incurred production royalties of $9.1 million and $10.1 million, respectively, payable to Arch Coal under sublease agreements.
The Company is charged selling, general and administrative services fees by Arch Coal. Expenses are allocated based on Arch Coal’s best estimates of proportional or incremental costs, whichever is more representative of costs incurred by Arch Coal on behalf of the Company. Amounts allocated to the Company by Arch Coal were $6.2 million and $5.5 million for the three month periods ended March 31, 2007 and 2006, respectively.
6. Contingencies
The Company is a party to numerous claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.
7. Segment Information
The Company has two reportable business segments, which are based on the major low-sulfur coal basins in which the Company operates. Geology, coal transportation routes to customers, regulatory environments and coal quality are generally consistent within a basin. Accordingly, market and contract pricing have developed by coal basin. The Company manages its coal sales by coal basin, not by individual mine complex. Mine operations are evaluated based on their per-ton operating costs (defined as including all mining costs but excluding pass-through
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transportation expenses), as well as on other non-financial measures, such as safety and environmental performance. The Company’s reportable segments are the Powder River Basin (PRB) segment, with operations in Wyoming; and the Western Bituminous (WBIT) segment, with operations in Utah, Colorado and Southern Wyoming.
Operating segment results for the three months ended March 31, 2007 and 2006 are presented below. Results for the operating segments include all direct costs of mining. Corporate, Other and Eliminations includes corporate overhead, land management, other support functions, and the elimination of intercompany transactions.
Corporate, | ||||||||||||||||
Other and | ||||||||||||||||
PRB | WBIT | Eliminations | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2007 | ||||||||||||||||
Coal sales | $ | 239,457 | $ | 130,640 | $ | — | $ | 370,097 | ||||||||
Income (loss) from operations | 30,249 | 25,902 | (7,073 | ) | 49,078 | |||||||||||
Total assets | 1,615,854 | 1,844,506 | (877,393 | ) | 2,582,967 | |||||||||||
Depreciation, depletion and amortization | 16,038 | 16,481 | — | 32,519 | ||||||||||||
Capital expenditures | 13,123 | 29,738 | — | 42,861 |
Corporate, | ||||||||||||||||
Other and | ||||||||||||||||
PRB | WBIT | Eliminations | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2006 | ||||||||||||||||
Coal sales | $ | 252,389 | $ | 109,807 | $ | — | $ | 362,196 | ||||||||
Income (loss) from operations | 62,213 | 25,713 | (6,450 | ) | 81,476 | |||||||||||
Total assets | 1,373,537 | 1,722,528 | (854,540 | ) | 2,241,525 | |||||||||||
Depreciation, depletion and amortization | 14,598 | 8,978 | — | 23,576 | ||||||||||||
Capital expenditures | 39,155 | 21,941 | — | 61,096 |
A reconciliation of segment income from operations to consolidated income before income taxes follows:
Three Months Ended | ||||||||
March 31 | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Income from operations | $ | 49,078 | $ | 81,476 | ||||
Interest expense | (17,621 | ) | (17,736 | ) | ||||
Interest income | 22,821 | 16,322 | ||||||
Other non-operating expense | (1,269 | ) | (2,718 | ) | ||||
Income before minority interest | $ | 53,009 | $ | 77,344 | ||||
8. Supplemental Condensed Consolidating Financial Information
