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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (859) 815-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g): None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
At October 31, 2000, based on the New York Stock Exchange closing
price, the aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $2,268,150,178. In determining this
amount, the Registrant has assumed that its directors and executive
officers are affiliates. Such assumption shall not be deemed conclusive for
any other purpose.
At October 31, 2000, there were 69,669,072 shares of Registrant's
common stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's Annual Report to Shareholders for the fiscal
year ended September 30, 2000 are incorporated by reference into Parts I,
II and IV.
Portions of Registrant's definitive Proxy Statement for its January
25, 2001 Annual Meeting of Shareholders are incorporated by reference into
Part III.
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EXPLANATORY NOTE
This amendment to the Annual Report on Form 10-K for the fiscal
year ended September 30, 2000 of Ashland Inc. ("Ashland") is being filed to
include the audited financial statements of Marathon Ashland Petroleum LLC
("MAP") for the fiscal year ended December 31, 2000 and the audited
financial statements of Arch Coal, Inc. ("Arch") for the fiscal year ended
December 31, 2000 as required by Rule 3-09 of Regulation S-X. Ashland has a
38% equity interest in MAP and held a 58% equity interest in Arch prior to
the spinoff by Ashland of most of its Arch Common Stock to Ashland's
shareholders in March 2000 and the subsequent sale of Ashland's remaining
shares of Arch Common Stock in February 2001. In accordance with Rule
12b-15 under the Securities Exchange Act of 1934, as amended, the text of
the amended item is set forth in its entirety in the pages attached hereto.
A consent of PricewaterhouseCoopers LLP, independent accountants
for MAP, and a consent of Ernst & Young LLP, independent auditors for Arch,
are being filed as exhibits hereto.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial
Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented or incorporated by reference in this report are listed in
the index on page 18.
Audited financial statements of Marathon Ashland Petroleum LLC.
Financial statement schedules are omitted because they are not applicable
as the required information is contained in the applicable financial
statements or notes thereto.
Audited financial statements and schedule of Arch Coal, Inc.
(3) Exhibits
3.1 - Second Restated Articles of Incorporation of Ashland,
as amended to January 30, 1998 (filed as Exhibit 3 to
Ashland's Form 10-Q for the quarter ended December 31,
1997 and incorporated herein by reference).
3.2 - By-laws of Ashland, as amended to January 26, 2000
(filed as Exhibit 3.2 to Ashland's Form 10-Q for the
quarter ended December 31, 1999 and incorporated herein
by reference).
4.1 - Ashland agrees to provide the SEC, upon request, copies
of instruments defining the rights of holders of
long-term debt of Ashland and all of its subsidiaries for
which consolidated or unconsolidated financial statements
are required to be filed with the SEC.
4.2 - Indenture, dated as of August 15, 1989, as amended and
restated as of August 15, 1990, between Ashland and
Citibank, N.A., as Trustee (filed as Exhibit 4(a) to
Ashland's Form 10-K for the fiscal year ended September
30, 1991 and incorporated herein by reference).
4.3 - Rights Agreement, dated as of May 16, 1996, between
Ashland Inc. and the Rights Agent, together with Form of
Right Certificate (filed as Exhibits 4(a) and 4(c),
respectively, to Ashland's Form 8-A filed with the SEC on
May 16, 1996 and incorporated herein by reference).
The following Exhibits 10.1 through 10.16 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 - Amended Stock Incentive Plan for Key Employees of
Ashland Inc. and its Subsidiaries (filed as Exhibit 10.1
to Ashland's Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
10.2 - Ashland Inc. Deferred Compensation Plan for
Non-Employee Directors (filed as Exhibit 10.2 to
Ashland's Form 10-K for the fiscal year ended September
30, 1999 and incorporated herein by reference).
10.3 - Tenth Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Employees (filed as
Exhibit 10.3 to Ashland's Form 10-K for the fiscal year
ended September 30, 1999 and incorporated herein by
reference).
10.4 - Ashland Inc. Incentive Compensation Program (filed as
Exhibit 10.6 to Ashland's Form 10-K for the fiscal year
ended September 30, 1993 and incorporated herein by
reference).
10.5 - Ashland Inc. Salary Continuation Plan (filed as Exhibit
10(c).11 to Ashland's Form 10-K for the fiscal year ended
September 30, 1988 and incorporated herein by reference).
10.6 - Form of Ashland Inc. Executive Employment Contract
between Ashland Inc. and certain executive officers of
Ashland (filed as Exhibit 10.6 to Ashland's Form 10-K for
the fiscal year ended September 30, 1999 and incorporated
herein by reference).
10.7 - Form of Indemnification Agreement between Ashland Inc.
and each member of its Board of Directors (filed as
Exhibit 10(c).13 to Ashland's Form 10-K for the fiscal
year ended September 30, 1990 and incorporated herein by
reference).
10.8 - Ashland Inc. Nonqualified Excess Benefit Pension Plan
(filed as Exhibit 10.11 to Ashland's Form 10-K for the
fiscal year ended September 30, 1998 and incorporated
herein by reference).
10.9 - Ashland Inc. Long-Term Incentive Plan.
10.10 - Ashland Inc. Directors' Charitable Award.
10.11 - Ashland Inc. 1993 Stock Incentive Plan.
10.12 - Ashland Inc. 1995 Performance Unit Plan.
10.13 - Ashland Inc. Incentive Compensation Plan for Key
Executives (filed as Exhibit 10.13 to Ashland's Form 10-K
for the fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.14 - Ashland Inc. Deferred Compensation Plan.
10.15 - Ashland Inc. 1997 Stock Incentive Plan.
10.16 - Ashland Inc. Incentive Plan (filed as Exhibit 10.1 to
Ashland's Form 10-Q for the quarter ended December 31,
1999 and incorporated herein by reference).
10.17 - Amended and Restated Limited Liability Company
Agreement of Marathon Ashland Petroleum LLC dated as of
December 31, 1998 (filed as Exhibit 10.17 to Ashland's
Form 10-K for the fiscal year ended September 30, 1999
and incorporated herein by reference).
10.18 - Put/Call, Registration Rights and Standstill Agreement
as amended to December 31, 1998 among Marathon Oil
Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum (filed as Exhibit 10.18 to Ashland's
Form 10-K for the fiscal year ended September 30, 1999
and incorporated herein by reference).
11 - Computation of Earnings Per Share (appearing on page 37
of Ashland's Annual Report to Shareholders, incorporated
by reference herein, for the fiscal year ended September
30, 2000).
12 - Computation of Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
13 - Portions of Ashland's Annual Report to Shareholders,
incorporated by reference herein, for the fiscal year
ended September 30, 2000.
21 - List of subsidiaries.
23.1 - Consent of Ernst & Young LLP.
23.2* - Consent of PricewaterhouseCoopers LLP.
23.3* - Consent of Ernst & Young LLP.
24 - Power of Attorney, including resolutions of the Board
of Directors.
27 - Financial Data Schedule for the fiscal year ended
September 30, 2000.
*Filed herewith.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
ASHLAND INC.
--------------------------
(Registrant)
Date: March 30, 2001 /s/ David L. Hausrath
------------------------------------
Name: David L. Hausrath
Title: Vice President and
General Counsel
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
CONTENTS
Page
REPORT OF INDEPENDENT ACCOUNTANTS: 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENT OF OPERATIONS ---------------------------- 2
CONSOLIDATED BALANCE SHEET -------------------------------------- 3
CONSOLIDATED STATEMENT OF CASH FLOWS ---------------------------- 4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL ---------------------- 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION ---- 6
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES ---------- 6
NOTE C - NEW ACCOUNTING STANDARDS -------------------------- 8
NOTE D - RELATED PARTY TRANSACTIONS ------------------------ 9
NOTE E - OTHER ITEMS --------------------------------------- 10
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS -------- 10
NOTE G - INCOME TAXES -------------------------------------- 12
NOTE H - INVENTORIES --------------------------------------- 13
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES ------------- 13
NOTE J - PROPERTY, PLANT AND EQUIPMENT --------------------- 14
NOTE K - SHORT-TERM DEBT ----------------------------------- 14
NOTE L - LONG-TERM DEBT ------------------------------------ 14
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION ---------------- 15
NOTE N - LEASES -------------------------------------------- 15
NOTE O - DERIVATIVE INSTRUMENTS ---------------------------- 16
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS --------------- 17
NOTE Q - CONTINGENCIES AND COMMITMENTS --------------------- 17
PricewaterhouseCoopers LLP
600 Grant Street, Suite 5200
Pittsburgh, PA 15219
(412) 355-6000
Report of Independent Accountants
February 7, 2001
To the Board of Managers of
Marathon Ashland Petroleum LLC:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and members' capital
present fairly, in all material respects, the financial position of
Marathon Ashland Petroleum LLC and its subsidiaries (MAP) at December 31,
2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of MAP's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania 15219
1
CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Revenues and other income:
Revenues - Note E $ 28,775 $ 20,008 $ 19,027
Dividend and investee income 24 18 13
Net gains (losses) on disposal of assets 28 (3) 6
Other income 28 24 20
------------- ------------- -------------
Total revenues and other income 28,855 20,047 19,066
------------- ------------- -------------
Costs and expenses:
Cost of revenues (excludes items shown below) 22,366 14,675 13,568
Selling, general and administrative expenses 394 369 387
Depreciation and amortization 316 283 275
Taxes other than income taxes - Note E 4,474 4,098 3,929
Inventory market valuation charges (credits) - Note H -- (552) 269
------------- ------------- -------------
Total costs and expenses 27,550 18,873 18,428
------------ ------------- -------------
Income from operations: 1,305 1,174 638
Net interest and other financial income - Note E 12 5 17
------------- ------------- -------------
Income before income taxes: 1,317 1,179 655
Provision for income taxes - Note G 7 2 1
------------- ------------- -------------
Net income $ 1,310 $ 1,177 $ 654
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED BALANCE SHEET (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
December 31
---------------------------------
2000 1999
------------- -------------
Assets:
Current assets:
Cash and cash equivalents $ 58 $ 38
Receivables, less allowance for doubtful accounts of $3
and $3 1,415 1,132
Inventories - Note H 1,824 1,820
Related party receivables - Note D 43 39
Other current assets 44 20
------------- -------------
Total current assets 3,384 3,049
Investments and long-term receivables - Note I 113 108
Property, plant and equipment - net - Note J 4,022 3,711
Other noncurrent assets 72 89
------------- -------------
Total assets $ 7,591 $ 6,957
============= =============
Liabilities:
Current liabilities:
Accounts payable $ 2,180 $ 1,890
Accounts payable to related parties - Note D 66 33
Payroll and benefits payable 159 79
Accrued taxes 38 33
Long-term debt due within one year - Note L -- 7
------------- -------------
Total current liabilities 2,443 2,042
Long-term debt - Note L 8 15
Deferred income taxes - Note G 4 3
Employee benefits - Note F 288 258
Deferred credits and other liabilities 7 26
------------- -------------
Total liabilities 2,750 2,344
------------- -------------
Members' Capital (details on page 5)
Members' contributed capital 4,244 4,218
Retained earnings 601 395
Accumulated other comprehensive income (losses) (4) --
------------- -------------
Total members' capital 4,841 4,613
------------- -------------
Total liabilities and members' capital $ 7,591 $ 6,957
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 1,310 $ 1,177 $ 654
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 316 283 275
Inventory market valuation charges (credits) -- (552) 269
Pensions and other postretirement benefits 30 44 22
Deferred income taxes -- (1) (2)
Net (gains) losses on disposal of assets (28) 3 (6)
Changes in:
Current receivables (278) (465) 194
Inventories (5) (41) (19)
Current accounts payable and accrued expenses 378 749 (126)
Net receivables and payables with related parties 31 22 28
All other - net (38) 38 (69)
------------- ------------- -------------
Net cash provided from operating activities 1,716 1,257 1,220
------------- ------------- -------------
Investing activities:
Capital expenditures (637) (597) (400)
Disposal of assets 70 162 16
Loans for Section 1031 transactions - principal loaned (46) -- --
- principal collected 42 -- --
Property exchange trust - deposits (54) (4) --
- withdrawals 53 2 --
Investees - investments (1) -- (22)
- loans and advances (5) -- --
- returns and repayments -- -- 1
------------- ------------- -------------
Net cash used in investing activities (578) (437) (405)
------------- ------------- -------------
Financing activities:
Revolving credit facilities - borrowings - Note D 931 386 --
- repayments - Note D (931) (386) --
Debt - additions -- -- 1
- repayments (14) -- (24)
Member distributions (1,104) (1,054) (555)
-------------- ------------- -------------
Net cash used in financing activities (1,118) (1,054) (578)
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 20 (234) 237
Cash and cash equivalents at beginning of year 38 272 35
------------- ------------- -------------
Cash and cash equivalents at end of year $ 58 $ 38 $ 272
============= ============= =============
See Note M for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Members' Capital Comprehensive Income
Year Ended Year Ended
December 31 December 31
---------------------------------------- ----------------------------------------
2000 1999 1998 2000 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
Members' contributed capital:
Balance at beginning of year $ 4,218 $ 4,188 $ 4,361
Member contributions 26 30 --
Distribution to members -- -- (173)
----------- ----------- -----------
Balance at end of year 4,244 4,218 4,188
----------- ----------- -----------
Retained earnings:
Balance at beginning of year 395 -- --
Net income 1,310 1,177 654 $ 1,310 $ 1,177 $ 654
Distributions to members (1,104) (782) (654)
------------ ----------- -----------
Balance at end of year 601 395 --
----------- ----------- -----------
Accumulated other comprehensive
income (loss):
Minimum pension liability adjustments:
Balance at beginning of year -- (5) (4)
Changes during the year (4) 5 (1) (4) 5 (1)
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of year (4) -- (5)
----------- ----------- -----------
Total comprehensive income $ 1,306 $ 1,182 $ 653
============ ============ ===========
Total members' capital $ 4,841 $ 4,613 $ 4,183
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
On December 12, 1997, Marathon Oil Company (Marathon), a wholly owned
subsidiary of USX Corporation (USX), entered into an Asset Transfer and
Contribution Agreement with Ashland Inc. (Ashland) providing for the
formation of Marathon Ashland Petroleum LLC (MAP). Effective January 1,
1998, Marathon contributed substantially all of its refining, marketing and
transportation (RM&T) operations to MAP. Also, on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. The purchase price was determined to be $1.9 billion,
based upon an external valuation. The acquisition of Ashland's net assets
was accounted for under the purchase method of accounting.
