Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

(Mark One)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                      .

 

Commission file number: 1-13105

 

GRAPHIC

 

Arch Coal, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

43-0921172

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification Number)

 

One CityPlace Drive, Suite 300, St. Louis, Missouri

 

63141

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (314) 994-2700

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

At July 31, 2012 there were 212,268,960 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

 

Page

Part I FINANCIAL INFORMATION

3

 

Item 1. Financial Statements

3

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

 

Item 4. Controls and Procedures

38

Part II OTHER INFORMATION

38

 

Item 1. Legal Proceedings

38

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

41

 

Item 4. Mine Safety Disclosures

41

 

Item 6. Exhibits

42

 

2



Table of Contents

 

Part I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,063,538

 

$

985,528

 

$

2,103,189

 

$

1,858,466

 

 

 

 

 

 

 

 

 

 

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

Cost of sales

 

881,259

 

715,590

 

1,732,130

 

1,369,274

 

Depreciation, depletion and amortization

 

132,868

 

97,236

 

272,834

 

180,773

 

Amortization of acquired sales contracts, net

 

(4,451

)

1,262

 

(18,468

)

7,206

 

Mine closure and asset impairment costs

 

525,762

 

 

525,762

 

 

Goodwill impairment

 

115,791

 

 

115,791

 

 

Selling, general and administrative expenses

 

35,178

 

29,040

 

66,039

 

59,474

 

Change in fair value of coal derivatives and coal trading activities, net

 

(32,054

)

2,672

 

(35,667

)

888

 

Acquisition and transition costs related to ICG

 

 

48,666

 

 

48,666

 

Other operating income, net

 

(1,831

)

(4,292

)

(20,329

)

(5,407

)

 

 

1,652,522

 

890,174

 

2,638,092

 

1,660,874

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(588,984

)

95,354

 

(534,903

)

197,592

 

Interest expense, net:

 

 

 

 

 

 

 

 

 

Interest expense

 

(78,728

)

(42,249

)

(153,500

)

(76,829

)

Interest income

 

1,088

 

755

 

2,109

 

1,501

 

 

 

(77,640

)

(41,494

)

(151,391

)

(75,328

)

Other nonoperating expense

 

 

 

 

 

 

 

 

 

Bridge financing costs related to ICG

 

 

(49,490

)

 

(49,490

)

Net loss resulting from early retirement and refinancing of debt

 

(19,042

)

(250

)

(19,042

)

(250

)

 

 

(19,042

)

(49,740

)

(19,042

)

(49,740

)

Income (loss) before income taxes

 

(685,666

)

4,120

 

(705,336

)

72,524

 

Provision for (benefit from) income taxes

 

(250,242

)

(2,510

)

(271,321

)

10,020

 

Net income (loss)

 

(435,424

)

6,630

 

(434,015

)

62,504

 

Less: Net income attributable to noncontrolling interest

 

(65

)

(318

)

(268

)

(591

)

Net income (loss) attributable to Arch Coal, Inc.

 

$

(435,489

)

$

6,312

 

$

(434,283

)

$

61,913

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

(2.05

)

$

0.04

 

$

(2.05

)

$

0.37

 

Diluted earnings (loss) per common share

 

$

(2.05

)

$

0.04

 

$

(2.05

)

$

0.37

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

212,048

 

174,244

 

211,868

 

168,442

 

Diluted

 

212,048

 

175,272

 

211,868

 

169,554

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.03

 

$

0.11

 

$

0.14

 

$

0.21

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(435,424

)

$

6,630

 

$

(434,015

)

$

62,504

 

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

 

Pension, postretirement and other post-employment benefits

 

(3,584

)

293

 

(3,121

)

866

 

Unrealized gains (losses) on available-for-sale securities

 

62

 

(1,434

)

314

 

(687

)

Unrealized gains and losses on derivatives, net of reclassifications into net income:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on derivatives

 

991

 

(3,127

)

2,751

 

6,374

 

Reclassifications of (gains) losses into net income

 

(518

)

(4,360

)

4,307

 

(6,484

)

Total other comprehensive income (loss)

 

(3,049

)

(8,628

)

4,251

 

69

 

Total comprehensive income (loss)

 

$

(438,473

)

$

(1,998

)

$

(429,764

)

$

62,573

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

512,527

 

$

138,149

 

Restricted cash

 

5,740

 

10,322

 

Trade accounts receivable

 

327,402

 

380,595

 

Other receivables

 

70,103

 

88,584

 

Inventories

 

455,091

 

377,490

 

Prepaid royalties

 

11,214

 

21,944

 

Deferred income taxes

 

65,531

 

42,051

 

Coal derivative assets

 

53,351

 

13,335

 

Other

 

67,568

 

110,304

 

Total current assets

 

1,568,527

 

1,182,774

 

 

 

 

 

 

 

Property, plant and equipment, net

 

7,397,131

 

7,949,150

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Prepaid royalties

 

89,441

 

86,626

 

Goodwill

 

480,312

 

596,103

 

Equity investments

 

235,299

 

225,605

 

Other

 

183,228

 

173,701

 

Total other assets

 

988,280

 

1,082,035

 

Total assets

 

$

9,953,938

 

$

10,213,959

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

316,669

 

$

383,782

 

Coal derivative liabilities

 

7,090

 

7,828

 

Accrued expenses and other current liabilities

 

360,793

 

348,207

 

Current maturities of debt and short-term borrowings

 

111,260

 

280,851

 

Total current liabilities

 

795,812

 

1,020,668

 

Long-term debt

 

4,464,351

 

3,762,297

 

Asset retirement obligations

 

424,289

 

446,784

 

Accrued pension benefits

 

49,040

 

48,244

 

