UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Year Ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
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Commission File Number: 001-33466
PATRIOT COAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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20-5622045 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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12312 Olive Boulevard, Suite 400 |
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St. Louis, Missouri
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63141 |
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(Address of principal executive offices)
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(Zip Code) |
(314) 275-3600
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01 per share
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New York Stock Exchange |
Preferred Share Purchase Rights
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
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Yes þ No o |
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
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Yes
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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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
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Yes
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Aggregate market value of the voting stock held by non-affiliates (shareholders who are not
directors or executive officers) of the Registrant, calculated using the closing price on June 30,
2009: Common Stock, par value $0.01 per share, $571.0 million.
Number of shares outstanding of each of the Registrants classes of Common Stock, as of February
19, 2010: Common Stock, par value $0.01 per share, 90,870,249 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the Companys Annual Meeting of
Stockholders to be held on May 13, 2010 (the Companys 2010 Proxy Statement) are incorporated by
reference into Part III hereof. Other documents incorporated by reference in this report are
listed in the Exhibit Index of this Form 10-K.
TABLE OF CONTENTS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report and other materials filed or to be filed by Patriot Coal Corporation
include statements of our expectations, intentions, plans and beliefs that constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe
harbor protection provided by those sections. You can identify these forward-looking statements
by the use of forward-looking words such as outlook, believes, expects, potential,
continues, may, will, should, seeks, approximately, predicts, intends, plans,
estimates, anticipates, foresees or the negative version of those words or other
comparable words and phrases. Any forward-looking statements contained in this report are based
upon our historical performance and on current plans, estimates and expectations. The inclusion
of this forward-looking information should not be regarded as a representation by us or any
other person that the future plans, estimates or expectations contemplated by us will be
achieved.
Without limiting the foregoing, all statements relating to our future outlook, anticipated
capital expenditures, future cash flows and borrowings, and sources of funding are
forward-looking statements. These forward-looking statements are based on numerous assumptions
that we believe are reasonable, but are subject to a wide range of uncertainties and business
risks and actual risks may differ materially from those discussed in the statements. Among the
factors that could cause actual results to differ materially are:
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price volatility and demand, particularly in higher margin products; |
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geologic, equipment and operational risks associated with mining; |
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changes in general economic conditions, including coal, power and steel market
conditions; |
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availability and costs of competing energy resources; |
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regulatory and court decisions including, but not limited to, those impacting
permits issued pursuant to the Clean
Water Act; |
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environmental laws and regulations including those affecting our operations and
those affecting our customers
coal usage; |
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developments in greenhouse gas emission regulation and treatment, including any
development of commercially
successful carbon capture and storage techniques or market-based mechanisms, such as a
cap-and-trade system, for regulating greenhouse gas emissions; |
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coal mining laws and regulations; |
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labor availability and relations; |
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changes in postretirement benefit obligations; |
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changes to contribution requirements to multi-employer retiree healthcare and pension plans; |
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reductions of purchases or
deferral of shipments by major customers; |
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availability and costs of credit, surety bonds and letters of credit; |
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customer performance and credit risks; |
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inflationary trends, including those impacting materials used in our business; |
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worldwide economic and political conditions; |
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downturns in consumer and company spending; |
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supplier and contract miner performance, and the availability and cost of key equipment
and commodities; |
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availability and costs of transportation; |
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difficulty in implementing our business strategy; |
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our ability to replace proven and probable coal reserves; |
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the outcome of commercial negotiations involving sales contracts or other transactions; |
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our ability to respond to changing customer preferences; |
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our dependence on Peabody Energy for a significant portion of our revenues; |
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failure to comply with debt covenants; |
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the outcome of pending or future litigation; |
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the effects of mergers, acquisitions and divestitures, including our ability to
successfully integrate mergers and acquisitions; |
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weather patterns affecting energy demand; |
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competition in our industry; |
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interest rate fluctuation; |
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wars and acts of terrorism or sabotage; |
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impact of pandemic illness; and |
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other factors, including those discussed in Legal Proceedings, set forth in Item 3 of
this report. |
2
These factors should not be construed as exhaustive and should be read in conjunction with
the other cautionary statements that are included in Item 1A. Risk Factors of this report. If
one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what we projected.
Consequently, actual events and results may vary significantly from those included in or
contemplated or implied by our forward-looking statements. We do not undertake any obligation
(and expressly disclaim any such obligation) to update or revise the forward-looking statements,
except as required by federal securities laws.
PART I
Unless the context indicates otherwise, all references in this report to Patriot, the
Company, us, we, or our include Patriot Coal Corporation and our subsidiaries (Patriot).
Overview
We are a leading producer of thermal coal in the eastern United States (U.S.), with
operations and coal reserves in Appalachia and the Illinois Basin. We are also a leading U.S.
producer of metallurgical quality coal. Our principal business is the mining, preparation and
sale of thermal coal, also known as steam coal, for sale primarily to electric utilities, and
metallurgical coal, for sale to steel mills and independent coke producers.
Our operations consist of fourteen current mining complexes, which include company-operated
mines, contractor-operated mines and coal preparation facilities. The Appalachia and Illinois
Basin segments consist of our operations in West Virginia and Kentucky, respectively. We control
approximately 1.8 billion tons of proven and probable coal reserves. Our proven and probable
coal reserves include metallurgical coal and medium and high-Btu thermal coal, with low, medium
and high sulfur content.
We ship coal to electric utilities, industrial users, steel mills and independent coke
producers. In 2009, we sold 32.8 million tons of coal, of which 83% was sold to domestic
electric utilities and industrial customers and 17% was sold to domestic and global steel and
coke producers. Coal is shipped via various company-owned and third-party loading facilities,
multiple rail and river transportation routes and ocean-going vessels.
Effective October 31, 2007, Patriot was spun off from Peabody Energy Corporation (Peabody)
and became a separate, public company traded on the New York Stock Exchange (symbol PCX). This
transaction is referred to in this Form 10-K as the distribution or the spin-off. The
spin-off from Peabody was accomplished through a dividend of all outstanding shares of Patriot.
On July 23, 2008, Patriot completed the acquisition of Magnum Coal Company (Magnum). Magnum
was one of the largest coal producers in Appalachia, operating eight mining complexes with
production from surface and underground mines in Appalachia and controlling more than 600
million tons of proven and probable coal reserves. Magnum results are included as of the date of
the acquisition.
Mining Operations
Our mining operations and coal reserves are as follows:
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Appalachia. In southern West
Virginia, we have ten mining
complexes located in Boone, Clay,
Lincoln, Logan and Kanawha counties,
and in northern West Virginia, we
have one complex located in
Monongalia County. As part of a
comprehensive strategic review of
operations upon the acquisition of
Magnum, we idled operations at our
Jupiter mining complex (December
2008) and our Remington mining
complex (March 2009). Additionally,
in response to the weakened coal
markets, we announced the idling of
our Black Oak mine (January 2009),
the deferral of the opening of our Blue
Creek mining complex, and the suspension of our
Samples surface mine (August 2009).
In Appalachia, we sold 25.8 million
tons of coal in the year ended
December 31, 2009. As of December
31, 2009, we controlled 1.2 billion
tons of proven and probable coal
reserves in Appalachia, of which 488
million tons were assigned to
current operations. |
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Illinois Basin. In the Illinois
Basin, we have three complexes
located in Union and Henderson
counties in western Kentucky. In the
Illinois Basin, we sold 7.0 million
tons of coal in the year ended
December 31, 2009. As of December
31, 2009, we controlled 646 million
tons of proven and probable coal
reserves in the Illinois Basin, of
which 126 million tons were assigned
to current operations. |
3
The following table provides the location and summary information of our operations as
of December 31, 2009.
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Mining |
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2009 Tons |
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Location |
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Complex |
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Mine(s) |
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Method(1) |
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Met/Steam |
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Sold(2) |
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Appalachia |
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Big Mountain |
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Big Mountain No. 16, Contractor |
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CM |
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Steam |
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2,072 |
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Blue Creek |
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Blue Creek No. 1, Blue Creek No. 2 |
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CM |
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Steam |
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134 |
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Campbells Creek |
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Campbells Creek No. 6, Campbells Creek No. 7 |
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CM |
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Steam |
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1,051 |
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Corridor G |
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Job 21, Hill Fork |
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TS, DL |
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Steam |
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3,565 |
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Kanawha Eagle |
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Eagle, Coalburg No. 1, Coalburg No. 2 |
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CM |
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Met/Steam |
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1,881 |
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Logan County |
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Guyan |
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TS |
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Steam |
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2,500 |
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Paint Creek |
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Samples, Winchester |
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TS, HW, CM |
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Met/Steam |
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2,071 |
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Panther |
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Panther |
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LW, CM |
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Met/Steam |
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2,023 |
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Remington(3) |
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Stockburg No. 2, Deskins, Wildcat |
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CM, TS, HW |
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Steam |
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182 |
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Rocklick |
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Harris No. 1, Black Oak, Contractor |
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TS, CM |
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Met/Steam |
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1,658 |
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Wells |
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Rivers Edge, Contractor |
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CM |
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Met |
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3,315 |
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Federal |
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Federal No. 2 |
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LW, CM |
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Steam |
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3,522 |
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Purchased coal |
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N/A |
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N/A |
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N/A |
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1,876 |
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Subtotal |
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25,850 |
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Illinois Basin |
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Bluegrass |
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Patriot, Freedom |
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TS, CM |
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Steam |
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2,433 |
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Dodge Hill |
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Dodge Hill No. 1 |
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CM |
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Steam |
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888 |
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Highland |
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Highland No. 9 |
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CM |
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Steam |
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3,665 |
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Subtotal |
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6,986 |
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Total |
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32,836 |
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(1) |
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LW = Longwall, CM = Continuous Miner, TS = Truck-and-Shovel, DL = Dragline, HW = Highwall. |
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Tons sold, presented in thousands, for each plant were the same as actual annual plant
production in 2009, subject to stockpile variations. |
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(3) |
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The Remington mining complex was idled in March 2009. |
Longwall mining. Longwall mining is an underground mining method that uses hydraulic
shields, varying from five feet to twelve feet in height, to support the roof of the mine while
a shearing machine traverses the coal face removing a two to three foot slab of coal with each
pass. An armored face conveyer then moves the coal to a standard deep mine conveyer system for
delivery to the surface. Longwall mining is highly productive, but it is effective only for
large blocks of medium to thick coal seams.
Continuous miner mining. Continuous miner mining is an underground method in which airways
and transportation entries are developed by continuous mining machines, leaving pillars to
support the roof. Continuous miner mining is also referred to as room-and-pillar mining.
Pillars may subsequently be extracted to maximize the reserve recovery. This method is often
used to mine smaller coal reserves or thin seams.
Truck-and-shovel/loader mining. Truck-and-shovel/loader mining is a surface mining method
that uses large electric- or diesel-powered shovels to remove overburden, which is used to
backfill pits after coal removal. Loading equipment is used to load coal into haul trucks for
transportation to the preparation plant or transportation loading facility. Productivity depends
on equipment, geological composition and the ratio of overburden to coal.
Dragline mining. Dragline mining is an efficient surface method that uses large capacity
draglines to remove overburden to expose the coal seams. In Central Appalachia, the seams to be
mined above the dragline are pre-stripped with support equipment in order to create a bench upon
which the dragline can operate. The coal is loaded into haul trucks for transportation to a
preparation plant or transportation to a loading facility.
Highwall mining. Highwall mining is a surface mining method generally utilized in
conjunction with truck-and-shovel/loader surface mining. As the highwall is exposed by the
truck-and-shovel/loader operation, a modified continuous miner with an attached auger conveyor
system cuts horizontal passages from the highwall into the coal seam. These passages can
penetrate to a depth of up to 1,600 feet.
4
Appalachian Mining Operations
Our Appalachian Mining Operations include eleven current mining complexes in West Virginia
and the Remington complex, which was idled in March 2009.
Appalachia
Big Mountain
The Big Mountain mining complex is sourced by one company-operated underground mine, Big
Mountain No. 16, and multiple contractor-operated underground mines located in southern West
Virginia. Coal is produced utilizing continuous mining methods. The coal is sold on the thermal
market and is transported from the preparation plant to customers via CSX rail or trucked to a
river and placed on barges. Coal is produced from the Coalburg seam with average thickness of
nine feet and the Dorothy seam with average thickness of six feet. Most of the employees at the
company-operated mine are represented by the United Mine Workers of America (UMWA).
Blue Creek
The Blue Creek mining complex is located in southern West Virginia and consists of two
company-operated underground mines, Blue Creek No. 1 and Blue Creek No. 2. One of the mines
became operational in December 2009 and the other is expected to begin production in the first
quarter of 2010. Both mines operate in the Stockton seam, with an average thickness of ten feet.
The complex utilizes continuous mining methods and a third-party-owned on-site preparation
facility. Coal produced at the Blue Creek complex is sold on the thermal market and is loaded
onto trucks for transportation to a barge loading facility on the Kanawha River. The employees
at the company-operated mines are not represented by a union.
Campbells Creek
The Campbells Creek mining complex consists of two underground mines located in southern
West Virginia. The company-operated Campbells Creek No. 7 mine operates in the Winifrede seam,
with an average mining thickness of seven and one half feet. The contractor-operated Campbells
Creek No. 6 mine operates in the Stockton seam, and has an average mining thickness of seven
feet. All mines in the Campbells Creek mining complex utilize the continuous mining method.
After processing, the coal is transported by truck to the Kanawha River for loading onto barges
that deliver the coal to customers. Coal produced at Campbells Creek mining complex is sold on
the thermal market. The employees at the company-operated mine are not represented by a union.
Corridor G
The Corridor G mining complex consists of two company-operated surface mines, Job 21 and
Hill Fork, located in southern West Virginia. Coal is sourced from the Kittanning, Stockton and
Coalburg seams, with a 16-to-1 average overburden to coal ratio. Corridor G utilizes
truck-and-shovel/loader and dragline mining. Coal produced at this complex is transferred by
belt to the on-site preparation plant and loadout facility. After processing, the coal is
transported to customers by CSX rail or trucked to a river and placed on barges. Coal produced
at the Corridor G mining complex is sold on the thermal market. Most of the employees at the
Corridor G mining complex are represented by the UMWA.
Kanawha Eagle
The Kanawha Eagle complex, which is contractor-operated, is located in southern West
Virginia and is sourced by the Eagle, Coalburg No. 1 and Coalburg No. 2 underground mines. All
three mines utilize continuous mining methods. Processed coal is sold on both metallurgical and
thermal markets and is transported via CSX rail directly to the
customer or by private line railroad to the Kanawha River and placed on
barges. Coal is produced from the Coalburg
seam, with average thickness of six feet, and the Eagle seam, with average thickness of four
feet.
5
Logan County
The Logan County mining complex consists of one company-operated surface mine, Guyan,
located in southern West Virginia. Coal from this complex is sold on the thermal market. The
Guyan mine utilizes the truck-and-shovel/loader mining method. Coal produced at this complex is
transferred by truck to its on-site preparation plant and loadout facility. Coal is principally
transported from the loadout facility to customers by CSX rail. Coal is sourced from the
Freeport, Kittanning, Stockton and Coalburg seams, with a 15-to-1 average overburden to coal
ratio. Certain employees at the Logan County complex are represented by the UMWA.
Paint Creek
The Paint Creek mining complex consists of one surface mine and one underground mine
located in southern West Virginia. Both mines are company-operated. The surface mine, Samples,
utilizes truck-and-shovel/loader and highwall mining methods, while the underground mine,
Winchester, utilizes the continuous mining method. The Winchester mine operates in the Hernshaw
seam, with an average mining thickness of six feet. Coal from Samples is sourced from the
Freeport, Kittanning, Stockton and Coalburg seams, with a 16.5-to-1 average overburden to coal
ratio. We announced the idling of our Samples mine in August 2009. After processing, coal is
transported from the on-site preparation plant and loadout facility to customers by CSX rail.
Coal can also be trucked approximately 14 miles to the Kanawha River and transported by barge.
Coal from this complex can be sold on either the metallurgical and thermal markets. The
employees at the Paint Creek complex are not represented by a union.
Panther
The Panther mining complex consists of one underground mine, Panther, located in southern
West Virginia. Coal is produced utilizing the longwall mining and continuous mining methods. All
coal is processed at an on-site preparation plant and then transported via truck to barges on
the Kanawha River or via CSX rail. Coal produced at the Panther complex is sold on both thermal
and metallurgical markets. Coal is produced from the Eagle seam, with an average mining
thickness of seven feet. The employees at the Panther complex are not represented by a union.
Remington
The Remington mining complex is located in southern West Virginia and consists of two
underground mines and one surface mine. As part of a comprehensive strategic review of
operations upon the acquisition of Magnum, the Remington complex was idled in March 2009.
Rocklick
The Rocklick mining complex is located in southern West Virginia and is sourced by two
company-operated underground mines, Harris No. 1 and Black Oak, and contractor-operated
underground and surface mines. Coal at the Rocklick mining complex is produced utilizing
continuous mining methods at underground mines and the truck-and-shovel/loader mining method at
surface mines. All Harris No. 1 and Black Oak coal is sold on the metallurgical market and
contractor processed coal is sold on either the thermal or metallurgical markets. Rocklick has
the capability to transport coal on both the CSX and the Norfolk Southern railroads.
Metallurgical coal at Harris No. 1 is produced from the Eagle seam, with average thickness of
four feet, if only the lower split is mined, or seven feet, if both seam splits are mined.
Thermal coal is produced from the Kittanning, Stockton, Clarion and Coalburg seams, with an
18-to-1 average overburden to coal ratio. In January 2009, the Black Oak mine was suspended due
to lower demand for metallurgical coal. Additionally, the contractor-operated surface mines were
idled at the Rocklick complex during 2009. Most of the employees at the company-operated mines
are represented by the UMWA.
Wells
The Wells mining complex is located in southern West Virginia and is sourced by one
company-operated underground mine, Rivers Edge, and multiple contractor-operated underground
mines. Coal is produced utilizing continuous mining methods. The majority of coal currently
produced at Wells is sold on the metallurgical market and is transported to customers via CSX
rail. Thermal coal can also be processed and sold at this operation. Rivers Edge mine produces coal
from the Powellton seam, with average thickness of approximately eight feet. Coal is also
produced from the Black Stallion contract mine in the Eagle seam, with average thickness of six
feet. Contract mines produce coal from the No. 2 Gas, Winifrede, Powellton and Lower Chilton
seams, each with an average thickness of five to eight feet. Most of the employees at the
company-operated facilities of the Wells mining complex are represented by the UMWA.
6
Federal
The Federal mining complex is located in northern West Virginia and is sourced by one
company-operated underground mine, Federal No. 2, utilizing longwall and continuous mining
methods. All coal produced at Federal is sold on the high-Btu thermal market and is transported
to customers via the CSX and Norfolk Southern railroads either directly or via barges on the
Ohio River. Coal is produced from the Pittsburgh seam, with average thickness of seven feet.
Most of the employees at the Federal mining complex are represented by the UMWA.
Illinois Basin Mining Operations
Our Illinois Basin Mining Operations include three mining complexes in western Kentucky.
Illinois Basin
Bluegrass
The Bluegrass mining complex is located in western Kentucky and is sourced by two
company-operated mines, Freedom, an underground mine, and Patriot, a surface mine. Coal at
Freedom is produced utilizing continuous mining methods, while coal at Patriot is produced
utilizing the truck-and-shovel/loader mining method. All coal is sold on the thermal market and
is transported via truck or via barge loaded on the Green River. Coal is produced from the
Kentucky No. 9 seam, with average thickness of four feet for the Freedom underground mine, and
with a 15-to-1 average overburden to coal ratio for the Patriot surface mine. The employees at
the Bluegrass mining complex are not represented by a union.
Dodge Hill
The Dodge Hill mining complex is located in western Kentucky and is sourced by one
company-operated underground mine, utilizing continuous mining methods. All coal is sold on the
thermal market and transported via barge on the Ohio River. Coal is produced from the Kentucky
No. 6 seam, with average thickness of four feet. The employees at the Dodge Hill mining complex
are not represented by a union.
Highland
The Highland mining complex is located in western Kentucky and is sourced by one
company-operated underground mine, Highland No. 9, utilizing continuous mining methods. All coal
is sold on the thermal market and is transported via barges loaded on the Ohio River. Coal is
produced from the Kentucky No. 9 seam, with average thickness of five feet. Most of the
employees at the Highland complex are represented by the UMWA.
7
Customers and Backlog
As of December 31, 2009, we had a sales backlog of 72.6 million tons of coal, including
backlog subject to price reopener and/or extension provisions. Our coal supply agreements have
remaining terms up to 8 years and an average volume-weighted remaining term of approximately 2.5
years.
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Commitments as of December 31, 2009 |
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2013 and |
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2010 |
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2011 |
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2012 |
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Later |
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Total |
Tons (in millions) |
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29.5 |
|
|
|
19.9 |
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|
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11.3 |
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|
|
11.9 |
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|
|
72.6 |
|
The 2010 commitments represent more than 85% of our currently estimated production for
2010.
In 2009, approximately 83% of our coal sales were under long-term (one year or greater)
contracts. Also in 2009, our coal was sold to over 98 electricity generating and industrial
plants in 8 countries, including the U.S., which is where we have our primary customer base.
We expect to continue selling a significant portion of our coal under supply agreements
with terms of one year or longer. Our approach is to selectively renew, or enter into, new coal
supply contracts when we can do so at prices we believe are favorable. We continue to supply
coal to Peabody under contracts that existed at the date of spin-off, and certain of these
contracts have terms into 2012. As of December 31, 2009, approximately 25% and 19% of our
current projected 2010 and 2011 total production, respectively, was committed under pre-existing
customer relationships with various Peabody subsidiaries, all of which are thermal coal
contracts.
Typically, customers enter into coal supply agreements to secure reliable sources of coal
at predictable prices, while we seek stable sources of revenue to support the investments
required to open, expand and maintain or improve productivity at the mines needed to supply
these contracts. The terms and conditions of coal supply agreements result from competitive
bidding and extensive negotiations with customers. Consequently, the terms and conditions of
these contracts vary significantly in many respects, including price adjustment features, price
reopener terms, coal quality requirements, quantity parameters, permitted sources of supply,
treatment of environmental constraints, extension options, force majeure, and termination and
assignment provisions.
Each contract sets a base price. Some contracts provide for a predetermined adjustment to
base price at times specified in the agreement. Base prices may be adjusted quarterly, annually
or at other periodic intervals for changes in production costs and/or changes due to inflation
or deflation. Changes in production costs may be measured by defined formulas that may include
actual cost experience at the mine as part of the formula. The inflation/deflation adjustments
are measured by public indices, the most common of which is the implicit price deflator for the
gross domestic product as published by the U.S. Department of Commerce. In most cases, the
components of the base price represented by taxes, fees and royalties which are based on a
percentage of the selling price are also adjusted for any changes in the base price and passed
through to the customer.
Most long-term contracts contain provisions to adjust the base price due to new laws or
changes in the language, interpretation or application of existing laws that increase our cost
of performance under such contracts. Buyers often negotiate similar clauses covering changes in
environmental laws. We often negotiate the right to supply coal that complies with a new
environmental requirement to avoid contract termination. Coal supply agreements typically
contain termination clauses if either party fails to comply with the terms and conditions of the
contract, although most termination provisions provide the opportunity to cure defaults.
Price reopener provisions are present in some of our multi-year coal contracts. These
provisions may allow either party to commence a renegotiation of the contract price at various
intervals. In most of the agreements with price reopener provisions, if the parties do not agree
on a new price, the purchaser or seller has an option to terminate the contract. Under some
contracts, we have the right to match lower prices offered to our customers by other suppliers.
Quality and volumes for the coal are stipulated in coal supply agreements, and in some
limited instances buyers have the option to vary annual or monthly volumes, if necessary.
Variations to the quality of coal may lead to adjustments in the contract price. Most coal
supply agreements contain provisions requiring us to deliver coal within certain ranges for
specific coal characteristics such as heat content (Btu), sulfur and ash content, grindability
and ash fusion temperature. Failure to meet these specifications can result in economic
penalties, suspension or cancellation of shipments or termination of the contracts. Coal supply
agreements typically stipulate procedures for sampling, analysis and weighing.
8
In most of our contracts, we have a right of substitution, allowing us to provide coal from
different mines, including third-party production, as long as the replacement coal meets the
contracted quality specifications and is sold at the same delivered cost.
Contract provisions in most cases set out mechanisms for temporary reductions or delays in
coal volumes in the case of a force majeure event, including strikes, adverse mining conditions,
labor shortages, permitting or serious transportation problems that affect the seller or
unanticipated plant outages that may affect the buyer. Most contracts stipulate that this
tonnage can be made up by either mutual agreement or at the option of the nonclaiming party.
Sales and Marketing
We sell coal produced by our operations and third-party producers. We contract with
third-party producers to mine our owned or leased coal reserves on a rate per ton or cost plus
basis. Our sales and marketing group includes personnel dedicated to performing sales functions,
transportation, distribution, market research, contract administration, and credit/risk
management activities.
Transportation
Coal consumed domestically is typically sold at the mine and transportation costs are borne
by the purchaser. At certain locations, we utilize truck, conveyor belt and rail to transport
coal from our mines to docks for transportation to customers via barges. Export coal is usually
sold at the loading port, with purchasers paying ocean freight. Producers usually pay shipping
costs from the mine to the port, trans-loading fees at the port and any applicable vessel
demurrage costs associated with delayed loadings.
Of our 32.8 million tons sold in 2009, we shipped approximately 50% by rail, 41% by barge,
7% by ocean-going vessel and 2% by truck. Our transportation staff manages the loading of coal
via these transportation modes.
Suppliers
The main types of goods we purchase are mining equipment and replacement parts,
steel-related (including roof control) products, belting products, lubricants, fuel and tires.
Although we have many, long, well-established relationships with our key suppliers, we do not
believe that we are dependent on any of our individual suppliers other than for purchases of
certain underground mining equipment. The supplier base providing mining materials has been
relatively consistent in recent years. Purchases of certain underground mining equipment are
concentrated with one principle supplier; however, supplier competition continues to develop.
Competition
The U.S. coal industry is highly competitive, both regionally and nationally. Coal
production in Appalachia and the Illinois Basin totaled approximately 448 million tons in 2009,
with the largest five producers (Alpha Natural Resources, Inc., CONSOL Energy, Inc., Massey
Energy Company, Patriot and Peabody) accounting for 41% of production. In addition to
competition within the eastern U.S. region, coal is transported into the region from the western
U.S. and international producers for purchase by utility customers.
A number of factors beyond our control affect the markets in which we sell our coal.
Continued demand for our coal and the prices obtained by us depend primarily on the coal
consumption patterns of the electricity and steel industries in the U.S. and elsewhere around
the world; the availability, location, cost of transportation and price of competing coal; and
other electricity generation and fuel supply sources such as natural gas, oil, nuclear,
hydroelectric and renewable energy. Coal consumption patterns are affected primarily by the
demand for electricity, environmental and other governmental regulations, and technological
developments. The most important factors on which we compete are delivered price (i.e.,
including transportation costs, which are paid by our customers), coal quality characteristics
and reliability of supply.
Employees & Labor Relations
Relations with our employees and, where applicable, organized labor, are important to our
success. As of December 31, 2009, we had approximately 3,500 employees. Approximately 52% of our
employees at our company operations were represented by an organized labor union and these
operations generated approximately 46% of our 2009 sales volume. Union labor is represented by
the UMWA under labor agreements which expire December 31, 2011. Our represented employees work
at various sites in Appalachia and at the Highland complex in the Illinois Basin.
We operate a training center in Appalachia. Our training center educates our workforce,
particularly our most recent hires, in our rigorous safety standards, the latest in mining
techniques and equipment, and serves as a center for dissemination of mining best practices
across all of our operations. Our training efforts are designed with the intent of attracting
new miners, in large part to replace miners expected to retire in the next few years, and to
develop and retain a productive and safety-oriented workforce.
9
Certain Liabilities
We have significant long-term liabilities for reclamation (also called asset retirement
obligations) and remediation, work-related injuries and illnesses, and retiree healthcare. In
addition, labor contracts with the UMWA and certain arrangements with non-union employees
include long-term benefits, notably healthcare coverage for retired employees and future
retirees and their dependents.
Asset Retirement Obligations
Asset retirement obligations primarily represent the present value of future anticipated
costs to restore surface land to levels equal to or greater than pre-mining conditions, as
required by the Surface Mining Control and Reclamation Act (SMCRA). Asset retirement obligation
expense (which includes liability accretion and asset amortization) for the years ended December
31, 2009, 2008 and 2007 was $29.5 million, $19.3 million, and $20.1 million, respectively. As of
December 31, 2009, our asset retirement obligations of $244.5 million included $183.1 million
related to locations with active mining operations and $61.4 million related to locations that
are closed or inactive.
Remediation Obligations
Remediation obligations primarily represent the present value of future anticipated costs
for water treatment of selenium discharges in excess of allowable limits, as required by current
court orders, consent decrees and mining permits. Our remediation obligation at the Magnum
acquisition date was estimated and recorded at June 30, 2009, when the purchase accounting
valuation of all assets acquired and liabilities assumed was finalized. Remediation obligation
expense for the year ended December 31, 2009 was $5.6 million, representing six months of
expense. We expect remediation obligation expense to be approximately $12 million in 2010. Our
remediation obligation liability was $88.6 million as of December 31, 2009.
Workers Compensation
These liabilities represent the estimates for compensable, work-related injuries (traumatic
claims) and occupational disease, principally black lung disease (pneumoconiosis) and are based
primarily on actuarial valuations. The Federal Black Lung Benefits Act requires employers to pay
black lung awards to former employees who filed successful claims after June 1973. These
liabilities were $220.3 million as of December 31, 2009, of which $26.6 million was a current
liability. Expense for the years ended December 31, 2009, 2008 and 2007 was $31.3 million, $25.1
million and $28.0 million, respectively.
Retiree Healthcare and Pension
Retiree healthcare obligations primarily represent the estimated cost of providing retiree
healthcare benefits to current retirees and active employees who will retire in the future.
Provisions for active employees represent the amount recognized to date, based on their service
to date. Additional amounts are accrued periodically so that the total estimated liability is
accrued when the employee retires.
Our retiree healthcare liabilities were $1.2 billion as of December 31, 2009, of which
$67.1 million was a current liability. Expense for the years ended December 31, 2009, 2008 and
2007 was $92.5 million, $66.0 million and $99.9 million, respectively.
In 2009, our results included a full year of retiree healthcare expense related to the Magnum operations as compared to only
five months in 2008. Our 2008 retiree healthcare expense decreased from 2007 primarily due to the retention by
Peabody of a portion of the liability at the spin-off (as discussed below) and a higher discount rate in 2008,
partially offset by the inclusion of five months of activity related to the Magnum operations in 2008.
In connection with the spin-off, a subsidiary of Peabody assumed certain of our
pre-spin-off obligations associated with the Coal Industry Retiree Health Benefits Act of 1992
(the Coal Act), the 2007 National Bituminous Coal Wage agreement (2007 NBCWA) and certain
salaried employee retiree healthcare benefits. At December 31, 2009 the present value of the
liability assumed by Peabody at spin-off was $665.0 million. We continue to administer these
benefits. Certain Patriot subsidiaries will remain jointly and severally liable for the Coal Act
obligations and remain secondarily liable for the 2007 NBCWA obligations and the salaried
employee obligations.
The Coal Act provides for the funding of health benefits for certain UMWA retirees. The
Coal Act established the United Mine Workers of America Combined Fund (Combined Fund) into which
signatory operators and related persons are obligated to pay annual premiums for
beneficiaries. This multi-employer fund provides healthcare benefits to a closed group of our
retired former employees who last worked prior to 1976, as well as orphaned beneficiaries of
bankrupt companies who were receiving benefits as orphans prior to the 1992 law. No new retirees
will be added to this group. The liability is subject to increases or decreases in per capita
healthcare costs, offset by the mortality curve in this aging population of beneficiaries. The
Coal Act also created a second benefit fund, the 1992 Benefit Plan, for miners who retired
between July 21, 1992, and September 30, 1994, and whose former employers are no longer in
business. Beneficiaries may continue to be added to this fund as employers default in providing
their former employees with retiree medical benefits, but the overall exposure for new
beneficiaries into this fund is limited to retirees covered under their employers plan who
retired prior to October 1, 1994. A third fund, the 1993 Benefit Plan, was established through
collective bargaining and provides benefits to qualifying former employees, who retired after
September 30, 1994, of certain signatory companies who have gone out of business and have
defaulted in providing their former employees with retiree medical benefits. Beneficiaries may
continue to be added to this fund as employers go out of business. The collective bargaining agreement with the UMWA, which specifies the payments to be made to
the 1993 Benefit Plan, expires on December 31, 2011.
10
In December 2006, the Surface Mining Control and Reclamation Act Amendments of 2006 (2006
Act) was enacted. Under the 2006 Act, the orphan benefits paid to the Combined Fund and the 1992
Benefit Plan will be the responsibility of the federal government on a phased-in basis. The
legislation authorizes $490 million per year in general fund revenues to pay for these and other
benefits under the bill. In addition, future interest from the federal Abandoned Mine Land (AML)
trust fund and previous unused interest from the AML trust fund will be available to offset
orphan retiree healthcare costs. Under current projections for the health funds, these available
resources are sufficient to cover all anticipated costs of orphan retirees. These amounts are
also in addition to any amounts that may be appropriated by Congress at its discretion. The
legislation also revises the AML fees paid by us on coal production, effective in October 2007,
with the imposition of such fee currently scheduled to expire in its entirety on September 30,
2021.
The 2006 Act specifically amended the federal laws establishing the Combined Fund, the 1992
Benefit Plan and the 1993 Benefit Plan. The 2006 Act provides new and additional funding to all
three programs, subject to the limitations described below. The 2006 Act guarantees full funding
of all beneficiaries in the Combined Fund by supplementing the annual transfers of interest
earned on the AML trust fund. The 2006 Act further provides funding for the annual orphan health
costs under the 1992 Benefit Plan on a phased-in basis: 25%, 50% and 75% in the years 2008, 2009
and 2010, respectively. Thereafter, federal funding will pay for 100% of the orphan health
costs. The coal producers that signed the 1988 labor agreement, including some of our
subsidiaries, remain responsible for the costs of the 1992 Benefit Plan. The 2006 Act also
included the 1993 Benefit Plan as one of the statutory funds and authorizes the trustees of the
1993 Benefit Plan to determine the contribution rates through 2010 for pre-2007 beneficiaries.
During calendar years 2008 through 2010, federal funding will pay a portion of the 1993 Benefit
Plans annual health costs on a phased-in basis: 25%, 50% and 75% in the years 2008, 2009 and
2010, respectively. The 1993 Benefit Plan trustees have set a $1.42 per hour statutory
contribution rate for 2010. Under the 2006 Act, these new and additional federal expenditures to
the Combined Fund, 1992 Benefit Plan, 1993 Benefit Plan and certain AML payments to the states
and Indian tribes are collectively limited by an aggregate annual cap of $490 million as
described above. To the extent that (i) the annual funding of the programs exceeds this amount
(plus the amount of interest from the AML trust fund paid with respect to the Combined Fund),
and (ii) Congress does not allocate additional funds to cover the shortfall, contributing
employers and affiliates, including some of our subsidiaries, would be responsible for the
additional costs. Those of our subsidiaries that have agreed to the 2007 NBCWA will pay $0.50
per hour worked to the 1993 Benefit Plan to provide benefits for post 2006 beneficiaries. To the
extent the $0.50 per hour payment exceeds the amount needed for this purpose, the difference
will be credited against the $1.42 per hour statutory payment.
The actuarially-determined liability for these benefit plans was $48.5 million as of
December 31, 2009, $6.3 million of which was a current liability. Expenses for the years ended
December 31, 2009, 2008 and 2007 were $3.2 million, $2.6 million and $2.9 million, respectively.
Cash payments to these funds were $6.3 million, $6.1 million and $5.5 million for 2009, 2008 and
2007, respectively. The benefit plans that qualify as multi-employer plans are expensed as
payments are made and no liability was recorded other than amounts due and unpaid. Expense
related to these funds was $11.2 million, $11.8 million and $15.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Certain of our subsidiaries participate in two defined benefit multi-employer pension funds
that were established as a result of collective bargaining with the UMWA pursuant to the 2007
NBCWA as periodically negotiated. These plans provide pension and disability pension benefits to
qualifying represented employees retiring from a participating employer where the employee last
worked prior to January 1, 1976, in the case of the UMWA 1950 Pension Plan, or after December
31, 1975, in the case of the UMWA 1974 Pension Plan. In December 2006, the 2007 NBCWA was
signed, which required funding of the 1974 Pension Plan through 2011 under a phased funding
schedule. The funding is based on an hourly rate for active UMWA workers. Under the labor
contract, the per hour funding rate increased to $4.25 in 2009 and increases each year until
reaching $5.50 in 2011. Our subsidiaries with UMWA-represented employees are required to
contribute to the 1974 Pension Plan at the new hourly rates. Contributions to these funds could
increase as a result of future collective bargaining with the UMWA, a shrinking contribution
base as a result of the insolvency of other coal companies who currently contribute to these
funds, lower than expected returns on pension fund assets or other funding deficiencies. Expense
related to these funds was $18.3 million, $13.5 million and $6.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Regulatory Matters
Federal and state authorities regulate the U.S. coal mining industry with respect to
matters such as employee health and safety, permitting and licensing requirements, the
protection of the environment, plants and wildlife, the reclamation and restoration of mining
properties after mining has been completed, surface subsidence from underground mining and the
effects of mining on groundwater quality and availability. In addition, the industry is affected
by significant legislation mandating certain benefits for current and retired coal miners. We
have in the past, and will in the future, be required to incur significant costs to comply with
these laws and regulations.
11
Future legislation and regulations are expected to become increasingly restrictive, and
there may be more rigorous enforcement of existing and future laws and regulations. Depending
on the development of future laws and regulations, we may experience substantial increases in
equipment and operating costs and may experience delays, interruptions or termination of
operations. Failure to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal fines or penalties, the acceleration of cleanup and site
restoration costs, the issuance of injunctions to limit or cease operations and the suspension
or revocation of permits and other enforcement measures that could have the effect of limiting
production from our operations.
Mine Safety and Health
Our goal is to achieve excellent mine safety and health performance. We measure our
progress in this area primarily through the use of accident frequency rates. We believe that it
is our responsibility to our employees to provide a superior safety and health environment. We
seek to implement this goal by: training employees in safe work practices; openly communicating
with employees; establishing, following and improving safety standards; involving employees in
the establishment of safety standards; and recording, reporting and investigating all accidents,
incidents and losses to avoid reoccurrence. We utilize best practices in emergency preparedness,
which includes maintaining multiple mine rescue teams. A portion of the annual performance
incentive for all Patriot personnel is tied to our safety record.
Our approach to safety has resulted in a steady decline in incidence numbers and their
severity rates. We received a number of significant safety awards in 2009, including four
Mountaineer Guardian Safety Awards from the West Virginia Coal Association. Our training center
educates our employees in safety best practices and reinforces our company-wide belief that
productivity and profitability follow when safety is a cornerstone of all of our operations.
Stringent health and safety standards have been in effect since Congress enacted the Coal
Mine Health and Safety Act of 1969. The Federal Mine Safety and Health Act of 1977 (the 1977
Act) significantly expanded the enforcement of safety and health standards and imposed safety
and health standards on all aspects of mining operations. In 1978, the Mine Safety and Health
Administration (MSHA) was created to carry out the mandates of the 1977 Act.
Congress enacted the Mine Improvement and New Emergency Response Act of 2006 (MINER Act) as
a result of an increase in fatal accidents. Among the new requirements, each miner must have at
least two, one-hour Self Contained Self Rescue (SCSR) devices for their use in the event of an
emergency (each miner had at least one SCSR device prior to the MINER Act) and additional caches
of SCSR devices in the escape routes leading to the surface. Our evacuation training programs
have been expanded to include more comprehensive training with the SCSR devices and frequent
escape drills, as well as mine-wide simulated disaster training. The MINER Act also requires
installation of two-way communication systems that allow communication between rescue workers
and trapped miners following an accident as mine operators must have the ability to locate each
miners last known position immediately before and after a disaster occurs. Compliance with this
regulation has and will continue to result in additional expense.
The states in which we operate also have programs for mine safety and health regulation and
enforcement. As a result of industry-wide fatal accidents in recent years, primarily at
underground mines, several states including West Virginia and Kentucky have adopted new safety
and training regulations. In addition, MSHA has issued numerous new policies and regulations
addressing, but not limited to, the following: emergency notification and response plans,
increased fines for violations and additional training and mine rescue coverage requirements.
Collectively, federal and state safety and health regulation in the coal mining industry is
perhaps the most comprehensive and pervasive system for protection of employee health and safety
affecting any segment of U.S. industry. While these changes have had a significant effect on our
operating costs, our U.S. competitors with underground mines are subject to the same degree of
regulation.
Black Lung
In the U.S., under the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits
Reform Act of 1977, as amended in 1981, each U.S. coal mine operator must pay federal black lung
benefits and medical expenses to claimants who are current and former employees and last worked
for the operator after July 1, 1973. Coal mine operators must also make payments to a trust fund
for the payment of benefits and medical expenses to claimants who last worked in the coal
industry prior to July 1, 1973. Historically, less than 7% of the miners currently seeking
federal black lung benefits are awarded these benefits. The trust fund is funded by an excise
tax on U.S. production of up to $1.10 per ton for coal from underground mines and up to $0.55
per ton for surface-mined coal, neither amount to exceed 4.4% of the gross sales price.
Mining Control and Reclamation Regulations
The SMCRA is administered by the Office of Surface Mining Reclamation and Enforcement (OSM)
and establishes mining, environmental protection and reclamation standards for all aspects of
U.S. surface mining as well as many aspects of underground mining. Mine operators must obtain
SMCRA permits and permit renewals for mining operations from the OSM. Where state regulatory
agencies have adopted federal mining programs under SMCRA, the state becomes the regulatory
authority. States in which we have active mining operations have achieved primary control of
enforcement through federal authorization.
12
SMCRA permit provisions include requirements for coal prospecting; mine plan development;
topsoil removal, storage and replacement; selective handling of overburden materials; mine pit
backfilling and grading; protection of the hydrologic balance; subsidence control for
underground mines; surface drainage control; mine drainage and mine discharge control and
treatment; and revegetation.
The U.S. mining permit application process is initiated by collecting baseline data to
adequately characterize the pre-mining environmental condition of the permit area. We develop
mine and reclamation plans by utilizing this geologic data and incorporating elements of the
environmental data. Our mine and reclamation plans incorporate the provisions of SMCRA, the
state programs and the complementary environmental programs that impact coal mining. Also
included in the permit application are documents defining ownership and agreements pertaining to
coal, minerals, oil and gas, water rights, rights of way and surface land, and documents
required of the OSMs Applicant Violator System, including the mining and compliance history of
officers, directors and principal stockholders of the applicant.
Once a permit application is prepared and submitted to the regulatory agency, it goes
through a completeness and technical review. Public notice of the proposed permit is given for a
comment period before a permit can be issued. Some SMCRA mine permit applications take over a
year to prepare, depending on the size and complexity of the mine, and often take six months to
two years to be issued. Regulatory authorities have considerable discretion in the timing of the
permit issuance and the public has the right to comment on and otherwise engage in the
permitting process, including public hearings and through intervention in the courts.
SMCRA requires compliance with many other major environmental programs. These programs
include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
(RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and
employee right-to-know provisions. Besides OSM, other federal regulatory agencies are involved
in monitoring or permitting specific aspects of mining operations. The Environmental Protection
Agency (EPA) is the lead agency for states with no authorized programs under the Clean Water
Act, RCRA and CERCLA. The U.S. Army Corps of Engineers (ACOE) regulates activities affecting
navigable waters and the U.S. Bureau of Alcohol, Tobacco and Firearms regulates the use of
explosive blasting.
Mine Closure Costs
Various federal and state laws and regulations, including SMCRA, require us to obtain
surety bonds or other forms of financial security to secure payment of certain long-term
obligations, including mine closure or reclamation costs, federal and state workers
compensation costs and other miscellaneous obligations. Many of these bonds are renewable on a
yearly basis. Surety bond costs have increased in recent years. As of December 31, 2009, we had
outstanding surety bonds and total letters of credit of $506.8 million including: $221.2 million
for post-mining reclamation; $201.1 million related to workers compensation obligations; $50.5
million for retiree health obligations; $10.3 million for coal lease obligations; and $23.7
million for other obligations (including collateral for surety companies and bank guarantees,
road maintenance and performance guarantees). Changes in these laws and regulations could
require us to obtain additional surety bonds or other forms of financial assurance.
The AML Fund, which is part of SMCRA, requires a fee on all coal produced in the United
States. The proceeds are used to rehabilitate land mined and left unreclaimed prior to August 3,
1977 and to pay healthcare benefit costs of orphan beneficiaries of the Combined Fund. Under
current law, from October 1, 2007 through September 30, 2012, the fee is $0.315 per ton for
surface-mined coal and $0.135 per ton for underground-mined coal and from October 1, 2012
through September 30, 2021, the fee will be $0.28 per ton for surface-mined coal and $0.12 per
ton for underground-mined coal.
Environmental Laws
We are subject to various federal and state environmental laws and regulations that impose
significant requirements on our operations. The cost of complying with current and future
environmental laws and regulations and our liabilities arising from past or future releases of,
or exposure to, hazardous substances, may adversely affect our business, results of operations
or financial condition. In addition, environmental laws and regulations, particularly relating
to air emissions, can reduce the demand for coal. Significant public opposition has been raised
with respect to the proposed construction of certain new coal-fueled electricity generating
plants due to the potential air emissions that would result. Such regulation and opposition
could reduce the demand for coal.
Numerous federal and state governmental permits and approvals are required for mining
operations. When we apply for these permits or approvals, we may be required to prepare and
present to federal or state authorities data pertaining to the effect or impact that a proposed
exploration for, or production or processing of, coal may have on the environment. Compliance
with these requirements can be costly and time-consuming and can delay exploration or production
operations. A failure to obtain or comply with permits could result in significant fines and
penalties and could adversely affect the issuance of other permits for which we may apply.
Certain key environmental issues, laws and regulations facing us are described further
below.
13
Clean Water Act
The federal Clean Water Act and corresponding state and local laws and regulations affect
coal mining operations by restricting the discharge of pollutants, including dredged or fill
materials, into waters of the United States. The Clean Water Act provisions and associated state
and federal regulations are complex and subject to amendments, legal challenges and changes in
implementation. As a result of recent court decisions and regulatory actions, permitting
requirements have increased and could continue to increase the cost and time we expend on
compliance with water pollution regulations.
These and other regulatory requirements, which have the potential to change due to legal
challenges, Congressional actions and other developments, increase the cost of, or could even
prohibit, certain current or future mining operations. Our operations may not always be
able to remain in full compliance with all Clean Water Act obligations and permit requirements,
and as a result we have, at times, been subject to compliance orders and private party
litigation seeking fines or penalties or changes to our operations.
Clean Water Act requirements that may affect our operations include the following:
Section 404
Section 404
of the Clean Water Act requires mining companies to obtain ACOE
permits to place material in streams for the purpose of creating slurry ponds, water
impoundments, refuse areas, valley fills or other mining activities. As is the case with other
coal mining companies operating in Appalachia, our construction and mining activities, including
our surface mining operations, frequently require Section 404 permits. ACOE issues two types of
permits pursuant to Section 404 of the Clean Water Act: nationwide (or general) and
individual permits. Nationwide permits are issued to streamline the permitting process for
dredging and filling activities that have minimal adverse environmental impacts. An individual
permit typically requires a more comprehensive application process, including public notice and
comment, but an individual permit can be issued for ten years (and may be extended thereafter
upon application).
The issuance of permits to construct valley fills and refuse impoundments under Section 404
of the Clean Water Act, whether general permits commonly described as the Nationwide Permit 21
(NWP 21), or individual permits, has been the subject of many recent court cases and increased
regulatory oversight, the results of which may materially increase our permitting and operating
costs, result in permitting delays, suspend current operations or prevent the opening of new
mines.
For instance, on June 11, 2009, the White House Council on Environmental Quality announced
that the EPA, the Department of the Interior (DOI) and the ACOE had entered into a Memorandum of
Understanding and Interagency Action Plan on Appalachian Surface Coal Mining (IAP) which is
designed to coordinate actions between the agencies and to increase federal scrutiny and
oversight of state permitting, enforcement and other activities affecting Appalachian surface
mining, all with the stated goal of reducing the environmental impacts of surface coal mining in
West Virginia and other Appalachian states. Among other things, the IAP set forth a proposal to
prohibit use of the general NWP 21 for surface coal mining operations and a commitment by the
DOI to issue guidance clarifying the rules on the use of valley fills within a set distance of a
stream. The IAP also stated that there will be a general review of how surface mining is
evaluated, authorized and regulated under the Clean Water Act, which may lead to further changes
to relevant laws or enforcement thereof.
On July 15, 2009, the ACOE announced it was soliciting public comments on proposals related
to the use of NWP 21 pursuant to the IAP. The proposals modify NWP 21 to prohibit its use in the
Appalachian region for surface coal mining operations and suspend the use of NWP 21 in West
Virginia and other Appalachian states while the ACOE completes the process of modifying it. In
the absence of NWP 21, individual permits are required for surface coal mining projects. We have
converted any pending permit applications that were submitted under NWP 21 to individual permit
applications and believe a prohibition on NWP 21 permits would have a minimal effect on our
future production. However, individual permits take longer and are more costly to obtain.
In July 2009, the EPA requested that the West Virginia Department of Environmental
Protection (WVDEP) provide copies of draft National Pollution Discharge Elimination System
(NPDES) permits for discharges associated with surface coal mining operations and announced its
plans to conduct Permit Quality Reviews of mining permits in West Virginia. In September 2009,
the EPA announced that proposed mining related to certain pending permits in Appalachia would
require additional review under the Clean Water Act due to the potential water quality impacts.
Seventy-nine permit applications were identified for further, detailed reviews, including our
Hobet 45 mine permit application and five of our other permit applications. In January 2010,
the evaluation process was finalized on our Hobet 45 permit and the permit was issued. It was
the first of the seventy-nine permits to be issued. The EPA and the ACOE continue to perform
reviews on the remaining permits pursuant to the IAP to ensure compliance with the Clean Water
Act. As a result of the EPAs increased scrutiny, the WVDEP announced in January 2010 that it is
suspending review of permit applications for certain surface mining operations until the EPA
establishes standards for such operations.
In November 2009, the DOI issued an advance notice of proposed rule making regarding the
use of valley fills within a set distance of a stream. The notice set forth a number of
potential options DOI is considering in order to meet the goals in the Memorandum of
Understanding (MOU). If more restrictive options are ultimately adopted, certain mining
activities could become prohibited.
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In addition, Region 3 of the EPA, which covers West Virginia, has asked the EPAs Office of
Research & Development (ORD) to provide expert advice on a draft assessment of the ecological
impacts associated with surface coal mining involving valley fills. ORDs assessment will cover
loss of headwater streams, downstream water quality, subsequent effects on in-stream biota,
cumulative ecological impacts and an evaluation of restoration and recovery methods used by
mining companies to address the foregoing.
It is unknown what other future changes will be implemented to the permitting review and
issuance process or to other aspects of surface mining operations, but the increased regulatory
focus, recent attention in Congress, the announced changes and reviews and any additional future
changes could materially and adversely affect all coal mining companies operating in Appalachia,
including us. In particular, we could be unable to obtain new permits or maintain existing
permits, we could be required to change operations in a manner that could be costly, and we
could incur fines, penalties and other costs, any of which could materially adversely affect our
business.
