Attached files
file | filename |
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EX-31.1 - EX-31.1 - Patriot Coal CORP | c57706exv31w1.htm |
EX-32.2 - EX-32.2 - Patriot Coal CORP | c57706exv32w2.htm |
EX-32.1 - EX-32.1 - Patriot Coal CORP | c57706exv32w1.htm |
EX-31.2 - EX-31.2 - Patriot Coal CORP | c57706exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33466
PATRIOT COAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 20-5622045 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
12312 Olive Boulevard, Suite 400 St. Louis, Missouri |
63141 | |
(Address of principal executive offices) | (Zip Code) |
(314) 275-3600
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 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):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 90,863,950; shares of common stock with a par value of $0.01 per share outstanding on
April 22, 2010.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
PATRIOT COAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands, except share and per | ||||||||
share data) | ||||||||
Revenues |
||||||||
Sales |
$ | 464,208 | $ | 522,838 | ||||
Other revenues |
3,049 | 6,098 | ||||||
Total revenues |
467,257 | 528,936 | ||||||
Costs and expenses |
||||||||
Operating costs and expenses |
433,043 | 495,208 | ||||||
Depreciation, depletion and amortization |
49,612 | 54,979 | ||||||
Reclamation and remediation obligation expense |
10,846 | 6,451 | ||||||
Sales contract accretion |
(25,308 | ) | (77,807 | ) | ||||
Selling and administrative expenses |
12,774 | 12,886 | ||||||
Net gain on disposal or exchange of assets |
(23,796 | ) | (30 | ) | ||||
Operating profit |
10,086 | 37,249 | ||||||
Interest expense |
9,032 | 8,593 | ||||||
Interest income |
(3,442 | ) | (3,487 | ) | ||||
Income before income taxes |
4,496 | 32,143 | ||||||
Income tax provision |
235 | | ||||||
Net income |
$ | 4,261 | $ | 32,143 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
90,835,561 | 77,906,152 | ||||||
Effect of dilutive securities |
1,331,396 | 93,095 | ||||||
Diluted |
92,166,957 | 77,999,247 | ||||||
Earnings per share, basic and diluted |
$ | 0.05 | $ | 0.41 |
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
PATRIOT COAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
March 31, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 26,489 | $ | 27,098 | ||||
Accounts receivable and other, net of allowance for doubtful accounts of
$141 as of March 31, 2010 and December 31, 2009 |
157,179 | 188,897 | ||||||
Inventories |
95,518 | 81,188 | ||||||
Prepaid expenses and other current assets |
23,632 | 14,366 | ||||||
Total current assets |
302,818 | 311,549 | ||||||
Property, plant, equipment and mine development |
||||||||
Land and coal interests |
2,902,920 | 2,864,225 | ||||||
Buildings and improvements |
397,168 | 396,449 | ||||||
Machinery and equipment |
652,708 | 631,615 | ||||||
Less accumulated depreciation, depletion and amortization |
(778,670 | ) | (731,035 | ) | ||||
Property, plant, equipment and mine development, net |
3,174,126 | 3,161,254 | ||||||
Notes receivable |
103,051 | 109,137 | ||||||
Investments and other assets |
35,228 | 36,223 | ||||||
Total assets |
$ | 3,615,223 | $ | 3,618,163 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of debt |
$ | 7,156 | $ | 8,042 | ||||
Trade accounts payable and accrued expenses |
408,169 | 406,351 | ||||||
Below market sales contracts acquired |
136,155 | 150,441 | ||||||
Total current liabilities |
551,480 | 564,834 | ||||||
Long-term debt, less current maturities |
198,415 | 197,951 | ||||||
Asset retirement obligations |
248,692 | 244,518 | ||||||
Workers compensation obligations |
207,095 | 193,719 | ||||||
Accrued postretirement benefit costs |
1,173,217 | 1,169,981 | ||||||
Obligation to industry fund |
41,325 | 42,197 | ||||||
Below market sales contracts acquired, noncurrent |
139,157 | 156,120 | ||||||
Other noncurrent liabilities |
112,078 | 113,349 | ||||||
Total liabilities |
2,671,459 | 2,682,669 | ||||||
Stockholders equity |
||||||||
Common stock ($0.01 par value; 100,000,000 shares authorized; 90,863,950
and 90,319,939 shares issued and outstanding at March 31, 2010 and
December 31, 2009, respectively) |
909 | 903 | ||||||
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares
outstanding at March 31, 2010 and December 31, 2009) |
| | ||||||
Series A Junior Participating preferred stock ($0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at March 31, 2010 and
December 31, 2009) |
| | ||||||
Additional paid-in capital |
952,690 | 947,159 | ||||||
Retained earnings |
240,869 | 236,608 | ||||||
Accumulated other comprehensive loss |
(250,704 | ) | (249,176 | ) | ||||
Total stockholders equity |
943,764 | 935,494 | ||||||
Total liabilities and stockholders equity |
$ | 3,615,223 | $ | 3,618,163 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
PATRIOT COAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Cash Flows From Operating Activities |
||||||||
