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 September 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
Arch Coal, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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43-0921172 |
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(State or other jurisdiction |
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(I.R.S. Employer |
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of incorporation or organization) |
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Identification Number) |
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One CityPlace Drive, Suite 300, St. Louis, Missouri |
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63141 |
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(Address of principal executive offices) |
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(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):
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 October 31, 2012 there were 212,277,465 shares of the registrant’s common stock outstanding.
FINANCIAL INFORMATION
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
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|
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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|
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2012 |
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2011 |
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2012 |
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2011 |
| ||||
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|
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(Unaudited) |
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Revenues |
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$ |
1,087,618 |
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$ |
1,198,673 |
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$ |
3,190,807 |
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$ |
3,057,139 |
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Costs, expenses and other |
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|
|
|
|
|
|
|
| ||||
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Cost of sales |
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896,809 |
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952,850 |
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2,628,939 |
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2,322,124 |
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Depreciation, depletion and amortization |
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126,838 |
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139,547 |
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399,672 |
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320,320 |
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Amortization of acquired sales contracts, net |
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(4,093 |
) |
(12,698 |
) |
(22,561 |
) |
(5,492 |
) | ||||
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Change in fair value of coal derivatives and coal trading activities, net |
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5,840 |
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8,360 |
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(29,827 |
) |
9,248 |
| ||||
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Selling, general and administrative expenses |
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33,266 |
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33,275 |
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99,305 |
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92,749 |
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Legal contingencies |
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(79,532 |
) |
— |
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(79,532 |
) |
— |
| ||||
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Mine closure and asset impairment costs |
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(2,194 |
) |
— |
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523,568 |
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7,316 |
| ||||
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Goodwill impairment |
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— |
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— |
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115,791 |
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— |
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Acquisition and transition costs - ICG |
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— |
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4,694 |
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— |
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46,044 |
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Other operating income, net |
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(25,276 |
) |
(3,611 |
) |
(45,605 |
) |
(9,018 |
) | ||||
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951,658 |
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1,122,417 |
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3,589,750 |
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2,783,291 |
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Income (loss) from operations |
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135,960 |
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76,256 |
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(398,943 |
) |
273,848 |
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Interest expense, net: |
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|
|
|
|
|
|
|
| ||||
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Interest expense |
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(75,710 |
) |
(77,694 |
) |
(229,210 |
) |
(154,523 |
) | ||||
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Interest income |
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1,459 |
|
840 |
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3,568 |
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2,341 |
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|
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(74,251 |
) |
(76,854 |
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(225,642 |
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(152,182 |
) | ||||
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Other nonoperating expense |
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|
|
|
|
|
|
|
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Bridge financing costs related to ICG |
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— |
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— |
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— |
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(49,490 |
) | ||||
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Net loss resulting from early retirement and refinancing of debt |
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— |
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(1,708 |
) |
(19,042 |
) |
(1,958 |
) | ||||
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|
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— |
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(1,708 |
) |
(19,042 |
) |
(51,448 |
) | ||||
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Income (loss) before income taxes |
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61,709 |
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(2,306 |
) |
(643,627 |
) |
70,218 |
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Provision for (benefit from) income taxes |
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15,958 |
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(11,427 |
) |
(255,363 |
) |
(1,407 |
) | ||||
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Net income (loss) |
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45,751 |
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9,121 |
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(388,264 |
) |
71,625 |
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Less: Net income attributable to noncontrolling interest |
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— |
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(231 |
) |
(268 |
) |
(822 |
) | ||||
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Net income (loss) attributable to Arch Coal, Inc. |
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$ |
45,751 |
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$ |
8,890 |
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$ |
(388,532 |
) |
$ |
70,803 |
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Earnings per common share |
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|
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Basic earnings (loss) per common share |
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$ |
0.22 |
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$ |
0.04 |
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$ |
(1.83 |
) |
$ |
0.39 |
|
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Diluted earnings (loss) per common share |
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$ |
0.22 |
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$ |
0.04 |
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$ |
(1.83 |
) |
$ |
0.39 |
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Weighted average shares outstanding |
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Basic |
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212,053 |
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211,337 |