Accrued postretirement benefits other than pension

 

42,028

 

42,309

 

Accrued workers’ compensation

 

82,372

 

71,948

 

Deferred income taxes

 

730,495

 

976,753

 

Other noncurrent liabilities

 

223,131

 

255,382

 

Total liabilities

 

6,811,518

 

6,624,385

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

17,500

 

11,534

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock, $0.01 par value, authorized 260,000 shares, issued 213,768 and 213,183 shares at June 30, 2012 and December 31, 2011, respectively

 

2,138

 

2,136

 

Paid-in capital

 

3,022,014

 

3,015,349

 

Treasury stock, at cost

 

(53,848

)

(53,848

)

Retained earnings

 

158,374

 

622,353

 

Accumulated other comprehensive loss

 

(3,758

)

(7,950

)

Total stockholders’ equity

 

3,124,920

 

3,578,040

 

Total liabilities and stockholders’ equity

 

$

9,953,938

 

$

10,213,959

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

(434,015

)

$

62,504

 

Adjustments to reconcile to cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

272,834

 

180,773

 

Amortization of acquired sales contracts, net

 

(18,468

)

7,206

 

Bridge financing costs related to ICG

 

 

49,490

 

Net loss resulting from early retirement of debt and refinancing activities

 

19,042

 

250

 

Noncash mine closure and asset impairment costs

 

501,942

 

7,316

 

Goodwill impairment

 

115,791

 

 

Prepaid royalties expensed

 

16,551

 

19,491

 

Employee stock-based compensation expense

 

7,014

 

7,071

 

Amortization relating to financing activities

 

8,948

 

5,093

 

Changes in:

 

 

 

 

 

Receivables

 

52,291

 

(25,329

)

Inventories

 

(80,199

)

(31,476

)

Coal derivative assets and liabilities

 

(37,985

)

4,902

 

Accounts payable, accrued expenses and other current liabilities

 

(64,965

)

8,912

 

Income taxes, net

 

22,869

 

(15,186

)

Deferred income taxes

 

(272,094

)

18,177

 

Other

 

(14,248

)

15,006

 

 

 

 

 

 

 

Cash provided by operating activities

 

95,308

 

314,200

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Acquisition of ICG, net of cash acquired

 

 

(2,910,380

)

Change in restricted cash

 

4,582

 

(74,814

)

Capital expenditures

 

(202,073

)

(107,725

)

Proceeds from dispositions of property, plant and equipment

 

22,551

 

1,411

 

Purchases of investments and advances to affiliates

 

(9,292

)

(38,059

)

Additions to prepaid royalties

 

(8,634

)

(25,212

)

 

 

 

 

 

 

Cash used in investing activities

 

(192,866

)

(3,154,779

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from the issuance of senior notes

 

 

2,000,000

 

Proceeds from term note

 

1,386,000

 

 

Proceeds from the issuance of common stock, net

 

 

1,249,407

 

Payments to retire debt

 

(452,654

)

(307,984

)

Change in restricted cash

 

 

(260,663

)

Net increase (decrease) in borrowings under lines of credit and commercial paper program

 

(391,300

)

303,096

 

Net payments on other debt

 

(11,164

)

(8,845

)

Debt financing costs

 

(34,381

)

(112,334

)

Dividends paid

 

(29,696

)

(34,192

)

Issuance of common stock under incentive plans

 

5,131

 

846

 

 

 

 

 

 

 

Cash provided by financing activities

 

471,936

 

2,829,331

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

374,378

 

(11,248

)

Cash and cash equivalents, beginning of period

 

138,149

 

93,593

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

512,527

 

$

82,345

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Arch Coal, Inc. and its subsidiaries and controlled entities (the “Company”). The Company’s primary business is the production of steam and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and export markets. On June 15, 2011, the Company acquired International Coal Group, Inc. (“ICG”).  The Company currently operates 18 mining complexes in West Virginia, Kentucky, Maryland, Virginia, Illinois, Wyoming, Colorado and Utah. All subsidiaries (except as noted below) are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of results to be expected for the year ending December 31, 2012. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K/A filed with the U.S. Securities and Exchange Commission.

 

The Company owned a 99% membership interest and acted as the managing member in Arch Western Resources, LLC (“Arch Western”) a joint venture with Delta Housing, Inc., a subsidiary of BP p.l.c, Arch Western operates coal mines in Wyoming, Colorado and Utah. On April 9, 2012, Delta Housing, Inc. exercised their contractual right to require us to purchase their membership interests in Arch Western.  The negotiated purchase amount of $17.5 million was paid on July 2, 2012.

 

2. Accounting Policies

 

There is no new accounting guidance that is expected to have a significant impact on the Company’s financial statements.

 

3.  Debt

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Indebtedness to banks under credit facilities

 

90,000

 

481,300

 

Term loan ($1.4 billion face value) due 2018

 

1,386,292

 

 

6.75% senior notes ($450.0 million face value) due 2013

 

 

450,971

 

8.75% senior notes ($600.0 million face value) due 2016

 

589,963

 

588,974

 

7.00% senior notes due in 2019 at par

 

1,000,000

 

1,000,000

 

7.25% senior notes due 2020 at par

 

500,000

 

500,000

 

7.25% senior notes due 2021 at par

 

1,000,000

 

1,000,000

 

Other

 

9,356

 

21,903

 

 

 

4,575,611

 

4,043,148

 

Less current maturities of debt and short-term borrowings

 

111,260

 

280,851

 

Long-term debt

 

$

4,464,351

 

$

3,762,297

 

 

The current maturities of debt include contractual maturities, as well as amounts borrowed that are supported by credit facilities that have a term of less than one year and amounts borrowed under credit facilities with terms longer than one year that the Company does not intend to refinance on a long-term basis, based on cash projections and management’s plans.

