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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1999
Commission file number
1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (606) 815-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g): None
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K 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. [ ]
At November 30, 1999, based on the New York Stock Exchange
closing price, the aggregate market value of voting stock held by
non-affiliates of the Registrant was approximately $2,394,294,188.
In determining this amount, the Registrant has assumed that
directors and executive officers are affiliates. Such assumption
shall not be deemed conclusive for any other purpose.
At November 30, 1999, there were 71,290,693 shares of
Registrant's common stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's Annual Report to Shareholders for
the fiscal year ended September 30, 1999 are incorporated by
reference into Parts I and II.
Portions of Registrant's definitive Proxy Statement for its
January 27, 2000 Annual Meeting of Shareholders are incorporated
by reference into Part III.
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EXPLANATORY NOTE
This amendment to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1999 of Ashland Inc. ("Ashland") is being filed to
include the audited financial statements of Marathon Ashland Petroleum LLC
("MAP") for the fiscal year ended December 31, 1999 and the audited
financial statements of Arch Coal, Inc. ("Arch") for the fiscal year ended
December 31, 1999 as required by Rule 3-09 of Regulation S-X. Ashland has a
38% equity interest in MAP and a 58% equity interest in Arch and accounts
for these investments using the equity method of accounting. In accordance
with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the
text of the amended item is set forth in its entirety in the pages attached
hereto.
A consent of PricewaterhouseCoopers LLP, independent accountants
for MAP, and a consent of Ernst & Young LLP, independent auditors for Arch,
are being filed as exhibits hereto.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented or incorporated by reference in this report are
listed in the index on Page 20.
Audited financial statements of Marathon Ashland Petroleum LLC.
Financial statement schedules are omitted because they are not
applicable as the required information is contained in the
applicable financial statements or notes thereto.
Audited financial statements and schedule of Arch Coal, Inc.
(3) Exhibits
3.1 - Second Restated Articles of Incorporation of Ashland,
as amended to January 30, 1998 (filed as Exhibit 3 to
Ashland's Form 10-Q for the quarter ended December 31,
1997 and incorporated herein by reference).
3.2 - By-laws of Ashland, as amended to January 28, 1999
(filed as Exhibit 3.2 to Ashland's Form 10-Q for the
quarter ended December 31, 1998 and incorporated herein
by reference).
4.1 - Ashland agrees to provide the SEC, upon request, copies
of instruments defining the rights of holders of
long-term debt of Ashland and all of its subsidiaries for
which consolidated or unconsolidated financial statements
are required to be filed with the SEC.
4.2 - Indenture, dated as of August 15, 1989, as amended and
restated as of August 15, 1990, between Ashland and
Citibank, N.A., as Trustee (filed as Exhibit 4(a) to
Ashland's Form 10-K for the fiscal year ended September
30, 1991 and incorporated herein by reference).
4.3 - Rights Agreement, dated as of May 16, 1996, between
Ashland Inc. and Harris Trust and Savings Bank, together
with Form of Right Certificate (filed as Exhibits 4(a)
and 4(c), respectively, to Ashland's Form 8-A filed with
the SEC on May 16, 1996 and incorporated herein by
reference).
The following Exhibits 10.1 through 10.16 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 - Amended Stock Incentive Plan for Key Employees of
Ashland Inc. and its Subsidiaries.
10.2 - Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors.
10.3 - Tenth Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Employees.
10.4 - Ashland Inc. Incentive Compensation Plan (filed as
Exhibit 10.6 to Ashland's Form 10-K for the fiscal year
ended September 30, 1993 and incorporated herein by
reference).
10.5 - Ashland Inc. Salary Continuation Plan (filed as Exhibit
10(c).11 to Ashland's Form 10-K for the fiscal year ended
September 30, 1988 and incorporated herein by reference).
10.6 - Form of Ashland Inc. Executive Employment Contract
between Ashland Inc. and certain executive officers of
Ashland.
10.7 - Form of Indemnification Agreement between Ashland Inc.
and each member of its Board of Directors (filed as
Exhibit 10(c).13 to Ashland's Form 10-K for the fiscal
year ended September 30, 1990 and incorporated herein by
reference).
10.8 - Ashland Inc. Nonqualified Excess Benefit Pension Plan
(filed as Exhibit 10.11 to Ashland's Form 10-K for the
fiscal year ended September 30, 1998 and incorporated
herein by reference).
10.9 - Ashland Inc. Long-Term Incentive Plan.
10.10- Ashland Inc. Directors' Charitable Award Program (filed
as Exhibit 10.13 to Ashland's Form 10-K for the fiscal
year ended September 30, 1996 and incorporated herein by
reference).
10.11- Ashland Inc. 1993 Stock Incentive Plan.
10.12- Ashland Inc. 1995 Performance Unit Plan (filed as
Exhibit 10.2 to Ashland's Form 10-Q for the quarter ended
December 31, 1998 and incorporated herein by reference).
10.13- Ashland Inc. Incentive Compensation Plan for Key
Executives.
10.14- Ashland Inc. Deferred Compensation Plan.
10.15- Ashland Inc. 1997 Stock Incentive Plan (filed as
Exhibit 10.18 to Ashland's Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference).
10.16- Retirement Agreement with Michael D. Rose, director of
Ashland.
10.17- Amended and Restated Limited Liability Company
Agreement of Marathon Ashland Petroleum LLC dated as of
December 31, 1998.
10.18- Put/Call, Registration Rights and Standstill Agreement
as amended to December 31, 1998 among Marathon Oil
Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum.
11 - Computation of Earnings Per Share (appearing on Page 41
of Ashland's Annual Report to Shareholders, incorporated
by reference herein, for the fiscal year ended September
30, 1999).
12 - Computation of Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
13 - Portions of Ashland's Annual Report to Shareholders,
incorporated by reference herein, for the fiscal year
ended September 30, 1999.
21 - List of subsidiaries.
23.1 - Consent of Ernst & Young LLP.
23.2 - Consent of PricewaterhouseCoopers LLP.
23.3 - Consent of Ernst & Young LLP.
24 - Power of Attorney, including resolutions of the Board
of Directors.
27 - Financial Data Schedule for the fiscal year ended
September 30, 1999.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) Reports on Form 8-K
A report on Form 8-K was filed on September 29, 1999 to announce
certain events relating to Ashland's tender offer for Superfos a/s.
A report on Form 8-K was filed on October 6, 1999 to announce that a
tax-free spin-off would be Ashland's preferred alternative for its
investment in Arch Coal. The report also noted that Ashland is reviewing
its alternatives with respect to a change in its ownership in MAP.
A report on Form 8-K was filed on October 12, 1999 to announce that
shareholders representing more than 90% of the share capital of Superfos
a/s accepted Ashland's September 27, 1999 offer and that Ashland will
implement the tender offer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
ASHLAND INC.
---------------------
(Registrant)
Date: March 21, 2000 /s/ David L. Hausrath
------------------------------------
Name: David L. Hausrath
Title: Vice President and
General Counsel
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
CONTENTS
Page
REPORT OF INDEPENDENT ACCOUNTANTS: 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENT OF OPERATIONS -------------------------------------------------------------------- 2
CONSOLIDATED BALANCE SHEET ------------------------------------------------------------------------------ 3
CONSOLIDATED STATEMENT OF CASH FLOWS -------------------------------------------------------------------- 4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL -------------------------------------------------------------- 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION -------------------------------------------- 6
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES -------------------------------------------------- 6
NOTE C - NEW ACCOUNTING STANDARD ------------------------------------------------------------------- 8
NOTE D - RELATED PARTY TRANSACTIONS ---------------------------------------------------------------- 8
NOTE E - REVENUES ---------------------------------------------------------------------------------- 9
NOTE F - OTHER ITEMS ------------------------------------------------------------------------------- 9
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS ------------------------------------------------ 9
NOTE H - INCOME TAXES ------------------------------------------------------------------------------ 11
NOTE I - INVENTORIES ------------------------------------------------------------------------------- 12
NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES ----------------------------------------------------- 12
NOTE K - PROPERTY, PLANT AND EQUIPMENT ------------------------------------------------------------- 13
NOTE L - LONG-TERM DEBT ---------------------------------------------------------------------------- 13
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION -------------------------------------------------------- 14
NOTE N - LEASES ------------------------------------------------------------------------------------ 14
NOTE O - DERIVATIVE INSTRUMENTS -------------------------------------------------------------------- 14
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS ------------------------------------------------------- 16
NOTE Q - CONTINGENCIES AND COMMITMENTS ------------------------------------------------------------- 16
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh PA 15219
Telephone (412) 355-6000
REPORT OF INDEPENDENT ACCOUNTANTS
February 8, 2000
To the Board of Managers of
Marathon Ashland Petroleum LLC
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and members' capital
present fairly, in all material respects, the financial position of
Marathon Ashland Petroleum LLC and its subsidiaries (MAP) at December 31,
1999 and 1998, and the results of their operations and their cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of MAP's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
----------------------------------------------
1999 1998
----------------- ------------------
REVENUES:
Sales - Note E $ 20,256 $ 19,202
Dividend and affiliate income 18 13
Gain (loss) on disposal of assets (3) 6
Other income 22 20
----------------- ------------------
Total revenues 20,293 19,241
----------------- ------------------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) - Note E 14,921 13,743
Selling, general and administrative expenses 369 387
Depreciation and amortization 283 275
Taxes other than income taxes - Note E 4,098 3,929
Inventory market valuation charge (credit) - Note I (552) 269
----------------- ------------------
Total costs and expenses 19,119 18,603
----------------- ------------------
INCOME FROM OPERATIONS: 1,174 638
Net interest and other financial income - Note F 5 17
----------------- ------------------
INCOME BEFORE INCOME TAXES: 1,179 655
Provision for estimated income taxes - Note H 2 1
----------------- ------------------
NET INCOME $ 1,177 $ 654
================= ==================
The accompanying notes are an integral part of these consolidated financial
statements.
2
CONSOLIDATED BALANCE SHEET (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
December 31
----------------------------------------------
1999 1998
----------------- ------------------
ASSETS:
Current assets:
Cash and cash equivalents, including amounts invested
with related parties of $0 and $272 - Note D $ 38 $ 272
Receivables, less allowance for doubtful accounts of $3
and $3 1,135 911
Inventories - Note I 1,820 1,264
Related party receivables - Note D 39 35
Other current assets 41 82
----------------- ------------------
Total current assets 3,073 2,564
Investments and long-term receivables - Note J 108 110
Long-term related party receivables - Note D -- 6
Property, plant and equipment - net - Note K 3,711 3,525
Prepaid pensions - Note G -- 44
Other noncurrent assets 89 81
----------------- ------------------
Total assets $ 6,981 $ 6,330
================= ==================
LIABILITIES:
Current liabilities:
Accounts payable $ 1,914 $ 1,427
Accounts payable to related parties - Note D 33 13
Distribution payable to related parties - Note D -- 272
Payroll and benefits payable 79 118
Accrued taxes 33 35
Long-term debt due within one year - Note L 7 --
----------------- ------------------
Total current liabilities 2,066 1,865
Long-term debt - Note L 15 7
Long-term deferred income taxes - Note H 3 3
Employee benefits - Note G 258 250
Deferred credits and other liabilities 26 22
----------------- ------------------
Total liabilities 2,368 2,147
----------------- ------------------
MEMBERS' CAPITAL (details on page 5)
Members' contributed capital $ 4,218 $ 4,188
Retained earnings 395 --
Accumulated other comprehensive income (loss) -- (5)
----------------- ------------------
Total members' capital 4,613 4,183
----------------- ------------------
Total liabilities and members' capital $ 6,981 $ 6,330
================= ==================
The accompanying notes are an integral part of these consolidated financial
statements.
3
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
----------------------------------------------
1999 1998
----------------- ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 1,177 $ 654
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 283 275
Inventory market valuation charge (credit) (552) 269
Pensions and other postretirement benefits 44 22
Deferred income taxes (1) (2)
(Gain) loss on disposal of assets 3 (6)
Changes in:
Current receivables (468) 194
Inventories (41) (19)
Current accounts payable and accrued expenses 752 (126)
Net receivables and payables with related parties 22 28
All other - net 38 (69)
----------------- ------------------
Net cash provided from operating activities 1,257 1,220
----------------- ------------------
INVESTING ACTIVITIES:
Capital expenditures (597) (400)
Disposal of assets 162 16
Property exchange trust - deposit (4) --
- withdrawal 2 --
Affiliates - investments -- (22)
- repayments of advances -- 1
----------------- ------------------
Net cash used in investing activities (437) (405)
----------------- ------------------
FINANCING ACTIVITIES:
Revolving credit facilities - borrowings 386 --
- repayments (386) --
Debt - additions -- 1
- repayments -- (24)
Member distributions (1,054) (555)
----------------- ------------------
Net cash used in financing activities (1,054) (578)
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (234) 237
Cash and cash equivalents at beginning of year 272 35
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 38 $ 272
================= ==================
See Note M for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Members' Capital Comprehensive Income
Year Ended Year Ended
December 31 December 31
------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
MEMBERS' CONTRIBUTED CAPITAL:
Balance at beginning of year $ 4,188 $ 4,361
Member contributions 30 --
Distribution to members -- (173)
------------- -------------
Balance at end of year 4,218 4,188
------------- -------------
RETAINED EARNINGS:
Balance at beginning of year -- --
Net income 1,177 654 $ 1,177 $ 654
Distributions to members (782) (654)
------------- -------------
Balance at end of year 395 --
------------- -------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustments:
Balance at beginning of year (5) (4)
Changes during the year 5 (1) 5 (1)
------------- ------------- ------------- --------------
Balance at end of year -- (5)
------------- -------------
TOTAL COMPREHENSIVE INCOME $ 1,182 $ 653
============= ==============
TOTAL MEMBERS' CAPITAL $ 4,613 $ 4,183
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
On December 12, 1997 Marathon Oil Company (Marathon), a wholly owned
subsidiary of USX Corporation (USX), entered into an Asset Transfer and
Contribution Agreement with Ashland Inc. (Ashland) providing for the
formation of Marathon Ashland Petroleum LLC (MAP). Effective January 1,
1998, Marathon contributed substantially all of its refining, marketing and
transportation (RM&T) operations to MAP. Also, on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. The purchase price was determined to be $1.9 billion,
based upon an external valuation. The acquisition of Ashland's net assets
was accounted for under the purchase method of accounting.