National Pollutant Discharge Elimination System
The Clean Water Act requires effluent limitations and treatment standards for wastewater
discharge through the NPDES program. NPDES permits govern the discharge of pollutants into water
and require regular monitoring and reporting and performance standards. States are empowered to
develop and enforce in stream water quality standards. These standards are subject to change
and must be approved by the EPA. Discharges must either meet state water quality standards or be
authorized through available regulatory processes such as alternate standards or variances. In
stream standards vary from state to state. Additionally, through the Clean Water Act Section
401 certification program, states have approval authority over federal permits or licenses that
might result in a discharge to their waters. States consider whether the activity will comply
with their water quality standards and other applicable requirements in deciding whether or not
to certify the activity.
Total Maximum Daily Load (TMDL) regulations establish a process by which states designate
stream segments as impaired (i.e., not meeting present water quality standards). Industrial
dischargers, including coal mining operations, may be required to meet new TMDL effluent
standards for these stream segments.
States must also conduct an anti-degradation review before approving permits for the
discharge of pollutants to waters that have been designated as high quality. A states
anti-degradation regulations would prohibit the diminution of water quality in these streams.
Several environmental groups and individuals recently challenged, in part successfully, West
Virginias anti-degradation policy. As a result, in general, waters discharged from coal mines
to high quality streams in West Virginia will be required to meet or exceed new high quality
standards. This could cause increases in the costs, time and difficulty associated with
obtaining new and complying with existing NPDES permits, and could adversely affect our coal
production.
Clean Air Regulations
The Clean Air Act and the corresponding state laws that regulate the emissions of materials
into the air affect U.S. coal mining operations both directly and indirectly. Direct impacts on
coal mining and processing operations may occur through Clean Air Act permitting requirements
and/or emission control requirements relating to particulate matter. The Clean Air Act
indirectly affects the coal industry by extensively regulating the air emissions of sulfur
dioxide, nitrogen oxide, mercury and other compounds emitted by our customers that operate
coal-fueled electricity generating plants. Additionally, the EPA has proposed regulating carbon
dioxide and other greenhouse gas emissions under the Clean Air Act. In recent years Congress has
also considered legislation that would require increased reductions in emissions of carbon
dioxide and other greenhouse gases, sulfur dioxide, nitrogen oxide and mercury. Existing and new
legislation may lead to some electricity generating customers switching to other sources of fuel
which would result in lower levels of regulated emissions.
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Clean Air Act requirements that may directly affect our customers include the following:
Sulfur Dioxide and Nitrogen Oxide Emissions
The EPA promulgated the Clean Air Interstate Rule (CAIR) in March 2005. CAIR requires the
reduction of sulfur dioxide and nitrogen oxide emissions from electricity generating plants in
28 eastern states and the District of Columbia (D.C.). CAIR has been subject to a complex
series of legal challenges since its promulgation which have alleged, among other things, that
it failed to meet the requirements of the federal Clean Air Act. However, as of December 2009,
based on an order issued by the U.S. Court of Appeals for the D.C. Circuit, CAIR is currently in
effect while the EPA develops a new clean air program for power plants that is consistent with
the Clean Air Act. It is unknown what additional or different obligations the EPA will place on
power plant air emissions as it revisits the obligations of the Clean Air Act. However, the
existing CAIR obligations are expected to require many coal-fueled power sources to install
additional pollution control equipment, such as wet scrubbers, or to incur costs to purchase the
right to emit from other sources who do reduce their emissions, and it is possible that further
changes in the rules, including those relating to emissions limitations and the right to
purchase and trade allowances, will require coal-fueled power plants to incur even more costs.
Congress is also considering additional legislation aimed at reducing sulfur dioxide and
nitrogen oxide emissions from power plants. All of the foregoing could cause our customers to
change their regional coal sources or reduce their demand for coal.
Mercury Emissions
The EPA promulgated the Clean Air Mercury Rule (CAMR) in March 2005. CAMR permanently caps
and reduces nationwide mercury emissions from new and existing coal-fueled power plants. The
rule established a market-based cap-and-trade program to reduce nationwide utility emissions of
mercury in two distinct phases. CAMR was vacated on February 8, 2008 by the U.S. Court of
Appeals for the D.C. Circuit and the EPA decided to develop mercury emissions standards for
power plants under the Clean Air Act rather than pursue an appeal of the decision. It is
anticipated that any new EPA rule will require power plants to implement maximum achievable
control technology (MACT) to reduce their mercury emissions. In January 2009, the EPA issued a
memorandum stating that any new electric steam generating units that began construction while
CAMR was effective will be subject to a MACT determination on a case-by-case basis. In addition,
Congress is also considering legislation mandating mercury emission reductions from coal-fueled
power plants. These decisions and future regulations and/or legislation could further limit
mercury emissions from power plants, which could adversely affect the demand for coal.
Particulate Matter
The Clean Air Act requires the EPA to set National Ambient Air Quality Standards (NAAQS)
for pollutants considered harmful to public health and the environment. States must develop and
maintain state implementation plans (SIPs) that explain how they will comply with established
NAAQS. These SIPs are subject to public comment and must be approved by the EPA. Areas not in
compliance with NAAQS must take steps to reduce emission levels, and as a result states that are
affected must update their SIPs accordingly. Our mining operations are subject to NAAQS and the
operations of some of our customers are also subject to NAAQS. In addition, the Clean Air Act
allows states to assert claims against a source in an upwind state if the source, which could
include coal-fueled power plants, is emitting pollutants in an amount and manner that the
downwind state believes is preventing it from attaining its NAAQS.
In October 2006, the EPA issued a final rule revising and updating NAAQS for various forms
of particulate matter (the PM Standards). Specifically, the PM Standards were updated for
fine and coarse particulate matter. Sources of fine particulate matter include power
generation, residential fuel burning, and motor vehicles. Coarse particulate matter can be
generated by, among other things, mining operations and construction and demolition activities.
Three groups of petitioners filed for review of the PM Standards. On February 24, 2009, the U.S.
Court of Appeals for the D.C. Circuit issued its opinion, and while it refused to review the
petitioners challenges to the coarse PM Standards, it remanded certain aspects of the fine PM
Standards for reconsideration by the EPA. As a result, the PM Standards related to fine
particulate matter, which may affect many of our power plant customers and are currently in
effect, will now be subject to further review by the EPA, and therefore these PM Standards could
become more stringent. If that occurs, some states will likely need to change their existing
SIPs to impose measures designed to ensure compliance with any new PM Standards.
Existing and possible future restrictions, including any that arise out of the EPAs
reconsideration described above, on the emission of fine or coarse particulate matter could
adversely affect our ability to develop new mines, could require us to modify our existing
operations and could result in additional and expensive control requirements for coal-fueled
power plants, which could adversely affect the demand for coal.
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Ozone
Nitrogen oxides, which are a by-product of coal combustion, can lead to the creation of
ozone. In March 2008, the EPA issued a rule in which it lowered the eight-hour ozone standard
from the current 0.0884 parts per million to 0.075 parts per million. The rule became effective
on May 27, 2008. Attainment dates for the new standard ranges between 2013 and 2030, depending
on the severity of the non-attainment. In January 2010, the EPA proposed to further lower these
standards to a range of 0.06 to 0.07 parts per million. The revised standard may require more
stringent emissions controls on sources of nitrogen oxides, including coal-fueled electric
generating plants. Demand for coal from our mining operations may be adversely affected when the
more stringent standard is implemented.
New Source Review Regulations
A number of pending regulatory changes and court actions will affect the scope of the EPAs
new source review (NSR) program, which under certain circumstances requires existing coal-fueled
power plants to install the more stringent air emissions control equipment required of new
plants. For example, in April 2007, the U.S. Supreme Court ruled, in Environmental Defense et
al. v. Duke Energy Corp. et al., against a generator in an NSR enforcement proceeding,
reversing the decision of the appellate court. This decision could potentially expose numerous
electricity generators to government or citizen actions based on a failure to obtain NSR permits
for changes to emissions sources and could effectively increase the costs to them of continuing
to use coal. Our customers are among the electricity generators subject to enforcement actions
and, if found not to be in compliance, our customers could be required to install additional
control equipment at the affected plants or they could decide to close some or all of those
plants. Changes to the NSR program and/or its enforcement may adversely impact demand for coal.
Regional Haze
The EPA published the final regional haze rule on July 1, 1999. This rule established
planning and emissions reduction timelines for states to use to improve visibility in national
parks throughout the U.S. On June 22, 2001, the EPA signed a proposed rule to guide states in
implementing the 1999 rule and in controlling power plant emissions that cause regional haze
problems. The proposed rule set guidelines for states in setting Best Alternative Retrofit
Technology (BART) at older power plants. On May 5, 2004, the EPA published a proposed rule with
new BART provisions and re-proposed the BART guidelines. On June 15, 2005, the EPA finalized
amendments to the July 1999 regional haze rule. The EPA directed states to develop plans for
meeting its requirements and determined that states which adopt the CAIR cap-and-trade program
for sulfur dioxide and nitrogen oxide will be allowed to apply CAIR controls as a substitute for
those required by BART.
Acid Rain
Title IV of the Clean Air Act regulates sulfur dioxide emissions by all coal-fueled power
plants with generating capacity greater than 25 megawatts. The affected electricity generators
have sought to meet these requirements by, among other compliance methods, switching to lower
sulfur fuels, installing pollution control devices, reducing electricity generating levels or
purchasing sulfur dioxide emission allowances. Title IV also requires that certain categories of
electric generating stations install certain types of nitrogen oxide controls. We cannot predict
the effect of these provisions of the Clean Air Act on us in future years.
State Laws
Several states have recently proposed or adopted legislation or regulations further
limiting emissions of sulfur dioxide, nitrogen oxide, mercury and carbon dioxide. Limitations
imposed by states on emissions of any of these substances could cause our customers to switch to
other fuels to the extent it becomes economically preferable for them to do so.
Global Climate Change
One by-product of burning coal is carbon dioxide, which has been linked in certain studies
as a contributor to climate change. Recently, legislators, including the U.S. Congress, have
been considering the passage of significant new laws. The EPA has also proposed using the Clean
Air Act to limit carbon dioxide and other greenhouse gas emissions, and other measures are being
imposed or offered with the ultimate goal of reducing greenhouse gas emissions.
Additionally, in 2009 the U.S. House of Representatives passed, and the U.S. Senate
considered, legislation that would, among other things, impose a nationwide cap on carbon
dioxide and other greenhouse gas emissions and require major sources, including coal-fueled
power plants, to obtain emission allowances to meet that cap. It is possible that federal
legislation related to greenhouse gas emissions will also be considered in Congress in 2010.
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The U.S. Supreme Courts April 2007 ruling in Massachusetts v. EPA clarified that the EPA
does have the authority to regulate carbon dioxide emissions as a pollutant under the Clean
Air Act insofar as motor vehicles are concerned. In response to this decision, in December 2009,
the EPA released a final finding that emissions of carbon dioxide and other greenhouse gases
contribute to air pollution and endanger human health and welfare. This finding will subject
certain stationary sources that emit carbon dioxide and other greenhouse gases, including
coal-fueled power plants, to existing permitting and other requirements under the Clean Air Act.
In October 2009, the EPA published a proposed rule referred to as the Greenhouse Gas Tailoring
Rule (GHG Tailoring Rule), which sets forth how the Clean Air Act requirements would be imposed
by the EPA on greenhouse gas emissions from stationary sources. The GHG Tailoring Rule, which is
expected to be finalized in March 2010, could require the installation of best available control
technologies in certain existing facilities and any new facilities that may be considered
significant sources of greenhouse gas emissions. These actions by the EPA could be delayed or
derailed by a number of factors, including expected legal challenges, lack of funding, and
preemption by federal legislation. However, if the EPAs regulation of greenhouse gases under
the Clean Air Act proceeds, it may ultimately affect coal-fueled power plants in particular, and
the amount of coal our customers purchase from us could decrease, which could adversely affect
our results of operations.
In the absence of federal legislation or regulation, many states, regions and local
authorities have adopted greenhouse gas regulations and initiatives. Several northeastern states
are part of the Regional Greenhouse Gas Initiative agreement, or RGGI. The RGGI program calls
for signatory states to stabilize carbon dioxide emissions to current levels from 2009 to 2015,
followed by a 2.5% reduction each year from 2015 to 2018. Auctions for carbon dioxide allowances
under this program began in September 2008 and occur on a quarterly basis.
In November 2007, the governors of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota,
Ohio, South Dakota and Wisconsin and the Premier of Manitoba signed the Midwestern Greenhouse
Gas Reduction Accord to develop and implement steps to reduce greenhouse gas emissions. In
addition, more than half of the states in the U.S. have implemented renewable portfolio
standards, which mandate that a specified percentage of electricity sales in the state come from
renewable energy, and in 2009, Congress also considered legislation with a similar provision.
These and other state and regional climate change rules will likely require additional
controls on coal-fueled power plants and industrial boilers and may even cause some users of
coal to switch from coal to a lower carbon fuel. In addition, some states, municipalities and
individuals have initiated common law nuisance suits against power, coal, and oil and gas
companies alleging that their operations are contributing to climate change. At least two U.S.
federal appellate courts have permitted these lawsuits to proceed. The plaintiffs are seeking
various remedies, including punitive and compensatory damages and injunctive relief. If
successful, there could be reductions in or other limitations on the amount of coal our
customers could utilize.
The permitting of new coal-fueled power plants has also recently been contested by state
regulators and environmental organizations based on concerns relating to greenhouse gas
emissions. As a result, certain power generating companies may reconsider short-term or
long-term plans to build coal-fueled plants or may elect to build capacity using alternative
forms of electrical generation.
Demand for and use of coal also may be limited by any global treaties which place
restrictions on carbon dioxide emissions. As part of the United Nations Framework Convention on
Climate Change, representatives from 187 nations met in Bali, Indonesia in December 2007 to
discuss a program to limit greenhouse gas emissions after 2012. The U.S. participated in the
conference. The convention adopted what is called the Bali Action Plan. The Bali Action Plan
contains no binding commitments, but concludes that deep cuts in global emissions will be
required and provides a timetable for two years of talks to shape the first formal addendum to
the 1992 United Nations Framework Convention on Climate Change treaty since the Kyoto Protocol.
In December 2009, an international meeting was held in Copenhagen, Denmark to further progress
towards a new treaty or agreement regarding greenhouse gas emissions reductions after 2012. A
number of countries, including the U.S., entered into an agreement called the Copenhagen
Accord, which contains non-binding emissions reductions targets. One of the goals in the Accord
is for all developed nations, including the U.S., to provide $100 billion (in the aggregate)
annually, beginning in 2020, to developing countries to fund climate change adaptation and
mitigation measures. Any treaty or other arrangement ultimately adopted by the U.S. or other
countries, may have a material adverse impact on the global supply and demand for coal, which in
turn could have an adverse impact on our business.
Hazardous Waste
The RCRA established comprehensive requirements for the treatment, storage and disposal of
hazardous wastes. These requirements primarily affect our customers as coal mine wastes, such as
overburden and coal cleaning wastes, are not considered hazardous waste materials under RCRA. In
1993 and 2000, the EPA declined to impose hazardous waste regulatory controls under subtitle C
of RCRA on the disposal of some coal combustion by-products (CCB), including the practice of
using CCB as land fill. The EPA continues to evaluate the possibility of placing additional
regulatory requirements on the disposal of such materials.
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The EPA published in the Federal Register in August 2007 a Notice of Data Availability
(NODA) of analyses of the disposal of CCB that have become available since the EPAs RCRA
regulatory determination in 2000. The NODA is not a proposed rule and does not include a
timeframe for issuing a proposed rule. The EPA has also indicated that it is proceeding with the
development of regulations governing the management of CCB. Any regulations that increase the
costs associated with handling or disposal of CCB could adversely impact our customers
operating costs and potentially reduce their purchase of coal.
Toxic Release Reporting
Under the EPAs Toxic Release Inventory process, companies are required to annually report
the use, manufacture or processing of listed toxic materials that exceed defined thresholds,
including chemicals used in equipment maintenance, reclamation and water treatment.
Federal and State Superfund Statutes
CERCLA and similar state laws impose liability for investigation and clean-up of
contaminated properties and for damages to natural resources. Under CERCLA or similar state
laws, strict, joint and several liability may be imposed on waste generators, site owners or
operators and others regardless of fault. Thus, coal mines or other sites that we currently own
or have previously owned or operated and sites to which we have sent waste material may be
subject to liability under CERCLA and similar state laws. We have been identified as a
potentially responsible party at some sites, but based on current information we do not believe
any liability under CERCLA or similar state laws will be material.
Additional Information
We file annual, quarterly and current reports, and our amendments to those reports, proxy
statements and other information with the Securities and Exchange Commission (SEC). You may
access and read our SEC filings free of charge through our website, at www.patriotcoal.com, or
the SECs website, at www.sec.gov. You may read and copy any document we file at the SECs
public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference room.
You may also request copies of our filings, free of charge, by telephone at (314) 275-3680
or by mail at: Patriot Coal Corporation, 12312 Olive Boulevard, St. Louis, Missouri 63141,
attention: Investor Relations.
New York Stock Exchange Certifications
Our Chief Executive Officer (CEO) certified to the New York Stock Exchange (NYSE) in 2009
that we were in compliance with the NYSE listing standards. Our CEO and Chief Financial Officer
(CFO) have executed the certification required by section 302 of the Sarbanes-Oxley Act of 2002,
which is contained herein as exhibits to this Annual Report on Form 10-K for the fiscal year
ended December 31, 2009.
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RISK FACTORS
You should carefully consider the risks described below, together with all of the other
information included in this report, in evaluating our company and our common stock. If any of
the risks described below actually occurs, our business, financial results, financial condition
and stock price could be materially adversely affected.
Risk Factors Relating to Our Business
A decline in coal prices could reduce our revenues and the value of our coal reserves.
Our results of operations are dependent upon the prices we charge for our coal as well as
our ability to maximize productivity and control costs. Declines in the prices we receive for
our coal could adversely affect our operating results and our ability to generate the cash flows
we require to fund our existing operations and obligations, improve our productivity and
reinvest in our business. The prices we receive for coal depend upon numerous factors beyond our
control, including coal and power market conditions, weather patterns affecting energy demand,
competition in our industry, availability and costs of competing energy resources, worldwide
economic and political conditions, economic strength and political stability in the U.S. and
countries in which we have customers, the outcome of commercial negotiations involving sales
contracts or other transactions, customer performance and credit risk, availability and costs of
transportation, our ability to respond to changing customer preferences, reductions of purchases
by major customers, and legislative and regulatory developments, including new environmental
regulations affecting the use of coal, such as mercury and carbon dioxide-related limitations.
Any material decrease in demand would cause coal prices to decline and require us to decrease
costs in order to maintain our margins.
Any change in coal consumption patterns, in particular by U.S. electric power generators or
global steel producers, could result in a decrease in the use of coal by those consumers, which
could result in lower prices for our coal, a reduction in our revenues and an adverse impact on
our earnings and the value of our coal reserves.
Thermal coal accounted for approximately 83%, 79% and 77% of our coal sales volume during
2009, 2008 and 2007, respectively. The majority of our sales of thermal coal was to U.S.
electric power generators. The amount of coal consumed for U.S. electric power generation is
affected primarily by the overall demand for electricity; the location, availability, quality
and price of competing fuels for power such as natural gas, nuclear, fuel oil and alternative
energy sources such as wind and hydroelectric power; technological developments; limitations on
financings for coal-fueled power plants and governmental regulations, including increasing
difficulties in obtaining permits for coal-fueled power plants and more burdensome restrictions
in the permits received for such facilities. In addition, the increasingly stringent
requirements of the Clean Air Act or other laws and regulations, including tax credits that have
been or may be provided for alternative energy sources and renewable energy mandates that have
been or may be imposed on utilities, may result in more electric power generators shifting away
from coal-fueled generation, the closure of existing coal-fueled plants and the building of more
non-coal fueled electrical generating sources in the future. All of the foregoing could reduce
demand for our coal, which could reduce our revenues, earnings and the value of our coal
reserves.
Weather patterns can greatly affect electricity generation. Extreme temperatures, both hot
and cold, cause increased power usage and, therefore, increased generating requirements from all
sources. Mild temperatures, on the other hand, result in lower electrical demand. Accordingly,
significant changes in weather patterns impact the demand for our coal.
Overall economic activity and the associated demands for power by industrial users can also
have significant effects on overall electricity demand. Deterioration in U.S. electric power
demand would reduce the demand for our thermal coal and could impact the collectability of our
accounts receivable from electric utility customers.
Metallurgical coal accounted for approximately 17%, 21% and 23% of our coal sales volume
during 2009, 2008 and 2007, respectively. A significant portion of our sales of metallurgical
coal was to the U.S. steel industry. The majority of our metallurgical coal production is
priced annually, and as a result, a decrease in near term metallurgical coal prices could
decrease our profitability. The current global recession resulted in decreased demand worldwide
for steel and electricity. Deterioration in global steel production reduced the demand for our
metallurgical coal, resulting in customer deferrals and cancellations
of deliveries during 2009. In addition, the steel industry relies on electric arc furnaces or
pulverized coal processes to make steel. These processes do not use furnace coke, an
intermediate product produced from metallurgical coal. Therefore, growth in future steel
production may not represent increased demand for metallurgical coal. If the demand or pricing
for metallurgical coal decreases in the future, the amount of metallurgical coal we sell and
prices that we receive for it could decrease, thereby reducing our revenues and adversely
impacting our earnings and the value of our coal reserves.
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Because we sell substantially all of our coal to electric utilities and steel producers,
our business and results of operations are closely linked to the global demand for electricity
and steel production. Historically, global demand for basic inputs, including for electricity
and steel production, has decreased during periods of economic downturn. The current recession
has created economic uncertainty, and electric utilities and steel producers have responded by
decreasing production.
Any downward pressure on coal prices, whether due to
increased use of alternative energy sources, changes in weather patterns, decreases in overall
demand or otherwise, would reduce our revenues and likely adversely impact our earnings and the
value of our coal reserves. Additionally,
if the current global recession results in sustained decreases in the global demand for
electricity and steel production, our financial condition, results of operations and cash flows
could be materially and adversely affected.
Increased competition both within the coal industry, and outside of it, such as competition
from alternative fuel providers, may adversely affect our ability to sell coal, and any excess
production capacity in the industry could put downward pressure on coal prices.
The coal industry is intensely competitive both within the industry and with respect to
other fuel sources. The most important factors with which we compete are price, coal quality and
characteristics, transportation costs from the mine to the customer and reliability of supply.
Our principal competitors include Alpha Natural Resources, Inc., Arch Coal, Inc., CONSOL Energy,
Inc., International Coal Group, Inc., James River Coal Company, Massey Energy Company and
Peabody Energy Corporation. We also compete directly with all other Central Appalachian coal
producers, as well as producers from other basins including Northern and Southern Appalachia,
the western U.S. and the Interior U.S., and foreign countries, including Colombia, Venezuela,
Australia and Indonesia.
Depending on the strength of the U.S. dollar relative to currencies of other coal-producing
countries, coal from such origins could enjoy cost advantages that we do not have. Several
domestic coal-producing regions have lower-cost production than Central Appalachia, including
the Powder River Basin in Wyoming. Coal with lower delivered costs shipped east from western
coal mines and from offshore sources can result in increased competition for coal sales in
regions historically sourced from Appalachian producers.
During the mid-1970s and early 1980s, a growing coal market and increased demand for coal
attracted new investors to the coal industry, spurred the development of new mines and resulted
in production capacity in excess of market demand throughout the industry. We could experience
decreased profitability if future coal production is consistently greater than coal demand.
Increases in coal prices could encourage the development of expanded coal producing capacity in
the U.S. and abroad. Any resulting overcapacity from existing or new competitors could reduce
coal prices and, therefore, our revenue and profitability.
We also face competition from renewable energy providers, like biomass, wind and solar, and
other alternative fuel sources, like natural gas and nuclear. Should renewable energy sources
become more competitively priced, which may be more likely to occur given the federal tax
incentives for alternative fuel sources that are already in place and that may be expanded in
the future, or sought after as an energy substitute for fossil fuels, the demand for such fuels
may adversely impact the demand for coal. Existing fuel sources also compete directly with coal.
For example, weak natural gas prices in 2009 caused some utilities to dispatch their natural
gas-fueled plants instead of their coal-fueled plants.
Our operations are subject to geologic, equipment and operational risks, including events
beyond our control, which could result in higher operating expenses and/or decreased production
and sales and adversely affect our operating results.
Our coal mining operations are conducted in underground and surface mines. The level of our
production at these mines is subject to operating conditions and events beyond our control that
could disrupt operations, affect production and the cost of mining at particular mines for
varying lengths of time and have a significant impact on our operating results. Adverse
operating conditions and events that coal producers have experienced in the past include changes
or variations in geologic conditions, such as the thickness of the coal deposits and the amount
of rock embedded in or overlying the coal deposit; mining and processing equipment failures and
unexpected maintenance problems; adverse weather and natural disasters, such as snowstorms, ice
storms, heavy rains and flooding; accidental mine water inflows; and
unexpected suspension of mining operations to prevent, or due to, a safety
accident, including fires and explosions from methane and other sources.
If any of these conditions or events occur in the future at any of our mines or affect
deliveries of our coal to customers, they may increase our cost of mining, delay or halt
production at particular mines, or negatively impact sales to our customers either permanently
or for varying lengths of time, which could adversely affect our results of operations, cash
flows and financial condition. We cannot assure you that these risks would be fully covered by
our insurance policies.
Both our Federal and Panther longwalls encountered some adverse geologic conditions in
2009, but significantly less than the difficulties encountered in 2008. The improved production
in 2009 reflects the benefits of mine plan adjustments made in late 2008 to minimize the impact
of difficult geology.
In February 2010, we announced that active mining operations at our Federal mine were
temporarily suspended upon discovering potentially adverse atmospheric conditions in an
abandoned area of the mine. We are currently conducting additional testing and working
with the U.S. Department of Labor, Mine Safety & Health Administration to develop a plan to address
this issue so that active mining operations can resume, the timing of which is currently uncertain.
21
In addition, the geological characteristics of underground coal reserves in Appalachia and
the Illinois Basin, such as rock intrusions, overmining, undermining and coal seam thickness,
make these coal reserves complex and costly to mine. As mines become depleted, replacement
reserves may not be mineable at costs comparable to those characteristic of the
depleting mines. These factors could materially and adversely affect the mining operations and
the cost structures of our mining complexes and customers willingness to purchase our coal.
A prolonged shortage of skilled labor and qualified managers in our operating regions could
pose a risk to labor productivity and competitive costs and could adversely affect our
profitability.
Efficient coal mining using modern techniques and equipment requires skilled laborers with
mining experience and proficiency as well as qualified managers and supervisors. In recent
years, a shortage of experienced coal miners and managers in Appalachia and the Illinois Basin
has at times negatively impacted our production levels and increased our costs. A prolonged
shortage of experienced labor could have an adverse impact on our productivity and costs and our
ability to expand production in the event there is an increase in the demand for our coal, which
could adversely affect our profitability.
We could be negatively affected if we fail to maintain satisfactory labor relations.
As of December 31, 2009, Patriot had approximately 3,500 employees. Approximately 52% of
the employees at company operations were represented by an organized labor union and they
generated approximately 46% of the 2009 sales volume. Relations with our employees and, where
applicable organized labor, are important to our success. Union labor is represented by the UMWA
under labor agreements which expire December 31, 2011. Our represented workers work at various
sites in Appalachia and at the Highland complex in the Illinois Basin.
Due to the increased risk of strikes and other work-related stoppages that may be
associated with union operations in the coal industry, our competitors who operate without union
labor may have a competitive advantage in areas where they compete with our unionized
operations. If some or all of our current non-union operations or those of third party contract
miners were to become organized, we could incur an increased risk of work stoppages.
Our ability to operate our company effectively could be impaired if we lose key personnel
or fail to attract qualified personnel.
We manage our business with a number of key personnel, the loss of a number of whom could
have a material adverse effect on us. In addition, as our business develops and expands, we
believe that our future success will depend greatly on our continued ability to attract and
retain highly skilled and qualified personnel. We cannot be certain that key personnel will
continue to be employed by us or that we will be able to attract and retain qualified personnel
in the future. Failure to retain or attract key personnel could have a material adverse effect
on us.
If our business does not generate sufficient cash for operations, we may not be able to
repay borrowings under our credit facility or fund other liquidity needs, and the amount of our
indebtedness could affect our ability to grow and compete.
Our ability to pay principal and interest on our debt and to refinance our debt, if
necessary, will partially depend upon our operating performance. Our business may not generate
sufficient cash flows from operations, and future borrowings may not be available to us under
our credit facility or otherwise in an amount sufficient to enable us to repay any borrowings
under any of our obligations or to fund our other liquidity needs. We also have significant
lease and long-term royalty obligations. Our ability to meet our debt, lease and royalty
obligations will depend upon our operating performance, which will be affected by economic
conditions and a variety of other business factors, many of which are beyond our control.
The amount of our indebtedness, as well as the current global recession, could have
significant consequences, including, but not limited to: (i) limiting our ability to pay
principal on our obligations; (ii) limiting our ability to refinance the revolver under our
credit facility, which expires October 2011, or our convertible debt, which matures on May 31,
2013, on commercially reasonable terms, or terms acceptable to us or at all; (iii) limiting our
ability to obtain additional financing to fund capital expenditures, future acquisitions,
working capital or other general corporate requirements; (iv) placing us at a competitive
disadvantage with competitors with lower amounts of debt or more advantageous financing options;
and (v) limiting our flexibility in planning for, or reacting to, changes in the coal industry.
Any inability by us to obtain financing in the future on favorable terms could have a negative
effect on our results of operations, cash flows and financial condition.
Our operations may depend on the availability of additional financing and access to funds
under our credit facility.
We expect to have sufficient liquidity to support the development of our business. In the
future, however, we may require additional financing for liquidity, capital requirements and
growth initiatives. We are dependent on our ability to generate cash flows from operations and
to borrow funds and issue securities in the capital markets to maintain and expand our business.
We may need to incur debt on terms and at interest rates that may not be as favorable as they
have been.
22
Our current credit facility is comprised of a group of lenders, each of which has severally
agreed to make loans to us under the facility. Currently each of these lenders has met its
individual obligation; however, based on the recent instability related to financial
institutions we can make no assurances that all future obligations will be met. A failure by one
or more of the participants to meet its obligation in the future could have a materially adverse
impact on our liquidity, results of operations and financial condition.
In late 2008 and early 2009, the credit markets experienced extreme volatility and
disruption. Any inability by us to obtain financing in the future on favorable terms could have
a negative effect on our results of operations, cash flows and financial condition.
Failure to obtain or renew surety bonds in a timely manner and on acceptable terms could
affect our ability to secure reclamation and employee-related obligations, which could adversely
affect our ability to mine coal.
U.S. federal and state laws require us to secure certain of our obligations relating to
reclaiming land used for mining, paying federal and state workers compensation, and satisfying
other miscellaneous obligations. The primary method for us to meet those obligations is to
provide a third-party surety bond or letters of credit. As of December 31, 2009, we had
outstanding surety bonds and letters of credit aggregating $506.8 million, of which $221.2
million was for post-mining reclamation, $201.1 million related to workers compensation
obligations, $50.5 million was for retiree health obligations, $10.3 million was for coal lease
obligations and $23.7 million was for other obligations (including collateral for surety
companies and bank guarantees, road maintenance and performance guarantees). These bonds are
typically renewable on an annual basis and the letters of credit are available through our
credit facility.
The current economic recession and volatility and disruption in the credit markets could
result in surety bond issuers deciding not to continue to renew the bonds or to demand
additional collateral upon those renewals. Our failure to maintain, or inability to acquire,
surety bonds or to provide a suitable alternative would have a material adverse effect on us.
That failure could result from a variety of factors including lack of availability, higher
expense or unfavorable market terms of new surety bonds, restrictions on the availability of
collateral for current and future third-party surety bond issuers under the terms of our credit
facility and the exercise by third-party surety bond issuers of their right to refuse to renew
the surety.
We could be adversely affected by a decline in the creditworthiness or financial condition
of our customers.
A significant portion of our revenues is generated through sales to a marketing affiliate
of Peabody, and we supply coal to Peabody on a contract basis so Peabody can meet its
commitments under customer agreements in existence prior to the spin-off sourced from our
operations. Our remaining sales are made directly to electric utilities, industrial companies
and steelmakers.
Our ability to receive payment for coal sold and delivered depends on the continued
creditworthiness of our customers. Our customer base has changed with deregulation as some
utilities have sold their power plants to their non-regulated affiliates or third parties. These
new power plant owners or other customers may have credit ratings that are below investment
grade. If the creditworthiness of our customers declines significantly and customers fail to
stay current on their payments, our business could be adversely affected.
As of December 31, 2009, we had $142.4 million in notes receivable outstanding from a
single counterparty, arising out of the sale of coal reserves and surface land. Each of these
notes contains a cross-collaterization provision secured primarily by the underlying coal
reserves and surface land.
In addition, many companies are struggling to maintain their business given the current
economic conditions. If our customers are significantly and negatively impacted by the current
economic conditions, or by other business factors, our results of operations and financial
condition could be materially adversely affected.
Prolonged global recessionary conditions could adversely affect our financial condition and
results of operations.
Because
we sell substantially all of our coal to electric utilities and steel
producers, our
business and results of operations are closely linked to global demand for electricity and
steel production. Historically, global demand for basic inputs, including electricity and steel production, has
decreased during periods of economic downturn. Prolonged decreases in global demand for
electricity and steel production, could adversely affect our financial condition and results of
operations.
The current downturn in the domestic and international financial markets has created economic uncertainty
and raised the risk of prolonged global recessionary conditions. During this current downturn, as the demand
for coal declined, certain of our thermal and metallurgical coal customers delayed shipments or requested
deferrals pursuant to existing long-term coal supply agreements. Other customers may, in the future,
seek to delay shipments or request deferrals under existing agreements. Customer deferrals, if agreed to,
could affect the amount of revenue we recognize in a certain period and could adversely affect our results
of operations and liquidity if we do not receive equivalent value from such customers and we are unable to
sell committed coal at the contracted prices under our existing coal supply agreements.
Additionally, certain of our contracts establish prices and terms that allow us to expect relatively higher levels of
profitability than other contracts, assuming both we and our customer perform under the terms of these agreements. To
the extent we or a customer do not fully perform under one of these relatively more profitable contracts, our results
of operations and operating profit in the reporting period during which such non performance occurs would be
materially and adversely affected.
A decrease in the availability or increase in costs of key supplies, capital equipment or
commodities used in our mining operations could decrease our profitability.
Our purchases of some items of underground mining equipment are concentrated with one
principal supplier. Further, our coal mining operations use significant amounts of steel, diesel
fuel, explosives and tires. Steel is used in roof control for roof bolts that are required for
the room-and-pillar method of mining. If the cost of any of these inputs increases
significantly, or if a source for such mining equipment or supplies was unavailable to meet our
replacement demands, our profitability could be reduced.
23
Failures of contractor-operated sources to fulfill the delivery terms of their contracts
with us could reduce our profitability.
Within our normal mining operations, we utilize third party sources for some coal
production, including contract miners, to fulfill deliveries under our coal supply agreements.
Approximately 23% of our total sales volume for 2009 was attributable to third-party
contractor-operated mines. Certain of their mines have experienced adverse geologic conditions,
escalated operating costs and/or financial difficulties that have made their delivery of coal to
us at the contracted price difficult or uncertain and, in many instances, these costs have been
passed along to us. Our profitability or exposure to loss on transactions or relationships such
as these is dependent upon a variety of factors, including the availability and reliability of
the third-party supply; the price and financial viability of the third-party supply; our
obligation to supply coal to our customers in the event that adverse geologic conditions
restrict deliveries from our suppliers; our willingness to reimburse temporary cost increases
experienced by third-party coal suppliers; our ability to pass on temporary cost increases to
customers; our ability to substitute, when economical, third-party coal sources with internal
production or coal purchased in the market; and other factors.
Fluctuations in transportation costs, the availability or reliability of transportation
facilities and our dependence on a single rail carrier for transport from certain of our mining
complexes could affect the demand for our coal or temporarily impair our ability to supply coal
to our customers.
Coal producers depend upon rail, barge, truck, overland conveyor, ocean-going
vessels and port facilities to deliver coal to customers. While our coal customers typically
arrange and pay for transportation of coal from the mine or port to the point of use, disruption
of these transportation services because of weather-related problems, infrastructure damage,
strikes, lock-outs, lack of fuel or maintenance items, transportation delays, lack of rail or
port capacity or other events could temporarily impair our ability to supply coal to customers
and thus could adversely affect our results of operations, cash flows and financial condition.
Transportation costs represent a significant portion of the total cost of coal for our
customers, and the cost of transportation is an important factor in a customers purchasing
decision. Increases in transportation costs, including increases resulting from emission control
requirements and fluctuations in the price of diesel fuel and demurrage, could make coal a less
competitive source of energy when compared to alternative fuels such as natural gas, or could
make Appalachian and/or Illinois Basin coal production less competitive than coal produced in
other regions of the U.S. or abroad.
Significant decreases in transportation costs could result in increased competition from
coal producers in other parts of the country and from abroad. Coordination of the many eastern
loading facilities, the large number of small shipments, terrain and labor issues all combine to
make shipments originating in the eastern U.S. inherently more expensive on a per ton-mile basis
than shipments originating in the western U.S. Historically, high coal transportation rates from
the western coal producing areas into Central Appalachian markets limited the use of western
coal in those markets. However, a decrease in rail rates from the western coal producing areas
to markets served by eastern U.S. producers could create major competitive challenges for
eastern producers. Increased competition due to changing transportation costs could have an
adverse effect on our business, financial condition and results of operations.
Coal produced at certain of our mining complexes is transported to our customers by a
single rail carrier. If there are significant disruptions in the rail services provided by that
carrier or if the rail rates rise significantly, then costs of transportation for our coal could
increase substantially. Additionally, if there are disruptions of the transportation services
provided by the railroad and we are unable to find alternative transportation providers to ship
our coal, our business and profitability could be adversely affected.
Our future success depends upon our ability to develop our existing coal reserves and to
acquire additional reserves that are economically recoverable.
Our recoverable reserves decline as we produce coal. We have not yet applied for the
permits required or developed the mines necessary to use all of our proven and probable coal
reserves that are economically recoverable. Furthermore, we may not be able to mine all of our
proven and probable coal reserves as profitably as we do at our current operations. Our future
success depends upon our conducting successful exploration and development activities and
acquiring properties containing economically recoverable proven and probable coal reserves. Our
current strategy includes using our existing properties and increasing our proven and probable
coal reserves through acquisitions of leases and producing properties.
Our planned mine development projects and acquisition activities may not result in
significant additional proven and probable coal reserves and we may not have continuing success
developing additional mines. A substantial portion of our proven and probable coal reserves is
not located adjacent to current operations and will require significant capital expenditures to
develop. In order to develop our proven and probable coal reserves, we must receive various
governmental permits. We make no assurances that we will be able to obtain the governmental
permits that we would need to continue developing our proven and probable coal reserves.
24
Our mining operations are conducted on properties owned or leased by us. We may not be able
to negotiate new leases from private parties or obtain mining contracts for properties
containing additional proven and probable coal reserves or maintain our leasehold interest in
properties on which mining operations are not commenced during the term of the lease.
Inaccuracies in our estimates of economically recoverable coal reserves could result in
lower than expected revenues, higher than expected costs or decreased profitability.
We base our proven and probable coal reserve information on engineering, economic and
geological data assembled and analyzed by our staff, which includes various engineers and
geologists, and outside firms. The reserve estimates as to both quantity and quality are
annually updated to reflect production of coal from the reserves and new drilling or other data
received. There are numerous uncertainties inherent in estimating quantities and qualities of
and costs to mine recoverable reserves, including many factors beyond our control. Estimates of
economically recoverable coal reserves and net cash flows necessarily depend upon a number of
variable factors and assumptions relating to geological and mining conditions, relevant
historical production statistics, the assumed effects of regulation and taxes, future coal
prices, operating costs, mining technology improvements, development costs and reclamation
costs.
For these reasons, estimates of the economically recoverable quantities and qualities
attributable to any particular group of properties, classifications of coal reserves based on
risk of recovery and estimates of net cash flows expected from particular reserves prepared by
different engineers or by the same engineers at different times may vary substantially. Actual
coal tonnage recovered from identified reserve areas or properties and revenues and expenditures
with respect to our proven and probable coal reserves may vary materially from estimates. These
estimates, thus, may not accurately reflect our actual coal reserves. Any inaccuracy in our
estimates related to our proven and probable coal reserves could result in lower than expected
revenues, higher than expected costs or decreased profitability.
As our coal supply agreements expire, our revenues and operating profits could be
negatively impacted if we are unable to extend existing agreements or enter new long-term supply
agreements due to competition, changing coal purchasing patterns or other variables.
As our coal supply agreements expire, we will compete with other coal suppliers to
renew these agreements or to obtain new sales. If we cannot renew these coal supply agreements
with our customers or find alternate customers willing to purchase our coal, our revenue and
operating profits could suffer. We continue to supply coal to Peabody under contracts that
existed at the date of spin-off. Contracts with Peabody to purchase coal sourced from our
operations accounted for 22% of our revenues for 2009, compared with 35% of our revenues in
2008.
Our customers may decide not to extend existing agreements or enter into new long-term
contracts or, in the absence of long-term contracts, may decide to purchase fewer tons of coal
than in the past or on different terms, including under different pricing terms. The global
recession has resulted in decreased demand worldwide for steel and electricity. This decrease in
demand may cause our customers to delay negotiations for new contracts and/or request lower
pricing terms. Furthermore, uncertainty caused by laws and regulations affecting electric
utilities could deter our customers from entering into long-term coal supply agreements. Some
long-term contracts contain provisions for termination due to environmental changes if these
changes prohibit utilities from burning the contracted coal. To the degree that we operate
outside of long-term contracts, our revenues are subject to pricing in the spot market that can
be significantly more volatile than the pricing structure negotiated through a long-term coal
supply agreement. This volatility could adversely affect the profitability of our operations if
spot market pricing for coal is unfavorable.
In most of the contract price adjustment provisions, failure of the parties to agree on
price adjustments may allow either party to terminate the contract. Coal supply agreements
typically contain force majeure provisions allowing temporary suspension of performance by us or
the customer during the duration of specified events beyond the control of the affected party.
Most of our coal supply agreements contain provisions requiring us to deliver coal meeting
quality thresholds for certain characteristics such as heat value, sulfur content, ash content,
chlorine content, hardness and ash fusion temperature in the case of thermal coal. Failure to
meet these specifications could result in economic penalties, including price adjustments,
purchasing replacement coal in a higher priced open market, the rejection of deliveries or
termination of the contracts.
Many agreements also contain provisions that permit the parties to adjust the contract
price upward or downward for specific events, including inflation or deflation, and changes in
the laws regulating the timing, production, sale or use of coal. Moreover, a limited number of
these agreements permit the customer to terminate the contract if transportation costs, which
are typically borne by the customer, increase substantially or in the event of changes in
regulations affecting the coal industry, that increase the price of coal beyond specified
amounts.
25
Any defects in title of leasehold interests in our properties could limit our ability to
mine these properties or could result in significant unanticipated costs.
We conduct a significant part of our mining operations on properties that we lease. These
leases were entered into over a period of many years by certain of our predecessors and title to
our leased properties and mineral rights may not be thoroughly verified until a permit to mine
the property is obtained. Our right to mine some of our proven and probable coal reserves may be
materially adversely affected if there were defects in title or boundaries. In order to obtain
leases or mining contracts to conduct our mining operations on property where these defects
exist, we may in the future have to incur unanticipated costs, which could adversely affect our
profitability.
The covenants in our credit facility and other debt indentures impose restrictions that
could limit our operational and financial flexibility.
The credit facility contains certain customary covenants, including financial covenants
limiting our total indebtedness (maximum leverage ratio of 2.75) and requiring minimum EBITDA
(as defined in the credit facility) coverage of interest expense (minimum interest coverage
ratio of 4.0), as well as certain limitations on, among other things, additional debt, liens,
investments, acquisitions and capital expenditures, future dividends, common stock repurchases
and asset sales. Compliance with debt covenants may limit our ability to draw on our credit
facility. In addition, the indenture for our convertible notes prohibits us from engaging in
certain mergers or acquisitions unless, among other things, the surviving entity assumes our
obligations under the notes. These and other provisions could prevent or deter a third party
from acquiring us even where the acquisition could be beneficial to our stockholders.
The ownership and voting interest of Patriot stockholders could be diluted as a result of
the issuance of shares of our common stock to the holders of convertible notes upon conversion.
The issuance of shares of our common stock upon conversion of the convertible notes
could dilute the interests of Patriots existing stockholders. The convertible notes are
convertible at the option of the holders during the period from issuance to February 15, 2013
into a combination of cash and shares of our common stock, unless we elect to deliver cash in
lieu of the common stock portion. The number of shares of our common stock that we may deliver
upon conversion will depend on the price of our common stock during an observation period as
described in the indenture. Specifically, the number of shares deliverable upon conversion will
increase as the common stock price increases above the conversion price of $67.67 per share
during the observation period. The maximum number of shares that we may deliver is 2,955,560.
However, if certain fundamental changes occur in our business that are deemed make-whole
fundamental changes as defined by the indenture, the number of shares deliverable on conversion
may increase, up to a maximum amount of 4,137,788 shares. These maximum amounts, the conversion
rate and conversion price are subject to adjustment for certain dilutive events, such as a stock
split or a distribution of a stock dividend.
The net share settlement feature of our convertible notes may have adverse consequences on
our liquidity.
We will pay an amount in cash equal to the aggregate principal portion of our convertible
notes calculated as described under the indenture for the convertible notes. Because we must
settle at least a portion of the conversion obligation with regard to the convertible notes in
cash, the conversion of our convertible notes may significantly reduce our liquidity.
Peabody and its shareholders who received Patriot shares at the time of the spin-off could
be subject to material amounts of taxes if the spin-off is determined to be a taxable
transaction.
On September 26, 2007, Peabody received a ruling from the Internal Revenue Service (IRS) to
the effect that the spin-off qualified as a tax-free transaction under Section 355 of the Code.
The IRS did not rule on whether the spin-off satisfied certain requirements necessary to obtain
tax-free treatment under Section 355 of the Code. Therefore, in addition to obtaining the ruling
from the IRS, Peabody received a favorable opinion from Ernst & Young LLP as to the satisfaction
of these qualifying conditions required for the application of Section 355 to the spin-off.
Ernst & Young LLPs tax opinion is not binding on the IRS or the courts.
The letter ruling and the Ernst & Young LLP opinion relied on certain representations,
assumptions and undertakings, including those relating to the past and future conduct of our
business, and neither the letter ruling nor the Ernst & Young LLP opinion would be valid if such
representations, assumptions and undertakings were incorrect. Moreover, the letter ruling did
not address all of the issues that are relevant to determining whether the distribution would
qualify for tax-free treatment. Notwithstanding the letter ruling and the Ernst & Young LLP
opinion, the IRS could determine that the distribution should be treated as a taxable
transaction if it determines that any of the representations, assumptions or undertakings that
were included in the request for the letter ruling are false or have been violated or if it
disagrees with the conclusions in the Ernst & Young LLP opinion that are not covered by the
letter ruling. If, notwithstanding the letter ruling and opinion, the spin-off is determined to
be a taxable transaction, Peabody shareholders who received Patriot shares at the time of the
spin-off and Peabody could be subject to material amounts of taxes.
26
Patriot could be liable to Peabody for adverse tax consequences resulting from certain
change in control transactions and therefore could be prevented from engaging in strategic or
capital raising transactions.
Peabody could recognize taxable gain if the spin-off is determined to be part of a plan or
series of related transactions pursuant to which one or more persons acquire, directly or
indirectly, stock representing a 50% or greater interest in either Peabody or Patriot. Under the
Code, any acquisitions of Peabody or Patriot within the four-year period beginning two years
before the date of the spin-off are presumed to be part of such a plan unless they are covered
by at least one of several mitigating rules established by IRS regulations. Nonetheless, a
merger, recapitalization or acquisition, or issuance or redemption of Patriot common stock after
the spin-off could, in some circumstances, be counted toward the 50% change of ownership
threshold. The tax separation agreement precludes Patriot from engaging in some of these
transactions unless Patriot first obtains a tax opinion acceptable to Peabody or an IRS ruling
to the effect that such transactions will not result in additional taxes. The tax separation
agreement further requires Patriot to indemnify Peabody for any resulting taxes regardless of
whether Patriot first obtains such opinion or ruling. As a result, Patriot may not be able to
engage in strategic or capital raising transactions that stockholders might consider favorable,
or to structure potential transactions in the manner most favorable to Patriot.
Although not required pursuant to the terms of the tax separation agreement, in connection
with the execution of the Magnum merger agreement, Patriot obtained an opinion dated April 2,
2008 from Ernst & Young LLP to the effect that the issuance of the Patriot common stock pursuant
to the merger agreement would not result in an acquisition of a 50% or greater interest in
Patriot within the meaning of Sections 355(d)(4) and (3)(4)(A) of the Code.
Terrorist attacks and threats, escalation of military activity in response to such attacks
or acts of war may negatively affect our business, financial condition and results of
operations.
Terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts
involving the U.S. or its allies, or military or trade disruptions affecting our customers or
the economy as a whole may materially adversely affect our operations or those of our customers.
As a result, there could be delays or losses in transportation and deliveries of coal to our
customers, decreased sales of our coal and extension of time for payment of accounts receivable
from our customers. Strategic targets such as energy-related assets may be at greater risk of
future terrorist attacks than other targets in the United States. In addition, disruption or
significant increases in energy prices could result in government-imposed price controls. Any of
these occurrences, or a combination of them, could have a material adverse effect on our
business, financial condition and results of operations.
Risks Related to Environmental and Other Regulation
Recent increased focus by regulatory authorities on the effects of surface coal mining on
the environment, the disposal of mining spoil material and surface coal mining permitting may
materially adversely affect us.
Section 404 of the Clean Water Act requires mining companies to obtain ACOE permits to
place material in streams for the purpose of creating slurry ponds, water impoundments, refuse
areas, valley fills or other mining activities. As is the case with other coal mining companies
operating in Appalachia, our construction and mining activities, including certain of our
surface mining operations, frequently require Section 404 permits. ACOE issues two types of
permits pursuant to Section 404 of the Clean Water Act: nationwide (or general) and
individual permits. Nationwide permits are issued to streamline the permitting process for
dredging and filling activities that have minimal adverse environmental impacts. Regulators are
considering prohibiting the use of nationwide permits for surface coal mining in Appalachia.
The issuance of permits to construct valley fills and refuse impoundments under Section 404 of
the Clean Water Act, has been the subject of many recent court cases and increased regulatory
oversight resulting in permitting delays that are expected to cause a delay in or even prevent
the opening of new mines.
See Item 1. Regulatory Matters for additional description of Section 404 of the Clean Water Act.
It is unknown what future changes will be implemented to the permitting review and issuance
process or to other aspects of surface mining operations, but the increased regulatory focus,
future laws and judicial decisions and any other future changes could materially and adversely
affect all coal mining companies operating in Appalachia, including us. In particular, we will
incur additional permitting and operating costs and we could be unable to obtain new permits or
maintain existing permits and we could incur fines, penalties and other costs, any of which
could materially adversely affect our business. If surface coal mining methods are limited or
prohibited, it could significantly increase our operational costs and make it more difficult to
economically recover a significant portion of our reserves. In the event that we cannot increase
the price we charge for coal to cover the higher production costs without reducing customer
demand for our coal, there could be a material adverse effect on our financial condition and
results of operations. In addition, increased public focus on the environmental, health and
aesthetic impacts of surface coal mining could harm our reputation and reduce demand for coal.
27
Like many of our competitors, we cannot always completely comply with permit restrictions
relating to the discharge of selenium into surface water, which has led to court challenges and
related orders and settlements, has required us to pay fines and penalties, and may require us
to incur other significant costs and may be difficult to resolve on a timely basis given current
technology.