 

On May 16, 2012, the Company entered into an amendment to its senior secured revolving credit facility that amended certain financial maintenance covenants, suspending the Company’s compliance with the debt-to-EBITDA ratio, easing other financial covenants through September 2014 and adding defined minimum EBITDA targets.  The maximum borrowing capacity of the revolving credit facility was reduced from $2 billion to $600 million.  In conjunction with the amendment, the Company borrowed $1.4 billion under a six-year secured term loan facility, issued at a 1% discount. The term loan contains no financial maintenance covenants, is prepayable and is secured by the same assets as borrowings under the revolving credit facility.  Quarterly principal payments of $3.5 million are due beginning in September 2012, plus interest at a rate of the greater of Libor or 1.25%, plus 450 basis points.  The

 

7



Table of Contents

 

proceeds of the term loan were used to retire all outstanding borrowings under the revolving credit facility and the outstanding $450.0 million principal amount of 6 ¾% Senior Notes due 2013 issued by Arch Western Finance, LLC (“Arch Western Finance”), the Company’s indirect subsidiary.

 

On May 16, 2012, Arch Western Finance accepted for purchase an aggregate of approximately $304.0 million principal amount of its 6 ¾% Senior Notes due 2013 in an initial settlement pursuant to the terms of its tender offer and consent solicitation, which commenced on May 1, 2012, and called for redemption all of the remaining notes outstanding after the completion of the tender offer.  The consideration for each $1,000 of principal purchased under the tender offer and consent solicitation was $1,002.50, for a total purchase consideration of $304.8 million.  On May 30, 2012, the remaining notes with an outstanding principal amount of $146.0 million were redeemed at par value.

 

The Company incurred financing costs of $27.4 million in conjunction with the term loan, which have been deferred on the balance sheet.  The Company wrote off $17.3 million of the $24.8 million of financing costs that had previously been deferred relating to the reduction in capacity of the senior secured revolving credit facility and $1.1 million related to the redemption of the 6 ¾% Senior Notes due 2013, offset by the $0.8 million of unamortized issue premium on the notes.  The write-off of deferred financing fees, along with other transaction fees associated with these transactions is reflected in “Loss on extinguishment and refinancing of debt” in the condensed consolidated statements of operations.

 

At June 30, 2012, cash on hand was $512.5 million and availability was $345.0 million under our lines of credit.

 

4.  Mine Closure and Asset Impairment Costs

 

An extreme downturn in demand for thermal coal resulted in the Company announcing on June 21, 2012 the closing of four mining complexes and the temporary idling of a fifth complex, all acquired with ICG, as well as cutbacks in production at other Appalachia mines.  These actions resulted in a total workforce reduction of approximately 750 positions.  The operations had ceased production prior to June 30, 2012, and will incur minimal ongoing annual maintenance costs customary with idling operations.  The terms of customer contracts will be fulfilled by other operations.

 

The following costs are reflected in the line “Mine closure and asset impairment costs” on the condensed consolidated statements of operations for the three and six months ended June 30, 2012:

 

Parts and supplies inventory writedown

 

$

2,598

 

Impairment of property, plant and equipment

 

95,641

 

Impairment of coal properties and deferred development costs

 

403,279

 

Royalty obligations

 

11,546

 

Employee termination benefits

 

12,274

 

Pension, postretirement and occupational disease curtailment charge, net (see notes 11 and 12)

 

424

 

 

 

$

525,762

 

 

The fair value of the closed or idled operations’ property, plant and equipment of approximately $51 million was based on the analysis of the marketability of thermal coal properties in the current market environment and our ability to redeploy equipment to other facilities.

 

The majority of the employee termination benefits will be paid in the third quarter of 2012.  The royalty obligations represent minimum payments on various leases and will be paid over the remaining term of the leases, through 2016.

 

The announcement of the closures triggered an actuarial curtailment under the Company’s sponsored pension, post-retirement medical and black lung benefit programs. Certain employees were informed that they would be terminated effective August 21, 2012, which will trigger the recognition of the remaining pension plan curtailment impact in the third quarter of 2012, a curtailment benefit of $2.2 million.

 

5.  Goodwill

 

A significant drop in the Company’s stock price during the second quarter of 2012, combined with continuing weak demand for thermal coal during the quarter and the Company’s resulting production cuts, indicated that the fair value of the Company’s goodwill could be less than its carrying value.  Accordingly, the Company has performed the first step of the two-step goodwill impairment test as of June 30, 2012.  The fair values of the reporting units are determined using a discounted cash flow (“DCF”) technique.  A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate and projections of sales volumes, selling prices and costs to produce.

 

8



Table of Contents

 

The value of the Company’s Black Thunder reporting unit in the Powder River Basin, where $115.8 million of goodwill had been allocated, is sensitive to thermal market demand. The further weakening in thermal coal markets in the second quarter significantly impacted the projected demand for and pricing of coal produced at Black Thunder.  In step one of the goodwill impairment testing, the fair value of the Black Thunder reporting unit did not exceed its carrying value, primarily due to the impact of lower demand on near term sales volumes and pricing.  The second step of the test requires that we determine the fair value of Black Thunder’s goodwill.  This will involve determining the value of Black Thunder’s assets and liabilities.  Based on initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book values, we recorded a preliminary write-off of the entire $115.8 million of goodwill allocated to the Black Thunder reporting unit during the second quarter of 2012.

 

The goodwill amounts allocated to certain reporting units in the Company’s Appalachia segment are particularly sensitive to volatility in the demand for metallurgical coal.  Should metallurgical coal markets weaken, affecting the volumes and pricing of metallurgical coal from the Company’s operations, it could cause the fair value of the reporting units to be less than their carrying value, requiring us to perform step 2 of the test for impairment.