In connection with the formation of MAP, Marathon and Ashland entered into
a Limited Liability Company Agreement (LLC Agreement) dated January 1,
1998. The LLC Agreement provides for an initial term expiring on December
31, 2022 (25 years from its formation). The term will automatically be
extended for ten-year periods, unless a termination notice is given by
either party.
Also in connection with the formation of MAP, the parties entered into a
Put/Call, Registration Rights and Standstill Agreement (the Put/Call
Agreement). The Put/Call Agreement provides that at any time after December
31, 2004, Ashland will have the right to sell to Marathon all of Ashland's
ownership interest in MAP, for an amount in cash and/or Marathon or USX
debt or equity securities equal to the product of 85% (90% if equity
securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could be made
at closing, or at Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any time after December
31, 2004, Marathon will have the right to purchase all of Ashland's
ownership interests in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time, multiplied by Ashland's
percentage interest in MAP.
In 1999, MAP recorded capital contributions from Marathon and Ashland for
environmental improvements of $2 million and $28 million, respectively. The
LLC Agreement stipulates that ownership interest in MAP will not be
adjusted as a result of such contributions.
MAP is engaged in petroleum supply, refining, marketing & transportation
operations and includes Speedway SuperAmerica LLC, a wholly owned
subsidiary, which operates retail outlets for petroleum products and
merchandise. In addition, MAP, through its wholly owned subsidiary,
Marathon Ashland Pipe Line LLC, is actively engaged in the pipeline
transportation of crude oil and petroleum products.
In the second quarter of 1999, MAP sold Scurlock Permian LLC, its crude oil
gathering business, to Plains Marketing, L.P. for $137 million. In 1999,
MAP recorded a pretax loss of $16 million related to the sale.
On December 10, 1999, MAP finalized the transaction with Ultramar Diamond
Shamrock ("UDS") to purchase 178 UDS owned and operated convenience stores
and 5 product terminals. In addition, MAP was assigned supply contracts
with UDS branded jobbers who supply 242 branded jobber stations in
Michigan. This transaction was accounted for under the purchase method of
accounting.
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial statements
include the accounts of MAP and the majority-owned subsidiaries which it
controls. Investments in undivided interest pipelines are consolidated on a
pro rata basis. Investments in other entities over which MAP has
significant influence are accounted for using the equity method of
accounting and are carried at MAP's share of net assets plus advances.
Investments in companies whose stocks have no readily determinable fair
value are carried at cost.
USE OF ESTIMATES - Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at year-end and the reported amounts of revenues and expenses
during the year. Significant items subject to such estimates and
assumptions include the carrying value of long-lived assets; valuation
allowances for receivables and inventories; environmental liabilities,
liabilities for potential tax deficiencies and potential litigation claims
and settlements; and assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when management
commits to a plan to close an operating facility or to exit a business
activity. Actual results could differ from the estimates and assumptions
used.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued
REVENUE RECOGNITION - Revenues principally include sales, dividend and
affiliate income and gains or losses on the disposal of assets.
Sales are recognized when products are shipped or services are provided to
customers. Consumer excise taxes on petroleum products and merchandise and
matching crude oil and refined products buy/sell transactions settled in
cash are included in both revenues and costs and expenses, with no effect
on income.
Dividend and affiliate income includes MAP's proportionate share of income
from equity method investments and dividend income from other investments.
Dividend income is recognized when dividend payments are received.
When long-lived assets depreciated on an individual basis are sold or
otherwise disposed of, any gains or losses are reflected in income. Gains
on disposal of long-lived assets are recognized when earned, which is
generally at the time of closing. If a loss on disposal is expected, such
losses are recognized when long-lived assets are reclassified as assets
held for sale. Proceeds from disposal of long-lived assets depreciated on a
group basis are credited to accumulated depreciation and amortization with
no immediate effect on income.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and on deposit and investments with related parties in highly liquid debt
instruments with maturities of three months or less. See Note D for
information regarding investments with related parties.
INVENTORIES - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
DERIVATIVE INSTRUMENTS - MAP uses commodity-based derivative instruments to
manage its exposure to price risk. Management is authorized to use futures,
forwards, swaps and options related to the purchase or sale of crude oil,
refined products and natural gas. While MAP's risk management activities
generally reduce market risk exposure due to unfavorable commodity price
changes for raw material purchases and products sold, such activities can
also encompass strategies which assume price risk.
COMMODITY-BASED HEDGING TRANSACTIONS - For transactions that qualify
for hedge accounting, the resulting gains or losses are deferred and
subsequently recognized in income from operations, as a component of
sales or cost of sales, in the same period as the underlying physical
transaction. To qualify for hedge accounting, derivative positions
cannot remain open if the underlying physical market risk has been
removed. If such derivative positions remain in place, they would be
marked-to-market and accounted for as trading and other activities.
Recorded deferred gains or losses are reflected within other current
and noncurrent assets or accounts payable and deferred credits and
other liabilities, as appropriate.
COMMODITY-BASED TRADING AND OTHER ACTIVITIES - Derivative instruments
used for trading and other activities are marked-to-market and the
resulting gains or losses are recognized in the current period within
income from operations. This category also includes the use of
derivative instruments that have no offsetting underlying physical
market risk.
LONG-LIVED ASSETS - Property, plant and equipment are depreciated
principally by the straight-line method. Expenditures for refinery
turnarounds are expensed ratably in the calendar year in which they occur.
MAP evaluates impairment of its assets on an individual asset basis or by
logical groupings of assets. Assets deemed to be impaired are written down
to their fair value, including any related goodwill, using discounted
future cash flows and, if available, comparable market values.
ENVIRONMENTAL LIABILITIES - MAP provides for remediation costs and
penalties when the responsibility to remediate is probable and the amount
of associated costs is reasonably determinable. Generally, the timing of
remediation accruals coincides with completion of a feasibility study or
the commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and could be
discounted in certain instances. If recoveries of remediation costs from
third parties are probable, a receivable is recorded.
INSURANCE - MAP is insured for catastrophic casualty and certain property
and business interruption exposures, as well as those risks required to be
insured by law or contract. Costs resulting from noninsured losses are
charged against income upon occurrence.
INCOME TAXES - MAP is a limited liability company, and therefore, except
for several small subsidiary corporations, is not subject to U.S. federal
income taxes. Accordingly, the taxable income or loss resulting from
operations of MAP is ultimately included in
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued
the U.S. federal income tax returns of USX and Ashland. MAP is, however,
subject to income taxes in certain state, local and foreign jurisdictions.
RECLASSIFICATIONS - Certain reclassifications of prior year's data have
been made to conform to 1999 classifications.
NOTE C - NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). This new Standard
requires recognition of all derivatives as either assets or liabilities at
fair value. SFAS No. 133 may result in additional volatility in both
current period earnings and other comprehensive income as a result of
recording recognized and unrecognized gains and losses resulting from
changes in the fair value of derivative instruments. The transition
adjustment resulting from adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle.
Under the new Standard, MAP may elect not to designate certain derivative
instruments as hedges even if the strategy qualifies for hedge accounting
treatment. This approach would eliminate the administrative effort needed
to measure effectiveness and monitor such instruments; however, this
approach also may result in additional volatility in current period
earnings.
MAP cannot reasonably estimate the effect of adoption on either the
financial position or results of operations. It is not possible to estimate
what effect this Statement will have on future results of operations,
although greater period-to-period volatility is likely. MAP plans to adopt
the Standard effective January 1, 2001.
NOTE D - RELATED PARTY TRANSACTIONS
MAP sales in 1999 and 1998 to Ashland and its affiliates were $198 million
and $185 million, respectively; and sales to USX and its affiliates were
$50 million and $10 million, respectively. MAP purchases in 1999 and 1998
from Ashland and its affiliates totaled $6 million and $18 million,
respectively; and purchases from USX and its affiliates totaled $297
million and $284 million, respectively. Such transactions were in the
ordinary course of business and included the purchase, sale and
transportation of crude oil and petroleum products. These transactions were
conducted under terms comparable to those with unrelated parties.
During the years ended December 31, 1999 and 1998, Ashland and Marathon
provided computer, treasury, accounting, internal auditing and legal
services and facilities to MAP. Billings to MAP for these services and
facilities for the years ended December 31, 1999 and 1998 from Ashland
totaled $19 million and $27 million, respectively. Billings to MAP for
these services and facilities for the years ended December 31, 1999 and
1998 from USX and its affiliates totaled $47 million and $83 million,
respectively.
As of December 31, 1999 and 1998, related party receivables included $26
million and $22 million, respectively, of accounts receivable due from
Ashland and its affiliates; and accounts payable to related parties
included $2 million and $3 million, respectively, due to Ashland and its
affiliates. As of December 31, 1999 and 1998, related party receivables
included $13 million and $13 million, respectively, of accounts receivable
due from USX and its affiliates; and accounts payable to related parties
included $31 million and $10 million, respectively, due to USX and its
affiliates.
As of December 31, 1998, the distribution payable to related parties
included $169 million due to Marathon and $103 million due to Ashland.
In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense. During 1998, Marathon reimbursed MAP $24 million for debt
repayments. Long-term related party receivables at December 31, 1998
included $6 million due from Marathon for future debt payment
reimbursements. The current related party receivable from USX and its
affiliates at December 31, 1999 included $6 million due from Marathon for
future debt payment reimbursements.
A revolving credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon (collectively the Lenders) and MAP (Borrower). This
agreement provides that the Lenders may loan to the Borrower up to $500
million at defined short-term market rates. At December 31, 1999 and 1998,
there were no borrowings against this facility. During 1999, MAP borrowed
and repaid $386 million under this revolving credit facility.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE D - RELATED PARTY TRANSACTIONS - Continued
On November 16, 1998, MAP entered into agreements with USX and Ashland,
which allow MAP to invest its surplus cash balances on a daily basis at
competitive interest rates with USX and Ashland in proportion up to their
ownership interests in MAP. These agreements expired on March 15, 1999, but
have been amended and extended with an expiration date of March 15, 2000.
At December 31, 1998, amounts held by USX and Ashland, which are included
in cash and cash equivalents, were $169 million and $103 million,
respectively. At December 31, 1999, there was no cash invested under these
agreements. During the years ended December 31, 1999 and 1998, interest
income earned from these investments was $4 million and $1 million,
respectively, from Ashland and $5 million and $0 million, respectively,
from USX.
NOTE E - REVENUES
The items below are included in revenues and costs and expenses, with no
effect on income.
Year Ended December 31
---------------------------
(Millions)
1999 1998
----------- -----------
Consumer excise taxes on petroleum products and merchandise $ 3,973 $ 3,824
Matching crude oil and refined product buy/sell transactions settled in cash 2,851 3,657
NOTE F - OTHER ITEMS
Year Ended December 31
---------------------------
(Millions)
1999 1998
----------- ----------
NET INTEREST AND OTHER FINANCIAL INCOME
INTEREST AND OTHER FINANCIAL INCOME:
Interest income - third parties $ 3 $ 22
Interest income - related parties 9 1
----------- -----------
Total 12 23
----------- -----------
INTEREST AND OTHER FINANCIAL COSTS:
Interest incurred 2 1
Other 5 5
----------- -----------
Total 7 6
----------- -----------
NET INTEREST AND OTHER FINANCIAL INCOME $ 5 $ 17
=========== ===========
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
MAP has a noncontributory defined benefit pension plan and several related
excess benefit plans covering substantially all employees. Benefits under
its final pay formula are based primarily upon age, years of service and
the highest three years earnings during the last ten years before
retirement. Benefits under its pension equity formula are based primarily
upon age, years of service and the final three years of earnings at
retirement.