Selenium is a naturally occurring element that is encountered in earthmoving operations.
The extent of selenium occurrence varies depending upon site specific geologic conditions.
Selenium is encountered globally in coal mining, phosphate mining and agricultural operations.
In coal mining applications, selenium can be discharged to surface water when mine tailings are
exposed to rain and other natural elements. Selenium effluent limits are included in permits
issued to us and other coal mining companies. Some of our permits have currently effective
limits on the selenium that can be discharged, and other permits have limits that will be
effective in the future. There is currently no reasonably available technology that has been
proven to effectively address selenium exceedances in permitted water discharges, and
accordingly we cannot currently meet the selenium discharge limits applicable to our operations.
A federal court ordered Apogee Coal Company, LLC (Apogee), one of our subsidiaries, to
develop and implement a treatment plan relating to the outfalls governed by its permits, or to
show cause of its inability to do so. In addition, as a result of a lawsuit filed by the WVDEP
in state court in West Virginia, Hobet Mining, LLC (Hobet), one of our subsidiaries, has entered
into a settlement agreement with the WVDEP requiring Hobet to pay fines and penalties with
respect to past violations of selenium limitations under four NPDES permits and to study
potential treatments to address the selenium discharges.
As a result of the above, we are actively engaged in studying potential solutions to
controlling selenium discharges and we have been installing test treatment facilities at various
permitted outfalls. Because the levels and frequency of selenium discharges at any given outfall
will be different, the solution for each outfall may be very different and a variety of
solutions will therefore ultimately be required. The potential solutions identified to date,
some of which have been provided to the federal court in West Virginia, have not proven to be
effective and otherwise may not be feasible due to a range of problems concerning technological
issues, prohibitive implementation costs and other issues. While we are actively continuing to
explore options, there can be no assurance as to when a definitive solution will be identified
and implemented. While these selenium discharge issues generally relate to historical rather
than ongoing mining operations, any failure to meet the deadlines in our consent decrees and
court orders or to otherwise comply with selenium limits in our permits could result in further
litigation against us, an inability to obtain new permits or to maintain existing permits, the
incurrence of significant and material fines and penalties or other costs and could otherwise
materially adversely affect our results of operations, cash flows and financial condition.
New developments in the regulation of greenhouse gas emissions and coal ash could
materially adversely affect our customers demand for coal and our results of operations, cash
flows and financial condition.
One by-product of burning coal is carbon dioxide, which has been linked in certain studies
as a contributor to climate change. Recently, legislators, including the U.S. Congress, have
been considering the passage of significant new laws, such as those that would impose a
nationwide cap on carbon dioxide and other greenhouse gas emissions and require major sources,
including coal-fueled power plants, to obtain emission allowances to meet that cap, and other
measures are being imposed or proposed with the ultimate goal of reducing carbon dioxide and
other greenhouse gas emissions. In addition, the EPA and other regulators are using existing
laws, including the federal Clean Air Act, to impose obligations, including emissions limits, on
carbon dioxide and other greenhouse gas emissions. Further, governmental agencies have been
providing grants or other financial incentives to entities developing or selling alternative
energy sources with lower levels of greenhouse gas emissions, which may lead to more competition
from those subsidized entities.
See Item 1. Regulatory Matters for additional discussion of greenhouse gas emission regulation.
There have also been several public nuisance lawsuits brought against power, coal, oil and
gas companies alleging that their operations are contributing to climate change. At least two
U.S. federal appellate courts have permitted these lawsuits to proceed. The plaintiffs are
seeking various remedies, including punitive and compensatory damages and injunctive relief.
Global treaties are also being considered that place restrictions on carbon dioxide and other
greenhouse gas emissions.
A well publicized failure in December 2008 of an ash slurry impoundment maintained by the
Tennessee Valley Authority has led to new legislative and regulatory proposals that, if enacted,
may impose significant obligations on us or our customers. The EPA has indicated that it plans
to proceed in developing regulations to address the management of coal ash.
These current, potential and any future international, federal, state, regional or local
laws, regulations or court orders addressing greenhouse gas emissions and/ or coal ash will
likely require additional controls on coal-fueled power plants and industrial boilers and may
cause some users of coal to close existing facilities, reduce construction of new facilities or
switch from coal to alternative fuels. These ongoing and future developments may have a material
adverse impact on the global supply and demand for coal, and as a result could materially
adversely affect our results of operations, cash flows and financial condition. Even in the
absence of future developments, increased awareness of, and any adverse publicity regarding,
greenhouse gas emissions and coal ash disposal associated with coal and coal-fueled power plants
could affect our customers reputation and reduce demand for coal.
28
Our mining operations are extensively regulated, which imposes significant costs on us, and
future regulations or violations of regulations could increase those costs or limit our ability
to produce coal.
Federal and state authorities regulate the coal mining industry with respect to matters
such as employee health and safety, permitting and licensing requirements, the protection of the
environment, plants and wildlife, reclamation and restoration of mining properties after mining
is completed, surface subsidence from underground mining and the effects that mining has on
groundwater quality and availability. Numerous governmental permits and approvals are required
for mining operations. We are required to prepare and present to federal, state and/or local
authorities data pertaining to the effect or impact that any proposed exploration for or
production of coal may have upon the environment. In addition, significant legislation mandating
specified benefits for retired coal miners affects our industry. The costs, liabilities and
requirements associated with these regulations are often costly and time-consuming and
may delay commencement or continuation of exploration or production. New or revised
legislation or administrative regulations (or judicial or administrative interpretations of
existing laws and regulations), including proposals related to the protection of the environment
or employee health and safety that would further regulate and tax the coal industry and/or users
of coal, may also require us or our customers to change operations significantly or incur
increased costs, which may materially adversely affect our mining operations and our cost
structure. The majority of our coal supply agreements contain provisions that allow a purchaser
to terminate its contract if legislation is passed that either restricts the use or type of coal
permissible at the purchasers plant or results in specified increases in the cost of coal or
its use. These factors could have a material adverse effect on our results of operations, cash
flows and financial condition.
In the event of certain violations of safety rules, MSHA may order the temporary closure of
mines. Our customers may challenge our issuance of force majeure notices in connection with such
closures. If these challenges are successful, we could be obligated to make up lost shipments,
to reimburse customers for the additional costs to purchase replacement coal, or, in some cases,
to terminate certain sales contracts.
Our operations may impact the environment or cause exposure to hazardous substances, and
our properties may have environmental contamination, which could result in material liabilities
to us.
Certain of our current and historical coal mining operations have used hazardous materials
and, to the extent that such materials are not recycled, they could become hazardous waste. We
may be subject to claims under federal and state statutes and/or common law doctrines for toxic
torts and other damages, as well as for natural resource damages and for the investigation and
remediation of soil, surface water, groundwater, and other media under laws such as CERCLA,
commonly known as Superfund. Such claims may arise, for example, out of current or former
conditions at sites that we own or operate currently, as well as at sites that we and companies
we acquired owned or operated in the past, and at contaminated sites that have always been owned
or operated by third parties. Liability may be without regard to fault and may be strict, joint
and several, so that we may be held responsible for more than our share of the contamination or
other damages, or even for the entire share.
We maintain coal slurry impoundments at a number of our mines. Such impoundments are
subject to extensive regulation. Structural failure of an impoundment can result in extensive
damage to the environment and natural resources, such as streams or bodies of water and
wildlife, as well as related personal injuries and property damages which in turn can give rise
to extensive liability. Some of our impoundments overlie areas where some mining has occurred,
which can pose a heightened risk of failure and of damages arising out of failure. If one of our
impoundments were to fail, we could be subject to substantial claims for the resulting
environmental contamination and associated liability, as well as for fines and penalties. In
addition, the EPA administrator has publicly called for more inspections of coal slurry
impoundments.
These and other similar unforeseen impacts that our operations may have on the environment,
as well as exposures to hazardous substances or wastes associated with our operations, could
result in costs and liabilities that could adversely affect us.
We are involved in legal proceedings that if determined adversely to us, could
significantly impact our profitability, financial position or liquidity.
We are involved in various legal proceedings that arise in the ordinary course of business.
Some of the lawsuits seek fines or penalties and damages in very large amounts, or seek to
restrict our business activities. In particular, we are subject to legal proceedings relating to
our receipt of and compliance with permits under the Clean Water Act and to other legal
proceedings relating to environmental matters involving current and historical operations and
ownership of land. It is currently unknown what the ultimate resolution of these proceedings
will be, but the costs of resolving these proceedings could be material, and could result in an
obligation to change our operations in a manner that could have an adverse effect on us. See
Item 3. Legal Proceedings for a full description of our environmental claims and litigation.
29
If our assumptions regarding our likely future expenses related to employee benefit plans
are incorrect, then expenditures for these benefits could be materially higher than we have
assumed.
We provide post-retirement health and life insurance benefits to eligible union and
non-union employees. We calculated the total accumulated postretirement benefit obligation
according to the guidance provided by U.S. accounting standards. We estimated the present value
of the obligation to be $1.2 billion as of December 31, 2009. We have estimated these unfunded
obligations based on actuarial assumptions described in the notes to our consolidated financial
statements. If our assumptions do not materialize as expected, cash expenditures and costs that
we incur could be materially higher.
Due to our participation in multi-employer pension plans and statutory retiree healthcare
plans, we may have exposure that extends beyond what our obligations would be with respect to
our employees.
Certain of our subsidiaries participate in two defined benefit multi-employer pension funds
that were established as a result of collective bargaining with the UMWA pursuant to the 2007
NBCWA as periodically negotiated. These plans provide pension and disability pension benefits to
qualifying represented employees retiring from a participating employer where the employee last
worked prior to January 1, 1976, in the case of the UMWA 1950 Pension Plan, or after December
31, 1975, in the case of the UMWA 1974 Pension Plan. In December 2006, the 2007 NBCWA was
signed, which required funding of the 1974 Pension Plan through 2011 under a phased funding
schedule. The funding is based on an hourly rate for active UMWA workers. Under the labor
contract, the per hour funding rate increased to $4.25 in 2009 and will increase each year
thereafter until reaching $5.50 in 2011. Our subsidiaries with UMWA-represented employees are
required to contribute to the 1974 Pension Plan at the new hourly rates. Contributions to these
funds could increase as a result of future collective bargaining with the UMWA, a shrinking
contribution base as a result of the insolvency of other coal companies who currently contribute
to these funds, lower than expected returns on pension fund assets or other funding
deficiencies.
The 2006 Act authorized $490 million in general fund revenues to pay for certain benefits,
including the healthcare costs under the Combined Fund, 1992 Benefit Plan and 1993 Benefit Plan
for orphans who are retirees and their dependents. Under the 2006 Act, these orphan benefits
will be the responsibility of the federal government on a phased-in basis through 2012. If
Congress were to amend or repeal the 2006 Act or if the $490 million authorization were
insufficient to pay for these healthcare costs, certain of our subsidiaries, along with other
contributing employers and their affiliates, would be responsible for the excess costs. Our
aggregate cash payments to the Combined Fund, 1992 Benefit Plan and 1993 Benefit Plan were $17.5
million and $17.9 million during 2009 and 2008, respectively.
We could be liable for certain retiree healthcare obligations assumed by Peabody in
connection with the spin-off.
In connection with the spin-off, a Peabody subsidiary assumed certain retiree healthcare
obligations of Patriot and its subsidiaries having a present value of $665.0 million as of
December 31, 2009. These obligations arise under the Coal Act, the 2007 NBCWA and predecessor
agreements and a subsidiarys salaried retiree healthcare plan.
Although the Peabody subsidiary is obligated to pay such obligations, certain Patriot
subsidiaries also remain jointly and severally liable for the Coal Act obligations, and
secondarily liable for the assumed 2007 NBCWA obligations and retiree healthcare obligations for
certain participants under a subsidiarys retiree healthcare plan. As a consequence, Patriots
recorded retiree healthcare obligations and related cash costs could increase substantially if
the Peabody subsidiary would fail to perform its obligations under the liability assumption
agreements. These additional liabilities and costs, if incurred, could have a material adverse
effect on our results of operations, cash flows and financial condition.
We have significant reclamation and mine closure obligations. If the assumptions underlying
our accruals are inaccurate, we could be required to expend greater amounts than anticipated.
SMCRA establishes operational, reclamation and closure standards for all aspects of surface
mining, as well as most aspects of deep mining. We calculated the total estimated reclamation
and mine-closing liabilities in accordance with authoritative guidance. Estimates of our total
reclamation and mine-closing liabilities are based upon permit requirements and our engineering
expertise related to these requirements. As of December 31, 2009, we had accrued reserves of
$124.6 million for reclamation liabilities and an additional $119.9 million for mine closure
costs, including medical benefits for employees and water treatment due to mine closure. The
estimate of ultimate reclamation liability is reviewed annually by our management and engineers.
The estimated liability could change significantly if actual cost or timing vary from assumptions, if the
underlying facts change or if governmental requirements change significantly.
|
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Item 1B. |
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Unresolved Staff Comments. |
None.
30
Coal Reserves
We had an estimated 1.8 billion tons of proven and probable coal reserves as of December
31, 2009 located in Appalachia and the Illinois Basin. Of our proven and probable coal reserves
13%, or just over 247 million tons, are compliance coal and 1,595 million tons are
non-compliance coal. We own approximately 36% of these reserves and lease property containing
the remaining 64%. Compliance coal is coal which, when burned, emits 1.2 pounds or less of
sulfur dioxide per million Btu and complies with certain requirements of the Clean Air Act.
Electricity generators are able to use non-compliance coal by using emissions reduction
technology, using emission allowance credits or blending higher sulfur coal with lower sulfur
coal.
Below is a table summarizing the locations and reserves of our major operating regions.
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Proven and Probable |
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Reserves as of |
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December 31, 2009(1) |
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Owned |
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Leased |
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Total |
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Geographic Region |
|
Tons |
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Tons |
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Tons |
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|
(In millions) |
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|
Appalachia |
|
|
280 |
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|
|
916 |
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1,196 |
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Illinois Basin |
|
|
380 |
|
|
|
266 |
|
|
|
646 |
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|
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|
Total proven and probable coal reserves |
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|
660 |
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|
|
1,182 |
|
|
|
1,842 |
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|
|
|
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|
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(1) |
|
Reserves have been adjusted to take into account recoverability factors in
producing a saleable product. |
Reserves are defined by SEC Industry Guide 7 as that part of a mineral deposit which could
be economically and legally extracted or produced at the time of the reserve determination.
Proven and probable coal reserves are defined by SEC Industry Guide 7 as follows:
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Proven (Measured) Reserves. Reserves for which (a) quantity is computed from
dimensions defined by outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so close and the geologic character
is so well defined that size, shape, depth and mineral content of coal reserves are
well-established. |
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Probable (Indicated) Reserves. Reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven (measured)
reserves, but the sites for inspection, sampling and measurement are farther apart
or are otherwise less adequately spaced. The degree of assurance, although lower
than that for proven (measured) reserves, is high enough to assume continuity
between points of observation. |
Our estimates of 1,118 million tons of proven and 724 million tons of probable coal
reserves are established within these guidelines. Patriot does not include sub-economic coal
within these proven and probable reserve estimates. Proven reserves require the coal to lie
within one-quarter mile of a valid point of measure or point of observation, such as exploratory
drill holes or previously mined areas. Estimates of probable reserves may lay more than
one-quarter mile, but less than three-quarters of a mile, from a point of thickness measurement.
Estimates within the proven category have the highest degree of assurance, while estimates
within the probable category have only a moderate degree of geologic assurance. Further
exploration is necessary to place probable reserves into the proven reserve category. Our active
properties generally have a much higher degree of reliability because of increased drilling
density.
Reserve estimates as of December 31, 2009 were prepared by our Director of Geology, a
Certified Professional Geologist, by updating the December 31, 2008 estimates and incorporating
reserve statements from outside consultants for certain operations. The reserve estimation
process includes evaluating select reserve areas, updating estimates to reflect remodeling and
additional available drilling information and coordinating third-party reviews when deemed
necessary. This process confirmed that Patriot had approximately 1.8 billion tons of proven and
probable reserves as of December 31, 2009.
31
Our reserve estimates are predicated on information obtained from an ongoing drilling
program, which totals more than 35,000 individual data points. We compile data from individual
data points in a computerized drill-hole database from which the depth, thickness and, where
core drilling is used, the quality of the coal are determined. The density of the data
determines whether the reserves will be classified as proven or probable. The reserve estimates
are then input into a computerized land management system, which overlays the geological data
with data on ownership or control of the mineral and surface interests to determine the extent
of our proven and probable coal reserves in a given area. The land management system contains
reserve information, including the quantity and quality (where available) of coal reserves as
well as production rates, surface ownership, lease payments and other information relating to
our coal reserves and land holdings. We periodically update our reserve estimates to reflect
production of coal from the reserves and new drilling or other data received. Accordingly,
reserve estimates will change from time to time to reflect mining activities, analysis of new
engineering and geological data, changes in reserve holdings, modification of mining methods and
other factors.
Our estimate of the economic recoverability of our proven and probable coal reserves is
based upon a comparison of unassigned reserves to assigned reserves currently in production in
the same geologic setting to determine an estimated mining cost. These estimated mining costs
are compared to existing market prices for the quality of coal expected to be mined and take
into consideration typical contractual sales agreements for the region and product. Where
possible, we also review production by competitors in similar mining areas. Only coal reserves
expected to be mined economically are included in our reserve estimates. Finally, our coal
reserve estimates include reductions for recoverability factors to estimate a saleable product.
With respect to the accuracy of our reserve estimates, our experience is that recovered
reserves are within plus or minus 10% of our proven and probable estimates, on average. Our
probable estimates are generally within the same statistical degree of accuracy when the
necessary drilling is completed to move reserves from the probable to the proven classification.
The expected degree of variance from reserve estimate to tons produced is lower in the Illinois
Basin due to the continuity of the coal seams as confirmed by the mining history. Appalachia has
a higher degree of risk due to the mountainous nature of the topography which makes exploration
drilling more difficult. Our proven and probable reserves in Appalachia are less predictable and
may vary by an additional one to two percent above the threshold discussed above.
Private coal leases normally have terms of between 10 and 20 years and usually give us the
right to renew the lease for a stated period or to maintain the lease in force until the
exhaustion of mineable and merchantable coal contained on the relevant site. These private
leases provide for royalties to be paid to the lessor either as a fixed amount per ton or as a
percentage of the sales price. Many leases also require payment of a lease bonus or minimum
royalty, payable either at the time of execution of the lease or in periodic installments.
The terms of our private leases are normally extended by active production on or near the
end of the lease term. Leases containing undeveloped reserves may expire or these leases may be
renewed periodically. With a portfolio of approximately 1.8 billion tons, we believe that we
have sufficient reserves to replace capacity from depleting mines for an extensive period of
time and that our significant base of proven and probable coal reserves is one of our strengths.
We believe that the current level of production at our major mines is sustainable for the
foreseeable future.
Consistent with industry practice, we conduct only limited investigation of title to our
coal properties prior to leasing. Title to land and reserves of the lessors or grantors and the
boundaries of our leased properties are not completely verified until we prepare to mine those
reserves.
32
The following chart provides a summary, by geographic region and mining complex, of
production for the years ended December 31, 2009, 2008 and 2007, tonnage of coal reserves
assigned to our operating mines, property interest in those reserves and other characteristics
of the facilities. Production for the Magnum operations is included from the date the
acquisition was consummated, July 23, 2008.
PRODUCTION AND ASSIGNED RESERVES(1)
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Production |
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Sulfur Content(2) |
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|
As of December 31, 2009 |
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>1.2 to 2.5 |
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≤1.2 lbs. |
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lbs. |
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>2.5 lbs. |
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Year |
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Year |
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Year |
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Sulfur |
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Sulfur |
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Sulfur |
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As |
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Assigned |
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Ended |
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Ended |
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Ended |
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Dioxide |
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Dioxide |
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Dioxide |
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Received |
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Proven and |
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Geographic Region/ |
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Dec 31, |
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Dec 31, |
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Dec 31, |
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Type of |
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per |
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per |
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per |
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Btu per |
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Probable |
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Under- |
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Mining Complex |
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2009 |
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2008 |
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2007 |
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Coal |
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Million Btu |
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Million Btu |
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Million Btu |
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Pound(3) |
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Reserves |
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Owned |
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Leased |
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Surface |
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|
ground |
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(Tons in millions) |
|
Appalachia: |
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Big Mountain |
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2.0 |
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1.9 |
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1.6 |
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Steam |
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9 |
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17 |
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12,200 |
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|
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26 |
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26 |
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26 |
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Blue Creek |
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0.1 |
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Steam |
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15 |
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12,000 |
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15 |
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15 |
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15 |
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Campbells Creek |
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1.0 |
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0.6 |
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Steam |
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1 |
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2 |
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12,200 |
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3 |
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3 |
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3 |
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Corridor G |
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3.6 |
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1.6 |
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Steam |
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5 |
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71 |
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1 |
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12,500 |
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|
|
77 |
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3 |
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74 |
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53 |
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24 |
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Jupiter |
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0.2 |
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Steam |
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2 |
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17 |
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12,500 |
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19 |
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|
19 |
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4 |
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15 |
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Kanawha Eagle |
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1.9 |
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2.1 |
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2.1 |
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Met/Steam |
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|
46 |
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5 |
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39 |
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13,100 |
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90 |
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90 |
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90 |
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Logan County |
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2.6 |
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1.0 |
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Met/Steam |
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21 |
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4 |
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12,900 |
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25 |
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8 |
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17 |
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15 |
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10 |
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Paint Creek |
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2.1 |
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1.1 |
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Met/Steam |
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8 |
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23 |
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13,300 |
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31 |
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31 |
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4 |
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27 |
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Panther |
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2.1 |
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0.6 |
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Met/Steam |
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44 |
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24 |
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13,500 |
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68 |
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1 |
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67 |
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|
|
|
68 |
|
Remington |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
Steam |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
12,200 |
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
1 |
|
|
|
5 |
|
Rocklick |
|
|
1.5 |
|
|
|
2.6 |
|
|
|
3.1 |
|
|
Met/Steam |
|
|
6 |
|
|
|
21 |
|
|
|
|
|
|
|
12,800 |
|
|
|
27 |
|
|
|
|
|
|
|
27 |
|
|
|
5 |
|
|
|
22 |
|
Wells |
|
|
3.4 |
|
|
|
3.4 |
|
|
|
3.2 |
|
|
Met/Steam |
|
|
24 |
|
|
|
23 |
|
|
|
|
|
|
|
13,400 |
|
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
47 |
|
Federal |
|
|
3.8 |
|
|
|
3.1 |
|
|
|
4.0 |
|
|
Steam |
|
|
|
|
|
|
12 |
|
|
|
42 |
|
|
|
13,300 |
|
|
|
54 |
|
|
|
48 |
|
|
|
6 |
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
24.3 |
|
|
|
18.5 |
|
|
|
14.0 |
|
|
|
|
|
|
|
169 |
|
|
|
237 |
|
|
|
82 |
|
|
|
|
|
|
|
488 |
|
|
|
60 |
|
|
|
428 |
|
|
|
82 |
|
|
|
406 |
|
Illinois Basin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluegrass |
|
|
2.5 |
|
|
|
2.8 |
|
|
|
2.5 |
|
|
Steam |
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
11,100 |
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
|
|
3 |
|
|
|
21 |
|
Dodge Hill |
|
|
0.9 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
Steam |
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
12,700 |
|
|
|
19 |
|
|
|
4 |
|
|
|
15 |
|
|
|
|
|
|
|
19 |
|
Highland |
|
|
3.7 |
|
|
|
3.9 |
|
|
|
3.9 |
|
|
Steam |
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
11,300 |
|
|
|
83 |
|
|
|
28 |
|
|
|
55 |
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7.1 |
|
|
|
7.7 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
126 |
|
|
|
32 |
|
|
|
94 |
|
|
|
3 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
31.4 |
|
|
|
26.2 |
|
|
|
21.5 |
|
|
|
|
|
|
|
169 |
|
|
|
237 |
|
|
|
208 |
|
|
|
|
|
|
|
614 |
|
|
|
92 |
|
|
|
522 |
|
|
|
85 |
|
|
|
529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following chart provides a summary of the amount of our proven and probable coal
reserves in each U.S. state, the predominant type of coal mined in the applicable location, our
property interest in the reserves and other characteristics of the facilities. |
ASSIGNED AND UNASSIGNED PROVEN AND PROBABLE COAL RESERVES(1)
AS OF DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur Content(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
>1.2 to 2.5 |
|
|
>2.5 lbs. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤1.2 lbs. |
|
|
lbs. |
|
|
Sulfur |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfur |
|
|
Sulfur |
|
|
Dioxide |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dioxide |
|
|
Dioxide |
|
|
per |
|
|
As |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per |
|
|
per |
|
|
Million Btu |
|
|
Received |
|
|
|
|
|
|
|
|
|
Total |
|
|
Tons |
|
|
Probable |
|
|
Proven |
|
|
Probable |
|
|
Type of |
|
|
Million Btu |
|
|
Million Btu |
|
|
(Non- |
|
|
Btu per |
|
|
Reserve Control |
|
|
Mining Method |
|
Coal Seam Location |
|
Assigned(1) |
|
|
Unassigned(1) |
|
|
Reserves |
|
|
(Measured) |
|
|
(Indicated) |
|
|
Coal |
|
|
(Phase II) |
|
|
(Phase I) |
|
|
Compliance) |
|
|
Pound(3) |
|
|
Owned |
|
|
Leased |
|
|
Surface |
|
|
Underground |
|
(Tons in millions) |
|
Appalachia: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio |
|
|
|
|
|
|
26 |
|
|
|
26 |
|
|
|
19 |
|
|
|
7 |
|
|
Steam |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
10,900 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
West Virginia |
|
|
488 |
|
|
|
682 |
|
|
|
1,170 |
|
|
|
793 |
|
|
|
377 |
|
|
Met/Steam |
|
|
243 |
|
|
|
671 |
|
|
|
256 |
|
|
|
13,000 |
|
|
|
254 |
|
|
|
916 |
|
|
|
189 |
|
|
|
981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
488 |
|
|
|
708 |
|
|
|
1,196 |
|
|
|
812 |
|
|
|
384 |
|
|
|
|
|
|
|
243 |
|
|
|
671 |
|
|
|
282 |
|
|
|
|
|
|
|
280 |
|
|
|
916 |
|
|
|
189 |
|
|
|
1,007 |
|
Illinois Basin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois |
|
|
|
|
|
|
237 |
|
|
|
237 |
|
|
|
94 |
|
|
|
143 |
|
|
Steam |
|
|
4 |
|
|
|
38 |
|
|
|
195 |
|
|
|
10,800 |
|
|
|
235 |
|
|
|
2 |
|
|
|
1 |
|
|
|
236 |
|
Kentucky |
|
|
126 |
|
|
|
283 |
|
|
|
409 |
|
|
|
212 |
|
|
|
197 |
|
|
Steam |
|
|
|
|
|
|
|
|
|
|
409 |
|
|
|
11,400 |
|
|
|
145 |
|
|
|
264 |
|
|
|
34 |
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
126 |
|
|
|
520 |
|
|
|
646 |
|
|
|
306 |
|
|
|
340 |
|
|
|
|
|
|
|
4 |
|
|
|
38 |
|
|
|
604 |
|
|
|
|
|
|
|
380 |
|
|
|
266 |
|
|
|
35 |
|
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total proven and
probable |
|
|
614 |
|
|
|
1,228 |
|
|
|
1,842 |
|
|
|
1,118 |
|
|
|
724 |
|
|
|
|
|
|
|
247 |
|
|
|
709 |
|
|
|
886 |
|
|
|
|
|
|
|
660 |
|
|
|
1,182 |
|
|
|
224 |
|
|
|
1,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Assigned reserves
represent recoverable coal
reserves that we have
committed to mine at
locations operating as of
December 31, 2009.
Unassigned reserves
represent coal at suspended
locations and coal that has
not been committed. These
reserves would require new
mine development, mining
equipment or plant
facilities before
operations could begin on the property. |
|
2) |
|
Compliance coal is
coal which, when burned,
emits 1.2 pounds or less of
sulfur dioxide per million
Btu and complies with the
Clean Air Act. Electricity
generators are able to use
coal that exceeds these
specifications by using
emissions reduction
technology, using emissions
allowance credits or
blending higher sulfur coal with lower sulfur coal. |
|
3) |
|
As-received Btu per
pound includes the weight
of moisture in the coal on
an as-sold basis. The
average moisture content
used in the determination
of as-received Btu in
Appalachia was 7%. The
moisture content used in
the determination of
as-received Btu in Illinois
Basin ranged from 9% to 14%. |
33
|
|
|
Item 3. |
|
Legal Proceedings. |
From time to time, Patriot and its subsidiaries are involved in legal proceedings,
arbitration proceedings and administrative procedures arising in the ordinary course of
business.
Management believes that the ultimate resolution of such pending or threatened proceedings is not reasonably likely to have a material effect on our financial position,
results of operations or cash flows.
Our significant legal proceedings are discussed below.
Environmental Claims and Litigation
We are subject to applicable federal, state and local environmental laws and regulations
where we conduct operations. Current and past mining operations are primarily covered by SMCRA,
the Clean Water Act and the Clean Air Act, but are also covered by, among other laws, CERCLA
(also known as Superfund) and RCRA.
Clean Water Act Permit Issues
The federal Clean Water Act and corresponding state and local laws and regulations affect
coal mining operations by restricting the discharge of pollutants, including dredged or fill
materials, into waters of the United States. In particular, the Clean Water Act requires
effluent limitations and treatment standards for wastewater discharge through the NPDES program.
NPDES permits, which we must obtain for both active and historical mining operations, govern the
discharge of pollutants into water, require regular monitoring and reporting, and set forth
performance standards. States are empowered to develop and enforce in-stream water quality
standards, which are subject to change and must be approved by the EPA. In-stream standards vary
from state to state.
Environmental claims and litigation in connection with our various NPDES permits, and
related Clean Water Act issues, include the following:
EPA Consent Decree
In February 2009, we entered into a consent decree with the EPA and the WVDEP to resolve
certain claims under the Clean Water Act and the West Virginia Water Pollution Control Act
relating to NPDES permits at several Magnum mining operations in West Virginia that existed
prior to our acquisition of these operations. The consent decree was entered by the federal
district court on April 30, 2009. Under the terms of the consent decree, we paid a civil penalty
of $6.5 million in June 2009. We also could be subject to stipulated penalties in the future for
failure to comply with certain permit requirements as well as certain other terms of the consent
decree. Because our operations are complex and periodically exceed our permit limitations, it is
possible that we will have to pay stipulated penalties in the future, but we do not expect the
amounts of any such penalties to be material. The civil penalty of $6.5 million was accrued as
part of the Magnum acquisition purchase accounting described in Note 6. The consent decree also
requires us to implement an enhanced company-wide environmental management system, which
includes regular compliance audits, electronic tracking and reporting, and annual training for
all employees and contractors with environmental responsibilities. In addition, we will complete
several stream restoration projects in consultation with the EPA and WVDEP. These latter
requirements could result in incremental operating costs in addition to the $6.5 million civil
penalty. We anticipate the incremental costs will be between $5 million and $10 million.
In a separate administrative proceeding with the WVDEP, we paid a civil penalty of $315,000
in the second quarter of 2009 for past violations of other NPDES permits held by certain
subsidiaries.
Apogee Coal Company, LLC (Apogee)
In 2007, Apogee, one of our subsidiaries, was sued in the U.S. District Court for the
Southern District of West Virginia (U.S. District Court) by the Ohio Valley Environmental
Coalition, Inc. (OVEC) and another environmental group (pursuant to the citizen suit provisions
of the Clean Water Act). We refer to this lawsuit as the Federal Apogee Case. This lawsuit
alleged that Apogee had violated water discharge limits for selenium set forth in one of its
NPDES permits. The lawsuit sought fines and penalties as well as injunctions prohibiting Apogee
from further violating laws and its permit.
On March 19, 2009, the U.S. District Court approved a consent decree between Apogee, Hobet
and the plaintiffs. The consent decree extended the compliance deadline to April 5, 2010 and
added interim reporting requirements up to that date. Under the terms of the March 2009 consent
decree, we paid a $50,000 penalty to the U.S. Treasury and $325,000 in attorneys fees in the
second quarter of 2009. We also agreed to spend approximately $350,000 to implement a pilot
project using certain reverse osmosis technology to determine whether the technology can
effectively treat selenium discharges from mining outfalls, and to undertake interim reporting
obligations. Finally, we agreed to comply with our NPDES permits water discharge limits for
selenium by April 5, 2010. We have completed the pilot project and submitted our findings for
review as required under the consent decree. We continue to install treatment systems at various permitted outfalls, but we will be
unable to comply with selenium discharge limits by April 5, 2010 due to the ongoing inability to identify effective
technology. We intend to seek a modification of the consent decree, to among other things, extend the compliance deadlines in order to continue our efforts to identify viable treatment alternatives.
34
Currently, available technology has not been fully tested or proven effective at addressing
selenium discharges in excess of allowable limits in mining outfalls similar to ours, and
alternative technology is still in the research stage of development. The potential solutions
identified to date, including the technology we are currently utilizing, have not been proven to
be effective at all scales of operation, and otherwise may not be feasible, particularly at
larger scale operations, due to a range of problems concerning technological issues, prohibitive
implementation costs and other issues. While we are actively continuing to explore options,
there can be no assurance as to when a definitive solution will be identified and implemented.
Legislative developments in West Virginia have created the potential for industry-wide
selenium compliance deadlines to be extended from 2010 to 2012. On May 13, 2009, the Governor of
West Virginia signed a bill that authorized the WVDEP to extend selenium compliance deadlines to
2012 and appropriated state funds for selenium research. The bill cites concerns within West
Virginia regarding the applicability of the research underlying the federal selenium criteria to
a state such as West Virginia which has high precipitation rates and free-flowing streams and
that the alleged environmental impacts that were documented in the applicable federal research
have not been observed in West Virginia. As a result of this bill, the WVDEP is required to
perform research that will assist in better defining and developing state laws and regulations
addressing selenium discharges.
We estimated the costs to treat our selenium discharges in excess of allowable limits at a
net present value of $85.2 million as of the Magnum acquisition date. This liability reflects
the estimated costs of the treatment systems necessary to be installed and maintained with the
goal of meeting the requirements of current court orders, consent decrees and mining permits.
This estimate was prepared considering the dynamics of current legislation, capabilities of
currently available technology and our planned remediation strategy. Future changes to
legislation, findings from current research initiatives and the pace of future technological
progress could result in costs that differ from our current estimates, which could have a
material adverse affect on our results of operations, cash flows and financial condition.
Additionally, any failure to meet the deadlines set forth in the March 2009 consent decree or
established by the federal government or the State of West Virginia or to otherwise comply with
selenium limits in our permits could result in further litigation against us, an inability to
obtain new permits or to maintain existing permits, and the imposition of significant and
material fines and penalties or other costs and could otherwise materially adversely affect our
results of operations, cash flows and financial condition.
Hobet Mining, LLC (Hobet)
In 2007, Hobet was sued for exceeding effluent limits contained in its NPDES permits in
state court in Boone County by the WVDEP. We refer to this case as the WVDEP Action. In 2008,
OVEC and another environmental group filed a lawsuit against Hobet and WVDEP in the U.S.
District Court (pursuant to the citizen suit provisions of the Clean Water Act). We refer to
this case as the Federal Hobet Case. The Federal Hobet Case involved the same four NPDES
permits that were the subject of the WVDEP Action in state court. However, the Federal Hobet
Case focused exclusively on selenium exceeding allowable limits in permitted water discharges,
while the WVDEP Action addressed all effluent limits, including selenium, established by the
permits. The Federal Hobet Case was included in the same March 19, 2009 consent decree that
addressed the Federal Apogee Case discussed above, and the terms of that consent decree,
including the April 5, 2010 deadline to comply with the selenium effluent limits established by
our permits, also apply to Hobet.
The WVDEP Action was resolved by a settlement and consent order entered in the Boone County
circuit court on September 5, 2008. As part of the settlement, we paid approximately $1.5
million in civil penalties, with the final payment made in July 2009. The settlement also
required us to complete five supplemental environmental projects estimated to cost approximately
$2.6 million, many of which focus on identifying methods for treatment of selenium discharges
and studying the effects of selenium on aquatic wildlife. Finally, we agreed to make gradual
reductions in the selenium discharges from our Hobet Job 21 surface mine, to achieve full
compliance with our NPDES permits by April 2010, and to study potential treatments for
wastewater runoff.
On October 8, 2009, a motion to enter a modified settlement and consent order was submitted
to the Boone County circuit court. This motion to modify the settlement and consent order was
jointly filed by Patriot and the WVDEP. The motion includes, among other term modifications, an
extension of the date to achieve full compliance with our NPDES permits from April 2010 to July
2012. On December 3, 2009, the Boone County circuit court approved and entered the modified
settlement and consent order.
As a result of ongoing litigation and federal regulatory initiatives related to water
quality standards that affect valley fills, impoundments and other mining practices, including
the selenium discharge matters described above, the process of applying for new permits has
become more time-consuming and complex, the review and approval process is taking longer, and in
certain cases, new permits may not be issued.
35
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
CERCLA and similar state laws create liability for investigation and remediation in
response to releases of hazardous substances in the environment and for damages to natural
resources. Under CERCLA and many similar state statutes, joint and several liability may be
imposed on waste generators, site owners and operators and others regardless of fault. These
regulations could require us to do some or all of the following: (i) remove or mitigate the
effects on the environment at various sites from the disposal or release of certain substances;
(ii) perform remediation work at such sites; and (iii) pay damages for loss of use and non-use
values.
Although waste substances generated by coal mining and processing are generally not
regarded as hazardous substances for the purposes of CERCLA and similar legislation, and are
generally covered by SMCRA, some products used by coal companies in operations, such as
chemicals, and the disposal of these products are governed by CERCLA. Thus, coal mines currently
or previously owned or operated by us, and sites to which we have sent waste materials, may be
subject to liability under CERCLA and similar state laws. A predecessor of one of our
subsidiaries has been named as a potentially responsible party at a third-party site, but given
the large number of entities involved at the site and our anticipated share of expected cleanup
costs, we believe that the ultimate liability, if any, will not be material to our financial
condition and results of operations.
Flood Litigation
2001 Flood Litigation
One of our subsidiaries, Catenary Coal Company, LLC (Catenary), has been named as a
defendant, along with various other property owners, coal companies, timbering companies and oil
and natural gas companies, in connection with alleged damages arising from flooding that
occurred on July 8, 2001 in various watersheds, primarily located in southern West Virginia
(referred to as the 2001 flood litigation). Pursuant to orders from the West Virginia Supreme
Court of Appeals, the cases are being handled as mass litigation, and a panel of three judges
was appointed to handle the matters that have been divided between the judges pursuant to the
various watersheds.
In December 2009, an agreement was reached to settle this litigation. These cases will be
dismissed once the settlement is finalized and approved by the West Virginia Supreme Court of
Appeals. Pursuant to the purchase and sale agreement related to Magnum, Arch Coal, Inc. (Arch)
indemnifies us against claims arising from certain pending litigation proceedings, including the
2001 flood litigation, which will continue indefinitely. The failure of Arch to satisfy its
indemnification obligations under the purchase agreement could have a material adverse effect on
us.
2004 Flood Litigation
In 2006, Hobet and Catenary, two of our subsidiaries, were named as defendants along with
various other property owners, coal companies, timbering companies and oil and natural gas
companies, in lawsuits arising from flooding that occurred on May 30, 2004 in various
watersheds, primarily located in southern West Virginia. This litigation is pending before two
different judges in the Circuit Court of Logan County, West Virginia. In the first action, the
plaintiffs have asserted that (i) Hobet failed to maintain an approved drainage control system
for a pond on land near, on, and/or contiguous to the sites of flooding; and (ii) Hobet
participated in the development of plans to grade, blast, and alter the land near, on, and/or
contiguous to the sites of the flooding. Hobet has filed a motion to dismiss both claims based
upon the assertion that insufficient facts have been stated to support the claims of the
plaintiffs.
In the second action, motions to dismiss have been filed, asserting that the allegations
asserted by the plaintiffs are conclusory in nature and likely deficient as a matter of law.
Most of the other defendants also filed motions to dismiss. Both actions were stayed during the
pendency of the appeals to the West Virginia Supreme Court of Appeals in the 2001 flood
litigation.
The outcome of the West Virginia flood litigation is subject to numerous uncertainties.
Based on our evaluation of the issues and their potential impact, the amount of any future loss
cannot be reasonably estimated. However, based on current information, we believe this matter is
likely to be resolved without a material adverse effect on our financial condition, results of
operations and cash flows.
36
Other Litigation and Investigations
Apogee has been sued, along with eight other defendants, including Monsanto Company,
Pharmacia Corporation and Akzo Nobel Chemicals, Inc., by certain plaintiffs in state court in
Putnam County, West Virginia. The lawsuits were filed in October 2007, but not served on Apogee
until February 2008, and each of the 77 lawsuits are identical except for the named plaintiff.
They each allege personal injury occasioned by exposure to dioxin generated by a plant owned and
operated by certain of the other defendants during production of a chemical, 2,4,5-T, from
1949-1969. Apogee is alleged to be liable as the successor to the liabilities of a company that
owned and/or controlled a dump site known as the Manila Creek landfill, which allegedly received
and incinerated dioxin-contaminated waste from the plant. The lawsuits seek compensatory and
punitive damages for personal injury. As of December 31, 2009, 44 of the original 77 lawsuits
have been dismissed. In December 2009, Apogee was served with 165 additional lawsuits with the
same allegations as the original 77 lawsuits. Under the terms of the governing lease, Monsanto
has assumed the defense of these lawsuits and has agreed to indemnify Apogee for any related
damages. The failure of Monsanto to satisfy its indemnification obligations under the lease
could have a material adverse effect on us.
We are a defendant in litigation involving Peabodys negotiation and June 2005 sale of two
properties previously owned by two of our subsidiaries. Environmental Liability Transfer, Inc.
(ELT) and its subsidiaries commenced litigation against these subsidiaries in the Circuit Court
of the City of St. Louis in the State of Missouri alleging, among other claims, fraudulent
misrepresentation, fraudulent omission, breach of duty and breach of contract. Pursuant to the
terms of the Separation Agreement, Plan of Reorganization and Distribution from the spin-off,
Patriot and Peabody are treating the case as a joint action with joint representation and equal
sharing of costs. Peabody and Patriot filed counterclaims against the plaintiffs in connection
with the sales of both properties. Motions for summary judgment on the complaint and
counterclaim have been filed by Peabody and Patriot and are pending. A trial date has been
preliminarily set for October 2010. The claim filed is for $40 million in damages. We are unable
to predict the likelihood of success of the plaintiffs claims, though we intend to vigorously
defend ourselves against all claims.
A predecessor of one of our subsidiaries operated the Eagle No. 2 mine located near
Shawneetown, Illinois from 1969 until closure of the mine in July of 1993. In 1999, the State of
Illinois brought a proceeding before the Illinois Pollution Control Board against the subsidiary
alleging that groundwater contamination due to leaching from a coal waste pile at the mine site
violated state standards. The subsidiary has developed a remediation plan with the State of
Illinois and is in litigation with the Illinois Attorney Generals office with respect to its
claim for a civil penalty of $1.3 million.
One of our subsidiaries is a defendant in several related lawsuits filed in the
Circuit Court of Boone County, West Virginia. As of December 31, 2009, there were 109 related lawsuits filed by approximately 267 plaintiffs. In addition to our subsidiary,
the lawsuits name Peabody and other coal companies with mining operations in Boone County. The
plaintiffs in each case allege contamination of their drinking water wells over a period in
excess of 30 years from coal mining activities in Boone County, including underground coal
slurry injection and coal slurry impoundments. The lawsuits seek property damages, personal
injury damages and medical monitoring costs. Public water lines are being installed by the Boone
County Public Service Commission, and all plaintiffs will have access to public water by April
2010. Pursuant to the terms of the Separation Agreement, Plan of Reorganization and Distribution
from the spin-off, Patriot is indemnifying and defending Peabody in this litigation. In December
2009, we filed a third party complaint against our current and former insurance carriers seeking
coverage for this litigation under the applicable insurance policies. The court has scheduled an
early mediation in this case for the last week in March 2010, directing all plaintiffs,
defendants and third party defendants to appear. A trial date has been set for May 2011. We are
unable to predict the likelihood of success of the plaintiffs claims, though we intend to
vigorously defend ourselves against all claims.
In late January 2010, the U.S. Attorneys office and the State of West Virginia
began investigations relating to one or more of our employees making inaccurate entries in
official mine records at our Federal No. 2 mine. We have undertaken an internal investigation into
the matter and have terminated one employee and placed two other employees on
administrative leave. We are cooperating with the relevant governmental authorities.
The outcome of other litigation and the investigations is subject to numerous uncertainties. Based on our
evaluation of the issues and their potential impact, the amount of any future loss cannot be
reasonably estimated. However, based on current information, we believe these matters are likely
to be resolved without a material adverse effect on our financial condition, results of
operations and cash flows.
37
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended December
31, 2009.
Executive Officers
Set forth below are the names, ages as of February 19, 2010 and current positions of our
executive officers. Executive officers are appointed by, and hold office at, the discretion of
our Board of Directors.
|
|
|
|
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|
Name |
|
Age |
|
Positions |
|
|
|
55 |
|
|
Chief Executive Officer & Director |
|
|
|
63 |
|
|
Chairman of the Board of Directors, Executive
Advisor and Director |
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|
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55 |
|
|
President & Chief Operating Officer |
|
|
|
53 |
|
|
Senior Vice President & Chief Financial Officer |
|
|
|
57 |
|
|
Senior Vice President Corporate Development |
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|
|
47 |
|
|
Senior Vice President Law & Administration,
General Counsel & Corporate Secretary |
|
|
|
47 |
|
|
Senior Vice President & Chief Marketing Officer |
Richard M. Whiting
Chief Executive Officer & Director
Richard M. Whiting, age 55, serves as Chief Executive Officer and as a Director. Mr.
Whiting joined Peabodys predecessor company in 1976 and held a number of operations, sales and
engineering positions both at the corporate offices and at field locations. Prior to the
spin-off, he was Peabodys Executive Vice President & Chief Marketing Officer from May 2006 to
2007, with responsibility for all marketing, sales and coal trading operations, as well as
Peabodys joint venture relationships. Mr. Whiting previously served as President & Chief
Operating Officer and as a director of Peabody from 1998 to 2002. He also served as Executive
Vice President Sales, Marketing & Trading from 2002 to 2006, and as President of Peabody
COALSALES Company from 1992 to 1998.
Mr. Whiting is the former Chairman of National Mining Associations Safety and Health
Committee, the former Chairman of the Bituminous Coal Operators Association, and a past board
member of the National Coal Council. He is currently a director of the National Mining
Association (NMA) and a director of the Society of Mining Engineers Foundation Board of
Trustees. Mr. Whiting holds a Bachelor of Science degree in mining engineering from West
Virginia University.
Irl F. Engelhardt
Chairman of the Board of Directors, Executive Advisor & Director
Irl F. Engelhardt, age 63, serves as Chairman of the Board of Directors and Executive
Advisor. Prior to the spin-off, Mr. Engelhardt served as Chairman and as a director of Peabody
from 1998 until October 2007. He also served as Chief Executive Officer of Peabody from 1998 to
2005 and as Chief Executive Officer of a predecessor of Peabody from 1990 to 1998. He also
served as Chairman of a predecessor of Peabody from 1993 to 1998 and as President from 1990 to
1995. After joining a predecessor of Peabody in 1979, Mr. Engelhardt held various officer level
positions in the executive, sales, business development and administrative areas, including
Chairman of Peabody Resources Ltd. (Australia) and Chairman of Citizens Power LLC. He also
served as Co-Chief Executive Officer and executive director of The Energy Group from February
1997 to May 1998, Chairman of Cornerstone Construction & Materials, Inc. from September 1994 to
May 1995 and Chairman of Suburban Propane Company from May 1995 to February 1996. Mr. Engelhardt
served as a director and Group Vice President of Hanson Industries from 1995 to 1996. He also
previously served as Chairman of the Federal Reserve Bank of St. Louis, the NMA, the Coal
Industry Advisory Board of the International Energy Agency, the Center for Energy and Economic
Development and the Coal Utilization Research Council, as well as Co-Chairman of the Coal Based
Generation Stakeholders Group. He serves on the Boards of Directors of Valero Energy Corporation
and The Williams Companies, Inc.
Paul H. Vining
President & Chief Operating Officer
Paul H. Vining, age 55, serves as President & Chief Operating Officer. Prior to the
Magnum acquisition, Mr. Vining served as President and Chief Executive Officer of Magnum since
2006. Prior to joining Magnum, Mr. Vining was Senior Vice President of Marketing and Trading at
Arch Coal. Prior to that, from 2003 to 2006, he was President of Ellett Valley CC Inc., a coal
trading, marketing and consulting company based in Williamsburg, Virginia. From 1999 to 2002,
Mr. Vining was Executive Vice President for Sales and Trading at Peabody. From 1996 to 1999, he
was President of Peabody
COALTRADE. From 1995 to 1996, Mr. Vining was Senior Vice President of Peabody COALSALES.
Earlier in his career, he held leadership positions with Guasare Coal America, AGIP Coal USA,
Island Creek Coal and A.T. Massey Energy.
38
Mr. Vining currently serves as Treasurer and board member of the West Virginia Coal
Association. Mr. Vining holds a Bachelor of Science degree in chemistry from the College of
William and Mary, and a Bachelor of Science in mineral engineering and a Master of Science
degree in extractive metallurgy from Columbia Universitys Henry Krumb School of Mines in New
York.
Mark N. Schroeder
Senior Vice President & Chief Financial Officer
Mark N. Schroeder, age 53, serves as Senior Vice President & Chief Financial Officer. Prior
to the spin-off, Mr. Schroeder held several key management positions in his career at Peabody
which began in 2000. These positions included President of Peabody China from 2006 to 2007, Vice
President of Materials Management from 2004 to 2006, Vice President of Business Development from
2002 to 2004 and Vice President and Controller from 2000 to 2002. He has more than 30 years of
business experience, including as Chief Financial Officer of Franklin Equity Leasing Company
from 1998 to 2000, Chief Financial Officer of Behlmann Automotive Group from 1997 to 1998, and
financial management positions with McDonnell Douglas Corporation and Ernst & Young, LLP.
Mr. Schroeder is a certified public accountant and holds a Bachelor of Science degree in
business administration from Southern Illinois University Edwardsville.
Charles A. Ebetino, Jr.
Senior Vice President Corporate Development
Charles A. Ebetino, Jr., age 57, serves as Senior Vice President Corporate Development.
Prior to the spin-off, Mr. Ebetino was Senior Vice President Business and Resource Development
for Peabody since May 2006. Mr. Ebetino also served as Senior Vice President Market
Development for Peabodys sales and marketing subsidiary from 2003 to 2006 and was directly
responsible for COALTRADE, LLC. He joined Peabody in 2003 after more than 25 years with American
Electric Power Company, Inc. (AEP) where he served in a number of management roles in the fuel
procurement and supply group, including Senior Vice President of Fuel Supply and President &
Chief Operating Officer of AEPs coal mining and coal-related subsidiaries from 1993 until 2002.
In 2002, he formed Arlington Consulting Group, Ltd., an energy industry consulting firm.
Mr. Ebetino is a past board member of NMA, former Chairman of the NMA Environmental
Committee, a former Chairman and Vice Chairman of the Edison Electric Institutes Power
Generation Subject Area Committee, a former Vice Chairman of the Inland Waterway Users Board,
and a past board member and President of the Western Coal Transportation Association. Mr.
Ebetino has a Bachelor of Science degree in civil engineering from Rensselaer Polytechnic
Institute. He also attended the New York University School of Business for graduate study in
finance.