In connection with the formation of MAP, Marathon and Ashland entered into
a Limited Liability Company Agreement (LLC Agreement) dated January 1,
1998. The LLC Agreement provides for an initial term expiring on December
31, 2022 (25 years from its formation). The term will automatically be
extended for ten-year periods, unless a termination notice is given by
either party.
Also in connection with the formation of MAP, the parties entered into a
Put/Call, Registration Rights and Standstill Agreement (the Put/Call
Agreement). The Put/Call Agreement provides that at any time after December
31, 2004, Ashland will have the right to sell to Marathon all of Ashland's
ownership interest in MAP, for an amount in cash and/or Marathon or USX
debt or equity securities equal to the product of 85% (90% if equity
securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could be made
at closing, or at Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any time after December
31, 2004, Marathon will have the right to purchase all of Ashland's
ownership interests in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time, multiplied by Ashland's
percentage interest in MAP.
MAP is engaged in petroleum supply, refining, marketing & transportation
operations and includes Speedway SuperAmerica LLC, a wholly owned
subsidiary, which operates retail outlets for petroleum products and
merchandise. In addition, MAP, through its wholly owned subsidiary,
Marathon Ashland Pipe Line LLC, is actively engaged in the pipeline
transportation of crude oil and petroleum products.
During 2000, MAP sold 159 Speedway SuperAmerica non-core stores for $48
million. MAP recorded a pretax gain of $19 million related to these sales.
In 2000 and 1999, MAP recorded capital contributions from Marathon of $2
million and $2 million, respectively, and from Ashland of $24 million and
$28 million, respectively, for environmental improvements. The LLC
Agreement stipulates that ownership interest in MAP will not be adjusted as
a result of such contributions.
In 1999, MAP sold Scurlock Permian LLC, its crude oil gathering business,
to Plains Marketing, L.P. for $137 million. In 1999, MAP recorded a pretax
loss of $16 million related to the sale.
In 1999, MAP finalized the transaction with Ultramar Diamond Shamrock
("UDS") to purchase 178 UDS owned and operated convenience stores and 5
product terminals. In addition, MAP was assigned supply contracts with UDS
branded jobbers who supplied 242 branded jobber stations in Michigan. This
transaction was accounted for under the purchase method of accounting.
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Principles applied in consolidation - The consolidated financial statements
include the accounts of MAP and the majority-owned subsidiaries which it
controls. Investments in undivided interest pipelines are consolidated on a
pro rata basis. Investments in other entities over which MAP has
significant influence are accounted for using the equity method of
accounting and are carried at MAP's share of net assets plus advances.
Investments in companies whose stocks have no readily determinable fair
value are carried at cost.
Dividend and investee income includes MAP's proportionate share of income
from equity method investments and dividend income from other investments.
Dividend income is recognized when dividend payments are received.
6
NOTES TO CONSOLIDATED FINNCIAL STATEMENTS - Continued
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued
Use of estimates - Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at year-end and the reported amounts of revenues and expenses
during the year. Significant items subject to such estimates and
assumptions include the carrying value of long-lived assets; valuation
allowances for receivables and inventories; environmental liabilities;
liabilities for potential tax deficiencies and potential litigation claims
and settlements; and assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when management
commits to a plan to close an operating facility or to exit a business
activity. Actual results could differ from the estimates and assumptions
used.
Revenue recognition - Revenues are recognized generally when products are
shipped or services are provided to customers, the sales price is fixed and
determinable, and collectibility is reasonably assured. Costs associated
with revenues, including shipping and other transportation costs, are
recorded in cost of revenues. Matching buy/sell transactions settled in
cash are recorded in both revenues and cost of revenues as separate sales
and purchase transactions, with no net effect on income.
Cash and cash equivalents - Cash and cash equivalents include cash on hand
and on deposit and investments with related parties in highly liquid debt
instruments with maturities of three months or less. See Note D for
information regarding investments with related parties.
Inventories - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
Derivative instruments - MAP uses commodity-based derivative instruments to
manage its exposure to price risk. Management is authorized to use futures,
forwards, swaps and options related to the purchase or sale of crude oil,
refined products and natural gas. While MAP's risk management activities
generally reduce market risk exposure due to unfavorable commodity price
changes for raw material purchases and products sold, such activities can
also encompass strategies which assume price risk.
Commodity-Based Hedging Transactions - For transactions that qualify
for hedge accounting, the resulting gains or losses are deferred and
subsequently recognized in income from operations, as a component of
revenues or cost of revenues, in the same period as the underlying
physical transaction. To qualify for hedge accounting, derivative
positions cannot remain open if the underlying physical market risk
has been removed. If such derivative positions remain in place, they
would be marked-to-market and accounted for as trading and other
activities. Recorded deferred gains or losses are reflected within
other current and noncurrent assets or accounts payable and deferred
credits and other liabilities, as appropriate.
Commodity-Based Trading and Other Activities - Derivative instruments
used for trading and other activities are marked-to-market and the
resulting gains or losses are recognized in the current period within
income from operations. This category also includes the use of
derivative instruments that have no offsetting underlying physical
market risk.
Long-lived assets - Property, plant and equipment are depreciated
principally by the straight-line method. MAP evaluates impairment of its
assets on an individual asset basis or by logical groupings of assets.
Assets deemed to be impaired are written down to their fair value,
including any related goodwill, using discounted future cash flows and, if
available, comparable market values.
When long-lived assets depreciated on an individual basis are sold or
otherwise disposed of, any gains or losses are reflected in income. Gains
on disposal of long-lived assets are recognized when earned, which is
generally at the time of closing. If a loss on disposal is expected, such
losses are recognized when long-lived assets are reclassified as assets
held for sale. Proceeds from disposal of long-lived assets depreciated on a
group basis are credited to accumulated depreciation and amortization with
no immediate effect on income.
Major maintenance activities - MAP incurs planned maintenance costs
primarily for refinery turnarounds. Such costs are expensed in the same
annual period as incurred; however, estimated annual turnaround costs are
recognized in income throughout the year on a pro rata basis.
7
NOTES TO CONSOLIDATED FINNCIAL STATEMENTS - Continued
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued
Environmental liabilities - MAP provides for remediation costs and
penalties when the responsibility to remediate is probable and the amount
of associated costs is reasonably determinable. Generally, the timing of
remediation accruals coincides with completion of a feasibility study or
the commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and could be
discounted in certain instances. If recoveries of remediation costs from
third parties are probable, a receivable is recorded.
Insurance - MAP is insured for catastrophic casualty and certain property
and business interruption exposures, as well as those risks required to be
insured by law or contract. Costs resulting from noninsured losses are
charged against income upon occurrence.
Income taxes - MAP is a limited liability company, and therefore, except
for several small subsidiary corporations, is not subject to U.S. federal
income taxes. Accordingly, the taxable income or loss resulting from
operations of MAP is ultimately included in the U.S. federal income tax
returns of USX and Ashland. MAP is, however, subject to income taxes in
certain state, local and foreign jurisdictions.
Reclassifications - Certain reclassifications of prior years' data have
been made to conform to 2000 classifications. These changes had no impact
on previously reported results of operations or members' capital.
NOTE C - NEW ACCOUNTING STANDARDS
In the fourth quarter of 2000, MAP adopted the following accounting
pronouncements primarily related to the classification of items in the
statement of operations. The adoption of these new pronouncements had no
net effect on the financial position or results of operations of MAP,
although they required reclassifications of certain amounts in the
statement of operations including all prior periods presented.
o In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements," which summarizes the SEC staff's
interpretations of generally accepted accounting principles related to
revenue recognition and classification.
o In 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board (EITF) issued EITF Consensus No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent," which addresses
whether certain cost items should be reported as a reduction of
revenue or as a component of cost of revenues, and EITF Consensus No.
00-10, "Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping goods to
customers.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which later was amended
by SFAS Nos. 137 and 138. This Standard requires recognition of all
derivatives as either assets or liabilities at fair value. Changes in fair
value will be reflected in either current period net income or other
comprehensive income, depending on the designation of the derivative
instrument. MAP may elect not to designate a derivative instrument as a
hedge even if the strategy would be expected to qualify for hedge
accounting treatment. The adoption of SFAS No. 133 will change the timing
of recognition for derivative gains and losses as compared to previous
accounting standards.
MAP will adopt the Standard effective January 1, 2001. The transition
adjustment resulting from the adoption of SFAS No. 133 will be reported as
a cumulative effect of a change in accounting principle. The unfavorable
cumulative effect on net income, net of tax, is expected to approximate $20
million. The favorable cumulative effect on other comprehensive income, net
of tax, will approximate $6 million. The amounts reported as other
comprehensive income will be reflected in income from operations when the
anticipated physical transactions are consummated. It is not possible to
estimate the effect that this Standard will have on future results of
operations, although it is likely that the effects of some derivative
transactions will be recognized in different periods than would have been
the case under previous accounting standards.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE D - RELATED PARTY TRANSACTIONS
MAP sales in 2000, 1999 and 1998 to Ashland and its affiliates were $285
million, $198 million and $190 million, respectively; and sales to USX and
its affiliates were $145 million, $50 million and $10 million,
respectively. MAP purchases in 2000, 1999 and 1998 from Ashland and its
affiliates totaled $19 million, $9 million and $20 million, respectively;
and purchases from USX and its affiliates totaled $540 million, $297
million and $284 million, respectively. Such transactions were in the
ordinary course of business and included the purchase, sale and
transportation of crude oil and petroleum products. These transactions were
conducted under terms comparable to those with unrelated parties.
During the years ended December 31, 2000, 1999 and 1998, Ashland and its
affiliates, and USX and its affiliates provided certain information
technology and administrative services and facilities to MAP. Billings to
MAP for these services and facilities for the years ended December 31,
2000, 1999 and 1998 from Ashland and its affiliates totaled $7 million, $13
million and $27 million, respectively. Billings to MAP for these services
and facilities for the years ended December 31, 2000, 1999 and 1998 from
USX and its affiliates totaled $48 million, $47 million and $83 million,
respectively.
As of December 31, 2000 and 1999, related party receivables included $35
million and $26 million, respectively, of accounts receivable due from
Ashland and its affiliates; and accounts payable to related parties
included $2 million and $2 million, respectively, due to Ashland and its
affiliates. As of December 31, 2000 and 1999, related party receivables
included $8 million and $13 million, respectively, of accounts receivable
due from USX and its affiliates; and accounts payable to related parties
included $64 million and $31 million, respectively, due to USX and its
affiliates.
In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense. During 2000, 1999 and 1998, Marathon reimbursed MAP $6 million, $0
million and $24 million, respectively, for debt repayments. Related party
receivables at December 31, 1999, included $6 million due from Marathon for
future debt payment reimbursements. For details relating to debt
repayments, see Note L.
A revolving credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon (collectively the Lenders) and MAP (Borrower). This
agreement provides that the Lenders may loan to the Borrower up to $500
million at defined short-term market rates. At December 31, 2000 and 1999,
there were no borrowings against this facility. During 2000 and 1999, MAP
borrowed and repaid $931 million and $386 million, respectively, under this
revolving credit facility. The weighted average borrowings outstanding
under this revolving credit facility during the years 2000 and 1999 were
$14 million and $4 million, respectively. During the year ended December
31, 2000, interest expense paid on these borrowings was $1 million to
Marathon.
On November 16, 1998, MAP entered into agreements with USX and Ashland,
which allow MAP to invest its surplus cash balances on a daily basis at
competitive interest rates with USX and Ashland in proportion up to their
ownership interests in MAP. These agreements, as previously extended,
expired on March 15, 2000 and have been subsequently amended and extended
with an expiration date of March 15, 2001. At December 31, 2000 and 1999,
there was no cash invested under these agreements. During the years ended
December 31, 2000, 1999 and 1998, interest income earned from these
investments was $6 million, $4 million and $1 million, respectively, from
Ashland and $7 million, $5 million and $0 million, respectively, from USX.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE E - OTHER ITEMS
Year Ended December 31
------------------------------------------
(Millions)
2000 1999 1998
----------- ----------- -----------
Net interest and other financial income
Interest and other financial income:
Interest income - third parties $ 9 $ 3 $ 22
Interest income - related parties 13 9 1
----------- ----------- -----------
Total 22 12 23
----------- ----------- -----------
Interest and other financial costs:
Interest incurred 3 2 1
Other 7 5 5
----------- ----------- -----------
Total 10 7 6
----------- ----------- -----------
Net interest and other financial income $ 12 $ 5 $ 17
=========== =========== ===========
Consumer excise tax - Included in revenues and costs and expenses for 2000,
1999 and 1998 were $4,344 million, $3,973 million and $3,824 million,
respectively, representing consumer excise taxes on petroleum products and
merchandise.
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
MAP has a noncontributory defined benefit pension plan and several related
excess benefit plans covering substantially all employees. Benefits under
its final pay formula are based primarily upon age, years of service and
the highest three years earnings during the last ten years before
retirement. Benefits under its pension equity formula are based primarily
upon age, years of service and the final three years of earnings at
retirement.
MAP also has defined benefit retiree health and life insurance plans (other
benefits) covering most employees upon their retirement. Health benefits
are provided, for the most part, through comprehensive hospital, surgical
and major medical benefit provisions subject to various cost sharing
features. Life insurance benefits are provided to certain nonunion and
union represented retiree beneficiaries primarily based on employees'
annual base salary at retirement. Other benefits have not been prefunded.
