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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13105
ARCH COAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0921172
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
CITYPLACE ONE, SUITE 300, ST. LOUIS, MISSOURI 63141
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
CITYPLACE ONE, SUITE 300, ST. LOUIS, MISSOURI 63141
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(MAILING ADDRESS) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 994-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 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
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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 ANY AMENDMENT TO THIS FORM 10-K. [X]
AT MARCH 9, 1998, BASED ON THE NEW YORK STOCK EXCHANGE CLOSING PRICE, THE
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS APPROXIMATELY $337,246,286. IN DETERMINING THIS FIGURE, ARCH
COAL, INC. HAS ASSUMED THAT ALL OF ITS EXECUTIVE OFFICERS AND DIRECTORS, AND
PERSONS KNOWN TO IT TO BE THE BENEFICIAL OWNERS OF MORE THAN FIVE PERCENT OF
ITS COMMON STOCK ARE AFFILIATES. SUCH ASSUMPTION SHALL NOT BE DEEMED CONCLUSIVE
FOR ANY OTHER PURPOSE.
AT MARCH 12, 1998, THERE WERE 39,657,898 SHARES OF REGISTRANT'S COMMON
STOCK OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF ARCH COAL, INC.'S DEFINITIVE PROXY STATEMENT, TO BE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION NO LATER THAN APRIL 30, 1998, ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business............................................................................ 1
ITEM 2. Properties.......................................................................... 9
ITEM 3. Legal Proceedings................................................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 11
ITEM X. Executive Officers.................................................................. 11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 12
ITEM 6. Selected Financial Data............................................................. 13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 22
ITEM 8. Financial Statements and Supplementary Data......................................... 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 44
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................. 44
ITEM 11. Executive Compensation............................................................. 44
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..................... 44
ITEM 13. Certain Relationships and Related Transactions..................................... 44
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K........................................................................... 45
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PART I
ITEM 1. BUSINESS
Arch Coal, Inc. ("Arch Coal" or the "Company") is the 6th largest U.S.
coal producer (when measured by tons produced). The Company markets its coal
primarily to domestic electric utilities and abroad, principally Europe. The
Company estimates that as of December 31, 1997, approximately two billion
recoverable tons of demonstrated (proven) and indicated (probable) coal
reserves were held by the Company's subsidiaries in the Central Appalachian,
Illinois and Western coal fields. Arch Coal was incorporated in Delaware in
1969.
RECENT DEVELOPMENTS
Closure of Mine No. 37. On January 31, 1998, the Company discontinued
operation of two continuous miner units in Mine No. 37 and the Cave Branch
preparation plant in Kentucky. Longwall mining equipment had operated at Mine
No. 37 until the third quarter of 1997 when the reserves mineable with such
equipment were depleted. Mine No. 37 produced 3.9 million tons during 1997,
and the continuous miners were expected to produce approximately 1.9 million
tons of coal through scheduled depletion of their dedicated reserves in 1999.
The first quarter of 1998 will be adversely affected by certain costs
associated with discontinuing this operation. The Company does not anticipate a
significant write-down of assets as most of the carrying amount of the assets
is expected to be recovered.
New Wage Agreement with United Mine Workers. The Company's Hobet Mining,
Inc. ("Hobet") and Apogee Coal Company ("Apogee") subsidiaries and the
United Mine Workers of America ("UMWA") executed the National Bituminous Coal
Wage Agreement of 1998 (the "Wage Agreement") effective January 1, 1998. The
Company believes that the terms of the Wage Agreement do not adversely affect
the Company, and that the Wage Agreement provides important certainty for the
Company with respect to its labor relations until expiration of the Wage
Agreement on December 31, 2002. A summary of the terms of the Wage Agreement is
included in the discussion of Employees beginning at page 6 below.
MERGER WITH ASHLAND COAL
On July 1, 1997, Ashland Coal, Inc. ("Ashland Coal") merged with a
subsidiary of the Company. The merger was accounted for as a purchase and
resulted in Ashland Coal becoming a wholly-owned subsidiary of the Company. A
total of 18,660,054 shares of Company common stock was issued in the merger.
At the time of the merger, Ashland Coal was engaged in the mining,
processing and marketing of low-sulfur bituminous coal primarily in the eastern
United States and Ashland Inc. ("Ashland") owned stock representing
approximately 57% of the voting power of Ashland Coal and 50% of the voting
stock of the Company. Ashland currently owns approximately 54% of the Company's
outstanding common stock.
Period to period comparisons in this report, including comparisons in the
1997 Sales and Production section below, the Company's Selected Financial Data
in Item 6, Management's Discussion and Analysis in Item 7, Financial Statements
in Item 8, and Financial Statement Schedules in Item 14, have been materially
affected by the merger with Ashland Coal.
1997 SALES AND PRODUCTION
In 1997, the Company and its independent operating subsidiaries sold
approximately 40.5 million tons of coal, as compared to sales of approximately
29.4 and 26.7 million tons in 1996 and 1995, respectively. Approximately 72% of
the total tonnage sold during 1997 was sold under long-term contracts as
compared to approximately 72% for 1996 and 76% for 1995. The balance was sold
on the spot market (contracts of a term of one year or less). Sales of
metallurgical coal in 1997 totaled 1.5 million tons, or approximately 4% of the
Company's total 1997 coal sales. In 1997, the Company sold approximately 1.9
million tons of coal in the export market, compared to approximately 0.1
million tons in 1996 and 0.2 million tons in 1995. Sales of metallurgical coal
accounted for approximately 35% of these export sales in 1997, while the
balance of export sales consisted of sales of steam coal. Approximately 74%,
72% and 80% of total revenues for 1997, 1996 and 1995, respectively, were
derived from long-term contracts (i.e., contracts of a term greater than one
year). In 1997, the Company's independent operating subsidiaries produced
approximately 36.7 million tons of coal as compared to approximately 26.9 and
25.6 million tons for 1996 and 1995, respectively. In
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addition, the Company purchased for resale approximately 2.9 million tons of
coal during 1997, approximately 2.0 million tons during 1996 and approximately
1.2 million tons during 1995.
MARKETING AND SALES CONTRACTS
As is characteristic of the coal industry, from time to time the expiration
of long-term sales contracts to which the Company is a party makes large
amounts of previously committed tonnage available for commitment under new
sales contracts. Virtually all of the Company's production that had been
committed under sales contracts which expired during 1997, including most of
the tonnage under a 1.9 million ton-per-year contract which expired in December
1997, has been recommitted under new long-term agreements or will be committed
under sales contracts currently pending execution. As is the trend in the coal
industry, the term of the Company's new long-term coal sales contracts is
becoming shorter, and most of the Company's new long-term sales contracts
expire in three years or less.
The Company believes that many of its new commitments were made at
favorable prices relative to the current market price for similar quality coal,
as a combination of factors, including a relatively mild winter in the markets
served by many of the Company's utility customers, have caused coal prices to
decline somewhat since such commitments were made. Contracts covering
approximately 15% of the Company's total production are scheduled to
expire at the end of 1998. These contracts are largely priced at or near the
current market price, and the Company does not expect any difficulty in
obtaining new commitments for this tonnage, nor does it anticipate a meaningful
difference between the current contract price under these expiring contracts
and the price at which the tonnage can be recommitted.
Since the July 1 merger with Ashland Coal, a variety of steps have been
taken, including amendment of sales contracts, to increase the number of
Company mines available to supply a given contract, and thereby to increase the
margin realizable by the Company on the sale of its coal and decrease the
customer's cost of fuel. The Company intends to continue to pursue sales
contract amendments and new arrangements which will allow it to fully and
efficiently utilize the variety of production sources and transportation
options made available by the merger. For example, as a result of production
options created by the merger, the Company has shifted some production
commitments of Mingo Logan operations to other transportation
advantaged sources, thereby lowering the customer's costs and improving the
Company's realizations by selling some of this high-quality Mingo Logan product
in the premium-priced metallurgical coal market.
As previously reported, the Company's Wyoming operations have experienced
substantial difficulties, including a 1997 fire that delayed deployment of
equipment, and, more recently, transportation delays as a consequence of poor
rail service from the Union Pacific Railroad after its merger with Southern
Pacific Railroad. Most recently, the Wyoming operations have experienced an
unexpected and substantial deterioration of customer demand for the Company's
Wyoming low-sulfur, low-Btu product. While the Company's Wyoming coal has
always been at a relative quality disadvantage vis-a-vis regional coals with
higher Btu and similar sulfur content, the price premium traditionally afforded
the higher-Btu product has permitted the Company to successfully market its
lower-priced product to certain customers with less stringent Btu requirements.
Recently, this premium has narrowed as a result of an oversupply of competing
higher-Btu coal in the market. Consequently, the Company has elected to
substantially reduce its Wyoming coal mining operations in 1998 in anticipation
of better market conditions in 1999 when the current oversupply of higher-Btu
product is expected to diminish. For more information concerning the Company's
Wyoming mines, see Western Operations at page 6 below.
During 1997, utility deregulation and consequent efforts by utilities to
minimize costs led to changes in power purchase arrangements among utilities
and third party producers of electricity from whom utilities purchase power. In
this regard, in January, 1998, the Company was advised that the coal purchases
by one of its customers for a power plant were being substantially reduced as a
consequence of amendment to a power purchase agreement between the customer and
the utility purchasing its power that is likely to lower the electrical output
(and coal burn) of the plant. For further information about this matter, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 beginning at page 14 of this report. Absent
changes in output dictated by changes in governmental regulation or by reason
of a "force majeure" event, the Company generally has minimal exposure under
its sales contracts to changes in its customers' electrical output because most
contracts specifically define the base tonnage required to be purchased by the
customer. However, optional tonnage rights in otherwise fixed-tonnage contracts
are frequently measured by reference to the customer's requirements, and the
Company
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expects to see greater volatility in individual customer demand as a result of
shorter contract terms and changes in electrical output by customers' plants as
a consequence of deregulation.
OPERATIONS
Central Appalachian Operations
Mingo Logan Operations. The Mingo Logan Complex is located in Mingo and
Logan Counties, West Virginia, on approximately 20,500 acres containing
approximately 42.1 million recoverable tons of coal. The Mingo Logan Complex
currently consists of one surface mining operation conducted by an independent
contract miner, four underground mines operated by independent contract miners,
and a longwall mine ("Mountaineer Mine") operated by Mingo Logan Coal Company
("MLCC"). Three MLCC and one independent contract continuous miner sections also
operate in the Mountaineer Mine. The Black Bear preparation plant is connected
to the Mountaineer Mine by a conveyor and to the loadout on the Norfolk Southern
Railway Company ("Norfolk Southern") railroad by a second conveyor. The loadout
facility is capable of loading a 13,000-ton unit train in less than four hours.
The total cost of property, plant, and equipment at the Mingo Logan Complex at
December 31, 1997, was $89.2 million, and the net book value was $78.7 million.
The Mingo Logan Complex produced approximately 8.4 million tons of coal during
1997.
Another Mingo Logan operation, the Holden 25 Mine, is a contract surface
mine operating on leased reserves. The Holden 25 Mine produced approximately
1.1 million tons of coal in 1997. The Holden 25 Mine is expected to produce
approximately 1.0 million tons prior to depletion of its assigned reserves in
1999.
The coal from the Holden 25 Mine, as well as some coal from the Mingo Logan
Complex, is loaded onto the Norfolk Southern railroad at the Holden 25/Ragland
loadout. The Holden 25/Ragland loadout has an operating capacity of 3,200 tons
per hour. The Holden 25 Mine also has an idle 650 ton-per-hour preparation
plant which may resume operation with the development of the Phoenix reserves,
described below. The total cost of the Holden 25 Mine's property, plant and
equipment at December 31, 1997, was $5.8 million, and the net book value was
$3.4 million.
Additionally, MLCC has entered into a contract mining agreement with its
affiliate, Coal-Mac, Inc. ("Coal-Mac"), whereby Coal-Mac will mine a large
surface coal reserve (known as the Phoenix reserve) on approximately 2,600
acres in Logan and Mingo Counties, West Virginia. Production is scheduled to
begin in April, 1998. Annual production from this new mine is expected to reach
approximately 1.5 million tons by 1999 and to remain constant at that level
until the assigned reserve base of approximately 29 million recoverable tons is
exhausted.
Dal-Tex Complex. The Dal-Tex mining complex ("Dal-Tex Complex") is
located primarily in Logan County, West Virginia, on approximately 25,000 acres
containing approximately 91 million tons of recoverable coal. The Dal-Tex
Complex currently consists of one large-scale surface mine using modern surface
mining equipment, including an 83-cubic-yard walking dragline, two
51-cubic-yard shovels, and one 24-cubic-yard loader. The surface mine is
complemented by two deep mines utilizing continuous miner sections. One deep
mine is operated by an independent contract miner. The Dal-Tex Complex includes
the Monclo preparation plant, which is located on the CSX Transportation rail
system ("CSX") , and is capable of loading a 14,000-ton unit train in less
than four hours. The total cost of property, plant, and equipment at the
Dal-Tex Complex at December 31, 1997, was $55.4 million, and the net book value
was $51.6 million. Approximately 5.9 million tons of coal were produced at the
Dal-Tex Complex during 1997.
Hobet 21 Complex. The Hobet 21 mining complex ("Hobet 21 Complex") in
Boone and Lincoln Counties, West Virginia, currently has dedicated reserves of
approximately 98 million recoverable tons of coal. The Hobet 21 Complex
consists of a large-scale surface mine, two contract deep mines and the
1,400-ton-per-hour Beth Station preparation plant. The surface mine uses modern
surface mining equipment, including an 83-cubic-yard walking dragline and a
51-cubic-yard shovel. A conveyor belt system transports the coal from the
surface mine to the Beth Station preparation plant where the coal is cleaned
and loaded into railcars at the adjacent 150-car rail siding for shipment on
the CSX rail system. The Beth Station preparation plant is capable of loading a
15,000-ton unit train in less than four hours. The total cost of property,
plant, and equipment at the Hobet 21 Complex at December 31, 1997, was $70.2
million, and the net book value was $65.6 million. Approximately 4.4 million
tons of coal were produced at the Hobet 21 Complex during 1997. In November
1997, the Company acquired approximately 23 million tons of low-sulfur coal
reserves adjacent to the Hobet 21 Complex for $6 million.
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Hobet 07 Operations. Hobet 07's primary mining complex (the "Hobet 07
Complex"), located in Mingo and Logan Counties, West Virginia, is expected to
produce approximately 1.4 million tons of coal during 1998, and thereafter to
discontinue operations. The Hobet 07 Complex currently has three deep mines,
one of which is operated by Hobet and two of which are operated by independent
contractors. The Hobet 07 Complex includes the 950-ton-per-hour Pine Creek
preparation plant which is served by CSX. The total cost of property, plant,
and equipment at the Hobet 07 Complex at December 31, 1997, was $3.8 million,
and the net book value was $2.8 million. The Hobet 07 Complex produced about
1.7 million tons of coal during 1997.
Other Hobet 07 operations consist of a contract deep mine in Logan County,
West Virginia (the "Holden 22 Mine"), that produced .5 million tons of coal
in 1997. Holden 22 Mine reserves are expected to deplete in 1998. Coal produced
from this deep mine is loaded on the CSX at the Holden 22 loadout or trucked to
Arch Coal Terminal Inc.'s Lockwood Dock terminal facility on the Big Sandy
River ("Lockwood Dock") and shipped by barge. The total cost of property,
plant, and equipment at the Holden 22 Mine at December 31, 1997, was $1.1
million, and the net book value was $.4 million.
Ruffner Mine. The Ruffner Mine, located in Logan County, West Virginia, is
a surface mining operation utilizing a 49-cubic-yard dragline, a 43-cubic-yard
shovel, a 22-cubic-yard shovel and a 28-cubic-yard loader. The Ruffner Mine has
25.4 million tons of dedicated recoverable coal reserves. Most of the coal
produced by the Ruffner Mine is shipped run-of-mine and does not require
processing, but any required processing occurs at the 650 ton-per-hour Ruffner
preparation plant. Ruffner production is shipped on the CSX from the 4,000
ton-per-hour Fanco loadout in Logan County, West Virginia. As of December 31,
1997, the total cost of the Ruffner Mine property, plant and equipment was
$81.8 million, and the net book value was $31.4 million. Approximately 3.4
million tons of coal was produced by the Ruffner Mine during 1997.
Wylo Mine. The Wylo Mine, located in Logan County, West Virginia, is a
truck-shovel surface operation utilizing a 53-cubic-yard shovel and a
28-cubic-yard loader. Approximately 1.6 million tons of coal were produced by
the Wylo Mine in 1997. The Wylo mine is expected to remain in production and
produce approximately 2.7 million tons through 1999. Coal produced at the Wylo
Mine is processed and shipped through the Ruffner preparation plant and the
Fanco loadout (described above), or trucked to the Lockwood Dock for shipment
by barge. At December 31, 1997, the total cost of the Wylo Mine property, plant
and equipment was $41.1 million, and the net book value was $12.7 million.
Samples Mine. The Samples Mine consists of a large-scale surface mine
producing approximately 4.6 million tons annually and utilizing a
110-cubic-yard dragline, a 53-cubic-yard shovel, a 22-cubic-yard hydraulic
excavator and two 28-cubic-yard loaders. The mine is located in Boone, Raleigh
and Kanawha Counties, West Virginia, on lands containing approximately 37.5
million tons of recoverable coal. Annual production is projected to increase
from 1997 levels of 4.4 million tons to approximately 4.7 million tons per year
in 2001. Most of the coal produced at the Samples Mine does not require
processing and is shipped by truck to the Paint Creek terminal for shipment
by barge. Any processing and rail shipment that is required occurs through the
250 ton-per-hour Toms Fork preparation plant and the 4,000 ton-per-hour Toms
Fork loadout facility on the CSX. The total cost of the property, plant and
equipment of the Samples Mine at December 31, 1997, was $97.6 million and the
net book value was $57.5 million. In April 1997, the Company acquired the
Kayford James reserve area consisting of approximately 13 million tons of
low-sulfur coal reserves adjacent to the Samples Mine for net consideration of
approximately $17.0 million.