 

6. Equity Investments and Membership Interests in Joint Ventures

 

The Company accounts for its investments and membership interests in joint ventures under the equity method of accounting if the Company has the ability to exercise significant influence, but not control, over the entity. Below are the equity method investments reflected in the condensed consolidated balance sheets:

 

 

 

Knight Hawk

 

DKRW

 

Dominion

 

Tenaska

 

Millennium

 

Tongue

 

 

 

 

 

Holdings,

 

Advanced

 

Terminal

 

Trailblazer

 

Bulk

 

River

 

 

 

In thousands

 

LLC

 

Fuels, LLC

 

Associates

 

Partners, LLC

 

Terminals, LLC

 

Railroad, LLC

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

135,225

 

$

19,715

 

$

16,086

 

$

15,266

 

$

26,324

 

$

12,989

 

$

225,605

 

Investments in affiliates

 

 

 

 

 

 

 

 

Advances to (distributions from) affiliates, net

 

(1,801

)

 

2,150

 

 

4,842

 

675

 

5,866

 

Equity in comprehensive income (loss)

 

9,641

 

(1,551

)

(2,374

)

 

(1,888

)

 

3,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2012

 

$

143,065

 

$

18,164

 

$

15,862

 

$

15,266

 

$

29,278

 

$

13,664

 

$

235,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable from investees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

 

$

30,751

 

$

 

$

5,059

 

$

 

$

 

$

35,810

 

Balance at June 30, 2012

 

$

 

$

34,817

 

$

 

$

5,047

 

$

 

$

 

$

39,864

 

 

The Company may be required to make future contingent payments of up to $73.0 million related to development financing for certain of its equity investees. The Company’s obligation to make these payments, as well as the timing of any payments required, is contingent upon a number of factors, including project development progress, receipt of permits and construction financing.

 

7. Derivatives

 

Diesel fuel price risk management

 

The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates purchasing approximately 73 to 78 million gallons of diesel fuel for use in its operations during 2012. To protect the Company’s cash flows from increases in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts, as well as heating oil swaps and purchased call options. At June 30, 2012, the Company had protected the price of approximately 80% of its expected purchases for the remainder of fiscal year 2012 and 50% of its 2013 purchases. At June 30, 2012, the Company had purchased heating oil call options for approximately 71 million gallons for the purpose of managing the price risk associated with future diesel purchases.

 

During the first quarter of 2012, the Company determined the effectiveness of the heating oil options could not be established as of December 31, 2011 and on an ongoing basis.  As a result, the amount remaining in accumulated other comprehensive income of $8.2 million, or $5.2 net of income taxes, was recorded in earnings, in the “other income, net” line on the condensed consolidated statement of income.

 

The Company also purchased heating oil call options to hedge the fuel surcharges on its barge and rail shipments that cover increases in diesel fuel prices. These positions reduce the Company’s risk of cash flow fluctuations related to these surcharges but the

 

9



Table of Contents

 

positions are not accounted for as hedges. At June 30, 2012, the Company held purchased call options for approximately 18.0 million gallons for the purpose of managing the fluctuations in cash flows associated with fuel surcharges on future shipments.

 

Coal risk management positions

 

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.

 

At June 30, 2012, the Company held derivatives for risk management purposes that are expected to settle in the following years :

 

(Tons in thousands)

 

2012

 

2013

 

2014

 

2015

 

Coal sales

 

3,821

 

3,517

 

3,240

 

720

 

Coal purchases

 

1,168

 

420

 

720

 

 

 

Coal trading positions

 

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The estimated future realization of the value of the trading portfolio is $0.6 million of gains in the remainder of 2012 and $2.1 million of losses in 2013.

 

Tabular derivatives disclosures

 

The Company’s contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the consolidated balance sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not the net position presented in the accompanying condensed consolidated balance sheets. The fair value and location of derivatives reflected in the accompanying condensed consolidated balance sheets are as follows:

 

 

 

June 30, 2012

 

 

 

December 31, 2011

 

 

 

Fair Value of Derivatives

 

Asset

 

Liability

 

 

 

Asset

 

Liability

 

 

 

(In thousands)

 

Derivative

 

Derivative

 

 

 

Derivative

 

Derivative

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating oil — diesel purchases

 

$

 

$

 

 

 

$

8,997

 

$

 

 

 

Coal

 

5,156

 

(1,284

)

 

 

1,109

 

 

 

 

Total

 

5,156

 

(1,284

)

 

 

10,106

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating oil — diesel purchases

 

5,534

 

 

 

 

 

 

 

 

Heating oil — fuel surcharges

 

1,310

 

 

 

 

1,797

 

 

 

 

Coal — held for trading purposes

 

37,492

 

(38,921

)

 

 

15,505

 

(19,927

)

 

 

Coal — risk management

 

56,125

 

(12,307

)

 

 

14,855

 

(6,035

)

 

 

Total

 

100,461

 

(51,228

)

 

 

32,157

 

(25,962

)

 

 

Total derivatives

 

105,617

 

(52,512

)

 

 

42,263

 

(25,962

)

 

 

Effect of counterparty netting

 

(45,422

)

45,422

 

 

 

(18,134

)

18,134

 

 

 

Net derivatives as classified in the balance sheets

 

$

60,195

 

$

(7,090

)

$

53,105

 

$

24,129

 

$

(7,828

)

$

16,301

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

 

 

2012

 

2011

 

Net derivatives as reflected on the balance sheets

 

 

 

 

 

 

 

Heating oil

 

Other current assets

 

$

6,844

 

$

10,794

 

Coal

 

Coal derivative assets

 

53,351

 

13,335

 

 

 

Coal derivative liabilities

 

(7,090

)

(7,828

)

 

 

 

 

$

53,105

 

$

16,301

 

 

The Company had a current liability for the obligation to post cash collateral of $25.2 million at June 30, 2012 and a current asset for the right to reclaim cash collateral of $12.4 million at December 31, 2011. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” and “other current assets”, respectively, in the accompanying condensed consolidated balance sheets.