Pension Benefits Other Benefits
---------------------- ---------------------
(Millions)
2000 1999 2000 1999
--------- --------- --------- ---------
Change in projected benefit obligation:
Benefit obligation at January 1 $ 482 $ 525 $ 152 $ 242
Service cost 36 41 8 10
Interest cost 38 33 12 13
Plan amendments 4 19 1 (44)
Actuarial (gains) losses 64 (110) 14 (71)
Acquisition and merger -- 14 -- 4
Benefits paid (56) (38) (3) (1)
Settlement, curtailment and termination benefits -- (2) -- (1)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 568 $ 482 $ 184 $ 152
========= ========= ========= =========
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
Pension Benefits Other Benefits
---------------------- ---------------------
(Millions)
2000 1999 2000 1999
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at January 1 $ 560 $ 528
Actual return on plan assets (4) 55
Acquisition and merger -- 13
Employer contributions 1 2
Benefits paid (55) (38)
--------- ---------
Fair value of plan assets at December 31 $ 502 $ 560
========= =========
Funded status of plans at December 31: (a) $ (66) $ 78 $ (184) $ (152)
Unrecognized net gain from transition (9) (10) -- --
Unrecognized prior service costs (credits) 25 24 (54) (64)
Unrecognized actuarial (gains) losses (5) (127) 17 4
Additional minimum liability (b) (6) (1) -- --
--------- --------- --------- ---------
Accrued benefit cost $ (61) $ (36) $ (221) $ (212)
========= ========= ========= =========
(a) Includes several small plans that have accumulated benefit
obligations and no plan assets:
Accumulated benefit obligation $ (12) $ (6)
Projected benefit obligation (17) (14)
(b) Additional minimum liability recorded
was offset by the following:
Intangible asset $ 2 $ 1
--------- ---------
Accumulated other comprehensive income (loss):
Beginning of year $ -- $ (5)
Change during year (4) 5
--------- ---------
Balance at end of year $ (4) $ --
========= =========
Pension Benefits Other Benefits
---------------------------------- ---------------------------------
(Millions)
2000 1999 1998 2000 1999 1998
--------- --------- --------- --------- --------- ---------
Components of net periodic benefit cost:
Service cost $ 36 $ 41 $ 26 $ 8 $ 10 $ 7
Interest cost 38 33 20 12 13 10
Expected return on plan assets (51) (46) (32) -- -- --
Amortization of prior service costs 2 1 -- (8) (6) --
Amortization of actuarial losses (4) 1 -- -- 3 --
Amortization of transition gain (2) (2) -- -- -- --
Other plans 1 2 2 -- -- --
Settlement, curtailment and termination benefits 3 2 -- -- (1) --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ 23 $ 32 $ 16 $ 12 $ 19 $ 17
========= ========= ========= ========= ========= =========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
Pension Benefits Other Benefits
--------------------- ---------------------
Actuarial assumptions at December 31: 2000 1999 2000 1999
--------- --------- --------- ---------
Discount rate 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets 9.5% 9.5% N/A N/A
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001. The rate was
assumed to decrease gradually to 5% for 2007 and remain at that level
thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
---------------------- ----------------------
(Millions)
Effect on total of service and interest
cost components $ 4 $ (3)
Effect on postretirement benefit obligation 28 (23)
NOTE G - INCOME TAXES
The taxable income or loss resulting from operations of MAP, except for
several small subsidiary corporations, is ultimately included in the
federal income tax returns of USX and Ashland. MAP is, however, subject to
taxation in certain state, local and foreign jurisdictions.
Provisions (credits) for income taxes:
Year Ended December 31
-------------------------------------------------------------------------------------------------
(Millions)
2000 1999 1998
---------------------------- ------------------------------- -------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Federal $ -- $ -- $ -- $ -- $ (1) $ (1) $ -- $ -- $ --
State and local 5 -- 5 1 -- 1 3 (2) 1
Foreign 2 -- 2 2 -- 2 -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 7 $ -- $ 7 $ 3 $ (1) $ 2 $ 3 $ (2) $ 1
========= ======== ========= ========= ========= ========= ========= ========= =========
Deferred tax liabilities at December 31, 2000 and 1999 of $4 million and $5
million, respectively, principally arise from differences between the book
and tax basis of inventories and property, plant and equipment. Pretax
income in 2000, 1999 and 1998 included $0 million, $3 million and $1
million, respectively, attributable to foreign sources.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE H - INVENTORIES
Inventories consist of the following:
December 31
---------------------------
(Millions)
2000 1999
----------- -----------
Crude oil and natural gas liquids $ 674 $ 688
Refined products and merchandise 1,074 1,051
Supplies and sundry items 76 81
----------- ------------
Total (at cost) 1,824 1,820
Less inventory market valuation reserve -- --
----------- ------------
Net inventory carrying value $ 1,824 $ 1,820
=========== ============
Inventories of crude oil and refined products are valued by the LIFO
method. The LIFO method accounted for 95% and 93% of total inventory at
December 31, 2000 and 1999, respectively. Current acquisition costs were
estimated to exceed the above inventory values at December 31 by
approximately $476 million and $194 million in 2000 and 1999, respectively.
Cost of revenues was reduced and income from operations was increased by
$14 million in 2000 as a result of liquidations of LIFO inventories.
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory turnover and increased to reflect decreases
in market prices. Changes in the inventory market valuation reserve result
in noncash charges or credits to costs and expenses. During 2000, there
were no charges or credits to costs and expenses.
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
---------------------------
(Millions)
2000 1999
----------- -----------
Equity method investments $ 104 $ 101
Receivables due after one year 6 5
Property exchange trust 3 2
----------- -----------
Total $ 113 $ 108
=========== ===========
The following represents summarized financial information of investees
accounted for by the equity method of accounting:
Year Ended December 31
------------------------------------------
(Millions)
2000 1999 1998
----------- ----------- -----------
Income data:
Revenues $ 239 $ 207 $ 171
Operating income 95 78 61
Net income 57 44 31
December 31
---------------------------
(Millions)
2000 1999
----------- -----------
Balance sheet data:
Current assets $ 99 $ 76
Noncurrent assets 605 614
Current liabilities 93 76
Noncurrent liabilities 418 441
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES - Continued
Dividends and partnership distributions received from equity investees were
$25 million, $18 million and $14 million in 2000, 1999 and 1998,
respectively. MAP purchases from equity investees totaled $61 million, $50
million and $63 million in 2000, 1999 and 1998, respectively. MAP sales to
equity investees were immaterial in each year.
NOTE J - PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------------
(Millions)
2000 1999
----------- -----------
Refining $ 2,555 $ 2,208
Marketing 2,270 2,184
Transportation 1,296 1,271
Other 20 11
----------- -----------
Total 6,141 5,674
Less accumulated depreciation and amortization 2,119 1,963
----------- -----------
Net $ 4,022 $ 3,711
=========== ===========
Property, plant and equipment at December 31, 2000 and 1999, includes gross
assets acquired under capital leases of $8 million and $20 million,
respectively, with no related material amounts in accumulated depreciation
and amortization.
NOTE K - SHORT-TERM DEBT
MAP has a $100 million short-term revolving credit facility with a group of
banks that terminates in July 2001. Interest is based on defined short-term
market rates. During the term of the agreement, MAP is required to pay a
variable facility fee on total commitments, which at December 31, 2000 was
0.11%. At December 31, 2000, there were no borrowings against this
facility.
NOTE L - LONG-TERM DEBT
December 31
---------------------------
(Millions)
2000 1999
----------- -----------
Capital lease obligations $ 7 $ 15
Variable rate Michigan Underground Storage
Tank Interest Rate Subsidy Loan due
2000 (a) -- 6
5% Promissory Note due 2009 1 1
Revolving credit facilities (b) (c) -- --
----------- -----------
Total (d) 8 22
Less amount due within one year -- 7
----------- -----------
Long-term debt due after one year $ 8 $ 15
=========== ===========
(a) This program was created in connection with the Michigan Underground
Storage Tank Assurance Act to assist owners in the clean up of
underground storage tank systems. MAP paid interest monthly, based on a
monthly LIBOR rate plus 5/8%. An interest subsidy is received quarterly
from the State of Michigan calculated at a rate of 6.1% per annum. The
effective rate of this loan during 2000 and 1999, including the effect
of the interest subsidy, was 5.7% and 3.3%, respectively. Marathon was
obligated to reimburse MAP for all payments with respect to this debt
and the debt was repaid during 2000.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE L - LONG-TERM DEBT - Continued
(b) MAP has a $400 million revolving credit facility with a group of banks
that terminates in July 2003. Interest is based on defined short-term
market rates. During the term of the agreement, MAP is required to pay
a variable facility fee on total commitments, which at December 31,
2000, was 0.125%. At December 31, 2000, the unused and available credit
was $352 million, which reflects reductions for outstanding letters of
credit. In the event that MAP defaults on indebtedness (as defined in
the agreement) in excess of $100 million, USX has guaranteed the
payment of any outstanding obligations.
(c) In 1998, MAP entered into a revolving credit agreement with Marathon
and Ashland for $500 million that terminated on December 31, 1998, and
which was renewed on an uncommitted basis for 1999. This agreement
expired on December 31, 1999, but has been extended with an expiration
date of March 15, 2001. Interest is based on defined short-term market
rates. At December 31, 2000, the unused and available credit was $500
million.
(d) Required payment of long-term debt for the year 2005 is $1 million. No
other significant payments of long-term debt are required in other
years.
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
------------------------------------------
(Millions)
2000 1999 1998
----------- ----------- -----------
Cash provided from operating activities includes:
Interest and other financial costs paid $ (3) $ (2) $ (1)
Income taxes paid (5) (5) (3)
Non-cash investing and financing activities:
Liabilities assumed in acquisitions -- 16 --
NOTE N - LEASES
Future minimum commitments for capital and operating leases having
noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
----------- -----------
(Millions)
2001 $ 1 $ 43
2002 1 34
2003 1 23
2004 1 17
2005 1 9
Later years 5 13
Sublease rentals -- (2)
----------- -----------
Total minimum lease payments 10 $ 137
===========
Less imputed interest costs: (3)
-----------
Present value of minimum lease payments
included in long-term debt $ 7
===========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE N - LEASES - Continued
Operating lease rental expense:
Year Ended December 31
------------------------------------------
(Millions)
2000 1999 1998
----------- ----------- -----------
Minimum rental $ 73 $ 66 $ 74
Contingent rental 10 11 11
Sublease rentals (6) (6) (1)
----------- ----------- -----------
Net rental expense $ 77 $ 71 $ 84
=========== =========== ===========
MAP leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, production
facilities and transportation equipment. Most long-term leases include
renewal options and, in certain leases, purchase options.
NOTE O - DERIVATIVE INSTRUMENTS
MAP remains at risk for possible changes in the market value of derivative
instruments; however, such risk should be mitigated by price changes in the
underlying hedged item. MAP is also exposed to credit risk in the event of
nonperformance by counterparties. The credit-worthiness of counterparties
is subject to continuing review, including the use of master netting
agreements to the extent practical, and full performance is anticipated.
The following table sets forth quantitative information by class of
derivative instrument:
Recognized
Fair Carrying Trading Recorded
Value Amount Gain or Deferred Aggregate
Assets Assets (Loss) for Gain or Contract
(Millions) (Liabilities)(a)(b) (Liabilities) the Year (Loss) Values(c)
---------- ----------------- ------------- ----------- ---------- ---------
December 31, 2000:
Exchange-traded commodity futures:
Trading $ -- $ -- $ (19) $ -- $ --
Other than trading -- -- -- 27 678
Exchange-traded commodity options:
Trading -- -- -- -- --
Other than trading (6) (d) (6) -- (1) 971
OTC commodity swaps (e):
Trading -- -- -- -- --
Other than trading -- -- -- -- 4
OTC commodity options:
Trading -- -- -- -- --
Other than trading (20) (f) (20) -- (20) 42
----------- ----------- ----------- ----------- -----------
Total commodities $ (26) $ (26) $ (19) $ 6 $ 1,695
=========== =========== =========== =========== ===========
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE O - DERIVATIVE INSTRUMENTS - Continued
December 31, 1999:
Exchange-traded commodity futures:
Trading $ -- $ -- $ 4 $ -- $ 8
Other than trading -- -- -- 18 243
Exchange-traded commodity options:
Trading -- -- 4 -- 179
Other than trading (6) (d) (6) -- (9) 793
OTC commodity swaps (e):
Trading -- -- -- -- --
Other than trading (3) (g) (3) -- (3) 69
OTC commodity options:
Trading -- -- -- -- --
Other than trading -- -- -- -- 7
--------- ----------- ----------- ----------- -----------
Total commodities $ (9) $ (9) $ 8 $ 6 $ 1,299
=========== =========== =========== =========== ===========
(a) The fair value amounts for OTC positions are based on various indices
or dealer quotes. The exchange-traded futures contracts and certain
option contracts do not have a corresponding fair value since changes
in the market prices are settled on a daily basis.
(b) The aggregate average fair values of all trading activities for 2000
and 1999 were $(5) million and $3 million, respectively.
(c) Contract or notional amounts do not quantify risk exposure, but are
used in the calculation of cash settlements under the contracts. The
contract or notional amounts do not reflect the extent to which
positions may offset one another.
(d) Includes fair values as of December 31, 2000 and 1999, for assets of
$10 million and $7 million and for liabilities of $(16) million and
$(13) million, respectively.
(e) The OTC swap arrangements vary in duration with certain contracts
extending into mid-2001.
(f) Includes fair value as of December 31, 2000, for assets of $1 million
and for liabilities of $(21) million.
(g) Includes fair values as of December 31, 1999, for assets of $0 million
and for liabilities of $(3) million.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments are based on historical
costs. The carrying values of cash and cash equivalents, receivables,
payables, long-term receivables and long-term debt approximate their fair
value.
MAP's unrecognized financial instruments consist of financial guarantees
and commitments to extend credit. It is not practicable to estimate the
fair value of these forms of financial instrument obligations because there
are no quoted market prices for transactions which are similar in nature.
For details relating to financial guarantees, see Note Q.
NOTE Q - CONTINGENCIES AND COMMITMENTS
MAP is the subject of, or party to, a number of pending or threatened legal
actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of
these matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
MAP financial statements. However, management believes that MAP will remain
a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE Q - CONTINGENCIES AND COMMITMENTS - Continued
Environmental matters - MAP is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. Marathon and Ashland
have retained the liabilities, subject to certain thresholds, for costs
associated with remediating properties conveyed to MAP for conditions
existing prior to January 1, 1998. The costs associated with these
thresholds are not expected to be material to the MAP financial statements.
At December 31, 2000 and 1999, MAP's accrued liabilities for remediation
totaled $10 million and $6 million, respectively. It is not presently
possible to estimate the ultimate amount of all remediation costs that
might be incurred or the penalties that may be imposed. Receivables for
recoverable costs from certain states, under programs to assist companies
in clean up efforts related to underground storage tanks at retail
marketing outlets, were $4 million and $3 million at December 31, 2000 and
1999, respectively.
MAP has made substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In 2000,
1999 and 1998, such capital expenditures for environmental controls totaled
$47 million, $24 million and $42 million, respectively. MAP anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees - At December 31, 2000 and 1999, MAP's pro rata share of
obligations of LOCAP INC. and Southcap Pipe Line Company secured by
throughput and deficiency agreements totaled $14 million and $19 million,
respectively. Under the agreements, MAP is required to advance funds if the
investees are unable to service debt. Any such advances are treated as
prepayments of future transportation charges.