Campbells Creek Operations. Campbells Creek operations include two contract
underground mines operating on leased and fee properties located in Kanawha
County, West Virginia containing approximately 6.8 million tons of dedicated
coal reserves. Run-of-mine coal from the underground operations is processed at
the Campbells Creek preparation plant, which is operated by a contractor. The
total cost of the Campbells Creek operations, property, plant and equipment at
December 31, 1997 was $6.0 million, and the net book value was $2.3 million.
The Campbells Creek mines produced approximately .8 million tons of coal in
1997, and reserves for Campbells Creek operations are expected to be depleted
in 2003.
Lone Mountain Operations. Lone Mountain's operations consist of two
underground mines, the Darby Fork Mine and the Huff Creek Mine, both in Harlan
County, Kentucky. These mines are currently operating predominantly on fee
property containing approximately 2.9 million tons of dedicated recoverable
coal reserves and there are significant additional reserves available for
dedication to these operations. The Darby Fork Mine was a two section mine in
1997, and a third section was added in early 1998. All three-sections utilize
battery cars for haulage. The Huff Creek Mine currently operates three
sections, two with continuous haulage units. Coal produced from the Darby
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Fork and Huff Creek Mines is transported on a beltline system directly to the
850 ton-per-hour Lone Mountain preparation plant where it is washed. The
loadout has dual rail service on the Norfolk Southern and CSX, and is capable
of loading at a rate of 3,000 tons per hour. The Darby Fork Mine produced .6
million tons of coal in 1997, and the Huff Creek Mine produced 1.4 million tons
in the same period. The total cost of property, plant and equipment for the
Lone Mountain operations at December 31, 1997, was $54.7 million, and the net
book value was $22.2 million.
Coal-Mac Operations. Coal-Mac operates three surface mines in Pike County,
Kentucky, and has entered into a contract mining agreement with Mingo Logan to
mine the Phoenix reserve in Mingo and Logan Counties, West Virginia.
Approximately 5.7 million recoverable tons of coal reserves in Pike County are
dedicated to Coal-Mac's Kentucky operations. Coal-Mac's Kentucky production is
trucked to the Elkhorn City loadout and shipped raw on the CSX. The total cost
of property, plant and equipment at Coal-Mac's Kentucky operations at December
31, 1997, was $17.4 million, and the net book value was $14.6 million. During
1997, Coal-Mac operations mined approximately 1.7 million tons of coal.
Pardee Complex. The Pardee Complex, located on fee property containing
approximately 12.3 million tons of dedicated recoverable coal reserves in Wise
County, Virginia, includes the Pardee, Band Mill and Dogwood Mines and the
Pardee preparation plant and loadout. The original Pardee Surface Mine was a
contour mining operation utilizing a 28-cubic-yard loader, along with a small
loader and auger operation. The mine produced approximately .7 million tons of
coal in 1997, but since the merger with Ashland Coal, the original Pardee
Surface Mine's contour mining operations have been closed and its production
commitments have been moved to lower-cost operations. Approximately .5 million
tons of coal will be produced from a new Pardee Mine in 1998 utilizing
smaller-scale surface mining and auger equipment on reserves near the original
Pardee Surface Mine.
The Band Mill Mine is a two-section underground mine initially developed in
1996. This mine produced approximately .7 million tons of coal in 1997. The
second section, with a continuous haulage system, became operational in the
first quarter of 1997. The Band Mill Mine is projected to produce approximately
.9 million tons of coal per year until exhaustion of its dedicated reserves,
estimated to occur in 2005.
The Dogwood Mine is a contract deep mine. Approximately .7 million tons of
coal reserves are dedicated to the Dogwood Mine, and its reserves will deplete
in 2002.
The majority of Pardee Complex surface-mined coal is shipped on a raw
basis, while all deep production and some highwall production requires
processing. Coal is processed at the 250 ton-per-hour Pardee preparation plant
and shipped from the 4,000 tons-per-hour Pardee loadout on the Norfolk Southern
railroad. The total cost of the Pardee Complex property, plant and equipment at
December 31, 1997 was $30.3 million, and the net book value was $16.3 million.
Illinois Operations
Captain Mine. The Captain Mine in Perry County, Illinois, is a large-scale
surface mine utilizing modern mining equipment, including an electric shovel
with a 105-cubic-yard bucket and a bucket wheel excavator. The Captain Mine
reserves are expected to be exhausted in mid-1998. 1997 production was
approximately 2.8 million tons. At December 31, 1997, the total cost of the
Captain Mine's property, plant and equipment was $80.3 million, and the net
book value was $4.1 million.
Conant Mine. The Conant Mine, an underground operation also located in
Perry County, Illinois, currently operates three continuous miners using
battery powered coal haulers and the Archveyor(R) system. Approximately
25 million tons of recoverable coal are currently dedicated to Conant Mine
operations, and production from the Conant Mine is expected to increase from
1997 production of approximately 2.0 million tons to approximately 2.6 million
tons in 1998 and approximately 3.0 million tons annually in 1999-2002 (as a
result of addition of a fourth section in late 1998 early 1999). The total cost
for the Conant Mine's property, plant and equipment at December 31, 1997, was
$40.1 million, and the net book value was $17.1 million.
The coal produced from the Captain and Conant Mines is processed through
the Captain preparation plant and loadout and is loaded onto the Illinois
Central Railroad or Union Pacific Railroad at the rate of 3,800 tons per hour.
The total cost of the Captain preparation plant and loadout's property, plant
and equipment at December 31, 1997, totalled $40.3 million, and its net book
value was $1.4 million.
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Western Operations
Medicine Bow Mine. The Medicine Bow Mine a surface mine in Carbon County,
Wyoming, produced 1.6 million tons of coal during 1997. As a result of
competition from similarly-priced higher-Btu coal produced by the Company's
competitors, the Medicine Bow Mine now is only expected to produce a total of
approximately 1.9 million tons through its depletion in 2000. The Medicine Bow
Mine utilizes a dragline with a 76-cubic-yard bucket and a dragline with a
64-cubic-yard bucket for overburden removal and reclamation. Significantly
reduced mining and increased reclamation activities will continue through 1998
pending a determination when to increase coal production.
Seminoe II Mine. The Seminoe II Mine is a surface mine that first began
production in 1973 and was idled in 1989. It was reactivated in mid-1995 and
produced .6 million tons in 1997. Approximately 1.4 million tons of coal are
currently dedicated to Seminoe II Mine production. Equipment deployed at the
Seminoe II Mine includes the Archveyor(R) system and a 32-cubic-yard dragline.
As a result of the same market factors experienced at the Medicine Bow Mine,
the Seminoe II Mine is not expected to produce significant amounts of coal in
1998, although reclamation activities will remain ongoing pending a
determination when to increase coal production.
Coal from each of the Medicine Bow and Seminoe II Mine loadouts is loaded
out of stockpile areas for unit train shipment at a rate of 4,000 tons per hour
on the Union Pacific Railroad. The total cost of property, plant and equipment
at Medicine Bow and Seminoe II Mines at December 31, 1997, was $65.3 million,
and the net book value was $6.8 million.
In June 1996, the Company acquired approximately 58,000 acres of land
containing approximately 96 million tons of low-sulfur coal reserves in the
Carbon Basin reserve area, approximately 25 miles southeast of the Seminoe II
Mine, for $14.2 million. Since acquiring this property, the Company has sold a
significant portion of the noncoal producing lands to third parties. The Company
intends to develop 27 million tons of these reserves as a large-scale surface
mining operation, with production currently projected to begin in 2001.
All of the mining complexes, mines and related facilities described above
in OPERATIONS are accessible by public road, and power to the complexes, mines
and facilities is supplied by public utility companies doing business in the
area of such operations. The total cost of property, plant and equipment
reflects purchase accounting adjustments.
TRANSPORTATION
Coal from the mines of the Company's subsidiaries is transported by rail,
truck, and barge to domestic customers and to Atlantic coast terminals for
shipment to domestic and international customers.
The Lockwood Dock is located on a 60-acre site on the Big Sandy River
approximately seven miles upstream from its confluence with the Ohio River. In
addition to providing storage and transloading services, the Lockwood Dock
provides certain maintenance and other services at the Company's idle Big Sandy
Terminal operation. The coal transloading and storage business of Big Sandy
Terminal and the Lockwood Dock was consolidated at the Lockwood Dock shortly
after the July 1 merger with Ashland Coal.
The Paint Creek Terminal is located on leased property on the Kanawha River
at Crown Hill, West Virginia. The facility transloads coal trucked from the
Samples Mine for shipment by barge to the Company's customers.
In addition, Company subsidiaries together own a 17.5% interest in Dominion
Terminal Associates ("DTA"), which leases and operates a ground
storage-to-vessel coal transloading facility (the "DTA Facility") in Newport
News, Virginia. The DTA Facility has a throughput capacity of 20 million tons
of coal per year and ground storage capacity of approximately 1.7 million tons.
The DTA Facility serves international customers, as well as domestic coal users
located on the eastern seaboard of the United States. For additional
information concerning the Company's investment in DTA, see the last paragraph
in Note 18 to the Company's Consolidated Financial Statements on page 42 below
and incorporated by reference in this Item 1.
EMPLOYEES
As of March 11, 1998, the Company and its independent operating
subsidiaries employed a total of 3,366 people (including 36 part-time
employees), 1,392 of whom are represented by the UMWA. Apogee and Hobet each
are signatories to the Wage Agreement, which was ratified on December 16, 1997,
became effective January 1, 1998, and
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expires on December 31, 2002. The provisions of the Wage Agreement will not
significantly affect the Company's operating costs.
The terms of the Wage Agreement principally affected pension matters for
laid-off miners by allowing miners with 20 years of pension credit to retire
regardless of their age. Pension accruals for active miners also were increased
by $4 per month for all years of service, past and future, and effective in
January 2000, the pension schedule for active miners was increased an
additional $2 per month per year of service. These changes together resulted in
an increase of 25% in a miner's pension income. For retired members, pensions
for all classes of retirees were increased by $15 per month.
In addition, the Wage Agreement provides for wage increases totalling $1.10
per hour over the first three years and a lump sum wage payment of $600 after
both the third and fourth years of the contract. Other benefits and changes
included increases in certain life, accident and health care insurance
benefits; increases in the contribution rates for the UMWA Training and
Education Fund and the UMWA 1993 Benefit Fund; revised work protection
procedures for grievances related to job opportunities and under the 1995
Memorandum of Understanding Regarding Job Opportunities; and rules changes to
permit more flexible scheduling by employers.
REGULATIONS AFFECTING COAL MINING
Coal mining is subject to strict regulation by federal, state, and local
authorities. The scope of the regulation includes environmental and health and
safety matters, and permits are required to be obtained by mining companies,
the terms of which permits strictly regulate the environmental effects of coal
mining by the permittee.
Permitting and Environmental Matters
Numerous permits are required for mining operations. The Company believes
all permits required to conduct present mining operations have been obtained.
The Company believes that, upon the filing of the required information with the
appropriate regulatory agencies, all permits necessary for continuing
operations will be obtained. Nevertheless, the regulatory authorities exercise
considerable discretion in the timing of permit issuance. Because both private
individuals and the public at large possess rights to comment on and otherwise
engage in the permitting process, no assurance can be made that all permits
will be issued in a timely matter.
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA")
was enacted to regulate certain surface mining of coal and the surface effects
of underground mining. All states in which the Company's subsidiaries operate
have similar laws and regulations enacted pursuant to SMCRA which regulate
surface and deep mining that impose, among other requirements, reclamation and
environmental requirements and standards.
The federal Clean Water Act affects coal mining operations by imposing
effluent discharge restrictions on pollutants discharged into waters. In
addition, the United States Environmental Protection Agency ("EPA") has
permitting requirements for storm water discharges from industrial facilities.
These regulations require permits for some aspects of mining operations.
Regular monitoring and compliance with reporting requirements and performance
standards are preconditions for the issuance and renewal of permits governing
the discharge of pollutants into waters. Further, mining operations are subject
to Clean Water Act regulations with respect to discharges into some ponds
created to treat or dispose of coal mining wastes.
All states in which the Company's subsidiaries operate also have laws
restricting discharge of pollutants into the waters of those states.
The federal Resource Conservation and Recovery Act ("RCRA") and
implementing federal regulations exclude from the definition of hazardous waste
all coal extraction, beneficiation and processing wastes. Additionally, other
coal mining wastes which are subject to an SMCRA permit are exempt from RCRA
permits and standards. Each of the states in which the Company's subsidiaries
are currently engaged in mining similarly exempt coal mine waste from their
respective state hazardous waste laws and regulations. The federal
Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act, affects coal
mining operations by subjecting them to liability for the remediation of
releases of hazardous substances (other than waste excluded from federal and
state regulation, as noted above) that may endanger public health or welfare or
the environment.
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The federal Clean Air Act, as amended in 1990, imposes numerous
requirements on various categories of emission sources and West Virginia state
air regulations impose permitting obligations and performance standards on
certain coal preparation plants and coal handling facilities, such as crushers
and screens.
Health and Safety Matters
The federal Mine Safety and Health Act of 1977 imposes health and safety
standards on all mining operations. Regulations are comprehensive and affect
numerous aspects of mining operations, including training of mine personnel,
mining procedures, blasting, and the equipment used in mining operations. The
Black Lung Benefits Reform Act of 1977 generally requires each coal mine
operator to secure payment of federal and state black lung benefits to its
employees through insurance, bonds, or contributions to a state-controlled
fund. The Black Lung Benefits Reform Act of 1977 also provides for the payment
from a trust fund of benefits and medical expenses to employees for whom no
benefits have been obtainable from their employer. This trust is financed by a
tax on coal sales.
The Coal Industry Retiree Health Benefit Act of 1992 ("Benefit Act")
addressed two under-funded trust funds which were created to provide medical
benefits for certain UMWA retirees. The 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) that commenced in 1995. The
constitutionality of the Benefit Act has been challenged and the U.S. Supreme
Court has heard, but has not yet ruled upon, the case. If the Benefit Act is
declared unconstitutional, there will be an immediate favorable benefit to the
Company. However, the Company is uncertain of the ultimate financial impact of
such decision because such impact will depend in part on the nature of
substitute legislation, if any, arising as a consequence of such a ruling.
Compliance with Regulatory Requirements and Existing Environmental
Liability
The Company's operating subsidiaries endeavor to conduct their operations
in compliance with all applicable federal, state, and local laws and
regulations. However, because of the extensive and comprehensive regulatory
requirements, violations during mining operations are not unusual in the
industry. From time to time the Company and its subsidiaries are party to civil
and administrative proceedings as a result of alleged failures to comply with
mandatory federal or state health and safety regulations. The Company believes
that any adverse results in the currently pending proceedings, if incurred,
would not have a material adverse effect on the Company's consolidated
financial condition, results of operations, or liquidity.
Mingo Logan is a party to civil and administrative proceedings brought by
owners of commercial surface property overlying part of Mingo Logan's
Mountaineer Mine. These proceedings seek revocation of mining permits for the
Mountaineer Mine and seek damages for loss in the value of the plaintiffs'
property and business. The Company does not believe that Mingo Logan's mining
permits will be revoked as a result of these proceedings, and that the damage
claim will not have a material adverse effect on the Company's consolidated
financial condition, results of operations, or liquidity.
On October 31, 1997, the EPA notified a Company subsidiary that it was a
potentially responsible party in the investigation and remediation of two
hazardous waste sites located in Kansas City, Kansas, and Kansas City,
Missouri. The Company's involvement arises from the subsidiary's sale, in the
mid-1980's, of fluids containing small quantities of polychlorinated biphenyls
("PCBs") to a company authorized to engage in the processing and disposal of
these wastes. Some of these waste materials were sent to one of the sites for
final disposal. The Company responded to the information request submitted by
EPA on December 1, 1997. Any liability which might be asserted by EPA against
the Company is not believed to be material because of the de minimis quantity
and concentration of PCBs linked to the Company. Moreover, the party with whom
the subsidiary contracted to dispose of the waste material has agreed to
indemnify the Company for any costs associated with this action.
On October 24, 1996, the rock strata overlaying an abandoned underground
mine adjacent to the coal-refuse impoundment used by the Lone Mountain
preparation plant failed, resulting in an accidental discharge of approximately
6.3 million gallons of water and fine coal slurry into a tributary of the
Powell River in Lee County, Virginia. At the request of the EPA and the U.S.
Fish and Wildlife Service, the United States Attorney for the Western District
of
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Virginia opened a criminal investigation of the 1996 incident. Arch Coal is
cooperating with the investigation, the results of which are not expected until
sometime later in 1998.
Except as described herein, the Company is not aware of any alleged or
existing conditions on property in which it has an ownership or other interest
that would give rise to material liability under federal, state, and local
environmental laws, regulations, or ordinances. The Company believes that
continued compliance with regulatory standards will not substantially affect
its ability to compete with similarly situated coal mining companies.
SEASONALITY
The results of the third quarter of each year are frequently adversely
affected by lower production and resultant higher costs because of scheduled
vacation periods at the majority of the Company's mines. In addition, costs are
typically somewhat higher during vacation periods because of maintenance
activity carried on during those periods. These adverse effects on the third
quarter may make the third quarter not comparable to the other quarters and not
indicative of results to be expected for the full year.
RELIANCE ON MAJOR CUSTOMERS
The Company's total sales to Southern Company and AEP and their respective
affiliates accounted for approximately 18% and 13%, respectively, of the
Company's total revenues in 1997. Southern Company and AEP and/or their
affiliates each currently have multiple long-term contracts with the Company.
If the Company experienced an unanticipated and immediate loss of all of the
contracts of either of these customers, the loss could have a material adverse
effect on the Company's business and results of operations.
COMPETITION
The coal industry is highly competitive, and the Company competes
(principally in price, location, and quality of coal) with a large number of
other coal producers, some of which are substantially larger and have greater
financial resources and larger reserve bases than the Company. Most long-term
supply agreements and spot market orders are the result of competitive bidding.