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211,931 |
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182,898 |
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Diluted |
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212,076 |
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211,974 |
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211,931 |
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183,850 |
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Dividends declared per common share |
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$ |
0.03 |
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$ |
0.11 |
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$ |
0.17 |
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$ |
0.32 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2012 |
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2011 |
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2012 |
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2011 |
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(Unaudited) |
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Net income (loss) |
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$ |
45,751 |
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$ |
9,121 |
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$ |
(388,264 |
) |
$ |
71,625 |
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Other comprehensive income (loss), net of income taxes: |
|
|
|
|
|
|
|
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Pension, postretirement and other post-employment benefits |
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(615 |
) |
386 |
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(3,795 |
) |
1,249 |
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Unrealized gains (losses) on available-for-sale securities |
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(555 |
) |
(569 |
) |
(241 |
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(1,256 |
) | ||||
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Unrealized gains and losses on derivatives, net of reclassifications into net income: |
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|
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Unrealized gains (losses) on derivatives |
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65 |
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(3,671 |
) |
2,816 |
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2,703 |
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Reclassifications of (gains) losses into net income |
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(347 |
) |
(3,575 |
) |
3,960 |
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(10,059 |
) | ||||
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Total other comprehensive income (loss) |
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(1,452 |
) |
(7,429 |
) |
2,740 |
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(7,363 |
) | ||||
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Total comprehensive income (loss) |
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$ |
44,299 |
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$ |
1,692 |
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$ |
(385,524 |
) |
$ |
64,262 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
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September 30, |
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December 31, |
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(Unaudited) |
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Assets |
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|
|
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Current assets |
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|
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|
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Cash and cash equivalents |
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$ |
550,756 |
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$ |
138,149 |
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Restricted cash |
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3,450 |
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10,322 |
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Short term investments |
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99,359 |
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— |
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Trade accounts receivable |
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277,634 |
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380,595 |
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Other receivables |
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71,114 |
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88,584 |
| ||
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Inventories |
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391,526 |
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377,490 |
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Prepaid royalties |
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12,120 |
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21,944 |
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Deferred income taxes |
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65,395 |
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42,051 |
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Coal derivative assets |
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40,837 |
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13,335 |
| ||
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Other |
|
67,495 |
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110,304 |
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Total current assets |
|
1,579,686 |
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1,182,774 |
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Property, plant and equipment, net |
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7,372,063 |
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7,949,150 |
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Other assets |
|
|
|
|
| ||
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Prepaid royalties |
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85,842 |
|
86,626 |
| ||
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Goodwill |
|
480,312 |
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596,103 |
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Equity investments |
|
237,645 |
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225,605 |
| ||
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Other |
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180,306 |
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173,701 |
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Total other assets |
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984,105 |
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1,082,035 |
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Total assets |
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$ |
9,935,854 |
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$ |
10,213,959 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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|
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Accounts payable |
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$ |
304,442 |
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$ |
383,782 |
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Coal derivative liabilities |
|
3,498 |
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7,828 |
| ||
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Accrued expenses and other current liabilities |
|
355,448 |
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348,207 |
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Current maturities of debt and short-term borrowings |
|
115,695 |
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280,851 |
| ||
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Total current liabilities |
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779,083 |
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1,020,668 |
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Long-term debt |
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4,465,445 |
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3,762,297 |
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Asset retirement obligations |
|
426,044 |
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446,784 |
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Accrued pension benefits |
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45,160 |
|
48,244 |
| ||
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Accrued postretirement benefits other than pension |
|
41,061 |
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42,309 |
| ||
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Accrued workers’ compensation |
|
85,251 |
|
71,948 |
| ||
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Deferred income taxes |
|
746,079 |
|
976,753 |
| ||
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Other noncurrent liabilities |
|
182,464 |
|
255,382 |
| ||
|
Total liabilities |
|
6,770,587 |
|
6,624,385 |
| ||
|
Redeemable noncontrolling interest |
|
— |
|
11,534 |
| ||
|
Stockholders’ Equity |
|
|
|
|
| ||
|
Common stock, $0.01 par value, authorized 260,000 shares, issued 213,759 and 213,183 shares at September 30, 2012 and December 31, 2011, respectively |
|
2,141 |
|
2,136 |
| ||
|
Paid-in capital |
|
3,024,435 |
|
3,015,349 |
| ||
|
Treasury stock, at cost |
|
(53,848 |