Commitments - At December 31, 2000 and 1999, MAP's contract commitments for
capital expenditures for property, plant and equipment totaled $89 million
and $14 million, respectively.
18
ARCH COAL, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page*
[S] [C]
REPORT OF INDEPENDENT AUDITORS: 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF OPERATIONS ---------------------------- 2
CONSOLIDATED BALANCE SHEETS -------------------------------------- 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY------------------- 4
CONSOLIDATED STATEMENTS OF CASH FLOWS ---------------------------- 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------------------- 6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ----------------- 30
ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE
ACCOUNTING REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION ARE NOT
REQUIRED UNDER THE RELATED INSTRUCTIONS OR ARE INAPPLICABLE AND,THEREFORE,
HAVE BEEN OMITTED.
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
ARCH COAL, INC.
We have audited the accompanying consolidated balance sheets of Arch Coal,
Inc. and subsidiaries as of December 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arch Coal,
Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 3 to the financial statements, in 1999, the Company
changed its method of accounting for depreciation of its preparation plants
and loadouts.
/s/ Ernst & Young LLP
St. Louis, Missouri
January 24, 2001
1
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
(in thousands of dollars except per share data) 2000 1999 1998
=============================================================================================================================
REVENUES
Coal sales $ 1,342,171 $ 1,509,596 $ 1,428,171
Income from equity investment 12,837 11,129 6,786
Other revenues 49,613 46,657 70,678
-----------------------------------------------------------------------------------------------------------------------------
1,404,621 1,567,382 1,505,635
-----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of coal sales 1,237,378 1,426,105 1,313,400
Selling, general and administrative expenses 38,887 46,357 44,767
Amortization of coal supply agreements 39,803 36,532 34,551
Write-down of impaired assets - 364,579 -
Other expenses 14,569 20,835 25,070
-----------------------------------------------------------------------------------------------------------------------------
1,330,637 1,894,408 1,417,788
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 73,984 (327,026) 87,847
-----------------------------------------------------------------------------------------------------------------------------
Interest expense, net:
Interest expense (92,132) (90,058) (62,202)
Interest income 1,412 1,291 756
-----------------------------------------------------------------------------------------------------------------------------
(90,720) (88,767) (61,446)
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary loss and
cumulative effect of accounting change (16,736) (415,793) 26,401
Benefit from income taxes (4,000) (65,700) (5,100)
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss and cumulative effect of accounting change (12,736) (350,093) 31,501
Extraordinary loss from the extinguishment of debt, net of taxes - - (1,488)
Cumulative effect of accounting change, net of taxes - 3,813 -
-----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (12,736) $ (346,280) $ 30,013
=============================================================================================================================
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item and cumulative effect of accounting change $ (.33) $ (9.12) $ .79
Extraordinary loss from the extinguishment of debt, net of taxes - - (.03)
Cumulative effect of accounting change, net of taxes - .10 -
-----------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share $ (.33) $ (9.02) $ .76
=============================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
December 31
(in thousands of dollars except share and per share data) 2000 1999
=========================================================================================
ASSETS
Current assets
Cash and cash equivalents $ 6,028 $ 3,283
Trade accounts receivable 141,727 162,802
Other receivables 38,540 25,659
Inventories 47,930 62,382
Prepaid royalties 2,262 1,310
Deferred income taxes 27,440 21,600
Other 13,963 8,916
-----------------------------------------------------------------------------------------
Total current assets 277,890 285,952
-----------------------------------------------------------------------------------------
Property, plant and equipment
Coal lands and mineral rights 1,106,547 1,170,956
Plant and equipment 1,006,452 1,042,128
Deferred mine development 104,579 92,265
-----------------------------------------------------------------------------------------
2,217,578 2,305,349
Less accumulated depreciation, depletion and amortization (787,525) (826,178)
-----------------------------------------------------------------------------------------
Property, plant and equipment, net 1,430,053 1,479,171
-----------------------------------------------------------------------------------------
Other assets
Prepaid royalties 17,500 --
Coal supply agreements 108,884 151,978
Deferred income taxes 179,343 182,500
Investment in Canyon Fuel 188,700 199,760
Other 30,244 33,013
-----------------------------------------------------------------------------------------
Total other assets 524,671 567,251
-----------------------------------------------------------------------------------------
Total assets $ 2,232,614 $ 2,332,374
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 103,014 $ 109,359
Accrued expenses 152,303 145,561
Current portion of debt 60,129 86,000
-----------------------------------------------------------------------------------------
Total current liabilities 315,446 340,920
Long-term debt 1,090,666 1,094,993
Accrued postretirement benefits other than pension 336,663 343,993
Accrued reclamation and mine closure 118,928 129,869
Accrued workers' compensation 78,593 105,190
Accrued pension cost 19,287 22,445
Obligations under capital leases 11,348 -
Other noncurrent liabilities 41,809 53,669
-----------------------------------------------------------------------------------------
Total liabilities 2,012,740 2,091,079
-----------------------------------------------------------------------------------------
Stockholders' equity
Common stock, $.01 par value, authorized 100,000,000 shares,
issued 39,714,333 and 39,705,628 shares 397 397
Paid-in capital 473,428 473,335
Retained deficit (234,980) (213,466)
Less treasury stock, at cost, 1,541,146 shares (18,971) (18,971)
-----------------------------------------------------------------------------------------
Total stockholders' equity 219,874 241,295
-----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,232,614 $ 2,332,374
=========================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Treasury
Three years ended December 31, 2000 Common Paid-In Earnings Stock
(in thousands of dollars except share and per share data) Stock Capital (Deficit) at Cost Total
==================================================================================================================================
BALANCE AT DECEMBER 31, 1997 $ 397 $ 472,425 $ 138,676 $ - $ 611,498
==================================================================================================================================
Net income 30,013 30,013
Dividends paid ($.46 per share) (18,266) (18,266)
Issuance of 47,635 shares of common
stock under the stock incentive plan 691 691
Treasury stock purchases (333,952 shares) (5,720) (5,720)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 397 473,116 150,423 (5,720) 618,216
==================================================================================================================================
Net loss (346,280) (346,280)
Dividends paid ($.46 per share) (17,609) (17,609)
Issuance of 95 shares of common
stock under the stock incentive plan 1 1
Treasury stock purchases (1,396,700 shares)
net of issuances (189,506 shares) 218 (13,251) (13,033)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 397 473,335 (213,466) (18,971) 241,295
==================================================================================================================================
Net loss (12,736) (12,736)
Dividends paid ($.23 per share) (8,778) (8,778)
Issuance of 8,705 shares of common stock
under the stock incentive plan 93 93
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 397 $ 473,428 $ (234,980) $(18,971) $ 219,874
==================================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
(in thousands of dollars) 2000 1999 1998
============================================================================================================================
OPERATING ACTIVITIES
Net income (loss) $ (12,736) $ (346,280) $ 30,013
Adjustments to reconcile to cash provided by operating activities:
Depreciation, depletion and amortization 201,512 235,658 204,307
Prepaid royalties expensed 7,322 14,217 19,694
Net gain on disposition of assets (20,444) (7,459) (41,512)
Income from equity investment (12,837) (11,129) (6,786)
Net distributions from equity investment 23,897 83,178 18,850
Cumulative effect of accounting change - (3,813) -
Write-down of impaired assets - 364,579 -
Changes in operating assets and liabilities (29,420) (69,471) (24,671)
Other (21,522) 20,483 (11,872)
----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 135,772 279,963 188,023
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for acquisition - - (1,126,706)
Addition to property, plant and equipment (115,080) (98,715) (141,737)
Proceeds from coal supply agreements 8,512 14,067 -
Additions to prepaid royalties (25,774) (26,057) (26,252)
Additions to notes receivable - - (10,906)
Proceeds from disposition of property, plant and equipment 24,846 26,347 34,230
----------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (107,496) (84,358) (1,271,371)
----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from (payments on) revolver and lines of credit (30,198) (37,884) 176,582
Net proceeds from (payments on) term loans - (151,210) 958,441
Payments on notes - - (42,860)
Payments for debt issuance costs - - (12,725)
Proceeds from sale and leaseback of equipment 13,352 - 45,442
Dividends paid (8,778) (17,609) (18,266)
Proceeds from sale of common stock 93 - 691
Proceeds from sale of treasury stock - 2,549 -
Purchases of treasury stock - (15,582) (5,720)
----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (25,531) (219,736) 1,101,585
----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,745 (24,131) 18,237
Cash and cash equivalents, beginning of year 3,283 27,414 9,177
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,028 $ 3,283 $ 27,414
============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 85,339 $ 100,781 $ 48,760
Cash paid (received) during the year for income taxes (refunds) $ (1,316) $ 11,251 $ 29,090
The accompanying notes are an integral part of the
consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Arch Coal,
Inc. and its subsidiaries ("the Company"), which operate in the coal mining
industry. The Company operates one reportable segment: the production of
steam and metallurgical coal from surface and deep mines throughout the
United States, for sale to utility, industrial and export markets. The
Company's mines are primarily located in the central Appalachian and
western regions of the United States. All subsidiaries (except as noted
below) are wholly owned. Significant intercompany transactions and accounts
have been eliminated in consolidation.
The membership interest in Canyon Fuel, LLC ("Canyon Fuel") are owned 65%
by the Company and 35% by a subsidiary of ITOCHU Corporation, a Japanese
corporation. The agreement which governs the management and operations of
Canyon Fuel provides for a Management Board to manage its business and
affairs. Generally, the Management Board acts by affirmative vote of the
representatives of the members holding more than 50% of the membership
interests. However, significant participation rights require either the
unanimous approval of the members or the approval of representatives of
members holding more than 70% of the membership interests. Those matters
which are considered significant participation rights include the
following:
. approval of the Annual Business Plan;
. approval of significant capital expenditures;
. approval of significant coal sales contracts;
. approval of the institution of or the settlement of litigation;
. approval of incurrence of indebtedness;
. approval of significant mineral reserve leases;
. selection and removal of the CEO, CFO, or General Counsel;
. approval of any material change in the business of Canyon Fuel;
. approval of any disposition whether by sale, exchange, merger,
consolidation, license or otherwise, and whether directly or
indirectly, of all or any portion of the assets of Canyon Fuel other
than in the ordinary course of business; and
. approval of a request that a member provide additional services to
Canyon Fuel.
The Canyon Fuel agreement also contains various restrictions on the
transfer of membership interest in Canyon Fuel. As a result of these
super-majority voting rights, the Company's 65% ownership of Canyon Fuel is
accounted for on the equity method in the consolidated financial
statements. Income from Canyon Fuel is reflected in the consolidated
statements of operations as income from equity investments. (See additional
discussion in "Investment in Canyon Fuel" in Note 5.)
The Company's 17.5% partnership interest in Dominion Terminal Associates is
accounted for on the equity method in the consolidated balance sheets.
Allocable costs of the partnership for coal loading and storage are
included in other expenses in the consolidated statements of operations.
6
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost. Cash equivalents consist of
highly liquid investments with an original maturity of three months or less
when purchased.
INVENTORIES
Inventories are comprised of the following:
December 31 (in thousands) 2000 1999
--------------------------------------------------------------------------------
Coal $ 21,185 $ 28,183
Supplies, net of allowance 26,745 34,199
--------------------------------------------------------------------------------
$ 47,930 $ 62,382
================================================================================
Coal and supplies inventories are valued at the lower of average cost or
market. Coal inventory costs include labor, supplies, equipment costs and
operating overhead. The Company has recorded a valuation allowance for
slow-moving and obsolete supplies inventories of $19.8 million and $23.5
million at December 31, 2000 and 1999, respectively.
COAL ACQUISITION AND PREPAID ROYALTIES
Coal lease rights obtained through acquisitions are capitalized and
amortized primarily by the units-of-production method over the estimated
recoverable reserves. Amortization occurs either as the Company mines on
the property or as others mine on the property through subleasing
transactions.
Rights to leased coal lands are often acquired through royalty payments.
Where royalty payments represent prepayments recoupable against production,
they are capitalized, and amounts expected to be recouped within one year
are classified as a current asset. As mining occur on these leases, the
prepayment is charged to cost of coal sales.
COAL SUPPLY AGREEMENTS
Acquisition costs allocated to coal supply agreements (sales contracts) are
capitalized and amortized on the basis of coal to be shipped over the term
of the contract. Value is allocated to coal supply agreements based on
discounted cash flows attributable to the difference between the above
market contract price and the then-prevailing market price. Accumulated
amortization for sales contracts was $171.2 million and $131.4 million at
December 31, 2000 and 1999, respectively.
7
EXPLORATION COSTS
Costs related to locating coal deposits and determining the economic
mineability of such deposits are expensed as incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Interest costs
applicable to major asset additions are capitalized during the construction
period. Expenditures which extend the useful lives of existing plant and
equipment are capitalized. Costs of purchasing rights to coal reserves and
developing new mines or significantly expanding the capacity of existing
mines are capitalized. These costs are amortized using the
units-of-production method over the estimated recoverable reserves that are
associated with the property being benefited. At December 31, 2000, all
mineral reserves of the Company that are capitalized are being amortized on
the units-of-production method through Company operations or through
sublease transactions (for which the Company receives royalty revenue)
except for a block of 197 million tons located adjacent to its Hobet 21
operations. The current value associated with this property is $177.8
million which the Company plans to recover via mining operations in the
future. Except for preparation plants and loadouts, plant and equipment are
depreciated principally on the straight-line method over the estimated
useful lives of the assets, which range from three to 20 years. Effective
January 1, 1999, preparation plants and loadouts are depreciated using the
units-of-production method over the estimated recoverable reserves subject
to a minimum level of depreciation (see additional discussion in Note 3,
"Change in Accounting Method"). Prior to January 1, 1999, preparation
plants and loadouts were depreciated on a straight-line basis over their
estimated useful lives.
Leased property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability.
Amortization of capitalized leased assets is computed on the straight-line
method over the term of the lease.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of
the asset will not be recoverable, as determined based on projected
undiscounted cash flows related to the asset over its remaining life, then
the carrying value of the asset is reduced to its estimated fair value.
(See additional discussion in Note 2, "Changes in Estimates and Other
Non-Recurring Revenues and Expenses.")