MAP also has defined benefit retiree health and life insurance plans (other
benefits) covering most employees upon their retirement. Health benefits
are provided, for the most part, through comprehensive hospital, surgical
and major medical benefit provisions subject to various cost sharing
features. Life insurance benefits are provided to certain nonunion and most
union represented retiree beneficiaries primarily based on employees'
annual base salary at retirement. Other benefits have not been prefunded.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
Pension Benefits Other Benefits
---------------------- ----------------------
(Millions)
1999 1998 1999 1998
--------- -------- --------- ---------
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation at January 1 $ 525 $ 52 $ 242 $ 6
Service cost 41 26 10 7
Interest cost 33 20 13 10
Plan amendments 19 (10) (44) (20)
Actuarial (gains) losses (110) 57 (71) 56
Acquisition and merger 14 392 4 184
Benefits paid (38) (12) (1) (1)
Settlement, curtailment and termination benefits (2) -- (1) --
--------- -------- --------- ---------
Benefit obligations at December 31 $ 482 $ 525 $ 152 $ 242
========= ======== ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 $ 528 $ 24
Actual return on plan assets 55 41
Acquisition and merger 13 467
Employer contributions 2 8
Benefits paid (38) (12)
--------- --------
Fair value of plan assets at December 31 $ 560 $ 528
========= ========
FUNDED STATUS OF PLANS AT DECEMBER 31: (A) $ 78 $ 3 $ (152) $ (242)
Unrecognized net gain from transition (10) (12) -- --
Unrecognized prior service costs (credits) 24 6 (64) (35)
Unrecognized actuarial (gains) losses (127) (4) 4 86
Additional minimum liability (b) (1) (6) -- --
--------- -------- --------- ---------
Accrued benefit cost $ (36) $ (13) $ (212) $ (191)
========= ======== ========= =========
(a) Includes several small plans that have
accumulated benefit obligations
and no plan assets:
Accumulated benefit obligation $ (6) $ (9)
Projected benefit obligation (14) (15)
(b) Additional minimum liability recorded
was offset by the following:
Intangible asset $ 1 $ 1
--------- --------
Accumulated other comprehensive income (loss):
Beginning of year $ (5) $ (4)
Change during year 5 (1)
--------- --------
Balance at end of year $ -- $ (5)
========= ========
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 41 $ 26 $ 10 $ 7
Interest cost 33 20 13 10
Expected return on plan assets (46) (32) -- --
Amortization of prior service costs 1 -- (6) --
Amortization of actuarial losses 1 -- 3 --
Amortization of transition gain (2) -- -- --
Other plans 2 2 -- --
Settlement, curtailment and termination benefits 2 -- (1) --
--------- -------- --------- ---------
Net periodic benefit cost $ 32 $ 16 $ 19 $ 17
========= ======== ========= =========
ACTUARIAL ASSUMPTIONS AT DECEMBER 31:
Discount rate 8.0% 6.5% 8.0% 6.5%
Expected annual return on plan assets 9.5% 9.5% N/A N/A
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 5% for 2006 and remain at that level
thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
---------------------- ------------------
(Millions)
Effect on total of service and interest
cost components $ 4 $ (3)
Effect on postretirement benefit obligation 24 (20)
NOTE H - INCOME TAXES
The taxable income or loss resulting from operations of MAP, except for
several small subsidiary corporations, is ultimately included in the
federal income tax returns of USX and Ashland. MAP is, however, subject to
taxation in certain state, local and foreign jurisdictions.
Provisions (credits) for estimated income taxes:
Year Ended December 31
---------------------------------------------------------------------------
(Millions)
1999 1998
----------------------------------- -----------------------------------
Current Deferred Total Current Deferred Total
Federal $ -- $ (1) $ (1) $ -- $ -- $ --
State and local 1 -- 1 3 (2) 1
Foreign 2 -- 2 -- -- --
--------- --------- -------- -------- --------- ---------
Total $ 3 $ (1) $ 2 $ 3 $ (2) $ 1
========= ========= ======== ======== ========= =========
Deferred tax liabilities at December 31, 1999 and 1998 of $5 million and $5
million, respectively, principally arise from differences between the book
and tax basis of inventories and property, plant and equipment. Pretax
income in 1999 and 1998 included $3 million and $1 million, respectively,
attributable to foreign sources.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE I - INVENTORIES
Inventories consist of the following:
December 31
---------------------------
(Millions)
1999 1998
----------- -----------
Crude oil and natural gas liquids $ 688 $ 715
Refined products and merchandise 1,051 1,028
Supplies and sundry items 81 73
----------- ------------
Total (at cost) 1,820 1,816
Less inventory market valuation reserve -- 552
----------- ------------
Net inventory carrying value $ 1,820 $ 1,264
============ ============
Inventories of crude oil and refined products are valued by the LIFO
method. The LIFO method accounted for 93% and 90% of total inventory at
December 31, 1999 and 1998, respectively. Current acquisition costs were
estimated to exceed the above inventory values at December 31, 1999, by
approximately $194 million.
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory turnover and increased to reflect decreases
in market prices. Changes in the inventory market valuation reserve result
in noncash charges or credits to costs and expenses.
NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
---------------------------
(Millions)
1999 1998
----------- -----------
Equity method investments $ 101 $ 106
Receivables due after one year 5 4
Property exchange trust 2 --
----------- -----------
Total $ 108 $ 110
=========== ===========
The following represents summarized financial information of affiliates
accounted for by the equity method of accounting:
Year Ended December 31
----------------------------
(Millions)
1999 1998
----------- ------------
Income data:
Revenues $ 207 $ 171
Operating income 78 61
Net income 44 31
December 31
----------------------------
(Millions)
1999 1998
----------- -----------
Balance sheet data:
Current assets $ 76 $ 57
Noncurrent assets 614 647
Current liabilities 76 84
Noncurrent liabilities 441 455
Dividends and partnership distributions received from equity affiliates
were $18 million and $14 million in 1999 and 1998, respectively. MAP
purchases from equity affiliates totaled $50 million and $63 million in
1999 and 1998, respectively. MAP sales to equity affiliates were immaterial
in both years.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE K - PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------------
(Millions)
1999 1998
----------- -----------
Refining $ 2,208 $ 2,027
Marketing 2,184 1,945
Transportation 1,271 1,310
Other 11 5
----------- -----------
Total $ 5,674 $ 5,287
Less accumulated depreciation and amortization 1,963 1,762
------------ -----------
Net $ 3,711 $ 3,525
============ ===========
Property, plant and equipment at December 31, 1999, includes gross assets
acquired under capital leases of $20 million with no related amounts in
accumulated depreciation and amortization.
NOTE L - LONG-TERM DEBT
December 31
---------------------------
(Millions)
1999 1998
----------- -----------
Capital lease obligations $ 15 $ --
Variable rate Michigan Underground Storage Tank Interest Rate Subsidy
Loan due 2000 (a) 6 6
5% Promissory Note due 2009 1 1
Revolving credit facilities (b) (c) -- --
----------- -----------
Total (d) 22 7
Less amount due within one year 7 --
----------- -----------
Long-term debt due after one year $ 15 $ 7
=========== ===========
(a) This program was created in connection with the Michigan Underground
Storage Tank Assurance Act to assist owners in the clean up of
underground storage tank systems. MAP pays interest monthly, based on a
monthly LIBOR rate plus 5/8%. An interest subsidy is received quarterly
from the State of Michigan calculated at a rate of 6.1% per annum. The
effective rate of this loan during 1999 and 1998, including the effect
of the interest subsidy, was 1.6%. Marathon is obligated to reimburse
MAP for all payments with respect to this debt.
(b) MAP has a revolving credit facility for $100 million that terminates in
July 2000 and a $400 million revolving credit facility that terminates
in July 2003. Interest is based on defined short-term market rates for
both facilities. During the terms of the agreements, MAP is obligated
to pay a variable facility fee on total commitments. At December 31,
1999, the facility fee was 0.11% for the $100 million facility and
0.125% for the $400 million facility. At December 31, 1999, the unused
and available credit was $429 million, which reflects reductions for
outstanding letters of credit. In the event that MAP defaults on
indebtedness (as defined in the agreement) in excess of $100 million,
USX has guaranteed the payment of any outstanding obligations.
(c) In 1998, MAP entered into a revolving credit agreement with Marathon
and Ashland for $500 million that terminated on December 31, 1998, and
which was renewed on an uncommitted basis for 1999. This agreement
expired on December 31, 1999, but has been extended with an expiration
date of March 15, 2001. Interest is based on defined short-term market
rates. At December 31, 1999, the unused and available credit was $500
million.
(d) Required payments of long-term debt for the years 2001 through 2004 are
$1 million per year.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
---------------------------
(Millions)
1999 1998
----------- -----------
CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDES:
Interest and other financial costs paid $ (2) $ (1)
Income taxes paid (5) (3)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Liabilities assumed in acquisitions 16 --
NOTE N - LEASES
Future minimum commitments for capital and operating leases having
noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
----------- -----------
(Millions)
2000 $ 2 $ 50
2001 2 39
2002 2 28
2003 2 17
2004 2 10
Later years 14 31
Sublease rentals -- (6)
----------- -----------
Total minimum lease payments $ 24 $ 169
===========
Less imputed interest costs: (9)
-----------
Present value of minimum lease payments
included in long-term debt $ 15
===========
Operating lease rental expense:
Year Ended December 31
---------------------------
(Millions)
1999 1998
----------- -----------
Minimum rental $ 66 $ 74
Contingent rental 11 11
Sublease rentals (6) (1)
----------- -----------
Net rental expense $ 71 $ 84
=========== ===========
MAP leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, production
facilities and transportation equipment. Most long-term leases include
renewal options and, in certain leases, purchase options.
NOTE O - DERIVATIVE INSTRUMENTS
MAP uses commodity-based derivative instruments to manage exposure to price
fluctuations related to the anticipated purchase of crude oil, natural gas
and refined products. The derivative instruments used, as part of an
overall risk management program, include exchange-traded futures contracts
and options, and instruments which require settlement in cash such as OTC
commodity swaps and OTC options. While risk management activities generally
reduce market risk exposure due to unfavorable commodity price changes for
raw material purchases and products sold, such activities can also
encompass strategies which assume certain price risk in certain
transactions.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE O - DERIVATIVE INSTRUMENTS - Continued
MAP remains at risk for possible changes in the market value of the
derivative instrument; however, such risk should be mitigated by price
changes in the underlying hedged item. MAP is also exposed to credit risk
in the event of nonperformance by counterparties. The credit worthiness of
counterparties is subject to continuing review, including the use of master
netting agreements to the extent practical, and full performance is
anticipated.
The following table sets forth quantitative information by class of
derivative instrument:
Recognized
Fair Carrying Trading Recorded
Value Amount Gain or Deferred Aggregate
Assets Assets (Loss) for Gain or Contract
(Millions) (Liabilities)(a)(b) (Liabilities) the Year (Loss) Values(c)
- ---------- ----------------- ------------- ------------ ------------ ------------
DECEMBER 31, 1999:
Exchange-traded commodity futures: $ $ $ $ $
Trading -- -- 4 -- 8
Other than trading -- -- -- 18 243
Exchange-traded commodity options:
Trading -- -- 4 -- 179
Other than trading (6) (d) (6) -- (9) 793
OTC commodity swaps (e):
Trading -- -- -- -- --
Other than trading (3) (f) (3) -- (3) 69
OTC commodity options:
Trading -- -- -- -- --
Other than trading -- -- -- -- 7
----------- ----------- ----------- ----------- -----------
Total commodities $ (9) $ (9) $ 8 $ 6 $ 1,299
=========== =========== =========== =========== ===========
DECEMBER 31, 1998:
Exchange-traded commodity futures: $ $ $ $
Trading -- -- -- --
Other than trading -- -- (3) 96
Exchange-traded commodity options:
Trading -- -- -- --
Other than trading 1 (d) 1 1 709
OTC commodity swaps (e):
Trading -- -- -- --
Other than trading -- (f) -- -- 140
----------- ----------- ----------- -----------
Total commodities $ 1 $ 1 $ (2) $ 945
=========== =========== =========== ===========
(a) The fair value amounts for OTC positions are based on various indices
or dealer quotes. The exchange-traded futures contracts and certain
option contracts do not have a corresponding fair value since changes
in the market prices are settled on a daily basis.
(b) The aggregate average fair value of all trading activities for the
period ended December 31, 1999 was $3 million.
(c) Contract or notional amounts do not quantify risk exposure, but are
used in the calculation of cash settlements under the contracts. The
contract or notional amounts do not reflect the extent to which
positions may offset one another.
(d) Includes fair values as of December 31, 1999 and 1998, for assets of
$7 million and $20 million and for liabilities of $(13) million and
$(19) million, respectively.
(e) The OTC swap arrangements vary in duration with certain contracts
extending into mid-2000.
(f) Includes fair values as of December 31, 1999 and 1998, for assets of
$0 million and $25 million and for liabilities of $(3) million and
$(25) million, respectively.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments are based on historical
costs. The carrying values of cash and cash equivalents, receivables,
payables, and debt approximate their fair value.
MAP's unrecognized financial instruments consist of financial guarantees.
It is not practicable to estimate the fair value of these forms of
financial instrument obligations because there are no quoted market prices
for transactions which are similar in nature. For details relating to
financial guarantees, see Note Q.
NOTE Q - CONTINGENCIES AND COMMITMENTS
MAP is the subject of, or party to, a number of pending or threatened legal
actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of
these matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
MAP financial statements. However, management believes that MAP will remain
a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
ENVIRONMENTAL MATTERS - MAP is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. Marathon and Ashland
have retained the liabilities, subject to certain thresholds, for costs
associated with remediating properties conveyed to MAP for conditions
existing prior to January 1, 1998. The costs associated with these
thresholds are not expected to be material to the MAP financial statements.
At December 31, 1999 and 1998, MAP's accrued liabilities for remediation
totaled $6 million and $3 million, respectively. It is not presently
possible to estimate the ultimate amount of all remediation costs that
might be incurred or the penalties that may be imposed. Receivables for
recoverable costs from certain states, under programs to assist companies
in clean up efforts related to underground storage tanks at retail
marketing outlets, were $3 million and $1 million at December 31, 1999 and
1998, respectively.
MAP has made substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In 1999 and
1998, such capital expenditures for environmental controls totaled $24
million and $42 million, respectively. MAP anticipates making additional
such expenditures in the future; however, the exact amounts and timing of
such expenditures are uncertain because of the continuing evolution of
specific regulatory requirements.
GUARANTEES - At December 31, 1999 and 1998, MAP's pro rata share of
obligations of LOCAP INC. and Southcap Pipe Line Company secured by
throughput and deficiency agreements totaled $19 million and $23 million,
respectively. Under the agreements, MAP is required to advance funds if the
affiliates are unable to service debt. Any such advances are treated as
prepayments of future transportation charges.
COMMITMENTS - At December 31, 1999 and 1998, MAP's contract commitments for
capital expenditures for property, plant and equipment totaled $14 million
and $38 million, respectively.