Coal also competes with other energy sources such as oil, natural gas,
hydropower, and nuclear energy for steam and electrical power generation. Over
time, the cost and other factors, such as safety and environmental
considerations, relating to these alternative fuels may affect the overall
demand for coal as a fuel.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company's subsidiaries owned, or controlled
primarily through long-term leases, approximately 275,000, 100,000 and 2,000
acres of coal lands in West Virginia, Eastern Kentucky, and Virginia,
respectively; 161,000 acres of coal lands in the Illinois Basin; and 53,000
acres of coal lands in Wyoming. Approximately 14,500 acres of the Company's
coal land are leased from the federal government with terms expiring between
1999 and 2011, subject to readjustment and/or extension and to earlier
termination for failure to meet diligent development requirements. The
Company's subsidiaries also control through ownership or long-term leases
approximately 4,100 acres of land which are used either for its coal processing
facilities or are being held for possible future development. The Pine Creek,
Black Bear, Campbells Creek, Samples, Ruffner and Holden 25/Ragland preparation
plants and related loadout facilities are located on properties held under
leases which expire in 2030, 2007 (with an optional 20-year extension), 2003,
2012, 2062 and 2006 (with unlimited extensions), respectively, and the balance
of the Company's preparation plants and loadout facilities are located on
property owned by the Company. The Company's executive headquarters occupy
approximately 50,000 square feet of leased space at CityPlace One, St. Louis,
Missouri, and the Company maintains an operational headquarters in
approximately 100,000 square feet of subleased space at 2205 Fifth Street Road,
Huntington, West Virginia. The descriptions set forth above in Item 1. Business
of the Company's subsidiaries' mining complexes, mines, transportation
facilities and other operations are hereby incorporated into this Item 2 by
reference.
The Company's subsidiaries currently own or lease the equipment that is
significant to their mining operations. Hobet, Apogee and Catenary Coal Company
lease equipment pursuant to a sale and leaseback transaction entered into in
January 29, 1998. For further information about this 1998 sale-leaseback
transaction, see Note 16 to the Company's Consolidated Financial Statements on
page 41 below.
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COAL RESERVES
The Company estimates that its subsidiaries owned or controlled, as of
December 31, 1997, approximately two billion recoverable tons of proven and
probable coal reserves. Reserve estimates are prepared by the Company's
engineers and geologists and reviewed and updated periodically. Total reserve
estimates and reserves assigned/dedicated to mines and complexes will change
from time to time reflecting mining activities, analysis of new engineering and
geological data, changes in reserve holdings and other factors. The following
table presents the Company's estimated reserves at December 31, 1997:
Recoverable Coal
MEASURED INDICATED TOTAL
---------- --------- ---------
(THOUSANDS OF TONS)
Central Appalachia...................................... 1,048,356 436,736 1,485,092
Illinois................................................ 312,861 101,550 414,411
Wyoming (and Other)..................................... 101,783 72,236 174,019
--------- ------- ---------
Total................................................... 1,463,000 610,522 2,073,522
========= ======= =========
Approximately 47% of the Company's coal reserves are held in fee, with the
balance controlled by leases most of which do not expire until the exhaustion
of mineable and merchantable coal. Other leases have primary terms expiring in
various years ranging from 1998 to 2013, and most contain options to renew for
stated periods. Royalties are paid to lessors either as a fixed price per ton
or as a percentage of the gross sales price of the mined coal. The majority of
the significant leases are on a percentage royalty basis. In certain cases, a
lease bonus (prepaid royalty) is required, payable either at the time of
execution of the lease or in annual installments following such execution. In
most cases, the prepaid royalty amount is applied to reduce future production
royalties. Subsidiaries of the Company currently own or control approximately
22,000 acres of lands upon which exploration has not been conducted.
Federal and state legislation controlling air pollution affects the demand
for certain types of coal by limiting the amount of sulfur dioxide which may be
emitted as a result of fuel combustion and, thereby, encourages a greater
demand for low-sulfur coal. So-called "compliance coal", i.e. coal which
emits 1.2 pounds or less of sulfur dioxide per million Btu upon combustion
without the aid of sulfur reduction technology, is referred to as such because
combustion of such coal results in sulfur emissions within the parameters
required by the Clean Air Act.
All of the identified coal reserves held by the Company's subsidiaries have
been subject to preliminary coal seam analysis to test sulfur content. Of these
reserves, approximately 32% consist of coal with a sulfur dioxide content of
1.2 lbs/MM Btu or less, and approximately 44% could be sold as low-sulfur coal.
The balance is classified as high-sulfur coal. Some of the Company's low-sulfur
coal can be marketed as compliance coal when blended with other compliance
coal. Accordingly, most of the Company's reserves are primarily suitable for
the domestic steam coal markets. However, a substantial portion of the
low-sulfur and compliance coal reserves at the Mingo Logan operations may also
be used as a high-volatile, low-sulfur, metallurgical coal.
The carrying cost of the Company's coal reserves at December 31, 1997, was
$748.6 million, consisting of $17.7 million of prepaid royalties included in
current assets, $20.8 million of prepaid royalties classified as an other
asset, and $710.1 million net book value of coal lands and mineral rights.
Title to coal properties held by lessors or grantors to the Company and its
subsidiaries and the boundaries of properties are normally verified at the time
of leasing or acquisition. However, in cases involving less significant
properties and consistent with industry practices, title and boundaries are not
completely verified until such time as the Company's independent operating
subsidiaries prepare to mine such reserves. If defects in title or boundaries
of undeveloped reserves are discovered in the future, control of and the right
to mine such reserves could be adversely affected.
From time to time, lessors or sublessors of land leased by the Company's
subsidiaries have sought to terminate such leases on the basis that such
subsidiaries' have failed to comply with the financial terms of the leases or
that the mining and related operations conducted by such subsidiaries are not
authorized by the leases. Some of these allegations relate to leases upon which
the Company conducts operations material to the Company's consolidated
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financial position, results of operations and liquidity, but the Company does
not believe any pending claims by such lessors or sublessors have merit or will
result in the termination of any material lease or sublease.
ITEM 3. LEGAL PROCEEDINGS
The description of pending legal proceedings with respect to the accidental
discharge at Lone Mountain in the fourth paragraph under the "Compliance With
Regulatory Requirements and Existing Environmental Liability" subsection under
the "Regulations Affecting Coal Mining" section of Item 1 at page 8 of this
report is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company through the solicitation of proxies or otherwise during the fourth
quarter of 1997.
ITEM X. EXECUTIVE OFFICERS
The following is a list of the Company's executive officers, their ages and
their positions and offices held during the last five years.
Steven F. Leer, 45, has been President and Chief Executive Officer of the
Company since 1992.
Kenneth G. Woodring, 48, has been Executive Vice President--Mining
Operations of the Company since the merger with Ashland Coal. Mr. Woodring
served as Senior Vice President--Operations of Ashland Coal since 1989.
C. Henry Besten, Jr., 49, has been Vice President--Strategic Marketing of
the Company and President of the Company's Arch Energy Resources, Inc.
subsidiary since the merger with Ashland Coal. Mr. Besten served as Senior Vice
President--Marketing for Ashland Coal since 1990.
John W. Eaves, 40, has been Vice President--Marketing of the Company since
the merger with Ashland Coal. In the five years preceding the merger, he held a
series of sales related positions with the Company, including President of the
Company's Arch Coal Sales Company, Inc. subsidiary since 1995.
Jeffrey A. Hoops, 41, has been Vice President--Operations of the Company
since the merger with Ashland Coal. In the five years preceding the merger, Mr.
Hoops held various operating positions with Ashland Coal, including Vice
President of Operations Planning and Central West Virginia Surface Operations
from 1994 until the merger.
Patrick A. Kriegshauser, 36, has been Senior Vice President, Treasurer and
Chief Financial Officer of the Company since July, 1996. During the prior five
years, he served as Vice President--Controller, Vice President--Planning &
Development, and Controller of Arch of West Virginia, Inc. (a subsidiary of the
Company that was merged into Apogee in 1993).
David B. Peugh, 43, has been Vice President--Business Development of the
Company since 1993. Prior to 1993, Mr. Peugh was Director of Exploration and
Development of Ashland Coal.
Jeffry N. Quinn, 39, has been Senior Vice President--Law & Human Resources,
Secretary and General Counsel of the Company since 1995. During the prior five
years, he served as Senior Vice President, Secretary and General Counsel.
Robert W. Shanks, 44, has been Vice President--Operations of the Company
since the merger with Ashland Coal, and has been President of Apogee Coal
Company, a subsidiary of the Company, since 1995. In the five years prior to
the merger, he was President of Apogee (formerly Arch of Illinois, Inc.) and
Vice President of the Illinois Division of Apogee. Mr. Shanks is currently the
Chairman of the Bituminous Coal Operators Association (the "BCOA").
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange and also has unlisted trading privileges on the Chicago Stock Exchange
(symbol: ACI).
Information regarding the Company's common stock is shown in the following
table.
QUARTER ENDED
--------------------------------------------------------------------------------------
1996 1997
------------------------------------------ ------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
--------- --------- --------- --------- --------- --------- --------- ---------
Dividend per common share........ -- -- $.38 -- $.108 $.108 $.115 $.115
Market price per common share<F*>
High......................... $30 3/8 $30 5/16
Low.......................... $27 1/8 $24 5/8
<FN>
- ---------
<F*> The Company's common stock did not trade publicly until the July 1, 1997
merger with Ashland Coal. Prices reflect New York Stock Exchange trading.
The Company expects to continue paying regular cash dividends, although
there is no assurance as to the amount or payment of dividends in the future
because they are dependent on the Company's future earnings, capital
requirements, and financial condition. In addition, the payment of dividends is
subject to the restriction described in Note 6 to the Company's Consolidated
Financial Statements below on page 33.
As of March 9, 1998, there were 871 holders of record of the Company's
common stock.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997<F2><F3> 1996 1995<F4><F5> 1994<F6> 1993<F7>
------------ -------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Coal sales and other revenues........... $1,066,873 $780,621 $737,838 $785,287 $487,670
Costs and expenses:
Cost of coal sales<F8>.............. 918,862 669,295 657,529 648,091 459,493
Selling, general and administrative
expenses.......................... 28,882 20,435 19,680 21,758 19,070
Amortization of coal supply
agreements........................ 18,063 12,604 13,374 15,346 7,672
Merger-related expenses............. 39,132 -- -- -- --
Write-down of impaired assets....... -- -- 10,241 -- --
Restructuring expenses.............. -- -- 8,250 -- --
Other expenses...................... 20,052 22,175 18,739 35,150 53,990
---------- -------- -------- -------- --------
Income (loss) from operations........... 41,882 56,112 10,025 64,942 (52,555)
Interest expense, net................... 17,101 17,592 22,962 21,582 15,443
Provision (benefit) for income taxes.... (5,500) 5,500 (1,900) 8,200 (29,100)
---------- -------- -------- -------- --------
Net income (loss)....................... $ 30,281 $ 33,020 $(11,037) $ 35,160 $(38,898)
========== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets............................ $1,656,324 $885,521 $940,768 $993,361 $849,804
Working capital......................... 40,904 33,166 40,077 27,512 (3,369)
Long-term debt.......................... 248,425 212,695 274,314 308,166 223,698
Other long-term obligations............. 594,127 421,754 429,993 413,209 413,427
Stockholders' equity.................... 611,498 130,626 113,692 131,426 96,266
COMMON STOCK DATA:
Basic and diluted earnings (loss) per
common share.......................... $ 1.00 $ 1.58 $ (0.53) $ 1.68 $ (1.86)
Dividends per share..................... .445 .38 .32 -- .38
Shares outstanding at year-end.......... 39,658 20,948 20,948 20,948 20,948
CASH FLOW DATA:
Cash provided by operating activities... $ 190,263 $138,471 $ 98,159 $ 81,273 $ 54,924
Depreciation, depletion and
amortization.......................... 143,632 114,703 100,101 99,431 80,415
Purchases of property, plant and
equipment............................. 54,378 48,290 80,347 96,717 98,795
Dividend payments....................... 13,630 8,000 6,697 -- 8,000
EBITDA<F9>.............................. 224,646 170,815 128,617 164,373 27,860
OPERATING DATA:
Tons sold............................... 40,525 29,443 26,742 27,898 17,574
Tons produced........................... 36,698 26,887 25,562 27,383 14,848
<FN>
- ---------
<F1> Certain amounts for years prior to 1997 have been reclassified to conform
with the 1997 classifications with no effect on previously reported net
income (loss) or stockholders' equity.
<F2> Information for 1997 reflects the merger with Ashland Coal on July 1,
1997.
<F3> Income from operations for 1997 reflects a $39.1 million charge in
connection with the Ashland Coal merger comprised of termination benefits,
relocation costs and costs associated with the idling of duplicate
facilities.
<F4> Income from operations for 1995 reflects total charges of $18.5 million
for restructuring and asset write-downs. The Company restructured its
selling, general and administrative functions and reduced its salaried
workforce by 143 employees. Total restructuring charges of $8.3 million
included charges for severance, pension and post-retiree medical benefits.
As a result of implementing SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
recorded charges of $10.2 million to write-down certain idle assets to
their fair value.
<F5> On July 31, 1995, the Company sold its timber rights to approximately
100,000 acres of property in the eastern United States for a gain of $8.4
million.
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<F6> In January 1994, the Company acquired the stock of Agipcoal Holding USA,
Inc., and its subsidiaries, simultaneously sold certain of the operations
and entered into a sale lease-back agreement for certain coal reserves for
net consideration of $65.9 million. Coal mining operations in Kentucky and
West Virginia, and certain coal supply agreements, were acquired. The
acquisition was accounted for as a purchase and, accordingly, the results
of operations are included in the consolidated financial statements of the
Company subsequent to the date of purchase.
<F7> The results of operations for 1993, were adversely affected by a
seven-month strike by the UMWA against all of Apogee's operations as part
of a nationwide strike against members of the BCOA. Depreciation and other
expenses, including back-to-work bonuses and start-up costs, were expensed
in cost of coal sales as incurred.
<F8> In 1993, in consultation with actuaries, the Company adjusted the discount
rate, the black lung benefit cost escalation rate, rates of disability and
other assumptions used in the actuarial determination of pneumoconiosis
(black lung) liabilities to reflect more accurately actual experience. The
effect of these changes was a significant increase in the unrecognized net
actuarial gain. In accordance with Company policy, this gain was amortized
as a credit to cost of coal sales and totaled approximately $10 million
annually in each of 1993 through 1997.
<F9> EBITDA is defined as income from operations before the effect of changes
in accounting principles, unusual items (Notes 3 and 4 above), net
interest expense, income taxes, depreciation, depletion and amortization.
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to incur and service debt. EBITDA should not be
considered in isolation or as an alternative to net income, operating
income, cash flows from operations or as a measure of a company's
profitability, liquidity or performance under generally accepted
accounting principles. This measure of EBITDA may not be comparable to
similar measures reported by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Contingencies," "Certain Risk Factors," "Impact of Year 2000"
and "Factors Routinely Affecting Results of Operations" sections below
discuss factors that may cause actual results to differ materially from the
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934) in the
"Outlook" and "Liquidity and Capital Resources" sections below, and
elsewhere herein.
RESULTS OF OPERATIONS
Merger With Ashland Coal
On July 1, 1997, Ashland Coal merged with a subsidiary of the Company, and
18,660,054 shares of Company common stock were issued in the merger. The merger
was accounted for as a purchase.
At the time of the merger, Ashland Coal was engaged in the mining,
processing and marketing of low-sulfur bituminous coal primarily in the eastern
United States, and Ashland Inc. owned stock representing approximately 57% of
the voting power of Ashland Coal and 50% of the voting stock of the Company.
Ashland Inc. currently owns approximately 54% of the Company's outstanding
common stock.
Comparisons of 1997 to 1996 have been materially affected by the merger
with Ashland Coal effective July 1, 1997.
1997 Compared to 1996
Net income for 1997 was $30.3 million compared to net income of $33.0
million for 1996. The current year includes a one-time charge of $39.1 million
($23.8 million after tax) related to the Company's merger with Ashland Coal.
Excluding this charge, the Company had net income of $54.1 million for the
year. The merger-related charge was comprised of termination benefits and
relocation costs of $8.1 million and costs of $31.0 million associated with the
idling of duplicate facilities, including a coal loading terminal on the
eastern side of the Big Sandy River and the Pardee Surface Mine on the
Kentucky/Virginia border. Coal loading operations were consolidated and are now
being conducted from a terminal facility on the west side of the Big Sandy
River that was operated by Ashland Coal prior to the merger. The Pardee Surface
Mine's sales commitments are expected to be sourced from available capacity at
other, lower-cost Arch Coal operations.
Gross profit on coal sales (selling price less cost of sales) on a per ton
basis increased $.11 per ton from 1996 to 1997. The average selling price
increased $.05 per ton while cost of coal sold decreased $.06 per ton. The
reduction in cost was primarily attributable to higher production from the
Ruffner and Wylo Mines, cost improvement at Lone
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Mountain's Huff Creek and Darby Fork mines, and the addition, as a result of the
merger, of low-cost production from the Mingo Logan and Dal-Tex Complexes.
Largely offsetting those effects were higher costs resulting from the depletion
of the longwall reserves at Mine No. 37, higher costs at the Company's Wyoming
and Pardee operations, and the addition of higher-cost surface production from
the Hobet 21 Complex after the merger with Ashland Coal.
Selling, general and administrative expenses increased $8.4 million
primarily due to the effects of the Ashland Coal merger.
Amortization of coal supply agreements increased $5.5 million. This
increase is primarily due to the amortization of the carrying value of the
Ashland Coal sales contracts, partially offset by a decrease in amortization
resulting from the completion of amortization on certain other sales contracts
at the end of 1996.
Interest expense declined $1.0 million in 1997 due to lower average debt
levels and the prepayment of higher-cost fixed-rate debt.
The income tax benefit recorded in 1997 was primarily attributed to the
$15.3 million tax benefit associated with the one-time merger-related charge
discussed above.