Pursuant to the indenture governing the Arch Western Finance senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present unaudited condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes (Arch Western Finance, LLC, a wholly-owned subsidiary of the Company), (iii) the Company’s wholly-owned subsidiaries (Thunder Basin Coal Company, L.L.C., Mountain Coal Company, L.L.C., and Arch of Wyoming, LLC), on a combined basis, which are guarantors under the Notes, and (iv) its majority owned subsidiary (Canyon Fuel Company, LLC) which is not a guarantor under the Notes:
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Statements of Operations
Three Months Ended March 31, 2007
(in thousands)
Three Months Ended March 31, 2007
(in thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales revenues | $ | — | $ | — | $ | 282,422 | $ | 87,675 | $ | — | $ | 370,097 | ||||||||||||
Cost of coal sales | 946 | — | 219,310 | 63,684 | (669 | ) | 283,271 | |||||||||||||||||
Depreciation, depletion and amortization | — | — | 21,440 | 11,079 | — | 32,519 | ||||||||||||||||||
Selling, general and administrative expenses allocated from Arch Coal | 6,152 | — | — | — | — | 6,152 | ||||||||||||||||||
Other operating income | (25 | ) | — | (611 | ) | (956 | ) | 669 | (923 | ) | ||||||||||||||
7,073 | — | 240,139 | 73,807 | — | 321,019 | |||||||||||||||||||
Income from investment in subsidiaries | 56,987 | — | — | — | (56,987 | ) | — | |||||||||||||||||
Income from operations | 49,914 | — | 42,283 | 13,868 | (56,987 | ) | 49,078 | |||||||||||||||||
Interest expense | (17,947 | ) | (15,013 | ) | (99 | ) | (582 | ) | 16,020 | (17,621 | ) | |||||||||||||
Interest income, primarily from Arch Coal | 22,311 | 16,020 | 133 | 377 | (16,020 | ) | 22,821 | |||||||||||||||||
4,364 | 1,007 | 34 | (205 | ) | — | 5,200 | ||||||||||||||||||
Other non-operating expense | (1,269 | ) | — | — | — | — | (1,269 | ) | ||||||||||||||||
Minority interest | (4,732 | ) | — | — | — | — | (4,732 | ) | ||||||||||||||||
Net income (loss) | $ | 48,277 | $ | 1,007 | $ | 42,317 | $ | 13,663 | $ | (56,987 | ) | $ | 48,277 | |||||||||||
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Statements of Operations
Three Months Ended March 31, 2006
(in thousands)
Three Months Ended March 31, 2006
(in thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Coal sales revenues | $ | — | $ | — | $ | 263,005 | $ | 99,191 | $ | — | $ | 362,196 | ||||||||||||
Cost of coal sales | 979 | — | 192,126 | 59,025 | — | 252,130 | ||||||||||||||||||
Depreciation, depletion and amortization | — | — | 17,706 | 5,870 | 23,576 | |||||||||||||||||||
Selling, general and administrative expenses allocated from Arch Coal | 5,489 | — | — | — | — | 5,489 | ||||||||||||||||||
Other operating income | (18 | ) | — | (288 | ) | (169 | ) | — | (475 | ) | ||||||||||||||
6,450 | — | 209,544 | 64,726 | — | 280,720 | |||||||||||||||||||
Income from investment in subsidiaries | 88,004 | — | — | — | (88,004 | ) | — | |||||||||||||||||
Income from operations | 81,554 | — | 53,461 | 34,465 | (88,004 | ) | 81,476 | |||||||||||||||||
Interest expense | (17,432 | ) | (15,501 | ) | (271 | ) | (530 | ) | 15,998 | (17,736 | ) | |||||||||||||
Interest income, primarily from Arch Coal | 15,940 | 15,998 | 121 | 261 | (15,998 | ) | 16,322 | |||||||||||||||||
(1,492 | ) | 497 | (150 | ) | (269 | ) | — | (1,414 | ) | |||||||||||||||
Other non-operating expense | (2,718 | ) | — | — | — | — | (2,718 | ) | ||||||||||||||||
Minority interest | (13,367 | ) | — | — | — | — | (13,367 | ) | ||||||||||||||||
Net income (loss) | $ | 63,977 | $ | 497 | $ | 53,311 | $ | 34,196 | $ | (88,004 | ) | $ | 63,977 | |||||||||||