16
ARCH COAL, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page*
REPORT OF INDEPENDENT AUDITORS: 46
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------------------------------------- 48
CONSOLIDATED BALANCE SHEETS ----------------------------------------------------------------------------- 49
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY---------------------------------------------------------- 50
CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------- 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------- 52
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS -------------------------------------------------------- 25
ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE
ACCOUNTING REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION ARE NOT
REQUIRED UNDER THE RELATED INSTRUCTIONS OR ARE INAPPLICABLE AND,THEREFORE,
HAVE BEEN OMITTED.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Arch Coal, Inc.
We have audited the accompanying consolidated balance sheets of Arch Coal,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the 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 (appearing on pages
48 to 72 of this annual report) present fairly, in all material respects, the
consolidated financial position of Arch Coal, Inc. and subsidiaries at December
31, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 3 to the financial statements, in 1999, the Company
changed its method of accounting for depreciation of its preparation plants and
loadouts.
Ernst & Young LLP
Louisville, Kentucky
January 21, 2000
46
Consolidated Statements of Operations
(in thousands of dollars except per share data)
Year Ended December 31
--------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Revenues
Coal sales........................................... $1,509,596 $1,428,171 $1,034,813
Income from equity investment........................ 11,129 6,786 --
Other revenues....................................... 46,657 70,678 32,062
--------------------------------------
1,567,382 1,505,635 1,066,875
--------------------------------------
Costs and expenses
Cost of coal sales................................... 1,426,105 1,313,400 916,802
Selling, general and administrative expenses......... 46,357 44,767 28,885
Amortization of coal supply agreements............... 36,532 34,551 18,063
Write-down of impaired assets........................ 364,579 -- --
Merger-related expenses.............................. -- -- 39,132
Other expenses....................................... 20,835 25,070 22,111
--------------------------------------
1,894,408 1,417,788 1,024,993
--------------------------------------
Income (loss) from operations...................... (327,026) 87,847 41,882
Interest expense, net:
Interest expense..................................... (90,058) (62,202) (17,822)
Interest income...................................... 1,291 756 721
--------------------------------------
(88,767) (61,446) (17,101)
--------------------------------------
Income (loss) before income taxes, extraordinary
loss and cumulative effect of accounting change... (415,793) 26,401 24,781
Benefit from income taxes............................. (65,700) (5,100) (5,500)
--------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of accounting change............ (350,093) 31,501 30,281
Extraordinary loss from the extinguishment of debt,
net of taxes......................................... -- (1,488) --
Cumulative effect of accounting change, net of taxes.. 3,813 -- --
--------------------------------------
Net income (loss).................................. $ (346,280) $ 30,013 $ 30,281
======================================
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item and
cumulative effect of accounting change............... $ (9.12) $ .79 $ 1.00
Extraordinary loss from the extinguishment of debt,
net of taxes......................................... -- (.03) --
Cumulative effect of accounting change, net of taxes.. .10 -- --
--------------------------------------
Basic and diluted earnings (loss) per common share.... $ (9.02) $ .76 $ 1.00
======================================
The accompanying notes are an integral part of the consolidated financial
statements.
48
Consolidated Balance Sheets
(in thousands of dollars except share and per share data)
December 31
-------------------------
1999 1998
=======================================================================================================
Assets
Current assets
Cash and cash equivalents................................................ $ 3,283 $ 27,414
Trade accounts receivable................................................ 162,802 202,871
Other receivables........................................................ 25,659 24,584
Inventories.............................................................. 62,382 68,455
Prepaid royalties........................................................ 1,310 13,559
Deferred income taxes.................................................... 21,600 8,694
Other.................................................................... 8,916 7,757
-------------------------
Total current assets................................................... 285,952 353,334
-------------------------
Property, plant and equipment
Coal lands and mineral rights............................................ 1,170,956 1,476,703
Plant and equipment...................................................... 1,042,128 1,111,120
Deferred mine development................................................ 92,265 80,926
-------------------------
2,305,349 2,668,749
Less accumulated depreciation, depletion and amortization................ (826,178) (732,005)
-------------------------
Property, plant and equipment, net..................................... 1,479,171 1,936,744
-------------------------
Other assets
Prepaid royalties........................................................ -- 31,570
Coal supply agreements................................................... 151,978 201,965
Deferred income taxes.................................................... 182,500 83,209
Investment in Canyon Fuel................................................ 199,760 272,149
Other.................................................................... 33,013 39,249
-------------------------
Total other assets..................................................... 567,251 628,142
-------------------------
Total assets........................................................... $2,332,374 $2,918,220
=========================
Liabilities and stockholders' equity
Current liabilities
Accounts payable......................................................... $ 109,359 $ 129,528
Accrued expenses......................................................... 145,561 142,630
Current portion of debt.................................................. 86,000 61,000
-------------------------
Total current liabilities.............................................. 340,920 333,158
Long-term debt............................................................. 1,094,993 1,309,087
Accrued postretirement benefits other than pension......................... 343,993 343,553
Accrued reclamation and mine closure....................................... 129,869 150,636
Accrued workers' compensation.............................................. 105,190 105,333
Accrued pension cost....................................................... 22,445 18,524
Other noncurrent liabilities............................................... 53,669 39,713
-------------------------
Total liabilities...................................................... 2,091,079 2,300,004
-------------------------
Stockholders' equity
Common stock, $.01 par value, 100,000,000 shares authorized,
38,164,482 issued and outstanding in 1999 and 39,371,581
issued and outstanding in 1998.......................................... 397 397
Paid-in capital.......................................................... 473,335 473,116
Retained earnings (deficit).............................................. (213,466) 150,423
Treasury stock, at cost (1,541,146 shares at December 31, 1999 and
333,952 shares at December 31, 1998).................................... (18,971) (5,720)
-------------------------
Total stockholders' equity............................................. 241,295 618,216
-------------------------
Total liabilities and stockholders' equity............................. $2,332,374 $2,918,220
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
49
Consolidated Statements of Stockholders' Equity
Three years ended December 31, 1999
(in thousands of dollars except share and per share data)
Retained Treasury
Common Paid-In Earnings Stock at
Stock Capital (Deficit) Cost Total
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1996.................. $209 $ 8,392 $ 122,025 $ -- $ 130,626
Net income.................................. 30,281 30,281
Dividends paid ($.445 per share)............ (13,630) (13,630)
Issuance of 18,660,054 shares of common
stock to stockholders of Ashland
Coal, Inc. pursuant to the merger
agreement................................. 187 462,984 463,171
Issuance of 49,400 shares of common stock
under the stock incentive plan............ 1 1,049 1,050
--------------------------------------------------------
Balance at December 31, 1997.................. 397 472,425 138,676 -- 611,498
Net income.................................. 30,013 30,013
Dividends paid ($.46 per share)............. (18,266) (18,266)
Issuance of 47,635 shares of common
stock under the stock incentive plan...... 691 691
Treasury stock purchases (333,952 shares)... (5,720) (5,720)
--------------------------------------------------------
Balance at December 31, 1998.................. 397 473,116 150,423 (5,720) 618,216
Net loss.................................... (346,280) (346,280)
Dividends paid ($.46 per share)............. (17,609) (17,609)
Issuance of 95 shares of common stock
under the stock incentive plan............ 1 1
Treasury stock purchases (1,396,700 shares),
net of issuances (189,506 shares)......... 218 (13,251) (13,033)
--------------------------------------------------------
Balance at December 31, 1999.................. $397 $473,335 $(213,466) $(18,971) $ 241,295
========================================================
The accompanying notes are an integral part of the consolidated financial
statements.
50
Consolidated Statements of Cash Flows
(in thousands of dollars)
Year Ended December 31
-----------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss)...................................................................... $(346,280) $ 30,013 $ 30,281
Adjustments to reconcile to cash provided by
operating activities:
Depreciation, depletion and amortization.......................................... 235,658 204,307 143,632
Prepaid royalties expensed........................................................ 14,217 19,694 8,216
Net gain on disposition of assets................................................. (7,459) (41,512) (4,802)
Income from equity investment..................................................... (11,129) (6,786) -
Distributions from equity investment.............................................. 83,178 18,850 -
Cumulative effect of accounting change............................................ (3,813) - -
Merger-related expenses........................................................... - - 33,096
Write-down of impaired assets..................................................... 364,579 - -
Changes in operating assets and liabilities....................................... (69,471) (24,671) (28,842)
Other............................................................................. 20,483 (11,872) 8,682
-----------------------------------
Cash provided by operating activities........................................ 279,963 188,023 190,263
-----------------------------------
Investing activities
Payments for acquisition............................................................... - (1,126,706) -
Additions to property, plant and equipment............................................. (98,715) (141,737) (77,309)
Proceeds from coal supply agreements................................................... 14,067 - -
Additions to prepaid royalties......................................................... (26,057) (26,252) (7,967)
Additions to notes receivable.......................................................... - (10,906) -
Proceeds from disposition of property, plant and equipment............................. 26,347 34,230 5,267
-----------------------------------
Cash used in investing activities............................................ (84,358) (1,271,371) (80,009)
-----------------------------------
Financing activities
Proceeds from (payments on) revolver and lines of credit............................... (37,884) 176,582 78,897
Net proceeds from (payments on) term loans............................................. (151,210) 958,441 -
Payments on notes...................................................................... - (42,860) (181,110)
Payments for debt issuance costs....................................................... - (12,725) -
Proceeds from sale and leaseback of equipment.......................................... - 45,442 -
Dividends paid......................................................................... (17,609) (18,266) (13,630)
Proceeds from sale of common stock..................................................... - 691 1,050
Proceeds from sale of treasury stock................................................... 2,549 - -
Purchases of treasury stock............................................................ (15,582) (5,720) -
-----------------------------------
Cash provided by (used in) financing activities.............................. (219,736) 1,101,585 (114,793)
-----------------------------------
Increase (decrease) in cash and cash equivalents............................. (24,131) 18,237 (4,539)
Cash and cash equivalents, beginning of year........................................... 27,414 9,177 13,716
-----------------------------------
Cash and cash equivalents, end of year................................................. $ 3,283 $ 27,414 $ 9,177
===================================
Supplemental cash flow information:
Cash paid during the year for interest................................................. $ 100,781 $ 48,760 $ 18,593
Cash paid during the year for income taxes, net of refunds............................. $ 11,251 $ 29,090 $ 21,918
The accompanying notes are an integral part of the consolidated financial
statements.
51
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
NOTE 1. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Arch Coal, Inc.
and its subsidiaries ("the Company"), which operate in the coal mining industry.
The Company operates one reportable segment: the production of steam and
metallurgical coal from surface and deep mines throughout the United States, for
sale to utility, industrial and export markets. The Company's mines are
primarily located in the central Appalachian and western regions of the United
States. All subsidiaries (except as noted below) are wholly owned. Significant
intercompany transactions and accounts have been eliminated in consolidation.
The Company's 65% ownership of Canyon Fuel, LLC ("Canyon Fuel") is accounted
for on the equity method in the consolidated financial statements as a result of
certain super-majority voting rights in the joint venture agreement. Income from
Canyon Fuel is reflected in the consolidated statements of operations as income
from equity investment. (See additional discussion in "Investment in Canyon
Fuel" in Note 6.)
The Company's 17.5% partnership interest in Dominion Terminal Associates is
accounted for on the equity method in the consolidated balance sheets. Allocable
costs of the partnership for coal loading and storage are included in other
expenses in the consolidated statements of operations.
Accounting Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
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.
Inventories
Inventories are comprised of the following:
December 31
---------------------
1999 1998
- --------------------------------------------------------------------
Coal.......................................... $ 28,183 $ 25,789
Supplies...................................... 34,199 42,666
---------------------
$ 62,382 $ 68,455
---------------------
Coal and supplies inventories are valued at the lower of average cost or market.
The Company has recorded a valuation allowance for slow-moving and obsolete
supplies inventories of $23.5 million and $23.9 million at December 31, 1999 and
1998, respectively.
Coal Acquisition Costs and Prepaid Royalties
Coal lease rights obtained through acquisitions are capitalized and amortized
primarily by the units-of-production method over the estimated recoverable
reserves.
Rights to leased coal lands are often acquired through royalty payments. Where
royalty payments represent prepayments recoupable against production, they are
capitalized, and amounts expected to be recouped within one year are classified
as a current asset. As mining occurs on these leases, the prepayment is charged
to cost of coal sales.
Coal Supply Agreements
Acquisition costs allocated to coal supply agreements (sales contracts) are
capitalized and amortized on the basis of coal to be shipped over the term of
the contract. Accumulated amortization for sales contracts was $131.4 million
and $94.8 million at December 31, 1999 and 1998, respectively.
52
Arch Coal, Inc. and Subsidiaries
Exploration Costs
Costs related to locating coal deposits and determining the economic mineability
of such deposits are expensed as incurred.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Interest costs applicable to
major asset additions are capitalized during the construction period.
Expenditures which extend the useful lives of existing plant and equipment are
capitalized. Costs of purchasing rights to coal reserves and 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. Except for preparation plants and loadouts, plant and
equipment are depreciated principally on the straight-line method over the
estimated useful lives of the assets, which range from three to 20 years.
Effective January 1, 1999, preparation plants and loadouts are depreciated using
the units-of-production method over the estimated recoverable reserves subject
to a minimum level of depreciation (see additional discussion in "Change in
Accounting Method" in Note 3). Prior to January 1, 1999, preparation plants and
loadouts were depreciated on a straight-line basis over their estimated useful
lives.
Asset Impairment
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the asset
will not be recoverable, as determined based on projected undiscounted cash
flows related to the asset over its remaining life, then the carrying value of
the asset is reduced to its estimated fair value. (See additional discussion in
"Restructuring Charge and Write-Down of Impaired Assets" in Note 2.)
Revenue Recognition
Coal sales revenues include sales to customers of coal produced at Company
operations and coal purchased from other companies. The Company recognizes
revenue from coal sales at the time title passes to the customer. Revenues from
sources other than coal sales, including gains and losses from dispositions of
long-term assets, are included in other revenues and are recognized as services
are performed or otherwise earned.