EBITDA (income from operations before the effects of changes in accounting
principles, unusual items (see notes 3 and 4 to Selected Financial Data at page
13 above), net interest expense, income taxes, depreciation, depletion and
amortization) was $224.6 million for 1997 compared to $170.8 million for 1996.
The increase in EBITDA is primarily attributable to the merger with Ashland
Coal. EBITDA is a widely accepted financial indicator of a company's ability to
incur and service debt, but EBITDA should not be considered in isolation or as
an alternative to net income, operating income, or cash flows from operations,
or as a measure of a company's profitability, liquidity or performance under
generally accepted accounting principles. The Company's method of computing
EBITDA also may not be the same method used to compute similar measures
reported by other companies.
1996 Compared to 1995
Net income of Arch Coal for 1996 was $33.0 million compared to a net loss
of $11.0 million in 1995. A restructuring charge of $8.3 million and a write
down of impaired assets of $10.2 million were reflected in 1995 results.
Gross profit on coal sales on a per-ton basis increased $.91 per ton from
1995 to 1996. The average selling price decreased $.95 per ton while cost of
coal sold decreased $1.86 per ton. The decrease in average selling price was
primarily due to increased sales of lower-realization shipments from the
Illinois and Wyoming operations. The decrease in costs were due to the sale of
certain Kentucky operations, closing of higher-cost West Virginia operations in
1995, a decrease in postretirement benefit costs of approximately $4.0 million,
improved productivities at most operations, and improved geologic conditions at
Mine No. 37. These positives were partially offset by lower yields and poor
geologic conditions at Lone Mountain's Huff Creek and Darby Fork mines. Also,
the Company reduced the estimated useful lives of certain long-lived assets
which resulted in an additional $11.3 million of depreciation and amortization
expense recorded to cost of sales in 1996. These changes in estimates were
primarily due to increased productivities and reductions in recoverable
reserves. These assets were being depreciated on a straight-line basis over the
estimated life of certain mines. As a result of increased production and
adjustments to economically recoverable reserves, the life of the mines were
reduced. Therefore, the asset lives were adjusted to conform to the estimated
recoverable reserves of the respective mines.
Selling, general and administrative expenses increased $.8 million
primarily due to costs associated with the Company's incentive compensation
plan, as the Company had net income as compared to a net loss in 1995.
Amortization of coal supply agreements decreased $.8 million from 1995
largely due to the expiration of the AEP-Central Operating contract in the
first quarter of 1996 and the buyout of a Carolina Power & Light contract on
February 28, 1995.
Other expenses increased $3.4 million in 1996 when compared to 1995. This
increase resulted from a charge of $1.7 million in connection with the
settlement of a lawsuit with the Utah Division of State Lands and Forestry and
$1.4 million in connection with the redemption of debt.
Interest expense decreased $5.0 million in 1996 due to lower average debt
levels, including lower levels of higher-cost fixed-rate debt.
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Income tax expense increased to $5.5 million from a benefit of $1.9 million
principally due to an increase in the Company's profitability. The effective
tax rate is sensitive to changes in profitability because of the effect of
percentage depletion. The 1995 net tax benefit included a $9.9 million
provision for open tax years.
OUTLOOK
Several events, together with the negative effect on operating income
resulting from the depletion of the longwall reserves at Mine No. 37, will
materially and adversely affect the Company's results in 1998.
The most significant event was the expiration of one of the Company's
long-term coal supply contracts with Georgia Power in December 1997. Under the
contract, the Company supplied 1.9 million tons of low-sulfur coal per year
from its Lone Mountain and Pardee operations and from third parties. The prices
for coal shipped under this contract were significantly above the then current
open market price of such coal. For 1997, 5.6% of the Company's pro forma
combined revenues and 16.9% of its pro forma combined operating income
(excluding the merger-related charge) related to sales under this contract, and
the impact of its expiration will be disproportionate to the percentage of
total shipments represented by the tonnage delivered under the contract. The
Company continues to supply a significant amount of similar quality coal to
Georgia Power at less favorable prices.
A customer of the Company has informed the Company that one of its power
plants will no longer provide baseload capacity to a public utility and instead
will be used to provide peak demand only and, as a result, the plant will
require substantially less coal under the customer's existing above-market
contract with the Company. The customer purchased 397,000 tons of coal from the
Company in 1997. A significant long-term reduction in the volume of coal
supplied under this contract will reduce the Company's after-tax earnings by as
much as $3 million annually. The Company has filed a civil action in Federal
District Court in the Southern District of West Virginia alleging breach of
contract and other causes of action against the customer in respect of the
customer's failure to comply with the terms of this contract. As of December
31, 1997, the carrying amount of acquisition costs allocated to this coal
supply contract amounts to approximately $17 million. The Company's current
estimates of undiscounted cash flows indicate the carrying amount of this asset
is expected to be recovered.
In 1997, the Company fully amortized its original $50 million unrecognized
net gain realized in 1993 as a result of changes in the discount rate, black
lung benefit cost escalation rate, rates of disability and other assumptions
used in the actuarial calculation of pneumoconiosis (black lung) liabilities.
The $50 million pre-tax gain was being amortized as a credit to cost of coal
sales and totaled approximately $10 million ($6 million after tax) annually in
each of 1993 through 1997.
On January 31, 1998, the Company discontinued operation of two continuous
miner units in Mine No. 37 and the Cave Branch preparation plant in Kentucky.
The discontinued operations were expected to produce approximately 1.9 million
tons of coal through scheduled depletion of their dedicated reserves in 1999.
The first quarter of 1998 will be adversely affected by certain costs
associated with discontinuing these operations. The Company does not anticipate
a significant write-down of assets as most of the carrying amount of the assets
is expected to be recovered.
These developments will be mitigated to some degree by synergies from the
Ashland Coal merger, increased income from the Company's Ark Land subsidiary's
ongoing third-party leasing efforts and normal sales of property, and by
reduced interest expense as a result of lower debt levels in general and the
refinancing of long-term debt at more favorable rates. In addition, operational
improvements including improving geology at Lone Mountain's Huff Creek and
Darby Fork Mines, deployment of a third equipment section at the Darby Fork
Mine and a second equipment section at the Band Mill Mine, and improving costs
at the Wylo Mine and Hobet 21 Complex are expected to contribute positively to
1998 results. There are a variety of factors, however, which could cause the
improvements not to be realized. These factors are set forth below in "Factors
Routinely Affecting Results of Operations". For example, adverse geologic
conditions could unexpectedly recur at Lone Mountain's Huff Creek and Darby
Fork Mines, or occur at other operations.
Management has decided to substantially scale back coal mining operations
during 1998 at the Wyoming operations as a result of oversupply of competing
coals in their market. In addition, the Hobet 07 Complex and the Captain Mine
are scheduled to close in 1998 upon depletion of their economical dedicated
reserves. Production losses as a result of mine closures, scaled-back
production and depletion are expected to be offset to some degree by the second
quarter 1998 start up of Mingo Logan's new surface mine in the Phoenix
reserves, several new contract and
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Company deep mines scheduled to open in 1998, and increased production as a
result of the operational improvements referred to above. Nevertheless, the
Company believes its 1998 production will decline somewhat from the pro forma
combined production of the Company and Ashland Coal in 1997.
The Wage Agreement became effective January 1, 1998, and will expire
December 31, 2002. The Wage Agreement, which covers the UMWA-represented
employees of the Company's Hobet and Apogee subsidiaries, provides for wage
increases totalling $1.10 per hour over the first three years and a lump sum
wage payment of $600 after both the third and fourth year of the contract. In
addition, certain other benefits, for both active and retired UMWA employees
and their spouses and dependents, were improved under the Wage Agreement. The
provisions of the Wage Agreement will not significantly affect the Company's
operating costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Arch Coal's debt was 31% of capital employed and its
current assets to current liabilities ratio was 1.2 to 1.0. Debt as a percent
of capital employed is down from 62% at the end of 1996, reflecting the equity
financing of the Ashland Coal merger (partially offset by the debt assumed in
the merger) and strong cash flows from operations during 1997. During the six
months following the Ashland Coal merger, debt as a percent of capital employed
declined five percent.
The following is a summary of cash provided by or used in each of the
indicated types of activities during the past three years:
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
Cash provided by (used in):
Operating activities.................................... $ 190,263 $138,471 $ 98,159
Investing activities.................................... (80,009) (72,638) (45,299)
Financing activities.................................... (114,793) (69,619) (40,549)
The 1997 increase in cash provided by operating activities from the 1996
level is principally due to the Ashland Coal merger, partially offset by tax
payments related to prior year audits. Cash flow from 1996 operating activities
exceeded that for 1995, primarily for the same reasons discussed above that
1996 costs were lower than 1995 levels.
The increase in cash used for investing activities in 1997 from the 1996
level principally reflects higher acquisition expenditures. The 1997
acquisition expenditures include $17.0 million for the Kayford James reserves
adjacent to the Samples Mine and $6.0 million for a reserve acquisition
adjacent to the Hobet 21 Complex, while 1996 expenditures include the $14.2
million Carbon Basin reserve acquisition. The 1996 increase in cash used for
investing activities from the 1995 level primarily is due to the higher amount
of proceeds received for sales of assets in 1995. During 1995, the Company sold
the timber rights to approximately 100,000 acres of its fee property, its
supply company, the Pevler mining operation and various other assets (including
the buyout of a sales contract) for proceeds totalling $42.6 million.
Cash used in financing activities principally reflects reductions in
borrowings of $102.2 million in 1997, $61.6 million in 1996 and $33.9 million
in 1995. The increase in debt repayments during 1997 versus 1996 primarily
resulted from the higher amount of cash flow generated by operations in the
second half of 1997. In addition to the increased debt repayments, 1997
dividend payments increased by $5.6 million compared to 1996. Payments on
borrowings during 1996 exceeded the 1995 level principally due to the lower
costs and resulting higher cash flow generated by operations in 1996 versus
1995. 1996 debt repayments include a $15.3 million payment in exchange for the
early redemption of preferred stock of an acquired company, and a prepayment on
indebtedness of $18.3 million.
The Company entered into a five year, $500 million revolving credit
facility, effective July 1, 1997, with a group of banks. This agreement
replaced the previous $200 million revolving credit facility. The rate of
interest on borrowings under the new agreement is, at the Company's option, a
money-market rate determined by a competitive bid process, the PNC Bank base
rate or a rate based on LIBOR. At December 31, 1997, the Company had $190
million borrowed under the revolving credit agreement.
The Company periodically establishes uncommitted lines of credit with
banks. These agreements generally provide for short-term borrowings at market
rates. At December 31, 1997, there were $95 million of such agreements and
borrowings of $36.3 million outstanding under these agreements.
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The Company also has indebtedness of $42.9 million at December 31, 1997,
under senior notes that were issued on January 29, 1993, with scheduled
principal payments of approximately $7.1 million that began on January 31,
1997, and continue on each January 31 thereafter until final maturity on
January 31, 2003.
Certain debt agreements contain covenants requiring current ratio and
consolidated net worth amounts, as well as covenants restricting new
borrowings, mortgages, lease commitments, investments and dividends to
stockholders. At December 31, 1997, retained earnings of $36.5 million were
available for dividends.
In connection with the Ashland Coal merger, the Company assumed $167.4
million of indebtedness, including senior notes with a principal balance of
$152.9 million. In August 1997, the Company redeemed the senior notes for
$170.7 million including accrued interest with proceeds from the revolving
credit agreement.
The Company's expenditures for additions to property, plant and equipment
(excluding acquisitions) were $54.4 million, $48.3 million and $80.3 million in
1997, 1996 and 1995, respectively. The expenditures for 1997 include $6.5
million to complete the upgrade and extension of the Hobet 21 conveyor system,
$8.6 million for improvements at Lone Mountain's Huff Creek and Darby Fork
mines and $4.1 million to add a second section with a continuous haulage system
to the Band Mill Mine. 1996 expenditures include $15.1 million related to the
final phase of development of Lone Mountain's operations, $5.9 million for the
development of the Band Mill Mine and $4.8 million for construction of the
Archveyor(R) system for the Conant Mine. In 1995, the Company expended $11.5
million for the development of the Pardee Surface Mine, $9.4 million to
complete the dragline operation at the Samples Mine (including a preparation
plant and loadout), $22.9 million for the development and expanded capacity at
Lone Mountain and $2.8 million towards the initial construction of an
Archveyor(R) system for the Conant Mine. Arch Coal estimates that its
expenditures for replacement and improvement of existing mining equipment,
expansion of existing mines and development of new mines (excluding
acquisitions) may be as much as $100 million during 1998.
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. The lease provides for annual
rental payments of approximately $9.1 million, $11.6 million, $11.2 million and
$2.7 million in 1998, 1999, 2000 and 2001, respectively. At the end of the
lease term, the Company has the option to renew the lease for two additional
one year periods or to purchase the equipment for approximately $51.1 million.
Alternatively, the equipment may be sold to a third party. In the event of such
a sale, the Company will be required to make payment to the lessor in the
event, and to the extent, that the proceeds of the third-party sale are below
$40.0 million. The gain on the sale and leaseback of $10.7 million was deferred
and will be amortized over the base term of the lease as a reduction of rental
expense.
The Company has historically satisfied its working capital requirements,
its capital expenditures (excluding major acquisitions) and scheduled debt
repayments from its operating cash flow. Cash requirements for the acquisition
of new business operations have generally been funded through a combination of
cash generated from operating activities, utilization of revolving credit
facilities and the issuance of long-term debt. The Company believes that cash
generated from operations will continue to be sufficient to meet its 1998
working capital requirements, anticipated 1998 capital expenditures (excluding
major acquisitions) and scheduled 1998 debt repayments.
CONTINGENCIES
Reclamation
The Federal Surface Mining Control and Reclamation Act of 1977 and similar
state statutes require that mine property be restored in accordance with
specified standards and an approved reclamation plan. 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 reclaiming
refuse and slurry ponds. The Company also accrues for 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 reviews its entire environmental liability periodically and
makes necessary adjustments, including permit changes and revisions to costs
and productivities to reflect current experience. These recosting adjustments
are
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recorded to cost of coal sales. Favorable adjustments were $4.4 million, $4.5
million and $5.0 million in 1997, 1996 and 1995, respectively. The Company's
management believes it is making adequate provision for all expected
reclamation and other associated costs with mine closures.
Reclamation and mine closing costs for operations as of December 31, 1997,
in the aggregate, are estimated to be approximately $137.6 million. At December
31, 1997 and December 31, 1996, the accrual for such costs, which is included
in accrued reclamation and mine closure and in accrued expenses, was $125.6
million and $97.6 million, respectively.
Legal Contingencies
The Company is a party to numerous claims and lawsuits with respect to
various matters. The Company provides for costs related to legal contingencies,
including environmental matters, when a loss is probable and the amount is
reasonably determinable. The Company estimates that at December 31, 1997, its
probable aggregate loss as a result of such claims is $5.6 million (included in
other noncurrent liabilities) and believes that probable insurance recoveries
of $.8 million (included in other assets) related to these claims will be
realized. The Company estimates that its reasonably possible aggregate losses
from all material currently pending litigation could be as much as $.9 million
(before taxes) in excess of the probable loss previously recognized. 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 position, results
of operations, or liquidity of the Company.
On October 24, 1996, the rock strata overlaying an abandoned underground
mine adjacent to the coal-refuse impoundment used by the Lone Mountain
Preparation Plant failed, resulting in an accidental discharge of approximately
6.3 million gallons of water and fine coal slurry into a tributary of the
Powell River in Lee County, Virginia. At the request of the EPA and the U.S.
Fish and Wildlife Service, the United States Attorney for the Western District
of Virginia has opened a criminal investigation of the 1996 incident. Arch Coal
is cooperating with the investigation, the results of which are not expected
until sometime later in 1998.
CERTAIN RISK FACTORS
Credit risk--The Company markets its coal principally to electric utilities
in the United States. As a group, electric utilities generally are stable, well
capitalized entities with favorable credit ratings. Credit is extended based on
an evaluation of each customer's financial condition, and collateral is not
generally required. Historically, the Company's credit losses have been
minimal.
Price risk--Selling prices for the Company's products are determined by
long-term contracts and the spot market. Selling prices in many of the
Company's long-term contracts are subject to adjustment, including for changes
in market conditions. Falling market prices raise the price risk under these
contracts. Spot prices fluctuate primarily because of changes in demand for and
supply of coal. Demand for coal in the short term is primarily driven by
changes in demand for electricity in the areas serviced by the utilities
purchasing the Company's coal. Demand for electricity in turn depends on the
level of economic activity and other factors such as prolonged temperature
extremes. The supply of coal in the spot market has historically been most
affected by excess productive capacity in the industry and short-term
disruptions, sometimes labor-related. The coal industry is highly competitive,
and Arch Coal competes with a large number of other coal producers. Factors
such as the availability of sulfur dioxide emissions allowances issued by the
EPA, utility deregulation, and new clean air regulations have had, or will
have, the effect of further intensifying competition between producers in the
eastern United States, and producers in other regions, including other
countries. Producers in some of those regions, because of geological
conditions, local labor costs, or access to inexpensive transportation modes,
are able to produce and deliver coal into some markets at a lower cost than the
Company. These competitive factors have an impact on the Company's pricing.
Arch Coal's operating subsidiaries purchase substantial amounts of power,
fuel, and supplies, generally under purchase orders at current market prices or
purchase agreements of relatively short duration.
Apogee and Hobet employees are covered by the Wage Agreement, which
provides for certain wage rates and benefits. Employees of two other operating
subsidiaries are covered by other collective bargaining organizations, and
employees at the Company's other operating subsidiaries are not covered by a
union contract but are compensated at rates representative of prevailing wage
rates in the local area. Among factors influencing such wage rates are the wage
rates paid under the Wage Agreement.