Joseph W. Bean
Senior Vice President Law & Administration, General Counsel & Corporate Secretary
Joseph W. Bean, age 47, serves as Senior Vice President Law & Administration, General
Counsel & Corporate Secretary. From the spin-off to February 2009, Mr. Bean served as Senior
Vice President, General Counsel & Corporate Secretary for Patriot. Prior to the spin-off, Mr.
Bean served as Peabodys Vice President & Associate General Counsel and Assistant Secretary from
2005 to 2007 and as Senior Counsel from 2001 to 2005. During his tenure at Peabody, he directed
the companys legal and compliance activities related to mergers and acquisitions, corporate
governance, corporate finance and securities matters.
Mr. Bean has 23 years of corporate law experience, including 19 years as in-house legal
counsel. He was counsel and assistant corporate secretary for The Quaker Oats Company prior to
its acquisition by PepsiCo in 2001 and assistant general counsel for Pet Incorporated prior to
its 1995 acquisition by Pillsbury. He also served as a corporate law associate with the law
firms of Mayer, Brown & Platt in Chicago and Thompson & Mitchell in St. Louis. Mr. Bean holds a
Bachelor of Arts degree from the University of Illinois and a Juris Doctorate from Northwestern
University School of Law.
Robert W. Bennett
Senior Vice President & Chief Marketing Officer
Robert W. Bennett, age 47, serves as Senior Vice President & Chief Marketing Officer. Mr.
Bennett has over 22 years of experience in the coal sales, marketing and trading arena. From the
time of the Magnum acquisition through March 2009, Mr. Bennett served as Patriots Senior Vice
President of Sales and Trading and was responsible for Patriots thermal coal sales. Prior to
the Magnum acquisition, Mr. Bennett served as Senior Vice President Sales and Trading of
Magnum Coal Company and President of Magnum Coal Sales, LLC, positions he held from 2006 to
2008. During 2005 and 2006, Mr. Bennett served as Vice President Appalachia Sales for
COALSALES, LLC. Mr. Bennett served as Vice President Brokerage and Agency Sales for COALTRADE,
LLC from 1997 to 2005 where he was responsible for all brokerage and
agency relationships in the eastern United States. Prior to 1997, Mr. Bennett held various
leadership positions with AGIP Coal Sales and Neweagle Corporation. Mr. Bennett holds a Bachelor
of Arts in Finance from Marshall University.
39
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
On October 31, 2007, Peabody effected the spin-off of Patriot and its subsidiaries. The
spin-off was accomplished through a dividend of all outstanding shares of Patriot Coal
Corporation. Our common stock is listed on the New York Stock Exchange, under the symbol PCX.
As of February 19, 2010, there were 858 holders of record of our common stock.
Effective August 11, 2008, Patriot implemented a 2-for-1 stock split effected in the form
of a 100% stock dividend. All share and per share amounts in this Annual Report on Form 10-K
reflect this stock split.
The table below sets forth the range of quarterly high and low sales prices for our common
stock on the New York Stock Exchange during the calendar quarters indicated.
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|
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High |
|
Low |
2007 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
21.50 |
|
|
$ |
13.54 |
|
2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
28.89 |
|
|
$ |
16.14 |
|
Second Quarter |
|
|
82.23 |
|
|
|
23.13 |
|
Third Quarter |
|
|
77.74 |
|
|
|
24.09 |
|
Fourth Quarter |
|
|
28.45 |
|
|
|
5.24 |
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
9.00 |
|
|
$ |
2.76 |
|
Second Quarter |
|
|
10.90 |
|
|
|
3.51 |
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Third Quarter |
|
|
14.12 |
|
|
|
4.97 |
|
Fourth Quarter |
|
|
17.24 |
|
|
|
10.21 |
|
Dividend Policy
We have not paid and we do not anticipate that we will pay cash dividends on our common
stock in the near term. The declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our financial condition, earnings,
capital requirements, financial covenants, regulatory constraints, industry practice and other
factors our Board deems relevant.
40
Stock Performance Graph
The following performance graph compares the cumulative total return on our common stock
with the cumulative total return of the following indices: (i) the S&P Smallcap 600 Index and
(ii) the Custom Composite Index comprised of Alpha Natural Resources, Inc., Arch Coal, Inc.,
CONSOL Energy, Inc., International Coal Group, Inc., James River Coal Co., Massey Energy Company,
Peabody Energy Corp. and Westmoreland Coal Company. These indices are included for comparative
purposes only and do not necessarily reflect managements opinion that such indices are an
appropriate measure of the relative performance of the stock involved, and are not intended to
forecast or be indicative of possible future performance of the common stock.
COMPARISON OF 26 MONTH CUMULATIVE TOTAL RETURN*
Among Patriot Coal Corporation, The S&P Smallcap 600 Index
And Custom Composite Index
*$100 invested on 11/1/07 in stock or 10/31/07 in index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
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11/07 |
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12/07 |
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3/08 |
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6/08 |
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9/08 |
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12/08 |
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3/09 |
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6/09 |
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9/09 |
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12/09 |
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|
Patriot Coal
Corporation |
|
|
|
100.00 |
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|
|
111.31 |
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|
|
125.25 |
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|
|
408.77 |
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154.93 |
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33.33 |
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19.79 |
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|
34.03 |
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|
62.72 |
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|
82.45 |
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|
S&P Smallcap 600 |
|
|
|
100.00 |
|
|
|
|
91.84 |
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|
|
84.99 |
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|
|
|
85.33 |
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84.60 |
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63.30 |
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52.64 |
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|
63.73 |
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|
75.62 |
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|
|
79.49 |
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|
|
Custom Composite |
|
|
|
100.00 |
|
|
|
|
127.81 |
|
|
|
|
120.67 |
|
|
|
|
220.88 |
|
|
|
|
100.33 |
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|
|
50.58 |
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|
|
|
48.19 |
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|
|
63.21 |
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83.08 |
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|
97.81 |
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|
In accordance with SEC rules, the information contained in the Stock Performance Graph
above, shall not be deemed to be soliciting material, or to be filed with the SEC or subject
to the SECs Regulation 14A or 14C, other than as provided under Item 201(e) of Regulation S-K,
or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except
to the extent that we specifically request that the information be treated as soliciting
material or specifically incorporate it by reference into a document filed under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
41
Item 6. Selected Consolidated Financial Data.
The following table presents selected financial and other data for the most recent five
fiscal years. The historical financial and other data have been prepared on a consolidated
basis derived from Patriots consolidated financial statements using the historical results of
operations and bases of the assets and liabilities of Patriots businesses and give effect to
allocations of expenses from Peabody in 2007, 2006, and 2005. For periods prior to the spin-off,
the historical consolidated statements of operations data set forth below do not reflect changes
that occurred in the operations and funding of our company as a result of our spin-off from
Peabody. Magnum results are consolidated as of the date the acquisition was consummated, July
23, 2008. The historical consolidated balance sheet data set forth below reflect the assets and
liabilities that existed as of the dates and the periods presented.
The selected consolidated financial data should be read in conjunction with, and are
qualified by reference to, Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations and the historical financial statements and the accompanying notes
thereto of us and our consolidated subsidiaries included elsewhere in this report. The
consolidated statements of operations and cash flow data for each of the three years in the
period ended December 31, 2009 and the consolidated balance sheet data as of December 31, 2009
and 2008 are derived from our audited consolidated financial statements included elsewhere in
this report, and should be read in conjunction with those consolidated financial statements and
the accompanying notes. The consolidated balance sheet data as of December 31, 2007, 2006 and
2005 and the consolidated statements of operations for the years ended December 31, 2006 and
2005 were derived from audited consolidated financial statements that are not presented in this
report.
42
The financial information presented below may not reflect what our results of operations,
cash flows and financial position would have been had we operated as a separate, stand-alone
entity for the years ended December 31, 2007, 2006, and 2005 or what our results of operations,
financial position and cash flows will be in the future. In addition, the Risk Factors section
of Item 1A of this report includes a discussion of risk factors that could impact our future
results of operations.
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Year Ended December 31, |
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2009 |
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2008 |
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2007 |
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2006 |
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2005 |
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(In thousands, except for share and per share data) |
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Results of Operations Data: |
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Revenues |
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Sales |
|
$ |
1,995,667 |
|
|
$ |
1,630,873 |
|
|
$ |
1,069,316 |
|
|
$ |
1,142,521 |
|
|
$ |
960,901 |
|
Other revenues |
|
|
49,616 |
|
|
|
23,749 |
|
|
|
4,046 |
|
|
|
5,398 |
|
|
|
17,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,045,283 |
|
|
|
1,654,622 |
|
|
|
1,073,362 |
|
|
|
1,147,919 |
|
|
|
978,277 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
1,893,419 |
|
|
|
1,607,746 |
|
|
|
1,109,315 |
|
|
|
1,051,932 |
|
|
|
869,163 |
|
Depreciation, depletion and
amortization |
|
|
205,339 |
|
|
|
125,356 |
|
|
|
85,640 |
|
|
|
86,458 |
|
|
|
65,972 |
|
Reclamation and remediation
obligation expense |
|
|
35,116 |
|
|
|
19,260 |
|
|
|
20,144 |
|
|
|
24,282 |
|
|
|
15,572 |
|
Sales contract accretion |
|
|
(298,572 |
) |
|
|
(279,402 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Restructuring and impairment charge |
|
|
20,157 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Selling and administrative expenses |
|
|
48,732 |
|
|
|
38,607 |
|
|
|
45,137 |
|
|
|
47,909 |
|
|
|
57,123 |
|
Other operating (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposal or exchange
of assets(1) |
|
|
(7,215 |
) |
|
|
(7,004 |
) |
|
|
(81,458 |
) |
|
|
(78,631 |
) |
|
|
(57,042 |
) |
Loss (income) from equity affiliates(2) |
|
|
(398 |
) |
|
|
915 |
|
|
|
(63 |
) |
|
|
(60 |
) |
|
|
(15,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
148,705 |
|
|
|
149,144 |
|
|
|
(105,353 |
) |
|
|
16,029 |
|
|
|
43,067 |
|
Interest expense |
|
|
38,108 |
|
|
|
23,648 |
|
|
|
8,337 |
|
|
|
11,419 |
|
|
|
9,833 |
|
Interest income |
|
|
(16,646 |
) |
|
|
(17,232 |
) |
|
|
(11,543 |
) |
|
|
(1,417 |
) |
|
|
(1,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
127,243 |
|
|
|
142,728 |
|
|
|
(102,147 |
) |
|
|
6,027 |
|
|
|
34,787 |
|
Income tax provision |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,350 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
127,243 |
|
|
|
142,728 |
|
|
|
(102,147 |
) |
|
|
(2,323 |
) |
|
|
34,787 |
|
Net income attributable to
noncontrolling interest(2) |
|
|
- |
|
|
|
- |
|
|
|
4,721 |
|
|
|
11,169 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Patriot |
|
|
127,243 |
|
|
|
142,728 |
|
|
|
(106,868 |
) |
|
|
(13,492 |
) |
|
|
34,787 |
|
Effect of noncontrolling interest
purchase arrangement |
|
|
- |
|
|
|
- |
|
|
|
(15,667 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common stockholders |
|
$ |
127,243 |
|
|
$ |
142,728 |
|
|
$ |
(122,535 |
) |
|
$ |
(13,492 |
) |
|
$ |
34,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic |
|
$ |
1.50 |
|
|
$ |
2.23 |
|
|
$ |
(2.29 |
) |
|
|
N/A |
|
|
|
N/A |
|
Earnings (loss) per share, diluted |
|
$ |
1.49 |
|
|
$ |
2.21 |
|
|
$ |
(2.29 |
) |
|
|
N/A |
|
|
|
N/A |
|
Weighted average shares
outstanding - basic |
|
|
84,660,998 |
|
|
|
64,080,998 |
|
|
|
53,511,478 |
|
|
|
N/A |
|
|
|
N/A |
|
Weighted average shares
outstanding - diluted |
|
|
85,424,502 |
|
|
|
64,625,911 |
|
|
|
53,546,116 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,618,163 |
|
|
$ |
3,622,320 |
|
|
$ |
1,199,837 |
|
|
$ |
1,178,181 |
|
|
$ |
1,113,058 |
|
Total liabilities(3) |
|
|
2,682,669 |
|
|
|
2,782,139 |
|
|
|
1,117,521 |
|
|
|
1,851,855 |
|
|
|
1,511,810 |
|
Total long-term debt, less current maturities |
|
|
197,951 |
|
|
|
176,123 |
|
|
|
11,438 |
|
|
|
20,722 |
|
|
|
11,459 |
|
Total stockholders equity (deficit) |
|
|
935,494 |
|
|
|
840,181 |
|
|
|
82,316 |
|
|
|
(673,674 |
) |
|
|
(398,752 |
) |
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands, except for share and per share data) |
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold (in millions and unaudited) |
|
|
32.8 |
|
|
|
28.5 |
|
|
|
22.1 |
|
|
|
24.3 |
|
|
|
23.8 |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
39,611 |
|
|
$ |
63,426 |
|
|
$ |
(79,699 |
) |
|
$ |
(20,741 |
) |
|
$ |
17,823 |
|
Investing activities |
|
|
(77,593 |
) |
|
|
(138,665 |
) |
|
|
54,721 |
|
|
|
1,993 |
|
|
|
(29,529 |
) |
Financing activities |
|
|
62,208 |
|
|
|
72,128 |
|
|
|
30,563 |
|
|
|
18,627 |
|
|
|
11,459 |
|
Adjusted EBITDA(4) (unaudited) |
|
|
110,745 |
|
|
|
44,238 |
|
|
|
431 |
|
|
|
126,769 |
|
|
|
124,611 |
|
Past mining obligation payments(5) (unaudited) |
|
|
129,060 |
|
|
|
101,746 |
|
|
|
144,811 |
|
|
|
150,672 |
|
|
|
154,479 |
|
Additions to property, plant, equipment
and mine development |
|
|
78,263 |
|
|
|
121,388 |
|
|
|
55,594 |
|
|
|
80,224 |
|
|
|
75,151 |
|
Acquisitions, net |
|
|
- |
|
|
|
9,566 |
|
|
|
47,733 |
|
|
|
44,538 |
|
|
|
- |
|
|
|
|
(1) |
|
Net gain on disposal or
exchange of assets included
a $37.4 million gain from an
exchange of coal reserves as
part of a dispute settlement
with a third-party supplier
in 2005, gains of
$66.6 million from sales of
coal reserves and surface
land in 2006 and gains of
$78.5 million from the sales
of coal reserves and surface
land in 2007. |
|
(2) |
|
In March 2006, we increased our 49% interest in KE
Ventures, LLC to an effective 73.9% interest and began
combining KE Ventures, LLCs results with ours effective
January 1, 2006. In 2007, we purchased the remaining interest.
Prior to 2006, KE Ventures, LLC was accounted for on an equity
basis and included in income from equity affiliates in our
consolidated statements of operations. |
|
(3) |
|
On December 31, 2006, we increased noncurrent liabilities
and decreased total invested capital (accumulated other
comprehensive loss) by $322.1 million as a result of a then
newly adopted authoritative guidance related to employers
accounting for postretirement benefit plans. |
|
(4) |
|
Adjusted EBITDA is defined as net income (loss) before
deducting net interest income and expense; income taxes;
reclamation and remediation obligation expense; depreciation,
depletion and amortization; restructuring and impairment
charge; and net sales contract accretion. Net sales contract
accretion represents contract accretion excluding back-to-back
coal purchase and sales contracts. The contract accretion on
the back-to-back coal purchase and sales contracts reflects the
accretion related to certain coal purchase and sales contracts
existing prior to July 23, 2008, whereby Magnum purchased coal
from third parties to fulfill tonnage commitments on sales
contracts. Adjusted EBITDA is used by management to measure
operating performance, and management also believes it is a
useful indicator of our ability to meet debt service and
capital expenditure requirements. The term Adjusted EBITDA does
not purport to be an alternative to operating income, net
income or cash flows from operating activities as determined in
accordance with generally accepted accounting principles as a
measure of profitability or liquidity. Because Adjusted EBITDA
is not calculated identically by all companies, our calculation
may not be comparable to similarly titled measures of other
companies. |
|
(5) |
|
Past mining obligation payments represents cash payments
relating to our postretirement benefit plans, work-related
injuries and illnesses obligations and multi-employer retiree
healthcare and pension plans. |
44
Adjusted EBITDA is calculated as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands) |
|
Net income (loss) |
|
$ |
127,243 |
|
|
$ |
142,728 |
|
|
$ |
(102,147 |
) |
|
$ |
(2,323 |
) |
|
$ |
34,787 |
|
Depreciation, depletion and
amortization |
|
|
205,339 |
|
|
|
125,356 |
|
|
|
85,640 |
|
|
|
86,458 |
|
|
|
65,972 |
|
Sales contract accretion, net(1) |
|
|
(298,572 |
) |
|
|
(249,522 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Asset retirement obligation expense |
|
|
35,116 |
|
|
|
19,260 |
|
|
|
20,144 |
|
|
|
24,282 |
|
|
|
15,572 |
|
Restructuring and impairment |
|
|
20,157 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
38,108 |
|
|
|
23,648 |
|
|
|
8,337 |
|
|
|
11,419 |
|
|
|
9,833 |
|
Interest income |
|
|
(16,646 |
) |
|
|
(17,232 |
) |
|
|
(11,543 |
) |
|
|
(1,417 |
) |
|
|
(1,553 |
) |
Income tax provision |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,350 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
110,745 |
|
|
$ |
44,238 |
|
|
$ |
431 |
|
|
$ |
126,769 |
|
|
$ |
124,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net sales contract accretion resulted
from the below market coal sales and purchase
contracts acquired in the Magnum acquisition
that were recorded at fair value in purchase
accounting. The net liability generated
from applying fair value to these contracts
is being accreted over the life of the
contracts as the coal is shipped. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a leading producer of thermal coal in the eastern U.S., with operations and coal
reserves in Appalachia and the Illinois Basin, our operating segments. We are also a leading
U.S. producer of metallurgical quality coal. Our principal business is the mining, preparation
and sale of thermal coal, for sale primarily to electric utilities, as well as the mining of
metallurgical coal, for sale to steel mills and independent coke producers. Our operations
consist of fourteen current mining complexes, which include company-operated mines,
contractor-operated mines and coal preparation facilities. The Appalachia and Illinois Basin
segments consist of our operations in West Virginia and Kentucky, respectively.
We ship coal to electric utilities, industrial users, steel mills and independent coke
producers. In 2009, we sold 32.8 million tons of coal, of which 83% was sold to domestic
electric utilities and 17% was sold to domestic and global steel producers. In 2008, we sold
28.5 million tons of coal, of which 79% was sold to domestic electric utilities and 21% was sold
to domestic and global steel producers. Coal is shipped via various company-owned and
third-party loading facilities, multiple rail and river transportation routes and ocean-going
vessels.
We typically sell coal to utility and steel-making customers under contracts with terms of
one year or more. Approximately 83% and 78% of our sales were under such contracts during 2009
and 2008, respectively.
Effective October 31, 2007, Patriot was spun off from Peabody. The spin-off was
accomplished through a dividend of all outstanding shares of Patriot, resulting in Patriot
becoming a separate, public company traded on the New York Stock Exchange (symbol PCX).
On July 23, 2008, Patriot completed the acquisition of Magnum. Magnum was one of the
largest coal producers in Appalachia, operating eight mining complexes with production from
surface and underground mines and controlling more than 600 million tons of proven and probable
coal reserves. Magnums results are included as of the date of the acquisition.
45
Results of Operations
Segment Adjusted EBITDA
The discussion of our results of operations below includes references to and analysis of
our Appalachia and Illinois Basin Segments Adjusted EBITDA results. Adjusted EBITDA is defined
as net income (loss) before deducting net interest income and expense; income taxes; reclamation
and remediation obligation expense; depreciation, depletion and amortization; restructuring and
impairment charge; and net sales contract accretion. Net sales contract accretion represents
contract accretion excluding back-to-back coal purchase and sales contracts. The contract
accretion on the back-to-back coal purchase and sales contracts reflects the accretion related to
certain coal purchase and sales contracts existing on July 23, 2008, whereby Magnum purchased
coal from third parties to fulfill tonnage commitments on sales contracts. Segment Adjusted
EBITDA is used by management primarily as a measure of our segments operating performance.
Because Segment Adjusted EBITDA is not calculated identically by all companies, our calculation
may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is
reconciled to its most comparable measure under generally accepted accounting principles in Item
6. Selected Consolidated Financial Data. Segment Adjusted EBITDA is calculated the same as
Adjusted EBITDA but also excludes selling, general and administrative expenses, past mining
obligation expense and gain on disposal or exchange of assets and is reconciled to its most
comparable measure below, under Net Income.
Geologic Conditions
Our results of operations are impacted by geologic conditions as they relate to coal
mining. These conditions refer to the physical nature of the coal seam and surrounding strata
and its effect on the mining process. Geologic conditions that can have an adverse effect on
underground mining include thinning coal seam thickness, rock partings within a coal seam, weak
roof or floor rock, sandstone channel intrusions, groundwater and increased stresses within the
surrounding rock mass due to over mining, under mining and overburden changes. The term adverse
geologic conditions is used in general to refer to these and similar situations where the
geologic setting can negatively affect the normal mining process. Adverse geologic conditions
would be markedly different from those that would be considered typical geologic conditions for
a given mine. Since approximately 70% of our 2009 production was sourced from underground
operations, geologic conditions can be a major factor in our results of operations.
Year ended December 31, 2009 compared to year ended December 31, 2008
Summary
Revenues were $2,045.3 million, an increase of $390.7 million, and Segment Adjusted EBITDA
was $302.9 million, an increase of $116.8 million, for the year ended December 31, 2009. The
increase in revenue and Segment Adjusted EBITDA resulted from the addition of Magnum, the
successful implementation of our Management Action Plan and improved performance at our longwall
mines.
Beginning in the third quarter of 2008, the global recession resulted in decreased
worldwide demand for steel and electricity, leading to weakened coal markets. Early in 2009, we
implemented a Management Action Plan as a strategic response to the weakened coal markets. The
Management Action Plan included output and cost reductions, workforce and capital redeployment
and sales contract renegotiations. As a result of this plan, during 2009 we suspended certain
company-operated and contract mines, including suspension of operations at our Samples surface
mine, deferred production start up at one newly-developed mining complex and cancelled certain
operating shifts at various other mining complexes. Additionally, we restructured certain
below-market legacy coal supply agreements.
Our 2009 results reflect the inclusion of a full year of the Magnum operations, which were
acquired on July 23, 2008. The increased revenue from the acquired Magnum operations was
partially offset by lower customer demand throughout the year and increased customer deferrals
during 2009.
Both our Federal and Panther longwalls encountered some adverse geologic conditions in
2009, but significantly less than the difficulties encountered in 2008. The improved production
in 2009 reflects the benefits of mine plan adjustments made in late 2008 to minimize the impact
of difficult geology. In the third quarter of 2009, significant upgrades were made to certain
components of the Panther longwall mining equipment. Both of the longwalls were performing well
by the end of 2009. In the fourth quarter of 2009, Federal had its best production quarter in
2009 and Panther had its best quarter since the Magnum acquisition.
46
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
|
|
2009 |
|
2008 |
|
Tons/$ |
|
% |
|
|
(Dollars and tons in thousands, except per ton amounts) |
|
Tons Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia |
|
|
25,850 |
|
|
|
20,654 |
|
|
|
5,196 |
|
|
|
25.2 |
% |
Illinois Basin |
|
|
6,986 |
|
|
|
7,866 |
|
|
|
(880 |
) |
|
|
(11.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total Tons Sold |
|
|
32,836 |
|
|
|
28,520 |
|
|
|
4,316 |
|
|
|
15.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per ton sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia |
|
$ |
66.79 |
|
|
$ |
65.23 |
|
|
$ |
1.56 |
|
|
|
2.4 |
% |
Illinois Basin |
|
|
38.52 |
|
|
|
36.06 |
|
|
|
2.46 |
|
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia Mining Operations |
|
$ |
1,726,588 |
|
|
$ |
1,347,230 |
|
|
$ |
379,358 |
|
|
|
28.2 |
% |
Illinois Basin Mining Operations |
|
|
269,079 |
|
|
|
283,643 |
|
|
|
(14,564 |
) |
|
|
(5.1 |
)% |
Appalachia Other |
|
|
49,616 |
|
|
|
23,749 |
|
|
|
25,867 |
|
|
|
108.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
2,045,283 |
|
|
$ |
1,654,622 |
|
|
$ |
390,661 |
|
|
|
23.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Costs and Expenses(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia Mining Operations and Other |
|
$ |
1,481,831 |
|
|
$ |
1,197,985 |
|
|
$ |
283,846 |
|
|
|
23.7 |
% |
Illinois Basin Mining Operations |
|
|
260,529 |
|
|
|
270,488 |
|
|
|
(9,959 |
) |
|
|
(3.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Costs and Expenses |
|
$ |
1,742,360 |
|
|
$ |
1,468,473 |
|
|
$ |
273,887 |
|
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia Mining Operations and Other |
|
$ |
294,373 |
|
|
$ |
172,994 |
|
|
$ |
121,379 |
|
|
|
70.2 |
% |
Illinois Basin Mining Operations |
|
|
8,550 |
|
|
|
13,155 |
|
|
|
(4,605 |
) |
|
|
(35.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total Segment Adjusted EBITDA |
|
$ |
302,923 |
|
|
$ |
186,149 |
|
|
$ |
116,774 |
|
|
|
62.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Segment Operating Costs and Expenses represent consolidated operating costs and
expenses of $1,893.0 million and $1,608.7 million less past mining obligation expense of $150.7 million and $110.3 million for the years
ended December 31, 2009 and 2008, respectively, as described below, and less back-to-back
contract accretion of $29.9 million for the year ended December 31, 2008. |
Tons Sold and Revenues
The increase in Appalachia revenue for the year ended December 31, 2009 compared to the
prior year primarily related to the $318.8 million net increase in revenues from the acquired
Magnum operations, due to an additional seven months of activity during 2009, as well as higher
sales prices at certain complexes. These increases were partially offset by lower customer
demand and increased customer deferrals.
Sales volumes in the Appalachia segment increased in 2009, primarily from the incremental
5.9 million tons sold from the acquired Magnum operations, partially offset by the overall
decline in customer demand for both metallurgical and thermal coal including lower sales due to
customer shipment deferrals and settlements. The overall decline in customer demand led to the
suspension of certain operations and decreased operating shifts at other operations.
Illinois Basin revenue decreased slightly in 2009 compared to the prior year primarily due
to lower sales volume caused by lower customer demand, unfavorable weather conditions early in
the year and increased downtime due to regulatory inspections. Lower sales volumes were
partially offset by higher average sales prices.
Appalachia Other Revenue was higher in 2009 primarily due to cash settlements received for
reduced shipments as a result of renegotiated customer agreements. In addition to royalty
income, Appalachia Other Revenue in 2008 included a structured settlement on a property
transaction, a settlement for past due coal royalties which had previously been fully reserved
due to the uncertainty of collection, and gains on the sale of purchased coal in the first
quarter.
47
Segment Operating Costs and Expenses
Segment operating costs and expenses represent consolidated operating costs and expenses
less past mining obligations.
Segment operating costs and expenses for Appalachia increased in 2009 as compared to the
prior year primarily due to the incremental $278.9 million of costs for the full year of the
acquired Magnum operations. Excluding the impact of Magnum, operating costs were higher due to
increased purchased coal ($12.8 million) and increased materials and supplies costs primarily
related to equipment rebuilds at various locations ($8.7 million). We purchased coal to cover
certain sales commitments at some of our suspended operations. The increased costs were
partially offset by decreased labor costs primarily due to reduced shifts and mine suspensions
as a result of lower customer demand ($10.6 million) and lower royalties resulting from
decreased production at certain mines ($7.1 million).
Operating costs and expenses for Illinois Basin decreased in 2009 as compared to the prior
year primarily due to decreased costs for purchased coal ($9.6 million) and lower diesel fuel
and explosives costs ($6.5 million). In 2008, higher priced spot sale opportunities were
available which resulted in more purchased coal to fulfill sales commitments. The decreased
costs were partially offset by higher repair and maintenance and outside services costs
primarily due to major non-recurring repairs including equipment rebuilds, belting and component
upgrades ($7.8 million).
Segment Adjusted EBITDA
Segment Adjusted EBITDA for Appalachia increased in 2009 from the prior year primarily due
to the contribution from the additional volume associated with the acquired Magnum operations.
Additionally, during 2009, we received cash settlements for reduced shipments. These cash
settlements approximated the financial impact associated with cancelled customer commitments.
Segment Adjusted EBITDA for the Illinois Basin decreased in 2009 primarily due to lower
production volumes attributable to lower customer demand and severe winter storms. This decrease also reflected higher
repair and maintenance and outside services costs that were primarily due to major non-recurring repairs including equipment rebuilds,
belting and component upgrades. These decreases were partially offset by higher average sales
prices and lower diesel fuel and explosives costs.
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) to |
|
|
Year Ended December 31, |
|
Income |
|
|
2009 |
|
2008 |
|
$ |
|
% |
|
|
(Dollars in thousands) |
Segment Adjusted EBITDA |
|
$ |
302,923 |
|
|
$ |
186,149 |
|
|
$ |
116,774 |
|
|
|
62.7 |
% |
Corporate and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past mining obligation expense |
|
|
(150,661 |
) |
|
|
(110,308 |
) |
|
|
(40,353 |
) |
|
|
(36.6 |
)% |
Net gain on disposal or exchange of assets |
|
|
7,215 |
|
|
|
7,004 |
|
|
|
211 |
|
|
|
3.0 |
% |
Selling and administrative expenses |
|
|
(48,732 |
) |
|
|
(38,607 |
) |
|
|
(10,125 |
) |
|
|
(26.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total Corporate and Other |
|
|
(192,178 |
) |
|
|
(141,911 |
) |
|
|
(50,267 |
) |
|
|
(35.4 |
)% |
Depreciation, depletion and amortization |
|
|
(205,339 |
) |
|
|
(125,356 |
) |
|
|
(79,983 |
) |
|
|
(63.8 |
)% |
Reclamation and remediation obligation expense |
|
|
(35,116 |
) |
|
|
(19,260 |
) |
|
|
(15,856 |
) |
|
|
(82.3 |
)% |
Sales contract accretion, net |
|
|
298,572 |
|
|
|
249,522 |
|
|
|
49,050 |
|
|
|
19.7 |
% |
Restructuring and impairment charge |
|
|
(20,157 |
) |
|
|
- |
|
|
|
(20,157 |
) |
|
|
N/A |
|
Interest expense |
|
|
(38,108 |
) |
|
|
(23,648 |
) |
|
|
(14,460 |
) |
|
|
(61.1 |
)% |
Interest income |
|
|
16,646 |
|
|
|
17,232 |
|
|
|
(586 |
) |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
127,243 |
|
|
$ |
142,728 |
|
|
$ |
(15,485 |
) |
|
|
(10.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Past Mining Obligation Expense
Past mining obligation expenses were higher in 2009 than the prior year primarily due to a
full year of retiree healthcare obligation expenses ($24.4 million) and multi-employer retiree
healthcare and pension costs ($5.8 million) from the acquired Magnum operations in 2009 versus
only five months in 2008; costs related to suspended mines ($9.9 million), primarily Samples;
and higher subsidence expense. These increases were partially offset by lower
spending at our closed locations ($2.6 million).
Selling and Administrative Expenses
Selling and administrative expenses for the year ended December 31, 2009 increased compared
to the prior year primarily due to increased headcount and expenses due to the addition and
integration of Magnum operations, which were acquired July 23, 2008.
48
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for 2009 increased compared to the prior year
primarily due to the full year impact from the addition of the Magnum assets.
Reclamation and Remediation Obligation Expense
Reclamation and remediation obligation expense increased in 2009 as compared to the prior
year primarily due to the full year impact from the acquisition of Magnum.
Sales Contract Accretion
Sales contract accretion resulted from the below market coal sale and purchase contracts
acquired in the Magnum acquisition and recorded at fair value in purchase accounting. The net
liability generated from applying fair value to these contracts is being accreted over the life
of the contracts as the coal is shipped.
Restructuring and Impairment Charge
The restructuring and impairment charge in 2009 related to certain infrastructure and
thermal coal reserves near our Rocklick complex that were deemed uneconomical to mine, as well
as a restructuring charge related to the discontinued use of a beltline into the Rocklick
preparation plant during the fourth quarter.
Interest Expense
Interest expense increased for 2009 compared to the prior year primarily due to interest
and debt discount expense related to our convertible notes that were issued in May 2008 and
higher letter of credit fees related to the Magnum acquisition. This increase was partially
offset by the commitment fee expensed due to the termination of a bridge loan facility related
to our assumption of Magnums debt during the second quarter of 2008. See Liquidity and Capital
Resources for details concerning our outstanding debt and credit facility.
Income Tax Provision
For the years ended December 31, 2009 and 2008, no income tax provision was recorded due to
net operating losses for the year and our full valuation allowance recorded against deferred tax
assets. For 2009 and 2008, the primary difference between book and taxable income was the
treatment of the net sales contract accretion on the below market purchase and sales contracts
acquired in the Magnum acquisition, with such amounts being included in the computation of book
income but excluded from the computation of taxable income.
Basis of Presentation Related to Periods Prior to the Spin-Off from Peabody
The statements of operations and cash flows for the twelve months ended December 31, 2007,
and related discussions below primarily relate to our historical results prior to the spin-off
from Peabody. These results may not necessarily reflect what our results of operations and cash
flows would have been as a stand-alone company. The consolidated financial statements presented
herein for this period includes allocations of Peabody expenses, assets and liabilities through
the date of the spin-off, including the following items:
Selling and Administrative Expenses
For the periods prior to spin-off, our historical selling and administrative expenses were
based on an allocation of Peabody general corporate expenses to all of its mining operations,
both foreign and domestic, based on principal activity, headcount, tons sold or revenues as
appropriate. The allocated expenses generally reflect service costs for marketing and sales,
general accounting, legal, finance and treasury, public relations, human resources,
environmental, engineering and internal audit.
Interest Expense
For the periods prior to the spin-off, our historical interest expense primarily related to
fees for letters of credit and surety bonds used to guarantee our reclamation, workers
compensation, retiree healthcare and lease obligations as well as interest expense related to
intercompany notes with Peabody. Our capital structure changed following our spin-off from
Peabody, and effective October 31, 2007, we entered into a four-year revolving credit facility.
See Liquidity and Capital Resources - Credit Facility for information about our credit facility.
The intercompany notes totaling $62.0 million with Peabody were forgiven at spin-off.
Income Tax Provision
Income taxes are accounted for using a balance sheet approach in accordance with
authoritative guidance. We account for deferred income taxes by applying statutory tax rates in
effect at the date of the balance sheet to differences between the book and tax basis of assets
and liabilities. A valuation allowance is established if it is more likely than not that the
related tax benefits will not be realized. In determining the appropriate valuation allowance,
we consider projected realization of tax benefits based on expected levels of future taxable
income, available tax planning strategies and the overall deferred tax position.
49
Authoritative guidance specifies that the amount of current and deferred tax expense for an
income tax return group are to be allocated among the members of that group when those members
issue separate financial statements. For purposes of the consolidated financial statements
prepared for the twelve months ended December 31, 2007 and for the other periods prior to the
spin-off, our income tax expense was recorded as if we filed a consolidated tax return separate
from Peabody, notwithstanding that a majority of the operations were historically included in
the U.S. consolidated income tax return filed by Peabody. Our valuation allowance for these
periods was also determined on the separate tax return basis. Additionally, our tax attributes
(i.e., net operating losses and Alternative Minimum Tax credits) for these periods have been
determined based on U.S. consolidated tax rules describing the apportionment of these items upon
departure (spin-off) from the Peabody consolidated group.
Peabody was managing its tax position for the benefit of its entire portfolio of
businesses. Peabodys tax strategies are not necessarily reflective of the tax strategies that
we would have followed or have followed as a stand-alone company, nor were they necessarily
strategies that optimized our stand-alone position.
Year ended December 31, 2008 compared to year ended December 31, 2007
Summary
Revenues were $1,654.6 million, an increase of $581.3 million, and Segment Adjusted EBITDA
was $186.1 million, an increase of $84.4 million, for the year ended December 31, 2008. Net
income attributable to Patriot was $142.7 million in 2008 compared to a net loss attributable to
Patriot of $106.9 million in 2007. The increase in revenue, Segment Adjusted EBITDA and net
income attributable to Patriot was mainly driven by the newly-acquired Magnum operations
including the impact of purchase accounting. The results of operations of Magnum are included in
the Appalachia Mining Operations segment from the date of acquisition.
2008 was a volatile year in the coal markets. Coal prices significantly increased during
the first half of the year, peaked in July and then declined in the later part of the year in
conjunction with the overall economic downturn. Sales for our Appalachia and Illinois Basin
segments reflected higher contract and spot prices. Offsetting this increase, several of our
mining complexes experienced adverse geologic conditions that impacted production levels as well
as higher costs related to labor, fuel, and materials and supplies.
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
|
|
2008 |
|
2007 |
|
Tons/$ |
|
% |
|
|
(Dollars and tons in thousands, except per ton amounts) |
|
Tons Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia |
|
|
20,654 |
|
|
|
14,432 |
|
|
|
6,222 |
|
|
|
43.1 |
% |
Illinois Basin |
|
|
7,866 |
|
|
|
7,711 |
|
|
|
155 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Tons Sold |
|
|
28,520 |
|
|
|
22,143 |
|
|
|
6,377 |
|
|
|
28.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per ton sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia |
|
$ |
65.23 |
|
|
$ |
56.62 |
|
|
$ |
8.61 |
|
|
|
15.2 |
% |
Illinois Basin |
|
|
36.06 |
|
|
|
32.71 |
|
|
|
3.35 |
|
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia Mining Operations |
|
$ |
1,347,230 |
|
|
$ |
817,070 |
|
|
$ |
530,160 |
|
|
|
64.9 |
% |
Illinois Basin Mining Operations |
|
|
283,643 |
|
|
|
252,246 |
|
|
|
31,397 |
|
|
|
12.4 |
% |
Appalachia Other |
|
|
23,749 |
|
|
|
4,046 |
|
|
|
19,703 |
|
|
|
487.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
1,654,622 |
|
|
$ |
1,073,362 |
|
|
$ |
581,260 |
|
|
|
54.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Costs and Expenses(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia Mining Operations and Other |
|
$ |
1,197,985 |
|
|
$ |
731,266 |
|
|
$ |
466,719 |
|
|
|
63.8 |
% |
Illinois Basin Mining Operations |
|
|
270,488 |
|
|
|
240,384 |
|
|
|
30,104 |
|
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Costs and Expenses |
|
$ |
1,468,473 |
|
|
$ |
971,650 |
|
|
$ |
496,823 |
|
|
|
51.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachia Mining Operations and Other |
|
$ |
172,994 |
|
|
$ |
89,850 |
|
|
$ |
83,144 |
|
|
|
92.5 |
% |
Illinois Basin Mining Operations |
|
|
13,155 |
|
|
|
11,862 |
|
|
|
1,293 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Segment Adjusted EBITDA |
|
$ |
186,149 |
|
|
$ |
101,712 |
|
|
$ |
84,437 |
|
|
|
83.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Segment Operating Costs and Expenses represent consolidated operating costs and
expenses of $1,608.7 million and $1,109.3 million less past mining obligation expense of $110.3 million and $137.6 million for the years
ended December 31, 2008 and 2007, respectively, as described below, and less back-to-back
contract accretion of $29.9 million for the year ended December 31, 2008. |
50
Tons Sold and Revenues
The increase in Appalachia revenue for the year ended December 31, 2008 compared to 2007
primarily related to $413.0 million of sales associated with the newly-acquired Magnum
operations. Excluding the impact of Magnum, revenues were also affected by higher average sales
prices, partially offset by lower sales volumes at the Federal and Rocklick mining complexes.
Average sales prices increased at our mining complexes, reflecting higher sales contract
pricing, including the repricing of a major coal supply agreement with Peabody as part of the
spin-off, and cost recovery under certain contracts for increased regulatory costs.
Sales volumes in the Appalachia segment increased in 2008, primarily due to 7.2 million
tons sold from the newly-acquired Magnum operations. Excluding Magnum, sales volume decreased
primarily due to production shortfalls at our Federal complex, the completion of the final
longwall panel at the Harris mine during the second quarter, labor shortages for much of the
year and reduced productivity at several mines.
Illinois Basin revenue increased in 2008 primarily related to higher average sales prices.
Compared to the prior year, sales volumes increased slightly.
Other Appalachia revenues increased in 2008. In addition to increased royalty income, other
revenues included a structured settlement on a property transaction, a settlement for past due
coal royalties, which had previously been fully reserved due to the uncertainty of collection,
and gains on the sale of purchased coal in the first quarter.
Segment Operating Costs and Expenses
Segment operating costs and expenses represent consolidated operating costs and expenses
less past mining obligations.
Operating costs and expenses for Appalachia increased in 2008 as compared to the prior year
primarily due to $382.4 million of costs associated with the newly-acquired Magnum operations.
Excluding the impact of Magnum, operating costs were higher in 2008 due to start-up costs as we
ramped up production at our Big Mountain ($22.4 million) and Kanawha Eagle ($16.2 million)
mining complexes, as well as higher contract mining costs ($16.3 million) primarily related to
higher material and supply and labor costs. Material and supply costs were primarily impacted by
higher fuel, explosives and steel-related costs. Higher labor costs were reflective of an
overall labor shortage in the Appalachia region.
Operating costs and expenses for Illinois Basin increased in 2008 as compared to the prior
year primarily due to increased costs for purchased coal ($9.3 million), increased labor costs
($6.1 million) and higher materials and supplies cost due to higher diesel fuel, explosives and
steel-related costs ($6.6 million). Purchased coal resulted from diverting tons to higher
priced spot sales and fulfilling sales commitments with purchased tons.
Segment Adjusted EBITDA
Segment Adjusted EBITDA for Appalachia increased in 2008 from the prior year primarily due
to the contribution from the newly-acquired Magnum operations and, to a lesser extent, higher
sales prices, partially offset by lower sales volumes and higher operating costs as described
above. Segment Adjusted EBITDA for Appalachia also increased in 2008 due to the previously
mentioned gains on the sale of purchased coal in the first quarter and the structured
settlements in the second quarter.
Segment Adjusted EBITDA for the Illinois Basin increased in 2008 primarily due to higher
average sales prices, offset by increased labor costs and higher diesel fuel, explosives and
steel-related costs as described above.
51
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) to |
|
|
Year Ended December 31, |
|
Income |
|
|
2008 |
|
2007 |
|
$ |
|
% |
|
|
(Dollars in thousands) |
Segment Adjusted EBITDA |
|
$ |
186,149 |
|
|
$ |
101,712 |
|
|
$ |
84,437 |
|
|
|
83.0 |
% |
Corporate and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past mining obligation expense |
|
|
(110,308 |
) |
|
|
(137,602 |
) |
|
|
27,294 |
|
|
|
19.8 |
% |
Net gain on disposal or exchange of assets |
|
|
7,004 |
|
|
|
81,458 |
|
|
|
(74,454 |
) |
|
|
(91.4 |
)% |
Selling and administrative expenses |
|
|
(38,607 |
) |
|
|
(45,137 |
) |
|
|
6,530 |
|
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total corporate and Other |
|
|
(141,911 |
) |
|
|
(101,281 |
) |
|
|
(40,630 |
) |
|
|
(40.1 |
)% |
Depreciation, depletion and amortization |
|
|
(125,356 |
) |
|
|
(85,640 |
) |
|
|
(39,716 |
) |
|
|
(46.4 |
)% |
Sales contract accretion, net |
|
|
249,522 |
|
|
|
- |
|
|
|
249,522 |
|
|
|
N/A |
|
Reclamation and remediation obligation expense |
|
|
(19,260 |
) |
|
|
(20,144 |
) |
|
|
884 |
|
|
|
4.4 |
% |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peabody |
|
|
- |
|
|
|
(4,969 |
) |
|
|
4,969 |
|
|
|
N/A |
|
Third-party |
|
|
(23,648 |
) |
|
|
(3,368 |
) |
|
|
(20,280 |
) |
|
|
(602.1 |
)% |
Interest income |
|
|
17,232 |
|
|
|
11,543 |
|
|
|
5,689 |
|
|
|
49.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
142,728 |
|
|
|
(102,147 |
) |
|
|
244,875 |
|
|
|
239.7 |
% |
Net income attributable to noncontrolling interest |
|
|
- |
|
|
|
(4,721 |
) |
|
|
4,721 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Patriot |
|
|
142,728 |
|
|
|
(106,868 |
) |
|
|
249,596 |
|
|
|
233.6 |
% |
Effect of
noncontrolling interest purchase arrangement |
|
|
- |
|
|
|
15,667 |
|
|
|
(15,667 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
142,728 |
|
|
$ |
(122,535 |
) |
|
$ |
265,263 |
|
|
|
216.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Past Mining Obligation Expense
Past mining obligation expenses were lower in 2008 than the prior year primarily due to the
retention by Peabody of a portion of the retiree healthcare liability at spin-off and a higher
discount rate associated with the 2008 expenses. Past mining obligation expense at the
newly-acquired Magnum operations totaled $19.0 million for the period beginning July 23, 2008,
the acquisition date, primarily associated with retiree healthcare liabilities.
Net Gain on Disposal or Exchange of Assets
Net gain on disposal or exchange of assets was $74.5 million lower for 2008 compared to the
prior year. The net gain on disposal or exchange of assets for 2008 included a $6.3 million
gain on the exchange/sale of certain leasehold mineral interests. The net gain on disposal or
exchange of assets for 2007 included coal reserve transactions that resulted in gains of $78.5
million.
Selling and Administrative Expenses
Our historical selling and administrative expenses for the year ended December 31, 2007
were based on an allocation of Peabody general corporate expenses to all of its mining
operations, both foreign and domestic. Selling and administrative expenses for the year ended
December 31, 2008 represent our actual expenses incurred as a stand-alone company, including
expenses from the newly-acquired Magnum operations, which overall were lower than the prior year
allocation.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for 2008 increased compared to the prior year
primarily due to the additional sales volume associated with the acquisition of Magnum.
Sales Contract Accretion
Sales contract accretion resulted from the below market coal sale and purchase contracts
acquired in the Magnum acquisition and recorded at fair value in purchase accounting. The net
liability generated from applying fair value to these contracts is being accreted over the life
of the contracts as the coal is shipped.
Reclamation and Remediation Obligation Expense
Reclamation and remediation obligation expense decreased in 2008 compared to the prior year
primarily due to accelerated reclamation work at closed mines in the first half of 2007, the
acceleration of a mine closure in early 2007, and the extension of the life of our Federal mine
in mid-2007 as a result of the acquisition of adjoining coal reserves, largely offset by
expenses related to the newly-acquired Magnum operations.
52
Interest Expense (Income)
Interest expense increased for 2008 compared to 2007 primarily due to amortized debt
discount and debt origination fees related to our May 2008 convertible debt issuance, interest
and a commitment fee expensed in the second quarter due to the termination of a bridge loan
facility related to the Magnum acquisition. Additionally, amortized origination debt fees
related to our credit facility put in place at the time of the spin-off also increased interest
expense in 2008. These increases were partially offset by lower interest expense related to a
demand note with Peabody which was forgiven at the spin-off, resulting in no similar interest
expense in 2008. See Liquidity and Capital Resources for details concerning our outstanding debt
and credit facility.
Interest income increased in 2008 compared to the prior year due to interest on a Black
Lung excise tax refund. In addition, we recognized a full year of interest income on notes
receivable that resulted from the sale of coal reserves in the first half of 2007.
Income Tax Provision
For the years ended December 31, 2008 and 2007, no income tax provision was recorded due to
net operating losses for the year and our full valuation allowance recorded against deferred tax
assets. For 2008, the primary difference between book and taxable income was the treatment of
the net sales contract accretion on the below market purchase and sales contracts acquired in
the Magnum acquisition, with such amounts being included in the computation of book income but
excluded from the computation of taxable income.
Noncontrolling Interest
We acquired an effective controlling interest in KE Ventures, LLC during the first quarter
of 2006, and began consolidating KE Ventures, LLC in our results in 2006. The portion of
earnings that represents the interests of the noncontrolling owners was deducted from our net
income (loss) to determine net income (loss) attributable to Patriot. The noncontrolling
interest recorded in 2007 represented the share of KE Ventures, LLC earnings in which the
noncontrolling holders were entitled to participate. In the fourth quarter of 2007, we
increased our ownership in KE Ventures, LLC to 100%.
Effect of Noncontrolling Interest Purchase Arrangement
At the spin-off, the noncontrolling interest holders of KE Ventures, LLC held an option
that could require Patriot to purchase the remaining 18.5% of KE Ventures, LLC upon a change in
control. Upon the spin-off from Peabody, the noncontrolling owners of KE Ventures, LLC exercised
this option, and we acquired the remaining noncontrolling interest in KE Ventures, LLC on
November 30, 2007 for $33.0 million. Because the option requiring Patriot to purchase KE
Ventures, LLC is considered a mandatorily redeemable instrument outside of our control, amounts
paid to the noncontrolling interest holders in excess of carrying value of the noncontrolling
interest in KE Ventures, LLC, or $15.7 million, was reflected as an increase in net loss
attributable to common stockholders in 2007. This obligation was fully redeemed as of December
31, 2007.
Outlook
Market
Market indicators are showing signs of increased strength in the metallurgical and thermal
coal markets. Asian economies are recovering rapidly and are importing metallurgical coal at a
robust pace. Idled steel mill capacity is being restarted around the globe. European and
Brazilian metallurgical markets are poised to expand further, while U.S. steel markets have
stabilized. Although U.S. coal producers have not historically shipped large quantities of
metallurgical coal to Asia, increased demand in Asian markets could begin to pull more U.S. coal
to Asian destinations.
Demand for thermal coal has increased and inventory levels have begun to decline as a
result of higher natural gas prices, coupled with the extremely cold temperatures experienced in
the U.S. during December 2009 and January 2010. Additionally, colder temperatures have also
begun to draw down natural gas inventories. Because of surface mine permitting issues and more
extensive safety regulations and inspections, as well as more difficult geology, Central
Appalachia may be the first U.S. coal basin to come into balance as thermal coal markets
continue to strengthen. Improving domestic and world economies will result in higher industrial
production and electricity usage, which should result in higher thermal coal demand and
decreased thermal coal inventories both in the U.S. and overseas.
53
Patriot Operations
As discussed more fully under Item 1A. Risk Factors, our results of operations in the
near-term could be negatively impacted by unforeseen adverse geologic conditions or equipment
problems at mining locations; customer performance and credit risks; the economic recession;
reductions of purchases or deferral of deliveries by major customers; the passage of new or
expanded regulations that could limit our ability to mine, increase our mining costs, or limit
our customers ability to utilize coal as fuel for electricity generation; environmental and
coal mining laws and regulations; the availability and costs of credit, surety bonds and letters
of credit; the inability of contract miners to fulfill delivery terms of their contracts; delays
in obtaining or the inability to obtain required permits for new mining operations; and the
unavailability of transportation for coal shipments.
On a long-term basis, our results of operations could also be impacted by our ability to
secure or acquire high-quality coal reserves; our ability to attract and retain skilled
employees and contract miners; our ability to find replacement buyers for coal under contracts
with comparable terms to existing contracts; and rising prices of key supplies, mining equipment
and commodities.
Potential legislation, regulation, treaties and accords at the local, state, federal and
international level have created uncertainty and could have a significant impact on our
customers, demand for coal and our future operational and financial results. For example,
increased scrutiny of surface mining permits could cause production delays in the future. The
lack of proven technology to meet selenium discharge standards creates uncertainty as to the
future costs of water treatment to comply with mining permits. The regulation of carbon dioxide
and other greenhouse gases emissions could have an adverse effect on the financial condition of
our customers and significantly impact the demand for coal. See Item 1A. Risk Factors for
expanded discussion of these factors.