) |
(53,848 |
) | ||
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Retained earnings |
|
197,749 |
|
622,353 |
| ||
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Accumulated other comprehensive loss |
|
(5,210 |
) |
(7,950 |
) | ||
|
Total stockholders’ equity |
|
3,165,267 |
|
3,578,040 |
| ||
|
Total liabilities and stockholders’ equity |
|
$ |
9,935,854 |
|
$ |
10,213,959 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
Nine Months Ended September 30, |
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|
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2012 |
|
2011 |
| ||
|
|
|
(Unaudited) |
| ||||
|
Operating activities |
|
|
|
|
| ||
|
Net income (loss) |
|
$ |
(388,264 |
) |
$ |
71,625 |
|
|
Adjustments to reconcile to cash provided by operating activities: |
|
|
|
|
| ||
|
Depreciation, depletion and amortization |
|
399,672 |
|
320,320 |
| ||
|
Amortization of acquired sales contracts, net |
|
(22,561 |
) |
(5,492 |
) | ||
|
Bridge financing costs related to ICG |
|
— |
|
49,490 |
| ||
|
Net loss resulting from early retirement of debt and refinancing activities |
|
19,042 |
|
1,958 |
| ||
|
Noncash mine closure and asset impairment costs |
|
501,942 |
|
7,316 |
| ||
|
Goodwill impairment |
|
115,791 |
|
— |
| ||
|
Prepaid royalties expensed |
|
19,802 |
|
26,880 |
| ||
|
Employee stock-based compensation expense |
|
9,435 |
|
9,019 |
| ||
|
Amortization relating to financing activities |
|
14,345 |
|
9,854 |
| ||
|
Changes in: |
|
|
|
|
| ||
|
Receivables |
|
102,252 |
|
(35,874 |
) | ||
|
Inventories |
|
(16,635 |
) |
(23,716 |
) | ||
|
Coal derivative assets and liabilities |
|
(29,523 |
) |
15,199 |
| ||
|
Accounts payable, accrued expenses and other current liabilities |
|
(51,968 |
) |
3,742 |
| ||
|
Income taxes, net |
|
22,048 |
|
(21,971 |
) | ||
|
Deferred income taxes |
|
(255,530 |
) |
17,062 |
| ||
|
Other |
|
(83,453 |
) |
25,955 |
| ||
|
Cash provided by operating activities |
|
356,395 |
|
471,367 |
| ||
|
Investing activities |
|
|
|
|
| ||
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Acquisition of ICG, net of cash acquired |
|
— |
|
(2,894,339 |
) | ||
|
Change in restricted cash |
|
6,872 |
|
(5,939 |
) | ||
|
Capital expenditures |
|
(303,968 |
) |
(215,899 |
) | ||
|
Proceeds from dispositions of property, plant and equipment |
|
22,624 |
|
25,133 |
| ||
|
Purchases of short term investments |
|
(99,628 |
) |
— |
| ||
|
Investments in and advances to affiliates |
|
(12,685 |
) |
(56,827 |
) | ||
|
Purchase of noncontrolling interest |
|
(17,500 |
) |
— |
| ||
|
Additions to prepaid royalties |
|
(9,192 |
) |
(26,135 |
) | ||
|
Cash used in investing activities |
|
(413,477 |
) |
(3,174,006 |
) | ||
|
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 |
|
— |
|
1,267,776 |
| ||
|
Payments to retire debt |
|
(452,806 |
) |
(604,096 |
) | ||
|
Net increase (decrease) in borrowings under lines of credit and commercial paper program |
|
(381,300 |
) |
283,096 |
| ||
|
Payments on term note |
|
(3,500 |
) |
— |
| ||
|
Net payments on other debt |
|
(13,078 |
) |
(8,792 |
) | ||
|
Debt financing costs |
|
(34,686 |
) |
(114,587 |
) | ||
|
Dividends paid |
|
(36,072 |
) |
(57,470 |
) | ||
|
Issuance of common stock under incentive plans |
|
5,131 |
|
1,628 |
| ||
|
Cash provided by financing activities |
|
469,689 |
|
2,767,555 |
| ||
|
Increase in cash and cash equivalents |
|
412,607 |
|
64,916 |
| ||
|
Cash and cash equivalents, beginning of period |
|
138,149 |
|
93,593 |
| ||
|
Cash and cash equivalents, end of period |
|
$ |
550,756 |
|
$ |
158,509 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and export markets. On June 15, 2011, the Company acquired International Coal Group, Inc. (“ICG”). The Company currently operates 15 mining complexes in West Virginia, Kentucky, Maryland, Virginia, Illinois, Wyoming, Colorado and Utah. All subsidiaries 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 nine month periods ended September 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’s subsidiary Arch Western Resources, LLC (“Arch Western”) operates coal mines in Wyoming, Colorado and Utah. On April 9, 2012, Delta Housing, Inc., a subsidiary of BP p.l.c. and a joint venture partner in Arch Western, exercised their contractual right to require the Company to purchase their 0.5% common and their preferred membership interests in Arch Western. 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
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
(In thousands) |
| ||||
|
Indebtedness to banks under credit facilities |
|
$ |
100,000 |
|
$ |
481,300 |
|
|
Term loan ($1.4 billion face value) due 2018 |
|
1,383,375 |
|
— |
| ||
|
6.75% senior notes ($450.0 million face value) due 2013 |
|
— |
|
450,971 |
| ||
|
8.75% senior notes ($600.0 million face value) due 2016 |
|
590,475 |
|
588,974 |
| ||
|
7.00% senior notes due 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 |
|
7,290 |
|
21,903 |
| ||
|
|
|
4,581,140 |
|
4,043,148 |
| ||
|
Less current maturities of debt and short-term borrowings |
|
115,695 |
|
280,851 |
| ||
|
Long-term debt |
|
$ |
4,465,445 |
|
$ |
3,762,297 |
|
The current maturities of debt include contractual maturities and amounts borrowed under our revolving credit facility and accounts receivable securitization program that the Company does not intend to refinance on a long-term basis, based on cash projections and management’s plans.
On May 16, 2012, the Company entered into an amendment to its senior secured revolving credit facility that amended certain financial maintenance covenants, suspending the Company’s compliance with the debt-to-EBITDA ratio, easing other financial covenants through September 2014 and adding defined minimum EBITDA targets. The maximum borrowing capacity of the revolving credit facility was reduced from $2 billion to $600 million. In conjunction with the amendment, the Company borrowed $1.4 billion under a six-year secured term loan facility, issued at a 1% discount. The term loan contains no financial maintenance covenants, is prepayable and is secured by the same assets as borrowings under the revolving credit
facility. Quarterly principal payments of $3.5 million are due beginning in September 2012, plus interest at a rate of the greater of a LIBOR-based rate or 1.25%, plus 450 basis points. The proceeds of the term loan were used to retire all outstanding borrowings under the revolving credit facility and the outstanding $450.0 million principal amount of 6.75% Senior Notes due 2013 issued by Arch Western Finance, LLC (“Arch Western Finance”), the Company’s indirect subsidiary.
On May 16, 2012, Arch Western Finance accepted for purchase an aggregate of approximately $304.0 million principal amount of its 6.75% Senior Notes due 2013 in an initial settlement pursuant to the terms of its tender offer and consent solicitation, which commenced on May 1, 2012, and called for redemption all of the remaining notes outstanding after the completion of the tender offer. The consideration for each $1,000 of principal purchased under the tender offer and consent solicitation was $1,002.50, for a total purchase consideration of $304.8 million. On May 30, 2012, the remaining notes with an outstanding principal amount of $146.0 million were redeemed at par value.
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 previously deferred financing costs relating to the reduction in capacity of the senior secured revolving credit facility and $1.1 million related to the redemption of the 6.75% Senior Notes due 2013, offset by 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.
Since May, when borrowings under the revolving credit facility were retired with the proceeds of the term loan, we have borrowed only under the accounts receivable securitization program. At September 30, 2012, the available borrowing capacity under our lines of credit was approximately $366 million.
4. Mine Closure and Asset Impairment Costs
In response to decreasing demand for thermal coal, the Company made the decision in the second quarter of 2012 to close four mining complexes and to temporarily idle a fifth complex, all acquired with ICG. The company also curtailed production at other Appalachia mines. These actions resulted in a total workforce reduction of approximately 750 positions. The operations had ceased production prior to June 30, 2012, but continued to ship from inventory in the third quarter of 2012. The Company will incur customary annual maintenance costs related to these properties in the future. The terms of customer contracts will be fulfilled by other operations.
The following costs are reflected in the line “Mine closure and asset impairment costs” on the condensed consolidated statements of operations for the nine months ended September 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 gain, net (see notes 13 and 14) |
|
(1,770 |
) | |
|
|
|
$ |
523,568 |
|
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 were paid in the third quarter of 2012. The royalty obligations represent minimum payments on various leases and will be paid over the remaining term of the leases, through 2016.
The 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 triggered the recognition of the remaining pension plan curtailment impact in the third quarter of 2012, a curtailment gain of $2.2 million.
5. Investments in Available-for-Sale Securities
From the proceeds of the term loan discussed in Note 3, “Debt”, the Company invested in marketable debt securities, primarily highly liquid AA - rated corporate bonds, U.S. government and government agency securities. These investments are
held in the custody of a major financial institution. These securities, along with the Company’s investments in marketable equity securities, are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.