REVENUE RECOGNITION
Coal sales revenues include sales to customers of coal produced at Company
operations and coal purchased from other companies. The Company recognizes
revenue from coal sales at the time title passes to the customer. Revenues
from sources other than coal sales, including gains and losses from
dispositions of long-term assets, are included in other revenues and are
recognized as performed or otherwise earned.
INTEREST-RATE SWAP AGREEMENTS
The Company enters into interest-rate swap agreements to modify the
interest characteristics of outstanding Company debt. The swap agreements
essentially convert variable-rate debt to fixed-rate debt. These agreements
require the exchange of amounts based on variable interest rates for
amounts based on fixed interest rates over the life of the agreement. The
Company accrues amounts to be paid or received under interest-rate swap
agreements over the lives of the agreements. Such amounts are recognized as
adjustments to interest expense over the lives of agreements, thereby
adjusting the effective interest rate on the Company's debt. The fair
values of
8
the swap agreements are not recognized in the financial statements. Gains
and losses on terminations of interest-rate swap agreements are deferred on
the balance sheets (in other long-term liabilities) and amortized as an
adjustment to interest expense over the remaining original term of the
terminated swap agreement.
INCOME TAXES
Deferred income taxes are based on temporary differences between the
financial statement and tax basis of assets and liabilities existing at
each balance sheet date using enacted tax rates for years during which
taxes are expected to be paid or recovered.
STOCK-BASED COMPENSATION
These financial statements include the disclosure requirements of Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). With respect to accounting for its stock options,
as permitted under FAS 123, the Company has retained the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related Interpretations.
2. CHANGES IN ESTIMATES AND OTHER NON-RECURRING REVENUES AND EXPENSES
The Company's operating results in 2000 include income from the recovery of
$31.0 million in partial insurance settlements under the Company's property
and business interruption insurance policy. The payments offset a portion
of the loss incurred at the West Elk mine in Gunnison County, Colorado,
which was idled from January 28, 2000 to July 12, 2000 following the
detection of combustion- related gases in a portion of the mine. The
Company expects to receive additional insurance payments under its property
and business interruption policy. Any additional recovery, however, will
depend on resolution of the claim with the insurance carrier, the timing of
which is uncertain. As a result of permit revisions at its idle mine
properties in Illinois, the Company reduced its reclamation liability at
Arch of Illinois by $7.8 million during 2000. In addition, the Internal
Revenue Service ("IRS") issued a notice during 2000 outlining the
procedures for obtaining tax refunds on certain excise taxes paid by the
industry on export sales tonnage. The notice is a result of a 1998 federal
district court decision that found such taxes to be unconstitutional. The
Company recorded $12.7 million of income related to these excise tax
recoveries. As a result of adjustments to employee postretirement medical
benefits, the Company was able to recognize $9.8 million of pre-tax
curtailment gains resulting from previously unrecognized postretirement
benefit changes which occurred from plan amendments in previous years. The
Company also settled certain workers' compensation liabilities with the
State of West Virginia resulting in pre-tax gains of $21.8 million. This
was partially offset by adjustments to other workers' compensation
liabilities resulting from changes in estimates which caused increases to
the liability of $13.5 million.
In 1999, the Company recorded pre-tax charges of $23.1 million related to
(i) the restructuring of its administrative workforce; (ii) the closure of
its Dal-Tex mining operation in West Virginia due to the inability to
secure the necessary permits to continue ongoing mining; and (iii) the
closure of several mines in Kentucky (Coal-Mac) and the one remaining
underground mine in Illinois (Arch of Illinois) due to depressed coal
prices, caused in part by increased competition from western coal mines. Of
the $23.1 million charge, $20.3 million was recorded in cost of coal sales,
$2.3 million was recorded in selling, general and administrative expenses
and $0.5 million was recorded in other expenses in the Company's
consolidated statement of operations. The restructuring of the
administrative workforce
9
included the elimination of 81 administrative jobs which was part of a
corporate-wide effort to reduce general and administrative expenses. The
mine closures included the termination of 161 employees. As of December 31,
1999, 74 administrative and 65 mine employees had been terminated, with the
remainder being terminated during 2000. The following are the components of
severance and other exit costs included in the restructuring charge along
with related 1999 and 2000 activity:
Balance Balance
1999 Utilized December 31, Utilized December 31,
(in thousands) Charge in 1999 1999 in 2000 2000
=======================================================================================================================
Employee costs $ 7,354 $ 704 $ 6,650 $ 5,184 $ 1,466
Obligations for non-cancelable lease payments 9,858 484 9,374 9,374 -
Reclamation liabilities 3,667 1,200 2,467 2,467 -
Depreciation acceleration 2,172 2,172 - - -
-----------------------------------------------------------------------------------------------------------------------
$23,051 $ 4,560 $ 18,491 $ 17,025 $ 1,466
=======================================================================================================================
Except for the charge related to depreciation acceleration, all of the 1999
restructuring charge will require the Company to use cash. Also, except for
amounts attributable to retiree healthcare, the Company utilized the
balance of the amounts reserved for employee costs in 2000.
In addition, during the fourth quarter of 1999, the Company determined that
significant changes were necessary in the manner and extent in which
certain central Appalachia coal assets would be deployed. The anticipated
changes were determined during the Company's annual planning process and
were necessitated by the adverse legal and regulatory rulings related to
surface mining techniques, as well as the continued negative pricing trends
related to central Appalachia coal production experienced by the Company.
As a result of the planned changes in the deployment of its long-lived
assets in the central Appalachia region and pursuant to FAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, the Company evaluated the recoverability of its active mining
operations and its coal reserves for which no future mining plans existed.
This evaluation indicated that the future undiscounted cash flows of three
mining operations, Dal-Tex, Hobet 21 and Coal-Mac, and certain coal
reserves with no future mining plans were below the carrying value of such
long-lived assets. Accordingly, during the fourth quarter of 1999, the
Company adjusted the operating assets and coal reserves to their estimated
fair value of approximately $99.7 million, resulting in a non-cash
impairment charge of $364.6 million (including $50.6 million relating to
operating assets and $314.0 million relating to coal reserves). The
estimated fair value for the three mining operations was based on
anticipated future cash flows discounted at a rate commensurate with the
risk involved. The estimated fair value for the coal reserves with no
future mining plans was based upon the fair value of these properties to be
derived from subleased operations. The impairment loss has been recorded as
a loss from the write-down of impaired assets in the consolidated
statements of operations.
3. CHANGE IN ACCOUNTING METHOD
Through December 31, 1998, plant and equipment had principally been
depreciated on the straight-line method over the estimated useful lives of
the assets, which ranged from three to 20 years. Effective January 1, 1999,
depreciation on the Company's preparation plants and loadouts was computed
using the units-of-production method, which is based upon units produced,
subject to a minimum level of depreciation. These assets are usage-based
assets, and their economic lives are typically based and measured on coal
throughput. The Company believes the units-of-production method is
preferable to the method previously used because the new method recognizes
10
that depreciation of this equipment is related substantially to physical
wear due to usage and also to the passage of time. This method, therefore,
more appropriately matches production costs over the lives of the
preparation plants and loadouts with coal sales revenue and results in a
more accurate allocation of the cost of the physical assets to the periods
in which the assets are consumed. The cumulative effect of applying the new
method for years prior to 1999 is an increase to income of $3.8 million
net-of-tax ($6.3 million pre-tax) reported as a cumulative effect of
accounting change in the consolidated statement of operations for the year
ended December 31, 1999. In addition, the net loss of the Company,
excluding the cumulative effect of accounting change, for the year ended
December 31, 1999 is $0.2 million less, or $.01 per share less, than it
would have been if the Company had continued to follow the straight-line
method of depreciation of equipment for preparation plants and loadouts.
4. ACQUISITION
On June 1, 1998, the Company acquired the Colorado and Utah coal operations
of Atlantic Richfield Company ("ARCO") and simultaneously combined the
acquired ARCO operations and the Company's Wyoming operations with ARCO's
Wyoming operations in a new joint venture named Arch Western Resources, LLC
("Arch Western"). The principal operating units of Arch Western are Thunder
Basin Coal Company, L.L.C., owned 100% by Arch Western, which operates two
coal mines in the Powder River Basin in Wyoming; Mountain Coal Company,
L.L.C., owned 100% by Arch Western, which operates a coal mine in Colorado;
Canyon Fuel Company, LLC ("Canyon Fuel"), 65% owned by Arch Western and 35%
by ITOCHU Coal International Inc., a subsidiary of ITOCHU Corporation,
which operates three coal mines in Utah; and Arch of Wyoming, LLC, owned
100% by Arch Western, which operates two coal mines in the Hanna Basin of
Wyoming.
Arch Western is 99% owned by the Company and 1% owned by ARCO. The
transaction was valued at approximately $1.14 billion and a wholly owned
subsidiary of the Company is the managing member of Arch Western. The
transaction was accounted for under the purchase method of accounting.
Results of operations of the acquired operations are included in the
consolidated statements of operations effective June 1, 1998. The acquired
ARCO operations continue to produce low-sulfur coal for sale to primarily
domestic utility customers.
5. INVESTMENT IN CANYON FUEL
The following tables present unaudited summarized financial information for
Canyon Fuel which, as part of the June 1, 1998 Arch Western transaction
(described in Note 4), was acquired by the Company and is accounted for on
the equity method.
CONDENSED INCOME STATEMENT INFORMATION
Seven
Year Ended Year Ended Months Ended
December 31, December 31, December 31,
(in thousands) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Revenues $ 259,101 $ 241,062 $ 155,634
Total costs and expenses 243,226 232,296 156,196
------------------------------------------------------------------------------------------------------------------------
Net income 15,875 8,766 (562)
========================================================================================================================
65% of Canyon Fuel net income 10,319 5,698 (365)
Effect of purchase adjustments 2,518 5,431 7,151
------------------------------------------------------------------------------------------------------------------------
Arch Coal's income from its equity investment in Canyon Fuel $ 12,837 $ 11,129 $ 6,786
========================================================================================================================
11
CONDENSED BALANCE SHEET INFORMATION
Arch
Canyon Ownership of
Fuel Canyon Fuel Arch Purchase
December 31, 2000 (in thousands) Basis Basis Adjustments Arch Basis
=========================================================================================================
Current assets $ 67,075 $ 43,599 $ (3,614) $ 39,985
Noncurrent assets 411,146 267,245 (84,765) 182,480
Current liabilities 33,766 21,948 - 21,948
Noncurrent liabilities 20,658 13,428 (1,611) 11,817
---------------------------------------------------------------------------------------------------------
Members' equity $ 423,797 $ 275,468 $ (86,768) $ 188,700
=========================================================================================================
December 31, 1999
---------------------------------------------------------------------------------------------------------
Current assets $ 61,212 $ 39,788 $ (3,615) $ 36,173
Noncurrent assets 441,330 286,865 (83,511) 203,354
Current liabilities 37,065 24,092 - 24,092
Noncurrent liabilities 20,789 13,513 2,162 15,675
---------------------------------------------------------------------------------------------------------
Members' equity $ 444,688 $ 289,048 $ (89,288) $ 199,760
=========================================================================================================
The Company's income from its equity investment in Canyon Fuel represents
65% of Canyon Fuel's net income after adjusting for the effect of its
investment in Canyon Fuel. The Company's investment in Canyon Fuel reflects
purchase adjustments primarily related to the reduction in amounts assigned
to sales contracts, mineral reserves and other property, plant and
equipment. The purchase adjustments are amortized consistent with the
underlying assets of the joint venture.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31 (in thousands) 2000 1999
======================================================================================
Accrued payroll and related benefits $ 22,500 $ 27,830
Accrued taxes other than income taxes 50,267 47,727
Accrued postretirement benefits other than pension 16,629 14,755
Accrued workers' compensation 10,438 11,144
Accrued interest 13,078 6,285
Accrued reclamation and mine closure 16,126 26,540
Other accrued expenses 23,265 11,280
--------------------------------------------------------------------------------------
$ 152,303 $ 145,561
======================================================================================
12
7. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
December 31 (in thousands) 2000 1999 1998
============================================================================================
Current:
Federal $ (4,882) $ 6,796 $ 8,077
State - - (260)
--------------------------------------------------------------------------------------------
Total current (4,882) 6,796 7,817
--------------------------------------------------------------------------------------------
Deferred:
Federal 3,067 (54,135) (12,583)
State (2,185) (18,361) (334)
--------------------------------------------------------------------------------------------
Total deferred 882 (72,496) (12,917)
--------------------------------------------------------------------------------------------
$ (4,000) $ (65,700) $ (5,100)
============================================================================================
A reconciliation of the statutory federal income tax expense (benefit) on
the Company's pretax income (loss) before extraordinary loss and cumulative
effect of accounting change to the actual provision (benefit) for income
taxes follows:
Year ended December 31 (in thousands) 2000 1999 1998
============================================================================================
Income tax expense (benefit) at statutory rate $ (5,858) $(145,526) $ 9,240
Percentage depletion allowance (9,063) (15,000) (14,437)
State taxes, net of effect of federal taxes (1,797) (18,361) (594)
Change in valuation allowance 5,515 112,345 -
AMT credit adjustment due to IRS exam 6,704 - -
Other, net 499 842 691
--------------------------------------------------------------------------------------------
$ (4,000) $ (65,700) $ (5,100)
============================================================================================
During 1998, the Company settled its protest of certain issues with the IRS
for the federal income tax returns for the years 1990 and 1991. A final
payment of $0.5 million was paid in June 1998 and charged against
previously recorded reserves. The IRS audit of the federal income tax
returns for the years 1992 through 1994 was completed during 1998 and
agreed to at the examination level. A payment of $15.5 million was made in
December 1998 in settlement of all issues. A significant number of the
issues were timing in nature, and the tax paid related to these temporary
differences is accounted for as a deferred tax asset, and the remaining tax
and interest paid was charged against previously recorded reserves. A
portion of the payment related to items that were settled in the 1987
through 1991 audits previously discussed. Permanent differences included a
reduction in percentage depletion and a decrease in cost depletion related
to the settlement for the adjustment in fair market value of certain coal
reserves.
During 1999, the Company settled an audit of former Ashland Coal, Inc. for
the years January 1995 through June 1997. A payment of $0.1 million was
made in January 1999 in settlement of all issues.
13
On January 10, 2000, the Company received notice from the IRS of its
proposed adjustments for tax years 1995 and 1996. The Company has agreed to
pay $6.0 million including accrued interest to partially settle the audit
but will continue to contest additional tax adjustments of $0.8 million
with the IRS. The Company expects to pay the $6.0 million during the first
quarter of 2001, which will be charged against previously recorded
reserves.