If upward pressure on costs exceeds our ability to realize sales increases, or if we
experience unanticipated operating or transportation difficulties, our operating margins would
be negatively impacted. Management has continued to focus on controlling costs, optimizing
performance and responding quickly to market changes. We are seeing positive results from our
ongoing emphasis on cash and cost control, as well as rationalization of higher-cost production.
We performed a comprehensive strategic review of our mining complexes and their relative
cost structures in conjunction with the Magnum acquisition. As a result, we idled our Jupiter
mining complex effective December 31, 2008 and the Remington complex effective March 31, 2009.
Additionally, we implemented a Management Action Plan in early 2009 in response to the weakened
coal markets. In January 2009, we announced the idling of our Black Oak mine. On April 2, 2009,
we announced additional contract mine suspensions, the deferral of the opening of the Blue Creek
complex and the cancellation of certain operating shifts at various mining complexes. In
addition, on August 3, 2009, we announced the suspension of our Samples surface mine due to its
higher cost structure relative to our other operations.
Both our Federal and Panther longwalls encountered some adverse geologic conditions in
2009, but significantly less than the difficulties encountered in 2008. The improved production
in 2009 reflects the benefits of mine plan adjustments made in late 2008 to minimize the impact
of difficult geology. In the third quarter of 2009, significant upgrades were made to certain
components of the Panther longwall mining equipment. Both of the longwalls were performing well
by the end of 2009. In the fourth quarter of 2009, Federal had its best production quarter in
2009 and Panther had its best quarter since the Magnum acquisition.
On February 22, 2010, we announced that
active mining operations at our Federal mine in northern West Virginia were temporarily suspended upon discovering
potentially adverse atmospheric conditions on February 18, 2010, in an abandoned area of the mine.
We are currently conducting additional testing and working with the U.S. Department of Labor, Mine
Safety & Health Administration to develop a plan to address this issue so that active mining operations
can resume, the timing of which is currently uncertain. The Federal mine complex historically accounts
for between 10% and 20% of our Segment Adjusted EBITDA.
We anticipate 2010 sales volume in the range of 33 to 35 million tons. This includes
metallurgical coal sales of at least 6.5 million tons. We are targeting higher metallurgical
coal volumes in 2010 from existing operations as a result of the strengthening market. As of
December 31, 2009 our total unpriced planned production for 2010 was approximately 4 to
6 million tons.
The guidance provided under the caption Outlook should be read in conjunction with the
section entitled Cautionary Notice Regarding Forward Looking Statements on page 2 and Item 1A.
Risk Factors. Actual events and results may vary significantly from those included in, or
contemplated, or implied by the forward-looking statements under Outlook. For additional
information regarding the risks and uncertainties that affect our business, see Item 1A. Risk
Factors.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results of operations, liquidity
and capital resources are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States.
Generally accepted accounting principles require that we make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis.
We base our estimates on historical experience and on various other assumptions that we believe
are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
54
Employee-Related Liabilities
We have significant long-term liabilities for our employees postretirement benefit costs
and workers compensation obligations. Detailed information related to these liabilities is
included in Notes 18 and 20 to our consolidated financial statements. Expense for the year ended
December 31, 2009 for these liabilities totaled $123.8 million, while payments were
$93.2 million.
Postretirement benefits and certain components of our workers compensation obligations are
actuarially determined, and we use various actuarial assumptions, including the discount rate
and future cost trends, to estimate the costs and obligations for these items. The discount rate
is determined by utilizing a hypothetical bond portfolio model which approximates the future
cash flows necessary to service our liabilities. We make assumptions related to future trends
for medical care costs in the estimates of retiree healthcare and work-related injuries and
illness obligations. Our medical trend assumption is developed by annually examining the
historical trend of our cost per claim data.
If our assumptions do not materialize as expected, actual cash expenditures and costs that
we incur could differ materially from our current estimates. Moreover, regulatory changes could
increase our obligation to satisfy these or additional obligations. Our most significant
employee liability is postretirement healthcare. Assumed discount rates and healthcare cost
trend rates have a significant effect on the expense and liability amounts reported for
postretirement healthcare plans. Below we have provided two separate sensitivity analyses to
demonstrate the significance of these assumptions in relation to reported amounts.
Healthcare cost trend rate:
|
|
|
|
|
|
|
|
|
|
|
+1.0% |
|
-1.0% |
|
|
(Dollars in thousands) |
|
Effect on total service and interest cost components |
|
$ |
9,306 |
|
|
$ |
(7,758 |
) |
Effect on (gain)/loss amortization component |
|
|
30,011 |
|
|
|
(25,951 |
) |
Effect on total postretirement benefit obligation |
|
|
160,756 |
|
|
|
(138,189 |
) |
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
+0.5% |
|
-0.5% |
|
|
(Dollars in thousands) |
Effect on total service and interest cost components |
|
$ |
898 |
|
|
$ |
(1,193 |
) |
Effect on (gain)/loss amortization component |
|
|
(7,672 |
) |
|
|
7,829 |
|
Effect on total postretirement benefit obligation |
|
|
(76,052 |
) |
|
|
81,034 |
|
Asset Retirement Obligations
Our asset retirement obligations (also referred to as reclamation) primarily consist of
spending estimates for surface land reclamation and support facilities at both underground and
surface mines in accordance with federal and state reclamation laws as defined by each mining
permit. Asset retirement obligations are determined for each mine using various estimates and
assumptions including, among other items, estimates of disturbed acreage as determined from
engineering data, estimates of future costs to reclaim the disturbed acreage, the timing of
these cash flows, and a credit-adjusted, risk-free rate. As changes in estimates occur (such as
mine plan revisions, changes in estimated costs, or changes in timing of the reclamation
activities), the obligation and asset are revised to reflect the new estimate after applying the
appropriate credit-adjusted, risk-free rate. If our assumptions do not materialize as expected,
actual cash expenditures and costs that we incur could be materially different than currently
estimated. Moreover, regulatory changes could increase our obligation to perform reclamation and
mine closing activities. Asset retirement obligation expense for the year ended December 31,
2009, was $29.5 million, and payments totaled $13.4 million. See detailed information regarding
our asset retirement obligations in Note 17 to our consolidated financial statements.
Asset retirement obligations are included in Reclamation and remediation obligation expense
in our consolidated statements of operations.
Remediation Obligations
Our remediation obligations primarily consist of the estimated liability for water
treatment in order to comply with selenium effluent limits included in certain mining permits.
This liability reflects the discounted estimated costs of the treatment systems to be installed
and maintained with the goal of meeting the requirements of current court orders, consent
decrees and mining permits. This estimate was prepared considering the dynamics of current
legislation, capabilities of currently available technology and our planned remediation
strategy. The exact amount of our assumed liability is uncertain due to the fact there is no
proven technology to remediate our existing selenium discharges in excess of allowable limits to
meet current permit standards. If technology becomes available that meets permit standards or
if the standards change in the future, our actual cash expenditures and costs that we incur
could be materially different than currently
estimated. Remediation obligation expense for the year ended December 31, 2009 was $5.6
million and payments totaled $5.5 million. See detailed information regarding our remediation
obligations in Note 6 to our consolidated financial statements.
Remediation obligations are included in Reclamation and remediation obligation expense
in our consolidated statements of operations.
55
Income Taxes
Deferred tax assets and liabilities are recognized using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and liabilities. In
addition, deferred tax assets are reduced by a valuation allowance if it is more likely than
not that some portion or the entire deferred tax asset will not be realized. In our annual
evaluation of the need for a valuation allowance, we take into account various factors,
including the expected level of future taxable income and available tax planning strategies. If
actual results differ from the assumptions made in our annual evaluation of our valuation
allowance, we may record a change in valuation allowance through income tax expense in the
period this determination is made. As of December 31, 2009 and 2008, we maintained a full
valuation allowance against our net deferred tax assets.
Uncertain tax positions taken on previously filed tax returns or expected to be taken on
future tax returns are reflected in the measurement of current and deferred taxes. The initial
recognition process is a two-step process with a recognition threshold step and a step to
measure the benefit. A tax benefit is recognized when it is more likely than not of being
sustained upon audit based on the merits of the position. The second step is to measure the
appropriate amount of the benefit to be recognized based on a best estimate measurement of the
maximum amount which is more likely than not to be realized. As of December 31, 2009 and 2008,
the unrecognized tax benefits are immaterial, and if recognized would not currently affect our
effective tax rate as any recognition would be offset with a valuation allowance. We do not
expect any significant increases or decreases to unrecognized tax benefits within twelve months
of this reporting date.
Additional detail regarding how we account for income taxes and the effect of income taxes
on our consolidated financial statements is available in Note 14.
Revenue Recognition
In general, we recognize revenues when they are realizable and earned. We generated
substantially all of our revenues in 2009 from the sale of coal to our customers. Revenues from
coal sales are realized and earned when risk of loss passes to the customer. Coal sales are made
to our customers under the terms of coal supply agreements, most of which have a term of one
year or more. Under the typical terms of these coal supply agreements, risk of loss transfers to
the customer at the mine or port, where coal is loaded to the rail, barge, ocean-going vessel,
truck or other transportation source that delivers coal to its destination.
With respect to other revenues, other operating income, or gains on asset sales recognized
in situations unrelated to the shipment of coal, we carefully review the facts and circumstances
of each transaction and apply the relevant accounting literature as appropriate. We do not
recognize revenue until the following criteria are met: persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered; the sellers price to the buyer is
fixed or determinable; and collectability is reasonably assured.
Derivatives
We utilize derivative financial instruments to manage exposure to certain commodity prices.
Authoritative guidance requires the recognition of derivative financial instruments at fair
value in the consolidated balance sheets. For derivatives that are not designated as hedges, the
periodic change in fair value is recorded directly to earnings. For derivative instruments that
qualify and are designated by us as cash flow hedges, the periodic change in fair value is
recorded to Accumulated other comprehensive loss until the contract settles or the
relationship ceases to qualify for hedge accounting. In addition, if a portion of the change in
fair value for a cash flow hedge is deemed ineffective during a reporting period, the
ineffective portion of the change in fair value is recorded directly to earnings. We entered
into heating oil swap contracts to manage our exposure to diesel fuel prices. The changes in
diesel fuel and heating oil prices are highly correlated, thus allowing the swap contracts to be
designated as cash flow hedges.
Share-Based Compensation
We have an equity incentive plan for employees and eligible non-employee directors that
allows for the issuance of share-based compensation in the form of restricted stock, incentive
stock options, nonqualified stock options, stock appreciation rights, performance awards,
restricted stock units and deferred stock units. We utilize the Black-Scholes option pricing
model to determine the fair value of stock options and an applicable lattice pricing model to
determine the fair value of certain market-based performance awards. Determining the fair value
of share-based awards requires judgment, including estimating the expected term that stock
options will be outstanding prior to exercise, the associated volatility, and a risk-free
interest rate. Judgment is also required in estimating the amount of share-based awards expected
to be forfeited prior to vesting. If actual forfeitures differ significantly from these
estimates, share-based compensation expense could be materially impacted.
56
Impairment of Long-Lived Assets
Impairment losses on long-lived assets used in operations are recorded when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets under various assumptions are less than the carrying
amounts of those assets. Impairment losses are measured by comparing the estimated fair value of
the impaired asset to its carrying amount. An impairment charge was recorded at December 31,
2009 related to certain infrastructure and thermal coal reserves near our Rocklick complex that
were deemed uneconomical to mine.
Business Combinations
We account for business acquisitions using the purchase method of accounting. Under this
method of accounting, the purchase price is allocated to the fair value of the net assets
acquired. Determining the fair value of assets acquired and liabilities assumed requires
managements judgment and the utilization of independent valuation experts, and often involves
the use of significant estimates and assumptions, including, but not limited to, assumptions
with respect to future cash flows, discount rates and asset lives.
Liquidity and Capital Resources
Our primary sources of cash include sales of our coal production to customers, sales of
non-core assets and financing transactions. Our primary uses of cash include our cash costs of
coal production, capital expenditures, interest costs and costs related to past mining
obligations as well as acquisitions. Our ability to service our debt (interest and principal)
and acquire new productive assets or businesses is dependent upon our ability to continue to
generate cash from the primary sources noted above in excess of the primary uses. We expect to
fund our capital expenditure requirements with cash generated from operations or borrowed funds
as necessary.
Net cash provided by operating activities was $39.6 million for the year ended December 31,
2009, a decrease of $23.8 million compared to the prior year. This decrease in net cash provided
by operating activities related to the use of working capital of $105.2 million, offset by
improved operating results of $81.4 million.
Net cash used in investing activities was $77.6 million for the year ended December 31,
2009, a decrease of $61.1 million compared to cash used in investing activities of $138.7
million in the prior year. The decrease in cash used reflected lower capital expenditures of
$43.1 million, a decrease of cash used for investment in joint ventures of $16.4 million and
higher cash proceeds from notes receivable of $11.0 million, partially offset by a decrease in
net cash acquired from acquisitions of $11.4 million.
Net cash provided by financing activities was $62.2 million for the year ended December 31,
2009, a decrease of $9.9 million compared to the prior year. The decrease in cash provided by
financing activities reflected a $46.0 million change in short-term borrowings on our credit
facility and a decrease of $200.0 million in gross proceeds from the convertible note received
in 2008. These decreases were partially offset by the $89.1 million in net proceeds from the
equity offering in 2009 and the termination of Magnums debt facility in 2008 for $136.8
million.
On June 16, 2009, we completed a public offering of 12 million shares of our common stock
in a registered public offering under our shelf registration at $7.90 per share. The net
proceeds from the sale of shares, after deducting fees and commissions, were $89.1 million. The
proceeds were used to repay the outstanding balance on our revolving credit facility, with the
remainder used for general corporate purposes.
Credit Facility
Effective October 31, 2007, we entered into a $500 million, four-year revolving credit
facility, which includes a $50 million swingline sub-facility and a letter of credit
sub-facility, subsequently amended for the Magnum acquisition and the issuance of the
convertible notes. In July 2009, we increased our revolving credit facility by $22.5 million,
bringing the total credit facility to $522.5 million. This facility is available for our working
capital requirements, capital expenditures and other corporate purposes. As of December 31,
2009, the balance of outstanding letters of credit issued against the credit facility totaled
$352.1 million. As of December 31, 2008, the balance of outstanding letters of credit issued
against the credit facility totaled $350.8 million, and $23.0 million short-term borrowings were
outstanding under the sub-facility. The weighted-average effective interest rate of the
sub-facility was 3.99% as of December 31, 2008. There were no short-term borrowings outstanding
as of December 31, 2009. Availability under the credit facility was $170.4 million and $126.2
million as of December 31, 2009 and 2008, respectively.
57
The obligations under our credit facility are secured by a first lien on substantially all
of our assets, including but not limited to certain of our mines and coal reserves and related
fixtures. The credit facility contains certain customary covenants,
including financial covenants limiting our total indebtedness (maximum leverage ratio of 2.75)
and requiring minimum EBITDA (as defined in the credit facility) coverage of interest expense
(minimum interest coverage ratio of 4.0), as well as certain limitations on, among other things,
additional debt, liens, investments, acquisitions and capital expenditures, future dividends and
asset sales. The credit facility calls for quarterly reporting of compliance with financial
covenants. The terms of the credit facility also contain certain customary events of default,
which gives the lenders the right to accelerate payments of outstanding debt in certain
circumstances. Customary events of default include breach of covenants, failure to maintain
required ratios, failure to make principal payments or to make interest or fee payments within a
grace period, and default, beyond any applicable grace period, on any of our other indebtedness
exceeding a certain amount.
In connection with the merger agreement with Magnum, we entered into an amendment dated as
of April 2, 2008 to the credit facility. The amendment among other things, (i) permitted the
merger with Magnum and the transactions contemplated by the merger agreement, (ii) increased the
rate of interest applicable to loans and letters of credit fees under the credit facility and
(iii) modified certain covenants and related definitions to allow for changes in permitted
indebtedness, permitted liens, permitted capital expenditures and other changes in respect of
Patriot and its subsidiaries in connection with the acquisition. The increase in the interest
rate and the covenant modifications were effective with the closing of the acquisition. In
connection with our issuance of the convertible notes discussed below, we entered into an
amendment to the credit facility dated as of May 19, 2008, allowing the issuance of the
convertible notes and modifying certain covenants for the period prior to the closing of the
Magnum acquisition. On September 25, 2008, we entered into an amendment to the credit facility
allowing, among other things, an increase to the permitted securitization programs without
adjusting the capacity of the credit facility. At December 31, 2009 we were in compliance with
the covenants of our amended credit facility.
Private Convertible Notes Issuance
On May 28, 2008, we completed a private offering of $200 million in aggregate principal
amount of 3.25% Convertible Senior Notes due 2013 (the notes), including $25 million related to
the underwriters overallotment option. The net proceeds of the offering were $193.5 million
after deducting the initial purchasers commissions and fees and expenses of the offering. As
discussed in Note 3, we adopted authoritative guidance related to accounting for convertible
debt effective January 1, 2009, with retrospective application to the issuance date of these
convertible notes. We utilized an interest rate of 8.85% to reflect the nonconvertible market
rate of our offering upon issuance, which resulted in a $44.7 million discount to the
convertible note balance and an increase to Additional paid-in capital to reflect the value of
the conversion feature. The nonconvertible market interest rate was based on an analysis of
similar securities trading in the market at the pricing date of the issuance, taking into
account company specific data such as credit spreads and implied volatility. In addition, we
allocated the financing costs related to the issuance of the convertible instruments between the
debt and equity components. The debt discount is amortized over the contractual life of the
convertible notes, resulting in additional interest expense above the contractual coupon amount.
At December 31, 2008, the principal amount of the convertible notes of $200.0 million was
adjusted for the debt discount of $40.4 million, resulting in a long-term convertible note
balance of $159.6 million. At December 31, 2009, the debt discount was $32.5 million, resulting
in a long-term convertible note balance of $167.5 million. For the year ended December 31, 2009,
interest expense for the convertible notes was $14.4 million, which included debt discount
amortization of $7.8 million. For the year ended December 31, 2008, interest expense for the
convertible notes was $8.2 million, which included debt discount amortization of $4.2 million.
Interest on the notes is payable semi-annually in arrears on May 31 and November 30 of each
year. The notes mature on May 31, 2013, unless converted, repurchased or redeemed in accordance
with their terms prior to such date. The notes are senior unsecured obligations and rank equally
with all of our existing and future senior debt and are senior to any subordinated debt. We used
the proceeds of the offering to repay Magnums existing senior secured indebtedness and
acquisition related fees and expenses. All remaining amounts were used for other general
corporate purposes.
The notes are convertible into cash and, if applicable, shares of Patriots common stock
during the period from issuance to February 15, 2013, subject to certain conditions of
conversion as described below. The conversion rate for the notes is 14.7778 shares of Patriots
common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of
approximately $67.67 per share of common stock. The conversion rate and the conversion price are
subject to adjustment for certain dilutive events, such as a future stock split or a
distribution of a stock dividend.
The notes require us to settle all conversions by paying cash for the lesser of the
principal amount or the conversion value of the notes, and by settling any excess of the
conversion value over the principal amount in cash or shares, at our option.
58
Holders of the notes may convert their notes prior to the close of business on the business
day immediately preceding February 15, 2013, only under the following circumstances: (1) during
the five trading day period after any ten consecutive trading day period (the measurement
period) in which the trading price per note for each trading day of that measurement period was
less than 97% of the product of the last reported sale price of Patriots common stock and the
conversion rate on each such trading day; (2) during any calendar quarter after the calendar
quarter ending September 30, 2008, and only during such calendar quarter, if the last reported
sale price of Patriots common stock for 20 or more trading days in a period of 30 consecutive
trading days ending on the last trading day of the immediately preceding calendar quarter
exceeds 130% of the conversion price in effect on each such trading day; (3) if such holders
notes have been called for redemption or (4) upon the occurrence of corporate events specified
in the indenture. The notes will be convertible, regardless of the foregoing circumstances, at
any time from, and including, February 15, 2013 until the close of business on the business day
immediately preceding the maturity date.
The number of shares of Patriots common stock that we may deliver upon conversion will
depend on the price of our common stock during an observation period as described in the
indenture. Specifically, the number of shares deliverable upon conversion will increase as the
common stock price increases above the conversion price of $67.67 per share during the
observation period. The maximum number of shares that we may deliver is 2,955,560. However, if
certain fundamental changes occur in Patriots business that are deemed make-whole fundamental
changes in the indenture, the number of shares deliverable on conversion may increase, up to a
maximum amount of 4,137,788 shares. These maximum amounts are subject to adjustment for certain
dilutive events, such as a stock split or a distribution of a stock dividend.
Holders of the notes may require us to repurchase all or a portion of our notes upon a
fundamental change in our business, as defined in the indenture. The holders would receive cash
for 100% of the principal amount of the notes, plus any accrued and unpaid interest.
Patriot may redeem (i) some or all of the notes at any time on or after May 31, 2011, but
only if the last reported sale price of our common stock for 20 or more trading days in a period
of 30 consecutive trading days ending on the trading day prior to the date we provide the
relevant notice of redemption exceeds 130% of the conversion price in effect on each such
trading day, or (ii) all of the notes if at any time less than $20 million in aggregate
principal amount of notes remain outstanding. In both cases, notes will be redeemed for cash at
a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any
accrued and unpaid interest up to, but excluding, the relevant redemption date.
Under the indenture for the notes, if we fail to timely file any document or report
required to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, (other than reports on Form 8-K), we are
required to pay additional interest on the notes of 0.50% of the principal balance of the notes.
This additional interest feature is considered an embedded derivative. Management has determined
the fair value of this embedded derivative is de minimis as the probability of reports not being
filed timely is remote and we have no history of late submissions.
The notes and any shares of common stock issuable upon conversion have not been registered
under the Securities Act of 1933, as amended (the Securities Act), or any state securities laws.
The notes were only offered to qualified institutional buyers pursuant to Rule 144A promulgated
under the Securities Act.
Bridge Loan Facility
In connection with the Magnum acquisition agreement, we obtained a subordinated bridge loan
financing commitment, allowing us to draw up to $150 million under the related bridge loan
facility at the effective date of the acquisition to repay a portion of the outstanding debt of
Magnum. We terminated the financing commitment on May 30, 2008, as a result of the issuance of
the convertible notes. We recognized $1.5 million in commitment fees in connection with the
financing commitment, which were included in Interest expense in the consolidated statements
of operations.
Promissory Notes
In conjunction with an exchange transaction involving the acquisition of Illinois Basin
coal reserves in 2005, we entered into promissory notes. Annual installments of $1.7 million on
the promissory notes for principal and interest were payable beginning in January 2008 and run
through January 2017. At December 31, 2009, the balance on the promissory notes was
$10.5 million, $1.0 million of which was a current liability.
Other
We do not anticipate that we will pay cash dividends on our common stock in the near term.
The declaration and amount of future dividends, if any, will be determined by our Board of
Directors and will be dependent upon covenant limitations in our credit facility and other debt
agreements, our financial condition and future earnings, our capital, legal and regulatory
requirements, and other factors our Board deems relevant.
59
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year as of December 31, 2009 |
|
|
Within 1 |
|
|
|
|
|
|
|
|
|
|
After 5 |
|
|
|
Year |
|
2-3 Years |
|
4-5 Years |
|
Years |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations (principal and cash interest) |
|
$ |
17,468 |
|
|
$ |
24,159 |
|
|
$ |
213,850 |
|
|
$ |
20,700 |
|
Operating lease obligations |
|
|
40,443 |
|
|
|
59,218 |
|
|
|
18,630 |
|
|
|
419 |
|
Coal reserve lease and royalty obligations |
|
|
28,191 |
|
|
|
43,612 |
|
|
|
36,984 |
|
|
|
145,283 |
|
Other long-term liabilities (1) |
|
|
122,467 |
|
|
|
294,201 |
|
|
|
277,839 |
|
|
|
1,392,335 |
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
208,569 |
|
|
$ |
421,190 |
|
|
$ |
547,303 |
|
|
$ |
1,558,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents long-term liabilities relating to our postretirement benefit
plans, work-related injuries and illnesses and mine reclamation and remediation and end-of-mine
closure costs. |
As of December 31, 2009, we had $24.9 million of purchase obligations for capital
expenditures. Total capital expenditures for 2010 are expected to range from $100 million to
$125 million.
Off-Balance Sheet Arrangements and Guarantees
In the normal course of business, we are a party to certain off-balance sheet arrangements.
These arrangements include guarantees, indemnifications, and financial instruments with
off-balance sheet risk, such as bank letters of credit and performance or surety bonds.
Liabilities related to these arrangements are not reflected in our consolidated balance sheets,
and we do not expect any material adverse effect on our financial condition, results of
operations or cash flows to result from these off-balance sheet arrangements.
We have used a combination of surety bonds and letters of credit to secure our financial
obligations for reclamation, workers compensation, postretirement benefits and lease
obligations as follows as of December 31, 2009:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers |
|
|
Retiree |
|
|
|
|
|
|
|
|
|
Reclamation |
|
|
Lease |
|
|
Compensation |
|
|
Health |
|
|
|
|
|
|
|
|
|
Obligations |
|
Obligations |
|
Obligations |
|
Obligations |
|
Other(1) |
|
Total |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surety bonds |
|
$ |
135,986 |
|
|
$ |
- |
|
|
$ |
44 |
|
|
$ |
- |
|
|
$ |
16,786 |
|
|
$ |
152,816 |
|
Letters of credit |
|
|
85,184 |
|
|
|
10,287 |
|
|
|
201,034 |
|
|
|
50,487 |
|
|
|
5,142 |
|
|
|
352,134 |
|
Third-party
guarantees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,819 |
|
|
|
1,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
221,170 |
|
|
$ |
10,287 |
|
|
$ |
201,078 |
|
|
$ |
50,487 |
|
|
$ |
23,747 |
|
|
$ |
506,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes collateral for surety companies and bank guarantees, road maintenance and performance guarantees. |
As of December 31, 2009, Arch held surety bonds of $93.3 million related to properties
acquired by Patriot in the Magnum acquisition, of which $91.7 million related to reclamation. As
a result of the acquisition, Patriot is required to post letters of credit in Archs favor for
the amount of the accrued reclamation liabilities no later than February 2011.
Peabody guarantees certain of our workers compensation obligations which totaled $152.1
million at December 31, 2009, with the U.S. Department of Labor (DOL). We will be required to either
post letters of credit in Peabodys favor if Peabody continues to guarantee this obligation or
post our own surety directly with the DOL by July 2011.
In relation to an exchange transaction involving the acquisition of Illinois Basin coal
reserves in 2005, we guaranteed bonding for a partnership in which we formerly held an interest.
The aggregate amount that we guaranteed was $2.8 million and the fair value of the guarantee
recognized as a liability was $0.3 million as of December 31, 2009. Our obligation under the
guarantee extends to September 2015.
In connection with the spin-off, Peabody assumed certain of Patriots retiree healthcare
liabilities. The present value of these liabilities totaled $665.0 million as of December 31,
2009. These liabilities included certain obligations under the Coal Act for which Peabody and
Patriot are jointly and severally liable, obligations under the 2007 NBCWA for which we are
secondarily liable, and obligations for certain active, vested employees of Patriot.
60
Newly Adopted Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards CodificationTM (Codification) which has become the source of authoritative
U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered
non-SEC accounting literature not included in the Codification has become nonauthoritative. The
Codification is meant to simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent
structure; its purpose is not to create new accounting and reporting guidance. Consistent with
the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standard
Updates. The Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009.
Debt
In May 2008, the FASB issued authoritative guidance which changed the accounting for our
convertible notes, specifying that issuers of convertible debt instruments that may settle in
cash upon conversion must bifurcate the proceeds from the debt issuance between debt and equity
components in a manner that reflects the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The equity component reflects the value of
the conversion feature of the notes. We adopted this authoritative guidance effective January 1,
2009, with retrospective application to the issuance date of our convertible notes. See Note 15
for additional disclosures.
Earnings Per Share
In September 2008, the FASB issued authoritative guidance which states that instruments
granted in share-based payment awards that entitle their holders to receive nonforfeitable
dividends or dividend equivalents before vesting should be considered participating securities
and need to be included in the earnings allocation in computing earnings per share under the
two-class method. The two-class method of computing earnings per share is an earnings
allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and participation rights
in undistributed earnings. We adopted this authoritative guidance effective January 1, 2009 with
all prior period earnings per share data adjusted retrospectively. The calculations of earnings
per share amounts presented in this report include all participating securities as required by
this authoritative guidance.
Business Combinations
In December 2007, the FASB issued authoritative guidance regarding business combinations.
The guidance defines the acquirer as the entity that obtains control of one or more businesses
in the business combination and establishes the acquisition date as the date that the acquirer
achieves control instead of the date that the consideration is transferred. The guidance also
requires an acquirer in a business combination to recognize the assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. It also requires the recognition of
assets acquired and liabilities assumed arising from certain contractual contingencies as of the
acquisition date to be measured at their acquisition-date fair values. This authoritative
guidance is effective for any business combination with an acquisition date on or after January
1, 2009.
Consolidation
In December 2007, the FASB issued authoritative guidance that establishes accounting and
reporting standards for noncontrolling interests in partially-owned consolidated subsidiaries
and the loss of control of subsidiaries. A noncontrolling interest (previously referred to as
minority interest) in a consolidated subsidiary is required to be displayed in the consolidated
balance sheet as a separate component of equity, and the amount of net income attributable to
the noncontrolling interest is required to be included in consolidated net income on the face of
the consolidated statement of operations. In addition, this guidance requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. We adopted the
provisions of this guidance effective January 1, 2009, with retrospective application to the
periods presented in this report.
61
Fair Value Measurements and Disclosures
In September 2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles
and expands disclosures about fair value measures. This guidance clarifies that fair value is a
market-based measurement that should be determined based on the assumptions that market
participants would use in pricing an asset or liability. This guidance was effective for fiscal
years beginning after November 15, 2007. We elected to implement the guidance with the one-year
deferral permitted by subsequent guidance. The deferral applied to nonfinancial assets and
liabilities measured at fair value in a business combination. As of January 1, 2009, we adopted
the fair value guidance, including applying its provisions to nonfinancial assets and
liabilities measured at fair value in a business combination. The adoption of this guidance did
not change the valuation approach or materially change the purchase accounting for the Magnum
acquisition, which was finalized in the second quarter of 2009.
Subsequent Events
In June 2009, the FASB issued authoritative guidance which establishes general standards of
accounting for and the disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Entities are required to
disclose the date through which subsequent events have been evaluated. We adopted this guidance
effective June 30, 2009.
Pending Adoption of Recent Accounting Pronouncements
Transfers of Financial Assets
In June 2009, the FASB issued authoritative guidance regarding
the accounting for transfers of financial assets which requires
enhanced disclosures about the continuing risk exposure to a transferor because of its
continuing involvement with transferred financial assets. This guidance is effective for fiscal
years beginning after November 15, 2009. We are currently evaluating the potential impact of this
guidance on our operating results, cash flows and financial condition.
Consolidation
In June 2009, the FASB issued authoritative guidance which requires a company to perform a
qualitative analysis to determine whether it has a controlling financial interest in a variable
interest entity. In addition, a company is required to assess whether it has the power to direct
the activities of the variable interest entity that most significantly impact the entitys
economic performance. This guidance is effective for fiscal years beginning after November 15,
2009. We are currently evaluating the potential impact of this guidance on our operating
results, cash flows and financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Commodity Price Risk
The potential for changes in the market value of our coal portfolio is referred to as
market risk. Due to lack of quoted market prices and the long term, illiquid nature of the
positions, we have not quantified market risk related to our portfolio of coal supply
agreements. We manage our commodity price risk for our coal contracts through the use of
long-term coal supply agreements, rather than through the use of derivative instruments. We sold
83% of our sales volume under coal supply agreements with terms of one year or more during 2009.
As of December 31, 2009 our total unpriced planned production for 2010 was approximately 4 to
6 million tons.
In connection with the spin-off, we entered into long-term coal contracts with marketing
affiliates of Peabody. The arrangements, except as described below under Credit Risk, have
substantially similar terms and conditions as the pre-existing contractual obligations of
Peabodys marketing affiliate. These arrangements may be amended or terminated only with the
mutual agreement of Peabody and Patriot.
We have commodity risk related to our diesel fuel purchases. To manage this risk, we have
entered into swap contracts with financial institutions. These derivative contracts have been
designated as cash flow hedges of anticipated diesel fuel purchases. As of February 19, 2010,
the notional amounts outstanding for these swaps included 14.0 million gallons of heating oil
expiring throughout 2010 and 2.0 million gallons of heating oil expiring throughout 2011. We
expect to purchase approximately 22 million gallons of diesel fuel annually. Aside from these
hedging activities, a $0.10 per gallon change in the price of diesel fuel would impact our
annual operating costs by approximately $2.2 million.
Credit Risk
A significant portion of our revenues is generated through sales to a marketing affiliate
of Peabody, and we will continue to supply coal to Peabody on a contract basis as described
above, so Peabody can meet its commitments under pre-existing customer agreements sourced from
our operations. The pre-existing customer arrangement between Patriot and Peabody with the
longest term will expire on December 31, 2012. Our remaining sales are made directly to electric
utilities, industrial companies and steelmakers. Therefore, our concentration of credit risk is
with Peabody, as well as electric utilities and steelmakers.
62
Our policy is to independently evaluate each customers creditworthiness prior to entering
into transactions and to constantly monitor the credit extended. In the event that we engage in
a transaction with a counterparty that does not meet our credit standards, we will protect our
position by requiring the counterparty to provide appropriate credit enhancement. When
appropriate (as determined by our credit management function), we have taken steps to mitigate
our credit exposure to customers or counterparties whose credit has deteriorated and who may
pose a higher risk of failure to perform under their contractual obligations. These steps may
include obtaining letters of credit or cash collateral, requiring prepayments for shipments or
the creation of customer trust accounts held for our benefit to serve as collateral in the event
of a failure to pay. While the economic recession may affect our customers, we do not anticipate
that it will significantly affect our overall credit risk profile due to our credit policies.
Additionally, as of December 31, 2009, we had $142.4 million in notes receivable
outstanding from a single counterparty, arising out of the sale of coal reserves and surface
land. Each of these notes contains a cross-collaterization provision secured primarily by the
underlying coal reserves and surface land.
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 15 of this report for information required by this Item.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the CEO and the CFO have each concluded that our
disclosure controls and procedures were designed, and were effective, to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended,
(the Exchange Act) is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms.
There have not been any significant changes in our internal control over financial
reporting identified during the quarter ended December 31, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
63
Managements Report on Internal Control Over Financial Reporting
Management is responsible for maintaining and establishing adequate internal control
over financial reporting. Our internal control framework and processes were designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our
consolidated financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Because of inherent limitations, any system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of our internal control over
financial reporting using the criteria set by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control Integrated Framework. Based on this
assessment, management concluded that the Companys internal control over financial reporting
was effective as of December 31, 2009.
Our Independent Registered Public Accounting Firm, Ernst & Young LLP, has audited our
internal control over financial reporting, as stated in their unqualified opinion report
included herein.
|
|
|
|
|
|
/s/ Richard M. Whiting
|
|
|
Richard M. Whiting |
|
|
Chief Executive Officer |
|
|
February 24, 2010
64
Managements Report on Internal Control Over Financial Reporting
Management is responsible for maintaining and establishing adequate internal control
over financial reporting. Our internal control framework and processes were designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our
consolidated financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Because of inherent limitations, any system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of our internal control over
financial reporting using the criteria set by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control Integrated Framework. Based on this
assessment, management concluded that the Companys internal control over financial reporting
was effective as of December 31, 2009.
Our Independent Registered Public Accounting Firm, Ernst & Young LLP, has audited our
internal control over financial reporting, as stated in their unqualified opinion report
included herein.
|
|
|
|
|
|
/s/ Mark N. Schroeder
|
|
|
Mark N. Schroeder |
|
|
Chief Financial Officer |
|
|
February 24, 2010
65
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Patriot Coal Corporation
We have audited Patriot Coal Corporations internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Patriot Coal Corporations management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Patriot Coal Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Patriot Coal Corporation as
of December 31, 2009 and 2008, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three years in the period ended December
31, 2009 and our report dated February 24, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 24, 2010
66
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 401 of Regulation S-K is included under the caption
Election of Directors in our Proxy Statement and in Part I of this report under the caption
Executive Officers of the Company. Such information is incorporated herein by reference. The
information required by Items 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is
included under the captions Section 16(a) Beneficial Ownership Reporting Compliance, Corporate
Governance Matters and Executive Compensation, respectively, in our Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Items 402 and 407 (e)(4) and (e)(5) of Regulation S-K is
included in our Proxy Statement under the caption Executive Compensation and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 403 of Regulation S-K is included under the caption
Ownership of Company Securities in our Proxy Statement and is incorporated herein by reference.
As required by Item 201(d) of Regulation S-K, the following table provides information
regarding our equity compensation plans as of December 31, 2009:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
|
|
|
|
Number of Securities |
|
|
|
Number of Securities |
|
|
|
|
|
|
Remaining Available |
|
|
|
to be Issued |
|
|
Weighted-Average |
|
|
for Future Issuance |
|
|
|
Upon Exercise of |
|
|
Exercise Price of |
|
|
Under Equity Compensation |
|
|
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
Plans (Excluding Securities |
|
Plan
Category |
|
Warrants and Rights |
|
Warrants and Rights |
|
Reflected in Column (a)) |
|
Equity compensation plans
approved by security
holders |
|
|
4,411,783 |
|
|
$ |
15.92 |
|
|
|
788,217 |
|
Equity compensation
plans not
approved by security
holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
Total |
|
|
4,411,783 |
|
|
$ |
15.92 |
|
|
|
788,217 |
|
|
|
|
|
|
|
|
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 of Regulation S-K is included under the captions
Certain Relationships and Related Party Transactions, Director Independence and Policy for
Approval of Related Person Transactions in our Proxy Statement and is incorporated herein by
reference. The information required by Item 407(a) of Regulation S-K is included under the
caption Executive Compensation in our Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by Item 9(e) of Schedule 14A is included under the caption Fees
Paid to Independent Registered Public Accounting Firm in our Proxy Statement and is incorporated
herein by reference.
67
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents Filed as Part of the Report
(1) Financial Statements.
The following consolidated financial statements of Patriot Coal Corporation are included
herein on the pages indicated:
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Page |
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F-1 |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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(2) Financial Statement Schedule.
The following financial statement schedule of Patriot Coal Corporation is at the page
indicated:
All other schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3) Exhibits.
See Exhibit Index hereto.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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PATRIOT COAL CORPORATION
|
|
|
/s/ RICHARD M. WHITING
|
|
|
Richard M. Whiting |
|
|
Chief Executive Officer and Director |
|
Date: February 24, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons, on behalf of the registrant and in the capacities and on the dates
indicated.
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Signature |
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Title |
|
Date |
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/s/ RICHARD M. WHITING
Richard M. Whiting
|
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Chief Executive Officer and
Director (principal executive officer)
|
|
February 24, 2010 |
|
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|
|
/s/ MARK N. SCHROEDER
Mark N. Schroeder
|
|
Senior Vice President and Chief
Financial Officer (principal
financial and accounting officer)
|
|
February 24, 2010 |
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Chairman of the Board and Director
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February 24, 2010 |
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Director
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February 24, 2010 |
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Director
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February 24, 2010 |
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Director
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|
February 24, 2010 |
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Director
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|
February 24, 2010 |
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Director
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February 24, 2010 |
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|
Director
|
|
February 24, 2010 |
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Director
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|
February 24, 2010 |
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Director
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February 24, 2010 |
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69
|
|
|
Exhibit No. |
|
Description of Exhibit |
2.1
|
|
Separation Agreement, Plan of Reorganization and Distribution, dated October 22, 2007,
between Peabody Energy Corporation and Patriot Coal Corporation (Incorporated by reference to
Exhibit 2.1 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of April 2, 2008, by and among Magnum Coal Company,
Patriot Coal Corporation, Colt Merger Corporation, and ArcLight Energy Partners Fund I, L.P. and
ArcLight Energy Partners Fund II, L.P., acting jointly, as Stockholder Representative (Incorporated
by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K, filed on April 8, 2008). |
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit
3.1 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
3.2
|
|
Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 of the
Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
4.1
|
|
Rights Agreement, dated October 22, 2007, between Patriot Coal Corporation and
American Stock Transfer & Trust Company (Incorporated by reference to Exhibit 4.1 of the
Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
4.2
|
|
Certificate of Designations of Series A Junior Participating Preferred Stock (Incorporated by
reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K, filed on November 6, 2007). |
|
|
|
4.3
|
|
First Amendment to Rights Agreement, dated as of April 2, 2008, to the Rights Agreement, dated
as of October 22, 2007 between Patriot Coal Corporation and American Stock Transfer & Trust
Company, as Rights Agent (Incorporated by reference to Exhibit 4.1 of the Registrants Current
Report on Form 8-K, filed on April 8, 2008). |
|
|
|
4.4
|
|
Indenture dated as of May 28, 2008, by and between Patriot Coal Corporation, as Issuer, and U.S.
Bank National Association, as trustee (including form of 3.25% Convertible Senior Notes due 2013)
(Incorporated by reference to the Registrants Current Report on Form 8-K, dated May 29, 2008). |
|
|
|
10.1
|
|
Tax Separation Agreement, dated October 22, 2007, between Peabody Energy Corporation and
Patriot Coal Corporation (Incorporated by reference to Exhibit 10.2 of the Registrants Current Report
on Form 8-K, filed on October 25, 2007). |
|
|
|
10.2
|
|
Employee Matters Agreement, dated October 22, 2007, between Peabody Energy Corporation and
Patriot Coal Corporation (Incorporated by reference to Exhibit 10.3 of the Registrants Current Report
on Form 8-K, filed on October 25, 2007). |
|
|
|
10.3
|
|
Coal Act Liabilities Assumption Agreement, dated October 22, 2007, among Patriot Coal Corporation,
Peabody Holding Company, LLC and Peabody Energy Corporation (Incorporated by reference to
Exhibit 10.9 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.4
|
|
NBCWA Liabilities Assumption Agreement, dated October 22, 2007, among Patriot Coal Corporation,
Peabody Holding Company, LLC, Peabody Coal Company, LLC and Peabody Energy Corporation
(Incorporated by reference to Exhibit 10.10 of the Registrants Current Report on Form 8-K, filed on
October 25, 2007). |
|
|
|
10.5
|
|
Salaried Employee Liabilities Assumption Agreement, dated October 22, 2007, among Patriot Coal
Corporation, Peabody Holding Company, LLC, Peabody Coal Company, LLC and Peabody Energy
Corporation (Incorporated by reference to Exhibit 10.11 of the Registrants Current Report on Form 8-K,
filed on October 25, 2007). |
|
|
|
10.6
|
|
Administrative Services Agreement, dated October 22, 2007, between Patriot Coal Corporation, Peabody
Holding Company, LLC and Peabody Energy Corporation (Incorporated by reference to Exhibit 10.12
of the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.7
|
|
Master Equipment Sublease Agreement, dated October 22, 2007, between Patriot Leasing Company LLC
and PEC Equipment Company, LLC (Incorporated by reference to Exhibit 10.13 of the Registrants
Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.8
|
|
Software License Agreement, dated October 22, 2007, between Patriot Coal Corporation and Peabody
Energy Corporation (Incorporated by reference to Exhibit 10.14 of the Registrants Current Report on
Form 8-K, filed on October 25, 2007). |
1
|
|
|
Exhibit No. |
|
Description of Exhibit |
10.9
|
|
Throughput and Storage Agreement, dated October 22, 2007, among Peabody Terminals, LLC, James
River Coal Terminal, LLC and Patriot Coal Sales LLC (Incorporated by reference to Exhibit 10.15 of the
Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
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10.10
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|
Conveyance and Assumption Agreement, dated October 22, 2007, among PEC Equipment Company,
LLC, Central States Coal Reserves of Indiana, LLC, Central States Coal Reserves of Illinois, LLC, Cyprus
Creek Land Company and Peabody Coal Company, LLC (Incorporated by reference to Exhibit 10.16 of
the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
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10.11
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|
Amendment No. 1 to the Separation Agreement, Plan of Reorganization and Distribution, dated
November 1, 2007, between Peabody Energy Corporation and Patriot Coal Corporation. (Incorporated
by reference to Exhibit 10.42 of the Registrants Current Report on Form 10-K, filed on March 14, 2008). |
|
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|
10.12
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|
Coal Supply Agreement, dated October 22, 2007, between Patriot Coal Sales LLC and COALSALES II,
LLC (Incorporated by reference to Exhibit 10.4 of the Registrants Current Report on Form 8-K, filed
on October 25, 2007). |
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|
|
10.13
|
|
Amendment 1 to Coal Supply Agreement between Patriot Coal LLC and COALSALES II LLC, dated
March 28, 2008. (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form
10-Q, filed on May 14, 2008). |
|
|
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10.14
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|
Coal Supply Agreement, dated October 22, 2007, between Patriot Coal Sales LLC and COALSALES
LLC (Incorporated by reference to Exhibit 10.5 of the Registrants Current Report on Form 8-K, filed
on October 25, 2007). |
|
|
|
10.15
|
|
Master Coal Supply Agreement, dated October 22, 2007, between Patriot Coal Sales LLC and
COALSALES LLC (Incorporated by reference to Exhibit 10.6 of the Registrants Current Report on
Form 8-K, filed on October 25, 2007). |
|
|
|
10.16
|
|
Amendment 1 to Master Coal Supply Agreement between Patriot Coal Sales LLC and COALSALES LLC,
dated February 26, 2008. (Incorporated by reference to Exhibit 10.43 of the Registrants Current Report
on Form 10-K, filed on March 14, 2008). |
|
|
|
10.17
|
|
Master Coal Supply Agreement, dated October 22, 2007, between Patriot Coal Sales LLC and
COALSALES II LLC (Incorporated by reference to Exhibit 10.7 of the Registrants Current Report on
Form 8-K, filed on October 25, 2007). |
|
|
|
10.18
|
|
Amendment 1 to Master Coal Supply Agreement between Patriot Coal Sales LLC and COALSALES II
LLC, dated February 26, 2008. (Incorporated by reference to Exhibit 10.44 of the Registrants Current
Report on Form 10-K, filed on March 14, 2008). |
|
|
|
10.19
|
|
Master Coal Supply Agreement, dated October 22, 2007, between Patriot Coal Sales LLC and
COALTRADE INTERNATIONAL, LLC (Incorporated by reference to Exhibit 10.8 of the Registrants
Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.20
|
|
Amendment 1 to Master Coal Supply Agreement between Patriot Coal Sales LLC and COALTRADE
International LLC, dated February 26, 2008. (Incorporated by reference to Exhibit 10.45 of the Registrants
Current Report on Form 10-K, filed on March 14, 2008). |
|
|
|
10.21
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and J. Joe
Adorjan (Incorporated by reference to Exhibit 10.3 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.22
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and B. R. Brown
(Incorporated by reference to Exhibit 10.4 of the Registrants Current Report on Form 8-K, filed on
November 6, 2007). |
|
|
|
10.23
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and John E.
Lushefski (Incorporated by reference to Exhibit 10.5 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.24
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and Michael M.
Scharf (Incorporated by reference to Exhibit 10.6 of the Registrants Current Report on Form 8-K, filed
on November 6, 2007). |
2
|
|
|
Exhibit No. |
|
Description of Exhibit |
10.25
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and Robert O.
Viets (Incorporated by reference to Exhibit 10.7 of the Registrants Current Report on Form 8-K, filed
on November 6, 2007). |
|
|
|
10.26
|
|
Indemnification Agreement, dated July 24, 2008, between Patriot Coal Corporation and Robb E. Turner
(Incorporated by reference to the Registrants Current Report on Form 8-K, filed on July 28, 2008). |
|
|
|
10.27
|
|
Indemnification Agreement, dated July 24, 2008, between Patriot Coal Corporation and John E. Erhard
(Incorporated by reference to the Registrants Current Report on Form 8-K, filed on July 28, 2008). |
|
|
|
10.28
|
|
Indemnification Agreement, dated July 24, 2008, between Patriot Coal Corporation and Michael P.
Johnson (Incorporated by reference to the Registrants Current Report on Form 8-K, filed on
July 28, 2008). |
|
|
|
10.29
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and Irl F.
Engelhardt (Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.30
|
|
Employment Agreement, dated October 31, 2007, between Patriot Coal Corporation and Irl F. Engelhardt
(Incorporated by reference to Exhibit 10.14 of the Registrants Current Report on Form 8-K, filed on
November 6, 2007). |
|
|
|
10.31
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and Richard M.
Whiting (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed
on November 6, 2007). |
|
|
|
10.32
|
|
Employment Agreement, dated October 31, 2007, between Patriot Coal Corporation and Richard M.
Whiting (Incorporated by reference to Exhibit 10.9 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.33
|
|
Indemnification Agreement, dated November 1, 2007, between Patriot Coal Corporation and Mark N.
Schroeder (Incorporated by reference to Exhibit 10.8 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.34
|
|
Employment Agreement, dated October 31, 2007, between Patriot Coal Corporation and Mark N.
Schroeder (Incorporated by reference to Exhibit 10.10 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.35
|
|
Employment Agreement, dated October 31, 2007, between Patriot Coal Corporation and Charles A.
Ebetino, Jr. (Incorporated by reference to Exhibit 10.12 of the Registrants Current Report on Form 8-K,
filed on November 6, 2007). |
|
|
|
10.36
|
|
Amendment to Employment Agreement between Patriot Coal Corporation and Charles A. Ebetino, Jr.
(Incorporated by reference to the Registrants Current Report on Form 8-K, filed on February 6, 2009). |
|
|
|
10.37
|
|
Employment Agreement, dated October 31, 2007, between Patriot Coal Corporation and Joseph W.