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Balance Sheets
March 31, 2007
(in thousands)
March 31, 2007
(in thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 13 | $ | 64 | $ | — | $ | 77 | ||||||||||||
Trade accounts receivable | — | — | — | 41 | — | 41 | ||||||||||||||||||
Other receivables | 221 | — | 4,093 | 894 | — | 5,208 | ||||||||||||||||||
Inventories | — | — | 63,065 | 37,153 | — | 100,218 | ||||||||||||||||||
Prepaid royalties | — | — | 1,089 | 384 | — | 1,473 | ||||||||||||||||||
Other | 7,752 | 2,151 | 7,273 | 6,547 | — | 23,723 | ||||||||||||||||||
Total current assets | 7,973 | 2,151 | 75,533 | 45,083 | — | 130,740 | ||||||||||||||||||
Property, plant and equipment, net | — | — | 865,051 | 365,274 | — | 1,230,325 | ||||||||||||||||||
Investment in subsidiaries | 1,976,988 | — | — | — | (1,976,988 | ) | — | |||||||||||||||||
Receivable from Arch Coal, Inc. | 1,165,017 | — | (2 | ) | 26,445 | — | 1,191,460 | |||||||||||||||||
Intercompanies | (1,951,274 | ) | 962,270 | 975,928 | 13,076 | — | — | |||||||||||||||||
Other | 687 | 11,226 | 13,248 | 5,281 | — | 30,442 | ||||||||||||||||||
Total other assets | 1,191,418 | 973,496 | 989,174 | 44,802 | (1,976,988 | ) | 1,221,902 | |||||||||||||||||
Total assets | $ | 1,199,391 | $ | 975,647 | $ | 1,929,758 | $ | 455,159 | $ | (1,976,988 | ) | $ | 2,582,967 | |||||||||||
Accounts payable | 7,053 | — | 69,350 | 15,318 | — | 91,721 | ||||||||||||||||||
Accrued expenses | 3,236 | 16,031 | 78,215 | 8,119 | — | 105,601 | ||||||||||||||||||
Total current liabilities | 10,289 | 16,031 | 147,565 | 23,437 | — | 197,322 | ||||||||||||||||||
Long-term debt | — | 958,539 | — | — | — | 958,539 | ||||||||||||||||||
Accrued postretirement benefits other than pension | 19,063 | — | 2,486 | 9,612 | — | 31,161 | ||||||||||||||||||
Asset retirement obligations | — | — | 167,562 | 11,325 | — | 178,887 | ||||||||||||||||||
Accrued workers’ compensation | 5,428 | — | 1,220 | 3,522 | — | 10,170 | ||||||||||||||||||
Other noncurrent liabilities | 5,936 | — | 36,725 | 5,552 | — | 48,213 | ||||||||||||||||||
Total liabilities | 40,716 | 974,570 | 355,558 | 53,448 | — | 1,424,292 | ||||||||||||||||||
Minority interest | 167,254 | — | — | — | — | 167,254 | ||||||||||||||||||
Redeemable equity interests | 7,183 | — | — | — | — | 7,183 | ||||||||||||||||||
Non-redeemable members’ equity | 984,238 | 1,077 | 1,574,200 | 401,711 | (1,976,988 | ) | 984,238 | |||||||||||||||||
Total liabilities, redeemable membership interests and non-redeemable membership interests | $ | 1,199,391 | $ | 975,647 | $ | 1,929,758 | $ | 455,159 | $ | (1,976,988 | ) | $ | 2,582,967 | |||||||||||
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BALANCE SHEETS
December 31, 2006
(in thousands)
December 31, 2006
(in thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 161 | $ | 25 | $ | — | $ | 186 | ||||||||||||
Trade accounts receivable | — | — | — | 985 | — | 985 | ||||||||||||||||||
Other receivables | 1,007 | — | 13,453 | 273 | — | 14,733 | ||||||||||||||||||
Inventories | — | — | 58,796 | 36,032 | — | 94,828 | ||||||||||||||||||
Prepaid royalties | — | — | 2,648 | 297 | — | 2,945 | ||||||||||||||||||
Other current assets | 11,439 | 2,154 | 6,235 | 4,630 | — | 24,458 | ||||||||||||||||||
Total current assets | 12,446 | 2,154 | 81,293 | 42,242 | — | 138,135 | ||||||||||||||||||
Property, plant and equipment, net | 879,211 | 354,635 | 1,233,846 | |||||||||||||||||||||
Investment in subsidiaries | 1,917,292 | — | — | — | (1,917,292 | ) | — | |||||||||||||||||