The Company’s investments in available-for-sale marketable securities are as follows:
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
Classification |
| ||||||||
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Fair |
|
Short-Term |
|
|
| ||||||
|
|
|
Cost Basis |
|
Gains |
|
Losses |
|
Value |
|
Investments |
|
Other Assets |
| ||||||
|
|
|
(In thousands) |
| ||||||||||||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
U.S. government and agency securities |
|
$ |
72,964 |
|
$ |
— |
|
$ |
(157 |
) |
$ |
72,807 |
|
$ |
72,807 |
|
$ |
— |
|
|
Corporate notes and bonds |
|
26,664 |
|
— |
|
(112 |
) |
26,552 |
|
26,552 |
|
— |
| ||||||
|
Equity securities |
|
5,271 |
|
4,678 |
|
(2,514 |
) |
7,435 |
|
— |
|
7,435 |
| ||||||
|
Total Investments |
|
$ |
104,899 |
|
$ |
4,678 |
|
$ |
(2,783 |
) |
$ |
106,794 |
|
$ |
99,359 |
|
$ |
7,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
Classification |
| ||||||||
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Recorded |
|
Short-Term |
|
|
| ||||||
|
|
|
Cost Basis |
|
Gains |
|
Losses |
|
Basis |
|
Investments |
|
Other Assets |
| ||||||
|
|
|
(In thousands) |
| ||||||||||||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Equity securities |
|
$ |
5,268 |
|
$ |
4,394 |
|
$ |
(2,122 |
) |
$ |
7,540 |
|
$ |
— |
|
$ |
7,540 |
|
|
Total Investments |
|
$ |
5,268 |
|
$ |
4,394 |
|
$ |
(2,122 |
) |
$ |
7,540 |
|
$ |
— |
|
$ |
7,540 |
|
Most of the debt securities have maturity dates in 2013, and the remainder mature in the first quarter of 2014. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
6. Goodwill
During the second quarter of 2012, a significant drop in the Company’s stock price, combined with continuing weak demand for thermal coal during the quarter and the Company’s resulting production cuts, indicated that the fair value of the Company’s goodwill could be less than its carrying value. Accordingly, the Company performed the first step of the two-step goodwill impairment test as of June 30, 2012. The fair values of the reporting units were determined using a discounted cash flow (“DCF”) technique. A number of significant assumptions and estimates were 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.
The value of the Company’s Black Thunder reporting unit in the Powder River Basin, where $115.8 million of goodwill had been allocated, is sensitive to market demand for thermal coal. The further weakening in thermal coal markets 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, which involves determining the value of Black Thunder’s assets and liabilities. The Company is in the process of completing this valuation. Based on initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book values, the Company recorded a preliminary impairment charge for the entire $115.8 million carrying value of Black Thunder’s goodwill during the second quarter of 2012.
The goodwill amounts allocated to certain reporting units in the Company’s Appalachia segment are sensitive to volatility in the demand for metallurgical coal. Should metallurgical coal markets weaken from the estimates used in the first step of the
impairment test, affecting the estimates of 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.
7. 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:
|
In thousands |
|
Knight Hawk |
|
DKRW |
|
Dominion |
|
Tenaska |
|
Millennium |
|
Tongue River |
|
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 |
|
(5,342 |
) |
— |
|
3,230 |
|
— |
|
5,853 |
|
1,708 |
|
5,449 |
| |||||||
|
Equity in comprehensive income (loss) |
|
16,033 |
|
(3,457 |
) |
(3,625 |
) |
(2 |
) |
(2,358 |
) |
— |
|
6,591 |
| |||||||
|
Balance at September 30, 2012 |
|
$ |
145,916 |
|
$ |
16,258 |
|
$ |
15,691 |
|
$ |
15,264 |
|
$ |
29,819 |
|
$ |
14,697 |
|
$ |
237,645 |
|
|
Notes receivable from investees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Balance at December 31, 2011 |
|
$ |
— |
|
$ |
30,751 |
|
$ |
— |
|
$ |
5,059 |
|
$ |
— |
|
$ |
— |
|
$ |
35,810 |
|
|
Balance at September 30, 2012 |
|
$ |
— |
|
$ |
36,402 |
|
$ |
— |
|
$ |
5,076 |
|
$ |
— |
|
$ |
— |
|
$ |
41,478 |
|
The Company may be required to make future contingent payments of up to $72.9 million related to development financing for certain of its equity investees. The Company’s obligation to make these payments, as well as the timing of any payments required, is contingent upon a number of factors, including project development progress, receipt of permits and construction financing.
8. 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 and purchased heating oil call options, and in the past, heating oil swaps. At September 30, 2012, the Company had protected the price of approximately 80% of its expected purchases for the remainder of 2012 and 67% of its 2013 purchases. At September 30, 2012, the Company had purchased heating oil call options for approximately 63.5 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 million net of income taxes, was recorded in earnings, in the “other operating income, net” line on the condensed consolidated statement of operations.
The Company also purchased heating oil call options to hedge the fuel surcharges on its barge and rail shipments that cover increases in diesel fuel prices. These positions reduce the Company’s risk of cash flow fluctuations related to these surcharges but the positions are not accounted for as hedges. At September 30, 2012, the Company held purchased call options for approximately 14 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 September 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 |
|
Total |
|
|
Coal sales |
|
2,915 |
|
5,713 |
|
4,020 |
|
720 |
|
13,368 |
|
|
Coal purchases |
|
1,851 |
|
1,140 |
|
900 |
|
— |
|
3,891 |
|
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 $3.6 million of gains in the remainder of 2012 and $1.6 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:
|
|
|
September 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 |
|
4,509 |
|
(1,679 |
) |
|
|
1,109 |
|
— |
|
|
| ||||||
|
Total |
|
4,509 |
|
(1,679 |
) |
|
|
10,106 |
|
— |
|
|
| ||||||
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Heating oil — diesel purchases |
|
10,913 |
|
(57 |
) |
|
|
— |
|
— |
|
|
| ||||||
|
Heating oil — fuel surcharges |
|
2,839 |
|
— |
|
|
|
1,797 |
|
— |
|
|
| ||||||
|
Coal — held for trading purposes |
|
27,190 |
|
(25,171 |
) |
|
|
15,505 |
|
(19,927 |
) |
|
| ||||||
|
Coal — risk management |
|
45,739 |
|
(13,249 |
) |
|
|
14,855 |
|
(6,035 |
) |
|
| ||||||
|
Total |
|
86,681 |
|
(38,477 |
) |
|
|
32,157 |
|
(25,962 |
) |
|
| ||||||
|
Total derivatives |
|
91,190 |
|
(40,156 |
) |
|
|
42,263 |
|
(25,962 |
) |
|
| ||||||
|
Effect of counterparty netting |
|
(36,658 |
) |
36,658 |
|
|
|
(18,134 |
) |
18,134 |
|
|
| ||||||
|
Net derivatives as classified in the balance sheets |
|
$ |
54,532 |
|
$ |
(3,498 |
) |
$ |
51,034 |
|
$ |
24,129 |
|
$ |
(7,828 |
) |
$ |
16,301 |
|
|
|
|
|
|
September 30, |
|
December 31, |
| ||
|
Net derivatives as reflected on the balance sheets |
|
|
|
|
|
|
| ||
|
Heating oil |
|
Other current assets |
|
$ |
13,695 |
|
$ |
10,794 |
|
|
Coal |
|
Coal derivative assets |
|
40,837 |
|
13,335 |
| ||
|
|
|
Coal derivative liabilities |
|
(3,498 |
) |
(7,828 |
) | ||
|
|
|
|
|
$ |
51,034 |
|
$ |
16,301 |
|
The Company had a current liability for the obligation to post cash collateral of $7.4 million at September 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.