Bean (Incorporated by reference to Exhibit 10.13 of the Registrants Current Report on Form 8-K, filed
on November 6, 2007). |
|
|
|
10.38
|
|
Amendment to Employment Agreement between Patriot Coal Corporation and Joseph W. Bean
(Incorporated by reference to the Registrants Current Report on Form 8-K, filed on February 6, 2009). |
|
|
|
10.39
|
|
Employment Agreement, made and entered into as of May 8, 2008, by and between Paul H. Vining and
Patriot Coal Corporation (Incorporated by reference to the Registrants Current Report on Form 8-K,
filed on May 13, 2008). |
|
|
|
10.40
|
|
Letter Agreement between Arclight Energy Partners Fund I, L.P., Arclight Energy Partners
Fund II, L.P. and Paul Vining dated August 7, 2009. (Incorporated by reference to Exhibit 10.1 of
the Registrants Current Report on Form 10-Q, filed on August 7, 2009). |
|
|
|
10.41
|
|
Patriot Coal Corporation Credit Agreement, dated October 31, 2007, among Patriot Coal Corporation,
Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender and the lenders from
time to time party thereto (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report
on Form 8-K, filed on October 31, 2007). |
3
|
|
|
Exhibit No. |
|
Description of Exhibit |
10.42
|
|
Patriot Coal Corporation Pledge and Security Agreement, dated October 31, 2007, among Patriot Coal
Corporation, certain subsidiaries of Patriot Coal Corporation and Bank of America, N.A. (Incorporated
by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K, filed on October 31, 2007). |
|
|
|
10.43
|
|
Amendment No. 1, dated as of April 2, 2008, to the Credit Agreement dated as of October 31, 2007, among
Patriot Coal Corporation, Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line
Lender, and the lenders party thereto (Incorporated by reference to the Registrants Current Report on
Form 8-K, filed on April 8, 2008). |
|
|
|
10.44
|
|
Amendment No. 2, dated as of May 19, 2008, to the Credit Agreement dated as of October 31, 2007,
among Patriot Coal Corporation, Bank of America, N.A., as administrative agent, L/C Issuer and Swing
Line Lender, and the lenders party thereto. (Incorporated by reference to the Registrants Current
Report on Form 8-K, filed on May 23, 2008). |
|
|
|
10.45
|
|
Amendment No. 3, dated as of September 25, 2008, to the Credit Agreement dated as of October 31, 2007,
among Patriot Coal Corporation, Bank of America, N.A., as administrative agent, L/C Issuer and Swing
Line Lender, and the lenders party thereto. (Incorporated by reference to the Registrants Current
Report on Form 10-Q, filed on November 13, 2008) |
|
|
|
10.46
|
|
Form of Registration Rights Agreement among Patriot Coal Corporation, ArcLight Energy Partners
Fund I, L.P. and ArcLight Energy Partners Fund II, L.P. (Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K, filed on April 8, 2008). |
|
|
|
10.47
|
|
Bridge Facility Commitment Letter dated April 2, 2008, among Patriot Coal Corporation, ArcLight Energy
Partners Fund I, L.P. and ArcLight Energy Partners Fund II, L.P. (Incorporated by reference to Exhibit
10.2 of the Registrants Current Report on Form 8-K, filed on April 8, 2008). |
|
|
|
10.48
|
|
Form of Support Agreement, dated as of April 2, 2008, between Patriot Coal Corporation and certain
stockholders of Magnum Coal Company (Incorporated by reference to the Registrants Current Report
on Form 8-K, filed on April 8, 2008). |
|
|
|
10.49
|
|
Voting and Standstill Agreement, dated as of April 2, 2008, among Patriot Coal Corporation, the
stockholders whose names appear on the signature page thereto, ArcLight Energy Partners Fund I, L.P.
and ArcLight Energy Partners Fund II, L.P., acting jointly, as stockholder representative (Incorporated
by reference to the Registrants Current Report on Form 8-K, dated April 8, 2008). |
|
|
|
10.50
|
|
Purchase Agreement, dated May 21, 2008 by and among Patriot Coal Corporation and Citigroup Global
Markets Inc. and Lehman Brothers Inc. (Incorporated by reference to the Registrants Current Report
on Form 8-K, filed on May 23, 2008). |
|
|
|
10.51
|
|
Patriot Coal Corporation 2007 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit
10.17 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.52
|
|
Patriot Coal Corporation Management Annual Incentive Compensation Plan (Incorporated by reference
to Exhibit 10.19 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.53
|
|
Form of Non-Qualified Stock Option Agreement under the Patriot Coal Corporation 2007 Long-Term
Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on
Form 8-K, filed on October 29, 2007). |
|
|
|
10.54
|
|
Form of Restricted Stock Unit Agreement under the Patriot Coal Corporation 2007 Long-Term Equity
Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K,
filed on October 29, 2007). |
|
|
|
10.55
|
|
Form of Restricted Stock Award Agreement under the Patriot Coal Corporation 2007 Long-Term Equity
Incentive Plan (Incorporated by reference to Exhibit 10.3 of the Registrants Current Report on Form 8-K,
filed on October 29, 2007). |
|
|
|
10.56
|
|
Form of Restricted Stock Award Agreement for use in connection with awards under the
Patriot Coal Corporation 2007 Long-Term Equity Incentive Plan. (Incorporated by reference to
Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed on January 4, 2010). |
|
|
|
10.57
|
|
Form of Deferred Stock Unit Award Agreement under the Patriot Coal Corporation 2007 Long-Term
Equity Incentive Plan (Incorporated by reference to Exhibit 10.4 of the Registrants Current Report on
Form 8-K, filed on October 29, 2007). |
4
|
|
|
Exhibit No. |
|
Description of Exhibit |
10.58
|
|
Form of Performance-Based Restricted Stock Units Award Agreement for use in connection with awards
under the Patriot Coal Corporation 2007 Long-Term Equity Incentive Plan (Incorporated by reference to
the Registrants Current Report on Form 8-K, filed on January 30, 2009). |
|
|
|
10.59
|
|
Form of Non-Qualified Stock Option Agreement for use in connection with awards under the Patriot Coal
Corporation 2007 Long-Term Equity Incentive Plan (Incorporated by reference to the Registrants Current
Report on Form 8-K, filed on January 30, 2009). |
|
|
|
10.60
|
|
Patriot Coal Corporation 401(k) Retirement Plan (Incorporated by reference to Exhibit 10.15 of the
Registrants Current Report on Form 8-K, filed on November 6, 2007). |
|
|
|
10.61
|
|
Patriot Coal Corporation Supplemental 401(k) Retirement Plan (Incorporated by reference to Exhibit 10.16
of the Registrants Current Report on Form 8-K, filed on November 6, 2007). |
|
|
|
10.62
|
|
Patriot Coal Corporation Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.18 of
the Registrants Current Report on Form 8-K, filed on October 25, 2007). |
|
|
|
10.63*
|
|
First Amendment to the Patriot Coal Corporation Employee Stock Purchase Plan. |
|
|
|
10.64*
|
|
Second Amendment to the Patriot Coal Corporation Employee Stock Purchase Plan. |
|
|
|
10.65*
|
|
Third Amendment to the Patriot Coal Corporation Employee Stock Purchase Plan. |
|
|
|
21.1*
|
|
List of Subsidiaries |
|
|
|
23.1*
|
|
Consent of Independent Registered Accounting Firm |
|
|
|
31.1*
|
|
Certification of periodic financial report by Patriot Coal Corporations Chief Executive Officer
pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of periodic financial report by Patriot Coal Corporations Chief Financial Officer
pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Patriot Coal Corporations Chief Executive
Officer. |
|
|
|
32.2*
|
|
Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Patriot Coal Corporations Chief Financial
Officer. |
|
|
|
99.1
|
|
Patriot Coal Corporation Rights Adjustment Certificate dated July 28, 2008 (Incorporated by
reference to Exhibit 99.4 of the Registrants Current Report on Form 8-K, filed on July 28, 2008). |
5
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Patriot Coal Corporation
We have audited the accompanying consolidated balance sheets of Patriot Coal
Corporation as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in the period
ended December 31, 2009. Our audits also included the financial statement schedule listed in
the Index at Item 15(a). These financial statements and schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 Patriot Coal Corporation at
December 31, 2009 and 2008, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the financial statements taken as a
whole, present fairly in all material respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the Company
retrospectively applied certain adjustments with the adoption of amended guidance related to
convertible debt instruments that may settle in cash upon conversion, noncontrolling
interests, and participating securities in the determination of earnings per share.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Patriot Coal Corporations internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 24, 2010, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 24, 2010
F-1
PATRIOT COAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands, except share and per share data) |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,995,667 |
|
|
$ |
1,630,873 |
|
|
$ |
1,069,316 |
|
Other revenues |
|
|
49,616 |
|
|
|
23,749 |
|
|
|
4,046 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,045,283 |
|
|
|
1,654,622 |
|
|
|
1,073,362 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
1,893,021 |
|
|
|
1,608,661 |
|
|
|
1,109,252 |
|
Depreciation, depletion and amortization |
|
|
205,339 |
|
|
|
125,356 |
|
|
|
85,640 |
|
Reclamation and remediation obligation expense |
|
|
35,116 |
|
|
|
19,260 |
|
|
|
20,144 |
|
Sales contract accretion |
|
|
(298,572 |
) |
|
|
(279,402 |
) |
|
|
- |
|
Restructuring and impairment charge |
|
|
20,157 |
|
|
|
- |
|
|
|
- |
|
Selling and administrative expenses |
|
|
48,732 |
|
|
|
38,607 |
|
|
|
45,137 |
|
Net gain on disposal or exchange of assets |
|
|
(7,215 |
) |
|
|
(7,004 |
) |
|
|
(81,458 |
) |
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
148,705 |
|
|
|
149,144 |
|
|
|
(105,353 |
) |
Interest expense |
|
|
38,108 |
|
|
|
23,648 |
|
|
|
8,337 |
|
Interest income |
|
|
(16,646 |
) |
|
|
(17,232 |
) |
|
|
(11,543 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
|
127,243 |
|
|
|
142,728 |
|
|
|
(102,147 |
) |
Net income attributable to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
4,721 |
|
|
|
|
|
|
|
|
Net income (loss) attributable to Patriot |
|
|
127,243 |
|
|
|
142,728 |
|
|
|
(106,868 |
) |
Effect of noncontrolling interest purchase arrangement |
|
|
- |
|
|
|
- |
|
|
|
(15,667 |
) |
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
127,243 |
|
|
$ |
142,728 |
|
|
$ |
(122,535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
84,660,998 |
|
|
|
64,080,998 |
|
|
|
53,511,478 |
|
Effect of dilutive securities |
|
|
763,504 |
|
|
|
544,913 |
|
|
|
34,638 |
|
|
|
|
|
|
|
|
Diluted |
|
|
85,424,502 |
|
|
|
64,625,911 |
|
|
|
53,546,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Patriot |
|
$ |
1.50 |
|
|
$ |
2.23 |
|
|
$ |
(2.00 |
) |
Effect of noncontrolling interest purchase arrangement |
|
|
- |
|
|
|
- |
|
|
|
(0.29 |
) |
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
1.50 |
|
|
$ |
2.23 |
|
|
$ |
(2.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Patriot |
|
$ |
1.49 |
|
|
$ |
2.21 |
|
|
$ |
(2.00 |
) |
Effect of noncontrolling interest purchase arrangement |
|
|
- |
|
|
|
- |
|
|
|
(0.29 |
) |
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
1.49 |
|
|
$ |
2.21 |
|
|
$ |
(2.29 |
) |
|
|
|
|
|
|
|
F-2
PATRIOT COAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands, except share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
27,098 |
|
|
$ |
2,872 |
|
Accounts receivable and other, net of allowance for doubtful accounts of
$141 and $540 at December 31, 2009 and 2008, respectively |
|
|
188,897 |
|
|
|
163,556 |
|
Inventories |
|
|
81,188 |
|
|
|
80,953 |
|
Below market purchase contracts acquired |
|
|
694 |
|
|
|
8,543 |
|
Prepaid expenses and other current assets |
|
|
13,672 |
|
|
|
12,529 |
|
|
|
|
|
|
Total current assets |
|
|
311,549 |
|
|
|
268,453 |
|
Property, plant, equipment and mine development |
|
|
|
|
|
|
|
|
Land and coal interests |
|
|
2,864,225 |
|
|
|
2,652,224 |
|
Buildings and improvements |
|
|
396,449 |
|
|
|
390,119 |
|
Machinery and equipment |
|
|
631,615 |
|
|
|
658,699 |
|
Less accumulated depreciation, depletion and amortization |
|
|
(731,035 |
) |
|
|
(540,366 |
) |
|
|
|
|
|
Property, plant, equipment and mine development, net |
|
|
3,161,254 |
|
|
|
3,160,676 |
|
Notes receivable |
|
|
109,137 |
|
|
|
131,066 |
|
Investments and other assets |
|
|
36,223 |
|
|
|
62,125 |
|
|
|
|
|
|
Total assets |
|
$ |
3,618,163 |
|
|
$ |
3,622,320 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of debt |
|
$ |
8,042 |
|
|
$ |
28,170 |
|
Trade accounts payable and accrued expenses |
|
|
406,351 |
|
|
|
413,790 |
|
Below market sales contracts acquired |
|
|
150,441 |
|
|
|
324,407 |
|
|
|
|
|
|
Total current liabilities |
|
|
564,834 |
|
|
|
766,367 |
|
Long-term debt, less current maturities |
|
|
197,951 |
|
|
|
176,123 |
|
Asset retirement obligations |
|
|
244,518 |
|
|
|
224,180 |
|
Workers compensation obligations |
|
|
193,719 |
|
|
|
188,180 |
|
Accrued postretirement benefit costs |
|
|
1,169,981 |
|
|
|
1,003,254 |
|
Obligation to industry fund |
|
|
42,197 |
|
|
|
42,571 |
|
Below market sales contracts acquired, noncurrent |
|
|
156,120 |
|
|
|
316,707 |
|
Other noncurrent liabilities |
|
|
113,349 |
|
|
|
64,757 |
|
|
|
|
|
|
Total liabilities |
|
|
2,682,669 |
|
|
|
2,782,139 |
|
Stockholders equity |
|
|
|
|
|
|
|
|
Common stock ($0.01 par value; 100,000,000 shares authorized; 90,319,939
and 77,383,199 shares issued and outstanding at December 31, 2009 and
2008, respectively) |
|
|
903 |
|
|
|
774 |
|
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares
outstanding at December 31, 2009 and December 31, 2008) |
|
|
- |
|
|
|
- |
|
Series A Junior Participating Preferred Stock ($0.01 par value; 1,000,000
shares
authorized; no shares issued and outstanding at December 31, 2009 and 2008) |
|
|
- |
|
|
|
- |
|
Additional paid-in capital |
|
|
947,159 |
|
|
|
842,323 |
|
Retained earnings |
|
|
236,608 |
|
|
|
109,365 |
|
Accumulated other comprehensive loss |
|
|
(249,176 |
) |
|
|
(112,281 |
) |
|
|
|
|
|
Total stockholders equity |
|
|
935,494 |
|
|
|
840,181 |
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,618,163 |
|
|
$ |
3,622,320 |
|
|
|
|
|
|
F-3
PATRIOT COAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
|
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
127,243 |
|
|
$ |
142,728 |
|
|
$ |
(102,147 |
) |
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
205,339 |
|
|
|
125,356 |
|
|
|
85,640 |
|
Sales contract accretion |
|
|
(298,572 |
) |
|
|
(279,402 |
) |
|
|
- |
|
Impairment charge |
|
|
12,949 |
|
|
|
- |
|
|
|
- |
|
Net gain on disposal or exchange of assets |
|
|
(7,215 |
) |
|
|
(7,004 |
) |
|
|
(81,458 |
) |
Stock-based compensation expense |
|
|
13,852 |
|
|
|
8,778 |
|
|
|
1,299 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,565 |
) |
|
|
60,699 |
|
|
|
(19,058 |
) |
Inventories |
|
|
(6,530 |
) |
|
|
3,693 |
|
|
|
3,655 |
|
Other current assets |
|
|
903 |
|
|
|
(1,498 |
) |
|
|
790 |
|
Accounts payable and accrued expenses |
|
|
(38,867 |
) |
|
|
(5,697 |
) |
|
|
10,828 |
|
Interest on notes receivable |
|
|
(14,030 |
) |
|
|
(13,113 |
) |
|
|
(10,013 |
) |
Reclamation and remediation obligations |
|
|
14,988 |
|
|
|
12,719 |
|
|
|
4,473 |
|
Workers compensation obligations |
|
|
4,470 |
|
|
|
(5,953 |
) |
|
|
6,654 |
|
Accrued postretirement benefit costs |
|
|
26,248 |
|
|
|
15,577 |
|
|
|
22,264 |
|
Obligation to industry fund |
|
|
(3,019 |
) |
|
|
(3,412 |
) |
|
|
7,286 |
|
Other, net |
|
|
5,417 |
|
|
|
9,955 |
|
|
|
(9,912 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
39,611 |
|
|
|
63,426 |
|
|
|
(79,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant, equipment and mine development |
|
|
(78,263 |
) |
|
|
(121,388 |
) |
|
|
(55,594 |
) |
Additions to advance mining royalties |
|
|
(16,997 |
) |
|
|
(11,981 |
) |
|
|
(3,964 |
) |
Investment in joint ventures |
|
|
- |
|
|
|
(16,365 |
) |
|
|
- |
|
Cash acquired in business combination |
|
|
- |
|
|
|
21,015 |
|
|
|
- |
|
Acquisitions |
|
|
- |
|
|
|
(9,566 |
) |
|
|
(47,733 |
) |
Proceeds from notes receivable |
|
|
11,000 |
|
|
|
- |
|
|
|
- |
|
Proceeds from disposal or exchange of assets |
|
|
5,513 |
|
|
|
2,077 |
|
|
|
29,426 |
|
Net change in receivables from former affiliates |
|
|
- |
|
|
|
- |
|
|
|
132,586 |
|
Other |
|
|
1,154 |
|
|
|
(2,457 |
) |
|
|
- |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(77,593 |
) |
|
|
(138,665 |
) |
|
|
54,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from equity offering, net of costs |
|
|
89,077 |
|
|
|
- |
|
|
|
- |
|
Short-term debt borrowings (payments) |
|
|
(23,000 |
) |
|
|
23,000 |
|
|
|
- |
|
Long-term debt payments |
|
|
(5,905 |
) |
|
|
(2,684 |
) |
|
|
(8,358 |
) |
Convertible notes proceeds |
|
|
- |
|
|
|
200,000 |
|
|
|
- |
|
Termination of Magnum debt facility |
|
|
- |
|
|
|
(136,816 |
) |
|
|
- |
|
Contribution from former Parent |
|
|
- |
|
|
|
- |
|
|
|
43,647 |
|
Deferred financing costs |
|
|
- |
|
|
|
(10,906 |
) |
|
|
(4,726 |
) |
Common stock issuance fees |
|
|
- |
|
|
|
(1,468 |
) |
|
|
- |
|
Proceeds from employee stock purchases |
|
|
2,036 |
|
|
|
1,002 |
|
|
|
- |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
62,208 |
|
|
|
72,128 |
|
|
|
30,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
24,226 |
|
|
|
(3,111 |
) |
|
|
5,585 |
|
Cash and cash equivalents at beginning of period |
|
|
2,872 |
|
|
|
5,983 |
|
|
|
398 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
27,098 |
|
|
$ |
2,872 |
|
|
$ |
5,983 |
|
|
|
|
|
|
|
|
F-4
PATRIOT COAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Other |
|
|
Former |
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Earnings |
|
|
Comprehensive |
|
|
Parents |
|
|
Noncontrolling |
|
|
|
|
|
|
Stock |
|
Capital |
|
(Deficit) |
|
Loss |
|
Equity |
|
Interest |
|
Total |
|
|
(Dollars in thousands) |
|
December 31, 2006 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(322,121 |
) |
|
$ |
(367,706 |
) |
|
$ |
16,153 |
|
|
$ |
(673,674 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(33,363 |
) |
|
|
- |
|
|
|
(73,505 |
) |
|
|
4,721 |
|
|
|
(102,147 |
) |
Increase in investment in KE
Ventures, LLC from
74% to 100% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19,825 |
) |
|
|
(19,825 |
) |
Dividends paid to noncontrolling
interest in KE
Ventures, LLC |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,049 |
) |
|
|
(1,049 |
) |
Postretirement plans and workers
compensation obligations (net of
taxes of $0): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in accumulated actuarial
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
91,709 |
|
|
|
- |
|
|
|
- |
|
|
|
91,709 |
|
Changes in prior service cost |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,962 |
) |
|
|
- |
|
|
|
- |
|
|
|
(8,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,274 |
) |
Contributions from former Parent |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,647 |
|
|
|
- |
|
|
|
13,647 |
|
Consummation of spin-off transaction
on
October 31, 2007 |
|
|
532 |
|
|
|
187,884 |
|
|
|
- |
|
|
|
165,334 |
|
|
|
427,564 |
|
|
|
- |
|
|
|
781,314 |
|
Stock-based compensation |
|
|
- |
|
|
|
1,299 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,299 |
|
Stock grants to employees |
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
536 |
|
|
|
189,183 |
|
|
|
(33,363 |
) |
|
|
(74,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
82,316 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
142,728 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
142,728 |
|
Postretirement plans and workers
compensation obligations (net of
taxes of $0): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in accumulated actuarial
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,866 |
) |
|
|
- |
|
|
|
- |
|
|
|
(27,866 |
) |
Changes in prior service cost |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(680 |
) |
|
|
- |
|
|
|
- |
|
|
|
(680 |
) |
Unrealized loss on diesel fuel hedge |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,695 |
) |
|
|
- |
|
|
|
- |
|
|
|
(9,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,487 |
|
Retrospective accounting adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note discount |
|
|
- |
|
|
|
44,656 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
44,656 |
|
Equity issuance costs |
|
|
- |
|
|
|
(1,462 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,462 |
) |
Issuance of 23,803,312 shares of
common stock upon
acquisition, net of issuance fees |
|
|
238 |
|
|
|
600,166 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
600,404 |
|
Stock-based compensation |
|
|
- |
|
|
|
8,778 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,778 |
|
Employee stock purchases |
|
|
- |
|
|
|
1,002 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
774 |
|
|
|
842,323 |
|
|
|
109,365 |
|
|
|
(112,281 |
) |
|
|
- |
|
|
|
- |
|
|
|
840,181 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
127,243 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
127,243 |
|
Postretirement plans and workers
compensation obligations (net of
taxes of $0): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in accumulated actuarial
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(147,074 |
) |
|
|
- |
|
|
|
- |
|
|
|
(147,074 |
) |
Changes in prior service cost |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(551 |
) |
|
|
- |
|
|
|
- |
|
|
|
(551 |
) |
Changes in diesel fuel hedge |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,730 |
|
|
|
- |
|
|
|
- |
|
|
|
10,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,652 |
) |
Issuance of 12,000,000 shares of
common stock from
equity offering |
|
|
120 |
|
|
|
88,957 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
89,077 |
|
Stock-based compensation |
|
|
- |
|
|
|
13,852 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,852 |
|
Employee stock purchases |
|
|
3 |
|
|
|
2,033 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,036 |
|
Stock grants to employees |
|
|
6 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
$ |
903 |
|
|
$ |
947,159 |
|
|
$ |
236,608 |
|
|
$ |
(249,176 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
935,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) |
|
Basis of Presentation |
Description of Business
Effective October 31, 2007, Patriot Coal Corporation (we, our, Patriot or the Company) was
spun-off from Peabody Energy Corporation (Peabody) and became a separate, public company traded
on the New York Stock Exchange (symbol PCX). The spin-off from Peabody was accomplished through
a dividend of all outstanding shares of Patriot.
Patriot is engaged in the mining, preparation and sale of thermal coal, also known as steam
coal, for sale primarily to electric utilities and metallurgical coal, for sale to steel mills
and independent coke producers. Our mining complexes and coal reserves are located in the
eastern and midwestern United States (U.S.), primarily in West Virginia and Kentucky.
We acquired Magnum Coal Company (Magnum) effective July 23, 2008. Magnum was one of the
largest coal producers in Appalachia, operating eight mining complexes with production from
surface and underground mines and controlling more than 600 million tons of proven and probable
coal reserves. See Note 6 for additional information about the acquisition.
Basis of Presentation
The consolidated financial statements include the accounts of Patriot and its
majority-owned subsidiaries. All significant transactions, profits and balances have been
eliminated between Patriot and its subsidiaries. Patriot operates in two domestic coal segments;
Appalachia and the Illinois Basin (see Note 24).
The statements of operations and cash flows and related discussions for the year ended
December 31, 2007 relate to our historical results and may not necessarily reflect what our
results of operations and cash flows will be in the future or would have been as a stand-alone
company. Upon the completion of the spin-off, our capital structure changed significantly. At
the spin-off date, we entered into various operational agreements with Peabody, including
certain on-going agreements that enhance both the financial position and cash flows of Patriot.
Such agreements include the assumption by Peabody of certain retiree healthcare liabilities and
the repricing of a major coal supply agreement to be more reflective of the then current market
pricing for similar quality coal.
Effective August 11, 2008, Patriot implemented a 2-for-1 stock split effected in the form
of a 100% stock dividend. All share and per share amounts in these consolidated financial
statements and related notes reflect this stock split, including share information related to
the Convertible Senior Notes and the Magnum acquisition.
(2) |
|
Summary of Significant Accounting Policies |
Sales
Revenues from coal sales are realized and earned when risk of loss passes to the customer.
Coal sales are made to customers under the terms of supply agreements, most of which are
long-term (greater than one year). Under the typical terms of these coal supply agreements,
title and risk of loss transfer to the customer at the mine, preparation plant or river
terminal, where coal is loaded onto the rail, barge, truck or other transportation source that
delivers coal to its destination. Shipping and transportation costs are generally borne by the
customer. In relation to export sales, we hold inventories at port facilities where title and
risk of loss do not transfer until the coal is loaded into an ocean-going vessel. We incur
certain add-on taxes and fees on coal sales. Coal sales are reported including taxes and fees
charged by various federal and state governmental bodies.
Other Revenues
Other revenues include payments from customer settlements, royalties related to coal lease
agreements and farm income. During 2009, certain metallurgical and thermal customers requested
shipment deferrals on committed tons. In certain situations, we agreed to release the customers
from receipt of the tons in exchange for a cash settlement. During 2009, these cash settlements
represented a significant portion of other revenue. Royalty income generally results from the
lease or sublease of mineral rights to third parties, with payments based upon a percentage of
the selling price or an amount per ton of coal produced. Certain agreements require minimum
annual lease payments regardless of the extent to which minerals are produced from the
leasehold, although revenue is only recognized on these payments as the mineral is mined. The
terms of these agreements generally range from specified periods of 5 to 15 years, or can be for
an unspecified period until all reserves are depleted.
F-6
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. Cash
equivalents consist of highly liquid investments with original maturities of three months or
less.
Accounts Receivable
Accounts receivable are recorded
at the invoiced amount and do not bear interest. Allowance for doubtful accounts was $141,000 and $540,000 at December 31, 2009
and 2008, respectively and reflects specific amounts for which the risk of collection has been identified based on the
current economic environment and circumstances of which we are aware. Account balances are written-off against the
allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Materials and supplies and coal inventory are valued at the lower of average cost or
market. Saleable coal represents coal stockpiles that will be sold in current condition. Raw
coal represents coal stockpiles that may be sold in current condition or may be further
processed prior to shipment to a customer. Coal inventory costs include labor, supplies,
equipment, operating overhead and other related costs.
Property, Plant, Equipment and Mine Development
Property, plant, equipment and mine development are recorded at cost, or at fair value in
the case of acquired businesses. Interest costs applicable to major asset additions are
capitalized during the construction period, including $0.6 million, $0.1 million and
$0.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Expenditures which extend the useful lives of existing plant and equipment assets are
capitalized. Maintenance and repairs are charged to operating costs as incurred. Costs incurred
to develop coal mines or to expand the capacity of operating mines are capitalized. Costs
incurred to maintain current production capacity at a mine and exploration expenditures are
charged to operating costs as incurred, including costs related to drilling and study costs
incurred to convert or upgrade mineral resources to reserves. Costs to acquire computer hardware
and the development and/or purchase of software for internal use are capitalized and depreciated
over the estimated useful lives.
Coal reserves are recorded
at cost or at fair value in the case of acquired businesses. Coal reserves are included in Land and coal interests
on the consolidated balance sheets. As of December 31, 2009, the book value of coal reserves totaled $2.6 billion,
including $1.3 billion attributable to properties where we were not currently engaged in mining operations or leasing
to third parties and, therefore, not currently depleting the related coal reserves. Included in the book value of coal
reserves are mineral rights for leased coal interests, including advance royalties. The net book value of these mineral
rights was $ 2.3 billion at December 31, 2009, with the remaining $ 0.3 billion of net book value related to coal
reserves held by fee ownership.
As of December 31, 2008, the book value
of coal reserves totaled $2.5 billion. At that time we were in the process of determining the fair value of the coal reserves
related to the Magnum acquisition, which was preliminarily valued at $1.9 billion at December 31, 2008. For further discussion
related to the acquisition see Note 6. Excluding Magnum, these coal reserve amounts included
$287.8 million as of December 31, 2008 attributable to properties where we were not currently engaged in mining operations or leasing to third
parties, and therefore, the coal reserves were not currently being depleted. As of December 31, 2008, excluding Magnum,
the net book value of coal reserves included mineral rights for leased coal interests, including advance royalties,
of $373.9 million.
Depletion of coal reserves and amortization of advance royalties are computed using the
units-of-production method utilizing only proven and probable reserves (as adjusted for
recoverability factors) in the depletion base. Mine development costs are principally amortized
ratably over the estimated lives of the mines.
Depreciation of plant and equipment (excluding life of mine assets) is computed ratably
over the estimated useful lives as follows:
|
|
|
|
|
Years |
Buildings and improvements |
|
10 to 20 |
Machinery and equipment |
|
3 to 30 |
Leasehold improvements |
|
Shorter of life of asset, mine or lease |
In addition, certain plant and equipment assets associated with mining are depreciated
ratably over the estimated life of the mine. Remaining lives vary from less than one year up to
28 years. The charge against earnings for depreciation of property, plant, equipment and mine
development was $113.4 million, $87.8 million and $60.3 million for the years ended December 31,
2009, 2008 and 2007, respectively.
F-7
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchased Contract Rights
In connection with the Magnum acquisition, we recorded assets related to certain below
market coal purchase contracts. These below market purchase contracts were recorded at their
fair value, resulting in a gross asset of $37.8 million, with $36.2 million of accumulated
amortization as of December 31, 2009. The purchase contracts are amortized into earnings as the
coal is ultimately sold, with the majority amortized within a year subsequent to the acquisition
date and included in Sales contract accretion in the consolidated statements of operations. We
also have gross purchased contract rights associated with the KE Ventures, LLC acquisition of
$6.2 million, with a net asset of $0.9 million as of December 31, 2009. The current portion of
these acquired contract rights is reported in Below market purchase contracts acquired and the
long-term portion is recorded in Investments and other assets in the consolidated balance
sheets.
Joint Ventures
We apply the equity method to investments in joint ventures when we have the ability to
exercise significant influence over the operating and financial policies of the joint venture.
We review the documents governing each joint venture to assess if we have a controlling
financial interest in the joint venture to determine if the equity method is appropriate or if
the joint venture should be consolidated. Investments accounted for under the equity method are
initially recorded at cost, and any difference between the cost of our investment and the
underlying equity in the net assets of the joint venture at the investment date is amortized
over the lives of the related assets that gave rise to the difference. Our pro rata share of
earnings from joint ventures and basis difference amortization was income of $0.4 million for
the year ended December 31, 2009, expense of $0.9 million for the year ended December 31, 2008,
and income of $0.1 million for the year ended December 31, 2007, which is reported in Operating
costs and expenses in the consolidated statements of operations. The book values of our equity
method investments as of December 31, 2009, and 2008 were $20.9 million and $21.2 million,
respectively, and are reported in Investments and other assets in the consolidated balance
sheets.
Sales Contract Liability
In connection with the Magnum acquisition, we recorded liabilities related to below market
sales contracts. The below market supply contracts were recorded at their fair values when
allocating the purchase price, resulting in a liability of $945.7 million, which is being
accreted into earnings as the coal is shipped over a weighted average period of approximately
three years. The net liability at December 31, 2009 relating to these below market sales
contracts was $306.6 million. The current portion of the liability is recorded in Below market
sales contracts acquired and the long-term portion of the liability is recorded in Below
market sales contracts acquired, noncurrent in the consolidated balance sheets.
Asset Retirement Obligations
Obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs are accounted for in accordance with authoritative guidance. Our asset
retirement obligations (ARO) primarily consist of spending estimates related to reclaiming
surface land and support facilities at both surface and underground mines in accordance with
federal and state reclamation laws as defined by each mining permit.
ARO liabilities for final reclamation and mine closure are estimated based upon detailed
engineering calculations of the amount and timing of the future cash spending for a third-party
to perform the required work. Spending estimates are escalated for inflation and then discounted
at the credit-adjusted, risk-free interest rate. We record an ARO asset associated with the
discounted liability for final reclamation and mine closure. The obligation and corresponding
asset are recognized in the period in which the liability is incurred. The ARO asset is
amortized on the units-of-production method over its expected life and the ARO liability is
accreted to the projected spending date. The asset amortization and liability accretion are
included in Reclamation and remediation obligation expense in the consolidated statements of
operations. As changes in estimates occur (such as mine plan revisions, changes in estimated
costs or changes in timing of the performance of reclamation activities), the revisions to the
obligation and asset are recognized at the appropriate credit-adjusted, risk-free interest rate.
We also recognize obligations for contemporaneous reclamation liabilities incurred as a result
of surface mining. Contemporaneous reclamation consists primarily of grading, topsoil
replacement and revegetation of backfilled pit areas.
F-8
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Remediation Obligations
In connection with the Magnum acquisition, we assumed liabilities related to water
treatment in order to comply with selenium effluent limits included in certain mining permits.
The cost to treat the selenium discharges in excess of allowable limits was recorded at its net
present value, which is accreted into earnings to the projected spending date. Accretion of the
estimated selenium liability is included in Reclamation and remediation obligation expense in
the consolidated statements of operations. The net liability at December 31, 2009 related to
water treatment was $88.6 million, including accumulated accretion of $5.6 million. This
liability reflects the estimated costs of the treatment systems to be installed and maintained
with the goal of meeting the requirements of current court orders, consent decrees and mining
permits. The current portion of the estimated remediation liability of $13.7 million is included
in Trade accounts payable and accrued expenses and the long-term portion is recorded in Other
noncurrent liabilities on our consolidated balance sheets.
Income Taxes
Income taxes are accounted for using a balance sheet approach in accordance with
authoritative guidance. Deferred income taxes are accounted for by applying statutory tax rates
in effect at the date of the balance sheet to differences between the book and tax basis of
assets and liabilities. A valuation allowance is established if it is more likely than not
that the related tax benefits will not be realized. In determining the appropriate valuation
allowance, projected realization of tax benefits is considered based on expected levels of
future taxable income, available tax planning strategies and the overall deferred tax position.
Authoritative guidance specifies that the amount of current and deferred tax expense for an
income tax return group should be allocated among the members of that group when those members
issue separate financial statements. For purposes of the consolidated financial statements
prepared for the twelve months ended December 31, 2007, our income tax expense was recorded as
if we had filed a consolidated tax return separate from Peabody, notwithstanding that a majority
of the operations were historically included in the U.S. consolidated income tax return filed by
Peabody. Our valuation allowance for these periods was also determined on the separate tax
return basis. Additionally, our tax attributes (i.e., net operating losses (NOL) and alternative
minimum tax (AMT) credits) for these periods have been determined based on U.S. consolidated tax
rules describing the apportionment of these items upon departure (spin-off) from the Peabody
consolidated group.
Peabody was managing its tax position for the benefit of its entire portfolio of
businesses. Peabodys tax strategies were not necessarily reflective of the tax strategies that
we would have followed or have followed as a stand-alone company, nor were they necessarily
strategies that optimized our stand-alone position.
Postretirement Healthcare Benefits
Postretirement benefits other than pensions represent the accrual of the costs of benefits
to be provided over the employees period of active service. These costs are determined on an
actuarial basis. The consolidated balance sheets as of December 31, 2009 and 2008 fully reflect
the funded status of postretirement benefits.
Multi-Employer Benefit Plans
We have an obligation to contribute to two plans established by the Coal Industry Retiree
Health Benefits Act of 1992 (the Coal Act) the Combined Fund and the 1992 Benefit Plan. A
third fund, the 1993 Benefit Fund (the 1993 Benefit Plan), was established through collective
bargaining, but is now a statutory plan under legislation passed in 2006. A portion of these
obligations is determined on an actuarial basis in accordance with authoritative guidance. The
remainder of these obligations qualify as multi-employer plans and expense is recognized as
contributions are made.
Pension Plans
Prior to the spin-off, we participated in a non-contributory defined benefit pension plan
(the Peabody Pension Plan), for which the cost to provide the benefits was required to be
accrued over the employees period of active service. The Peabody Pension Plan was sponsored by
one of Peabodys subsidiaries and covered certain salaried employees and eligible hourly
employees of Peabody. In connection with the spin-off, our employees no longer participate in a
defined benefit pension plan, and we did not retain any of the assets or liabilities for the
Peabody Pension Plan. Accordingly the assets and liabilities of the Peabody Pension Plan are
not allocated to us and are not presented in the accompanying balance sheets. However, annual
contributions to the Peabody Pension Plan were made as determined by consulting actuaries based
upon the Employee Retirement Income Security Act of 1974 minimum funding standard. We recorded
expense of $1.1 million for the year ended December 31, 2007, as a result of our participation
in the Peabody Pension Plan, reflecting our proportional share of Peabodys expense based on the
number of plan participants.
F-9
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We also participate in two multi-employer pension plans, the United Mine Workers of America
(UMWA) 1950 Pension Plan (the 1950 Plan) and the UMWA 1974 Pension Plan (the 1974 Plan). These
plans qualify as multi-employer plans and expense is recognized as contributions are made. The
plan assets of the 1950 Plan and the 1974 Plan are managed by the UMWA. See Note 19 for
additional information.
Postemployment Benefits
Postemployment benefits are provided to qualifying employees, former employees and
dependents, and we account for these items on the accrual basis in accordance with applicable
authoritative guidance. Postemployment benefits include workers compensation occupational
disease, which is accounted for on the actuarial basis over the employees periods of active
service; workers compensation traumatic injury claims, which are accounted for based on
estimated loss rates applied to payroll and claim reserves determined by independent actuaries
and claims administrators; disability income benefits, which are accrued when a claim occurs;
and continuation of medical benefits, which is recognized when the obligation occurs. Our
consolidated balance sheets as of December 31, 2009 and 2008 fully reflect the funded status of
postemployment benefits.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In particular, we have significant long-term liabilities relating to retiree healthcare and
work-related injuries and illnesses. Each of these liabilities is actuarially determined and
uses various actuarial assumptions, including the discount rate and future cost trends, to
estimate the costs and obligations for these items. In addition, we have significant asset
retirement obligations that involve estimations of costs to remediate mining land and the timing
of cash outlays for such costs. If these assumptions do not materialize as expected, actual cash
expenditures and costs incurred could differ materially from current estimates. Moreover,
regulatory changes could increase our liability to satisfy these or additional obligations.
Finally, in evaluating the valuation allowance related to deferred tax assets, various
factors are taken into account, including the expected level of future taxable income and
available tax planning strategies. If actual results differ from the assumptions made in the
evaluation of the valuation allowance, a change in valuation allowance may be recorded through
income tax expense in the period such determination is made.
Share-Based Compensation
We have an equity incentive plan for employees and eligible non-employee directors that
allows for the issuance of share-based compensation in the form of restricted stock, incentive
stock options, nonqualified stock options, stock appreciation rights, performance awards,
restricted stock units and deferred stock units. We recognize compensation expense for awards
with only service conditions that have a graded vesting schedule on a straight line basis over
the requisite service period for each separately vesting portion of the award.
Derivatives
We have utilized derivative financial instruments to manage exposure to certain commodity
prices. Authoritative guidance requires the recognition of derivative financial instruments at
fair value on the consolidated balance sheets. For derivatives that are not designated as
hedges, the periodic change in fair value is recorded directly to earnings. For derivative
instruments that are eligible and qualify as cash flow hedges, the periodic change in fair value
is recorded to Accumulated other comprehensive loss until the hedged transaction occurs or the
relationship ceases to qualify for hedge accounting. In addition, if a portion of the change in
fair value for a cash flow hedge is deemed ineffective during a reporting period, the
ineffective portion of the change in fair value is recorded directly to earnings.
The activity recorded to earnings is included in Operating costs and expenses in the consolidated statements of operations.
Beginning in 2008, we entered into heating oil swap contracts to manage our exposure to diesel fuel prices.
The changes in diesel fuel and heating oil prices are highly correlated thus allowing the swap
contracts to be designated as cash flow hedges.
Impairment of Long-Lived Assets
Impairment losses on long-lived assets used in operations are recorded when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets under various assumptions are less than the carrying
amounts of those assets. Impairment losses are measured by comparing the estimated fair value of
the impaired asset to its carrying amount. A non-cash impairment charge of $12.9 million was
recorded at December 31, 2009 related to certain infrastructure and thermal coal reserves
near our Rocklick complex that were deemed uneconomical to mine. The Rocklick complex is
included in our Appalachia segment.
F-10
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Combinations
We accounted for the Magnum acquisition
using the purchase method of accounting as required under previous authoritative guidance since Magnum was acquired prior to January 1, 2009.
Under this
method of accounting, the purchase price is allocated to the fair value of the net assets
acquired. Determining the fair value of assets acquired and liabilities assumed requires
managements judgment and the utilization of independent valuation experts, and often involves
the use of significant estimates and assumptions, including, but not limited to, assumptions
with respect to future cash flows, discount rates and asset lives.
Deferred Financing Costs
We capitalize costs incurred in connection with borrowings or establishment of credit
facilities and issuance of debt securities. These costs are amortized as an adjustment to
interest expense over the life of the borrowing or term of the credit facility using the
interest method.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the 2009
presentation of Sales contract accretion as a separate line item in the consolidated statements of operations.
(3) |
|
New Accounting Pronouncements |
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards CodificationTM (Codification) which has become the source of authoritative
U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature not included in
the Codification has become nonauthoritative. The Codification is meant to simplify user access
to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly
90 accounting topics within a consistent structure; its purpose is not to create new accounting
and reporting guidance. Consistent with the Codification, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standard Updates. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15, 2009.
Debt
In May 2008, the FASB issued authoritative guidance which changed the accounting for our
convertible notes, specifying that issuers of convertible debt instruments that may settle in
cash upon conversion must bifurcate the proceeds from the debt issuance between debt and equity
components in a manner that reflects the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The equity component reflects the value of
the conversion feature of the notes. We adopted this authoritative guidance effective January 1,
2009, with retrospective application to the issuance date of our convertible notes. See Note 15
for additional disclosures.
Earnings Per Share
In September 2008, the FASB issued authoritative guidance which states that instruments
granted in share-based payment awards that entitle their holders to receive nonforfeitable
dividends or dividend equivalents before vesting should be considered participating securities
and need to be included in the earnings allocation in computing earnings per share under the
two-class method. The two-class method of computing earnings per share is an earnings
allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and participation rights
in undistributed earnings. We adopted this authoritative guidance effective January 1, 2009 with
all prior period earnings per share data adjusted retrospectively. The calculations of earnings
per share amounts presented in this report include all participating securities as required by
this authoritative guidance.
F-11
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Combinations
In December 2007, the FASB issued authoritative guidance regarding business combinations.
The guidance defines the acquirer as the entity that obtains control of one or more businesses
in the business combination and establishes the acquisition date as the date that the acquirer
achieves control instead of the date that the consideration is transferred. The guidance also
requires an acquirer in a business combination to recognize the assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. It also requires the recognition of
assets acquired and liabilities assumed arising from certain contractual contingencies as of the
acquisition date to be measured at their acquisition date fair values. This authoritative
guidance is effective for any business combination with an acquisition date on or after January
1, 2009.
Consolidation
In December 2007, the FASB issued authoritative guidance that establishes accounting and
reporting standards for noncontrolling interests in partially-owned consolidated subsidiaries
and the loss of control of subsidiaries. A noncontrolling interest (previously referred to as
minority interest) in a consolidated subsidiary is required to be displayed in the consolidated
balance sheet as a separate component of equity, and the amount of net income attributable to
the noncontrolling interest is required to be included in consolidated net income on the face of
the consolidated statement of operations. In addition, this guidance requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. We adopted the
provisions of this guidance effective January 1, 2009, with retrospective application to the
periods presented in this report.
Fair Value Measurements and Disclosures
In September 2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles
and expands disclosures about fair value measures. This guidance clarifies that fair value is a
market-based measurement that should be determined based on the assumptions that market
participants would use in pricing an asset or liability. This guidance was effective for fiscal
years beginning after November 15, 2007. We elected to implement the guidance with the one-year
deferral permitted by subsequent guidance. The deferral applied to nonfinancial assets and
liabilities measured at fair value in a business combination. As of January 1, 2009, we adopted
the fair value guidance, including applying its provisions to nonfinancial assets and
liabilities measured at fair value in a business combination. The adoption of this guidance did
not change the valuation approach or materially change the purchase accounting for the Magnum
acquisition, which was finalized in the second quarter of 2009.
Fair value is a market-based measurement that should be determined based on the assumptions
that market participants would use in pricing an asset or liability. Authoritative guidance
establishes a three-level fair value hierarchy for fair value to be measured based on the
observability of the inputs utilized in the valuation. The levels are: Level 1 inputs from
quoted prices in an active market, Level 2 inputs other than a quoted price market that are
directly or indirectly observable through market corroborated inputs and Level 3 inputs that
are unobservable and require assumptions about pricing by market participants.
Subsequent Events
In June 2009, the FASB issued authoritative guidance which establishes general standards of
accounting for and the disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Entities are required to
disclose the date through which subsequent events have been evaluated. We adopted this guidance
effective June 30, 2009.
Pending Adoption of Recent Accounting Pronouncements
Transfers of Financial Assets
In June 2009, the FASB issued
authoritative guidance regarding the accounting for transfers of financial assets which requires enhanced disclosures
about the continuing risk exposure to a transferor because of its continuing involvement with transferred financial
assets. This guidance is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the
potential impact of this guidance on our operating results, cash flows and financial condition.
Consolidation
In June 2009, the FASB issued authoritative guidance which requires a company to perform a
qualitative analysis to determine whether it has a controlling financial interest in a variable
interest entity. In addition, a company is required to assess whether it has the power to direct
the activities of the variable interest entity that most significantly impact the entitys
economic performance. This guidance is effective for fiscal years beginning after November 15,
2009. We are currently evaluating the potential impact of this guidance on our operating
results, cash flows and financial condition.
F-12
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) |
|
Common Stock Offering |
On June 16, 2009, we completed a public offering of 12 million shares of our common stock
in a registered public offering under our shelf registration at $7.90 per share. The net
proceeds from the sale of shares, after deducting fees and commissions, were $89.1 million. The
proceeds were used to repay the outstanding balance on our revolving credit facility, with the
remainder used for general corporate purposes.
(5) |
|
Restructuring and Impairment Charge |
In the fourth quarter of 2009, we recorded a $20.2 million restructuring and impairment
charge. The charge includes a $12.9 million non-cash impairment charge related to certain
infrastructure and thermal coal reserves near our Rocklick complex that were deemed uneconomical
to mine. Additionally, $7.3 million related to a restructuring charge for the discontinued use
of a beltline into the Rocklick preparation plant. This restructuring charge represents the
future lease payments and contract termination costs for the beltline that will be made with no
future economic benefit. The future lease payments and contract termination fees are expected to
be paid during the first six months of 2010.
(6) |
|
Business Combinations |
Magnum Coal Company
On July 23, 2008, Patriot consummated the acquisition of Magnum. Magnum stockholders
received 23,803,312 shares of newly-issued Patriot common stock and cash in lieu of fractional
shares. The fair value of $25.29 per share of Patriot common stock issued to the Magnum
shareholders was based on the average Patriot stock price for the five business days surrounding
and including the merger announcement date, April 2, 2008. The total consideration for the
acquisition was $739.0 million, including the assumption of $148.6 million of long-term debt, of
which $11.8 million related to capital lease obligations. In conjunction with the acquisition,
we issued convertible notes in order to repay Magnums existing senior secured indebtedness as
discussed in Note 15.
The results of operations of Magnum are included in the Appalachia Mining Operations
segment from the date of acquisition. This acquisition was accounted for using the purchase
method of accounting based on authoritative guidance for business combinations in effect prior
to January 1, 2009. Under this method of accounting, the purchase price was allocated to the
fair value of the net assets acquired.
The following table summarizes the fair values of the assets acquired and the liabilities
assumed at the date of acquisition:
(Dollars in thousands)
|
|
|
|
|
Cash |
|
$ |
21,015 |
|
Accounts receivable, net |
|
|
88,471 |
|
Inventories |
|
|
49,294 |
|
Other current assets |
|
|
39,073 |
|
Property, plant, equipment and mine development, net |
|
|
2,360,072 |
|
Other noncurrent assets |
|
|
5,193 |
|
|
|
|
Total assets acquired |
|
|
2,563,118 |
|
|
|
|
Trade accounts payable and accrued expenses |
|
|
235,505 |
|
Below market sales contracts acquired, current |
|
|
497,882 |
|
Long-term debt |
|
|
144,606 |
|
Below market sales contracts acquired, noncurrent |
|
|
447,804 |
|
Accrued postretirement benefit costs |
|
|
430,837 |
|
Other noncurrent liabilities |
|
|
195,051 |
|
|
|
|
Total liabilities assumed |
|
|
1,951,685 |
|
|
|
|
Total purchase price |
|
$ |
611,433 |
|
|
|
|
F-13
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2009, we finalized the valuation of all assets acquired and liabilities
assumed. Changes from preliminary purchase accounting to the final opening balance sheet
presented above primarily related to the valuation of the selenium liability discussed below and
final adjustments to certain assumptions utilized in the valuation of the coal reserves and
acquired coal purchase and sales contracts. Based on a purchase price determined at the
announcement date of the acquisition, the fair value of the net assets acquired exceeded the
purchase price by $360.3 million. This excess value over the purchase price was allocated as a
pro-rata reduction to noncurrent assets, which included property, plant, equipment and mine
development and other noncurrent assets.
Included in Property, plant, equipment and mine development, net is over 600 million tons
of coal reserves valued at $2.1 billion. To value these coal reserves, we utilized a discounted
cash flow model based on assumptions that market participants would use in the pricing of these
assets as well as projections of revenues and expenditures that would be incurred to mine or
maintain these coal reserves. A sustained or long-term decline in coal prices from those used to
estimate the fair value of the acquired assets could result in impairment to the carrying
amounts of the coal reserves and related coal mining equipment.
In connection with the valuation of the Magnum acquisition, we recorded liabilities and
assets related to below market coal sales and purchase contracts. The below market supply
contracts were recorded at their fair value when allocating the purchase price, resulting in a
liability of $945.7 million, which is being accreted into earnings as the coal is shipped over a
weighted average period of approximately three years. The below market purchase contracts were
recorded at their fair value, resulting in an asset of $37.8 million, which is being amortized
into earnings as the coal is ultimately sold, with the majority amortized within a year
subsequent to the acquisition date. Sales contract accretion in the consolidated statements of
operations represents the below market supply contract accretion, net of the below market
purchase contract amortization.
In connection with the Magnum acquisition, we assumed liabilities related to water
treatment. At the acquisition date, Magnum was in the process of testing various water
treatment alternatives related to selenium effluent limits in order to comply with certain
mining permits. Subsequent to the acquisition of Magnum, we have implemented selenium control
plans to adjust our mining processes in a manner intended to prevent future violations of the
applicable water quality standard for selenium. Uncertainty existed at the time of the
acquisition related to the exact amount of our assumed liability due to the fact there is no
proven technology to remediate our existing selenium discharge exceedances to meet current
permit standards. The cost to treat the selenium exceedances was estimated at a net present
value of $85.2 million at the acquisition date. This liability reflects the estimated costs of
the treatment systems to be installed and maintained with the goal of meeting the requirements
of current court orders, consent decrees and mining permits. This estimate was prepared
considering the dynamics of current legislation, capabilities of currently available technology
and our planned remediation strategy. (See Clean Water Act Permit Issues in Note 23 for
additional discussion of selenium treatment issues.)
We used a 13% discount rate in determining the net present value of the selenium liability.
The estimated aggregate undiscounted liability was $390.7 million at acquisition date. Our
estimated future payments for selenium remediation average $12 million each year over the next
five years, with the remainder to be paid in the 25 years thereafter. Our estimated selenium
liability is included in Other noncurrent liabilities and Trade accounts payable and accrued
expenses on our condensed consolidated balance sheets. Accretion of the estimated selenium
liability is included in Reclamation and remediation obligation expense in the condensed
consolidated statements of operations.
Based on the fair values set forth above as compared to the carryover tax basis in assets
and liabilities, $67.0 million of net deferred tax liability would have been recorded on
Magnums opening balance sheet. As part of the business combination, these deferred tax
liabilities have impacted managements view as to the realization of our deferred tax assets,
against which a full valuation allowance had previously been recorded. In such situations,
authoritative guidance in effect at the date of the acquisition required that any reduction in
our valuation allowance be accounted for as part of the business combination. As such, deferred
tax liabilities have been offset against a release of $67.0 million of valuation allowance
within purchase accounting.