 

10



Table of Contents

 

The effects of derivatives on measures of financial performance are as follows for the three month periods ended June 30:

 

Derivatives used in Cash Flow Hedging Relationships (in thousands)

 

 

 

 

 

 

 

Gains (Losses) Reclassified

 

 

 

Gain (Loss) Recognized in OCI

 

from OCI into Income

 

 

 

(Effective Portion)

 

(Effective Portion)

 

 

 

2012

 

2011

 

2012

 

2011

 

Heating oil — diesel purchases

 

$

 

$

(6,337

)

$

 

$

6,654

(2)

Coal sales

 

2,231

 

1,344

 

809

 

237

(1)

Coal purchases

 

(742

)

97

 

 

(2)

Totals

 

$

1,489

 

$

(4,896

)

$

809

 

$

6,891

 

 

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended June 30, 2012 and 2011.

 

Derivatives Not Designated as Hedging Instruments (in thousands)

 

 

 

Gain (Loss) Recognized

 

 

 

2012

 

2011

 

Coal — unrealized

 

$

27,446

 

$

(374

)(3)

Coal — realized

 

8,671

 

147

(4)

Heating oil — diesel purchases

 

(22,509

)

(4)

Heating oil — fuel surcharges

 

$

(2,599

)

$

(4)

 


Location in Statement of Income:

(1) — Revenues

(2) — Cost of sales

(3) — Change in fair value of coal derivatives and coal trading activities, net

(4) — Other operating income, net

 

The effects of derivatives on measures of financial performance are as follows for the six month periods ended June 30:

 

Derivatives used in Cash Flow Hedging Relationships (in thousands)

 

 

 

 

 

 

 

Gains (Losses) Reclassified from

 

 

 

Gain (Loss) Recognized in OCI

 

OCI into Income

 

 

 

(Effective Portion)

 

(Effective Portion)

 

 

 

2012

 

2011

 

2012

 

2011

 

Heating oil — diesel purchases

 

$

 

$

7,921

 

$

 

$

9,824

(2)

Coal sales

 

4,724

 

2,750

 

1,010

 

324

(1)

Coal purchases

 

(944

)

(779

)

 

(2)

Totals

 

$

3,780

 

$

9,892

 

$

1,010

 

$

10,148

 

 

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended June 30, 2012 and 2011.

 

Derivatives Not Designated as Hedging Instruments (in thousands)

 

 

 

Gain (Loss) Recognized

 

 

 

2012

 

2011

 

Coal — unrealized

 

$

34,998

 

$

(1,419

)(3)

Coal — realized

 

11,829

 

147

(4)

Heating oil — diesel purchases

 

(22,086

)

(4)

Heating oil — fuel surcharges 

 

$

(2,232

)

$

(4)

 


Location in Statement of Income:

(1) — Revenues

(2) — Cost of sales

(3) — Change in fair value of coal derivatives and coal trading activities, net

(4) — Other operating income, net

 

The Company recognized net unrealized and realized gains of 4.6 million and $2.3 million during the three months ended June 30, 2012 and 2011, respectively, related to its trading portfolio. The Company recognized net unrealized and realized gains of $0.7 million $0.5 million during the six months ended June 30, 2012 and 2011, respectively, related to its trading portfolio, which are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated

 

11



Table of Contents

 

statements of operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.

 

Based on fair values at June 30, 2012, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $4.0 million are expected to be reclassified from other comprehensive income into earnings during the next twelve months.

 

8. Inventories

 

Inventories consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Coal

 

$

267,600

 

$

206,517

 

Repair parts and supplies

 

178,626

 

163,527

 

Work-in-process

 

8,865

 

7,446

 

 

 

$

455,091

 

$

377,490

 

 

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $11.3 million at June 30, 2012, and $13.1 million at December 31, 2011.

 

9. Fair Value Measurements

 

The hierarchy of fair value measurements prioritizes the inputs to valuation techniques used to measure fair value. The levels of the hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

 

·    Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities and coal futures that are submitted for clearing on the New York Mercantile Exchange.

 

·    Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s level 2 assets and liabilities include commodity contracts (coal and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

 

·    Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (coal and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at June 30, 2012.

 

The table below sets forth, by level, the Company’s financial assets and liabilities that are recorded at fair value in the accompanying condensed consolidated balance sheet:

 

 

 

Fair Value at June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments in equity securities

 

$

8,035

 

$

8,035

 

$

 

$

 

Derivatives

 

60,195

 

51,701

 

1,650

 

6,844

 

Total assets

 

$

68,230

 

$

59,736

 

$

1,650

 

$

6,844

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

$

7,090

 

$

 

$

5,355

 

$

1,735

 

 

The Company’s contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying condensed consolidated balance sheet, based on this counterparty netting.

 

The following table summarizes the change in the fair values of financial instruments categorized as level 3.

 

12



Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2012

 

June 30, 2012

 

 

 

 

 

 

 

Balance, beginning of period

 

$

13,241

 

6,211

 

Realized and unrealized losses recognized in earnings, net

 

(14,092

)

(11,596

)

Realized and unrealized losses recognized in other comprehensive income, net

 

 

 

Purchases

 

6,468

 

11,729

 

Issuances

 

 

 

Settlements

 

(508

)

(1,235

)

 

 

 

 

 

 

Ending balance

 

$

5,109

 

5,109

 

 

Net unrealized losses during the three and six month periods ended June 30, 2012 related to level 3 financial instruments held on June 30, 2012 were $12.4 million and $9.6 million, respectively.