Receivable from Arch Coal, Inc. | 1,124,910 | — | (2 | ) | 27,194 | — | 1,152,102 | |||||||||||||||||
Intercompanies | (1,903,278 | ) | 977,096 | 910,676 | 15,506 | — | — | |||||||||||||||||
Other | 639 | 11,764 | 15,829 | 5,457 | 33,689 | |||||||||||||||||||
Total other assets | 1,139,563 | 988,860 | 926,503 | 48,157 | (1,917,292 | ) | 1,185,791 | |||||||||||||||||
Total assets | $ | 1,152,009 | $ | 991,014 | $ | 1,887,007 | $ | 445,034 | $ | (1,917,292 | ) | $ | 2,557,772 | |||||||||||
Accounts payable | 15,151 | — | 77,347 | 18,227 | — | 110,725 | ||||||||||||||||||
Accrued expenses | 3,360 | 32,063 | 85,202 | 8,870 | — | 129,495 | ||||||||||||||||||
Total current liabilities | 18,511 | 32,063 | 162,549 | 27,097 | — | 240,220 | ||||||||||||||||||
Long-term debt | — | 958,881 | — | — | — | 958,881 | ||||||||||||||||||
Accrued postretirement benefits other than pension | 18,981 | — | 2,485 | 9,570 | — | 31,036 | ||||||||||||||||||
Asset retirement obligations | — | — | 163,832 | 11,070 | — | 174,902 | ||||||||||||||||||
Accrued workers’ compensation | 5,262 | — | 1,236 | 3,529 | — | 10,027 | ||||||||||||||||||
Other noncurrent liabilities | 5,254 | — | 27,757 | 5,694 | — | 38,705 | ||||||||||||||||||
Total liabilities | 48,008 | 990,944 | 357,859 | 56,960 | — | 1,453,771 | ||||||||||||||||||
Redeemable equity interests | 6,934 | — | — | — | — | 6,934 | ||||||||||||||||||
Minority interest | 162,522 | — | — | — | — | 162,522 | ||||||||||||||||||
Non-redeemable members’ equity | 934,545 | 70 | 1,529,148 | 388,074 | (1,917,292 | ) | 934,545 | |||||||||||||||||
Total liabilities, redeemable membership interests and non-redeemable membership interests | $ | 1,152,009 | $ | 991,014 | $ | 1,887,007 | $ | 445,034 | $ | (1,917,292 | ) | $ | 2,557,772 | |||||||||||
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Statements of Cash Flows
Three Months Ended March 31, 2007
(in thousands)
Three Months Ended March 31, 2007
(in thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
Operating Activities | ||||||||||||||||||||
Cash provided by (used in) operating activities | $ | (7,889 | ) | $ | (14,826 | ) | $ | 72,330 | $ | 19,201 | $ | 68,816 | ||||||||
Investing Activities | ||||||||||||||||||||
Capital expenditures | — | — | (20,819 | ) | (22,042 | ) | (42,861 | ) | ||||||||||||
Increase in receivable from Arch Coal | (40,107 | ) | — | (112 | ) | 431 | (39,788 | ) | ||||||||||||
Proceeds from dispositions of capital assets | — | — | 213 | 19 | 232 | |||||||||||||||
Reimbursement of deposit on equipment | — | — | 13,492 | — | 13,492 | |||||||||||||||
Cash used in investing activities | (40,107 | ) | — | (7,226 | ) | (21,592 | ) | (68,925 | ) | |||||||||||
Financing Activities | ||||||||||||||||||||
Transactions with affiliates, net | 47,996 | 14,826 | (65,252 | ) | 2,430 | — | ||||||||||||||
Cash provided by (used in) financing activities | 47,996 | 14,826 | (65,252 | ) | 2,430 | — | ||||||||||||||
(Decrease) increase in cash and cash equivalents | — | — | (148 | ) | 39 | (109 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | — | — | 161 | 25 | 186 | |||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | — | $ | 13 | $ | 64 | $ | 77 | ||||||||||
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Statements of Cash Flows
Three Months Ended March 31, 2006
(in thousands)
Three Months Ended March 31, 2006
(in thousands)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent Company | Issuer | Subsidiaries | Subsidiaries | Consolidated | ||||||||||||||||
Operating Activities | ||||||||||||||||||||