Upon the acquisition of Magnum, we performed a comprehensive strategic review of all mining
complexes and their relative cost structures in order to optimize our performance. As a result
of this review, we announced plans to idle operations of both the acquired Jupiter and Remington
mining complexes. The Jupiter mining complex ceased operations in December 2008 and the
Remington mining complex ceased operations in March 2009. The fair value of the assets and
liabilities acquired for these two mining complexes reflects their status as idled in purchase
accounting.
F-14
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited pro forma financial information presents the combined results of
operations of Patriot and Magnum, on a pro forma basis, as though the companies had been
combined as of January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
1,654,622 |
|
|
$ |
1,073,362 |
|
Pro forma |
|
|
2,207,353 |
|
|
|
2,194,432 |
|
Net income: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
142,728 |
|
|
$ |
(102,147 |
) |
Pro forma |
|
|
253,626 |
|
|
|
299,725 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
2.23 |
|
|
$ |
(2.00 |
) |
Pro forma |
|
$ |
3.96 |
|
|
$ |
5.60 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
2.21 |
|
|
$ |
(2.00 |
) |
Pro forma |
|
$ |
3.92 |
|
|
$ |
5.60 |
|
The combined pro forma financial information has been adjusted to exclude non-recurring
transaction-related expenses and includes purchase accounting adjustments for fair values
impacting coal inventories, sales contract accretion, depletion of coal reserves and
depreciation of property, plant and equipment. This unaudited pro forma financial information
does not necessarily reflect the results of operations that would have occurred had Patriot and
Magnum constituted a single entity during these periods.
KE Ventures, LLC
At January 1, 2007 we held a 73.9% ownership interest in KE Ventures, LLC. In September
2007, we acquired an additional 7.6% interest in KE Ventures, LLC for $13.6 million, increasing
effective ownership to 81.5%. The noncontrolling interest holders of KE Ventures, LLC held an
option which could require us to purchase the remaining 18.5% of KE Ventures, LLC upon a change
in control. This option became fully exercisable upon the spin-off from Peabody. The
noncontrolling owners of KE Ventures, LLC exercised this option in 2007, and we acquired the
remaining noncontrolling interest in KE Ventures, LLC on November 30, 2007 for $33.0 million.
The additional purchase price of $46.6 million was allocated to the proportional percentage of
assets and liabilities acquired in 2007. The purchase price was primarily allocated to coal
reserves as it was the most significant asset acquired.
Because the option requiring us to purchase KE Ventures, LLC was considered a mandatorily
redeemable instrument outside of our control, amounts paid to the noncontrolling interest
holders in excess of carrying value of the noncontrolling interest in KE Ventures, LLC was
reflected as an increase in net loss attributable to common stockholders of $15.7 million in
2007. This obligation was fully redeemed as of December 31, 2007.
F-15
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) |
|
Risk Management and Financial Instruments |
We are exposed to various types of risk in the normal course of business, including
fluctuations in commodity prices and interest rates. These risks are actively monitored to
ensure compliance with our risk management policies. We manage our commodity price risk related
to the sale of coal through the use of long-term, fixed-price contracts, rather than financial
instruments.
Credit Risk
Our concentration of credit risk is substantially with large utility customers and Peabody.
In 2009, approximately 22% of our revenues were from a marketing affiliate of Peabody at prices
paid by third-party customers (see Note 21 for additional discussion of related party
transactions). Allowance for doubtful accounts was $141,000 and $540,000 at December 31, 2009
and 2008, respectively and reflects specific amounts for which risk of collection has been
identified based on the current economic environment and circumstances of which we are aware. We
also have $142.4 million in notes receivable as of December 31, 2009 outstanding from one
counterparty from the sale of coal reserves and surface land in 2007 and 2006. The current
portion of these receivables was $33.3 million as of December 31, 2009 and is included in
Accounts receivable and other on the consolidated balance sheet. Each of these notes contains
a cross-collaterization provision secured primarily by the underlying coal reserves and surface
land.
Our policy is to independently evaluate each customers creditworthiness prior to entering
into transactions and to constantly monitor the credit extended. In the event that a
transaction occurs with a counterparty that does not meet our credit standards, we may protect
our position by requiring the counterparty to provide appropriate credit enhancement. When
appropriate, steps have been taken to reduce credit exposure to customers or counterparties
whose credit has deteriorated and who may pose a higher risk, as determined by the credit
management function, of failure to perform under their contractual obligations. These steps
might include obtaining letters of credit or cash collateral, requiring prepayments for
shipments or the creation of customer trust accounts held for our benefit to serve as collateral
in the event of failure to pay.
Commodity Price Risk
We have commodity risk related to our diesel fuel purchases. To manage this risk, we have
entered into heating oil swap contracts with financial institutions. These derivative contracts
have been designated as cash flow hedges of anticipated diesel fuel purchases such that the
changes in fair value of these derivatives are recorded through other comprehensive income. As
of December 31, 2009, the notional amount outstanding for these swap contracts included 12.0
million gallons of heating oil expiring throughout 2010.
Employees
As of December 31, 2009, we had approximately 3,500 employees. Approximately 52% of the
employees at our operations were represented by an organized labor union and they generated
approximately 46% of the 2009 sales volume. Union labor is represented by the UMWA under labor
agreements which expire December 31, 2011.
Fair Value of Financial Instruments
Our heating oil swap contracts discussed previously were the only financial instruments
that were measured and recorded at fair value on a recurring basis at December 31, 2009 and
2008. The heating oil contracts had a net unrealized gain of $1.0 million as of December 31,
2009, and a net unrealized loss of $9.7 million as of December 31, 2008. We utilized New York
Mercantile Exchange (NYMEX) quoted market prices for the fair value measurement of these
contracts, which reflects a Level 2 input.
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses have
carrying values which approximate fair value due to the short maturity or the financial nature
of these instruments. The fair value of notes receivable approximates the carrying value as of
December 31, 2009 and 2008.
F-16
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the fair value of our remaining financial instruments at
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Fuel contracts, cash flow hedges |
|
$ |
2,021 |
|
|
$ |
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
Fuel contracts, cash flow hedges |
|
|
986 |
|
|
|
9,695 |
|
$200 million of 3.25% Convertible Senior Notes due 2013 |
|
|
163,617 |
|
|
|
99,863 |
|
All of the instruments above were valued using Level 2 inputs. For additional disclosures
regarding our fuel contracts, see Note 16.
The fair value of the Convertible Senior Notes was estimated using the last traded value, as provided by a third party.
(8) |
|
Net Gain on Disposal or Exchange of Assets and Other Commercial Transactions |
In June 2009, we entered into an agreement to swap certain surface land for certain coal
mineral rights and cash with another coal producer. We recognized a gain totaling $4.2 million
on this transaction. In December 2009, we entered into another agreement to swap certain coal
mineral rights with another coal producer. We recognized a gain totaling $2.4 million on this
transaction. Both of these swap transactions were recorded at fair value. We utilized Level 3
inputs as defined by authoritative guidance in a discounted cash flows model to calculate the
fair value of the coal reserve swaps due to the lack of an active, quoted market for coal
reserves and due to the inability to use other transaction comparisons because of the unique
nature of the assets relinquished and the coal mineral rights received.
Other revenues include payments from customer settlements, royalties related to coal lease
agreements and farm income. During 2009, certain metallurgical and thermal customers requested
shipment deferrals on committed tons. In certain situations, we agreed to release the customers
from receipt of the tons in exchange for a cash settlement. For the year ended December 31,
2009, these cash settlements represented a significant portion of other revenue.
In June 2008, we entered into an agreement to swap certain leasehold coal mineral rights
with another coal producer. Additionally, we sold approximately 2.7 million tons of adjacent
leasehold coal mineral rights for $1.0 million. We recognized gains totaling $6.3 million on
these transactions. The swap transaction was recorded at fair value. We utilized Level 3 inputs
as defined by authoritative guidance in a discounted cash flows model to calculate the fair
value of the coal reserve swap due to the lack of an active, quoted market and due to the
inability to use other transaction comparisons because of the unique nature of each coal seam.
Also in the second quarter of 2008, we recorded a $4.9 million gain related to a structured
settlement on a property transaction and received a $4.5 million settlement for past due coal
royalties, which had previously been fully reserved due to the uncertainty of collection. Both
transactions were recorded as Other revenues in the consolidated statements of operations.
Additionally, in the second quarter of 2008, we entered into two joint ventures for which
we contributed cash totaling $16.4 million and committed certain coal reserve rights. We hold a
49% interest in each joint venture and account for the interests under the equity method of
accounting. Our maximum exposure to loss is the value contributed plus additional future
committed capital contributions, which in total for these joint ventures is capped at $4.1
million. The investments in these joint ventures were recorded in Investments and other assets
in the consolidated balance sheets.
During 2007, we sold approximately 88 million tons of non-strategic coal reserves and over
18,000 acres of surface land located in Kentucky for cash of $26.5 million and notes receivable
of $69.4 million. We recognized gains totaling $78.5 million on these transactions.
F-17
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic earnings per share is computed by dividing net income (loss) attributable to Patriot
by the number of weighted average common shares outstanding during the reporting period. Diluted
earnings per share is calculated to give effect to all potentially dilutive common shares that
were outstanding during the reporting period.
For the years ended December 31, 2009 and 2008, the effect of dilutive securities includes
the dilutive impact of stock options and restricted stock units. For the years ended December
31, 2009 and 2008, 1.3 million shares and 0.3 million shares, respectively, related to
share-based compensation awards as described in Note 26, and 3.0 million common shares for both
years related to the convertible notes described in Note 15, were excluded from the
diluted earnings per share calculation because they were
anti-dilutive for those periods. For the
year ended December 31, 2007, 65,858 shares related to share-based compensation awards were
excluded from the diluted earnings per share calculation because they were anti-dilutive for
that period due to a net loss attributable to common stockholders.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Materials and supplies |
|
$ |
39,285 |
|
|
$ |
52,023 |
|
Saleable coal |
|
|
28,255 |
|
|
|
15,107 |
|
Raw coal |
|
|
13,648 |
|
|
|
13,823 |
|
|
|
|
|
|
Total |
|
$ |
81,188 |
|
|
$ |
80,953 |
|
|
|
|
|
|
Materials, supplies and coal inventory are valued at the lower of average cost or market.
Saleable coal represents coal stockpiles that will be sold in current condition. Raw coal
represents coal stockpiles that may be sold in current condition or may be further processed
prior to shipment to a customer. Coal inventory costs include labor, supplies, equipment,
operating overhead and other related costs. The increase in saleable coal inventory from
December 31, 2008 to December 31, 2009 primarily resulted from the timing of customer shipments.
The decrease in materials and supplies from December 31, 2008 to December 31, 2009 was primarily
the result of effective cost control measures implemented during the year.
F-18
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) |
|
Accumulated Other Comprehensive Loss |
The following table sets forth the components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated with |
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
Prior Service |
|
|
|
|
|
|
Total |
|
|
|
Plans and |
|
|
Cost Associated |
|
|
|
|
|
|
Accumulated |
|
|
|
Workers |
|
|
with |
|
|
Diesel |
|
|
Other |
|
|
|
Compensation |
|
|
Postretirement |
|
|
Fuel |
|
|
Comprehensive |
|
|
|
Obligations |
|
Plans |
|
Hedge |
|
Loss |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
$ |
(318,614 |
) |
|
$ |
(3,507 |
) |
|
$ |
- |
|
|
$ |
(322,121 |
) |
Unrealized gains (losses) |
|
|
56,624 |
|
|
|
(7,656 |
) |
|
|
- |
|
|
|
48,968 |
|
Reclassification from other
comprehensive income to
earnings |
|
|
35,085 |
|
|
|
(1,306 |
) |
|
|
- |
|
|
|
33,779 |
|
Retention by Peabody of certain
liabilities at spin-off |
|
|
165,334 |
|
|
|
- |
|
|
|
- |
|
|
|
165,334 |
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
(61,571 |
) |
|
|
(12,469 |
) |
|
|
- |
|
|
|
(74,040 |
) |
Unrealized losses |
|
|
(39,263 |
) |
|
|
- |
|
|
|
(9,695 |
) |
|
|
(48,958 |
) |
Reclassification from other
comprehensive income to
earnings |
|
|
11,397 |
|
|
|
(680 |
) |
|
|
- |
|
|
|
10,717 |
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
(89,437 |
) |
|
|
(13,149 |
) |
|
|
(9,695 |
) |
|
|
(112,281 |
) |
Unrealized gains (losses) |
|
|
(163,339 |
) |
|
|
- |
|
|
|
5,450 |
|
|
|
(157,889 |
) |
Reclassification from other
comprehensive income to
earnings |
|
|
16,265 |
|
|
|
(551 |
) |
|
|
5,280 |
|
|
|
20,994 |
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
$ |
(236,511 |
) |
|
$ |
(13,700 |
) |
|
$ |
1,035 |
|
|
$ |
(249,176 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
loss differs from net income (loss) attributable to common
stockholders by the amount of
unrealized gain or loss resulting from valuation changes of our diesel fuel hedge and
adjustments related to the change in funded status of various benefit plans during the periods.
We lease equipment and facilities, directly or through Peabody, under various
non-cancelable operating lease agreements. Certain lease agreements require the maintenance of
specified ratios and contain restrictive covenants that limit indebtedness, subsidiary
dividends, investments, asset sales and other actions. Rental expense under operating leases
was $50.3 million, $39.5 million and $30.9 million for the years ended December 31, 2009, 2008
and 2007, respectively.
A substantial amount of the coal we mine is produced from mineral reserves leased from
third-party land owners. We lease these coal reserves under agreements that require royalties
to be paid as the coal is mined. Certain of these lease agreements also require minimum annual
royalties to be paid regardless of the amount of coal mined during the year. Total royalty
expense was $72.2 million, $71.6 million and $43.2 million for the years ended December 31,
2009, 2008 and 2007, respectively.
F-19
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease and royalty payments as of December 31, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
Coal |
|
|
|
Leases |
|
Leases |
|
Reserves |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
9,268 |
|
|
$ |
40,443 |
|
|
$ |
28,191 |
|
2011 |
|
|
4,159 |
|
|
|
33,411 |
|
|
|
22,616 |
|
2012 |
|
|
3,600 |
|
|
|
25,807 |
|
|
|
20,996 |
|
2013 |
|
|
3,600 |
|
|
|
14,825 |
|
|
|
19,519 |
|
2014 |
|
|
3,600 |
|
|
|
3,805 |
|
|
|
17,465 |
|
2015 and thereafter |
|
|
15,600 |
|
|
|
419 |
|
|
|
145,283 |
|
|
|
|
|
|
|
|
Total minimum lease and royalty payments |
|
$ |
39,827 |
|
|
$ |
118,710 |
|
|
$ |
254,070 |
|
|
|
|
|
|
|
|
|
|
Less interest |
|
|
(11,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum capital lease payments |
|
$ |
28,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2002, Peabody entered into a transaction with Penn Virginia Resource Partners, L.P.
(PVR) whereby two Peabody subsidiaries sold 120 million tons of coal reserves in exchange for
$72.5 million in cash and 2.76 million units, or 15%, of the PVR master limited partnership. We
participated in the transaction, selling approximately 40 million tons of coal reserves with a
net book value of $14.3 million in exchange for $40.0 million. We leased back the coal from PVR
and pay royalties as the coal is mined. A $25.7 million gain was deferred at the inception of
this transaction, and $3.2 million of the gain was recognized in each of the years 2009, 2008
and 2007. The remaining deferred gain of $3.2 million at December 31, 2009 is intended to
provide for potential exposure to loss resulting from continuing involvement in the properties
and will be amortized to Operating costs and expenses in the consolidated statements of
operations over the minimum remaining term of the lease, which ends December 31, 2010.
As of December 31, 2009, certain of our lease obligations were secured by $10.2 million
outstanding letters of credit under our credit facility.
(13) Trade Accounts Payable and Accrued Expenses
Trade accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
147,254 |
|
|
$ |
201,046 |
|
Accrued healthcare, including postretirement |
|
|
70,993 |
|
|
|
66,509 |
|
Accrued taxes other than income |
|
|
47,540 |
|
|
|
27,646 |
|
Accrued payroll and related benefits |
|
|
35,923 |
|
|
|
40,719 |
|
Workers compensation obligations |
|
|
26,609 |
|
|
|
28,225 |
|
Environmental obligations |
|
|
13,730 |
|
|
|
- |
|
Other accrued benefits |
|
|
10,901 |
|
|
|
11,029 |
|
Accrued royalties |
|
|
10,011 |
|
|
|
9,532 |
|
Accrued lease payments |
|
|
9,910 |
|
|
|
4,330 |
|
Diesel fuel hedge |
|
|
986 |
|
|
|
5,915 |
|
Other accrued expenses |
|
|
32,494 |
|
|
|
18,839 |
|
|
|
|
|
|
Total trade accounts payable and accrued expenses |
|
$ |
406,351 |
|
|
$ |
413,790 |
|
|
|
|
|
|
F-20
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income (loss) before income taxes and noncontrolling interest was income of $127.2 million
and $142.7 million, and loss of $102.1 million, for the years ended December 31, 2009, 2008 and
2007, respectively, and consisted entirely of domestic results.
The income tax rate differed from the U.S. federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate |
|
$ |
44,535 |
|
|
$ |
49,955 |
|
|
$ |
(35,751 |
) |
Depletion |
|
|
(22,588 |
) |
|
|
(16,597 |
) |
|
|
(11,281 |
) |
State income taxes, net of U.S. federal tax benefit |
|
|
3,520 |
|
|
|
5,692 |
|
|
|
(6,911 |
) |
Noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
(1,652 |
) |
Changes in valuation allowance |
|
|
(27,225 |
) |
|
|
(42,871 |
) |
|
|
55,183 |
|
Changes in tax reserves |
|
|
1,307 |
|
|
|
960 |
|
|
|
107 |
|
Other, net |
|
|
451 |
|
|
|
2,861 |
|
|
|
305 |
|
|
|
|
|
|
|
|
Total |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Postretirement benefit obligations |
|
$ |
372,335 |
|
|
$ |
425,087 |
|
Tax credits and loss carryforwards |
|
|
240,471 |
|
|
|
133,860 |
|
Accrued workers compensation liabilities |
|
|
98,051 |
|
|
|
92,199 |
|
Accrued reclamation and mine closing liabilities |
|
|
89,406 |
|
|
|
98,084 |
|
Obligation to industry fund |
|
|
16,357 |
|
|
|
12,672 |
|
Sales contract liabilities |
|
|
124,157 |
|
|
|
274,704 |
|
Other |
|
|
81,556 |
|
|
|
43,986 |
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
1,022,333 |
|
|
|
1,080,592 |
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant, equipment and mine development, leased coal interests
and advance royalties, principally due to differences in depreciation,
depletion and asset writedowns |
|
|
878,874 |
|
|
|
878,144 |
|
Long-term debt |
|
|
12,758 |
|
|
|
15,824 |
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
891,632 |
|
|
|
893,968 |
|
|
|
|
|
|
Valuation allowance |
|
|
(130,701 |
) |
|
|
(186,624 |
) |
|
|
|
|
|
Net deferred tax liability |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
Deferred taxes consisted of the following: |
|
|
|
|
|
|
|
|
Current deferred income taxes |
|
$ |
- |
|
|
$ |
- |
|
Noncurrent deferred income taxes |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
F-21
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2009, the unrecognized tax benefits in our consolidated financial
statements were immaterial, and
if recognized, would not currently affect our effective tax rate as any recognition would
be offset by valuation allowance. We do not expect any significant increases or decreases to our
unrecognized tax benefits within 12 months of this reporting date.
Due to the immaterial nature of our unrecognized tax benefits and the existence of net
operating loss carryforwards, we have not currently accrued interest on any of our unrecognized
tax benefits. We have considered the application of penalties on our unrecognized tax benefits
and have determined, based on several factors, including the existence of net operating loss
carryforwards, that no accrual of penalties related to our unrecognized tax benefits is
required. If the accrual of interest or penalties becomes appropriate, we will record an accrual
as part of our income tax provision.
Our deferred tax assets include NOL carryforwards and AMT credits of $240.5 million and
$133.9 million as of December 31, 2009 and 2008, respectively. The NOL carryforwards and AMT
credits include amounts apportioned to us in accordance with the Internal Revenue Code and
Treasury Regulations at the time of our spin-off from Peabody on October 31, 2007, Magnum NOL
carryforwards from periods prior to the merger on July 23, 2008, and taxable losses from our
operations for the last two months of 2007 and for the calendar years ended December 31, 2008
and December 31, 2009. The NOL carryforwards begin to expire in 2019, and the AMT credits have
no expiration date.
Overall, our net deferred tax assets are offset by a valuation allowance of $130.7 million
and $186.6 million as of December 31, 2009 and 2008, respectively. The valuation allowance
decreased by $55.9 million for the year ended December 31,
2009, primarily as a result of net
future deductible temporary differences decreasing by $401.3 million (tax effected $162.5
million) during 2009, offset by increases in NOL carryforwards during 2009 of $263.2 million
(tax effected $106.6 million). We evaluated and assessed the expected near-term utilization of
net operating loss carryforwards, book and taxable income trends, available tax strategies and
the overall deferred tax position to determine the valuation allowance required as of December
31, 2009 and 2008.
The federal and state income tax returns for the Magnum companies for the tax years
2006-2008 remain subject to examination by the relevant taxing authorities. Patriot and the
remainder of its subsidiaries were included in the consolidated Peabody income tax returns prior
to November 1, 2007, with Peabody retaining all liability related to these returns. Therefore,
for Patriot and the remainder of its subsidiaries, we only have examination exposure related to
the Federal and state income tax returns for the two month tax year ended December 31, 2007 and
for the year ended December 31, 2008.
We made no federal income tax payments and made only immaterial state and local income tax
payments for the years ended December 31, 2009 and 2008.
(15) Long-Term Debt
Our total indebtedness consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
3.25% Convertible Senior Notes due 2013 |
|
$ |
167,501 |
|
|
$ |
159,637 |
|
Capital leases |
|
|
28,039 |
|
|
|
10,218 |
|
Promissory notes |
|
|
10,453 |
|
|
|
11,438 |
|
Short-term borrowings |
|
|
- |
|
|
|
23,000 |
|
|
|
|
|
|
Total |
|
$ |
205,993 |
|
|
$ |
204,293 |
|
Less current portion of debt |
|
|
(8,042 |
) |
|
|
(28,170 |
) |
|
|
|
|
|
Long-term debt, less current maturities |
|
$ |
197,951 |
|
|
$ |
176,123 |
|
|
|
|
|
|
F-22
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Facility
Effective October 31, 2007, we entered into a $500 million, four-year revolving credit
facility, which includes a $50 million swingline sub-facility and a letter of credit
sub-facility, subsequently amended for the Magnum acquisition and the issuance of the
convertible notes. In July 2009, we increased our revolving credit facility by $22.5 million,
bringing the total credit facility to $522.5 million. This facility is available for our working
capital requirements, capital expenditures and other corporate purposes. As of December 31,
2009, the balance of outstanding letters of credit issued against the credit facility totaled
$352.1 million. As of December 31, 2008, the balance of outstanding letters of credit issued
against the credit facility totaled $350.8 million, and $23.0 million short-term borrowings were
outstanding under the sub-facility. The weighted-average effective interest rate of the
sub-facility was 3.99% as of December 31, 2008. There were no short-term borrowings outstanding
as of December 31, 2009. Availability under the credit facility was $170.4 million and $126.2
million as of December 31, 2009 and 2008, respectively.
The obligations under our credit facility are secured by a first lien on substantially all
of our assets, including but not limited to certain of our mines and coal reserves and related
fixtures. The credit facility contains certain customary covenants,
including financial covenants limiting our total indebtedness (maximum leverage ratio of 2.75)
and requiring minimum EBITDA (as defined in the credit facility) coverage of interest expense
(minimum interest coverage ratio of 4.0), as well as certain limitations on, among other things,
additional debt, liens, investments, acquisitions and capital expenditures, future dividends and
asset sales. The credit facility calls for quarterly reporting of compliance with financial
covenants. The terms of the credit facility also contain certain customary events of default,
which gives the lenders the right to accelerate payments of outstanding debt in certain
circumstances. Customary events of default include breach of covenants, failure to maintain
required ratios, failure to make principal payments or to make interest or fee payments within a
grace period, and default, beyond any applicable grace period, on any of our other indebtedness
exceeding a certain amount.
In connection with the merger agreement with Magnum, we entered into an amendment dated as
of April 2, 2008 to the credit facility. The amendment among other things, (i) permitted the
merger with Magnum and the transactions contemplated by the merger agreement, (ii) increased the
rate of interest applicable to loans and letters of credit fees under the credit facility and
(iii) modified certain covenants and related definitions to allow for changes in permitted
indebtedness, permitted liens, permitted capital expenditures and other changes in respect of
Patriot and its subsidiaries in connection with the acquisition. The increase in the interest
rate and the covenant modifications were effective with the closing of the acquisition. In
connection with our issuance of the convertible notes discussed below, we entered into an
amendment to the credit facility dated as of May 19, 2008, allowing the issuance of the
convertible notes and modifying certain covenants for the period prior to the closing of the
Magnum acquisition. On September 25, 2008, we entered into an amendment to the credit facility
allowing, among other things, an increase to the permitted securitization programs without
adjusting the capacity of the credit facility. At December 31, 2009 we were in compliance with
the covenants of our amended credit facility.
Private Convertible Notes Issuance
On May 28, 2008, we completed a private offering of $200 million in aggregate principal
amount of 3.25% Convertible Senior Notes due 2013 (the notes), including $25 million related to
the underwriters overallotment option. The net proceeds of the offering were $193.5 million
after deducting the initial purchasers commissions and fees and expenses of the offering. As
discussed in Note 3, we adopted authoritative guidance related to accounting for convertible
debt effective January 1, 2009, with retrospective application to the issuance date of these
convertible notes. We utilized an interest rate of 8.85% to reflect the nonconvertible market
rate of our offering upon issuance, which resulted in a $44.7 million discount to the
convertible note balance and an increase to Additional paid-in capital to reflect the value of
the conversion feature. The nonconvertible market interest rate was based on an analysis of
similar securities trading in the market at the pricing date of the issuance, taking into
account company specific data such as credit spreads and implied volatility. In
addition, we allocated the financing costs related to the issuance of the convertible
instruments between the debt and equity components. The debt discount is amortized over the
contractual life of the convertible notes, resulting in additional interest expense above the
contractual coupon amount.
At December 31, 2008, the principal amount of the convertible notes of $200.0 million was
adjusted for the debt discount of $40.4 million, resulting in a long-term convertible note
balance of $159.6 million. At December 31, 2009, the debt discount was $32.5 million, resulting
in a long-term convertible note balance of $167.5 million. For the year ended December 31, 2009,
interest expense for the convertible notes was $14.4 million, which included debt discount
amortization of $7.8 million. For the year ended December 31, 2008, interest expense for the
convertible notes was $8.2 million, which included debt discount amortization of $4.2 million.
F-23
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest on the notes is payable semi-annually in arrears on May 31 and November 30 of each
year. The notes mature on May 31, 2013, unless converted, repurchased or redeemed in accordance
with their terms prior to such date. The notes are senior unsecured obligations and rank equally
with all of our existing and future senior debt and are senior to any subordinated debt. We used
the proceeds of the offering to repay Magnums existing senior secured indebtedness and
acquisition related fees and expenses. All remaining amounts were used for other general
corporate purposes.
The notes are convertible into cash and, if applicable, shares of Patriots common stock
during the period from issuance to February 15, 2013, subject to certain conditions of
conversion as described below. The conversion rate for the notes is 14.7778 shares of Patriots
common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of
approximately $67.67 per share of common stock. The conversion rate and the conversion price are
subject to adjustment for certain dilutive events, such as a future stock split or a
distribution of a stock dividend.
The notes require us to settle all conversions by paying cash for the lesser of the
principal amount or the conversion value of the notes, and by settling any excess of the
conversion value over the principal amount in cash or shares, at our option.
Holders of the notes may convert their notes prior to the close of business on the business
day immediately preceding February 15, 2013, only under the following circumstances: (1) during
the five trading day period after any ten consecutive trading day period (the measurement
period) in which the trading price per note for each trading day of that measurement period was
less than 97% of the product of the last reported sale price of Patriots common stock and the
conversion rate on each such trading day; (2) during any calendar quarter after the calendar
quarter ending September 30, 2008, and only during such calendar quarter, if the last reported
sale price of Patriots common stock for 20 or more trading days in a period of 30 consecutive
trading days ending on the last trading day of the immediately preceding calendar quarter
exceeds 130% of the conversion price in effect on each such trading day; (3) if such holders
notes have been called for redemption or (4) upon the occurrence of corporate events specified
in the indenture. The notes will be convertible, regardless of the foregoing circumstances, at
any time from, and including, February 15, 2013 until the close of business on the business day
immediately preceding the maturity date.
The number of shares of Patriots common stock that we may deliver upon conversion will
depend on the price of our common stock during an observation period as described in the
indenture. Specifically, the number of shares deliverable upon conversion will increase as the
common stock price increases above the conversion price of $67.67 per share during the
observation period. The maximum number of shares that we may deliver is 2,955,560. However, if
certain fundamental changes occur in Patriots business that are deemed make-whole fundamental
changes in the indenture, the number of shares deliverable on conversion may increase, up to a
maximum amount of 4,137,788 shares. These maximum amounts are subject to adjustment for certain
dilutive events, such as a stock split or a distribution of a stock dividend.
Holders of the notes may require us to repurchase all or a portion of our notes upon a
fundamental change in our business, as defined in the indenture. The holders would receive cash
for 100% of the principal amount of the notes, plus any accrued and unpaid interest.
Patriot may redeem (i) some or all of the notes at any time on or after May 31, 2011, but
only if the last reported sale price of our common stock for 20 or more trading days in a period
of 30 consecutive trading days ending on the trading day prior to the date we provide the
relevant notice of redemption exceeds 130% of the conversion price in effect on each such
trading day, or (ii) all of the notes if at any time less than $20 million in aggregate
principal amount of notes remain outstanding. In both cases, notes will be redeemed for cash at
a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any
accrued and unpaid interest up to, but excluding, the relevant redemption date.
Under the indenture for the notes, if we fail to timely file any document or report
required to be filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, (other than reports on Form 8-K), we are
required to pay additional interest on the notes of 0.50% of the principal balance of the notes.
This additional interest feature is considered an embedded derivative. Management has determined
the fair value of this embedded derivative is de minimis as the probability of reports not being
filed timely is remote and we have no history of late submissions.
The notes and any shares of common stock issuable upon conversion have not been registered
under the Securities Act of 1933, as amended (the Securities Act), or any state securities laws.
The notes were only offered to qualified institutional buyers pursuant to Rule 144A promulgated
under the Securities Act.
F-24
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Bridge Loan Facility
In connection with the Magnum acquisition agreement, we obtained a subordinated bridge loan
financing commitment, allowing us to draw up to $150 million under the related bridge loan
facility at the effective date of the acquisition to repay a portion of the outstanding debt of
Magnum. We terminated the financing commitment on May 30, 2008, as a result of the Convertible
Senior Notes issuance. For the year ended December 31, 2008, we recognized $1.5 million in
commitment fees in connection with the financing commitment, which were included in Interest
expense in the consolidated statements of operations.
Capital Lease Obligations and Other
Capital lease obligations include a capital lease related to the Blue Creek mining complex
preparation plant as well as obligations assumed in the Magnum acquisition, primarily for mining
equipment. As of December 31, 2009, Property, plant, equipment and mine development on the
consolidated balance sheets includes approximately $25.0 million related to assets subject to
capital leases, of which $22.0 million is related to the Blue Creek mining complex preparation
plant. As of December 31, 2008, Property, plant, equipment and mine development on the
consolidated balance sheets includes approximately $7.6 million related to assets subject to
capital leases and $13.5 million related to a capital lease for the Blue Creek mining complex
preparation plant. Amortization of capital leases is included in Depreciation, depletion and
amortization in the consolidated statements of operations. See Note 12 for additional
information on our capital lease obligations.
The aggregate amounts of long-term debt maturities subsequent to December 31, 2009,
including capital lease obligations, were as follows:
|
|
|
|
|
|
|
(Dollars in |
|
Year of Maturity |
|
thousands) |
|
|
|
|
|
|
2010 |
|
$ |
8,042 |
|
2011 |
|
|
3,329 |
|
2012 |
|
|
3,033 |
|
2013 |
|
|
203,294 |
|
2014 |
|
|
3,581 |
|
2015 and thereafter |
|
|
17,213 |
|
|
|
|
Total cash payments on debt |
|
|
238,492 |
|
Debt discount on convertible notes |
|
|
(32,499 |
) |
|
|
|
Total long-term debt |
|
$ |
205,993 |
|
|
|
|
Cash interest paid on long-term debt was $8.9 and $5.2 million for the years ended December
31, 2009 and 2008, respectively. Prior to the spin-off, all cash payments for interest were made
by our former parent, Peabody.
Promissory Notes
In conjunction with an exchange transaction involving the acquisition of Illinois Basin
coal reserves in 2005, we entered into promissory notes. The promissory notes and related
interest are payable in annual installments of $1.7 million beginning January 2008. The
promissory notes mature in January 2017. At December 31, 2009, the short-term portion of the
promissory notes was $1.0 million.
F-25
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Derivatives
We utilize derivative financial instruments to manage exposure to certain commodity prices.
Authoritative guidance requires the recognition of derivative financial instruments at fair
value in the consolidated balance sheets. For derivatives that are not designated as hedges, the
periodic change in fair value is recorded directly to earnings. For derivative instruments that
are eligible and designated as cash flow hedges, the periodic change in fair value is recorded
to Accumulated other comprehensive loss until the hedged transaction occurs or the
relationship ceases to qualify for hedge accounting. In addition, if a portion of the change in
fair value for a cash flow hedge is deemed ineffective during a reporting period, the
ineffective portion of the change in fair value is recorded directly to earnings.
We have commodity risk related to our diesel fuel purchases. To manage a portion of this
risk, we entered into heating oil swap contracts with financial institutions. The changes in
diesel fuel and heating oil prices are highly correlated, thus allowing the swap contracts to be
designated as cash flow hedges of anticipated diesel fuel purchases. As of December 31, 2009,
the notional amounts outstanding for these swaps included 12.0 million gallons of heating oil
expiring throughout 2010. In 2010, we expect to purchase approximately 22 million gallons of
diesel fuel across all operations. Aside from the hedging activities, a $0.10 per gallon change
in the price of diesel fuel would impact our annual operating costs by approximately $2.2
million. For the year ended December 31, 2009, we recognized a loss of $5.3 million in earnings
on settled contracts. Based on the analysis required by authoritative guidance, a portion of
the fair value for the cash flow hedges was deemed ineffective for the year ended December 31,
2009 and 2008, resulting in less than $0.1 million recorded directly to earnings.
The following table presents the fair values of our derivatives and the amounts of
unrealized gains and losses, net of tax, included in Accumulated other comprehensive loss related to
fuel hedges in the consolidated balance sheets. See Note 11 for a rollforward of
Accumulated other comprehensive loss for our fuel hedges.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Fair value of current fuel contracts (Prepaid expenses and
other current assets) |
|
$ |
2,021 |
|
|
$ |
- |
|
Fair value of current fuel contracts (Trade accounts payable and
accrued expenses) |
|
|
986 |
|
|
|
5,915 |
|
Fair value of noncurrent fuel contracts (Other noncurrent liabilities) |
|
|
- |
|
|
|
3,780 |
|
Net
unrealized gains (losses) from fuel hedges, net of tax
(Accumulated other comprehensive loss) |
|
|
1,035 |
|
|
|
(9,695 |
) |
We utilized NYMEX quoted market prices for the fair value measurement of these contracts,
which reflects a Level 2 fair value input.
F-26
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(17) Asset Retirement Obligations
Reconciliations of our liability for asset retirement obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
224,180 |
|
|
$ |
134,364 |
|
Liabilities incurred |
|
|
4,113 |
|
|
|
203 |
|
Liabilities settled or disposed |
|
|
(16,248 |
) |
|
|
(6,540 |
) |
Accretion expense |
|
|
25,395 |
|
|
|
19,116 |
|
Revisions to estimate |
|
|
1,780 |
|
|
|
1,057 |
|
Liabilities acquired through acquisition |
|
|
5,298 |
|
|
|
75,980 |
|
|
|
|
|
|
Balance at end of year |
|
$ |
244,518 |
|
|
$ |
224,180 |
|
|
|
|
|
|
As of December 31, 2009, asset retirement obligations of $244.5 million consisted of
$183.1 million related to locations with active mining operations and $61.4 million related to
locations that are closed or inactive. As of December 31, 2008, asset retirement obligations of
$224.2 million consisted of $171.8 million related to locations with active mining operations
and $52.4 million related to locations that are closed or inactive. The credit-adjusted,
risk-free interest rates were 9.45% and 9.00% at January 1, 2009 and 2008, respectively.
As of December 31, 2009, we had $221.2 million in surety bonds and letters of credit
outstanding to secure our reclamation obligations or activities.
As of December 31, 2009, Arch Coal, Inc. (Arch) held surety bonds of $93.3 million related
to properties acquired by Patriot in the Magnum acquisition, of which $91.7 million related to
reclamation. As a result of the acquisition, Patriot is required to post letters of credit in
Archs favor for the amount of the accrued reclamation liabilities no later than February 2011.
(18) Workers Compensation Obligations
Certain of our operations are subject to the Federal Coal Mine Health and Safety Act of
1969, and the related workers compensation laws in the states in which we operate. These laws
require our operations to pay benefits for occupational disease resulting from coal workers
pneumoconiosis (occupational disease). Provisions for occupational disease costs are based on
determinations by independent actuaries or claims administrators.
We provide income replacement and medical treatment for work related traumatic injury
claims as required by applicable state law. Provisions for estimated claims incurred are
recorded based on estimated loss rates applied to payroll and claim reserves determined by
independent actuaries or claims administrators. Certain of our operations are required to
contribute to state workers compensation funds for second injury and other costs incurred by
the state fund based on a payroll-based assessment by the applicable state. Provisions are
recorded based on the payroll-based assessment criteria.
The workers compensation provision consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
5,462 |
|
|
$ |
3,382 |
|
|
$ |
2,971 |
|
Interest cost |
|
|
9,042 |
|
|
|
9,876 |
|
|
|
9,124 |
|
Net amortization of actuarial gains |
|
|
(4,504 |
) |
|
|
(4,009 |
) |
|
|
(1,607 |
) |
|
|
|
|
|
|
|
Total occupational disease |
|
|
10,000 |
|
|
|
9,249 |
|
|
|
10,488 |
|
Traumatic injury claims |
|
|
18,798 |
|
|
|
13,261 |
|
|
|
13,160 |
|
State assessment taxes |
|
|
2,503 |
|
|
|
2,546 |
|
|
|
4,373 |
|
|
|
|
|
|
|
|
Total provision |
|
$ |
31,301 |
|
|
$ |
25,056 |
|
|
$ |
28,021 |
|
|
|
|
|
|
|
|
F-27
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The increase in traumatic workers compensation costs in 2009 primarily reflects the
integration of Magnum operations for the full year versus five months in 2008.
The weighted-average assumptions used to determine the workers compensation provision were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
Occupational disease |
|
|
6.00 |
% |
|
|
6.40 |
% |
|
|
6.00 |
% |
Traumatic injury |
|
|
6.06 |
% |
|
|
5.80 |
% |
|
|
6.00 |
% |
Inflation rate |
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.50 |
% |
Workers compensation obligations consist of amounts accrued for loss sensitive insurance
premiums, uninsured claims, and related taxes and assessments under black lung and traumatic
injury workers compensation programs.
The workers compensation obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Occupational disease costs |
|
$ |
152,079 |
|
|
$ |
154,527 |
|
Traumatic injury claims |
|
|
68,249 |
|
|
|
61,878 |
|
|
|
|
|
|
Total obligations |
|
|
220,328 |
|
|
|
216,405 |
|
Less current portion (included in Accrued expenses) |
|
|
(26,609 |
) |
|
|
(28,225 |
) |
|
|
|
|
|
Noncurrent obligations (included in Workers compensation obligations) |
|
$ |
193,719 |
|
|
$ |
188,180 |
|
|
|
|
|
|
The accrued workers compensation liability recorded on the consolidated balance sheets at
December 31, 2009 and 2008 reflects the accumulated benefit obligation less any portion that is
currently funded. The accumulated actuarial gain that has not yet been reflected in net periodic
postretirement benefit costs is included in Accumulated other comprehensive loss.
As of December 31, 2009, we had $201.1 million in surety bonds and letters of credit
outstanding to secure workers compensation obligations.
Peabody guarantees certain of our workers compensation obligations which totaled $152.1
million at December 31, 2009, with the U.S. Department of Labor (DOL). We will be required to either
post letters of credit in Peabodys favor if Peabody continues to guarantee this obligation or
post our own surety directly with the DOL by July 2011.
F-28
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reconciliation of changes in the occupational disease liability benefit obligation is
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Beginning of year obligation |
|
$ |
154,527 |
|
|
$ |
155,829 |
|
Service cost |
|
|
5,462 |
|
|
|
3,382 |
|
Interest cost |
|
|
9,042 |
|
|
|
9,876 |
|
Acquisitions/divestitures |
|
|
- |
|
|
|
3,176 |
|
Net change in actuarial gain |
|
|
(6,508 |
) |
|
|
(6,876 |
) |
Benefit and administrative payments |
|
|
(10,444 |
) |
|
|
(10,860 |
) |
|
|
|
|
|
Net obligation at end of year |
|
|
152,079 |
|
|
|
154,527 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period |
|
|
- |
|
|
|
- |
|
Employer contributions |
|
|
10,444 |
|
|
|
10,860 |
|
Benefits paid |
|
|
(10,444 |
) |
|
|
(10,860 |
) |
|
|
|
|
|
Fair value of plan assets at end of period |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Obligation at end of period |
|
$ |
152,079 |
|
|
$ |
154,527 |
|
|
|
|
|
|
The liability for occupational disease claims represents the actuarially-determined present
value of known claims and an estimate of future claims that will be awarded to current and
former employees. The liability for occupational disease claims was based on a discount rate of
5.9% and 6.0% at December 31, 2009 and 2008, respectively. Traumatic injury workers
compensation obligations are estimated from both case reserves and actuarial determinations of
historical trends, discounted at 4.8% and 6.1% as of December 31, 2009 and 2008, respectively.
Federal Black Lung Excise Tax Refunds
In addition to the obligations discussed above, certain subsidiaries of Patriot are
required to pay black lung excise taxes to the Federal Black Lung Trust Fund (the Trust Fund).
The Trust Fund pays occupational disease benefits to entitled former miners who worked prior to
July 1, 1973. Excise taxes are based on the selling price of coal, up to a maximum of $1.10 per
ton for underground mines and $0.55 per ton for surface mines. We had a receivable for excise
tax refunds of $5.8 million as of December 31, 2008, related to new legislation that allowed for
excise taxes paid in prior years on export coal and related interest to be refunded to us, which
was included in Accounts receivable and other in the consolidated balance sheet. This amount,
as well as an additional $3.9 million, was collected in 2009.
F-29
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) Pension and Savings Plans
Multi-Employer Pension Plans
Certain subsidiaries participate in multi-employer pension plans (the 1950 Plan and the
1974 Plan), which provide defined benefits to substantially all hourly coal production workers
represented by the UMWA. Benefits under the UMWA plans are computed based on service with the
subsidiaries or other signatory employers. The 1950 Plan and the 1974 Plan qualify as
multi-employer benefit plans, allowing us to recognize expense as contributions are made. The
expense related to these funds was $18.3 million, $13.5 million and $6.9 million for the years
ended December 31, 2009, 2008, and 2007, respectively. In December 2006, the 2007 National
Bituminous Coal Wage Agreement was signed, which required funding of the 1974 Plan through 2011
under a phased funding schedule. The funding is based on an hourly rate for certain UMWA
workers. Under the labor contract, the per-hour funding rate increased to $4.25 in 2009 and
increases each year thereafter until reaching $5.50 in 2011. We expect to pay approximately $22
million related to these funds in 2010. Contributions to these funds could increase as a result
of future collective bargaining with the UMWA, a shrinking contribution base as a result of the
insolvency of other coal companies who currently contribute to these funds, lower than expected
returns on pension fund assets or other funding deficiencies.
Defined Contribution Plans
Patriot sponsors employee retirement accounts under a 401(k) plan for eligible salaried and
non-union hourly employees of the Company (the 401(k) Plan). Generally, Patriot matches
voluntary contributions to the 401(k) Plan up to specified levels. The match was temporarily
suspended for the second half of 2009. Prior to the spin-off, Peabody also sponsored a similar
401(k) plan in which eligible Patriot employees could participate. A performance contribution
feature under both Patriots plan and Peabodys plan allows for additional contributions based
upon meeting specified performance targets. We recognized expense for these plans of $4.5
million, $6.1 million and $3.4 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
In addition, Magnum had three defined contribution plans prior to the acquisition. The
first two were the Magnum Coal Company 401(k) Plan and the Day Mining, LLC Employee Savings
Plan. These plans matched voluntary employee contributions up to specified levels, similar to
Patriots 401(k) Plan. Additionally, certain employees were covered by the Magnum Coal Company
Defined Contribution Retirement Plan based on age and compensation. Magnum funded the plan in an
amount not less than the minimum statutory funding requirements or more than the maximum amount
allowed to be deducted for federal income tax purposes. Expenses incurred under these plans were
$2.4 million for the year ended December 31, 2008. These plans were merged into Patriots 401(k)
Plan effective December 31, 2008.
(20) Postretirement Healthcare Benefits
We currently provide healthcare and life insurance benefits to qualifying salaried and
hourly retirees and their dependents from defined benefit plans established by Peabody and
continued by Patriot after the spin-off. Plan coverage for health and life insurance benefits is
provided to certain hourly retirees in accordance with the applicable labor agreement.
Net periodic postretirement benefit costs included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned |
|
$ |
3,715 |
|
|
$ |
1,731 |
|
|
$ |
981 |
|
Interest cost on accumulated postretirement benefit obligation |
|
|
70,509 |
|
|
|
51,472 |
|
|
|
65,964 |
|
Amortization of prior service cost |
|
|
(551 |
) |
|
|
(680 |
) |
|
|
(1,306 |
) |
Amortization of actuarial losses |
|
|
18,813 |
|
|
|
13,516 |
|
|
|
34,260 |
|
|
|
|
|
|
|
|
Net periodic postretirement benefit costs |
|
$ |
92,486 |
|
|
$ |
66,039 |
|
|
$ |
99,899 |
|
|
|
|
|
|
|
|
F-30
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the plans combined funded status reconciled with the
amounts shown in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation at beginning of
period |
|
$ |
1,064,928 |
|
|
$ |
554,748 |
|
Service cost |
|
|
3,715 |
|
|
|
1,731 |
|
Interest cost |
|
|
70,509 |
|
|
|
51,472 |
|
Participant contributions |
|
|
969 |
|
|
|
412 |
|
Plan amendments |
|
|
(19,391 |
) |
|
|
- |
|
Acquisitions/divestitures |
|
|
- |
|
|
|
456,396 |
|
Benefits paid |
|
|
(65,203 |
) |
|
|
(42,491 |
) |
Change in actuarial loss |
|
|
181,523 |
|
|
|
42,660 |
|
|
|
|
|
|
Accumulated postretirement benefit obligation at end of period |
|
|
1,237,050 |
|
|
|
1,064,928 |
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period |
|
|
- |
|
|
|
- |
|
Employer contributions |
|
|
64,234 |
|
|
|
42,079 |
|
Participant contributions |
|
|
969 |
|
|
|
412 |
|
Benefits paid and administrative fees (net of Medicare Part D
reimbursements) |
|
|
(65,203 |
) |
|
|
(42,491 |
) |
|
|
|
|
|
Fair value of plan assets at end of period |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Accrued postretirement benefit obligation |
|
|
1,237,050 |
|
|
|
1,064,928 |
|
Less current portion (included in Accrued expenses) |
|
|
(67,069 |
) |
|
|
(61,674 |
) |
|
|
|
|
|
Noncurrent obligation (included in Accrued postretirement benefit costs) |
|
$ |
1,169,981 |
|
|
$ |
1,003,254 |
|
|
|
|
|
|
The accrued postretirement benefit liability recorded on the consolidated balance sheets at
December 31, 2009 and 2008 reflects the accumulated postretirement benefit obligation less any
portion that is currently funded. The accumulated actuarial loss and prior service costs that
have not yet been reflected in net periodic postretirement benefit costs are included in
Accumulated other comprehensive loss.
The
change to the actuarial loss reflects changes in actuarial assumptions including, among
others, the discount rate, healthcare cost trend rate, grade-down period for the trend
rate, ultimate trend rate, retirement and mortality rates. The increase in the actuarial
loss in 2009 was mainly impacted by a lower discount rate, negative claims cost experience and
an increase in expected beneficiaries due to retirement age, turnover rates and mortality rates.
We amortize actuarial gains and losses using a 0% corridor with an amortization period that
covers the average remaining service period of active employees (6.16 years, 6.47 years and
6.47 years utilized for 2009, 2008 and 2007, respectively). For the year ending December 31,
2010, an estimated actuarial loss of $36.5 million and an estimated gain from prior service cost
of $0.8 million will be amortized from accumulated comprehensive loss into net periodic
postretirement costs.
The weighted-average assumptions used to determine the benefit obligations as of the end of
each year were as follows:
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
|
|
|
|
Discount rate |
|
6.30% |
|
6.80% |
Rate of compensation increase |
|
3.50% |
|
3.50% |
Measurement date |
|
December 31, 2009 |
|
December 31, 2008 |
F-31
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average assumptions used to determine net periodic benefit cost were as
follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Discount rate |
|
6.80% |
|
6.80% |
|
6.00% |
Rate of compensation increase |
|
3.50% |
|
3.50% |
|
3.50% |
Measurement date |
|
December 31, 2008 |
|
December 31, 2007 |
|
December 31, 2006 |
Due to the valuation under purchase accounting, the discount rate used for Magnum
operations for the five months of 2008 following acquisition was 7.25%. In 2009, the discount
rate of 6.80% was utilized across all operations.
The following presents information about the assumed healthcare cost trend rate:
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
|
|
|
|
Healthcare cost trend rate assumed for next year |
|
7.00% |
|
9.25% |
Rate to which the cost trend is assumed to decline (the ultimate trend rate) |
|
5.00% |
|
4.75% |
Year that the rate reaches that ultimate trend rate |
|
2016 |
|
2014 |
Assumed healthcare cost trend rates have a significant effect on the amounts reported for
healthcare plans. A one percentage-point change in the assumed healthcare cost trend would have
the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+1.0% |
|
-1.0% |
|
|
(Dollars in thousands) |
|
Effect on total service and interest cost components |
|
$ |
9,306 |
|
|
$ |
(7,758 |
) |
Effect on year-end postretirement benefit obligation |
|
|
160,756 |
|
|
|
(138,189 |
) |
Plan Assets
Our postretirement benefit plans are unfunded.
Estimated Future Benefits Payments
The following benefit payments (net of retiree contributions), which reflect expected
future service, as appropriate, are expected to be paid by Patriot:
|
|
|
|
|
|
|
Postretirement |
|
|
|
Benefits |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
2010 |
|
$ |
67,069 |
|
2011 |
|
|
72,337 |
|
2012 |
|
|
76,848 |
|
2013 |
|
|
81,532 |
|
2014 |
|
|
85,119 |
|
Years 2015-2018 |
|
|
457,581 |
|
Plan Changes
In 2009, changes were made to certain defined benefit plans for retired and active,
salaried individuals resulting in a reduction to projected healthcare costs of $8.5 million that
will be amortized over 7.0 years and a reduction to projected
healthcare costs of $10.9 million that will be amortized over 12.5 years.