The effects of derivatives on measures of financial performance are as follows for the three month periods ended September 30:
Derivatives used in Cash Flow Hedging Relationships (in thousands)
For the three months ended September 30
|
|
|
|
|
|
|
Gains (Losses) Reclassified |
| ||||||
|
|
|
Gain (Loss) Recognized in Other |
|
from Other Comprehensive |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
Heating oil — diesel purchases |
|
$ |
— |
|
$ |
(6,386 |
) |
$ |
— |
|
$ |
5,122 |
(2) |
|
Coal sales |
|
259 |
|
1,820 |
|
542 |
|
466 |
(1) | ||||
|
Coal purchases |
|
(178 |
) |
(1,274 |
) |
— |
|
— |
(2) | ||||
|
Totals |
|
$ |
81 |
|
$ |
(5,840 |
) |
$ |
542 |
|
$ |
5,588 |
|
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 September 30, 2012 and 2011.
Derivatives Not Designated as Hedging Instruments (in thousands)
For the three months ended September 30
|
|
|
Gain (Loss) Recognized |
| ||||
|
|
|
2012 |
|
2011 |
| ||
|
Coal — unrealized |
|
$ |
(11,328 |
) |
$ |
(6,131 |
)(3) |
|
Coal — realized |
|
$ |
14,072 |
|
$ |
166 |
(4) |
|
Heating oil — diesel purchases |
|
$ |
5,184 |
|
$ |
— |
(4) |
|
Heating oil — fuel surcharges |
|
$ |
1,092 |
|
$ |
(2,501 |
)(4) |
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating income, net
The effects of derivatives on measures of financial performance are as follows for the nine month periods ended September 30:
Derivatives used in Cash Flow Hedging Relationships (in thousands)
For the nine months ended September 30
|
|
|
|
|
|
|
Gains (Losses) Reclassified from |
| ||||||
|
|
|
Gain (Loss) Recognized in Other |
|
from Other Comprehensive |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
Heating oil — diesel purchases |
|
$ |
— |
|
$ |
1,535 |
|
$ |
— |
|
$ |
14,946 |
(2) |
|
Coal sales |
|
4,983 |
|
4,570 |
|
1,552 |
|
790 |
(1) | ||||
|
Coal purchases |
|
(1,122 |
) |
(2,053 |
) |
— |
|
— |
(2) | ||||
|
Totals |
|
$ |
3,861 |
|
$ |
4,052 |
|
$ |
1,552 |
|
$ |
15,736 |
|
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 nine month periods ended September 30, 2012 and 2011.
Derivatives Not Designated as Hedging Instruments (in thousands)
For the nine months ended September 30
|
|
|
Gain (Loss) Recognized |
| ||||
|
|
|
2012 |
|
2011 |
| ||
|
Coal — unrealized |
|
$ |
23,670 |
|
$ |
(7,550 |
)(3) |
|
Coal — realized |
|
$ |
25,901 |
|
$ |
313 |
(4) |
|
Heating oil — diesel purchases |
|
$ |
(16,902 |
) |
$ |
— |
(4) |
|
Heating oil — fuel surcharges |
|
$ |
(1,140 |
) |
$ |
(2,501 |
)(4) |
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating income, net
Related to the Company’s trading portfolio, net unrealized and realized gains of $5.5 million and losses of $2.2 million were recognized during the three months ended September 30, 2012 and 2011, respectively. The Company recognized net unrealized and realized gains of $6.2 million and losses of $1.7 million during the nine months ended September 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 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 September 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.
9. Inventories
Inventories consist of the following:
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
(In thousands) |
| ||||
|
Coal |
|
$ |
202,103 |
|
$ |
206,517 |
|
|
Repair parts and supplies |
|
178,710 |
|
163,527 |
| ||
|
Work-in-process |
|
10,713 |
|
7,446 |
| ||
|
|
|
$ |
391,526 |
|
$ |
377,490 |
|
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $11.4 million at September 30, 2012, and $13.1 million at December 31, 2011.
10. Fair Value Measurements
The hierarchy of fair value measurements prioritizes the inputs to valuation techniques used to measure fair value. The levels of the hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
· Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities, U.S Treasury securities, and coal futures that are submitted for clearing on the New York Mercantile Exchange.
· Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s level 2 assets and liabilities include U.S. government agency securities and commodity contracts (coal and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.
· Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (coal and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at September 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 September 30, 2012 |
| ||||||||||
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Assets |
|
|
|
|
|
|
|
|
| ||||
|
Investments in marketable securities |
|
$ |
106,794 |
|
$ |
58,109 |
|
$ |
48,685 |
|
$ |
— |
|
|
Derivatives |
|
54,532 |
|
40,884 |
|
(47 |
) |
13,695 |
| ||||
|
Total assets |
|
$ |
161,326 |
|
$ |
98,993 |
|
$ |
48,638 |
|
$ |
13,695 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Derivatives |
|
$ |
3,498 |
|
$ |
— |
|
$ |
1,912 |
|
$ |
1,586 |
|
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.