The following is a summary of additional taxes paid for IRS audits and the
related financial statement impact, none of which resulted in additional
expense in the statements of operations subsequent to the tax years to
which they relate:
Net Deferred Taxes Income Tax Cash
(in millions) Tax Asset Payable Reserves Paid
=============================================================================
1998 $ 6.1 $ 4.6 $ 5.3 $ 16.0
1999 0.2 - (0.1) 0.1
2000 - - - -
-----------------------------------------------------------------------------
Totals $ 6.3 $ 4.6 $ 5.2 $ 16.1
=============================================================================
Management believes that the Company has adequately provided for any income
taxes and interest which may ultimately be paid with respect to all open
tax years.
Significant components of the Company's deferred tax assets and liabilities
that result from carry forwards and temporary differences between the
financial statement basis and tax basis of assets and liabilities are
summarized as follows:
December 31 (in thousands) 2000 1999
=============================================================================
DEFERRED TAX ASSETS:
-----------------------------------------------------------------------------
Postretirement benefits other than pension $ 136,268 $ 139,796
Alternative minimum tax credit carryforward 80,017 91,604
Workers' compensation 30,301 43,029
Reclamation and mine closure 25,019 30,016
Net operating loss carryforwards 28,338 11,507
Plant, equipment, coal lands and mineral rights 17,784 40,104
Advance royalties 15,976 24,064
Other 55,035 25,514
-----------------------------------------------------------------------------
Gross deferred tax assets 388,738 405,634
Valuation allowance (117,860) (112,345)
-----------------------------------------------------------------------------
Total deferred tax assets 270,878 293,289
-----------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
-----------------------------------------------------------------------------
Leases 20,371 21,990
Coal supply agreements 19,796 36,750
Other 23,928 30,449
-----------------------------------------------------------------------------
Total deferred tax liabilities 64,095 89,189
-----------------------------------------------------------------------------
Net deferred tax asset 206,783 204,100
Less current asset 27,440 21,600
-----------------------------------------------------------------------------
Long-term deferred tax asset $ 179,343 $ 182,500
=============================================================================
14
The Company has a net operating loss carryforward for regular income tax
purposes of $28.3 million which will expire in the years 2008 to 2014. The
Company has an alternative minimum tax credit carryforward of $80.0 million
which may carry forward indefinitely to offset future regular tax in excess
of alternative minimum tax.
During 1999, the Company recorded a valuation allowance for a portion of
its deferred tax assets that management believes, more likely than not,
will not be realized. These deferred tax assets include a portion of the
alternative minimum tax credits and some of the deductible temporary
differences that will likely not be realized at the maximum effective tax
rate. Such valuation allowance consisted of the following components at
December 31 on the years indicated:
December 31 (in thousands) 2000 1999
===============================================================================
Unrealized future deductible temporary differences $ 85,372 $ 66,992
Unutilized alternative minimum tax credits 32,488 45,353
-------------------------------------------------------------------------------
Valuation allowance at December 31 $ 117,860 $ 112,345
===============================================================================
8. DEBT AND FINANCING ARRANGEMENTS
Debt consists of the following:
December 31 (in thousands) 2000 1999
============================================================================================================
Indebtedness to banks under revolving credit agreement, expiring May 31, 2003
(weighted average rate at December 31, 2000-8.00%, December 31, 1999-7.61%) $ 332,100 $ 365,000
Variable rate fully amortizing term loan payable quarterly from July 1, 2001
through May 31, 2003 (weighted average rate at December 31, 2000-8.29%,
December 31, 1999-7.49%) 135,000 135,000
Variable rate non-amortizing term loan due May 31, 2003
(weighted average rate at December 31, 2000-8.03%, December 31, 1999-7.85%) 675,000 675,000
Other 8,695 5,993
------------------------------------------------------------------------------------------------------------
1,150,795 1,180,993
Less current portion 60,129 86,000
------------------------------------------------------------------------------------------------------------
Long-term debt $1,090,666 $1,094,993
============================================================================================================
The Company has two five-year credit facilities: a $675 million
non-amortizing term loan in the name of Arch Western, the entity owning the
right to the coal reserves and operating assets acquired in the Arch
Western transaction, and a $900 million credit facility in the name of the
Company, including a $300 million fully amortizing term loan and a $600
million revolver. The $675 million term loan is secured by Arch Western's
membership interests in its subsidiaries. The Arch Western credit facility
is not guaranteed by the Company. The rate of interest on the borrowings
under the agreements is, at the Company's option, the PNC Bank base rate or
a rate based on LIBOR. The revolving credit agreement provides borrowing up
to $600 million less any outstanding letters of credit. At December 31,
2000, the Company had $32.3 million in letters of credit outstanding which
when combined with borrowings under the revolver allowed for $235.6 million
of available borrowings under the revolver.
On August 23, 1999, the Company prepaid $105 million, or seven required
quarterly installments, on the $300 million fully amortizing term loan. The
next required quarterly installment will be July 1, 2001. The prepayments
were funded by additional borrowings under the $600 million revolver.
15
The Company periodically establishes uncommitted lines of credit with
banks. These agreements generally provide for short-term borrowings at
market rates. At December 31, 2000, there were $20 million of such
agreements in effect, of which no borrowings were outstanding.
Except for amounts expected to be repaid in 2001, amounts borrowed under
the revolving credit agreement and the bank lines of credit are classified
as long-term as the Company has the intent and the ability to maintain
these borrowings on a long-term basis. Aggregate required maturities of
debt at December 31, 2000 for the next five years are $33.6 million in
2001, $60.5 million in 2002, $1.1 billion in 2003, $0.6 million in 2004,
$0.6 million in 2005 and $2.9 million thereafter.
Terms of the Company's credit facilities and leases contain financial and
other covenants that limit the ability of the Company to, among other
things, effect acquisitions or dispositions and borrow additional funds and
require the Company to, among other things, maintain various financial
ratios and comply with various other financial covenants. In addition, the
covenants required the pledging of assets to collateralize the term loan
and the $600 million revolver. The assets pledged include equity interests
wholly owned subsidiaries, certain real property interest, accounts
receivable and inventory of the Company. Failure by the Company to comply
with such covenants could result in an event of default which, if not cured
or waived, could have a material adverse effect on the Company. The Company
was in compliance with these financial covenants at December 31, 2000.
The Company enters into interest-rate swap agreements to modify the
interest characteristics of the Company's outstanding debt. At December 31,
2000, the Company had interest-rate swap agreements having a total notional
value of $767.5 million. These swap agreements are used to convert
variable-rate debt to fixed-rate debt. Under these swap agreements, the
Company pays a weighted-average fixed rate of 6.16% (before the credit
spread over LIBOR) and is receiving a weighted-average variable rate based
upon 30-day and 90-day LIBOR. At December 31, 2000, the remaining terms of
the swap agreements ranged from 20 to 54 months.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value.
Debt: The carrying amounts of the Company's borrowings under its revolving
credit agreement, lines of credit, variable rate term loans and other
long-term debt approximate their fair value.
Interest rate swaps: The fair values of interest rate swaps are based on
quoted prices, which reflect the present value of the difference between
estimated future amounts to be paid and received. At December 31, 2000 and
1999, the fair value of these swaps is a liability and an asset of $7.9
million and $27.4 million respectively.
10. ACCRUED WORKERS' COMPENSATION
The Company is liable under the federal Mine Safety and Health Act of 1977,
as amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by
such persons on or after July 1, 1973. The Company is also liable under
various states' statutes for black lung benefits. The Company currently
provides for federal and state claims principally through a self-insurance
program. Charges are being made to operations as determined by independent
actuaries, at the present value of the actuarially computed present and
future liabilities for such benefits over the employees' applicable years
of
16
service. In addition, the Company is liable for workers' compensation
benefits for traumatic injuries which are accrued as injuries are incurred.
Workers' compensation costs (credits) include the following components:
Year ended December 31 (in thousands) 2000 1999 1998
===========================================================================
Self-insured black lung benefits:
Service cost $ 1,273 $ 1,671 $ 1,022
Interest cost 3,620 3,522 3,173
Net amortization and deferral (1,486) 327 111
---------------------------------------------------------------------------
3,407 5,520 4,306
Other workers' compensation benefits 6,942 13,241 19,396
---------------------------------------------------------------------------
$ 10,349 $ 18,761 $ 23,702
===========================================================================
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.75% as of December 31, 2000 (7.50% and 7.00%
as of December 31, 1999 and 1998, respectively) and a black lung benefit
cost escalation rate of 4% in 2000, 1999 and 1998. In 2000, the Company
settled several of its mining operations' self-insured workers'
compensation and black lung liabilities with the State of West Virginia,
resulting in pre-tax gains of $21.8 million. This was partially offset by
adjustments to other workers' compensation liabilities resulting from
changes in estimates which caused increases to the liability of $13.5
million.
Summarized below is information about the amounts recognized in the
consolidated balance sheets for workers' compensation benefits:
December 31 (in thousands) 2000 1999
================================================================================
Actuarial present value for self-insured black lung:
Benefits contractually recoverable from others $ 2,144 $ 3,254
Benefits for Company employees 35,710 48,267
--------------------------------------------------------------------------------
Accumulated black lung benefit obligation 37,854 51,521
Unrecognized net gain (loss) 6,252 4,890
--------------------------------------------------------------------------------
44,106 56,411
Traumatic and other workers' compensation 44,925 59,923
--------------------------------------------------------------------------------
Accrued workers' compensation 89,031 116,334
Less amount included in accrued expenses 10,438 11,144
--------------------------------------------------------------------------------
$ 78,593 $ 105,190
================================================================================
Receivables related to benefits contractually recoverable from others of
$2.1 million in 2000 and $3.3 million in 1999 are recorded in other
long-term assets.
17
11. ACCRUED RECLAMATION AND MINE CLOSING COSTS
The federal Surface Mining Control and Reclamation Act of 1977 and similar
state statutes require that mine property be restored in accordance with
specified standards and an approved reclamation plan. The Company accrues
for the costs of final mine closure reclamation over the estimated useful
mining life of the property. These costs relate to reclaiming the pit and
support acreage at surface mines and sealing portals at deep mines. Other
costs of final mine closure common to both types of mining are related to
reclaiming refuse and slurry ponds. The Company also accrues for
significant reclamation that is completed during the mining process prior
to final mine closure. The establishment of the final mine closure
reclamation liability and the other ongoing reclamation liability is based
upon permit requirements and requires various estimates and assumptions,
principally associated with costs and productivities. The Company accrued
$10.4 million, $12.9 million and $12.5 million in 2000, 1999 and 1998,
respectively, for current and final mine closure reclamation, excluding
reclamation recosting adjustments identified below. Cash payments for final
mine closure reclamation and current disturbances approximated $18.2
million, $15.8 million and $15.0 million for 2000, 1999 and 1998
respectively. Periodically, the Company reviews its entire environmental
liability and makes necessary adjustments for permit changes as granted by
state authorities, additional costs resulting from accelerated mine
closures, and revisions to costs and productivities, to reflect current
experience. These recosting adjustments are recorded in cost of coal sales.
Adjustments included a net decrease in the liability of $9.2 million in
2000 and a net increase in the liability of $4.3 million and $4.9 million
in 1999 and 1998, respectively. The Company's management believes it is
making adequate provisions for all expected reclamation and other costs
associated with mine closures.
12. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has non-contributory defined benefit pension plans covering
certain of its salaried and non-union hourly employees. Benefits are
generally based on the employee's years of service and compensation. The
Company funds the plans in an amount not less than the minimum statutory
funding requirements nor more than the maximum amount that can be deducted
for federal income tax purposes.
The Company also currently provides certain postretirement medical/life
insurance coverage for eligible employees. Generally, covered employees who
terminate employment after meeting eligibility requirements are eligible
for postretirement coverage for themselves and their dependents. The
salaried employee postretirement medical/life plans are contributory, with
retiree contributions adjusted periodically, and contain other cost-sharing
features such as deductibles and coinsurance. The postretirement medical
plan for retirees who were members of the United Mine Workers of America
("UMWA") is not contributory. The Company's current funding policy is to
fund the cost of all postretirement medical/life insurance benefits as they
are paid. Summaries of the changes in the benefit obligations, plan assets
(primarily listed stocks and debt securities) and funded status of the
plans are as follows:
18
Other
Pension Benefits Postretirement Benefits
(in thousands) 2000 1999 2000 1999
=====================================================================================================================
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 $ 131,783 $ 139,433 $ 330,846 $ 335,823
Service cost 6,817 7,118 1,901 2,424
Interest cost 9,546 8,980 24,416 21,580
Benefits paid (15,111) (13,462) (16,636) (14,736)
Plan amendments 642 (435) (13,658) -
Other-primarily actuarial (gain) loss 5,387 (9,851) (27,437) (14,245)
--------------------------------------------------------------------------------------------------------------------
Benefit obligations at December 31 $ 139,064 $ 131,783 $ 299,432 $ 330,846
--------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Value of plan assets at January 1 $ 147,217 $ 127,274 $ - $ -
Actual return on plan assets (2,915) 31,308 - -
Employer contributions 9,673 2,097 16,636 14,736
Benefits paid (15,111) (13,462) (16,636) (14,736)
--------------------------------------------------------------------------------------------------------------------
Value of plan assets at December 31 $ 138,864 $ 147,217 $ - $ -
--------------------------------------------------------------------------------------------------------------------
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets $ 200 $ (15,434) $ 299,432 $ 330,846
Unrecognized actuarial gain 16,908 37,513 41,304 16,341
Unrecognized net transition asset 491 689 - -
Unrecognized prior service gain 1,886 2,815 12,556 11,561
--------------------------------------------------------------------------------------------------------------------
Net liability recognized $ 19,485 $ 25,583 $ 353,292 $ 358,748
--------------------------------------------------------------------------------------------------------------------
BALANCE SHEET LIABILITIES
Prepaid benefit costs $ - $ - $ - $ -
Accrued benefit liabilities 19,485 25,583 353,292 358,748
--------------------------------------------------------------------------------------------------------------------
Net liability recognized 19,485 25,583 353,292 358,748
Less current portion 198 3,138 16,629 14,755
--------------------------------------------------------------------------------------------------------------------
Long term liability $ 19,287 $ 22,445 $ 336,663 $ 343,993
--------------------------------------------------------------------------------------------------------------------
The reduction in the postretirement benefit obligation in 2000 associated
with the $13.7 million plan amendment resulted from: the July 2000
amendment changing some of the cost sharing provisions of the plan for
salaried and non-union hourly participants; and an October 2000 plan
amendment changing eligibility requirements to 10 years of service after
reaching age 45 for salaried and non- union hourly participants. The latter
plan change triggered a curtailment that resulted in the recognition of
$9.8 million in previously unrecognized prior service gains. The $25
million increase in the 2000 unrecognized actuarial gain from 1999 resulted
from plan assumption changes.