F-32
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assumption of Certain Patriot Liabilities
Peabody assumed certain of our retiree healthcare liabilities at the spin-off, which had a
present value of $665.0 million as of December 31, 2009 and are not reflected above. These
liabilities included certain obligations under the Coal Act for which Peabody and Patriot are
jointly and severally liable, obligations under the 2007 National Bituminous Coal Wage Act for
which Patriot is secondarily liable, and obligations for certain active, vested employees of
Patriot.
Multi-Employer Benefit Plans
Retirees formerly employed by certain subsidiaries and their predecessors receive health
benefits provided by the Combined Fund, a fund created by the Coal Act, if they meet the
following criteria: they were members of the UMWA; last worked before January 1, 1976; and were
receiving health benefits on July 20, 1992. The Coal Act requires former employers (including
certain entities of the Company) and their affiliates to contribute to the Combined Fund
according to a formula. The Coal Act also established the 1992 Benefit Plan, which provides
medical and death benefits to persons who are not eligible for the Combined Fund, who retired
prior to October 1, 1994. A prior national labor agreement established the 1993 Benefit Plan to
provide health benefits for retired miners not covered by the Coal Act. The 1993 Benefit Plan
provides benefits to qualifying retired former employees, who retired after September 30, 1994,
of certain signatory companies which have gone out of business and defaulted in providing their
former employees with retiree medical benefits. Beneficiaries continue to be added to this fund
as employers go out of business. We expect to pay $16.2 million in 2010 related to these funds.
The Surface Mining Control and Reclamation Act of 2006 (the 2006 Act), enacted in December
2006, amended the federal laws establishing the Combined Fund, 1992 Benefit Plan and the 1993
Benefit Plan. Among other things, the 2006 Act guarantees full funding of all beneficiaries in
the Combined Fund, provides funds on a phased-in basis for the 1992 Benefit Plan, and authorizes
the trustees of the 1993 Benefit Plan to determine the contribution rates through 2010 for
pre-2007 beneficiaries. The new and additional federal expenditures to the Combined Fund, 1992
Benefit Plan, 1993 Benefit Plan and certain Abandoned Mine Land payments to the states and
Indian tribes are collectively limited by an aggregate annual cap of $490 million. To the extent
that (i) the annual funding of the programs exceeds this amount (plus the amount of interest
from the Abandoned Mine Land trust fund paid with respect to the Combined Fund), and
(ii) Congress does not allocate additional funds to cover the shortfall, contributing employers
and affiliates, including some of our entities, would be responsible for the additional
costs.
We have recorded actuarially determined liabilities representing a portion of the amount
anticipated to be due to these funds. The noncurrent portion related to these obligations was
$42.2 million and $42.6 million as of December 31, 2009 and 2008, respectively, and is reflected
in Obligation to industry fund in the consolidated balance sheets. The current portion related
to these obligations reflected in Trade accounts payable and accrued expenses in the
consolidated balance sheets was $6.3 million and $6.6 million as of December 31, 2009 and 2008,
respectively. Expense of $3.2 million was recognized related to these obligations for the year
ended December 31, 2009, and consisted of interest discount of $3.4 million and amortization of
actuarial gain of $0.2 million. Expense of $2.6 million was recognized related to these
obligations for the year ended December 31, 2008, and consisted of interest discount of
$2.7 million and amortization of actuarial gain of $0.1 million. Expense of $2.9 million was
recognized related to these obligations for the year ended December 31, 2007, and consisted of
interest discount of $2.3 million and amortization of actuarial loss of $0.6 million. We made
payments of $6.3 million, $6.1 million and $5.5 million to these obligations for the years ended
December 31, 2009, 2008 and 2007, respectively.
The obligation to industry fund recorded on the consolidated balance sheets at December 31,
2009 and 2008 reflects the obligation less any portion that is currently funded. The accumulated
actuarial gain or loss that has not yet been reflected in expense as of December 31, 2009 and
2008 was a loss of $1.8 million and a gain of $0.8 million, respectively, and is included in
Accumulated other comprehensive loss.
A portion of these funds qualify as multi-employer benefit plans, which allows us to
recognize expense as contributions are made. The expense related to these funds was $11.2
million, $11.8 million and $15.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Pursuant to the amended provisions of the 1992 Benefit Plan, we are required to provide
security in an amount equal to one times the annual cost of providing healthcare benefits for
all individuals receiving benefits from the 1992 Benefit Plan who are attributable to Patriot,
plus all individuals receiving benefits from an individual employer plan maintained by Patriot
who are entitled to receive such benefits.
F-33
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(21) Related Party Transactions
Prior to the spin-off, we routinely entered into transactions with Peabody and its
affiliates. The terms of these transactions were outlined in agreements executed by Peabody and
its affiliates.
We sold 8.8 million tons of coal resulting in revenues of $456.1 million for the year ended
December 31, 2009; 12.1 million tons of coal resulting in revenues of $578.1 million for the
year ended December 31, 2008; and 21.6 million tons of coal resulting in revenues of $1.03
billion for the year ended December 31, 2007 to a marketing affiliate of Peabody, which
negotiated and maintained coal sales contracts. These revenues were recorded in both the
Appalachia and Illinois Basin segments. As of December 31, 2009 and 2008, Accounts receivable
and other on the consolidated balance sheets included $42.2 million and $34.8 million,
respectively, of outstanding trade receivables from Peabody related to coal sales.
Selling and administrative expenses include $37.3 million for the year ended December 31,
2007 for services provided by Peabody and represent an allocation of Peabody general corporate
expenses to all of its mining operations, both foreign and domestic, based on principal
activity, headcount, tons sold and revenues as applicable to the specific expense being
allocated. The allocated expenses generally reflected service costs for: marketing and sales,
legal, finance and treasury, public relations, human resources, environmental engineering and
internal audit. Different general accounting allocation bases or methods could have been used
and could have resulted in significantly different results. The allocation from Peabody was not
necessarily indicative of the selling and administrative expenses that would have been incurred
if Patriot had been an independent entity.
We recognized interest expense of $4.1 million for the year ended December 31, 2007 related
to a $62.0 million intercompany demand note payable to Peabody, which was forgiven at spin-off.
We entered into certain agreements with Peabody to provide transition services following
the spin-off, which were completed by September 30, 2008. For the year ended December 31, 2008,
transition service expenses were $1.4 million, and are included in Selling and administrative
expenses in the consolidated statements of operations.
In 2007 we received contributions from Peabody of $43.6 million primarily for the funding
of acquisitions prior to the spin-off.
In June 2007, Peabody exchanged numerous oil and gas rights and assets owned throughout its
operations, including some owned by Patriot, for coal reserves in West Virginia and Kentucky.
Peabody did not allocate gain recognized from this transaction to Patriot but contributed to
Patriot approximately 28 million tons of West Virginia coal reserves. These reserves are located
in the Pittsburgh coal seam adjacent to Patriots Federal No. 2 mining operations and were
valued at $45.2 million.
ArcLight Energy Partners Fund I L.P. (ArcLight) is a significant stockholder of Patriot due
to its former ownership of Magnum. In January 2007, ArcLight purchased from a third party
rights to a royalty stream based on coal mined on certain properties, and then leased the rights
to one of Magnums operations. Royalty payments to ArcLight for the year ended December 31, 2009
and for the period from July 23, 2008 to December 31, 2008 were approximately $1.0 million and
$475,000, respectively.
(22) Guarantees
In the normal course of business, we are party to guarantees and financial instruments with
off-balance-sheet risk, such as bank letters of credit, performance or surety bonds and other
guarantees and indemnities, which are not reflected in the accompanying consolidated balance
sheets. Such financial instruments are valued based on the amount of exposure under the
instrument and the likelihood of required performance. Management does not expect any material
losses to result from these guarantees or off-balance-sheet instruments.
F-34
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Letters of Credit and Bonding
Letters of credit and surety bonds in support of our reclamation, lease, workers
compensation and other obligations were as follows as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers |
|
Retiree |
|
|
|
|
|
|
Reclamation |
|
Lease |
|
Compensation |
|
Health |
|
|
|
|
|
|
Obligations |
|
Obligations |
|
Obligations |
|
Obligations |
|
Other(1) |
|
Total |
|
|
(Dollars in thousands) |
Surety bonds |
|
$ |
135,986 |
|
|
$ |
- |
|
|
$ |
44 |
|
|
$ |
- |
|
|
$ |
16,786 |
|
|
$ |
152,816 |
|
Letters of credit |
|
|
85,184 |
|
|
|
10,287 |
|
|
|
201,034 |
|
|
|
50,487 |
|
|
|
5,142 |
|
|
|
352,134 |
|
Third-party
guarantees |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,819 |
|
|
|
1,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
221,170 |
|
|
$ |
10,287 |
|
|
$ |
201,078 |
|
|
$ |
50,487 |
|
|
$ |
23,747 |
|
|
$ |
506,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Other includes letters of credit and surety bonds related to collateral
for surety companies and bank guarantees, road maintenance and performance guarantees.
As of December 31, 2009, Arch held surety bonds of $93.3 million related to properties
acquired by Patriot in the Magnum acquisition, of which $91.7 million related to reclamation. As
a result of the acquisition, Patriot is required to post letters of credit in Archs favor for
the amount of the accrued reclamation liabilities no later than February 2011.
Peabody guarantees certain of our workers compensation obligations which totaled $152.1
million at December 31, 2009, with the U.S. Department of Labor (DOL). We will be required to either
post letters of credit in Peabodys favor if Peabody continues to guarantee this obligation or
post our own surety directly with the DOL by July 2011.
In relation to an exchange transaction involving the acquisition of Illinois Basin coal
reserves in 2005, we guaranteed bonding for a partnership in which we formerly held an interest.
The aggregate amount that we guaranteed was $2.8 million and the fair value of the guarantee
recognized as a liability was $0.3 million as of December 31, 2009. Our obligation under the
guarantee extends to September 2015.
Other Guarantees
We are the lessee or sublessee under numerous equipment and property leases. It is
common in such commercial lease transactions for Patriot, as the lessee, to agree to indemnify
the lessor for the value of the property or equipment leased, should the property be damaged or
lost during the course of our operations. We expect that losses with respect to leased property
would be covered by insurance (subject to deductibles). Patriot and certain of our subsidiaries
have guaranteed other subsidiaries performance under their various lease obligations. Aside
from indemnification of the lessor for the value of the property leased, our maximum potential
obligations under their leases are equal to the respective future minimum lease payments,
assuming no amounts could be recovered from third parties.
(23) Commitments and Contingencies
Commitments
As of December 31, 2009, purchase commitments for capital expenditures were $24.9 million.
Other
On occasion, we become a party to claims, lawsuits, arbitration proceedings and
administrative procedures in the ordinary course of business. Our significant legal proceedings
are discussed below.
F-35
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Clean Water Act Permit Issues
The federal Clean Water Act and corresponding state and local laws and regulations affect
coal mining operations by restricting the discharge of pollutants, including dredged or fill
materials, into waters of the United States. In particular, the Clean Water Act requires
effluent limitations and treatment standards for wastewater discharge through the National
Pollution Discharge Elimination System (NPDES) program. NPDES permits, which we must obtain for
both active and historical mining operations, govern the discharge of pollutants into water,
require regular monitoring and reporting, and set forth performance standards. States are
empowered to develop and enforce in-stream water quality standards, which are subject to
change and must be approved by the Environmental Protection Agency (EPA). In-stream standards
vary from state to state.
Environmental claims and litigation in connection with our various NPDES permits, and
related Clean Water Act issues, include the following:
EPA Consent Decree
In February 2009, we entered into a consent decree with the EPA and the West Virginia
Department of Environmental Protection (WVDEP) to resolve certain claims under the Clean Water
Act and the West Virginia Water Pollution Control Act relating to NPDES permits at several
Magnum mining operations in West Virginia that existed prior to our acquisition of these
operations. The consent decree was entered by the federal district court on April 30, 2009.
Under the terms of the consent decree, we paid a civil penalty of $6.5 million in June 2009. We
also could be subject to stipulated penalties in the future for failure to comply with certain
permit requirements as well as certain other terms of the consent decree. Because our operations
are complex and periodically exceed our permit limitations, it is possible that we will have to
pay stipulated penalties in the future, but we do not expect the amounts of any such penalties
to be material. The civil penalty of $6.5 million was accrued as part of the Magnum acquisition
purchase accounting described in Note 6. The consent decree also requires us to implement an
enhanced company-wide environmental management system, which includes regular compliance audits,
electronic tracking and reporting, and annual training for all employees and contractors with
environmental responsibilities. In addition, we will complete several stream restoration
projects in consultation with the EPA and WVDEP. These latter requirements could result in
incremental operating costs in addition to the $6.5 million civil penalty. We anticipate the
incremental costs will be between $5 million and $10 million.
In a separate administrative proceeding with the WVDEP, we paid a civil penalty of $315,000
in the second quarter of 2009 for past violations of other NPDES permits held by certain
subsidiaries.
Apogee Coal Company, LLC (Apogee)
In 2007, Apogee, one of our subsidiaries, was sued in the U.S. District Court for the
Southern District of West Virginia (U.S. District Court) by the Ohio Valley Environmental
Coalition, Inc. (OVEC) and another environmental group (pursuant to the citizen suit provisions
of the Clean Water Act). We refer to this lawsuit as the Federal Apogee Case. This lawsuit
alleged that Apogee had violated water discharge limits for selenium set forth in one of its
NPDES permits. The lawsuit sought fines and penalties as well as injunctions prohibiting Apogee
from further violating laws and its permit.
On March 19, 2009, the U.S. District Court approved a consent decree between Apogee, Hobet
and the plaintiffs. The consent decree extended the compliance deadline to April 5, 2010 and
added interim reporting requirements up to that date. Under the terms of the March 2009 consent
decree, we paid a $50,000 penalty to the U.S. Treasury and $325,000 in attorneys fees in the
second quarter of 2009. We also agreed to spend approximately $350,000 to implement a pilot
project using certain reverse osmosis technology to determine whether the technology can
effectively treat selenium discharges from mining outfalls, and to undertake interim reporting
obligations. Finally, we agreed to comply with our NPDES permits water discharge limits for
selenium by April 5, 2010.
We have completed the pilot project and submitted our findings for review as required under the consent decree.
We continue to install treatment systems at various permitted outfalls, but we will be unable to comply with
selenium discharge limits by April 5, 2010 due to the ongoing inability to identify effective technology.
We intend to seek a modification of the consent decree, to among other things, extend the compliance deadlines in order to
continue our efforts to identify viable treatment alternatives.
F-36
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Currently, available technology has not been fully tested or proven effective at addressing
selenium discharges in excess of allowable limits in mining outfalls similar to ours, and
alternative technology is still in the research stage of development. The potential solutions
identified to date, including the technology we are currently utilizing, have not been proven to
be effective at all scales of operation, and otherwise may not be feasible, particularly at
larger scale operations, due to a range of problems concerning technological issues, prohibitive
implementation costs and other issues. While we are actively continuing to explore options,
there can be no assurance as to when a definitive solution will be identified and implemented.
Legislative developments in West Virginia have created the potential for industry-wide
selenium compliance deadlines to be extended from 2010 to 2012. On May 13, 2009, the Governor of
West Virginia signed a bill that authorized the WVDEP to extend selenium compliance deadlines to
2012 and appropriated state funds for selenium research. The bill cites concerns within West
Virginia regarding the applicability of the research underlying the federal selenium criteria to
a state such as West Virginia which has high precipitation rates and free-flowing streams and
that the alleged environmental impacts that were documented in the applicable federal research
have not been observed in West Virginia. As a result of this bill, the WVDEP is required to
perform research that will assist in better defining and developing state laws and regulations
addressing selenium discharges.
We estimated the costs to treat our selenium discharges in excess of allowable limits at a
net present value of $85.2 million as of the Magnum acquisition date. This liability reflects
the estimated costs of the treatment systems necessary to be installed and maintained with the
goal of meeting the requirements of current court orders, consent decrees and mining permits.
This estimate was prepared considering the dynamics of current legislation, capabilities of
currently available technology and our planned remediation strategy. Future changes to
legislation, findings from current research initiatives and the pace of future technological
progress could result in costs that differ from our current estimates, which could have a
material adverse affect on our results of operations, cash flows and financial condition.
Additionally, any failure to meet the deadlines set forth in the March 2009 consent decree or
established by the federal government or the State of West Virginia or to otherwise comply with
selenium limits in our permits could result in further litigation against us, an inability to
obtain new permits or to maintain existing permits, and the imposition of significant and
material fines and penalties or other costs and could otherwise materially adversely affect our
results of operations, cash flows and financial condition.
Hobet
Mining, LLC (Hobet)
In 2007, Hobet was sued for exceeding effluent limits contained in its NPDES permits in
state court in Boone County by the WVDEP. We refer to this case as the WVDEP Action. In 2008,
OVEC and another environmental group filed a lawsuit against Hobet and WVDEP in the U.S.
District Court (pursuant to the citizen suit provisions of the Clean Water Act). We refer to
this case as the Federal Hobet Case. The Federal Hobet Case involved the same four NPDES
permits that were the subject of the WVDEP Action in state court. However, the Federal Hobet
Case focused exclusively on selenium exceeding allowable limits in permitted water discharges,
while the WVDEP Action addressed all effluent limits, including selenium, established by the
permits. The Federal Hobet Case was included in the same March 19, 2009 consent decree that
addressed the Federal Apogee Case discussed above, and the terms of that consent decree,
including the April 5, 2010 deadline to comply with the selenium effluent limits established by
our permits, also apply to Hobet.
The WVDEP Action was resolved by a settlement and consent order entered in the Boone County
circuit court on September 5, 2008. As part of the settlement, we paid approximately $1.5
million in civil penalties, with the final payment made in July 2009. The settlement also
required us to complete five supplemental environmental projects estimated to cost approximately
$2.6 million, many of which focus on identifying methods for treatment of selenium discharges
and studying the effects of selenium on aquatic wildlife. Finally, we agreed to make gradual
reductions in the selenium discharges from our Hobet Job 21 surface mine, to achieve full
compliance with our NPDES permits by April 2010, and to study potential treatments for
wastewater runoff.
On October 8, 2009, a motion to enter a modified settlement and consent order was submitted
to the Boone County circuit court. This motion to modify the settlement and consent order was
jointly filed by Patriot and the WVDEP. The motion includes, among other term modifications, an
extension of the date to achieve full compliance with our NPDES permits from April 2010 to July
2012. On December 3, 2009, the Boone County circuit court approved and entered the modified
settlement and consent order.
F-37
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of ongoing litigation and federal regulatory initiatives related to water
quality standards that affect valley fills, impoundments and other mining practices, including
the selenium discharge matters described above, the process of applying for new permits has
become more time-consuming and complex, the review and approval process is taking longer, and in
certain cases, new permits may not be issued.
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
CERCLA and similar state laws create liability for investigation and remediation in
response to releases of hazardous substances in the environment and for damages to natural
resources. Under CERCLA and many similar state statutes, joint and several liability may be
imposed on waste generators, site owners and operators and others regardless of fault. These
regulations could require us to do some or all of the following: (i) remove or mitigate the
effects on the environment at various sites from the disposal or release of certain substances;
(ii) perform remediation work at such sites; and (iii) pay damages for loss of use and non-use
values.
Although waste substances generated by coal mining and processing are generally not
regarded as hazardous substances for the purposes of CERCLA and similar legislation, and are
generally covered by the Surface Mining Control and Reclamation Act, some products used by coal
companies in operations, such as chemicals, and the disposal of these products are governed by
CERCLA. Thus, coal mines currently or previously owned or operated by us, and sites to which we
have sent waste materials, may be subject to liability under CERCLA and similar state laws. A
predecessor of one of our subsidiaries has been named as a potentially responsible party at a
third-party site, but given the large number of entities involved at the site and our
anticipated share of expected cleanup costs, we believe that the ultimate liability, if any,
will not be material to our financial condition and results of operations.
Flood Litigation
2001 Flood Litigation
One of our subsidiaries, Catenary Coal Company, LLC (Catenary), has been named as a
defendant, along with various other property owners, coal companies, timbering companies and oil
and natural gas companies, in connection with alleged damages arising from flooding that
occurred on July 8, 2001 in various watersheds, primarily located in southern West Virginia
(referred to as the 2001 flood litigation). Pursuant to orders from the West Virginia Supreme
Court of Appeals, the cases are being handled as mass litigation, and a panel of three judges
was appointed to handle the matters that have been divided between the judges pursuant to the
various watersheds.
In December 2009, an agreement was reached to settle this litigation. These cases will be
dismissed once the settlement is finalized and approved by the West Virginia Supreme Court of
Appeals. Pursuant to the purchase and sale agreement related to Magnum, Arch Coal, Inc. (Arch)
indemnifies us against claims arising from certain pending litigation proceedings, including the
2001 flood litigation, which will continue indefinitely. The failure of Arch to satisfy its
indemnification obligations under the purchase agreement could have a material adverse effect on
us.
2004 Flood Litigation
In 2006, Hobet and Catenary, two of our subsidiaries, were named as defendants along with
various other property owners, coal companies, timbering companies and oil and natural gas
companies, in lawsuits arising from flooding that occurred on May 30, 2004 in various
watersheds, primarily located in southern West Virginia. This litigation is pending before two
different judges in the Circuit Court of Logan County, West Virginia. In the first action, the
plaintiffs have asserted that (i) Hobet failed to maintain an approved drainage control system
for a pond on land near, on, and/or contiguous to the sites of flooding; and (ii) Hobet
participated in the development of plans to grade, blast, and alter the land near, on, and/or
contiguous to the sites of the flooding. Hobet has filed a motion to dismiss both claims based
upon the assertion that insufficient facts have been stated to support the claims of the
plaintiffs.
In the second action, motions to dismiss have been filed, asserting that the allegations
asserted by the plaintiffs are conclusory in nature and likely deficient as a matter of law.
Most of the other defendants also filed motions to dismiss. Both actions were stayed during the
pendency of the appeals to the West Virginia Supreme Court of Appeals in the 2001 flood
litigation.
The outcome of the West Virginia flood litigation is subject to numerous uncertainties.
Based on our evaluation of the issues and their potential impact, the amount of any future loss
cannot be reasonably estimated. However, based on current information, we believe this matter is
likely to be resolved without a material adverse effect on our financial condition, results of
operations and cash flows.
F-38
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Litigation and Investigations
Apogee has been sued, along with eight other defendants, including Monsanto Company,
Pharmacia Corporation and Akzo Nobel Chemicals, Inc., by certain plaintiffs in state court in
Putnam County, West Virginia. The lawsuits were filed in October 2007, but not served on Apogee
until February 2008, and each of the 77 lawsuits are identical except for the named plaintiff.
They each allege personal injury occasioned by exposure to dioxin generated by a plant owned and
operated by certain of the other defendants during production of a chemical, 2,4,5-T, from
1949-1969. Apogee is alleged to be liable as the successor to the liabilities of a company that
owned and/or controlled a dump site known as the Manila Creek landfill, which allegedly received
and incinerated dioxin-contaminated waste from the plant. The lawsuits seek compensatory and
punitive damages for personal injury. As of December 31, 2009, 44 of the original 77 lawsuits
have been dismissed. In December 2009, Apogee was served with 165 additional lawsuits with the
same allegations as the original 77 lawsuits. Under the terms of the governing lease, Monsanto
has assumed the defense of these lawsuits and has agreed to indemnify Apogee for any related
damages. The failure of Monsanto to satisfy its indemnification obligations under the lease
could have a material adverse effect on us.
We are a defendant in litigation involving Peabodys negotiation and June 2005 sale of two
properties previously owned by two of our subsidiaries. Environmental Liability Transfer, Inc.
(ELT) and its subsidiaries commenced litigation against these subsidiaries in the Circuit Court
of the City of St. Louis in the State of Missouri alleging, among other claims, fraudulent
misrepresentation, fraudulent omission, breach of duty and breach of contract. Pursuant to the
terms of the Separation Agreement, Plan of Reorganization and Distribution from the spin-off,
Patriot and Peabody are treating the case as a joint action with joint representation and equal
sharing of costs. Peabody and Patriot filed counterclaims against the plaintiffs in connection
with the sales of both properties. Motions for summary judgment on the complaint and
counterclaim have been filed by Peabody and Patriot and are pending. A trial date has been
preliminarily set for October 2010. The claim filed is for $40 million in damages. We are unable
to predict the likelihood of success of the plaintiffs claims, though we intend to vigorously
defend ourselves against all claims.
A predecessor of one of our subsidiaries operated the Eagle No. 2 mine located near
Shawneetown, Illinois from 1969 until closure of the mine in July of 1993. In 1999, the State of
Illinois brought a proceeding before the Illinois Pollution Control Board against the subsidiary
alleging that groundwater contamination due to leaching from a coal waste pile at the mine site
violated state standards. The subsidiary has developed a remediation plan with the State of
Illinois and is in litigation with the Illinois Attorney Generals office with respect to its
claim for a civil penalty of $1.3 million.
One of our subsidiaries is a defendant in several related lawsuits filed in the
Circuit Court of Boone County, West Virginia. As of December 31, 2009, there were 109 related lawsuits filed by approximately 267 plaintiffs. In addition to our subsidiary,
the lawsuits name Peabody and other coal companies with mining operations in Boone County. The
plaintiffs in each case allege contamination of their drinking water wells over a period in
excess of 30 years from coal mining activities in Boone County, including underground coal
slurry injection and coal slurry impoundments. The lawsuits seek property damages, personal
injury damages and medical monitoring costs. Public water lines are being installed by the Boone
County Public Service Commission, and all plaintiffs will have access to public water by April
2010. Pursuant to the terms of the Separation Agreement, Plan of Reorganization and Distribution
from the spin-off, Patriot is indemnifying and defending Peabody in this litigation. In December
2009, we filed a third party complaint against our current and former insurance carriers seeking
coverage for this litigation under the applicable insurance policies. The court has scheduled an
early mediation in this case for the last week in March 2010, directing all plaintiffs,
defendants and third party defendants to appear. A trial date has been set for May 2011. We are
unable to predict the likelihood of success of the plaintiffs claims, though we intend to
vigorously defend ourselves against all claims.
In late January 2010, the U.S. Attorneys office and the State of West Virginia began investigations relating to one or more of our employees making inaccurate entries in official mine records at our Federal No. 2 mine. We have undertaken an internal investigation into the matter and have terminated one employee and
placed two other employees on administrative leave. We are cooperating with the relevant governmental
authorities.
The outcome of other litigation and the investigations is subject to numerous uncertainties. Based on our
evaluation of the issues and their potential impact, the amount of any future loss cannot be
reasonably estimated. However, based on current information, we believe these matters are likely
to be resolved without a material adverse effect on our financial condition, results of
operations and cash flows.
F-39
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(24) Segment Information
We report our operations through two reportable operating segments, Appalachia and Illinois
Basin. The Appalachia and Illinois Basin segments primarily consist of our mining operations in
West Virginia and Kentucky, respectively. The principal business of the Appalachia segment is
the mining, preparation and sale of thermal coal, sold primarily to electric utilities and
metallurgical coal, sold to steel and coke producers. The principal business of the Illinois
Basin segment is the mining, preparation and sale of thermal coal, sold primarily to electric
utilities. For the twelve months ended December 31, 2009, 83% of our sales were to electricity
generators and 17% to steel and coke producers. For the twelve months ended December 31, 2009
and 2008, our revenues attributable to foreign countries, based on where the product was
shipped, were $322.2 million and $241.3 million, respectively. We utilize underground and
surface mining methods and produce coal with high and medium Btu content. Our operations have
relatively short shipping distances from the mine to most of our domestic utility customers and
certain metallurgical coal customers. Corporate and Other includes selling and administrative
expenses, net gain on disposal or exchange of assets and costs associated with past mining
obligations.
Our chief operating decision makers use Adjusted EBITDA as the primary measure of segment
profit and loss. Adjusted EBITDA is defined as net income (loss) before deducting interest
income and expense; income taxes; reclamation and remediation obligation expense; depreciation,
depletion and amortization; restructuring and impairment charge; and net sales contract
accretion. Net sales contract accretion represents contract accretion excluding back-to-back
coal purchase and sales contracts. The contract accretion on the back-to-back coal purchase and
sales contracts reflects the accretion related to certain coal purchase and sales contracts
existing prior to July 23, 2008, whereby Magnum purchased coal from third parties to fulfill
tonnage commitments on sales contracts. Because Segment Adjusted EBITDA is not calculated
identically by all companies, our calculation may not be comparable to similarly titled measures
of other companies.
Operating segment results for the year ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois |
|
Corporate |
|
|
|
|
Appalachia |
|
Basin |
|
and Other(1) |
|
Consolidated |
|
|
(Dollars in thousands) |
Revenues |
|
$ |
1,776,204 |
|
|
$ |
269,079 |
|
|
$ |
- |
|
|
$ |
2,045,283 |
|
Adjusted EBITDA |
|
|
294,373 |
|
|
|
8,550 |
|
|
|
(192,178 |
) |
|
|
110,745 |
|
Additions to property, plant,
equipment and mine development |
|
|
69,931 |
|
|
|
7,437 |
|
|
|
895 |
|
|
|
78,263 |
|
Income from equity affiliates |
|
|
398 |
|
|
|
- |
|
|
|
- |
|
|
|
398 |
|
Operating segment results for the year ended December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois |
|
Corporate |
|
|
|
|
Appalachia |
|
Basin |
|
and Other(1) |
|
Consolidated |
|
|
(Dollars in thousands) |
Revenues |
|
$ |
1,370,979 |
|
|
$ |
283,643 |
|
|
$ |
- |
|
|
$ |
1,654,622 |
|
Adjusted EBITDA |
|
|
172,994 |
|
|
|
13,155 |
|
|
|
(141,911 |
) |
|
|
44,238 |
|
Additions to property, plant,
equipment and mine development |
|
|
109,428 |
|
|
|
8,823 |
|
|
|
3,137 |
|
|
|
121,388 |
|
Loss from equity affiliates |
|
|
(915 |
) |
|
|
- |
|
|
|
- |
|
|
|
(915 |
) |
F-40
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Operating segment results for the year ended December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois |
|
Corporate |
|
|
|
|
Appalachia |
|
Basin |
|
and Other(1) |
|
Consolidated |
|
|
(Dollars in thousands) |
Revenues |
|
$ |
821,116 |
|
|
$ |
252,246 |
|
|
$ |
- |
|
|
$ |
1,073,362 |
|
Adjusted EBITDA |
|
|
89,850 |
|
|
|
11,862 |
|
|
|
(101,281 |
) |
|
|
431 |
|
Additions to property, plant, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment and mine development |
|
|
48,955 |
|
|
|
6,639 |
|
|
|
- |
|
|
|
55,594 |
|
Income from equity affiliates |
|
|
63 |
|
|
|
- |
|
|
|
- |
|
|
|
63 |
|
(1) Corporate and Other results include the gains on disposal of assets
discussed in Note 8.
A reconciliation of Adjusted EBITDA to net income (loss) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted EBITDA |
|
$ |
110,745 |
|
|
$ |
44,238 |
|
|
$ |
431 |
|
Depreciation, depletion and amortization |
|
|
(205,339 |
) |
|
|
(125,356 |
) |
|
|
(85,640 |
) |
Sales contract accretion, net |
|
|
298,572 |
|
|
|
249,522 |
|
|
|
- |
|
Reclamation and remediation obligation expense |
|
|
(35,116 |
) |
|
|
(19,260 |
) |
|
|
(20,144 |
) |
Restructuring and impairment |
|
|
(20,157 |
) |
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
(38,108 |
) |
|
|
(23,648 |
) |
|
|
(8,337 |
) |
Interest income |
|
|
16,646 |
|
|
|
17,232 |
|
|
|
11,543 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
127,243 |
|
|
$ |
142,728 |
|
|
$ |
(102,147 |
) |
|
|
|
|
|
|
|
|
|
|
(25) Stockholders Equity
Common Stock
On October 31, 2007, the spin-off of Patriot from Peabody was completed and holders of
Peabody common stock received a dividend of one share of Patriot common stock for each ten
shares of Peabody common stock that they owned. Patriot has 100 million authorized shares of
$0.01 par value common stock. Each share of common stock is entitled to one vote in the election
of directors and all other matters submitted to stockholder vote. Except as otherwise required
by law or provided in any resolution adopted by the Board of Directors with respect to any
series of preferred stock, the holders of common stock will possess all voting power. The
holders of common stock do not have cumulative voting rights. In general, all matters submitted
to a meeting of stockholders, other than as described below, shall be decided by vote of a
majority of the shares of Patriots common stock. Directors are elected by a plurality of the
shares of Patriots common stock.
Subject to preferences that may be applicable to any series of preferred stock, the owners
of Patriots common stock may receive dividends when declared by the Board of Directors. Common
stockholders will share equally in the distribution of all assets remaining after payment to
creditors and preferred stockholders upon liquidation, dissolution or winding up of the Company,
whether voluntarily or not. The common stock will have no preemptive or similar rights.
Effective August 11, 2008, we implemented a 2-for-1 stock split on all shares of our common
stock. All share and per share amounts in these consolidated financial statements and related
notes reflect the stock split.
On June 16, 2009, we completed a public offering of 12 million shares of our common stock
in a registered public offering under our shelf registration at $7.90 per share.
F-41
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes common share activity from October 31, 2007 to December 31,
2009:
|
|
|
|
|
|
|
Shares |
|
|
|
Outstanding |
|
|
|
|
|
|
October 31, 2007 |
|
|
53,141,880 |
|
Stock grants to employees |
|
|
375,656 |
|
|
|
|
December 31, 2007 |
|
|
53,517,536 |
|
Stock grants to employees |
|
|
5,697 |
|
Employee stock purchases |
|
|
56,654 |
|
Shares issued to Magnum shareholders |
|
|
23,803,312 |
|
|
|
|
December 31, 2008 |
|
|
77,383,199 |
|
Stock grants to employees |
|
|
553,428 |
|
Employee stock purchases |
|
|
370,583 |
|
Shares issued in equity offering |
|
|
12,000,000 |
|
Stock options exercised |
|
|
12,729 |
|
|
|
|
December 31, 2009 |
|
|
90,319,939 |
|
|
|
|
Preferred Stock
In addition to the common stock, the Board of Directors is authorized to issue up to 10
million shares of $0.01 par value preferred stock. The authorized preferred shares include
1,000,000 shares of Series A Junior Participating Preferred Stock. Our certificate of
incorporation authorizes the Board of Directors, without the approval of the stockholders, to
fix the designation, powers, preferences and rights of one or more series of preferred stock,
which may be greater than those of the common stock. We believe that the ability of the Board to
issue one or more series of preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs that might
arise. The issuance of shares of preferred stock, or the issuance of rights to purchase shares
of preferred stock, could be used to discourage an unsolicited acquisition proposal. There were
no outstanding shares of preferred stock as of December 31, 2009.
Preferred Share Purchase Rights Plan and Series A Junior Participating Preferred Stock
The Board of Directors adopted a stockholders rights plan pursuant to the Rights Agreement
with American Stock Transfer & Trust Company (the Rights Agreement). In connection with the
Rights Agreement, on October 31, 2007, we filed the Certificate of Designations of Series A
Junior Participating Preferred Stock (the Certificate of Designations) with the Secretary of
State of the State of Delaware. Pursuant to the Certificate of Designations, we designated
1,000,000 shares of preferred stock as Series A Junior Participating Preferred Stock having the
designations, rights, preferences and limitations set forth in the Rights Agreement. Each
preferred share purchase right represents the right to purchase one-half of one-hundredth of a
share of Series A Junior Participating Preferred Stock.
The rights have certain anti-takeover effects. If the rights become exercisable, the rights
will cause substantial dilution to a person or group that attempts to acquire Patriot on terms
not approved by the Board of Directors, except pursuant to any offer conditioned on a
substantial number of rights being acquired. The rights should not interfere with any merger or
other business combination approved by the Board since the rights may be redeemed by Patriot at
a nominal price prior to the time that a person or group has acquired beneficial ownership of
15% or more of common stock. Thus, the rights are intended to encourage persons who may seek to
acquire control of Patriot to initiate such an acquisition through negotiations with the Board.
However, the effect of the rights may be to discourage a third party from making a partial
tender offer or otherwise attempting to obtain a substantial equity position in our equity
securities or seeking to obtain control of Patriot. To the extent any potential acquirers are
deterred by the rights, the rights may have the effect of preserving incumbent management in
office. There were no outstanding shares of Series A Junior Participating Preferred Stock as of
December 31, 2009.
We have not paid cash dividends and do not anticipate that we will pay cash dividends on
our common stock in the near term. The declaration and amount of future dividends, if any, will
be determined by our Board of Directors and will be dependent upon covenant limitations in our
credit facility and other debt agreements, our financial condition and future earnings, our
capital, legal and regulatory requirements, and other factors the Board deems relevant.
F-42
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(26) Stock-Based Compensation
We have one equity incentive plan for employees and eligible non-employee directors that
allows for the issuance of share-based compensation in the form of restricted stock, incentive
stock options, nonqualified stock options, stock appreciation rights, performance awards,
restricted stock units and deferred stock units. Members of our Board of Directors are eligible
for deferred stock unit grants at the date of their election and annually. This plan has 5.2
million shares of our common stock available for grant, with 0.8 million shares remaining
available for grant as of December 31, 2009. Additionally, we have established an employee stock
purchase plan that provides for the purchase of up to 1.0 million shares of our common stock,
with 0.6 million shares available for grant as of December 31, 2009.
Share-based compensation expense of $11.4 million and $7.3 million was recorded in Selling
and administrative expenses in the consolidated statements of operations for the years ended
December 31, 2009 and 2008, respectively, and $1.3 million and $0.6 million was recorded in
Operating costs and expenses for the years ended December 31, 2009 and 2008, respectively.
Share-based compensation expense included $0.9 million and $1.4 million related to awards from
restricted stock and stock options granted by Peabody to Patriot employees prior to spin-off for
the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, the total
unrecognized compensation cost related to nonvested awards granted after the spin-off was $25.8
million, net of taxes, which is expected to be recognized over a weighted-average period of
3.3 years. As of December 31, 2009, the total unrecognized compensation cost related to
nonvested awards granted by Peabody prior to the spin-off was $0.6 million, net of taxes, which
is expected to be recognized through 2011.
Restricted Stock
We have restricted stock agreements in place for grants to employees and service providers
of Patriot and our subsidiaries. Generally, these agreements provide that restricted stock
issued will fully vest on the third anniversary of the date the restricted stock was granted to
the employee or service provider. However, the restricted stock will fully vest sooner if a
grantee terminates employment with or stops providing services to Patriot because of death or
disability, or if a change in control occurs (as such term is defined in the Equity Plan).
A summary of restricted stock award activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Year Ended |
|
Average |
|
|
December 31, |
|
Grant-Date |
|
|
2009 |
|
Fair Value |
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2009 |
|
|
381,353 |
|
|
$ |
23.73 |
|
Granted |
|
|
663,740 |
|
|
|
5.14 |
|
Forfeited |
|
|
(109,889 |
) |
|
|
12.13 |
|
Vested |
|
|
(1,092 |
) |
|
|
22.91 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
934,112 |
|
|
|
11.88 |
|
|
|
|
|
|
|
|
Restricted Stock Units
We have long-term incentive restricted stock unit agreements in place for grants to
employees and service providers. These agreements grant restricted stock units that vest over
time as well as restricted stock units that vest based upon our financial performance. In
general, the restricted stock units that vest over time will be 50% vested on the fifth
anniversary of the initial date of grant, 75% vested on the sixth such anniversary and 100%
vested on the seventh such anniversary. However, the restricted stock units that vest over time
will fully vest sooner if a grantee terminates employment with or stops providing services to
Patriot because of death or disability, or if a change in control occurs (as such term is
defined in the Equity Plan).
In addition, we have deferred stock unit agreements in place for grants to non-employee
directors of Patriot. These agreements provide that the deferred stock units will fully vest on
the first anniversary of the date of grant, but only if the non-employee director served as a
director for the entire one-year period between the date of grant and the first anniversary of
the grant. However, the deferred stock units will fully vest sooner if a non-employee director
ceases to be a Patriot director due to death or disability, or if a change in control occurs (as
such term is defined in the Equity Plan).
Any unvested deferred stock units will be forfeited if a non-employee director terminates
service with Patriot for any reason other than death or disability prior to the first
anniversary of the grant date. After vesting, the deferred stock
units will be settled
F-43
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by issuing shares of Patriot common stock equal to the number of deferred
stock units, and the settlement will occur upon the earlier of (i) the non-employee directors
termination of service as a director or (ii) the third anniversary of the grant date or a
different date chosen by the non-employee director, provided the date was chosen by the
non-employee director prior to January 1 of the year in which the director received the grant.
A
summary of restricted stock time-based units and deferred stock units award activity is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Year Ended |
|
Average |
|
|
December 31, |
|
Grant-Date |
|
|
2009 |
|
Fair Value |
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2009 |
|
|
506,375 |
|
|
$ |
21.88 |
|
Granted |
|
|
59,568 |
|
|
|
5.13 |
|
Forfeited |
|
|
(50,756 |
) |
|
|
23.48 |
|
Vested |
|
|
(1,894 |
) |
|
|
56.77 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
513,293 |
|
|
|
19.65 |
|
|
|
|
|
|
|
|
As of December 31, 2009, there were 39,234 deferred stock units vested that had an
aggregate intrinsic value of $0.6 million.
Certain performance-based restricted stock units vest according to a formula described in
the form of Extended Long-Term Incentive Restricted Stock Units Agreement, which is primarily
based on our financial performance as measured by EBITDA, return on equity and leverage ratios.
The achievement of the performance-based unit calculations is determined on December 31
following the fifth, sixth and seventh anniversaries of the initial grant date. We estimated
the number of performance-based units that are expected to vest and utilized this amount in the
calculation of the stock-based compensation expense related to these awards. Any changes to
this estimate will impact stock-based compensation expense in the period the estimate is
changed.
We have also granted performance-based stock units that vest based on market conditions.
The number of shares issued is dependent upon the change in our shareholder value over a three-year
vesting period versus the change of various peers for that time period. The fair value of these
awards was determined using a Monte Carlo simulation model, allowing us to factor in the
probability of various outcomes. The weighted-average fair value of $7.48 was determined using a
risk-free rate of 1.31%, an expected option life of 2.9 years, an expected dividend yield of
zero, and volatilities that ranged from 67.43% to 122.28%.
A summary of restricted stock performance units award activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Year Ended |
|
Average |
|
|
December 31, |
|
Grant-Date |
|
|
2009 |
|
Fair Value |
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2009 |
|
|
679,352 |
|
|
$ |
23.47 |
|
Granted |
|
|
378,800 |
|
|
|
7.48 |
|
Forfeited |
|
|
(111,477 |
) |
|
|
18.49 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
946,675 |
|
|
|
18.01 |
|
|
|
|
|
|
|
|
Long-Term Incentive Non-Qualified Stock Option
We have long-term incentive non-qualified stock option agreements in place for grants to
employees and service
providers of Patriot. Generally, the agreements provide that any option awarded will become
exercisable in three installments. Options granted in 2007 and 2008 will be 50% exercisable on
the fifth anniversary of the November 2007 grant date, 75% exercisable on the sixth such
anniversary and 100% exercisable on the seventh such anniversary.
Options granted in 2009 are exercisable on a graded vesting schedule of 33.33% on each
anniversary over a three year period. However, the option will become fully exercisable sooner
if a grantee terminates employment with or stops providing services to Patriot because of death
or disability, or if a change in control occurs (as such term is defined in the Equity Plan).
F-44
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The award will be forfeited if employment terminates for any other reason prior to the time
the award becomes vested. No option can be exercised more than ten years after the date of
grant, but the ability to exercise the option may terminate sooner upon the occurrence of
certain events detailed in the Long-Term Incentive Non-Qualified Stock Option Agreement.
A summary of non-qualified stock option outstanding activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Aggregate |
|
Average |
|
|
Year Ended |
|
Average |
|
Intrinsic |
|
Remaining |
|
|
December 31, |
|
Grant-Date |
|
Value |
|
Contractual |
|
|
2009 |
|
Fair Value |
|
(in
millions) |
|
Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2009 |
|
|
1,069,730 |
|
|
$ |
23.66 |
|
|
|
|
|
|
|
Granted |
|
|
757,600 |
|
|
|
5.13 |
|
|
|
|
|
|
|
Forfeited |
|
|
(182,507 |
) |
|
|
17.24 |
|
|
|
|
|
|
|
Exercised |
|
|
(12,729 |
) |
|
|
5.13 |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
1,632,094 |
|
|
|
15.92 |
|
|
$ |
6.9 |
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
We used the Black-Scholes option pricing model to determine the fair value of stock
options. Determining the fair value of share-based awards requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise and the
associated volatility. We utilized U.S. Treasury yields as of the grant date for the risk-free
interest rate assumption, matching the treasury yield terms to the expected life of the option.
We utilized a peer historical look-back to develop the expected volatility.
Expected option life assumptions were developed by taking the weighted average time to vest plus
the weighted average holding period after vesting.
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Weighted-average fair value |
|
$2.49 |
|
$30.10 |
|
$7.67 |
Risk-free interest rate |
|
1.31% |
|
3.55% |
|
4.22% |
Expected option life |
|
2.87 years |
|
6.69 years |
|
6.69 years |
Expected volatility |
|
78.41% |
|
47.61% |
|
30.64% |
Dividend yield |
|
0% |
|
0% |
|
0% |
Employee Stock Purchase Plan
Based on our employee stock purchase plan, eligible full-time and part-time employees are
able to contribute up to 15% of their base compensation into this plan, subject to a fair market
value limit of $25,000 per person per year as defined by the Internal Revenue Service (IRS).
Effective January 1, 2008, employees are able to purchase Patriot common stock at a 15% discount
to the lower of the fair market value of our common stock on the initial or final trading dates
of each six-month offering period. Offering periods begin on January 1 and July 1 of each year.
The fair value of the six-month look-back option in our employee stock purchase plan is
estimated by adding the fair value of 0.15 of one share of stock to the fair value of 0.85 of an
option on one share of stock. We issued 370,583 shares of common
stock and recognized $1.1 million expense in Selling and administrative expenses and $0.1
million in Operating costs and expenses for the year ended December 31, 2009 related to our
employee stock purchase plan. We issued 56,654 shares of common stock and recognized $0.7
million expense in Selling and administrative expenses and $0.1 million in Operating costs
and expenses for the year ended December 31, 2008 related to our employee stock purchase plan.
We issued no shares of common stock and recognized no expense for the year ended December 31,
2007 related to our
employee stock purchase plan.
F-45
PATRIOT COAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(27) Summary Quarterly Financial Information (Unaudited)
A summary of the unaudited quarterly results of operations for the years ended December 31,
2009 and 2008, is presented below. Patriot common stock is listed on the New York Stock Exchange
under the symbol PCX.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
(Dollars in thousands, except per share and stock price data) |
Revenues |
|
$ |
528,936 |
|
|
$ |
506,996 |
|
|
$ |
506,189 |
|
|
$ |
503,162 |
|
Operating profit |
|
|
37,249 |
|
|
|
34,691 |
|
|
|
59,775 |
|
|
|
16,990 |
|
Net income |
|
|
32,143 |
|
|
|
31,390 |
|
|
|
52,842 |
|
|
|
10,868 |
|
Basic earnings per share |
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
0.59 |
|
|
$ |
0.12 |
|
Diluted earnings per share |
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
0.58 |
|
|
$ |
0.12 |
|
Weighted average shares used in
calculating basic earnings per share |
|
|
77,906,152 |
|
|
|
79,940,308 |
|
|
|
90,277,301 |
|
|
|
90,322,074 |
|
Stock price - high and low prices |
|
$ |
9.00-$2.76 |
|
|
$ |
10.90-$3.51 |
|
|
$ |
14.12-$4.97 |
|
|
$ |
17.24-$10.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
(Dollars in thousands, except per share and stock price data) |
Revenues |
|
$ |
284,334 |
|
|
$ |
339,680 |
|
|
$ |
489,583 |
|
|
$ |
541,025 |
|
Operating profit (loss) |
|
|
(4,905 |
) |
|
|
16,917 |
|
|
|
72,394 |
|
|
|
64,738 |
|
Net income (loss)(1) |
|
|
(3,066 |
) |
|
|
11,236 |
|
|
|
71,199 |
|
|
|
63,359 |
|
Basic earnings per share(1) |
|
$ |
(0.06 |
) |
|
$ |
0.21 |
|
|
$ |
0.99 |
|
|
$ |
0.82 |
|
Diluted earnings per share(1) |
|
$ |
(0.06 |
) |
|
$ |
0.21 |
|
|
$ |
0.99 |
|
|
$ |
0.82 |
|
Weighted average shares used in
calculating basic earnings per share(1) |
|
|
53,518,744 |
|
|
|
53,512,286 |
|
|
|
71,681,084 |
|
|
|
77,382,195 |
|
Stock price - high and low prices |
|
$ |
28.89-$16.14 |
|
|
$ |
82.23-$23.13 |
|
|
$ |
77.74-$24.09 |
|
|
$ |
28.45-$5.24 |
|
(1)
Net income, basic earnings per share and diluted earnings per share were adjusted to reflect the retrospective
application of authoritative guidance adopted January 1, 2009. Net income and earnings per share were adjusted to
reflect additional interest expense above the stated coupon rate of 3.25% on our Convertible Senior Notes issued
in May 2008 based on the requirement to bifurcate the conversion feature of the debt. Additionally, restricted stock
shares were included in the calculation of basic earnings per share as unvested participating securities
in all four quarters.
(28) Subsequent Events
On February 22, 2010, we
announced that active mining operations at our Federal mine in northern West Virginia were temporarily suspended upon
discovering potentially adverse atmospheric conditions on February 18, 2010, in an abandoned area of the
mine. We are currently conducting additional testing and working with the U.S. Department of Labor, Mine Safety
& Health Administration to develop a plan to address this issue so that active mining operations can resume,
the timing of which is currently uncertain. The Federal mine complex historically accounts for between 10% and 20% of our Segment Adjusted EBITDA.
We have performed a review of subsequent events through the date the financial statements were filed with the SEC.
F-46
PATRIOT COAL CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Beginning |
|
Costs and |
|
|
|
|
|
|
|
|
|
End of |
Description |
|
of Period |
|
Expenses |
|
Deductions(1) |
|
Other |
|
Period |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance royalty recoupment reserve |
|
$ |
4,716 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,985 |
)(2) |
|
$ |
2,731 |
|
Reserve for materials and supplies |
|
|
1,458 |
|
|
|
74 |
|
|
|
- |
|
|
|
(1,252 |
)(2) |
|
|
280 |
|
Allowance for doubtful accounts |
|
|
252 |
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
251 |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance royalty recoupment reserve |
|
|
2,731 |
|
|
|
12 |
|
|
|
- |
|
|
|
40,821 |
(3) |
|
|
43,564 |
|
Reserve for materials and supplies |
|
|
280 |
|
|
|
288 |
|
|
|
- |
|
|
|
9,375 |
(3) |
|
|
9,943 |
|
Allowance for doubtful accounts |
|
|
251 |
|
|
|
399 |
|
|
|
(110 |
) |
|
|
- |
|
|
|
540 |
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance royalty recoupment reserve |
|
|
43,564 |
|
|
|
252 |
|
|
|
- |
|
|
|
927 |
(4) |
|
|
44,743 |
|
Reserve for materials and supplies |
|
|
9,943 |
|
|
|
(11 |
) |
|
|
(19 |
) |
|
|
2,619 |
(4) |
|
|
12,532 |
|
Allowance for doubtful accounts |
|
|
540 |
|
|
|
115 |
|
|
|
(514 |
) |
|
|
- |
|
|
|
141 |
|
(1) Reserves utilized, unless otherwise indicated.
(2) Balance transferred to Peabody as part of Patriot spin-off.
(3) Balance reflects the preliminary purchase accounting asset
valuation entries for the Magnum acquisition, which occurred on July 23, 2008.
(4) Activity reflects the final purchase accounting asset valuation entries for the
Magnum acquisition, which were finalized in June 2009.
F-47