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||
|
Balance, beginning of period |
|
$ |
5,109 |
|
$ |
6,211 |
|
|
Realized and unrealized losses recognized in earnings, net |
|
4,265 |
|
(7,331 |
) | ||
|
Realized and unrealized losses recognized in other comprehensive income, net |
|
— |
|
— |
| ||
|
Purchases |
|
2,869 |
|
14,598 |
| ||
|
Issuances |
|
— |
|
— |
| ||
|
Settlements |
|
(134 |
) |
(1,369 |
) | ||
|
Ending balance |
|
$ |
12,109 |
|
$ |
12,109 |
|
Net unrealized gains during the three month period ended September 30, 2012 related to level 3 financial instruments held on September 30, 2012 was $4.3 million. Net unrealized losses during the nine month period ended September 30, 2012 related to level 3 financial instruments held on September 30, 2012 was $3.1 million.
Fair Value of Long-Term Debt
At both September 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.
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2012 |
|
2011 |
| ||
|
|
|
(In thousands) |
| ||||
|
Payroll and employee benefits |
|
$ |
80,782 |
|
$ |
65,323 |
|
|
Taxes other than income taxes |
|
123,100 |
|
133,331 |
| ||
|
Interest |
|
70,619 |
|
55,266 |
| ||
|
Acquired sales contracts |
|
16,327 |
|
38,441 |
| ||
|
Workers’ compensation |
|
10,155 |
|
11,666 |
| ||
|
Asset retirement obligations |
|
44,178 |
|
27,119 |
| ||
|
Other |
|
10,287 |
|
17,061 |
| ||
|
|
|
$ |
355,448 |
|
$ |
348,207 |
|
12. Stock-Based Compensation and Other Incentive Plans
During the nine months ended September 30, 2012 the Company granted options to purchase approximately1.3 million shares of common stock with a weighted average exercise price of $13.30 per share and a weighted average grant-date fair value of $5.27 per share. The options’ fair value was determined using the Black-Scholes option pricing model, using a weighted average risk-free rate of 0.757%, a weighted average dividend yield of 2.92% and a weighted average volatility of 60.72%. 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.
During the nine months ended September 30, 2012, the Company also granted restricted share awards totaling 569,550 shares whose average market price at the time of grant was $13.32. The shares vest over three years.
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 $11.8 million and $9.6 million as of September 30, 2012 and December 31, 2011, respectively.
13. Workers’ Compensation Expense
The following table details the components of workers’ compensation expense:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
419 |
|
$ |
807 |
|
$ |
1,458 |
|
$ |
1,246 |
|
|
Interest cost |
|
629 |
|
619 |
|
1,708 |
|
1,177 |
| ||||
|
Net amortization |
|
— |
|
(109 |
) |
(574 |
) |
(370 |
) | ||||
|
Curtailments |
|
— |
|
— |
|
1,933 |
|
— |
| ||||
|
Total occupational disease |
|
1,048 |
|
1,317 |
|
4,525 |
|
2,053 |
| ||||
|
Traumatic injury claims and assessments |
|
7,453 |
|
5,207 |
|
19,052 |
|
10,856 |
| ||||
|
Total workers’ compensation expense |
|
$ |
8,501 |
|
$ |
6,524 |
|
$ |
23,577 |
|
$ |
12,909 |
|
14. Employee Benefit Plans
The following table details the components of pension benefit costs:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
6,156 |
|
$ |
4,122 |
|
$ |
21,062 |
|
$ |
12,367 |
|
|
Interest cost |
|
3,683 |
|
4,063 |
|
11,755 |
|
12,190 |
| ||||
|
Curtailments |
|
— |
|
— |
|
324 |
|
— |
| ||||
|
Expected return on plan assets |
|
(5,508 |
) |
(5,453 |
) |
(16,523 |
) |
(16,359 |
) | ||||
|
Amortization of prior service cost (credit) |
|
273 |
|
(47 |
) |
200 |
|
(142 |
) | ||||
|
Amortization of other actuarial losses |
|
3,248 |
|
2,187 |
|
11,019 |
|
6,561 |
| ||||
|
Net benefit cost |
|
$ |
7,852 |
|
$ |
4,872 |
|
$ |
27,837 |
|
$ |
14,617 |
|
The following table details the components of other postretirement benefit costs (credits):
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
541 |
|
$ |
1,493 |
|
$ |
1,629 |
|
$ |
2,416 |
|
|
Interest cost |
|
508 |
|
1,125 |
|
1,519 |
|
2,152 |
| ||||
|
Curtailments |
|
(2,212 |
) |
— |
|
(4,049 |
) |
— |
| ||||
|
Amortization of prior service cost credits |
|
(2,837 |
) |
(636 |
) |
(8,708 |
) |
(1,773 |
) | ||||
|
Amortization of other actuarial gains |
|
(130 |
) |
(775 |
) |
(391 |
) |
(2,325 |
) | ||||
|
Net benefit cost (credit) |
|
$ |
(4,130 |
) |
$ |
1,207 |
|
$ |
(10,000 |
) |
$ |
470 |
|
15. 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 September 30, |
|
Nine Months Ended September 30, |
| ||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
|
|
(In thousands) |
| ||||||
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
212,053 |
|
211,337 |
|
211,931 |
|
182,898 |
|
|
Effect of common stock equivalents under incentive plans |
|
23 |
|
637 |
|
— |
|
952 |
|
|
Diluted weighted average shares outstanding |
|
212,076 |
|
211,974 |
|
211,931 |
|
183,850 |
|
The weighted effect of restricted stock, restricted stock units and options for 5.8 million and 3.0 million shares of common stock for the three months ended September 30, 2012 and 2011, respectively, and 5.0 million and 2.1 million shares for the nine months ended September 30, 2012 and 2011, respectively, were excluded from the calculation of diluted weighted average shares outstanding because the effect would have been antidilutive.
16. Guarantees
On December 31, 2005, Arch entered into a purchase and sale agreement with Magnum Coal Company (“Magnum”) to sell certain assets to Magnum. On July 23, 2008, Patriot Coal Corporation acquired Magnum. On July 9, 2012, Patriot Coal Corporation and certain of its wholly owned subsidiaries, including Magnum, (collectively, “Patriot”) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”).