 

Fair Value of Long-Term Debt

 

At both June 30, 2012 and December 31, 2011, the fair value of the Company’s debt, including amounts classified as current, was $4.2 billion. Fair values are based upon observed prices in an active market when available or from valuation models using market information.

 

10. Stock-Based Compensation and Other Incentive Plans

 

During the six months ended June 30, 2012, the Company granted options to purchase approximately1.3 million shares of common stock with a weighted average exercise price of $13.46 per share and a weighted average grant-date fair value of $5.31 per share. The options’ fair value was determined using the Black-Scholes option pricing model, using a weighted average risk-free rate of .759%, a weighted average dividend yield of 2.95% and a weighted average volatility of 60.48%. The options’ expected life is 4.5 years and the options vest ratably over three years, and provide for the continuation of vesting after retirement for recipients that meet certain criteria. The expense for these options will be recognized through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn all or part of the award.

 

The Company has a long-term incentive program that allows for the award of performance units. The total number of units earned by a participant is based on financial and operational performance measures, and may be paid out in cash or in shares of the Company’s common stock. The Company recognizes compensation expense over the three-year term of the grant.  Amounts accrued and unpaid for all grants under the plan totaled $8.6 million and $9.6 million as of June 30, 2012 and December 31, 2011, respectively.

 

11. Workers’ Compensation Expense

 

The following table details the components of workers’ compensation expense:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Service cost

 

$

71

 

$

246

 

$

1,039

 

$

439

 

Interest cost

 

399

 

304

 

1,079

 

558

 

Net amortization

 

(851

)

(160

)

(574

)

(261

)

Curtailments

 

1,933

 

 

1,933

 

 

Total occupational disease

 

1,552

 

390

 

3,477

 

736

 

Traumatic injury claims and assessments

 

6,423

 

3,324

 

11,599

 

5,649

 

Total workers’ compensation expense

 

$

7,975

 

$

3,714

 

$

15,076

 

$

6,385

 

 

12. Employee Benefit Plans

 

The following table details the components of pension benefit costs:

 

13



Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Service cost

 

$

7,310

 

$

3,926

 

$

14,906

 

$

8,245

 

Interest cost

 

4,092

 

3,996

 

8,072

 

8,127

 

Curtailments

 

324

 

 

324

 

 

Expected return on plan assets

 

(5,477

)

(5,438

)

(11,015

)

(10,906

)

Amortization of prior service cost (credit)

 

(37

)

(142

)

(73

)

(95

)

Amortization of other actuarial losses

 

4,200

 

2,234

 

7,771

 

4,374

 

Net benefit cost

 

$

10,412

 

$

4,576

 

$

19,985

 

$

9,745

 

 

The following table details the components of other postretirement benefit costs (credits):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Service cost

 

$

539

 

$

518

 

$

1,088

 

$

923

 

Interest cost

 

520

 

529

 

1,011

 

1,027

 

Curtailments

 

(1,837

)

 

(1,837

)

 

Amortization of prior service credits

 

(2,876

)

(546

)

(5,871

)

(1,137

)

Amortization of other actuarial gains

 

(171

)

(952

)

(261

)

(1,550

)

Net benefit cost (credit)

 

$

(3,825

)

$

(450

)

$

(5,870

)

$

(737

)

 

13. Earnings per Common Share

 

The following table provides the basis for earnings per share calculations by reconciling basic and diluted weighted average shares outstanding:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

212,048

 

174,244

 

211,868

 

168,442

 

Effect of common stock equivalents under incentive plans

 

 

1,028

 

 

1,112

 

Diluted weighted average shares outstanding

 

212,048

 

175,272

 

211,868

 

169,554

 

 

The weighted effect of restricted stock, restricted stock units and options for 5.3 million and 1.1 million shares of common stock for the three month periods ended June 30, 2012 and 2011, respectively, and 4.5 million and 1.7 million shares for the six month periods ending June 30, 2012 and 2011, respectively, were excluded from the calculation of diluted weighted average shares outstanding because the effect would have been antidilutive. An additional weighted effect of 40,000 and 130,000 shares for the three and six month periods ending June 30, 2012, respectively, were excluded from the calculation of diluted weighted average shares outstanding because the Company incurred a loss for those periods.

 

14. Guarantees

 

The Company has agreed to continue to provide surety bonds and letters of credit for obligations, primarily reclamation, of Magnum Coal Company (“Magnum”) related to the properties the Company sold to Magnum on December 31, 2005. Patriot Coal Corporation (“Patriot Coal”) acquired Magnum in July 2008. The surety bonding amounts are mandated by the state and are not directly related to the estimated cost to reclaim the properties. At June 30, 2012, the Company had $35.3 million of surety bonds remaining related to properties sold to Magnum, however Patriot Coal has posted letters of credit of $16.7 million in the Company’s favor.

 

14



Table of Contents

 

Magnum would have acquired a contract to supply coal through 2017 to a customer that had not consented to the contract’s assignment from the Company to Magnum. The Company has committed to purchase coal from Magnum to supply to the customer at the same price the customer is charged for the sale. Under the coal supply contract, as amended, Magnum has the ability to buy out of its monthly obligations under the contract at prices that are predetermined for the remainder of the agreement. Additionally, a predecessor of the Company entered into a guarantee for the delivery of coal under a contract assigned to Magnum. If Magnum is unable to supply the coal for these coal sales contracts or pay the buy out amount if elected, and if the guarantee is enforceable, then the Company may be required to fulfill Magnum’s delivery or payment obligations. The maximum financial impact to the Company if required to fulfill Magnum’s obligations over the term of these contracts would be approximately $70.0 million as of June 30, 2012.