Interest Rate Swap Agreements
The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Company debt. The swap agreements essentially
convert variable-rate debt to fixed-rate debt. These agreements require the
exchange of amounts based on variable interest rates for amounts based on fixed
interest rates over the life of the agreement. The Company accrues amounts to be
paid or received under interest-rate swap agreements over the lives of the
agreements. Such amounts are recognized as adjustments to interest expense over
the lives of agreements, thereby adjusting the effective interest rate on the
Company's debt. The fair values of the swap agreements are not recognized in the
financial statements. Gains and losses on terminations of interest-rate swap
agreements are deferred on the balance sheets (in other long-term liabilities)
and amortized as an adjustment to interest expense over the remaining original
term of the terminated swap agreement.
Income Taxes
Deferred income taxes are based on temporary differences between the financial
statement and tax basis of assets and liabilities existing at each balance sheet
date using enacted tax rates for years during which taxes are expected to be
paid or recovered.
53
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
Stock-Based Compensation
These financial statements include the disclosure requirements of Financial
Accounting Standards Board Statement No. 123 ("FAS 123"), Accounting for Stock-
Based Compensation. With respect to accounting for its stock options, as
permitted under FAS 123, the Company has retained the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, and related Interpretations.
NOTE 2. RESTRUCTURING CHARGE AND WRITE-DOWN OF IMPAIRED ASSETS
In 1999, the Company recorded a pre-tax charge of $23.1 million related to the
restructuring of its administrative workforce, the closure of its Dal-Tex mining
operation in West Virginia due to permitting problems and the closure of several
mines in Kentucky and Illinois due to the depressed coal prices and increased
competition from western coal mines. Of the $23.1 million charge, $20.3 million
was recorded in cost of coal sales, $2.3 million was recorded in selling,
general and administrative expenses and $.5 million was recorded in other
expenses in the Company's consolidated statement of operations. The
restructuring of the administrative workforce included the elimination of 81
administrative jobs, 58 of which were corporate and the remainder of which were
subsidiary positions all of which was part of a corporate-wide effort to reduce
general and administrative expenses. The mine closures included the termination
of 161 employees. As of December 31, 1999, 74 administrative and 65 mine
employees have been terminated. The following are the components of
severance and other exit costs included in the restructuring charge along with
related 1999 activity:
Balance at
Utilized in December 31,
1999 Charge 1999 1999
- ------------------------------------------------------------------------
Employee costs.............. $ 7,354 $ 704 $ 6,650
Obligations for
non-cancelable
lease payments............ 9,858 484 9,374
Reclamation
liabilities............... 3,667 1,200 2,467
Depreciation
acceleration.............. 2,172 2,172 --
-------------------------------------------
$23,051 $4,560 $18,491
-------------------------------------------
Except for the charge related to depreciation acceleration, all of the 1999
restructuring charge will require the Company to use cash. Also, the Company
expects to utilize the balance of the amounts reserved for employee costs in
2000, while the obligations for non-cancelable lease payments and reclamation
liabilities will be utilized in future periods as lease payments are made and
reclamation procedures are performed.
In addition, during the fourth quarter of 1999, the Company determined that
significant changes were necessary in the manner and extent in which certain
central Appalachia coal assets would be deployed. The anticipated changes were
determined during the Company's annual planning process and were necessitated by
the adverse legal and regulatory rulings related to surface mining techniques
(see Note 20), as well as the continued negative pricing trends related to
central Appalachia coal production experienced by the Company. As a result of
the planned changes in the deployment of its long-
54
Arch Coal, Inc. and Subsidiaries
lived assets in the central Appalachia region and pursuant to FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, the Company evaluated the recoverability of its active mining
operations and its coal reserves for which no future mining plans exist. This
evaluation indicated that the future undiscounted cash flows of three mining
operations, Dal-Tex, Hobet 21 and Coal-Mac, and certain coal reserves with no
future mining plans were below the carrying value of such long-lived assets.
Accordingly, during the fourth quarter of 1999, the Company adjusted the
operating assets and coal reserves to their estimated fair value of
approximately $99.7 million, resulting in a non-cash impairment charge of $364.6
million (including $50.6 million relating to operating assets and $314.0 million
relating to coal reserves). The estimated fair value for the three mining
operations was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved. The estimated fair value for the coal
reserves with no future mining plans was based upon the fair value of these
properties to be derived from subleased operations. The impairment loss has been
recorded as a loss from the write-down of impaired assets in the consolidated
statements of operations.
NOTE 3. CHANGE IN ACCOUNTING METHOD
Through December 31, 1998, plant and equipment had principally been depreciated
on the straight-line method over the estimated useful lives of the assets, which
range from three to 20 years. Effective January 1, 1999, depreciation on the
Company's preparation plants and loadouts was computed using the units-of-
production method, which is based upon units produced, subject to a minimum
level of depreciation. These assets are usage-based assets and their economic
lives are typically based and measured on coal throughput. The Company believes
the units-of-production method is preferable to the method previously used
because the new method recognizes that depreciation of this equipment is related
substantially to physical wear due to usage as well as to the passage of time.
This method, therefore, more appropriately matches production costs over the
lives of the preparation plants and loadouts with coal sales revenue and results
in a more accurate allocation of the cost of the physical assets to the periods
in which the assets are consumed. The cumulative effect of applying the new
method for years prior to 1999 is an increase to income of $3.8 million net-of-
tax ($6.3 million pre-tax) reported as a cumulative effect of accounting change
in the consolidated statement of operations for the year ended December 31,
1999. In addition, the net loss of the Company, excluding the cumulative effect
of accounting change, for the year ended December 31, 1999 is $.2 million less,
or $.01 per share less, than it would have been if the Company had continued to
follow the straight-line method of depreciation of equipment for preparation
plants and loadouts.
The unaudited pro-forma amounts below reflect the retroactive application of
units-of-production depreciation on preparation plants and loadouts and the
corresponding elimination of the cumulative effect of the accounting change.
Year Ended
December 31
------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
Net income (loss)
as reported....................... $(346,280) $30,013 $30,281
Pro-forma net
income (loss)..................... (350,093) 29,511 32,442
Basic and diluted earnings
(loss) per common share
as reported....................... (9.02) 0.76 1.00
Pro-forma basic and diluted
earnings (loss) per
common share...................... (9.12) 0.74 1.07
55
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
NOTE 4. MERGER AND ACQUISITION
On June 1, 1998, the Company acquired the Colorado and Utah coal operations of
Atlantic Richfield Company ("ARCO") and simultaneously combined the acquired
ARCO operations and the Company's Wyoming operations with ARCO's Wyoming
operations in a new joint venture named Arch Western Resources, LLC ("Arch
Western"). The principal operating units of Arch Western are Thunder Basin Coal
Company, L.L.C., owned 100% by Arch Western, which operates two coal mines in
the Southern Powder River Basin in Wyoming; Mountain Coal Company, L.L.C., owned
100% by Arch Western, which operates a coal mine in Colorado; Canyon Fuel
Company, LLC ("Canyon Fuel"), 65% owned by Arch Western and 35% by ITOCHU Coal
International Inc., a subsidiary of ITOCHU Corporation, which operates three
coal mines in Utah; and Arch of Wyoming, LLC, owned 100% by Arch Western, which
operates two coal mines in the Hanna Basin of Wyoming.
Arch Western is 99% owned by the Company and 1% owned by ARCO. The transaction
was valued at approximately $1.14 billion and a wholly owned subsidiary of the
Company is the managing member of Arch Western. The transaction has been
accounted for under the purchase method of accounting. Accordingly, the cost to
acquire ARCO's U.S. coal operations has been allocated to the assets acquired
and liabilities assumed according to their respective estimated fair values.
Results of operations of the acquired operations are included in the
consolidated statements of operations effective June 1, 1998. The acquired ARCO
operations continue to produce low-sulfur coal for sale to primarily domestic
utility customers.
On July 1, 1997, Ashland Coal, Inc. ("Ashland Coal") merged with a subsidiary
of the Company. Under the terms of the merger, Ashland Coal's stockholders
received one share of the Company's common stock for each common share of
Ashland Coal and 20,500 shares of the Company's common stock for each share of
Ashland Coal preferred stock. A total of 18,660,054 shares of Company common
stock were issued in the merger, resulting in a total purchase price (including
fair value of stock options and transaction-related fees) of approximately
$464.8 million. The merger was accounted for under the purchase method of
accounting. Results of operations of Ashland Coal are included in the
consolidated statements of operations effective July 1, 1997.
Summarized below are the unaudited pro forma combined results of operations
for the years ended December 31, 1998 and 1997. These results reflect the July
1, 1997 Ashland Coal merger as if it had occurred on January 1, 1997 and the
June 1, 1998 Arch Western transaction as if it had occurred on January 1, 1998
and 1997.
1998 1997
- ---------------------------------------------------------------------
Revenues.................................. $1,669,824 $1,792,582
Income before extraordinary item.......... 22,994 36,175
Net income................................ 21,506 36,175
Earnings per share before
extraordinary loss...................... .58 .91
Earnings per share........................ .54 .91
In the opinion of the management of the Company, all adjustments necessary to
present pro forma results of operations have been made. The unaudited pro forma
results of operations do not purport to be indicative of the results that would
have occurred had these transactions actually occurred at the beginning of the
relevant periods or of the results of operations that may be achieved in the
future.
NOTE 5. MERGER-RELATED EXPENSES
During 1997, in connection with the Ashland Coal merger, the Company recorded a
one-time charge of $39.1 million (before tax), or $23.8 million (after tax),
comprised of termination benefits
56
Arch Coal, Inc. and Subsidiaries
and relocation costs of $8.1 million and costs of $31.0 million associated with
the idling of duplicate facilities. The $8.1 million costs arising from the
termination benefits and relocation costs have been paid. The $31.0 million
costs associated with the idling of duplicate facilities reduced the book value
of the duplicate facilities. A portion of this charge related to Big Sandy
Terminal. As a result of a change in management strategy related to the Big
Sandy Terminal, the assets were sold in 1998 for a pre-tax gain of $7.5 million.
NOTE 6. INVESTMENT IN CANYON FUEL
The following tables present unaudited summarized financial information for
Canyon Fuel which, as part of the June 1, 1998 Arch Western transaction
(described in Note 4), was acquired by the Company and is accounted for on the
equity method.
Seven
Year Months
Ended Ended
Condensed Income December 31, December 31,
Statement Information 1999 1998
- --------------------------------------------------------------------
Revenues............................. $241,062 $155,634
Total costs and expenses............. 230,512 153,039
------------------------------
Net income........................... $ 10,550 $ 2,595
==============================
65% of Canyon Fuel net income........ $ 6,858 $ 1,687
Effect of purchase adjustments....... 4,271 5,099
------------------------------
Arch Coal's income from its equity
investment in Canyon Fuel.......... $ 11,129 $ 6,786
==============================
December 31
Condensed Balance ------------------------------
Sheet Information 1999 1998
- --------------------------------------------------------------------
Current assets....................... $ 61,212 $ 87,620
Noncurrent assets.................... 452,103 532,119
Current liabilities.................. 37,065 31,459
Noncurrent liabilities............... 20,789 19,247
Members' equity...................... 455,461 569,033
The Company's income from its equity investment in Canyon Fuel represents 65% of
Canyon Fuel's net income after adjusting for the effect of its investment in
Canyon Fuel. The Company's investment in Canyon Fuel reflects purchase
adjustments primarily related to the reduction in amounts assigned to sales
contracts, mineral reserves and other property, plant and equipment totaling
$96.3 million at December 31, 1999 which are not reflected in the condensed
balance sheet information above.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31
------------------------
1999 1998
- ----------------------------------------------------------------
Accrued payroll and
related benefits..................... $ 27,830 $ 29,878
Accrued taxes other than
income taxes......................... 47,727 44,665
Accrued postretirement
benefits other than pension.......... 14,755 15,555
Accrued workers'
compensation......................... 11,144 15,869
Accrued interest....................... 6,285 17,007
Accrued reclamation and
mine closure......................... 26,540 6,841
Other accrued expenses................. 11,280 12,815
------------------------
$145,561 $142,630
========================
NOTE 8. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
December 31
-----------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Current:
Federal.............................. $ 6,796 $ 8,077 $ 8,250
State................................ -- (260) (250)
-----------------------------------
Total current.......................... 6,796 7,817 8,000
Deferred:
Federal.............................. (54,135) (12,583) (13,180)
State................................ (18,361) (334) (320)
-----------------------------------
Total deferred......................... (72,496) (12,917) (13,500)
-----------------------------------
$(65,700) $ (5,100) $ (5,500)
===================================
A reconciliation of the statutory federal income tax expense (benefit) on the
Company's pretax income (loss) before extraordinary loss and cumulative effect
of accounting change to the
57
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
actual provision (benefit) for income taxes follows:
December 31
-------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Income tax expense
(benefit) at statutory
rate................................ $(145,526) $ 9,240 $ 8,673
Percentage depletion
allowance........................... (15,000) (14,437) (13,543)
State taxes, net of effect of
federal taxes....................... (18,361) (594) (570)
Change in valuation
allowance........................... 112,345 -- --
Non-deductible expenses............... 284 621 236
Other, net............................ 558 70 (296)
-------------------------------------
$(65,700) $ (5,100) $ (5,500)
=====================================
The Company's federal income tax returns for the years 1995 and 1996 are
currently under review by the Internal Revenue Service (IRS).
During 1997, the Company settled its protest of certain adjustments proposed
by the IRS for the federal income tax returns for the years 1987 through 1989. A
deposit of $8.0 million was made in April 1997 in anticipation of the
settlement.