The Company has agreed to continue to provide surety bonds and letters of credit for certain Magnum obligations, primarily reclamation. The surety bonding amounts are mandated by the state and are not directly related to the estimated cost to reclaim the properties. At September 30, 2012, the Company had $35.3 million of surety bonds remaining related to Magnum properties , however Patriot Coal has posted letters of credit of $16.7 million in the Company’s favor.
On September 20, 2012, Patriot filed a motion in the Bankruptcy Court to reject a master coal sales and services agreement entered into on December 31, 2005 between Arch and Magnum that was established to supply coal for a sales agreement with a customer who did not consent to the assignment of their contract to Magnum. The motion is pending before the court. The underlying coal sales agreement provides the coal supplier with the ability to either ship coal or to elect to buy out of its monthly obligations at amounts that are predetermined for the remainder of the agreement. The remaining monthly buyout election payments total approximately $64 million, payable if elected through the end of the contract in 2017. If the Bankruptcy Court approves the rejection of the master coal sales agreement, the Company believes it would have the right to source the underlying contract from a variety of alternative sources, including the potential of sourcing it from its operations. The Company could elect to buy out of the contract obligations, depending on market conditions. The Company does not expect that, if elected, the monthly buyout payments would have a material impact on the Company’s liquidity.
Additionally, a predecessor of the Company entered into a guarantee for the delivery of coal under a contract assigned to Magnum. Patriot’s motion to reject the contract has been approved by the Bankruptcy Court. If the guarantee is enforceable against the Company, then it may be required to fulfill Magnum’s delivery or payment obligations. The Company does not expect that fulfilling the guarantee would have a material impact on the Company’s liquidity.
Because the Company does not believe that it is probable that it would have to purchase replacement coal to fulfill the customer contract or perform under the guarantee, no losses have been recorded in the consolidated financial statements as of September 30, 2012.
Should Patriot not emerge from bankruptcy, or is incapable of paying retiree medical benefits pursuant to Section 9711 of the Coal Industry Retiree Health Benefit Act of 1992 (“Coal Act”) to a certain subset of retirees, the Company could become responsible for their retiree medical obligations. The retirees were employees of certain subsidiaries sold to Magnum and their predecessor entities who retired prior to October 1, 1994. The Company does not have the information necessary to determine the potential amount of such obligations, but does not expect that the annual benefit payments would have a material impact on the Company’s liquidity.
17. 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 damage calculations were significantly inflated because they were not determined as of the time of the breach and, in some instances, artificially assumed future non-delivery or did not take into account the apparent requirement to supply coal in the future. On May 2, 2011, the trial court entered a Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. ICG and Allegheny filed post-verdict motions in the trial court and on August 23, 2011, the court denied the parties’ motions. The court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included pre-judgment interest. The parties appealed the lower court’s decision to the
Superior Court of Pennsylvania. Wolf Run and Hunter Ridge have filed an appeal bond in the amount of $124.9 million. On August 13, 2012, the Superior Court of Pennsylvania ruled that the lower court should have calculated damages as of the date of breach, and remanded the matter back to the lower court with instructions to recalculate the award. This ruling resulted in a reduction of the Company’s best estimate of the probable loss related to this lawsuit.
In addition, the Company is a party to numerous claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. As of September 30, 2012 and December 31, 2011, the Company had accrued $32.3 million and $117.2 million, respectively, for all legal matters, including $4.3 million and $6.3 million classified as current. The ultimate resolution of any such legal matter could result in outcomes which may be materially different from amounts the Company has accrued for such matters.
18. 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 nine month periods ended September 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.
|
|
|
PRB |
|
APP |
|
WBIT |
|
Other |
|
Corporate, |
|
Consolidated |
| ||||||
|
|
|
(in thousands) |
| ||||||||||||||||
|
Three Months Ended September 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Revenues |
|
$ |
406,719 |
|
$ |
436,409 |
|
$ |
217,963 |
|
$ |
26,527 |
|
$ |
— |
|
$ |
1,087,618 |
|
|
Income (loss) from operations |
|
38,873 |
|
88,695 |
|
40,828 |
|
(1,298 |
) |
(31,138 |
) |
135,960 |
| ||||||
|
Depreciation, depletion and amortization |
|
43,944 |
|
61,596 |
|
17,881 |
|
2,594 |
|
823 |
|
126,838 |
| ||||||
|
Amortization of acquired sales contracts, net |
|
(589 |
) |
(3,711 |
) |
— |
|
207 |
|
— |
|
(4,093 |
) | ||||||
|
Mine closure and asset impairment costs |
|
— |
|
(1,801 |
) |
(50 |
) |
(210 |
) |
(133 |
) |
(2,194 |
) | ||||||
|
Capital expenditures |
|
5,620 |
|
77,772 |
|
13,510 |
|