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Although the Company cannot predict changes in its costs of production and
coal prices with certainty, Arch Coal believes that in the current economic
environment of low to moderate inflation, the price adjustment provisions in
its older long-term contracts will largely offset changes in the costs of
providing coal under those contracts, except for those costs related to changes
in productivity. However, the increasingly shorter terms of sales contracts and
the consequent absence of price adjustment provisions in such shorter long-term
contracts also makes it more likely that increases in mining costs during the
contract term will not be recovered by the Company through a later price
adjustment. Further, because levels of general price inflation are closely
linked to levels of economic activity, it is expected that changes in costs of
producing coal for the spot market may be offset in part by changes in spot
coal prices. The Company attempts to limit exposure to depressed spot market
prices which result from industry overcapacity by entering into long-term coal
supply agreements, which ordinarily provide for prices somewhat in excess of
spot market prices. In the event of a disruption of supply, the Company might,
depending on the level of its sales commitments, benefit from higher spot
prices if its own mines were not affected by the disruption.
Interest rate risk--Arch Coal has significant debt which is linked to
short-term interest rates. If interest rates rise, Arch Coal's costs relative
to those obligations would also rise. Because an increase in interest rates is
usually an outgrowth of a higher level of economic activity and because
increased economic activity would likely lead to a higher demand for
electricity and consequently to higher spot prices for coal, Arch Coal believes
that the negative effects of higher interest rates on Arch Coal's earnings
could be partially offset, depending on the level of its sales commitments at
the time, by higher spot prices.
The Company has entered into an interest-rate swap agreement to modify the
interest characteristics of its outstanding debt. At December 31, 1997, the
Company had an interest-rate swap agreement having a total notional value of
$25 million. This agreement was used to convert variable-rate debt to
fixed-rate debt. Under this agreement, the Company pays a weighted average
fixed rate of 6.03% and is receiving a weighted average variable rate based
upon 30-day LIBOR. The remaining life on the swap at December 31, 1997, was
approximately 58 months.
IMPACT OF YEAR 2000
At the time of the merger of Ashland Coal into the Company, the entities
utilized different computer systems. In order to standardize key financial,
informational and operational computer systems, the Company is currently in the
process of replacing its key systems. The new systems, including associated
software, will be Year 2000 compliant. The system replacement project is
estimated to be completed not later than the third quarter of 1999, which is
prior to any anticipated impact of year 2000 on the Company's operating
systems. The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions at the Company's principal operations are not made, or are not
completed on a timely basis, the current systems' inability to properly process
year 2000 data could have a material adverse effect on the operations of the
Company.
The total cost of these new systems is estimated at approximately $5
million, which includes the purchase of new software and consulting services.
All such costs will be capitalized. As of December 31, 1997, the Company has
incurred approximately $1.4 million in software and consulting costs. The
Company believes that the total costs associated with replacing and modifying
its current systems will not have a material effect on its results of
operations. Additional systematic efforts are being made to identify and
evaluate within the Company, and with respect to the Company's vendors,
suppliers, and other entities with which it exchanges electronic information,
Year 2000 risk and appropriate steps to eliminate such risk at reasonable cost.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated.
FACTORS ROUTINELY AFFECTING RESULTS OF OPERATIONS
The Company sells a substantial portion of its coal production pursuant to
long-term coal supply agreements, and as a consequence may experience
fluctuations in operating results in the future, both on an annual and
quarterly basis, as a result of expiration or termination of, or sales price
redeterminations or suspensions of deliveries under, such coal supply
agreements. Other short and long-term contracts define base or optional tonnage
requirements by
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reference to the customer's requirements, which are subject to change as a
result of factor's beyond the Company's (and sometimes the customer's) control,
including utility deregulation. In addition, price adjustment provisions permit
a periodic increase or decrease in the contract price to reflect increases and
decreases in production costs, changes in specified price indices or items such
as taxes or royalties. Price reopener provisions provide for an upward or
downward adjustment in the contract price based on market factors, and from
time to time the Company has renegotiated contracts after execution to extend
contract term or to accommodate changing market conditions. The contracts also
typically include stringent minimum and maximum coal quality specifications and
penalty or termination provisions for failure to meet such specifications,
force majeure provisions allowing suspension of performance or termination by
the parties during the duration of certain events beyond the control of the
affected party, and some long-term contracts contain provisions that permit the
utility to terminate the contract if changes in the law make it illegal or
uneconomic for the utility to consume the Company's coal or if the utility has
unexpected difficulties in utilizing the Company's coal. Imposition of new
nitrous oxide emissions limits in connection with Phase II of the Clean Air Act
in 2000 could result in price adjustments, or in affected utilities seeking to
terminate or modify long-term contracts in reliance on such termination
provisions. If the parties to any long-term contracts with the Company were to
modify, suspend or terminate those contracts, the Company could be adversely
affected to the extent that it is unable to find alternative customers at the
same or better level of profitability.
From time to time, disputes with customers may arise under long-term
contracts relating to, among other things, coal quality, pricing and quantity.
The Company may thus become involved in arbitration and legal proceedings
regarding its long-term contracts. There can be no assurance that the Company
will be able to resolve such disputes in a satisfactory manner.
The Company's customers frequently combine various qualities of coal,
nuclear, natural gas and other energy sources in their generating operations,
and, accordingly, their demand for coal of the kind produced by the Company
varies depending on price and transportation, regulatory, and other factors.
The Company's coal production and sales are subject to a variety of
operational, transportation, geologic, and weather-related factors that
routinely cause production to fluctuate.
Operational factors affecting production include anticipated and
unanticipated events. For example, at Mingo Logan's Mountaineer Mine, the
longwall equipment must be dismantled and moved to a new area of the mine
whenever the coal reserves in a segment of the mine, called a panel, are
exhausted. The size of a panel varies, and therefore, the frequency of moves
can also vary. Unanticipated events, such as the unavailability of essential
equipment because of breakdown or unscheduled maintenance, could adversely
affect production. Permits are sometimes delayed by unanticipated regulatory
requests or processing delays. Timely completion of improvement projects and
equipment relocation depends to a large degree on availability of labor and
equipment, timely issuance of permits, and the weather. Sales can be adversely
affected by fluctuations in production and by transportation delays arising
from equipment unavailability and weather-related events, such as flooding.
Changes in transportation rates and service also significantly influence
the Company's results. CSX and Norfolk Southern Corporation are major railroads
in the eastern United States which together transport most of the coal sold by
the Company. CSX and NS agreed to acquire Conrail Inc. ("Conrail"), another
major railroad, whose primary service area is the Northeastern United States,
and have divided Conrail's assets between them. Costs of the reconstituted CSX
and NS may be somewhat lower than the costs of those railroads prior to the
acquisition. If lower costs are realized and freight rates are lowered as a
consequence, the coal of some producers could become less costly on a delivered
basis and therefore gain competitive advantage in some markets. It is not
possible to predict with certainty the effects of the division of Conrail on
interregional competition and, specifically, the effects on the Company.
Geologic conditions within mines are not uniform. Overburden ratios at the
surface mines vary, as do roof and floor conditions and seam thickness in
underground mines. These variations can be either positive or negative for
production.
Weather conditions can also have a significant effect on the Company's
production, depending on the severity and duration of the condition. For
example, extremely cold weather combined with substantial snow and ice
accumulations may impede surface operations directly and all operations
indirectly by making it difficult for workers and suppliers to reach the mine
sites.
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The results of the third quarter of each year are normally adversely
affected by lower production and resultant higher costs because of scheduled
vacation periods. In addition, costs are typically somewhat higher during
vacation periods because of maintenance activity carried on during those
periods. These adverse effects on the third quarter may make the third quarter
not comparable to the other quarters and not indicative of results to be
expected for the full year.
Apogee and Hobet operations are parties to the Wage Agreement. From time to
time in the past, strikes and work stoppages have adversely affected production
at Apogee's and Hobet's mining complexes. Any future strike or work stoppage
that affected these operations for a prolonged period would have a significant
adverse effect on the Company's results of operations.
Any one or a combination of changing demand; fluctuating selling prices;
routine operational, geologic, transportation and weather-related factors;
unexpected regulatory changes; changes in transportation rates and service;
results of litigation; or labor disruptions may occur at times or in a manner
that causes current and projected results of operations to deviate from
projections and expectations. Any event disrupting substantially all production
at any of the Company's principal mines for a prolonged period would have a
significant adverse effect on the Company's current and projected results of
operations. Unexpected decreases in production from anticipated levels usually
lead to increased mining costs and decreased net income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures of market risk under SEC
Regulation S-K, Item 305, will be provided, in accordance with the SEC's
requirements, for the Company's fiscal years ending after June 15, 1998.
Reference is made to the second paragraph under the Interest rate risk
subsection of the Certain Risk Factors discussion at page 19 of this report for
information about the Company's current derivatives positions. The Company
accrues amounts to be paid or received under its interest rate swap agreements
over the lives of the agreements. Such amounts are recognized as adjustments to
interest expense over the lives of the agreements, thereby adjusting the
effective interest rate on the Company's debt. The Company's accounting
policies with respect to its current derivatives positions do not materially
affect the Company's determination of financial position, cash flows or results
of operations.
22
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Reports of Independent Auditors................................................. 23
Audited Consolidated Financial Statements
Consolidated Statements of Income--Years ended December 31, 1997, 1996 and
1995....................................................................... 25
Consolidated Balance Sheets--December 31, 1997 and 1996..................... 26
Consolidated Statements of Stockholders' Equity--Years ended December 31,
1997, 1996 and 1995........................................................ 27
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996
and 1995................................................................... 28
Notes to Consolidated Financial Statements.................................. 29
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Arch Coal, Inc.
We have audited the consolidated balance sheet of Arch Coal, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income, stockholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule for the year ended
December 31, 1997, listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arch Coal,
Inc. and subsidiaries at December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule for 1997, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Louisville, Kentucky
January 29, 1998
23
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Coal, Inc.:
We have audited the accompanying consolidated balance sheet of Arch Coal,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1996 and 1995. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arch Coal, Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 13 to the consolidated financial statements, in 1995
the Company changed its method of accounting for impairments of long-lived
assets.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements at Item 14(a) is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
January 16, 1997 (except with
respect to the matter discussed
in Note 11 as to which the
date is April 4, 1997)
24
27
CONSOLIDATED STATEMENTS OF INCOME
ARCH COAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---------- -------- --------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
REVENUES
Coal sales.............................................. $1,034,813 $750,123 $706,845
Other revenues.......................................... 32,060 30,498 30,993
---------- -------- --------
1,066,873 780,621 737,838
---------- -------- --------
COSTS AND EXPENSES
Cost of coal sales...................................... 918,862 669,295 657,529
Selling, general and administrative expenses............ 28,882 20,435 19,680
Amortization of coal supply agreements.................. 18,063 12,604 13,374
Merger-related expenses................................. 39,132 -- --
Write-down of impaired assets........................... -- -- 10,241
Restructuring expenses.................................. -- -- 8,250
Other expenses.......................................... 20,052 22,175 18,739
---------- -------- --------
1,024,991 724,509 727,813
---------- -------- --------
Income from operations.............................. 41,882 56,112 10,025
---------- -------- --------
Interest expense, net:
Interest expense........................................ (17,822) (18,783) (23,794)
Interest income......................................... 721 1,191 832
---------- -------- --------
(17,101) (17,592) (22,962)
---------- -------- --------
Income (loss) before income taxes................... 24,781 38,520 (12,937)
Provision (benefit) for income taxes........................ (5,500) 5,500 (1,900)
---------- -------- --------
NET INCOME (LOSS)................................... $ 30,281 $ 33,020 $(11,037)
========== ======== ========
Basic and diluted earnings (loss) per common share.......... $ 1.00 $ 1.58 $ (0.53)
========== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
25
28
CONSOLIDATED BALANCE SHEETS
ARCH COAL, INC. AND SUBSIDIARIES
DECEMBER 31
-------------------------
1997 1996
---------- ----------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets
Cash and cash equivalents........................... $ 9,177 $ 13,716
Trade accounts receivable........................... 133,810 75,657
Other receivables................................... 14,046 5,143
Inventories......................................... 50,419 35,234
Prepaid royalties................................... 17,745 2,624
Deferred income taxes............................... 8,506 14,500
Other............................................... 9,475 6,738
---------- ----------
Total current assets............................ 243,178 153,612
---------- ----------
Property, plant and equipment
Coal lands and mineral rights....................... 853,053 394,634
Plant and equipment................................. 890,303 691,834
Deferred mine development........................... 102,909 76,151
---------- ----------
1,846,265 1,162,619
Less accumulated depreciation, depletion and
amortization...................................... (696,339) (595,552)
---------- ----------
Property, plant and equipment, net.............. 1,149,926 567,067
---------- ----------
Other assets
Prepaid royalties................................... 20,826 3,723
Coal supply agreements.............................. 185,306 83,369
Deferred income taxes............................... 44,023 67,207
Other............................................... 13,065 10,543
---------- ----------
Total other assets.............................. 263,220 164,842
---------- ----------
Total assets.................................... $1,656,324 $ 885,521
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................... $ 84,692 $ 42,712
Accrued expenses.................................... 88,082 77,734
Current portion of debt............................. 29,500 --
---------- ----------
Total current liabilities....................... 202,274 120,446
Long-term debt.......................................... 248,425 212,695
Accrued postretirement benefits other than pension...... 323,115 228,843
Accrued reclamation and mine closure.................... 116,199 97,595
Accrued workers' compensation........................... 97,759 70,849
Accrued pension cost.................................... 21,730 14,297
Other noncurrent liabilities............................ 35,324 10,170
---------- ----------
Total liabilities............................... 1,044,826 754,895
---------- ----------
Stockholders' equity
Common stock, $.01 par value, 100,000,000 shares
authorized, 39,657,898 issued and outstanding in
1997 and 20,948,444 issued and outstanding in 1996 397 209
Paid-in capital..................................... 472,425 8,392
Retained earnings................................... 138,676 122,025
---------- ----------
Total stockholders' equity...................... 611,498 130,626
---------- ----------
Total liabilities and stockholders' equity...... $1,656,324 $ 885,521
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
26
29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ARCH COAL, INC. AND SUBSIDIARIES
Three years ended December 31, 1997
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ------- -------- --------
(IN THOUSANDS OF DOLLARS)
Balance at January 1, 1995........................ $209 $ 8,392 $122,825 $131,426
Net loss...................................... (11,037) (11,037)
Dividends paid ($.32 per share)............... (6,697) (6,697)
---- -------- -------- --------
Balance at December 31, 1995...................... 209 8,392 105,091 113,692
Net income.................................... 33,020 33,020
Dividends paid ($.38 per share)............... (8,000) (8,000)
Income tax charge related to assets acquired
from related parties........................ (8,086) (8,086)
---- -------- -------- --------
Balance at December 31, 1996...................... 209 8,392 122,025 130,626
Net income.................................... 30,281 30,281
Dividends paid ($.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
==== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
27
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
ARCH COAL, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income (loss)....................................... $ 30,281 $ 33,020 $(11,037)
Adjustments to reconcile to cash provided by operating
activities:
Depreciation, depletion and amortization............ 143,632 114,703 100,101
Prepaid royalties expensed.......................... 8,216 4,754 3,998
Net gain on disposition of assets................... (4,802) (7,959) (8,514)
Merger-related expenses............................. 33,096 -- --
Write-down of impaired assets....................... -- -- 10,241
Changes in operating assets and liabilities......... (28,842) (551) (2,730)
Other............................................... 8,682 (5,496) 6,100
--------- -------- --------
Cash provided by operating activities........... 190,263 138,471 98,159
--------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment.............. (54,378) (48,290) (80,347)
Additions to coal supply agreements..................... -- (7,150) (1,924)
Additions to prepaid royalties.......................... (7,967) (7,071) (5,633)
Payments for acquisitions............................... (22,931) (14,200) --
Proceeds from dispositions of property, plant and
equipment............................................. 5,267 4,073 42,605
--------- -------- --------
Cash used in investing activities............... (80,009) (72,638) (45,299)
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from (payments on) revolver and lines of
credit................................................ 78,897 (11,000) (14,500)
Payments on notes....................................... (181,110) (50,619) (19,352)
Dividends paid.......................................... (13,630) (8,000) (6,697)
Proceeds from sale of common stock...................... 1,050 -- --
--------- -------- --------
Cash used in financing activities............... (114,793) (69,619) (40,549)
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................... (4,539) (3,786) 12,311
Cash and cash equivalents, beginning of year............ 13,716 17,502 5,191
--------- -------- --------
Cash and cash equivalents, end of year.................. $ 9,177 $ 13,716 $ 17,502
========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest.................. $ 18,593 $ 20,294 $ 24,772
Cash paid during the year for income taxes, net of
refunds............................................... $ 21,918 $ 14,731 $ 966
The accompanying notes are an integral part of the consolidated financial statements.
28
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars except per share data)
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 produces steam and metallurgical coal from surface and
deep mines in Kentucky, West Virginia, Virginia, Illinois and Wyoming, for sale
to utility, industrial and export markets. All subsidiaries are wholly owned.
Significant intercompany transactions and accounts have been eliminated in
consolidation.
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 income.
Accounting Estimates
The preparation of financial statements in conformity with 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
------------------
1997 1996
------- -------
Coal........................................................ $25,359 $21,866
Supplies.................................................... 25,060 13,368
------- -------
$50,419 $35,234
======= =======
Coal and supplies inventories are valued at the lower of average cost or
market. The Company has recorded a valuation allowance for obsolete supplies
inventories of $17.7 million and $11.3 million at December 31, 1997 and 1996,
respectively.
Coal Acquisition Costs and Prepaid Royalties
Coal lease rights obtained through acquisition of other companies 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 offset against earned royalties and is included in the 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 $60.3 million
and $43.0 million at December 31, 1997 and 1996, respectively.
29
32
1. ACCOUNTING POLICIES (CONTINUED)
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. Costs of purchasing
rights to coal reserves and of developing new mines or significantly expanding
the capacity of existing mines are amortized using the units-of-production
method over the estimated recoverable reserves. 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.
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.
Revenue Recognition
Coal sales revenues include sales to customers of coal produced at Company
operations and purchased from other companies. The Company recognizes revenue
from coal sales at the time title passes to the customer. Revenues other than
from coal sales are included in other revenues and are recognized as services
are performed or otherwise earned.
Interest Rate Swap Agreements
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.
Income Taxes
Deferred income taxes are based on temporary differences between the
financial statement and tax bases 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.