19
The actuarial loss in the 2000 pension benefit obligation resulted from
changes in plan assumptions. The decrease in funded status in year 2000
resulted from decreased earnings on plan assets during the year, which also
contributed to the reduction in the unrecognized actuarial gain as compared
to the prior year.
Other
Pension Benefits Postretirement Benefits
December 31 2000 1999 2000 1999
==============================================================================================================================
Weighted average assumptions
Discount rate 7.75% 7.50% 7.75% 7.50%
Rate of compensation increase 4.75% 5.25% N/A N/A
Expected return on plan assets 9.00% 9.00% N/A N/A
Health care cost trend on covered charges N/A N/A 5.00% 5.00%
The following table details the components of pension and other post-retirement
benefit costs.
Pension Benefits Other Postretirement Benefits
Year ended December 31 (in thousands) 2000 1999 1998 2000 1999 1998
==============================================================================================================================
Service cost $ 6,817 $ 7,118 $ 5,841 $ 1,901 $ 2,424 $ 3,715
Interest cost 9,546 8,980 8,137 24,416 21,580 23,101
Expected return on plan assets (10,915) (9,929) (7,521) - - -
Other amortization and deferral (3,047) (1,122) 790 (5,382) (9,628) (2,884)
Curtailments - - - (9,756) - -
------------------------------------------------------------------------------------------------------------------------------
$ 2,401 $ 5,047 $ 7,247 $ 11,179 $ 14,376 $ 23,932
==============================================================================================================================
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost
trend rate by one percentage point each year would increase the accumulated
postretirement obligation as of December 31, 2000 by $35.7 million, or
11.9%, and the net periodic postretirement benefit cost for 2000 by $2.7
million, or 24.2%.
MULTI-EMPLOYER PENSION AND BENEFIT PLANS
Under the labor contract with the UMWA, the Company made payments of $0.1
million, $0.2 million and $1.3 million in 2000, 1999 and 1998,
respectively, into a multi-employer defined benefit pension plan trust
established for the benefit of union employees. Payments are based on hours
worked and are expensed as paid. Under the Multi-employer Pension Plan
Amendments Act of 1980, a contributor to a milti-employer pension plan may
be liable, under certain circumstances, for its proportionate share of the
plan's unfunded vested benefit (withdrawal liability). At December 31,
2000, the Company has been informed by the UMWA Health and Retirement Funds
that the UMWA 1950 and 1974 Pension Plans do not have any unfunded vested
benefits. Therefore, there is no withdrawal liability to the Company. The
Company is not aware of any circumstances which would require it to reflect
its share of unfunded vested pension benefits in its financial statements.
At December 31, 2000, approximately 17% of the Company's workforce was
represented by the UMWA. The current UMWA collective bargaining agreement
expires at December 31, 2002.
The Coal Industry Retiree Health Benefit Act of 1992 ("Benefit Act")
provides for the funding of medical and death benefits for certain retired
members of the UMWA through premiums to be paid by assigned operators
(former employers), transfers of monies in 1993 and
20
1994 from an overfunded pension trust established for the benefit of
retired UMWA members, and transfers from the Abandoned Mine Lands Fund
(funded by a federal tax on coal production) commencing in 1995. The
Company treats its obligation under the Benefit Act as a participation in a
multi-employer plan and recognizes expense as premiums are paid. The
Company recognized $3.3 million in 2000, $2.7 million in 1999 and $3.7
million in 1998, in expense relative to premiums paid pursuant to the
Benefit Act.
OTHER PLANS
The Company sponsors savings plans which were established to assist
eligible employees in providing for their future retirement needs. The
Company's contributions to the plans were $8.0 million in 2000, $8.4
million in 1999 and $6.8 million in 1998.
13. CAPITAL STOCK
Subsequent to the end of the year, the Company completed a public offering
of 9,927,765 shares of its common stock. The offering consisted of
5,170,797 shares sold directly by the Company (including 1,541,146 shares
held in the Company's treasury) and the remaining 4,756,968 shares held by
its then largest stockholder, Ashland Inc. The net proceeds of $93.2
million from the shares sold directly by the Company were used to pay down
debt.
On September 29, 1998, the Company's Board of Directors authorized the
Company to repurchase up to 2 million shares of Company common stock. The
timing of the purchases and the number of shares to be purchased are
dependent on market conditions. Through December 31, 1999, the Company had
acquired 1,726,900 shares under the repurchase program at an average price
of $12.29 per share. There were no treasury share purchases during 2000.
On February 25, 1999, the Company's Board of Directors authorized the
Company to amend its Automatic Dividend Reinvestment Plan to provide, among
other things, that dividends may be reinvested in the Company's common
stock by purchasing authorized but unissued shares (including treasury
shares) directly from the Company, as well as by purchasing shares in the
open market. On May 4, 1999, the Company filed a Form S-3 with the
Securities and Exchange Commission to register 2,000,000 shares of the
Company's common stock for issuance under the amended Plan. As reflected in
the Prospectus filed therewith, the amended Plan provides that the Company
determines whether the Plan's administrator should reinvest dividends in
shares purchased in the open market or in shares acquired directly from the
Company. The Company authorized and directed its Plan administrator (for
all shareholders who had elected to reinvest their dividends in Company
stock) to reinvest the June 15, 1999 and September 15, 1999 dividends in
the Company's treasury stock. As of December 31, 2000 and 1999,
approximately $2.5 million of the Company's dividends were reinvested in
189,506 shares of treasury stock. In accordance with the terms of the
amended Plan, the treasury stock was reissued by the Company at the average
of the high and low per share sales prices as reported by the New York
Stock Exchange on the date of the dividend, which averaged $13.446 per
share. The Company accounts for the issuance of the treasury stock using
the average cost method.
14. STOCKHOLDER RIGHTS PLAN
On March 3, 2000, the Board of Directors adopted a stockholder rights plan
under which preferred share purchase rights were distributed as a dividend
to the Company's stockholders of record on March 20, 2000. The rights are
exercisable only if a person or group acquires 20% or more of the Company's
common stock (an "Acquiring Person") or announces a tender or exchange
offer the consummation of which would result in ownership by a person or
group of 20% or more of the Company's common stock. Each right entitles the
holder to buy one one-hundredth of a share of a series of junior
participating preferred stock at an exercise price of $42 or in certain
circumstances allows the holder (expect for the Acquiring Person) to
purchase the Company's common stock or voting stock of the
21
Acquiring Person at a discount. At its option, the Board of Directors may allow
some or all holders (except for the Acquiring Person) to exchange their rights
for Company common stock. The rights will expire on March 20, 2010, subject
to
earlier redemption or exchange by the Company as described in the plan.
15. STOCK INCENTIVE PLAN
On April 22, 1998, the stockholders ratified the adoption of the 1997 Stock
Incentive Plan (the "Company Incentive Plan"), reserving 6,000,000 shares
of Arch Coal common stock for awards to officers and other selected key
management employees of the Company. The Company Incentive Plan provides
the Board of Directors with the flexibility to grant stock options, stock
appreciation rights (SARs), restricted stock awards, restricted stock
units, performance stock or units, merit awards, phantom stock awards and
rights to acquire stock through purchase under a stock purchase program
("Awards"). Awards the Board of Directors elect to pay out in cash do not
count against the 6,000,000 shares authorized in the 1997 Stock Incentive
Plan.
Stock options generally become exercisable in full or in part one year from
the date of grant and are granted at a price equal to 100% of the fair
market value of the stock on the date of grant. SARs entitle employees to
receive a payment equal to the appreciation in market value of the stated
number of common shares from the SARs' exercise price to the market value
of the shares on the date of its exercise. Unexercised options and SARs
lapse 10 years after the date of grant. Restricted stock awards and
restricted stock units entitle employees to purchase shares or stock units
at a nominal cost. Such awards entitle employees to vote shares acquired
and to receive any dividends thereon, but such shares cannot be sold or
transferred and are subject to forfeiture if employees terminate their
employment prior to the prescribed period, which can be from one to five
years. Restricted stock units generally carry the same restrictions and
potential forfeiture, but are generally paid in cash upon vesting. Merit
awards are grants of stock without restriction and at a nominal cost.
Performance stock or unit awards can be earned by the recipient if the
Company meets certain pre-established performance measures. Until earned,
the performance awards are nontransferable, and when earned, performance
awards are payable in cash, stock, or restricted stock as determined by the
Company's Board of Directors. Phantom stock awards are based on the
appreciation of hypothetical underlying shares or the earnings performance
of such shares and may be paid in cash or in shares of common stock.
As of December 31, 2000, performance units and stock options were the only
types of awards granted. As of December 31, 2000, 2.1 million performance
units had been granted under the plan. The performance awards will be
earned by participants based on Company performance for .4 million and 1.7
million performance units for the years 1998 through 2001 and 2000 through
2003, respectively. The Company accrues for anticipated awards to be paid
out in cash over the life of the award. Information regarding stock options
under the Company Incentive Plan is as follows for the years ended December
31, 2000, 1999 and 1998:
2000 1999 1998
Weighted Weighted Weighted
Common Average Common Average Common Average
(in thousands except per share data) Shares Price Shares Price Shares Price
==========================================================================================================================
Options outstanding at January 1 1,809 $ 19.33 1,128 $ 24.86 926 $ 25.23
Granted 62 9.44 744 10.69 360 22.88
Exercised (9) 10.69 - - (48) 14.50
Canceled (273) 18.61 (63) 16.28 (110) 25.88
--------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31 1,589 19.11 1,809 19.33 1,128 24.86
==========================================================================================================================
Options exercisable at December 31 965 $ 23.57 837 $ 24.77 600 $ 25.04
Options available for grant at December 31 4,305 4,094 4,775
22
The Company applies APB 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for the Company Incentive Plan.
Accordingly, no compensation expense has been recognized for the fixed
stock option portion of the Company Incentive Plan. Had compensation
expense for the fixed stock option portion of the Company Incentive Plan
been determined based on the fair value at the grant dates for awards under
this plan consistent with the method of FAS 123, Accounting for Stock-Based
Compensation, the Company's net income (loss) and earnings (loss) per
common share would have been changed to the pro forma amounts as indicated
in the table below. The after-tax fair value of options granted in 2000,
1999 and 1998 was determined to be $0.2 million, $2.9 million and $2.3
million, respectively, using the Black-Scholes option pricing model and the
weighted average assumptions noted below. For purposes of these pro forma
disclosures, the estimated fair value of the options is recognized as
compensation expense over the options' vesting period. The stock options
granted in 2000, 1999 and 1998 vest ratably over three, four and three
years, respectively.
Year ended December 31 (in millions except per share data) 2000 1999 1998
=================================================================================================
As reported
Net income (loss) $ (12.7) $(346.3) $ 30.0
Basic and diluted earnings (loss) per share (.33) (9.02) .76
Pro forma (unaudited)
Net income (loss) $ (14.1) $(347.7) $ 29.3
Basic and diluted earnings (loss) per share (.37) (9.06) .74
Weighted average fair value per share of options granted $ 4.06 $ 4.13 $ 7.22
Assumptions (weighted average)
Risk-free interest rate 5.1% 6.6% 6.0%
Expected dividend yield 2.0% 2.0% 2.0%
Expected volatility 51.2% 41.4% 31.8%
Expected life (in years) 5.0 5.0 5.0
The table below shows pertinent information on options outstanding at December
31, 2000:
(Options in thousands) Options Outstanding Options Exercisable
Weighted Average Weighted
Remaining Weighted Average
Range of Number Contractual Average Number Exercise
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Price
=====================================================================================================================
$ 8 - $11 662 8.29 $10.58 122 $10.67
$22 - $23 479 5.68 22.56 395 22.49
$25 - $35 448 4.57 28.05 448 28.05
---------------------------------------------------------------------------------------------------------------------
$ 8 - $35 1,589 6.46 $19.11 965 $23.57
23
16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company places its cash equivalents in investment-grade short-term
investments and limits the amount of credit exposure to any one commercial
issuer.
The Company markets its coal principally to electric utilities in the
United States. Sales to foreign countries are immaterial. As of December
31, 2000 and 1999, accounts receivable from electric utilities located in
the United States totaled $112.2 million and $120.2 million, respectively.
Generally, credit is extended based on an evaluation of the customer's
financial condition, and collateral is not generally required. Credit
losses are provided for in the financial statements and historically have
been minimal.
The Company is committed under long-term contracts to supply coal that
meets certain quality requirements at specified prices. These prices are
generally adjusted based on indices. Quantities sold under some of these
contracts may vary from year to year within certain limits at the option of
the customer. The Company and its operating subsidiaries sold approximately
105.5 million tons of coal in 2000. Approximately 79% of this tonnage was
sold under long-term contracts (contracts having a term of greater than one
year) accounting for 78% of the Company's total revenue. Prices for coal
sold under long-term contracts ranged from $3.45 to $52.95 per ton.
Long-term contracts ranged in remaining life from one to 18 years. Some of
these contracts include pricing which is above and, in some cases,
materially above current market prices. The Company currently supplies coal
under long-term coal supply contracts with one customer which have price
renegotiation or modification provisions that take effect in mid-2001. The
prices for coal shipped under these contracts are materially above the
current market price for similar type coal. For the year ended December 31,
2000, approximately $18.4 million of the Company's operating income related
to these contracts. The Company expects income from operations to be
reduced by approximately one-half of the operating income attributable to
these contracts in 2001 and by the full amount of this operating income in
2002. These amounts are predicated on current market pricing and will
change with market conditions. Sales (including spot sales) to major
customers were as follows:
Year ended December 31 (in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
AEP $188,129 $157,278 $195,682
Southern Company 161,553 163,826 170,452
24
17. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per common share:
Year ended December 31 (in thousands except per share data) 2000 1999 1998
===============================================================================================================================
Numerator:
Income (loss) before extraordinary loss and cumulative effect of accounting change $ (12,736) $ (350,093) $ 31,501
Extraordinary loss from the extinguishment of debt, net of taxes - - (1,488)
Cumulative effect of accounting change, net of taxes - 3,813 -
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12,736) $ (346,280) $ 30,013
===============================================================================================================================
Denominator:
Weighted average shares-denominator for basic 38,164 38,392 39,626
Dilutive effect of employee stock options - - 25
-------------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares-denominator for diluted 38,164 38,392 39,651
===============================================================================================================================
Basic and diluted earnings (loss) per common share before
extraordinary loss and cumulative effect of accounting change $ (.33) $ (9.12) $ .79
===============================================================================================================================
Basic and diluted earnings (loss) per common share $ (.33) $ (9.02) $ .76
===============================================================================================================================
At December 31, 2000, 1999 and 1998, 1.6 million, 1.8 million and 1.1
million shares, respectively, were not included in the diluted per share
calculation since the exercise price is greater than the average market
price.