During 1998, the Company settled its protest of certain unagreed issues with
the IRS for the federal income tax returns for the years 1990 and 1991. A final
payment of $0.5 million was paid in June 1998 and charged against previously
recorded reserves. The IRS audit of the federal income tax returns for the years
1992 through 1994 was completed during 1998 and agreed to at the examination
level. A payment of $15.5 million was made in December 1998 in settlement of all
issues. A significant number of the issues were timing in nature and the tax
paid related to these temporary differences is accounted for as a deferred tax
asset and the remaining tax and interest paid was charged against previously
recorded reserves. A portion of the payment related to items that were settled
in the 1987 through 1991 audits previously discussed. Permanent differences
included a reduction in percentage depletion and a decrease in cost depletion
related to the settlement for the adjustment in fair market value of certain
coal reserves.
During 1999, the Company settled an audit of former Ashland Coal, Inc. for the
years January 1995 through June 1997. A payment of $.1 million was made in
January 1999 in settlement of all issues.
Management believes that the Company has adequately provided for any income
taxes and interest which may ultimately be paid with respect to all open tax
years.
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
------------------------
1999 1998
- ------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefits other
than pension $139,796 $136,004
Alternative minimum tax credit
carryforward 91,604 70,897
Workers' compensation................ 43,029 29,345
Reclamation and mine closure......... 30,016 22,567
Net operating loss carryforwards..... 11,507 10,232
Plant and equipment.................. 49,069 --
Advance royalties.................... 24,064 --
Other................................ 25,514 17,983
------------------------
Gross deferred tax assets......... 414,599 287,028
Valuation allowance.................. (112,345) --
------------------------
Total deferred tax assets......... 302,254 287,028
------------------------
Deferred tax liabilities:
Coal lands and mineral rights........ 8,965 78,869
Plant and equipment.................. -- 78,359
Leases............................... 21,990 7,884
Coal supply agreements............... 36,750 17,390
Other................................ 30,449 12,623
------------------------
Total deferred tax liabilities.... 98,154 195,125
------------------------
Net deferred tax asset........ 204,100 91,903
Less current asset................ 21,600 8,694
------------------------
Long-term deferred tax asset.. $182,500 $ 83,209
========================
58
Arch Coal, Inc. and Subsidiaries
The Company has a net operating loss carryforward for regular income tax
purposes of $35.4 million which will expire in the years 2008 to 2019. The
Company has an alternative minimum tax credit carryforward of $91.6 million
which may carry forward indefinitely to offset future regular tax in excess of
alternative minimum tax.
During 1999, the Company recorded a valuation allowance for a portion of its
deferred tax assets that management believes, more likely than not, will not be
realized. These deferred tax assets include a portion of the alternative minimum
tax credits and some of the deductible temporary differences that will likely
not be realized at the maximum effective tax rate.
NOTE 9. DEBT AND FINANCING ARRANGEMENTS
Debt consists of the following:
December 31
---------------------------
1999 1998
- ------------------------------------------------------------------------------
Indebtedness to banks under lines of
credit (weighted average rate at
December 31, 1998--5.40%)....................... $ -- $ 12,884
Indebtedness to banks under revolving
credit agreement, expiring
May 31, 2003 (weighted average rate
at December 31, 1999--7.61%;
December 31, 1998--6.27%)....................... 365,000 390,000
Variable rate fully amortizing term loan
payable quarterly from July 1, 2001
through May 31, 2003 (weighted
average rate at December 31, 1999--
7.49%; December 31, 1998--6.16%)................ 135,000 285,000
Variable rate non-amortizing term loan
due May 31, 2003 (weighted average
rate at December 31, 1999--7.85%;
December 31, 1998--6.87%)......................... 675,000 675,000
Other............................................. 5,993 7,203
---------------------------
1,180,993 1,370,087
Less current portion.............................. 86,000 61,000
---------------------------
Long-term debt.................................... $1,094,993 $1,309,087
===========================
In connection with the Arch Western transaction, the Company entered into two
new five-year credit facilities: a $675 million non-amortizing term loan in the
name of Arch Western, the entity owning the right to the coal reserves and
operating assets acquired in the Arch Western transaction, and a $900 million
credit facility in the name of the Company, including a $300 million fully
amortizing term loan and a $600 million revolver. Borrowings under the Company's
new credit facilities were used to finance the acquisition of ARCO's Colorado
and Utah coal operations, to pay related fees and expenses, to refinance
existing corporate debt and for general corporate purposes. The Company
recognized an extraordinary charge of $1.5 million (net of a tax benefit of $.9
million) related to the refinancing of a July 1, 1997 credit facility and the
prepayment of certain other notes. Borrowings under the Arch Western credit
facility were used to fund a portion of a $700 million cash distribution by Arch
Western to ARCO, which distribution occurred simultaneously with ARCO's
contribution of its Wyoming coal operations and certain other assets to Arch
Western. The $675 million term loan is secured by Arch Western's membership
interests in its subsidiaries. The Arch Western credit facility is not
guaranteed by the Company. The rate of interest on the borrowings under the
agreements is, at the Company's option, the PNC Bank base rate or a rate based
on LIBOR.
On August 23, 1999, the Company prepaid $105 million or seven required
quarterly installments on the $300 million fully amortizing term loan. The next
required quarterly installment will be July 1, 2001. The prepayments were funded
by additional borrowings under the $600 million revolver.
The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
December 31, 1999, there were $65 million of such agreements in effect, of which
no borrowings were outstanding.
Except for amounts expected to be repaid in 2000, amounts borrowed under the
revolving
59
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
credit agreement and the bank lines of credit are classified as long-term as the
Company has the intent and the ability to maintain these borrowings on a long-
term basis. Aggregate maturities of debt at December 31, 1999 for the next five
years are $86.0 million in 2000, $30.5 million in 2001, $60.5 million in 2002,
$1.0 billion in 2003 and $.6 million in 2004.
Terms of the Company's credit facilities and leases contain financial and
other restrictive covenants that limit the ability of the Company to, among
other things, pay dividends, effect acquisitions or dispositions and borrow
additional funds, and require the Company to, among other things, maintain
various financial ratios and comply with various other financial covenants.
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. At December 31, 1999, as a result of the effect of the write-down
of impaired assets and other restructuring costs, the Company did not comply
with certain of these restrictive covenant requirements, for which the Company
received an amendment on January 21, 2000. These amendments contain, among other
things, provisions for the payment of fees of .25% and an increase in the
interest rate of .375% associated with the Company's term loan and the $600
million revolver. In addition, the amendments require the pledging of assets to
collateralize the term loan and the $600 million revolver by May 20, 2000. The
assets to be pledged are expected to include equity interests in wholly owned
entities, certain real property interests, accounts receivable and inventory of
the Company.
The Company enters into interest-rate swap agreements to modify the interest
characteristics of the Company's outstanding debt. At December 31, 1999, the
Company had interest-rate swap agreements having a total notional value of $780
million. These swap agreements are used to convert variable-rate debt to fixed-
rate debt. Under these swap agreements, the Company pays a weighted-average
fixed rate of 5.53% (before the credit spread over LIBOR) and is receiving a
weighted-average variable rate based upon 30-day and 90-day LIBOR. At December
31, 1999, the remaining terms of the swap agreements ranged from 32 to 56
months.
NOTE 10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value.
Debt: The carrying amounts of the Company's borrowings under its revolving
credit agreement, lines of credit, variable rate term loans and other long-term
debt approximate their fair value.
Interest rate swaps: The fair values of interest rate swaps are based on quoted
prices, which reflect the present value of the difference between estimated
future amounts to be paid and received. At December 31, 1999 and 1998, the fair
value of these swaps is an asset of $27.4 million and a liability of $14.2
million, respectively.
NOTE 11. ACCRUED WORKERS' COMPENSATION
The Company is liable under the federal Mine Safety and Health Act of 1977, as
amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by such
persons on or after July 1, 1973. The Company is also liable under various
states' statutes for black lung benefits. The Company currently provides for
federal and state claims principally through a self-insurance program. Charges
are being made to operations as determined by inde-
60
Arch Coal, Inc. and Subsidiaries
pendent actuaries, at 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 which are accrued as injuries are incurred. Workers'
compensation costs (credits) include the following components:
1999 1998 1997
- ----------------------------------------------------------------------
Self-insured black lung benefits:
Service cost............................. $ 1,671 $ 1,022 $ 678
Interest cost............................ 3,522 3,173 2,353
Net amortization and deferral............ 327 111 (10,084)
---------------------------
5,520 4,306 (7,053)
Other workers' compensation benefits..... 13,241 19,396 12,182
---------------------------
$18,761 $23,702 $ 5,129
===========================
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.50% as of December 31, 1999 (7.00% and 7.25% as of
December 31, 1998 and 1997, respectively) and a black lung benefit cost
escalation rate of 4% in 1999, 1998 and 1997. In consultation with independent
actuaries, the Company changed the discount rate, black lung benefit cost
escalation rate, rates of disability and other assumptions used in the actuarial
determination of black lung liabilities as of January 1, 1993, to better reflect
actual experience. The effect of these changes was a significant increase in the
unrecognized net gain. This gain was amortized through 1997 and totaled $10.8
million (before tax) and $6.6 million (after tax) in 1997.
Summarized below is information about the amounts recognized in the
consolidated balance sheets for workers' compensation benefits:
December 31
-----------------------
1999 1998
- --------------------------------------------------------------------------------------
Actuarial present value for self-insured black lung:
Benefits contractually recoverable from others............. $ 3,254 $ 4,649
Benefits for Company employees............................. 48,267 51,137
------------------------
Accumulated black lung benefit obligation.................. 51,521 55,786
Unrecognized net gain (loss)............................... 4,890 (1,722)
------------------------
56,411 54,064
Traumatic and other workers' compensation..................... 59,923 67,138
------------------------
Accrued workers' compensation................................. 116,334 121,202
Less amount included in accrued expenses...................... 11,144 15,869
------------------------
$105,190 $105,333
========================
Receivables related to benefits contractually recoverable from others of $3.3
million in 1999 and $4.7 million in 1998 are recorded in other long-term assets.
NOTE 12. ACCRUED RECLAMATION AND MINE CLOSING COSTS
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. The Company accrues for the costs of
final mine closure reclamation over the estimated useful mining life of the
property. These costs relate to reclaiming the pit and support acreage at
surface mines and sealing portals at deep mines. Other costs of final mine
closure common to both types of mining are related to
61
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
reclaiming refuse and slurry ponds. The Company also accrues for significant
reclamation that is completed during the mining process prior to final mine
closure. The establishment of the final mine closure reclamation liability and
the other ongoing reclamation liability is based upon permit requirements and
requires various estimates and assumptions, principally associated with costs
and productivities. The Company accrued $12.9 million, $12.5 million and $10.8
million in 1999, 1998 and 1997, respectively, for current and final mine closure
reclamation, excluding reclamation recosting adjustments identified below. Cash
payments for final mine closure reclamation and current disturbances
approximated $15.8 million, $15.0 million and $8.5 million for 1999, 1998 and
1997, respectively. Periodically, the Company reviews its entire environmental
liability and makes necessary adjustments for permit changes as granted by state
authorities, additional costs resulting from accelerated mine closures, and
revisions to costs and productivities, to reflect current experience. These
recosting adjustments are recorded in cost of coal sales. Adjustments included a
net increase in the liability of $4.3 million and $4.9 million in 1999 and 1998,
respectively, and a net decrease in the liability of $4.4 million in 1997. The
Company's management believes it is making adequate provisions for all expected
reclamation and other costs associated with mine closures.
13. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Other Postretirement Benefit Plans
The Company has non-contributory defined benefit pension plans covering certain
of its salaried and non-union hourly employees. Benefits are generally based on
the employee's years of service and compensation. The Company funds the plans in
an amount not less than the minimum statutory funding requirements nor more than
the maximum amount that can be deducted for federal income tax purposes.
The Company also currently provides certain postretirement health and life
insurance coverage for eligible employees. Generally, covered employees who
terminate employment after meeting the eligibility requirements for pension
benefits are also eligible for postretirement coverage for themselves and their
dependents. The salaried employee postretirement medical and dental plans are
contributory, with retiree contributions adjusted periodically, and contain
other cost-sharing features such as deductibles and coinsurance. The
postretirement medical plan for retirees who were members of the UMWA is not
contributory. The Company's current funding
62
Arch Coal, Inc. and Subsidiaries
policy is to fund the cost of all postretirement health and life insurance
benefits as they are paid. Summaries of the changes in the benefit obligations,
plan assets (primarily listed stocks and debt securities) and funded status of
the plans are as follows:
Other
Pension benefits postretirement benefits
------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1................................ $139,433 $ 84,085 $335,823 $333,908
Service cost.................................................... 7,118 5,841 2,424 3,715
Interest cost................................................... 8,980 8,137 21,580 23,101
Benefits paid................................................... (13,462) (8,562) (14,736) (13,224)
Plan amendments................................................. (435) (3,809) -- (15,924)
Acquisition of ARCO Coal operations............................. -- 39,674 -- 13,625
Other-primarily actuarial (gain) loss........................... (9,851) 14,067 (14,245) (9,378)
------------------------------------------------------------------
Benefit obligations at December 31.............................. $131,783 $139,433 $330,846 $335,823
------------------------------------------------------------------
Change in plan assets
Value of plan assets at January 1............................... $127,274 $ 64,577 $ -- $ --
Actual return on plan assets.................................... 31,308 21,771 -- --
Employer contributions.......................................... 2,097 8,346 14,736 13,224
Acquisition of ARCO Coal operations............................. -- 41,142 -- --
Benefits paid................................................... (13,462) (8,562) (14,736) (13,224)
------------------------------------------------------------------
Value of plan assets at December 31............................. $147,217 $127,274 $ -- $ --
------------------------------------------------------------------
Funded status of the plans
Accumulated obligations less plan assets........................ $(15,434) $ 12,159 $330,846 $335,823
Unrecognized actuarial gain..................................... 37,513 6,920 16,341 6,918
Unrecognized net transition asset............................... 689 887 -- --
Unrecognized prior service gain................................. 2,815 2,667 11,561 16,367
------------------------------------------------------------------
Net liability recognized........................................ $ 25,583 $ 22,633 $358,748 $359,108
------------------------------------------------------------------
Balance sheet liabilities (assets)
Prepaid benefit costs........................................... $ -- $ (1,092) $ -- $ --
Accrued benefit liabilities..................................... 25,583 23,725 358,748 359,108
------------------------------------------------------------------
Net liability recognized........................................ 25,583 22,633 358,748 359,108
Less current portion............................................ 3,138 4,109 14,755 15,555
------------------------------------------------------------------
$ 22,445 $ 18,524 $343,993 $343,553
==================================================================
Changes in demographic information associated with the defined benefit pension
plan resulted in a $9.9 million actuarial gain in 1999 and a $14.1 million
actuarial loss for 1998. The Company's primary defined benefit pension plan was
amended January 1998 to a cash balance plan, which resulted in a $3.8 million
gain. The $14.2 million actuarial gain in the postretirement benefit plan during
1999 results primarily from reduced obligations associated with the Dal-Tex
closure. A January 1997 amendment to the postretirement benefit plan resulted in
a $15.9 million gain in 1998. The gain resulted from the implementation of a
defined dollar benefit cap which limits the Company's disbursements under the
plan. The $9.4 million actuarial gain in 1998 resulted from favorable claims
experience compared to previous projections.