Cash provided by (used in) operating activities | $ | 75,704 | $ | (15,336 | ) | $ | 76,298 | $ | 68,355 | $ | 205,021 | |||||||||
Investing Activities | ||||||||||||||||||||
Capital expenditures | — | — | (42,207 | ) | (18,889 | ) | (61,096 | ) | ||||||||||||
Increase in receivable from Arch Coal | (112,493 | ) | — | (32 | ) | (31,502 | ) | (144,027 | ) | |||||||||||
Cash used in investing activities | (112,493 | ) | — | (42,239 | ) | (50,391 | ) | (205,123 | ) | |||||||||||
Financing Activities | ||||||||||||||||||||
Transactions with affiliates, net | 36,789 | 15,336 | (34,147 | ) | (17,978 | ) | — | |||||||||||||
Cash provided by (used in) financing activities | 36,789 | 15,336 | (34,147 | ) | (17,978 | ) | — | |||||||||||||
Decrease in cash and cash equivalents | — | — | (88 | ) | (14 | ) | (102 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | — | — | 126 | 26 | 152 | |||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | — | $ | 38 | $ | 12 | $ | 50 | ||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This document contains “forward-looking statements” ¯ that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from changes in the demand for our coal by the domestic electric generation industry; from legislation and regulations relating to the Clean Air Act and other environmental initiatives; from operational, geological, permit, labor and weather-related factors; from fluctuations in the amount of cash we generate from operations; from future integration of acquired businesses; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For a description of some of the risks and uncertainties that may affect our future results, see “Risk Factors” under Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2006.
Executive Overview
Market conditions were considerably less favorable in the first quarter of 2007 than in the year-ago period, prompting us to reduce production volume targets, which we announced at the end of 2006. We sold 2.5 million, or 10%, fewer tons in the first quarter of 2007 than in the fourth quarter of 2006. These cut-backs affected all operating segments. While soft market conditions continued into the first quarter of 2007, our realized average regional prices in the Powder River Basin and Western Bituminous Region were higher than in the fourth quarter of 2006 resulting from the roll-off of legacy contracts.
We believe market fundamentals are improving. We believe strong domestic and global demand growth for coal along with supply pressures will positively influence future coal prices. Increased electricity demand, the relatively high cost of competing fossil fuels, planned new coal-fueled electric generation facilities and geopolitical risks associated with global oil and natural gas resources suggest that the long-term fundamentals of the domestic coal industry remain strong.
Results of Operations
Items Affecting Comparability of Reported Results
The combustion-related event at our West Elk mine in Colorado in the fourth quarter of 2005 caused the idling of the mine into the first quarter of 2006. We estimate that the idling resulted in $30.0 million in lost profits during the first quarter of 2006. We recognized insurance recoveries related to the event of $10.0 million during the first quarter of 2006. We have reflected the insurance recoveries as a reduction of cost of coal sales.
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
The following discussion summarizes our operating results for the three months ended March 31, 2007 and compares those results to our operating results for the three months ended March 31, 2006.