Earnings Per Common Share
In 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share was issued. SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share (EPS) with basic and diluted EPS. Unlike
primary, basic EPS excludes any dilutive effects of options, warrants and
convertible securities. Diluted EPS is very similar to the previously reported
fully diluted EPS. The adoption of the provisions of SFAS No. 128 did not have
any effect on previously reported EPS amounts.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the classifications in the 1997 financial
statements with no effect on previously reported net income (loss) or
stockholders' equity.
2. MERGER AND ACQUISITIONS
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. Accordingly, the cost to acquire Ashland Coal has been
preliminarily allocated to the assets acquired and liabilities assumed
according to their respective estimated fair
30
33
2. MERGER AND ACQUISITIONS (CONTINUED)
values and the results of operations of Ashland Coal are included in the
consolidated statements of income effective July 1, 1997.
Summarized below are the unaudited pro forma combined results of operations
for the years ended December 31, 1997 and 1996 as though the merger had
occurred on January 1, 1997 and 1996, respectively:
1997 1996
---------- ----------
Revenues.................................................... $1,389,542 $1,357,485
Income before income taxes.................................. 49,018 50,141
Net income.................................................. 51,632 47,878
Earnings per common share................................... $ 1.30 $ 1.21
The unaudited pro forma results of operations do not reflect the total cost
savings and other synergies that may result from the merger. 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 the merger occurred at the beginning of these periods or results
of operations that may be achieved in the future.
In connection with the merger, the Company recorded a one-time charge of
$39.1 million (before tax) or $23.8 million (after tax) comprised of
termination benefits and relocation costs of $8.1 million and costs of $31.0
million associated with the idling of duplicate facilities, including a coal
loading terminal on the Big Sandy River and the Pardee Surface Mine on the
Kentucky/Virginia border. The terminal's coal loading operations were
consolidated with the operations of another terminal facility formerly operated
by Ashland Coal. The Pardee Surface Mine's sales commitments are expected to be
sourced from available capacity at other, lower-cost Company operations. The
termination benefits and relocation costs relate principally to corporate
employees. During the six months ended December 31, 1997, the Company paid
approximately $5.5 million in termination and relocation benefits against the
liabilities established for such purposes.
In November 1997, the Company acquired approximately 23 million tons of
low-sulfur reserves that are adjacent to the Hobet 21 mining complex for $6.0
million.
In April 1997, the Company acquired the Kayford James reserve area
consisting of approximately 13 million tons of low-sulfur reserves that are
adjacent to the Samples Mine for net consideration of $17.0 million.
In June 1996, the Company acquired approximately 58,000 acres in the Carbon
Basin reserve area consisting of approximately 96 million tons of low-sulfur
reserves for $14.2 million.
3. PREPAID ROYALTIES
The Company has entered into various noncancelable royalty lease agreements
under which future minimum payments are approximately $32.0 million per year
through 2002, and $255.0 million in the aggregate thereafter. Geological
surveys performed by outside consultants indicate that there are sufficient
reserves relative to these properties to permit recovery of the Company's
investment.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31
------------------
1997 1996
------- -------
Accrued payroll and related benefits........................ $17,314 $12,410
Accrued income taxes........................................ -- 19,000
Accrued taxes other than income taxes....................... 22,259 14,272
Accrued postretirement benefits other than pension.......... 14,390 13,000
Accrued workers' compensation............................... 12,649 10,298
Other accrued expenses...................................... 21,470 8,754
------- -------
$88,082 $77,734
======= =======
31
34
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
1997 1996 1995
-------- ------- -------
Current:
Federal................................................. $ 8,250 $ 9,200 $ 200
State................................................... (250) 1,050 --
-------- ------- -------
Total current....................................... 8,000 10,250 200
-------- ------- -------
Deferred:
Federal................................................. (13,100) (4,050) (800)
State................................................... (400) (700) (1,300)
-------- ------- -------
Total deferred...................................... (13,500) (4,750) (2,100)
-------- ------- -------
$ (5,500) $ 5,500 $(1,900)
======== ======= =======
A reconciliation of the statutory federal income tax expense (benefit) on
the Company's pretax income to the actual provision (benefit) for income taxes
follows:
1997 1996 1995
-------- -------- -------
Income tax expense (benefit) at statutory rate.............. $ 8,673 $ 13,482 $(4,528)
Increase (decrease) in taxes resulting from:
Percentage depletion allowance.......................... (13,543) (10,431) (6,701)
State income taxes, net of effect of federal taxes...... (570) 350 (1,281)
Nondeductible expenses, net of nontaxable income........ 236 1,000 700
Other items............................................. (296) 1,099 9,910
-------- -------- -------
$ (5,500) $ 5,500 $(1,900)
======== ======== =======
The other items category in the statutory rate reconciliation includes
provisions in excess of statutory requirements for open tax years.
The Company's federal income tax returns for the years 1992 through 1994
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 and a
final payment of approximately $4.0 million will be made in the first quarter
of 1998.
The IRS audits for the federal income tax returns for the years 1990 and
1991 are partially settled and the Company has filed an appeal with the IRS for
certain unagreed issues. The appeal was held in abeyance awaiting IRS
determination of certain issues that carryover from the prior years' audit.
During 1996, the IRS completed its audits for the tax years 1990 and 1991 and
the Company and the IRS agreed to a settlement of various tax issues for a
payment of $6.5 million including interest which was charged against previously
recorded reserves. Part of the settlement related to the acquisition from the
Company's stockholders of certain Illinois coal reserves for $55.2 million. The
acquisition was valued for accounting purposes at the stockholders' net book
value of $22.8 million with the $32.4 million difference between the net book
value and fair market value less $12.3 million of deferred tax benefits being
recorded as a reduction to stockholders' equity. As part of the settlement with
the IRS, the Company agreed to adjust the fair market value of the coal
properties to $33.8 million for tax purposes resulting in a decrease to the
deferred tax asset of $8.1 million from $12.3 million to $4.2 million. The
decrease in the deferred tax asset was charged directly to stockholders' equity
in 1996. Management expects to reach final settlement of the audits for the tax
years 1990 and 1991 during 1998 based generally on prior years' audit
settlements.
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.
32
35
5. INCOME TAXES (CONTINUED)
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
---------------------
1997 1996
-------- --------
Deferred tax assets:
Postretirement benefits other than pension.............. $129,818 $ 89,249
Alternative minimum tax credit carryforward............. 80,441 42,503
Workers' compensation................................... 30,503 27,631
Reclamation and mine closure............................ 23,905 5,264
Net operating loss carryforwards........................ 8,214 7,677
Other................................................... 28,498 23,819
-------- --------
Total deferred tax assets........................... 301,379 196,143
-------- --------
Deferred tax liabilities:
Coal lands and mineral rights........................... 86,471 28,529
Plant and equipment..................................... 79,962 50,373
Deferred mine development............................... 3,643 4,469
Coal supply agreements.................................. 38,406 8,834
Other................................................... 40,368 22,231
-------- --------
Total deferred tax liabilities...................... 248,850 114,436
-------- --------
Net deferred tax asset.......................... 52,529 81,707
Less current asset.................................. 8,506 14,500
-------- --------
Long-term deferred tax asset.................... $ 44,023 $ 67,207
======== ========
If not used, the carryforwards for net operating losses of $21.1 million
will expire in the years 2003 through 2010. The alternative minimum tax credit
carryforwards have no statutory expiration date.
The Company is required to record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. It is management's belief that the Company's net deferred income tax
asset will more likely than not be realized by generating sufficient taxable
income in the future.
6. DEBT AND FINANCING ARRANGEMENTS
Debt consists of the following:
DECEMBER 31
---------------------
1997 1996
-------- --------
Indebtedness to banks under revolving credit agreement
(weighted average rate at December 31,1997-6.14%;
1996-6.12%)............................................... $190,000 $147,000
7.79% senior notes due January 31, 2003, payable in seven
equal annual installments beginning January 31, 1997...... 42,860 50,000
Indebtedness to banks under lines of credit (weighted
average rate at December 31,1997-7.05%)................... 36,302 --
9.85% senior notes.......................................... -- 8,000
Other....................................................... 8,763 7,695
-------- --------
277,925 212,695
Less current portion........................................ 29,500 --
-------- --------
Long-term debt.............................................. $248,425 $212,695
======== ========
In connection with the Ashland Coal merger, the Company assumed $167.4
million of indebtedness, principally in senior notes, which were paid in August
1997 with proceeds from the revolving credit agreement.
33
36
6. DEBT AND FINANCING ARRANGEMENTS (CONTINUED)
Effective July 1, 1997, the Company has a revolving credit agreement, which
terminates in 2002, with a group of banks providing for borrowings of up to
$500 million. This replaced a revolving credit agreement providing for
borrowings of up to $200 million. The rate of interest on borrowings under this
agreement is, at the Company's option, a money-market rate determined by a
competitive bid process, the PNC Bank base rate or a rate based on LIBOR. The
provisions of the revolving credit agreement require a facility fee, which is
currently computed at the rate of 0.085% per annum on the amount of the
commitment. The rate used to compute the facility fee is redetermined quarterly
based upon the Company's ratio of debt to capital and may vary from 0.070% to
0.200% per annum.
The Company periodically establishes uncommitted lines of credit with
banks. These agreements generally provide for short-term borrowings at market
rates. At December 31, 1997, there were $95 million of such agreements in
effect.
Except for amounts expected to be repaid in 1998, amounts borrowed under
the revolving 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,
1997, are $29.5 million in 1998, $23.4 million in 1999, $7.6 million in 2000,
$7.6 million in 2001, $197.6 million in 2002, and $12.2 million thereafter.
Included in these maturities are expected discretionary prepayments of $21.2
million in 1998 and $15.1 million in 1999.
Certain debt agreements contain covenants requiring current ratio and
consolidated net worth amounts, as well as covenants restricting new
borrowings, mortgages, lease commitments, investments and dividends to
stockholders. At December 31, 1997, retained earnings of $36.5 million were
available for dividends.
The Company enters into interest rate swap agreements to modify the
interest characteristics of its outstanding debt. At December 31, 1997, the
Company had an interest rate swap agreement having a notional value of $25.0
million. This agreement was used to convert variable-rate debt to fixed-rate
debt. Under this agreement, the Company pays a fixed rate of 6.03% and was
receiving a variable rate at December 31, 1997 of 5.97%. The swap agreement
matures in 2002.
7. 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 and lines of credit approximate their fair value. The fair
values of the Company's senior notes and other long-term debt are estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Interest rate swaps: The fair values of interest rate swaps are based on
quoted market prices, which reflect the present value of the difference between
estimated future amounts paid and received.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1997 and 1996 are as follows:
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Cash and cash equivalents................................... $ 9,177 $ 9,177 $ 13,716 $ 13,716
Revolving credit agreement.................................. 190,000 190,000 147,000 147,000
Senior notes................................................ 42,860 44,690 58,000 59,510
Lines of credit............................................. 36,302 36,302 -- --
Other debt.................................................. 8,763 8,763 7,695 7,695
Interest rate swap.......................................... -- (93) -- --
34
37
8. 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 independent 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:
1997 1996 1995
-------- ------- -------
Self-insured black lung benefits:
Service cost............................................ $ 678 $ 639 $ 572
Interest cost........................................... 2,353 1,735 1,879
Net amortization and deferral........................... (10,084) (9,766) (9,691)
-------- ------- -------
(7,053) (7,392) (7,240)
Other workers' compensation benefits........................ 12,182 13,350 13,041
-------- ------- -------
$ 5,129 $ 5,958 $ 5,801
-------- ------- -------
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.25% as of December 31, 1997 (7.5% and 7.25% as of
December 31, 1996 and 1995, respectively) and a black lung benefit cost
escalation rate of 4% in 1997, 1996 and 1995. 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 approximately $10 million (before tax) and $6 million (after tax) in
each of the years 1997, 1996 and 1995.
Summarized below is information about the amounts recognized in the
consolidated balance sheets for workers' compensation benefits:
DECEMBER 31
-------------------
1997 1996
-------- -------
Actuarial present value for self-insured
black lung:
Benefits contractually recoverable from others.......... $ 5,053 $ 5,665
Benefits for Company employees.......................... 42,677 24,842
-------- -------
Accumulated black lung benefit obligation............... 47,730 30,507
Unrecognized net gain (loss)............................ (3,004) 7,347
-------- -------
44,726 37,854
Traumatic and other workers' compensation................... 65,682 43,293
-------- -------
Accrued workers' compensation........................... 110,408 81,147
Less amount included in accrued expenses.................... 12,649 10,298
-------- -------
$ 97,759 $70,849
======== =======
9. 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 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 common to both
types of mining are related to reclaiming refuse and slurry ponds. The Company
accrues for current mine disturbance which will be reclaimed prior to final
mine closure. The establishment of the final mine closure reclamation liability
and the current disturbance is based upon permit requirements and requires
various estimates and assumptions, principally associated with costs and
productivities. The Company accrued $10.8 million, $6.1
35
38
9. ACCRUED RECLAMATION AND MINE CLOSING COSTS (CONTINUED)
million and $6.5 million in 1997, 1996 and 1995, respectively, for current and
final mine closure reclamation. Cash payments for final mine closure
reclamation and current disturbances approximated $8.5 million, $9.8 million
and $12.2 million for 1997, 1996 and 1995, respectively. Periodically, the
Company reviews its entire environmental liability and makes necessary
adjustments, including permit changes as granted by state authorities and
revisions to costs and productivities, to reflect current experience. These
recosting adjustments are recorded in cost of coal sales. Favorable adjustments
were $4.4 million, $4.5 million and $5.0 million in 1997, 1996 and 1995,
respectively. The Company's management believes it is making adequate
provisions for all expected reclamation and other costs associated with mine
closures.
10. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company has noncontributory 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. Plan assets consist primarily of equity securities and fixed income
securities.
The net pension cost of the plans includes the following components:
1997 1996 1995
------- ------- -------
Service cost of benefits earned............................. $ 2,788 $ 2,295 $ 2,339
Interest cost on projected benefit obligation............... 4,970 4,051 3,454
Actual return on plan assets................................ (6,980) (4,159) (9,052)
Net amortization and deferral............................... 2,086 1,281 5,405
------- ------- -------
Net periodic pension cost............................... 2,864 3,468 2,146
Provision for restructuring................................. -- -- 2,125
------- ------- -------
$ 2,864 $ 3,468 $ 4,271
======= ======= =======
The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheets for pension benefits:
DECEMBER 31
------------------
1997 1996
------- -------
Actuarial present value of benefit obligation:
Vested benefits......................................... $66,261 $46,195
Nonvested benefits...................................... 4,577 2,974
------- -------
Accumulated benefit obligation...................... 70,838 49,169
Effect of projected compensation increases.............. 13,247 7,541
------- -------
Projected benefit obligation........................ 84,085 56,710
Plan assets at fair value................................... 64,577 45,929
------- -------
Projected benefit obligation in excess of plan
assets............................................ 19,508 10,781
Unrecognized transition credit.............................. 1,085 1,283
Unrecognized prior service cost............................. (879) (1,017)
Unrecognized net gain....................................... 3,451 3,250
------- -------
Accrued pension cost................................ 23,165 14,297
Less amount included in accrued expenses.................... 1,435 --
------- -------
$21,730 $14,297
======= =======
36
39
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The assumptions used in computing the information above were as follows:
DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
Discount rate............................................... 7.25% 7.50% 7.25%
Expected long-term rate of return on plan assets............ 9.00% 9.00% 9.00%
Future compensation growth rate............................. 5.00% 5.00% 5.00%
Multiemployer Pension and Benefit Plans
Under the labor contract with the United Mine Workers of America (UMWA),
the Company made payments of $2.0 million in 1997 and $1.9 million in each of
1996 and 1995 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 $11.5 million at December 31, 1997. 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.
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 $3.9 million in 1997, $2.8 million in 1996 and
$2.6 million in 1995 in expense relative to premiums paid pursuant to the
Benefit Act.
Other Postretirement Benefits Plans
The Company 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 policy is to fund the cost of all
postretirement health and life insurance benefits as they are paid.
The net periodic postretirement benefit cost of these plans includes the
following components:
1997 1996 1995
------- ------- -------
Service cost................................................ $ 3,717 $ 2,246 $ 3,383
Interest cost............................................... 19,546 15,648 17,050
Net amortization and deferral............................... (2,573) (1,527) 67
------- ------- -------
Net periodic postretirement benefit cost................ $20,690 $16,367 $20,500
======= ======= =======
37
40
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the amounts recognized in the consolidated
balance sheets for postretirement benefits other than pension, none of which
have been funded:
DECEMBER 31
---------------------
1997 1996
-------- --------
Accumulated postretirement benefit obligation:
Retirees................................................ $149,365 $123,130
Fully eligible active plan participants................. 101,888 62,403
Other active plan participants.......................... 82,655 34,799
-------- --------
333,908 220,332
Unrecognized net gain....................................... 2,302 20,996
Unrecognized prior service gain............................. 1,295 515
-------- --------
Accrued postretirement obligation....................... 337,505 241,843
Less amount included in accrued expenses.................... 14,390 13,000
-------- --------
$323,115 $228,843
======== ========
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% and 7.5% at December 31, 1997 and 1996,
respectively. The assumed health care cost trend rate for 1998 is 6% (7% in
1997), decreasing to 5% in the year 1999. 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 in
each year would increase the accumulated postretirement benefit obligation as
of December 31, 1997, by $54.1 million or 16.2%, and the net periodic
postretirement benefit cost for 1997 by $5.2 million or 29.9%.
Net periodic postretirement benefit cost decreased approximately $4.1
million (an increase in net income of $2.4 million) in 1996 due to changes in
certain actuarial assumptions, including a decrease in the healthcare cost
trend rate and a decrease in the discount rate.
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 $4.6 million in 1997 and $3.4 million
in each of 1996 and 1995.
11. 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 July 25, 1997, the Company's Board of Directors authorized a share
repurchase plan under which the Company may repurchase, from time to time, up
to 1,000,000 shares of the Company's common stock. Shares acquired may be used
for general corporate purposes. At December 31, 1997, no shares had been
repurchased under this authorization.