63
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
Other
Pension benefits postretirement benefits
------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Average Assumptions as of December 31
Discount rate.................................................... 7.50% 7.00% 7.50% 7.00%
Rate of compensation increase.................................... 5.25% 4.75% N/A N/A
Expected return on plan assets................................... 9.00% 9.00% N/A N/A
Health care cost trend on covered charges........................ N/A N/A 5.0% 4.5%
The following table details the components of pension and other postretirement
benefit costs.
Other
Pension benefits postretirement benefits
-----------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Service cost............................... $ 7,118 $ 5,841 $ 2,788 $ 2,424 $ 3,715 $ 3,717
Interest cost.............................. 8,980 8,137 4,970 21,580 23,101 19,546
Expected return on plan assets............. (9,929) (7,521) (4,391) -- -- --
Other amortization and deferral............ (1,122) 790 (503) (9,628) (2,884) (2,573)
-----------------------------------------------------------------------
$ 5,047 $ 7,247 $ 2,864 $14,376 $23,932 $20,690
=======================================================================
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rate by one percentage point each year would increase the accumulated
postretirement obligation as of December 31, 1999 by $44.5 million, or 13.5%,
and the net periodic postretirement benefit cost for 1999 by $3.1 million, or
21.6%.
Multiemployer Pension and Benefit Plans
Under the labor contract with the United Mine Workers of America ("UMWA"), the
Company made payments of $.2 million, $1.3 million and $2.0 million in 1999,
1998, and 1997, respectively, into a multiemployer defined benefit pension plan
trust established for the benefit of union employees. Payments are based on
hours worked and are expensed as paid. Under the Multiemployer Pension Plan
Amendments Act of 1980, a contributor to a multiemployer pension plan may be
liable, under certain circumstances, for its proportionate share of the plan's
unfunded vested benefits (withdrawal liability). The Company has estimated its
share of such amount to be $29.6 million at December 31, 1999. The Company is
not aware of any circumstances which would require it to reflect its share of
unfunded vested pension benefits in its financial statements. At December 31,
1999, approximately 23% of the Company's workforce was represented by the UMWA.
The current UMWA collective bargaining agreement expires at December 31, 2002.
The Coal Industry Retiree Health Benefit Act of 1992 ("Benefit Act") provides
for the funding of medical and death benefits for certain retired members of the
UMWA through premiums to be paid by assigned operators (former employers),
transfers of monies in 1993 and 1994 from an overfunded pension trust
established for the benefit of retired UMWA members, and transfers from the
Abandoned Mine Lands Fund (funded by a federal tax on coal production)
commencing in 1995. The Company treats its obligation under the Benefit Act as a
participation in a multiemployer plan and recognizes expense as premiums are
paid. The Company recognized $2.7 million in 1999, $3.7 million in 1998, and
$3.9 million in 1997 in expense relative to premiums paid pursuant to the
Benefit Act.
64
Arch Coal, Inc. and Subsidiaries
Other Plans
The Company sponsors savings plans which were established to assist eligible
employees in providing for their future retirement needs. The Company's
contributions to the plans were $8.4 million in 1999, $6.8 million in 1998, and
$4.6 million in 1997.
NOTE 14. CAPITAL STOCK
On April 4, 1997, the Company changed its capital stock whereby the number of
authorized shares was increased to 100,000,000 common shares, the par value was
changed to $.01 per share, and a common stock split of 338.0857-for-one was
effected. All share and per share information reflect the stock split.
On September 29, 1998, the Company's Board of Directors authorized the Company
to repurchase up to 2 million shares of Company common stock. The timing of the
purchases and the number of shares to be purchased are dependent on market
conditions. Through December 31, 1999, the Company had acquired 1,726,900 shares
under the repurchase program at an average price of $12.29 per share compared to
330,200 shares at an average price of $17.08 per share through December 31,
1998.
On February 25, 1999, the Company's Board of Directors authorized the Company
to amend its Automatic Dividend Reinvestment Plan to provide, among other
things, that dividends may be reinvested in the Company's common stock by
purchasing authorized but unissued shares (including treasury shares) directly
from the Company, as well as by purchasing shares in the open market. On May 4,
1999, the Company filed a Form S-3 with the Securities and Exchange Commission
to register 2 million shares of the Company's common stock for issuance under
the amended Plan. As reflected in the Prospectus filed therewith, the amended
Plan provides that the Company determines whether the Plan's administrator
should reinvest dividends in shares purchased in the open market or in shares
acquired directly from the Company. The Company authorized and directed its Plan
administrator (for all shareholders who had elected to reinvest their dividends
in Company stock) to reinvest the June 15, 1999 and September 15, 1999 dividends
in the Company's treasury stock. As of December 31, 1999, approximately $2.5
million of the Company's dividends were reinvested in 189,506 shares of treasury
stock. In accordance with the terms of the amended Plan, the treasury stock was
reissued by the Company at the average of the high and low per share sales price
as reported by the New York Stock Exchange on the date of the dividends, which
averaged $13.446 per share. The Company accounts for the issuance of the
treasury stock using the average cost method.
NOTE 15. STOCK INCENTIVE PLAN
On April 22, 1998, the stockholders ratified the adoption of the 1997 Stock
Incentive Plan (the "Company Incentive Plan"), reserving 6,000,000 shares of
Arch Coal common stock for awards to officers and other selected key management
employees of the Company. The Company Incentive Plan provides the Board of
Directors with the flexibility to grant stock options, stock appreciation rights
(SARs), restricted stock awards or 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 elect to pay
out in cash do not count against the 6,000,000 shares authorized in the 1997
Stock Incentive Plan. Stock options outstanding under the Ashland Coal stock
incentive plans at the date of the Ashland Coal merger were substituted for
fully vested stock options in the Company Incentive Plan (and are exercisable on
the same terms and conditions including per share exercise prices as were
applicable to such options when granted). Stock options generally become
exercisable in full or in part one year from the date of grant
65
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
and are granted at a price equal to 100% of the fair market value of the stock
on the date of grant. SAR's entitle employees to receive a payment equal to the
appreciation in market value of the stated number of common shares from the
SAR's exercise price to the market value of the shares on the date of its
exercise. Unexercised options and SAR's lapse 10 years after the date of grant.
Restricted stock awards and restricted stock units entitle employees to purchase
shares or stock units at a nominal cost. Such awards entitle employees to vote
shares acquired and to receive any dividends thereon, but such shares cannot be
sold or transferred and are subject to forfeiture if employees terminate their
employment prior to the prescribed period, which can be from one to five years.
Restricted stock units generally carry the same restrictions and potential
forfeiture, but are generally paid in cash upon vesting. Merit awards are grants
of stock without restriction and at a nominal cost. Performance stock or unit
awards can be earned by the recipient if the Company meets certain pre-
established performance measures. Until earned, the performance awards are
nontransferable, and when earned, performance awards are payable in cash, stock,
or restricted stock as determined by the Company's Board of Directors. Phantom
stock awards are based on the appreciation of hypothetical underlying shares or
the earnings performance of such shares and may be paid in cash or in shares of
common stock. As of December 31, 1999, performance units and stock options were
the only types of awards granted. As of December 31, 1999, 361,550 performance
units had been granted and will be earned by participants based on Company
performance for the years 1998 through 2001. Information regarding stock options
under the Company Incentive Plan is as follows for the years ended December 31,
1999, 1998 and 1997:
1999 1998 1997
----------------------------------------------------------------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
Options outstanding at January 1................. 1,128 $24.86 926 $25.23 -- $ --
Issued in exchange for Ashland Coal
stock options.................................. -- -- -- -- 675 23.69
Granted.......................................... 744 10.69 360 22.88 300 27.88
Exercised........................................ -- -- (48) 14.50 (49) 21.25
Canceled......................................... (63) 16.28 (110) 25.88 -- --
------ ------ ------
Options outstanding at December 31............... 1,809 19.33 1,128 24.86 926 25.23
------ ------ ------
Options exercisable at December 31............... 837 $24.77 600 $25.04 626 $23.88
Options available for grant at December 31....... 4,094 4,775 5,025
The Company applies APB 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for the Company Incentive Plan.
Accordingly, no compensation expense has been recognized for the fixed stock
option portion of the Company Incentive Plan. Had compensation expense for the
fixed stock option portion of the Company Incentive Plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of FAS 123, Accounting for Stock-Based Compensation, the Company's
net income (loss) and earnings (loss) per common share would have been changed
to the pro forma amounts as
66
Arch Coal, Inc. and Subsidiaries
indicated in the table below. The fair value of options granted in 1999, 1998
and 1997 was determined to be $2.9 million, $2.3 million and $2.5 million,
respectively, using the Black-Scholes option pricing model and the weighted
average assumptions noted below. For purposes of these pro forma disclosures,
the estimated fair value of the options is recognized as compensation expense
over the options' vesting period. The stock options granted in 1999 vest over
four years, while the stock options granted in 1998 and 1997 vest ratably over
three years.
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Pro forma (unaudited)
Net income (loss) (in millions)......................................... $(347.7) $29.3 $30.1
Basic and diluted earnings (loss) per share............................ $ (9.06) $ .74 $ .98
----------------------------------------------
Weighted average fair value per share of options granted.................. $ 4.13 $7.22 $8.36
----------------------------------------------
Assumptions (weighted average)
Risk-free interest rate................................................. 6.6% 6.0% 6.3%
Expected dividend yield................................................. 2.0% 2.0% 2.0%
Expected volatility..................................................... 41.4% 31.8% 29.0%
Expected life (in years)................................................ 5.0 5.0 5.0
The pro forma effect on net income (loss) for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants issued prior to 1996.
Exercise prices for options outstanding as of December 31, 1999, range from
$10.6875 to $34.375, and the weighted average remaining contractual life at that
date was 7.3 years. The table below shows pertinent information on options
outstanding at December 31, 1999:
(Options in thousands) Options outstanding Options exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average Weighted
Range of Number remaining contractual Weighted average Number average exercise
exercise prices outstanding life (years) exercise price exercisable price
- -----------------------------------------------------------------------------------------------------------------------------
$10 - $18 754 8.63 $11.08 65 $15.24
$22 - $23 544 6.84 $22.58 342 $22.41
$25 - $35 511 5.77 $28.04 430 $28.07
NOTE 16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company places its cash equivalents in investment-grade short-term
investments and limits the amount of credit exposure to any one commercial
issuer.
The Company markets its coal principally to electric utilities in the United
States. As of December 31, 1999 and 1998, accounts receivable from electric
utilities located in the United States totaled $120.2 million and $152.1
million, respectively. Generally, credit is extended based on an evaluation of
the customer's financial condition, and collateral is not generally required.
Credit losses are provided for in the financial statements and historically have
been minimal.
The Company is committed under long-term contracts to supply 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.
Sales (including spot sales) to major customers were as follows:
1999 1998 1997
- -------------------------------------------------
AEP................. $157,278 $195,682 $129,981
Southern Company.... 163,826 170,452 187,800
67
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
NOTE 17. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per common share:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary loss and cumulative effect of
accounting change............................................................. $(350,093) $31,501 $30,281
Extraordinary loss from the extinguishment of debt, net of taxes.............. -- (1,488) --
Cumulative effect of accounting change, net of taxes.......................... 3,813 -- --
----------------------------------------
Net income (loss)............................................................. $(346,280) $30,013 $30,281
========================================
Denominator:
Weighted average shares-denominator for basic................................. 38,392 39,626 30,374
Dilutive effect of employee stock options..................................... -- 25 34
----------------------------------------
Adjusted weighted average shares-denominator for diluted...................... 38,392 39,651 30,408
========================================
Basic and diluted earnings (loss) per common share before extraordinary
loss and cumulative effect of accounting change............................... $ (9.12) $ .79 $ 1.00
========================================
Basic and diluted earnings (loss) per common share.............................. $ (9.02) $ .76 $ 1.00
========================================
At December 31, 1999, 1998 and 1997, 1.8 million, 1.1 million and .4 million
shares, respectively, were not included in the diluted earnings per share
calculation since the shares are antidilutive.