Revenues.The following table summarizes the number of tons we sold during the three months ended March 31, 2007 and the sales associated with those tons and compares those results to the comparable information for the three months ended March 31, 2006:
Three months ended March 31 | Increase (decrease) | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
(Amounts in thousands, except per ton data) | ||||||||||||||||
Coal sales | $ | 370,097 | $ | 362,196 | $ | 7,901 | 2.2 | % | ||||||||
Tons sold | 27,706 | 26,234 | 1,472 | 5.6 | ||||||||||||
Coal sales realization per ton sold | $ | 13.36 | $ | 13.81 | $ | (0.45 | ) | (3.3 | ) |
The increase in our coal sales from the first quarter of 2006 to the first quarter of 2007 resulted from higher sales volumes, partially offset by a lower overall average price per ton sold. See the regional realization tables
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below for a discussion of changes in regional sales volumes and prices.
The following table shows the number of tons sold by operating segment during the three months ended March 31, 2007 and compares those amounts to the comparable information for the three months ended March 31, 2006:
Three months ended March 31 | Increase | |||||||||||||||
2007 | 2006 | Tons | % | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Powder River Basin | 22,942 | 22,174 | 768 | 3.5 | % | |||||||||||
Western Bituminous Region | 4,764 | 4,060 | 704 | 17.3 | ||||||||||||
Total | 27,706 | 26,234 | 1,472 | 5.6 | % | |||||||||||
Sales volume in the Powder River Basin increased during the first quarter of 2007 from the restart of the Coal Creek mine during the second half of 2006. This increase in sales volumes was partially offset by a decrease in production at the Black Thunder mine due to planned production reductions, weather-related shipment challenges and an unplanned belt outage in the first quarter of 2007.
In the Western Bituminous Region, sales volume increased during the first quarter of 2007, reflecting a full quarter of production at the West Elk mine, which was idled in the first quarter of 2006, and the Skyline longwall mine, which commenced mining in a new reserve area in the second quarter of 2006. These increases were partially offset by difficulties encountered in starting up the new longwall at the Sufco mine in Utah and planned lower production volume.
The following table shows the coal sales price per ton by operating segment during the three months ended March 31, 2007 and compares those amounts to the comparable information for the three months ended March 31, 2006. Coal sales prices per ton exclude certain transportation costs that we pass through to our customers. We use these financial measures because we believe the amounts, as adjusted, better represent the coal sales prices we achieved within our operating segments. Since other companies may calculate coal sales prices per ton differently, our calculation may not be comparable to similarly titled measures used by those companies. Transportation costs per ton billed to customers for the three months ended March 31, 2007 were $0.07 for the Powder River Basin and $2.65 for the Western Bituminous region. For the three months ended March 31, 2006, transportation costs per ton billed to customers were $0.04 for the Powder River Basin and $3.73 for the Western Bituminous region.
Three months ended March 31 | Increase (decrease) | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
Powder River Basin | $ | 10.37 | $ | 11.34 | $ | (0.97 | ) | (8.6 | )% | |||||||
Western Bituminous Region | 24.77 | 23.31 | 1.46 | 6.3 |
Decreases in sales prices in the Powder River Basin during the first quarter of 2007 when compared with the first quarter of 2006 reflect lower sulfur dioxide emission allowance market prices. In the Western Bituminous Region, higher sales prices during the first quarter of 2007 represent higher base pricing resulting from the roll-off of lower-priced legacy contracts.
Expenses, costs and other.The following table summarizes our operating costs and expenses for the three months ended March 31, 2007 and compares those results to the comparable information for the three months ended March 31, 2006:
Increase (decrease) | ||||||||||||||||
Three months ended March 31 | in Net Income | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Cost of coal sales | $ | 283,271 | $ | 252,130 | $ | (31,141 | ) | (12.4 | )% | |||||||
Depreciation, depletion and amortization | 32,519 | 23,576 | (8,943 | ) | (37.9 | ) | ||||||||||
Selling, general and administrative expenses | 6,152 | 5,489 | (663 | ) | (12.1 | ) | ||||||||||
Other operating income, net | (923 | ) | (475 | ) | 448 | 94.3 | ||||||||||
$ | 321,019 | $ | 280,720 | $ | (40,299 | ) | (14.4 | ) | ||||||||
Cost of coal sales. Our cost of coal sales increased from the first quarter of 2006 to the first quarter of 2007 primarily due to higher overall sales volumes and higher per-ton costs in the Powder River Basin. See the analysis of regional operating margins below for a discussion of individual segment results.