12. STOCK INCENTIVE PLANS
On April 4, 1997, the stockholders approved the 1997 Stock Incentive Plan
(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, restricted stock units, performance stock, performance units,
merit awards, phantom stock awards and rights to acquire stock through purchase
under a stock purchase program (Awards). Stock options outstanding under the
Ashland Coal plans at the date of the merger were exchanged for fully vested
stock options in the Company Incentive Plan. Stock options generally become
exercisable in full or in part one year from the date of grant and are granted
at a price equal to 100% of the fair market value of the stock on the date of
grant. SARs entitle employees to receive a payment equal to the appreciation in
market value of the stated number
38
41
12. STOCK INCENTIVE PLANS (CONTINUED)
of common shares from the SARs exercise price to the market value of the shares
on the date of its exercise. Unexercised options and SARs lapse 10 years after
the date of grant. Restricted stock awards entitle employees to purchase shares
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. Merit awards are
grants of stock without restriction and at a nominal cost. Performance share 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 Board of Directors. As of
December 31, 1997, 341,100 performance shares had been granted and will be
earned by participants based on company performance for the years 1998 through
2001. 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. As of December 31, 1997, stock options and performance
shares were the only type of Awards granted.
Information regarding stock options under the Company Incentive Plan is as
follows for the year ended December 31, 1997 (in thousands except per share
data):
WEIGHTED
COMMON AVERAGE
SHARES PRICE
------ --------
Options outstanding at January 1............................ -- $ --
Issued in exchange for Ashland Coal, Inc.
stock options............................................. 675 23.69
Granted..................................................... 300 27.88
Exercised................................................... (49) 21.25
-----
Options outstanding at December 31.......................... 926 25.23
=====
Options exercisable at December 31.......................... 626 $23.88
Options available for grant at December 31.................. 4,684
The Company applies Accounting Principles Board Opinion No. 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 SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net income and earnings per common
share for the year ended December 31, 1997 would have been reduced to the pro
forma amounts of $29.9 million and $.98, respectively. 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 1997 vest ratably over three years.
The fair value per option granted in 1997 was $8.36. Exercise prices for
options outstanding as of December 31, 1997, range from $11 to $34.375, and the
weighted average remaining contractual life at that date was 6.8 years. The
fair value of options granted in 1997 was determined to be $2.5 million using
the Black-Scholes option pricing model and the following weighted-average
assumptions:
Risk-free interest rate..................................... 6.33%
Dividend yield.............................................. 2%
Volatility of the expected market price of the Company's
common stock.............................................. 0.29
Expected life of options (in years)......................... 5
39
42
12. STOCK INCENTIVE PLANS (CONTINUED)
The table below shows pertinent information on options outstanding at
December 31, 1997, priced below $25 per share and priced at $25 per share or
more.
OPTION EXERCISE PRICE
-----------------------
BELOW $25 $25 OR MORE
--------- -----------
Options outstanding (in thousands).......................... 338 588
Weighted-average exercise price............................. $20.40 $28.00
Weighted-average remaining contractual life (in years)...... 5.2 7.7
Options currently exercisable (in thousands)................ 338 288
Weighted-average exercise price of options currently
exercisable............................................... $20.40 $28.12
13. CHANGES IN ESTIMATES AND OTHER NON-RECURRING REVENUES AND EXPENSES
During 1996, the Company sold an idle processing plant and loadout
facilities in Eastern Kentucky for the assumption of the environmental
liabilities. As a result, the Company recognized a gain of $4.9 million which
is included in other revenues. During 1995, the Company sold its timber rights
to approximately 100,000 acres of property in the Eastern United States for a
gain of $8.4 million which is included in other revenues.
During 1996, the Company reduced the estimated useful lives of certain
long-lived assets (primarily related to life of mine assets including
preparation plants and beltlines) for depreciation and amortization purposes.
These changes in estimates were primarily due to increased productivities and
reductions in recoverable reserves. As a result, an additional $11.3 million
(after tax impact of $6.9 million or $.33 per share) of depreciation and
amortization expense was recorded in cost of coal sales. The assets included a
preparation plant that had an original life of 16 years that was adjusted to
7.5 years, a preparation plant and beltline related to a surface mine that
carried an original life of 20 years that was adjusted to 17 years and deferred
mine development for a surface mine with an original life of 5 years adjusted
to 4 years.
Effective September 30, 1995, the Company adopted the provisions of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. As a result, the Company recorded charges of $10.2
million to write down certain assets to their fair value. These assets included
idled facilities at the Company's Arch of Illinois, Arch of Kentucky and
Cumberland River Coal Company operations. Fair value was based upon
management's best estimate of discounted cash flows.
During 1995, the Company restructured its selling, general and
administrative functions and reduced its salaried workforce by 143 employees,
52 of which accepted the Company's early retirement program. Total
restructuring charges of $8.3 million included charges for severance, pension
and postretirement medical benefits. The restructuring reflected the Company's
efforts to reduce its costs and improve its competitive position.
14. 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, 1997 and 1996, accounts receivable from
electric utilities located in the United States totaled $102.8 million and
$61.3 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:
1997 1996 1995
-------- -------- --------
Customer A.................................................. $187,800 $147,567 $127,911
Customer B.................................................. 129,981 86,756 82,857
40
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15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
1997 1996 1995
------- ------- --------
Numerator:
Net income (loss)....................................... $30,281 $33,020 $(11,037)
======= ======= ========
Denominator:
Weighted average shares-denominator for basic........... 30,374 20,948 20,948
Dilutive effect of employee stock options............... 34 -- --
------- ------- --------
Adjusted weighted average shares-denominater for
diluted............................................... 30,408 20,948 20,948
======= ======= ========
Basic earnings (loss) per common share...................... $ 1.00 $ 1.58 $ (0.53)
======= ======= ========
Diluted earnings (loss) per common share.................... $ 1.00 $ 1.58 $ (0.53)
======= ======= ========
16. 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. The lease provides for annual
rental payments of approximately $9.1 million, $11.6 million, $11.2 million and
$2.7 million in 1998, 1999, 2000 and 2001, respectively. 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 for approximately $51.1 million.
Alternatively, the equipment may be sold to a third party. In the event of such
a sale, the Company will be required to make payment to the lessor in the
event, and to the extent, that the proceeds are below $40.0 million. The gain
on the sale and leaseback of $10.7 million was deferred and will be amortized
over the base term of the lease as a reduction of rental expense.
17. 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 $4.7 million in 1997, $3.8 million
in 1996 and $5.0 million in 1995. Ashland Inc. owns approximately 54% of the
Company's outstanding shares of common stock. Management believes that charges
between the Company and Ashland Inc. for services and purchases were concluded
on terms equivalent to those prevailing among unaffiliated parties.
18. 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 $14.9 million in 1997, $8.5
million in 1996 and $8.1 million in 1995. Minimum annual rentals due in future
years under lease agreements in effect at December 31, 1997 are as follows:
1998........................................................ $ 7,949
1999........................................................ 5,037
2000........................................................ 4,349
2001........................................................ 3,618
2002........................................................ 3,487
Thereafter.................................................. 5,452
-------
$29,892
=======
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,
1997, the Company estimates that its probable aggregate loss as a result of
such claims is $5.6 million (included in
41
44
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
other noncurrent liabilities) and believes that probable insurance recoveries
of $.8 million (included in other assets) related to these claims will be
realized. The Company estimates that its reasonably possible aggregate losses
from all currently pending litigation could be as much as $.9 million (before
tax) in excess of the probable loss previously recognized. However, the Company
believes it is probable that substantially all of such losses, if any occur,
will be insured. 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.
A customer of the Company has informed the Company that one of its power
plants will no longer provide baseload capacity to a public utility and instead
will be used to provide peak demand only and, as a result, the plant will
require substantially less coal under the customer's existing above-market
contract with the Company. The Company has filed a civil action in Federal
District Court in the Southern District of West Virginia alleging breach of
contract and other causes of action against the customer in respect of the
customer's failure to comply with the terms of this contract. As of December
31, 1997, the carrying amount of acquisition costs allocated to this coal
supply contract amounts to approximately $17 million. The Company's current
estimates of undiscounted cash flows indicate the carrying amount of this asset
is expected to be recovered.
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 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 $8.6 million at December 31, 1997 (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.
19. CASH FLOW
The changes in operating assets and liabilities as shown in the
consolidated statements of cash flows are comprised of the following:
1997 1996 1995
-------- -------- -------
Decrease (increase) in operating assets:
Receivables............................................. $(12,179) $ 10,857 $(1,802)
Inventories............................................. 16,323 4,024 8,133
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses................... 5,403 (7,464) 233
Income taxes............................................ (27,448) (1,145) (2,867)
Accrued postretirement benefits other than pension...... 7,437 4,566 8,810
Accrued reclamation and mine closure.................... (9,370) (10,492) (6,877)
Accrued workers' compensation........................... (9,008) (897) (8,360)
-------- -------- -------
Changes in operating assets and liabilities................. $(28,842) $ (551) $(2,730)
======== ======== =======
42
45
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for 1997 and 1996 is summarized below:
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------
1997:
Coal sales and other revenues............................... $198,461 $196,425 $329,475 $342,512
Income (loss) from operations............................... 16,314<F1> 16,296<F2> (20,468)<F3> 29,740<F4>
Net income (loss)........................................... 10,420 11,732 (13,001) 21,130
Earnings (loss) per common share<F8>........................ 0.50 0.56 (0.33) 0.53
1996:
Coal sales and other revenues............................... $189,643 $192,071 $196,966<F5> $201,941
Income from operations...................................... 14,949 11,112 16,713 13,338<F6>
Net income.................................................. 7,600 5,235 10,929 9,256<F7>
Earnings per common share<F8>............................... 0.36 0.25 0.52 0.44
<FN>
- --------
<F1> During the first quarter of 1997, the Company recorded $3.1 million in
costs associated with the impoundment failure in October 1996 at Lone
Mountain Processing, Inc. and a $3.3 million reduction in its reclamation
and mine closure liability due to permit changes.
<F2> During the second quarter of 1997, the Company recorded a $4.2 million
reduction in its workers' compensation liability due to better than
anticipated safety performance, $1.5 million in costs associated with the
impoundment failure noted in (1) and a $1.5 million charge to other
expenses in connection with the Trail Mountain lawsuit.
<F3> During the third quarter of 1997, the Company recorded a $39.1 million
charge in connection with the Ashland Coal merger comprised of termination
benefits, relocation costs and costs associated with the idling of
duplicate facilities.
<F4> During the fourth quarter of 1997, the Company recorded a $1.1 million
reduction in its reclamation and mine closure liability as a result of
permit changes and a favorable adjustment of $2.0 million due to changes
in actuarial assumptions related to postretirement and pension benefit
obligations.
<F5> During the third quarter of 1996, the Company sold an idle processing
plant and loadout facility in Eastern Kentucky for a gain of $4.9 million
included in other revenues and recorded charges to other expenses of $1.7
million in connection with the Trail Mountain lawsuit and $1.4 million in
connection with the redemption of debt.
<F6> During the fourth quarter of 1996, the Company recorded a $3.8 million
reduction in its reclamation and mine closure liability due to permit
changes granted by state authorities and revisions to costs associated
with removal of structures and productivities to reflect current
experience.
<F7> During the fourth quarter of 1996, no income tax provision was required in
order to achieve the effective tax rate.
<F8> The sum of the quarterly earnings per common share amounts may not equal
earnings 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.
43
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 1, 1997, the Board of Directors of the Company engaged Ernst &
Young LLP, to act as the Company's independent certified public accountant.
Ernst & Young LLP replaced Arthur Andersen LLP, who was dismissed on July 1,
1997. Ernst & Young LLP acts as the independent auditor for Ashland, the
Company's majority stockholder, and Ashland consolidates the financial
statements of the Company as a consequence of the merger with Ashland Coal.
Arthur Andersen LLP's reports on the Company's financial statements for the
fiscal years ended December 31, 1996 and 1995 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
between the Company and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures during such fiscal years or thereafter through and including the
date of the conclusion of Arthur Andersen LLP's services, which, if not
resolved to the satisfaction of Arthur Andersen LLP, would have caused Arthur
Andersen LLP to make reference to the matter in their reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing under the subcaption "Nominees for Director"
which appears under the caption "Election of Directors" beginning on Page 2
in the Company's Proxy Statement to be distributed to Company stockholders in
connection with the Company's 1998 Annual Meeting (the "1998 Proxy
Statement"). See also the list of the Company's executive officers and related
information under "Executive Officers" in Part I, Item X herein.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing in and under the "Summary Compensation Table",
the "Option Grants in Last Fiscal Year" table, the "Aggregated Option
Exercise in Last Fiscal Year and Fiscal Year-End Option Values" table, the
"Long-Term Incentive Plan Awards in Last Fiscal Year" table, the Pension
Plan section (including the table therein), the Employment Agreements and Other
Arrangements section, the Compensation of Directors section, and the
Compensation Committee Interlocks and Insider Participation section appearing
on Pages 10 to 13 in the Company's 1998 Proxy Statement. No portion of the
Personnel and Compensation Committee and Stock Incentive Committee Report on
Executive Compensation for 1997 or the Arch Coal Performance Graph is
incorporated herein in reliance on Regulation S-K, Item 402(a)(8).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing under the caption "Security Ownership of
Certain Beneficial Owners and Management" beginning on Page 5 of the Company's
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference into this Annual Report on Form
10-K the information appearing under the caption "Certain Relationships and
Related Transactions" beginning on Page 13 of the Company's 1998 Proxy
Statement.
44
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
PAGE
----
(1) The following consolidated financial statements of Arch Coal, Inc. and
subsidiaries are included in Item 8 at the page indicated:
Reports of Independent Auditors......................................... 23
Consolidated Statements of Income--Years Ended December 31, 1997, 1996
and 1995.............................................................. 25
Consolidated Balance Sheets--December 31, 1997 and 1996................. 26
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 1997, 1996 and 1995...................................... 27
Consolidated Statements of Cash Flows--Years Ended December 31, 1997,
1996 and 1995......................................................... 28
Notes to Consolidated Financial Statements.............................. 29
(2) The following consolidated financial statement schedule of Arch Coal,
Inc. and subsidiaries is included in Item 14 at the page indicated:
II--Valuation and Qualifying Accounts................................... 48
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
(3) Exhibits filed as part of this Report are as follows:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (Exhibit 3.1)<F*>
3.2 Restated and Amended Bylaws of Arch Coal, Inc. (Exhibit 3.4)<F*>
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex International, Ltd., Ashland Inc.
and Arch Coal, Inc. (formerly Arch Mineral Corporation) (Exhibit 4.1)<F*>
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch Coal, Inc. (formerly Arch
Mineral Corporation), Ashland Inc., Carboex International, Ltd. and the entities listed on Schedules
I and II thereto (Exhibit 4.2)<F*>
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997, among Carboex International,
Ltd., Ashland Inc., Ashland Coal, Inc. and Arch Coal, Inc. (formerly Arch Mineral Corporation)
(Exhibit 4.3)<F*>
4.4 Credit Agreement dated as of July 1, 1997, by and among Arch Coal, Inc., the banks party thereto,
PNC Bank, National Association, as Administrative and Syndication Agent and Morgan Guaranty Tract
Company of New York, as Documentation and Syndication Agent (incorporated herein by reference to
Exhibit 4.1 to the Current Report of Arch Coal, Inc. on Form 8-K filed July 15, 1997).
4.5 Lease Intended as Security dated as of January 15, 1998, among Apogee Coal Company, Catenary Coal
Company and Hobet Mining, Inc., as Lessees; The First Security Bank, National Association, as
Lessor, and the Certificate Purchasers named therein.<F***>
10.1 Coal Off-Take Agreement, executed as of April 4, 1997, among Arch Coal, Inc. (formerly Arch Mineral
Corporation), Carboex International, Ltd. and Ashland Inc. (Exhibit 10.1)<F*>
10.2 Sales Agency Agreement, executed as of April 4, 1997, among Arch Coal, Inc. (formerly Arch Mineral
Corporation), Ashland Inc. and Carboex S.A. (Exhibit 10.2)<F*>
10.3 Assignment, Assumption and Amendment of Coal Sales Agency Agreement, executed as of April 4, 1997,
among Arch Coal, Inc. (formerly Arch Mineral Corporation), Ashland Coal, Inc., Saarbergwerke AG and
Carboex International, Ltd. (Exhibit 10.3)<F*>
45
48
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.4 Shareholder Services Contract, executed as of April 4, 1997, among Arch Coal, Inc. (formerly Arch
Mineral Corporation), Ashland Coal, Inc., Carboex International, Ltd. and Ashland Inc. (Exhibit
10.4)<F*>
10.5 Deed of Lease and Agreement between Dingess-Rum Coal Company and Amherst Coal Company (predecessor
to Ark Land Company), dated June 1, 1962, as supplemented January 1, 1968, June 1, 1973, July 1,
1974, November 12, 1987, Lease Exchange Agreement dated July 2, 1979 amended as of January 1, 1984
and January 7, 1993; February 24, 1993; Partial Release dated as of May 6, 1988; Assignments dated
March 15, 1990, October 5, 1990 (Exhibit 10.8)<F*>
10.6 Agreement of Lease by and between Shonk Land Company, Limited Partnership and Lawson Hamilton
(predecessor to Ark Land Company), dated February 8, 1983, as amended October 7, 1987, March 9,
1989, April 1, 1992, October 31, 1992, December 5, 1992, February 16, 1993, August 4, 1994, October
1, 1995, July 31, 1996 and November 27, 1996 (Exhibit 10.9)<F*>
10.7 Lease between Little Coal Land Company and Ashland Land & Development Co., a wholly-owned subsidiary
of Ashland Coal, which was merged into Allegheny Land Company, a second tier subsidiary of the
Company (Exh. 10.11).<F**>
10.8 Agreement of Lease dated January 1, 1988, between Courtney Company and Allegheny Land Company (legal
successor by merger with Allegheny Land Co. No. 2, the assignee of Primeacre Land Corporation under
October 5, 1992, assignments), a second-tier subsidiary of the Company (Exhibit 10.3 to the
Company's first-tier subsidiary, Ashland Coal, Inc.'s Form 10-K for the year ended December 31,
1995, filed with the SEC on March 6, 1996, is incorporated herein by reference).