 

On July 9, 2012 Patriot Coal filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code, in order to undertake a comprehensive financial restructuring.  Patriot has the expectation of continuing to serve customers, after receiving a commitment of debtor-in-possession financing.  At this time, the Company does not believe that it is probable that it would have to purchase replacement coal, and, accordingly, no losses have been recorded in the consolidated financial statements as of June 30, 2012.

 

15. Contingencies

 

Allegheny Energy Supply (“Allegheny”), the sole customer of coal produced at the Company’s subsidiary Wolf Run Mining Company’s (“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. (“Hunter Ridge”), and ICG in state court in Allegheny County, Pennsylvania on December 28, 2006, and amended its complaint on April 23, 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract. The Sycamore No. 2 mine was idled after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped. After extensive searching for gas wells and rehabilitation of the mine, it was re-opened in 2007, but with notice to Allegheny that it would necessarily operate at reduced volumes in order to safely and effectively avoid the many gas wells within the reserve. The amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract in early 2005. Allegheny voluntarily dropped the breach of representation claims later. Allegheny claimed that it would incur costs in excess of $100 million to purchase replacement coal over the life of the contract. ICG, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining claims.

 

On November 3, 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other things, fraudulent inducement and conspiracy. On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to ICG, which was not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract.  No new substantive claims were asserted.  ICG answered the second amended complaint on October 13, 2009, denying all of the new claims. ICG’s counterclaim was dismissed on motion for summary judgment entered on May 11, 2010.  Allegheny’s claims against ICG were also dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not. The court conducted a non-jury trial of this matter beginning on January 10, 2011 and concluding on February 1, 2011. At the trial, Allegheny presented its evidence for breach of contract and claimed that it is entitled to past and future damages in the aggregate of between $228.0 million and $377.0 million. Wolf Run and Hunter Ridge presented their defense of the claims, including evidence with respect to the existence of force majeure conditions and excuse under the contract and applicable law. Wolf Run and Hunter Ridge presented evidence that Allegheny’s damages calculations were significantly inflated because it did not seek to determine damages as of the time of the breach and in some instances artificially assumed future non-delivery or did not take into account the apparent requirement to supply coal in the future. On May 2, 2011, the trial court entered a Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. ICG and Allegheny filed post-verdict motions in the trial court and on August 23, 2011, the court denied the parties’ motions.  The court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included pre-judgment interest.  The parties appealed the lower court’s decision to the Superior Court of Pennsylvania.  Wolf Run and Hunter Ridge have filed an appeal bond in the amount of $124.9 million. Briefing is complete and oral argument was held on May 16, 2012.  The matter is pending a decision by the Court.

 

As of June 30, 2012 and December 31, 2011, the Company had accrued $111.4 million and $108.3 million, respectively, for this lawsuit, including interest.  The ultimate resolution of this matter could result in an outcome which may be materially different than what the Company has accrued.

 

In addition, the Company is a party to numerous claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims, other than as noted above, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

 

15



Table of Contents

 

16. Segment Information

 

The Company has three reportable business segments, which are based on the major coal producing basins in which the Company operates. Each of these reportable business segments includes a number of mine complexes. The Company manages its coal sales by coal basin, not by individual mine complex. Geology, coal transportation routes to customers, regulatory environments and coal quality are characteristic to a basin. Accordingly, market and contract pricing have developed by coal basin. Mine operations are evaluated based on their per-ton operating costs (defined as including all mining costs but excluding pass-through transportation expenses), as well as on other non-financial measures, such as safety and environmental performance. The Company’s reportable segments are the Powder River Basin (PRB) segment, with operations in Wyoming; the Western Bituminous (WBIT) segment, with operations in Utah, Colorado and southern Wyoming; the Appalachia (APP) segment, with operations in West Virginia, Kentucky, Maryland and Virginia.  The Appalachia segment includes the acquired ICG operations in Appalachia, as well as the Company’s previous Central Appalachia segment. The “Other” operating segment represents primarily the Company’s Illinois operations and ADDCAR subsidiary, which manufactures and sells its patented highwall mining system.

 

Operating segment results for the three and six month periods ended June 30, 2012 and 2011 are presented below. Results for the reportable segments include all direct costs of mining, including all depreciation, depletion and amortization related to the mining operations, even if the assets are not recorded at the operating segment level. See discussion of segment assets below. Corporate, Other and Eliminations includes the change in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management; other support functions; and the elimination of intercompany transactions.

 

The asset amounts below represent an allocation of assets consistent with the Company’s incentive compensation plans. The amounts in Corporate, Other and Eliminations represent primarily corporate assets (cash, receivables, investments, plant, property and equipment) as well as unassigned coal reserves, above-market acquired sales contracts and other unassigned assets. Goodwill is allocated to the respective reporting units, even though it may not be reflected in the subsidiaries’ financial statements.