3,640 |
|
1,353 |
|
101,895 |
| ||||||
|
Three Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Revenues |
|
$ |
394,012 |
|
$ |
611,403 |
|
$ |
168,795 |
|
$ |
24,463 |
|
$ |
— |
|
$ |
1,198,673 |
|
|
Income (loss) from operations |
|
38,632 |
|
63,350 |
|
24,653 |
|
(1,487 |
) |
(48,892 |
) |
76,256 |
| ||||||
|
Depreciation, depletion and amortization |
|
42,676 |
|
73,420 |
|
19,125 |
|
3,674 |
|
652 |
|
139,547 |
| ||||||
|
Amortization of acquired sales contracts, net |
|
3,802 |
|
(15,701 |
) |
— |
|
(832 |
) |
33 |
|
(12,698 |
) | ||||||
|
Mine closure and asset impairment costs |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
| ||||||
|
Capital expenditures |
|
20,937 |
|
62,121 |
|
16,110 |
|
4,705 |
|
4,300 |
|
108,173 |
| ||||||
|
Nine Months Ended September 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Revenues |
|
$ |
1,130,408 |
|
$ |
1,409,776 |
|
$ |
562,074 |
|
$ |
88,549 |
|
$ |
— |
|
$ |
3,190,807 |
|
|
Income (loss) from operations |
|
94,163 |
|
(388,563 |
) |
85,848 |
|
(3,757 |
) |
(186,634 |
) |
(398,943 |
) | ||||||
|
Depreciation, depletion and amortization |
|
122,298 |
|
210,789 |
|
54,935 |
|
9,704 |
|
1,946 |
|
399,672 |
| ||||||
|
Amortization of acquired sales contracts, net |
|
(1,374 |
) |
(21,658 |
) |
— |
|
471 |
|
— |
|
(22,561 |
) | ||||||
|
Mine closure and asset impairment costs |
|
— |
|
524,115 |
|
129 |
|
(437 |
) |
(239 |
) |
523,568 |
| ||||||
|
Total assets |
|
2,234,941 |
|
3,846,136 |
|
676,057 |
|
454,118 |
|
2,724,602 |
|
9,935,854 |
| ||||||
|
Capital expenditures |
|
15,399 |
|
222,177 |
|
42,761 |
|
8,153 |
|
15,478 |
|
303,968 |
| ||||||
|
Nine Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Revenues |
|
$ |
1,178,537 |
|
$ |
1,336,581 |
|
$ |
513,388 |
|
$ |
28,633 |
|
$ |
— |
|
$ |
3,057,139 |
|
|
Income (loss) from operations |
|
121,118 |
|
205,701 |
|
95,217 |
|
(1,412 |
) |
(146,776 |
) |
273,848 |
| ||||||
|
Depreciation, depletion and amortization |
|
125,532 |
|
127,526 |
|
61,753 |
|
4,210 |
|
1,299 |
|
320,320 |
| ||||||
|
Amortization of acquired sales contracts, net |
|
15,349 |
|
(19,907 |
) |
— |
|
(934 |
) |
— |
|
(5,492 |
) | ||||||
|
Mine closure and asset impairment costs |
|
— |
|
7,316 |
|
— |
|
— |
|
— |
|
7,316 |
| ||||||
|
Total assets |
|
2,240,458 |
|
5,241,004 |
|
667,658 |
|
452,491 |
|
1,360,046 |
|
9,961,657 |
| ||||||
|
Capital expenditures |
|
39,422 |
|
108,711 |
|
38,003 |
|
9,078 |
|
20,685 |
|
215,899 |
| ||||||
A reconciliation of segment income from operations to consolidated income before income taxes follows:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
(in thousands) |
| ||||||||||
|
Income (loss) from operations |
|
$ |
135,960 |
|
$ |
76,256 |
|
$ |
(398,943 |
) |
$ |
273,848 |
|
|
Interest expense |
|
(75,710 |
) |
(77,694 |
) |
(229,210 |
) |
(154,523 |
) | ||||
|
Interest income |
|
1,459 |
|
840 |
|
3,568 |
|
2,341 |
| ||||
|
Other nonoperating expense |
|
— |
|
(1,708 |
) |
(19,042 |
) |
(51,448 |
) | ||||
|
Income (loss) before income taxes |
|
$ |
61,709 |
|
$ |
(2,306 |
) |
$ |
(643,627 |
) |
$ |
70,218 |
|
19. Supplemental Condensed Consolidating Financial Information
Pursuant to the indentures governing Arch Coal, Inc.’s senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors under the senior notes (Arch Receivable Company, LLC and the Company’s subsidiaries outside the U.S.):
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2012
|
|
|
Parent/Issuer |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
(In thousands) |
| |||||||||||||
|
Revenues |
|
$ |
— |
|
$ |
1,087,618 |
|
$ |
— |
|
$ |
— |
|
$ |
1,087,618 |
|
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Cost of sales |
|
2,434 |
|
922,455 |
|
— |
|
(28,080 |
) |
896,809 |
| |||||
|
Depreciation, depletion and amortization |
|
1,400 |
|
125,429 |
|
9 |
|
— |
|
126,838 |
| |||||
|
Amortization of acquired sales contracts, net |
|
— |
|
(4,093 |
) |
— |
|
— |
|
(4,093 |
) | |||||
|
Legal contingencies |
|
— |
|
(79,532 |
) |
— |
|
— |
|
(79,532 |
) | |||||
|
Mine closure and asset impairment costs |
|
— |
|
(2,194 |
) |
— |
|
— |
|
(2,194 |
) | |||||
|
Goodwill impairment |
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||
|
Selling, general and administrative expenses |
|
22,050 |
|
11,353 |
|
1,783 |
|
(1,920 |
) |
33,266 |
| |||||
|
Change in fair value of coal derivatives and coal trading activities, net |
|
— |
|
5,840 |
|
— |
|
— |
|
5,840 |
| |||||
|
Other operating (income) expense, net |
|
(11,051 |
) |
(44,137 |
) |
(89 |
) |
30,001 |
|
(25,276 |
) | |||||
|
|
|
14,833 |
|
935,121 |
|
1,703 |
|
1 |
|
951,658 |
| |||||
|
Income from investment in subsidiaries |
|
159,653 |
|
— |
|
— |
|
(159,653 |
) |
— |
| |||||
|
Income (loss) from operations |
|
144,820 |
|
152,497 |
|
(1,703 |
) |
(159,654 |
) |
135,960 |
| |||||
|
Interest expense, net: |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Interest expense |
|
(91,589 |
) |
(7,021 |
) |
(649 |
) |
23,549 |
|
(75,710 |
) | |||||
|
Interest income |
|
8,478 |
|
14,584 |
|
1,946 |
|
(23,549 |
) |
1,459 |
| |||||
|
|
|
(83,111 |
) |
7,563 |
|
1,297 |
|
— |
|
(74,251 |
) | |||||
|
Other non-operating expense |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Bridge financing costs related to ICG |
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||
|
Net loss resulting from early retirement of ICG debt |
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||
|
|
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||
|
Income (loss) before income taxes |
|
61,709 |
|
160,060 |
|
(406 |
) |
(159,654 |
) |
61,709 |
| |||||
|
Provision for income taxes |
|
15,958 |
|
|||||||||||||