NOTE 18. SALE AND LEASEBACK
On January 29, 1998, the Company sold mining equipment for approximately $74.2
million and leased back the equipment under an operating lease with a term of
three years. This included the sale and leaseback of equipment purchased under
an existing operating lease that expired on the same day. The proceeds of the
sale were used to purchase the equipment under the expired lease for $28.3
million and to pay down debt. At the end of the lease term, the Company has the
option to renew the lease for two additional one-year periods or purchase the
equipment. Alternatively, the equipment may be sold to a third party. In the
event of such a sale, the Company will be required to make a payment to the
lessor in the event, and to the extent, that the proceeds are below a certain
threshold. The gain on the sale and leaseback of $10.7 million was deferred and
is being amortized over the base term of the lease as a reduction of rental
expense. Effective April 1, 1999, as a result of the shutdown of the Dal-Tex
operation, the Company purchased for $14.4 million several pieces of equipment
under lease that were included in this transaction and transferred them to the
Company's Wyoming operations. A pro-rata portion of the deferred gain, or $3.1
million, was offset against the cost of the assets. After the effect of this
purchase, at the end of the lease term, the remaining assets can be purchased
for $40.1 million or sold to a third party with the Company required to make a
payment to the lessor in the event, and to the extent that, proceeds are below
$31.3 million.
NOTE 19. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company receives certain services and
purchases fuel, oil and other products on a competitive basis from subsidiaries
of Ashland Inc., which totaled $4.8 million in 1999, $7.2 million in 1998, and
$4.7 million in 1997. At December 31, 1999, Ashland Inc. owns approximately 58%
of the Company's outstanding shares of common stock. Management believes that
charges between the Company and Ashland Inc. for services and purchases were
transacted on terms equivalent to those prevailing among unaffiliated parties.
As described in Note 1, the Company has a 65% ownership interest in Canyon
Fuel which is accounted for on the equity method. The Company receives
administration and production fees
68
Arch Coal, Inc. and Subsidiaries
from Canyon Fuel for managing the Canyon Fuel operations. The fees recognized as
other income by the Company and as expense by Canyon Fuel were $7.0 million and
$4.1 million for the years ended December 31, 1999 and 1998, respectively.
NOTE 20. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, land and various other properties under
noncancelable long-term leases, expiring at various dates. Rental expense
related to these operating leases amounted to $44.2 million in 1999, $31.4
million in 1998, and $14.9 million in 1997. The Company has also entered into
various noncancelable royalty lease agreements and federal lease bonus payments
under which future minimum payments are due. On October 1, 1998, the Company was
the successful bidder in a federal auction of certain mining rights in the 3,546
acre Thundercloud tract in the Powder River Basin of Wyoming. The Company's
lease bonus bid amounted to $158 million for the tract, of which $31.6 million
was paid on October 1, 1998 (the remaining lease bonus payments are reflected
below under the caption "Royalties"). The tract contains approximately 412
million tons of demonstrated coal reserves and is contiguous with the Company's
Black Thunder mine. Geological surveys performed by outside consultants indicate
that there are sufficient reserves relative to these properties to permit
recovery of the Company's investment.
Minimum payments due in future years under these agreements in effect at
December 31, 1999 are as follows:
Leases Royalties
- ---------------------------------
2000........ $ 29,878 $ 63,421
2001........ 23,731 63,026
2002........ 17,728 62,799
2003........ 10,427 62,485
2004........ 6,389 30,474
Thereafter.. 21,950 196,805
-------------------
$110,103 $479,010
===================
On October 20, 1999, the U.S. District Court for the Southern District of West
Virginia permanently enjoined the West Virginia Division of Environmental
Protection (the "West Virginia DEP") from issuing any new permits that authorize
the construction of valley fills as part of coal mining operations in West
Virginia. The West Virginia DEP complied with the district court's injunction
by issuing an order banning the issuance of nearly all new permits for valley
fills and prohibiting the further advancement of nearly all existing fills. The
West Virginia DEP also filed an appeal of the district court's decision with the
U.S. Court of Appeals for the Fourth Circuit. On October 29, 1999, the district
court granted a stay of its injunction, pending the outcome of the West Virginia
DEP's appeal. It is impossible to predict the outcome of the appeal. If,
however, the district court's decision is not overturned or if a legislative or
other solution is not achieved, then the Company's and other coal producer's
ability to mine coal in West Virginia will be seriously compromised. This
injunction was entered as part of the litigation that caused the delay in
obtaining mining permits for the Company's Dal-Tex operation. As a result of
such delay, the Company idled its Dal-Tex mining operation on July 23, 1999.
Reopening the Dal-Tex operation is contingent upon the district court's
injunction being overturned or a legislative or other solution being achieved,
as well as then-existing market conditions.
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, 1999, the
Company estimates that its probable aggregate loss as a result of such claims is
$5.2 million (included in other noncurrent liabilities). The Company estimates
that its reasonably possible aggregate losses from all currently pending
litigation could be as much as $.5 million (before tax) in excess of the loss
previously recognized.
69
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share data)
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 the consolidated financial condition, results
of operations or liquidity of the Company.
The Company holds a 17.5% general partnership interest in Dominion Terminal
Associates ("DTA"), which operates a ground storage-to-vessel coal transloading
facility in Newport News, Virginia. DTA leases the facility from Peninsula Ports
Authority of Virginia ("PPAV") for amounts sufficient to meet debt-service
requirements. Financing is provided through $132.8 million of tax-exempt bonds
issued by PPAV (of which the Company is responsible for 17.5%, or $23.2 million)
which mature July 1, 2016. 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 its share of the facility's
loading capacity and is required to make periodic cash advances to DTA to fund
such costs. On a cumulative basis, costs exceeded cash advances by $10.3 million
at December 31, 1999 (included in other noncurrent liabilities). Future
payments for fixed operating costs and debt service are estimated to
approximate $3.3 million annually through 2015 and $26.0 million in 2016.
In connection with the Arch Western transaction, the Company entered into an
agreement pursuant to which the Company agreed to indemnify another member of
Arch Western against certain tax liabilities in the event that such liabilities
arise as a result of certain actions taken prior to June 1, 2013, including the
sale or other disposition of certain properties of Arch Western, the repurchase
of certain equity interests in Arch Western by Arch Western or the reduction
under certain circumstances of indebtedness incurred by Arch Western in
connection with the Arch Western transaction. Depending on the time at which any
such indemnification obligation was to arise, it could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
NOTE 21. CASH FLOW
The changes in operating assets and liabilities as shown in the consolidated
statements of cash flows are comprised of the following:
1999 1998 1997
- ----------------------------------------------------------------------------------------
Decrease (increase) in operating assets:
Receivables......................................... $ 38,356 $(35,464) $(12,179)
Inventories......................................... 5,188 6,723 16,323
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses............... (15,593) 30,229 5,403
Income taxes........................................ (76,952) (35,057) (27,448)
Accrued postretirement benefits other than pension.. 440 6,813 7,437
Accrued reclamation and mine closure................ (20,767) 1,936 (9,370)
Accrued workers' compensation....................... (143) 149 (9,008)
-------------------------------
Changes in operating assets and liabilities............ $(69,471) $(24,671) $(28,842)
===============================
70
Arch Coal, Inc. and Subsidiaries
NOTE 22. ACCOUNTING DEVELOPMENT
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. FAS 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. FAS 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what effect FAS 133 will have on the earnings and financial
position of the Company.
NOTE 23. SUBSEQUENT EVENTS (UNAUDITED)
The Company temporarily idled its West Elk underground mine in Gunnison County,
Colorado, on January 28, 2000 following the detection of higher-than-normal
levels of carbon monoxide in a portion of the mine. Higher-than-normal readings
of carbon monoxide indicate that combustion is present somewhere within the
affected portion of the mine. The Company has sealed the affected portion of the
mine while it further isolates the affected area and determines the cause of and
solutions to the problem. West Elk produced approximately 7.3 million tons of
coal in 1999, employs approximately 300 people and generated approximately $13.1
million of the Company's total operating income in 1999. The Company does not
believe the mine's closure will have a material long-term effect on the
Company's financial condition, but it could have a material adverse effect on
the Company's results of operations until the mine is reopened and fully
operating.
Ashland Inc., which owns approximately 58% of the outstanding common stock
of the Company, announced on March 16, 2000 that its Board of Directors has
declared a taxable distribution of approximately 17.4 million of its 22.1
million shares of the Company's common stock. The distribution will be in the
form of a taxable dividend, to be distributed on or around March 27, 2000 to
Ashland's stockholders of record as of March 24, 2000. Ashland also confirmed
that it plans to dispose of its remaining 4.7 million shares of the Company's
common stock in a tax efficent manner after the distribution, subject to then-
existing market conditions.
Subsequent to December 31, 1999, the Company's Board of Directors adopted a
stockholder rights plan under which preferred share purchase rights ("Rights")
are to be distributed as a dividend to holders of Company common stock on March
20, 2000 (the "Record Date"). The Rights will become exercisable only if a
person or group (other than certain affiliated entities, including Ashland Inc.,
except in certain circumstances, an "Acquiring Person") acquires 20% or more of
the Company common stock or announces a tender or exchange offer which would
result in the Acquiring Person becoming the beneficial owner of 20% or more of
the Company's outstanding shares of common stock. When exercisable, each Right
entitles the holder to purchase 1/100 of a share of a series of junior
participating preferred stock at an exercise price of $42 per 1/100 of a share,
or in certain circumstances, will allow the holder (except for the Acquiring
Person) to purchase common stock from the Company or voting stock of the
Acquiring Person at one-half the then current market price. At its option, the
Company's Board may allow holders (except for the Acquiring Person) to exchange
their Rights for Company common stock. The Rights will expire on March 20, 2010,
subject to earlier redemption by the Company.
71
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
NOTE 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for 1999 and 1998 is summarized below:
March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999:
Coal sales, equity income and other revenues........................$421,126 $391,292 $382,236 $ 372,728
Income (loss) from operations....................................... 13,983/(1)/ 20,739 12,602 (374,350)/(3)/
Income (loss) before cumulative effect of accounting change......... (2,380) 2,459 (1,820) (348,352)
Net income (loss)................................................... 1,433/(2)/ 2,459 (1,820) (348,352)
Basic and diluted earnings (loss) per common share before
cumulative effect of accounting change/(7)/........................ (0.06) 0.06 (0.05) (9.12)
Basic and diluted earnings (loss) per common share/(7)/............. 0.04 0.06 (0.05) (9.12)
1998:
Coal sales, equity income and other revenues........................$312,564/(4)/ $353,238 $424,123/(5)/ $ 415,710
Income from operations.............................................. 22,359 27,450 23,909 14,129/(6)/
Income before extraordinary loss.................................... 15,821 14,999 544 137
Net income.......................................................... 15,821 13,511 544 137
Basic and diluted earnings per common share before
extraordinary loss/(7)/............................................ 0.40 0.38 0.01 0.00
Basic and diluted earnings per common share/(7)/.................... 0.40 0.34 0.01 0.00
(1) During the first quarter of 1999, the Company recorded a charge of $6.5
million related to severance costs, obligations for non-cancelable lease
payments and a change in the reclamation liability due to the shut-down of
the Company's Dal-Tex operation.
(2) During the first quarter of 1999, the Company changed its depreciation
method on preparation plants and loadouts and recorded a cumulative effect
adjustment which increased income by $3.8 million (net of tax) from
applying the new method for years prior to 1999.
(3) During the fourth quarter of 1999, the Company recorded a one-time pre-tax
charge of $364.6 million to write-down the assets at its Dal-Tex, Hobet 21
and Coal-Mac operations and write-down certain other coal reserves in
central Appalachia and a $16.3 million pre-tax charge related to the
restructuring of the Company's administrative work force and the closure of
mines in Illinois, Kentucky and West Virginia.
(4) During the first quarter of 1998, the Company recorded gains on the sale of
surplus land totaling $7.9 million.
(5) During the third quarter of 1998, the Company sold idle assets and reserves
in eastern Kentucky for a gain of $18.5 million.
(6) During the fourth quarter of 1998, the Company sold its idle Big Sandy
Terminal for a gain of $7.5 million. This was partially offset by a net
unfavorable adjustment of $4.9 million associated with the Company's
routine, periodic review of reclamation accruals.
(7) The sum of the quarterly earnings (loss) per common share amounts may not
equal earnings (loss) per common share for the full year because per share
amounts are computed independently for each quarter and for the year based
on the weighted average number of common shares outstanding during each
period.
72
SCHEDULE II
ARCH COAL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Year Expenses Deductions(/1/) Other(/2/) Year
----------- ---------- ---------- --------------- ---------- ----------
Year Ended December 31,
1999
Reserves Deducted from
Asset Accounts
Property, Plant, and
Equipment.......... $ -- $ -- $ -- $ -- $ --
Other Assets--Other
Notes and Accounts
Receivable......... 582 325 366 -- 541
Current Assets--
Supplies Inventory. 23,901 5,966 6,325 -- 23,542
Year Ended December 31,
1998
Reserves Deducted from
Asset Accounts
Property, Plant, and
Equipment.......... $ -- $ -- $ -- $ -- $ --
Other Assets--Other
Notes and Accounts
Receivable......... 471 306 195 -- 582
Current Assets--
Supplies Inventory. 17,681 2,292 5,999 9,927 23,901
Year Ended December 31,
1997
Reserves Deducted from
Asset Accounts
Property, Plant, and
Equipment.......... $ 100 $ -- $ 100 $ -- $ --
Other Assets--Other
Notes and Accounts
Receivable......... 410 61 -- -- 471
Current Assets--
Supplies Inventory. 11,313 1,218 282 5,432 17,681
- --------
(/1/Reserves)utilized, unless otherwise indicated.
(/2/Balances)acquired in the Arch Western transaction and Ashland Coal merger.
25
EXHIBIT INDEX
Exhibit No. Description
------------ -----------------------------------------------------
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Ernst & Young LLP