10.9 Lease between Dickinson Properties, Inc., the Southern Land Company, and F. B. Nutter, Jr. and F. B.
Nutter, Sr., predecessors in interest to Hobet Mining & Construction Co., Inc., an independent
operating subsidiary of the Company that subsequently changed its name to Hobet Mining, Inc. (Exh.
10.14).<F**>
10.10 Lease between Oglebay Norton Company and F. B. Nutter, Sr., predecessor in interest to Hobet Mining
& Construction Co., Inc., an independent operating subsidiary of the Company that subsequently
changed its name to Hobet Mining, Inc. (Exh. 10.15).<F**>
10.11 Lease Agreement between Fielden B. Nutter, Dorothy Nutter and Hobet Mining & Construction Co., Inc.,
an independent operating subsidiary of the Company that subsequently changed its name to Hobet
Mining, Inc. (Exh. 10.22).<F**>
10.12 Lease and Modification Agreement between Horse Creek Coal Land Company, Ashland and Hobet Mining &
Construction Co., Inc., an independent operating subsidiary of the Company that subsequently changed
its name to Hobet Mining, Inc. (Exh. 10.24).<F**>
10.13 Lease Agreement between C. C. Lewis Heirs Limited Partnership and Allegheny Land Company, a
second-tier subsidiary of the Company (Exh. 10.25).<F**>
10.14 Sublease between F. B. Nutter, Sr., et al., and Hobet Mining & Construction Co., Inc., an
independent operating subsidiary of the Company that subsequently changed its name to Hobet Mining,
Inc. (Exh. 10.27).<F**>
10.15 Coal Lease Agreement dated as of March 31, 1992, among Hobet Mining, Inc. (successor by merger with
Dal-Tex Coal Corporation) as lessee and UAC and Phoenix Coal Corporation, as lessors, and related
Company Guarantee (Exhibit 10.2 to the Company's first-tier subsidiary, Ashland Coal, Inc.'s Form
8-K dated April 6, 1992, is incorporated herein by reference).
10.16 Lease dated as of October 1, 1987, between Pocahontas Land Corporation and Mingo Logan Collieries
Company whose name is now Mingo Logan Coal Company (Exhibit 10.3 to Amendment No. 1 filed with SEC
on February 14, 1990, to the Company's first-tier subsidiary, Ashland Coal, Inc.'s Form 8-K filed
with the SEC on February 8, 1990, is incorporated herein by reference).
10.17 Consent, Assignment of Lease and Guaranty dated January 24, 1990, among Pocahontas Land Corporation,
Mingo Logan Coal Company, Mountain Gem Land, Inc. and Ashland Coal, Inc. (Exhibit 10.4 to Amendment
No. 1 filed with the SEC on February 14, 1990, to the Company's first-tier subsidiary, Ashland Coal,
Inc.'s Form 8-K filed with the SEC on February 8, 1990, is incorporated herein by reference).
10.18 Employment Agreement between Arch Mineral Corporation and Steven F. Leer, dated March 1, 1992
(Exhibit 10.12)<F*>
46
49
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.19 Consulting Agreement between Arch Mineral Corporation and Ronald E. Samples, effective September 1,
1992, as amended by letter agreements dated October 6, 1992, September 1, 1993, September 1, 1994,
September 1, 1995, August 31, 1996 and March 30, 1997 (Exhibit 10.13)<F*>
10.20 Form of At Will Employee Retention/Severance Agreement (Exhibit 10.14)<F*>
10.21 Form of Indemnity Agreement between Arch Coal, Inc. and Indemnitee (as defined therein) (Exhibit
10.15)<F*>
10.22 Arch Coal, Inc. 1998 Incentive Compensation Plan<F***>
10.23 Arch Coal, Inc. (formerly Arch Mineral Corporation) Deferred Compensation Plan (Exhibit 10.17)<F*>
10.24 Arch Coal, Inc. Deferred Compensation Plan for Directors' Fees (Exhibit 10.18)<F*>
10.25 Arch Coal, Inc. 1997 Stock Incentive Plan (Exhibit 10.9; appears as Annex E to Appendix A to the
Proxy Statement/Prospectus forming part of the Company's S-4 Registration Statement)<F*>
10.26 Arch Mineral Corporation 1996 ERISA Forfeiture Plan (Exhibit 10.20)<F*>
16 Letter of Arthur Andersen & Company LLP filed pursuant to Regulation S-K, Item 304(a)(3)<F***>
21 Subsidiaries of the Company<F***>
23.1 Consent of Independent Auditors<F***>
23.2 Consent of (Predecessor) Independent Accountants<F***>
24 Power of Attorney<F***>
27 Financial Data Schedule<F***>
<FN>
- --------
<F*> Incorporated by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-28149) filed with the SEC on May 30,
1997. The exhibit number referred to within the parentheses corresponds
to the number of such exhibit in Item 21 of such Registration Statement.
<F**> Incorporated by reference from the Company's first-tier subsidiary,
Ashland Coal, Inc.'s, Registration Statement on Form S-1
(Registration No. 33-22425) filed with the SEC on June 9, 1988, and
Amendments No. 1, No. 2 and No. 3 filed with the SEC on July 14,
1988, August 3, 1988, and August 5, 1988, respectively, and
Post-Effective Amendment No. 1 filed with the SEC on August 11, 1988.
The exhibit number referred to within the parentheses corresponds to
the number of such exhibit in Item 16(a) of Post-Effective Amendment
No. 1 to such Registration Statement.
<F***> Included with this Report.
Exhibits 10.22, 10.23, 10.24, 10.25 and 10.26 are executive compensation
plans.
Upon written or oral request to the Company's Secretary, a copy of any of
the above exhibits will be furnished at cost.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the quarter ended
December 31, 1997.
47
50
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<F1> OTHER<F2> YEAR
----------- ---------- ---------- -------------- --------- ----------
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
Year Ended December 31, 1996
Reserves Deducted from Asset Accounts
Property, Plant, and Equipment...................... $ 1,111 $ -- $1,011 $ -- $ 100
Other Assets--Other
Notes and Accounts Receivable................... 408 150 148 -- 410
Current Assets--Supplies Inventory.................. 11,976 500 1,163 -- 11,313
Year Ended December 31, 1995
Reserves Deducted from Asset Accounts
Property, Plant, and Equipment...................... $ 1,156 $ -- $ 45 $ -- $ 1,111
Other Assets--Other
Notes and Accounts Receivable................... 749 117 458 -- 408
Current Assets--Supplies Inventory.................. 11,437 1,273 734 -- 11,976
<FN>
- ---------
<F1> Reserves utilized, unless otherwise indicated.
<F2> Balances acquired in the Ashland Coal merger.
48
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ARCH COAL, INC.
(REGISTRANT)
BY: /s/ PATRICK A. KRIEGSHAUSER
---------------------------------
Patrick A. Kriegshauser
Senior Vice President, Treasurer
and Chief Financial Officer
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 16, 1998.
SIGNATURES CAPACITY
---------- --------
/s/ STEVEN F. LEER President and Chief Executive Officer and Director
------------------------------------------
Steven F. Leer
/s/ PATRICK A. KRIEGSHAUSER Senior Vice President, Treasurer, and Chief Financial Officer
------------------------------------------
Patrick A. Kriegshauser
/s/ JAMES P. PYE Controller
------------------------------------------
James P. Pye
James R. Boyd Director
Robert A. Charpie Director
Paul W. Chellgren Director
Thomas L. Feazell Director
Juan Antonio Ferrando Director
John R. Hall Director
Robert L. Hintz Director
Douglas H. Hunt Director
Steven F. Leer Director By: /s/ JEFFRY N. QUINN
Thomas Marshall Director ----------------------------------
James L. Parker Director Jeffry N. Quinn
J. Marvin Quin Director As Attorney-in Fact
ORIGINAL POWERS OF ATTORNEY AUTHORIZING STEVEN F. LEER, PATRICK A.
KRIEGSHAUSER AND JEFFRY N. QUINN, AND EACH OF THEM, TO SIGN THIS ANNUAL REPORT
ON FORM 10-K AND AMENDMENTS THERETO ON BEHALF OF THE ABOVE-NAMED PERSONS HAVE
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS EXHIBIT 24 TO THIS
REPORT.
49
52
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
3.1 Restated Certificate of Incorporation of Arch Coal, Inc. (Exhibit 3.1)<F*>
3.2 Restated and Amended Bylaws of Arch Coal, Inc. (Exhibit 3.4)<F*>
4.1 Stockholders Agreement, dated as of April 4, 1997, among Carboex International, Ltd., Ashland Inc.
and Arch Coal, Inc. (formerly Arch Mineral Corporation) (Exhibit 4.1)<F*>
4.2 Registration Rights Agreement, dated as of April 4, 1997, among Arch Coal, Inc. (formerly Arch
Mineral Corporation), Ashland Inc., Carboex International, Ltd. and the entities listed on Schedules
I and II thereto (Exhibit 4.2)<F*>
4.3 Agreement Relating to Nonvoting Observer, executed as of April 4, 1997, among Carboex International,
Ltd., Ashland Inc., Ashland Coal, Inc. and Arch Coal, Inc. (formerly Arch Mineral Corporation)
(Exhibit 4.3)<F*>
4.4 Credit Agreement dated as of July 1, 1997, by and among Arch Coal, Inc., the banks party thereto,
PNC Bank, National Association, as Administrative and Syndication Agent and Morgan Guaranty Tract
Company of New York, as Documentation and Syndication Agent (incorporated herein by reference to
Exhibit 4.1 to the Current Report of Arch Coal, Inc. on Form 8-K filed July 15, 1997).
4.5 Lease Intended as Security dated as of January 15, 1998, among Apogee Coal Company, Catenary Coal
Company and Hobet Mining, Inc., as Lessees; The First Security Bank, National Association, as
Lessor, and the Certificate Purchasers named therein.<F***>
10.1 Coal Off-Take Agreement, executed as of April 4, 1997, among Arch Coal, Inc. (formerly Arch Mineral
Corporation), Carboex International, Ltd. and Ashland Inc. (Exhibit 10.1)<F*>
10.2 Sales Agency Agreement, executed as of April 4, 1997, among Arch Coal, Inc. (formerly Arch Mineral
Corporation), Ashland Inc. and Carboex S.A. (Exhibit 10.2)<F*>
10.3 Assignment, Assumption and Amendment of Coal Sales Agency Agreement, executed as of April 4, 1997,
among Arch Coal, Inc. (formerly Arch Mineral Corporation), Ashland Coal, Inc., Saarbergwerke AG and
Carboex International, Ltd. (Exhibit 10.3)<F*>
10.4 Shareholder Services Contract, executed as of April 4, 1997, among Arch Coal, Inc. (formerly Arch
Mineral Corporation), Ashland Coal, Inc., Carboex International, Ltd. and Ashland Inc. (Exhibit
10.4)<F*>
10.5 Deed of Lease and Agreement between Dingess-Rum Coal Company and Amherst Coal Company (predecessor
to Ark Land Company), dated June 1, 1962, as supplemented January 1, 1968, June 1, 1973, July 1,
1974, November 12, 1987, Lease Exchange Agreement dated July 2, 1979 amended as of January 1, 1984
and January 7, 1993; February 24, 1993; Partial Release dated as of May 6, 1988; Assignments dated
March 15, 1990, October 5, 1990 (Exhibit 10.8)<F*>
10.6 Agreement of Lease by and between Shonk Land Company, Limited Partnership and Lawson Hamilton
(predecessor to Ark Land Company), dated February 8, 1983, as amended October 7, 1987, March 9,
1989, April 1, 1992, October 31, 1992, December 5, 1992, February 16, 1993, August 4, 1994, October
1, 1995, July 31, 1996 and November 27, 1996 (Exhibit 10.9)<F*>
10.7 Lease between Little Coal Land Company and Ashland Land & Development Co., a wholly-owned subsidiary
of Ashland Coal, which was merged into Allegheny Land Company, a second tier subsidiary of the
Company (Exh. 10.11).<F**>
10.8 Agreement of Lease dated January 1, 1988, between Courtney Company and Allegheny Land Company (legal
successor by merger with Allegheny Land Co. No. 2, the assignee of Primeacre Land Corporation under
October 5, 1992, assignments), a second-tier subsidiary of the Company (Exhibit 10.3 to the
Company's first-tier subsidiary, Ashland Coal, Inc.'s Form 10-K for the year ended December 31,
1995, filed with the SEC on March 6, 1996, is incorporated herein by reference).
50
53
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.9 Lease between Dickinson Properties, Inc., the Southern Land Company, and F. B. Nutter, Jr. and F. B.
Nutter, Sr., predecessors in interest to Hobet Mining & Construction Co., Inc., an independent
operating subsidiary of the Company that subsequently changed its name to Hobet Mining, Inc. (Exh.
10.14).<F**>
10.10 Lease between Oglebay Norton Company and F. B. Nutter, Sr., predecessor in interest to Hobet Mining
& Construction Co., Inc., an independent operating subsidiary of the Company that subsequently
changed its name to Hobet Mining, Inc. (Exh. 10.15).<F**>
10.11 Lease Agreement between Fielden B. Nutter, Dorothy Nutter and Hobet Mining & Construction Co., Inc.,
an independent operating subsidiary of the Company that subsequently changed its name to Hobet
Mining, Inc. (Exh. 10.22).<F**>
10.12 Lease and Modification Agreement between Horse Creek Coal Land Company, Ashland and Hobet Mining &
Construction Co., Inc., an independent operating subsidiary of the Company that subsequently changed
its name to Hobet Mining, Inc. (Exh. 10.24).<F**>
10.13 Lease Agreement between C. C. Lewis Heirs Limited Partnership and Allegheny Land Company, a
second-tier subsidiary of the Company (Exh. 10.25).<F**>
10.14 Sublease between F. B. Nutter, Sr., et al., and Hobet Mining & Construction Co., Inc., an
independent operating subsidiary of the Company that subsequently changed its name to Hobet Mining,
Inc. (Exh. 10.27).<F**>
10.15 Coal Lease Agreement dated as of March 31, 1992, among Hobet Mining, Inc. (successor by merger with
Dal-Tex Coal Corporation) as lessee and UAC and Phoenix Coal Corporation, as lessors, and related
Company Guarantee (Exhibit 10.2 to the Company's first-tier subsidiary, Ashland Coal, Inc.'s Form
8-K dated April 6, 1992, is incorporated herein by reference).
10.16 Lease dated as of October 1, 1987, between Pocahontas Land Corporation and Mingo Logan Collieries
Company whose name is now Mingo Logan Coal Company (Exhibit 10.3 to Amendment No. 1 filed with SEC
on February 14, 1990, to the Company's first-tier subsidiary, Ashland Coal, Inc.'s Form 8-K filed
with the SEC on February 8, 1990, is incorporated herein by reference).
10.17 Consent, Assignment of Lease and Guaranty dated January 24, 1990, among Pocahontas Land Corporation,
Mingo Logan Coal Company, Mountain Gem Land, Inc. and Ashland Coal, Inc. (Exhibit 10.4 to Amendment
No. 1 filed with the SEC on February 14, 1990, to the Company's first-tier subsidiary, Ashland Coal,
Inc.'s Form 8-K filed with the SEC on February 8, 1990, is incorporated herein by reference).
10.18 Employment Agreement between Arch Mineral Corporation and Steven F. Leer, dated March 1, 1992
(Exhibit 10.12)<F*>
10.19 Consulting Agreement between Arch Mineral Corporation and Ronald E. Samples, effective September 1,
1992, as amended by letter agreements dated October 6, 1992, September 1, 1993, September 1, 1994,
September 1, 1995, August 31, 1996 and March 30, 1997 (Exhibit 10.13)<F*>
10.20 Form of At Will Employee Retention/Severance Agreement (Exhibit 10.14)<F*>
10.21 Form of Indemnity Agreement between Arch Coal, Inc. and Indemnitee (as defined therein) (Exhibit
10.15)<F*>
10.22 Arch Coal, Inc. 1998 Incentive Compensation Plan<F***>
10.23 Arch Coal, Inc. (formerly Arch Mineral Corporation) Deferred Compensation Plan (Exhibit 10.17)<F*>
10.24 Arch Coal, Inc. Deferred Compensation Plan for Directors' Fees (Exhibit 10.18)<F*>
10.25 Arch Coal, Inc. 1997 Stock Incentive Plan (Exhibit 10.9; appears as Annex E to Appendix A to the
Proxy Statement/Prospectus forming part of the Company's S-4 Registration Statement)<F*>
10.26 Arch Mineral Corporation 1996 ERISA Forfeiture Plan (Exhibit 10.20)<F*>
51
54
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
16 Letter of Arthur Andersen & Company LLP filed pursuant to Regulation S-K, Item 304(a)(3)<F***>
21 Subsidiaries of the Company<F***>
23.1 Consent of Independent Auditors<F***>
23.2 Consent of (Predecessor) Independent Accountants<F***>
24 Power of Attorney<F***>
27 Financial Data Schedule<F***>
<FN>
- --------
<F*> Incorporated by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-28149) filed with the SEC on May 30,
1997. The exhibit number referred to within the parentheses corresponds
to the number of such exhibit in Item 21 of such Registration Statement.
<F**> Incorporated by reference from the Company's first-tier subsidiary,
Ashland Coal, Inc.'s, Registration Statement on Form S-1
(Registration No. 33-22425) filed with the SEC on June 9, 1988, and
Amendments No. 1, No. 2 and No. 3 filed with the SEC on July 14,
1988, August 3, 1988, and August 5, 1988, respectively, and
Post-Effective Amendment No. 1 filed with the SEC on August 11, 1988.
The exhibit number referred to within the parentheses corresponds to
the number of such exhibit in Item 16(a) of Post-Effective Amendment
No. 1 to such Registration Statement.
<F***> Included with this Report.
52