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Depreciation, depletion and amortization.The increase in depreciation, depletion and amortization from the first quarter of 2006 to the first quarter of 2007 is due primarily to the commencement of mining in a new reserve area at the Skyline mine during the second quarter of 2006 and an increase in amortization of deferred development due to the outage of the West Elk mine in the first quarter of 2006. In addition, generally higher capital spending in 2006 compared to 2005 resulted in higher depreciation, depletion and amortization costs in the first quarter of 2007 compared to the first quarter of 2006. For more information on our ongoing capital improvement and development projects, see “Liquidity and Capital Resources.”
Selling, general and administrative expenses. Selling, general and administrative expenses represent expenses allocated to us from Arch Coal.
Operating margins.Our operating margins (reflected below on a per-ton basis) include all mining costs, which consist of all amounts classified as cost of coal sales (except pass-through transportation costs discussed in “Revenues” above) and all depreciation, depletion and amortization attributable to mining operations.
Three months ended March 31 | Decrease | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
Powder River Basin | $ | 1.29 | $ | 2.79 | $ | (1.50 | ) | (53.8 | )% | |||||||
Western Bituminous Region | 5.23 | 6.28 | (1.05 | ) | (16.7 | ) |
Powder River Basin — On a per-ton basis, operating margins for the first quarter of 2007 decreased from the first quarter of 2006 due to the decrease in per-ton coal sales prices and increase in per-ton costs. The increase in per-ton costs resulted from lower volumes caused by weather-related shipment challenges and an unplanned belt outage at our Black Thunder mine in the first quarter of 2007 and higher diesel and labor costs, partially offset by lower sales-sensitive costs.
Western Bituminous Region — Operating margins per ton for the first quarter of 2007 decreased from the first quarter of 2006 primarily due to higher depreciation, depletion and amortization costs and the impact of the start up issues associated with the installation of the new longwall at the Sufco mine, which offset the impact of improved per-ton coal sales prices, and the production at the West Elk mine and Skyline mine in the first quarter of 2007.
Net interest expense. The following table summarizes our net interest expense for the three months ended March 31, 2007 and compares that information to the comparable information for the three months ended March 31, 2006:
Increase | ||||||||||||||||
Three months ended March 31 | in Net Income | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Interest expense | $ | (17,621 | ) | $ | (17,736 | ) | $ | 115 | 0.6 | % | ||||||
Interest income | 22,821 | 16,322 | 6,499 | 39.8 | ||||||||||||
$ | 5,200 | $ | (1,414 | ) | $ | 6,614 | 467.8 | |||||||||
The slight decrease in interest expense during the three months ended March 31, 2007 compared to the three months ended March 31, 2006 results from an increase in capitalized interest, which was partially offset by an increase in the discount on trade accounts receivable sold to Arch Coal pursuant to Arch Coal’s accounts receivable securitization program.
Our cash transactions are managed by Arch Coal. Cash paid to or from us that is not considered a distribution or a contribution is recorded as a receivable from Arch Coal. The receivable balance earns interest from Arch Coal at the prime interest rate. The increase in interest income results primarily from a higher average receivable balance in the three months ended March 31, 2007 as compared to the same period in 2006.
Liquidity and Capital Resources
Our primary sources of cash include sales of our coal production to customers, sales of assets and debt offerings related to significant transactions. Excluding any significant mineral reserve acquisitions, we generally satisfy our working capital requirements and fund capital expenditures and debt-service obligations with cash generated from operations and, if necessary, cash from Arch Coal. Our ability to satisfy debt service obligations, to fund planned capital expenditures and to make acquisitions will depend upon our future operating performance, which will be
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affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.