18. SALE AND LEASEBACK
On June 30, 2000, the Company sold several shovels and continuous miners
for $14.9 million and leased back the equipment under operating and capital
leases. The proceeds of the sales were used to pay down debt and for
general corporate purposes. The shovels have been leased over a period of
five years, while the continuous miners have been leased with terms ranging
from two to five years. The leases contain renewal options at lease
termination and purchase options at amounts approximating fair value at
lease termination. The gain on the sale and leaseback of $1.5 million was
deferred and is being amortized over the base term of the lease as a
reduction of lease expense.
On January 29, 1998, the Company sold mining equipment for approximately
$74.2 million and leased back the equipment under an operating lease with a
term of three years. This included the sale and leaseback of equipment
purchased under an existing operating lease that expired on the same day.
The proceeds of the sale were used to purchase the equipment under the
expired lease for $28.3 million and to pay down debt. At the end of the
lease term, the Company had the option to renew the lease for two
additional one-year periods or purchase the equipment. Alternatively, the
equipment could have been sold to a third party. The gain on the sale and
25
leaseback of $10.7 million was deferred and is being amortized over the
base term of the lease as a reduction of rental expense. Effective April 1,
1999 and February 4, 2000, the Company purchased for $14.4 million and
$10.3 million, respectively, several pieces of equipment under lease that
were included in this transaction. A pro-rata portion of the deferred gain,
or $3.4 million, was offset against the cost of the assets. On May 17,
2000, the Company purchased the remaining assets under the lease for $34.7
million, which resulted in the termination of the lease. The remaining
deferred gain of $1.2 million was offset against the cost of the assets.
19. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company receives certain services
and purchases fuel, oil and other products on a competitive basis from
subsidiaries of Ashland Inc., which totaled $3.6 million in 2000, $4.8
million in 1999 and $7.2 million in 1998. Management believes that charges
between the Company and Ashland Inc. for services and purchases were
transacted on terms equivalent to those prevailing among unaffiliated
parties. At December 31, 2000, Ashland Inc. owned approximately 12% of the
Company's outstanding shares of common stock. On August 3, 2000, the
Company received a written notice from Ashland Inc. pursuant to which
Ashland Inc. exercised its demand registration rights under a Registration
Rights Agreement, dated April 4, 1997, by and among the Company, Ashland
Inc., Carboex International, Limited (now Carboex, S.A.) and the certain
Hunt entities and requested that its remaining 4,756,968 shares be sold by
means of an underwritten offering. Such shares were sold subsequent to
year-end.
As described in Note 1, the Company has a 65% ownership interest in Canyon
Fuel which is accounted for on the equity method. The Company receives
administration and production fees from Canyon Fuel for managing the Canyon
Fuel operations. The fee arrangement is calculated annually and is approved
by the Canyon Fuel Management Board. The production fee is calculated on a
per-ton basis, while the administration fee represents the costs incurred
by Arch Coal employees related to Canyon Fuel administrative matters. The
fees recognized as other income by the Company and as expense by Canyon
Fuel were $7.4 million, $7.0 million and $4.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
20. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, land and various other properties under
noncancelable long-term leases, expiring at various dates. Rental expense
related to these operating leases amounted to $22.7 million in 2000, $42.2
million in 1999 and $28.0 million in 1998. The decrease in rental expense
is the result of the purchase of several assets during 2000 out of a sale
and leaseback arrangement entered into in 1998 (see additional discussion
in Note 18, "Sale and Leaseback"). In addition, the Company recorded an
obligation for non-cancelable lease payments at its Dal-Tex operation
during 1999 (see additional discussion in Note 2, "Changes in Estimates and
Other Non-recurring Revenues and Expenses"). The Company has also entered
into various non-cancelable royalty lease agreements and federal lease
bonus payments under which future minimum payments are due. On October 1,
1998, the Company was the successful bidder in a federal auction of certain
mining rights in the 3,546- acre Thundercloud tract in the Powder River
Basin of Wyoming. The Company's lease bonus bid amounted to $158 million
for the tract, of which $31.6 million was paid on October 1, 1998 and $31.6
million was paid on January 3, 2000. The remaining lease bonus payments are
reflected below under the caption "Royalties." The tract contains
approximately 412 million tons of demonstrated coal reserves and is
contiguous with the Company's Black Thunder mine. Geological surveys
performed by outside consultants indicate that there are sufficient
reserves relative to these properties to permit recovery of the Company's
investment.
26
Minimum payments due in future years under these agreements in effect at
December 31, 2000 are as follows:
Operating
Leases and Capital
(in thousands) Leases Royalties Leases
========================================================================================================
2001 $ 16,990 $ 60,050 $ 4,226
2002 12,431 62,773 3,756
2003 10,556 62,603 3,756
2004 6,619 30,205 3,756
2005 6,506 26,807 1,466
Thereafter 15,616 177,089 -
--------------------------------------------------------------------------------------------------------
$ 68,718 $419,527 $ 16,960
========================================================================================================
Less amount representing interest $ 3,087
-------------------------------------------------------------------------------------------------------
Present value of net minimum lease payments under capital leases 13,873
Current portion 2,525
--------------------------------------------------------------------------------------------------------
Long-term capitalized lease obligations $ 11,348
========================================================================================================
Property, plant and equipment at year-end include the following amounts for
capitalized leases:
December 31 (in thousands) 2000
========================================================================================================
Plant and equipment $ 15,228
Accumulated amortization 1,475
--------------------------------------------------------------------------------------------------------
$ 13,753
========================================================================================================
The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. As of December 31, 2000, the
Company had accrued $2.5 million related to a settlement with the U.S.
Department of the Interior associated with the 1996 impoundment failure at Lone
Mountain. The Company expects to make the settlement payment during the first
quarter of 2001. After conferring with counsel, it is the opinion of management
that the ultimate resolution of these claims, to the extent not previously
provided for, will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of the Company.
The Company holds a 17.5% general partnership interest in Dominion Terminal
Associates ("DTA"), which operates a ground storage-to-vessel coal
transloading facility in Newport News, Virginia. DTA leases the facility
from Peninsula Ports Authority of Virginia ("PPAV") for amounts sufficient
to meet debt-service requirements. Financing is provided through $132.8
million of tax-exempt bonds issued by PPAV (of which the Company is
responsible for 17.5%, or $23.2 million) which mature July 1, 2016. Under
the terms of a throughput and handling agreement with DTA, each partner is
charged its share of cash operating and debt-service costs in exchange for
the right to use its share of the facility's loading capacity and is
required to make periodic cash advances to DTA to fund such costs. On a
cumulative basis, costs exceeded cash advances by $10.9 million at December
31, 2000 (included in other noncurrent liabilities). Future payments for
fixed operating costs and debt service are estimated to approximate $3.3
million annually through 2015 and $26.0 million in 2016.
27
In connection with the Arch Western transaction, the Company entered into
an agreement pursuant to which the Company agreed to indemnify another
member of Arch Western against certain tax liabilities in the event that
such liabilities arise as a result of certain actions taken prior to June
1, 2013, including the sale or other disposition of certain properties of
Arch Western, the repurchase of certain equity interests in Arch Western by
Arch Western or the reduction under certain circumstances of indebtedness
incurred by Arch Western in connection with the Arch Western transaction.
Depending on the time at which any such indemnification obligation was to
arise, it could have a material adverse effect on the business, results of
operations and financial condition of the Company.
21. CASH FLOW
The changes in operating assets and liabilities as shown in the consolidated
statements of cash flows are comprised of the following:
Year ended December 31 (in thousands) 2000 1999 1998
========================================================================================
Decrease (increase) in operating assets:
Receivables $ 8,194 $ 38,356 $ (35,464)
Inventories 14,452 5,188 6,723
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (4,515) (15,593) 30,229
Income taxes (2,683) (76,952) (35,057)
Accrued postretirement benefits other than pension (7,330) 440 6,813
Accrued reclamation and mine closure (10,941) (20,767) 1,936
Accrued workers' compensation (26,597) (143) 149
----------------------------------------------------------------------------------------
Changes in operating assets and liabilities $ (29,420) $ (69,471) $ (24,671)
========================================================================================
22. ACCOUNTING DEVELOPMENT
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. FAS 133
permits early adoption as of the beginning of any fiscal quarter after its
issuance. FAS 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. FAS 133 will not
have a significant impact on the financial position or results of
operations of the Company.
28
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for 2000 and 1999 is summarized below:
(in thousands) March 31/(1)/ June 30/(1)/ Sept. 30/(1)/ Dec. 31/(1)/
================================================================================================================================
2000:
Coal sales, equity income and other revenues $ 357,801 $ 340,153 $ 359,289 $ 347,378
Income from operations 2,898 19,966/(2)(3)/ 15,851 35,269/(4)(5)/
Net income (loss) (15,027) (2,125) (5,198) 9,614
Basic and diluted earnings (loss) per common share/(9)/ (0.39) (0.06) (0.14) 0.25
1999:
Coal sales, equity income and other revenues $ 421,126 $ 391,292 $ 382,236 $ 372,728
Income (loss) from operations 13,983/(6)/ 20,739 12,602 (374,350)/(8)/
Income (loss) before cumulative effect of accounting change (2,380) 2,459 (1,820) (348,352)
Net income (loss) 1,433/(7)/ 2,459 (1,820) (348,352)
Basic and diluted earnings (loss) per
common share before cumulative effect of accounting change (0.06) 0.06 (0.05) (9.12)
Basic and diluted earnings (loss) per common share/(9)/ 0.04 0.06 (0.05) (9.12)
(1) At the West Elk underground mine in Gunnison County, Colorado,
following the detection of combustion-related gases in a portion of
the mine, the Company idled its operation on January 28, 2000. While
it was idled, the Company incurred between $4 million and $6 million
per month in after-tax losses at that mine. On July 12, 2000, after
controlling the combustion-related gases, the Company resumed
production at the West Elk mine and started to ramp up to normal
levels of production. During the ramp-up process, the mine experienced
geological conditions that hindered production during the fourth
quarter. The Company recognized partial pre-tax insurance settlements
of $12.0 million during each of the second and third quarters of 2000
and $7.0 million during the fourth quarter of 2000 which covered a
portion of the losses incurred at West Elk during 2000. The Company
expects to receive additional insurance payments under its property
and business interruption policy. However, any additional recovery
will depend on resolution of the claim with the insurance carrier, the
timing of which is uncertain.
(2) During the second quarter of 2000, as a result of permit revisions at
Arch of Illinois, the Company reduced its reclamation liability at
Arch of Illinois by $7.8 million (pre-tax).
(3) During the second quarter of 2000, the IRS issued a notice outlining
the procedures for obtaining tax refunds on certain excise taxes paid
by the industry on export sales tonnage. The notice was the result of
a 1998 federal court decision that found such taxes to be
unconstitutional. The Company recorded $12.7 million of pre-tax income
related to these excise tax recoveries.
(4) During the fourth quarter of 2000, as a result of adjustments to
employee postretirement medical benefits, the Company recognized $9.8
million of pre- tax curtailment gains resulting from previously
unrecognized postretirement benefit changes which occurred in prior
years.
(5) During the fourth quarter of 2000, the Company settled certain
workers' compensation liabilities with the State of West Virginia
partially offset by adjusting other workers' compensation liabilities
resulting in a net pre- tax gain of $13.0 million.
(6) During the first quarter of 1999, the Company recorded a charge of
$6.5 million related to severance costs, obligations for
non-cancelable lease payments and a change in the reclamation
liability due to the shut-down of the Company's Dal-Tex operation.
(7) During the first quarter of 1999, the Company changed its depreciation
method on preparation plants and loadouts and recorded a cumulative
effect adjustment which increased income by $3.8 million (net of tax)
from applying the new method for years prior to 1999.
(8) During the fourth quarter of 1999, the Company recorded a one-time
pre-tax charge of $380.9 million to write-down the assets at its
Dal-Tex, Hobet 21 and Coal-Mac operations and write-down certain other
coal reserves in central Appalachia. Included in this charge was a
$16.3 million pre-tax charge related to the restructuring of the
Company's administrative work force and the closure of mines in
Illinois, Kentucky and West Virginia.
(9) The sum of the quarterly earnings (loss) per common share amounts may
not equal earnings (loss) per common share for the full year because
per share amounts are computed independently for each quarter and for
the year based on the weighted average number of common shares
outstanding during each period.
29
SCHEDULE II
ARCH COAL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions(1) Other(2) of Year
----------- ---------- ---------- ------------- -------- -------
Year Ended December 31,
2000.....................
Reserves Deducted from
Asset Accounts.........
Other Assets--Other
Notes and Accounts
Receivable........... 541 -- 482 -- 59
Current Assets--
Supplies Inventory... 23,542 4,223 7,926 -- 19,839
Year Ended December 31,
1999.....................
Reserves Deducted from
Asset Accounts.........
Other Assets--Other
Notes and Accounts
Receivable........... 582 325 366 -- 541
Current Assets--
Supplies Inventory... 23,901 5,966 6,325 -- 23,542
Year Ended December 31,
1998.....................
Reserves Deducted from
Asset Accounts.........
Other Assets--Other
Notes and Accounts
Receivable........... 471 306 195 -- 582
Current Assets--
Supplies Inventory... 17,681 2,292 5,999 9,927 23,901
--------
(1) Reserves utilized, unless otherwise indicated.
(2) Balances acquired in the Arch Western transaction.
30
EXHIBIT INDEX
Exhibit No. Description
---------- ----------------------------------------------------------
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Ernst & Young LLP