 

16



Table of Contents

 

 

 

 

 

 

 

 

 

Other

 

Corporate,

 

 

 

 

 

 

 

 

 

 

 

Operating

 

Other and

 

 

 

 

 

PRB

 

APP

 

WBIT

 

Segments

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

322,512

 

$

504,309

 

$

199,552

 

$

37,165

 

$

 

$

1,063,538

 

Income (loss) from operations

 

22,747

 

(493,093

)

13,779

 

1,291

 

(133,708

)

(588,984

)

Depreciation, depletion and amortization

 

37,131

 

73,176

 

18,454

 

3,423

 

684

 

132,868

 

Amortization of acquired sales contracts, net

 

31

 

(4,859

)

 

377

 

 

(4,451

)

Mine closure and asset impairment costs

 

 

525,916

 

179

 

(227

)

(106

)

525,762

 

Capital expenditures

 

5,793

 

78,102

 

14,114

 

(1,131

)

11,924

 

108,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

391,413

 

$

400,795

 

$

189,154

 

$

4,169

 

$

(3

)

$

985,528

 

Income from operations

 

35,615

 

87,961

 

43,673

 

113

 

(72,008

)

95,354

 

Depreciation, depletion and amortization

 

41,165

 

33,091

 

22,099

 

536

 

345

 

97,236

 

Amortization of acquired sales contracts, net

 

5,603

 

(4,206

)

 

(135

)

 

1,262

 

Capital expenditures

 

15,647

 

29,288

 

10,115

 

4,373

 

9,591

 

69,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

723,689

 

$

973,367

 

$

344,111

 

$

62,022

 

$

 

$

2,103,189

 

Income (loss) from operations

 

55,290

 

(477,258

)

45,020

 

(2,459

)

(155,496

)

(534,903

)

Depreciation, depletion and amortization

 

78,354

 

149,193

 

37,054

 

7,110

 

1,123

 

272,834

 

Amortization of acquired sales contracts, net

 

(785

)

(17,947

)

 

264

 

 

(18,468

)

Mine closure and asset impairment costs

 

 

525,916

 

179

 

(227

)

(106

)

525,762

 

Total assets

 

2,044,743

 

3,870,734

 

715,362

 

580,272

 

2,742,827

 

9,953,938

 

Capital expenditures

 

9,779

 

144,405

 

29,251

 

4,513

 

14,125

 

202,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

784,526

 

$

725,181

 

$

344,593

 

$

4,166

 

$

 

$

1,858,466

 

Income from operations

 

82,489

 

142,356

 

70,564

 

705

 

(98,522

)

197,592

 

Depreciation, depletion and amortization

 

82,856

 

54,107

 

42,628

 

357

 

825

 

180,773

 

Amortization of acquired sales contracts, net

 

11,547

 

(4,206

)

 

(135

)

 

7,206

 

Total assets

 

2,231,636

 

4,694,368

 

674,765

 

562,291

 

2,093,488

 

10,256,548

 

Capital expenditures

 

18,485

 

46,590

 

21,892

 

4,373

 

16,385

 

107,725

 

 

17



Table of Contents

 

A reconciliation of segment income from operations to consolidated income before income taxes follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

Income (loss) from operations

 

$

(588,984

)

$

95,354

 

$

(534,903

)

$

197,592

 

Interest expense

 

(78,728

)

(42,249

)

(153,500

)

(76,829

)

Interest income

 

1,088

 

755

 

2,109

 

1,501

 

Other nonoperating expenses

 

(19,042

)

(49,740

)

(19,042

)

(49,740

)

Income (loss) before income taxes

 

$

(685,666

)

$

4,120

 

$

(705,336

)

$

72,524

 

 

17. Supplemental Condensed Consolidating Financial Information

 

Pursuant to the indentures governing Arch Coal, Inc.’s senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors under the senior notes (Arch Western Resources, LLC and its subsidiaries, Arch Receivable Company, LLC and the Company’s subsidiaries outside the U.S.):

 

18



Table of Contents

 

Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2012

 

 

 

 

 

Guarantor

 

Non-
Guarantor

 

 

 

 

 

 

 

Parent/Issuer

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Revenues

 

$

 

$

558,400

 

$

505,138

 

$

 

$

1,063,538

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

2,288

 

458,214

 

442,387

 

(21,630

)

881,259

 

Depreciation, depletion and amortization

 

1,345

 

93,254

 

38,270

 

(1

)

132,868

 

Amortization of acquired sales contracts, net

 

 

(4,482

)

31

 

 

(4,451

)

Mine closure and asset impairment costs

 

 

525,690

 

72

 

 

525,762

 

Goodwill impairment

 

 

115,791

 

 

 

115,791

 

Selling, general and administrative expenses

 

21,774

 

2,700

 

12,392

 

(1,688

)

35,178

 

Change in fair value of coal derivatives and coal trading activities, net

 

 

(32,054

)

 

 

(32,054

)

Other operating (income) expense, net

 

6,472

 

(35,930

)

4,308

 

23,319

 

(1,831

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,879

 

1,123,183

 

497,460

 

 

1,652,522

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from investment in subsidiaries

 

(553,007

)

 

 

553,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(584,886

)

(564,783

)

7,678

 

553,007

 

(588,984

)

Interest expense, net:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(89,740

)

(1,198

)

(8,809

)

21,019

 

(78,728

)

Interest income

 

6,309

 

159

 

15,639

 

(21,019

)

1,088

 

 

 

(83,431

)

(1,039

)

6,830

 

 

(77,640

)

 

 

 

 

 

 

 

 

 

 

 

 

Other non-operating expense

 

 

 

 

 

 

 

 

 

 

 

Bridge financing costs related to ICG

 

 

 

 

 

 

Net loss resulting from early retirement of ICG debt

 

(17,349

)

 

(1,693

)

 

(19,042

)

 

 

(17,349

)

 

(1,693

)

 

(19,042

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(685,666

)

(565,822

)

12,815

 

553,007

 

(685,666

)

Benefit from income taxes

 

(250,242

)

 

 

 

(250,242

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(435,424

)

(565,822

)

12,815

 

553,007

 

(435,424

)

Less: Net income attributable to noncontrolling interest

 

(65

)

 

 

 

(65

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Arch Coal, Inc.

 

$

(435,489

)

$

(565,822