The following is a summary of cash provided by or used in each of the indicated types of activities:
Three months ended | ||||||||
March 31 | ||||||||
2007 | 2006 | |||||||
(in thousands) | ||||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | 68,816 | $ | 205,021 | ||||
Investing activities | (68,925 | ) | (205,123 | ) |
Cash provided by operating activities decreased $136.2 million in the first quarter of 2007 compared to the first quarter of 2006 primarily as a result of the commencement of Arch Coal’s accounts securitization program in the first quarter of 2006, which resulted in a substantial decrease in our trade receivables in the first quarter of 2006.
Cash used in investing activities in the first quarter of 2007 was $136.2 million less than in the first quarter of 2006 due to the commencement of Arch Coal’s accounts securitization program in the first quarter of 2006, which caused the receivable from Arch Coal to increase $144.0 million in the first quarter of 2006, compared with $39.8 million in the first quarter of 2007. In addition, cash used in investing activities decreased due to a decrease in capital spending compared with the first quarter of 2006 and the reimbursement of deposits made to purchase equipment in the first quarter of 2007. Capital expenditures are made to improve and replace existing mining equipment, expand existing mines, develop new mines and improve the overall efficiency of mining operations. In the first quarter of 2007, we spent approximately $17.0 million for the new longwall now in service at our Sufco mine in Utah. In the first quarter of 2006, we had significant spending at our Powder River Basin operations related to the restart of the Coal Creek mine. In the first quarter of 2007, we also recovered $13.5 million of deposits we made primarily in the fourth quarter of 2006 to purchase equipment in the Powder River Basin that we subsequently leased.
Contingencies
Reclamation.The Federal Surface Mining Control and Reclamation Act of 1977 and similar state statutes require that mine property be restored in accordance with specified standards and an approved reclamation plan. We accrue for the costs of reclamation in accordance with the provisions of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” adopted as of January 1, 2003. These costs relate to reclaiming the pit and support acreage at surface mines and sealing portals at deep mines. Other costs of reclamation common to surface and underground mining are related to reclaiming refuse and slurry ponds, eliminating sedimentation and drainage control structures, and dismantling or demolishing equipment or buildings used in mining operations. The establishment of the asset retirement obligation liability is based upon permit requirements and requires various estimates and assumptions, principally associated with costs and productivities.
We review our entire environmental liability periodically and make necessary adjustments, including permit changes and revisions to costs and productivities to reflect current experience. Our management believes it is making adequate provisions for all expected reclamation and other associated costs.
We are a party to numerous claims and lawsuits and are subject to numerous other contingencies with respect to various matters. We provide for costs related to contingencies, including environmental, legal and indemnification matters, when a loss is probable and the amount is reasonably determinable. After conferring with counsel, it is the opinion of management that the ultimate resolution of these claims, to the extent not previously provided for, will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In addition to the other quantitative and qualitative disclosures about market risk contained in this report, you should see Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures.
We performed an evaluation under the supervision and with the participation of our management, including our
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chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2007. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date. There were no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There is hereby incorporated by reference the information under the caption “Contingencies” appearing in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors.
Our business inherently involves certain risks and uncertainties. The risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006 and in Part II, Item 1A of the Quarterly Reports that we have filed during the interim period are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Should one or more of any of these risks materialize, our business, financial condition or results of operations could be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibits filed as part of this Quarterly Report on Form 10-Q are as follows:
Exhibit | Description | |
3.1 | Certificate of Formation (incorporated herein by reference to Exhibit 3.3 to the Form S-4 (File No. 333-107569) filed on August 1, 2003 by Arch Western Finance, LLC, Arch Western Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., and Thunder Basin Coal Company, L.L.C.). | |
3.2 | Limited Liability Company Agreement (incorporated herein by reference to Exhibit 3.4 to the Form S-4 (File No. 333-107569) filed on August 1, 2003 by Arch Western Finance, LLC, Arch Western Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., and Thunder BasinCoal Company, L.L.C.). | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Paul A. Lang. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Robert J. Messey. | |
32.1 | Section 1350 Certification of Paul A. Lang. | |
32.2 | Section 1350 Certification of Robert J. Messey. |
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