Net income |
$ | 4,261 | $ | 32,143 | ||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||
Depreciation, depletion and amortization |
49,612 | 54,979 | ||||||
Sales contract accretion |
(25,308 | ) | (77,807 | ) | ||||
Net gain on disposal or exchange of assets |
(23,796 | ) | (30 | ) | ||||
Stock-based compensation expense |
4,455 | 2,734 | ||||||
Changes in current assets and liabilities: |
||||||||
Accounts receivable |
31,718 | (17,567 | ) | |||||
Inventories |
(14,330 | ) | (15,333 | ) | ||||
Other current assets |
(9,278 | ) | (5,260 | ) | ||||
Accounts payable and accrued expenses |
(3,977 | ) | (1,336 | ) | ||||
Interest on notes receivable |
(3,414 | ) | (3,409 | ) | ||||
Reclamation and remediation obligations |
6,813 | 2,060 | ||||||
Workers compensation obligations |
1,632 | 587 | ||||||
Accrued postretirement benefit costs |
12,236 | 8,435 | ||||||
Obligation to industry fund |
(722 | ) | (802 | ) | ||||
Other, net |
2,208 | 1,410 | ||||||
Net cash provided by (used in) operating activities |
32,110 | (19,196 | ) | |||||
Cash Flows From Investing Activities |
||||||||
Additions to property, plant, equipment and mine development |
(35,130 | ) | (19,042 | ) | ||||
Additions to advance mining royalties |
(5,177 | ) | (3,101 | ) | ||||
Proceeds from disposal or exchange of assets |
400 | 3,958 | ||||||
Proceeds from notes receivable |
9,500 | | ||||||
Other |
| 66 | ||||||
Net cash used in investing activities |
(30,407 | ) | (18,119 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Long-term debt payments |
(2,494 | ) | (2,024 | ) | ||||
Deferred financing costs |
(900 | ) | | |||||
Proceeds from employee stock purchases |
1,082 | 667 | ||||||
Short-term borrowings |
| 42,000 | ||||||
Net cash provided by (used in) financing activities |
(2,312 | ) | 40,643 | |||||
Net increase (decrease) in cash and cash equivalents |
(609 | ) | 3,328 | |||||
Cash and cash equivalents at beginning of period |
27,098 | 2,872 | ||||||
Cash and cash equivalents at end of period |
$ | 26,489 | $ | 6,200 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(1) Basis of Presentation
Description of Business
Patriot Coal Corporation (Patriot, we, our or the Company) 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.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of
Patriot and its subsidiaries as well as entities in which Patriot directly or indirectly has a
controlling financial interest. 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 12).
The accompanying condensed consolidated financial statements as of March 31, 2010 and for
the three months ended March 31, 2010 and 2009, and the notes thereto, are unaudited. However,
in the opinion of management, these financial statements reflect all normal, recurring
adjustments necessary for a fair presentation of the results for the periods presented.
Operating results for the three months ended March 31, 2010 may not necessarily be indicative of
the results for the year ending December 31, 2010.
(2) Newly Adopted Accounting Pronouncements
Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance
regarding the accounting for transfers of financial assets, which requires enhanced disclosures
about the continuing risk exposure to a transferor resulting from its continuing involvement
with transferred financial assets. This guidance is effective for fiscal years beginning after
November 15, 2009. See Note 3 for additional disclosures.
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, including an assessment of the companys 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. Upon adoption, we
performed a qualitative assessment of our existing interests in joint ventures and determined
that the joint ventures were not variable interest entities.
Fair Value Disclosures
In January 2010, the FASB issued authoritative guidance which requires additional
disclosures and clarifies certain existing disclosure requirements regarding fair value
measurements. This guidance is effective for interim and annual reporting periods beginning
after December 15, 2009. We adopted this guidance effective January 1, 2010. However, none of
the specific additional disclosures were applicable at this time. See Note 7 for our fair value
measurement disclosures.
(3) Receivables Securitization
In March 2010, we entered into a $125 million accounts receivable securitization program,
which provides for the issuance of letters of credit and direct borrowings. Trade accounts
receivable are sold, on a revolving basis, to a bankruptcy-remote entity (facilitating entity),
which then sells an undivided interest in all of the trade receivables to the creditors as
collateral for any borrowings. As of the inception of the program and at March 31, 2010, we had
commitments for up to $75 million of borrowing capacity. Available liquidity under the program
fluctuates with the balance of our trade accounts receivables.
4
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Based on our continuing involvement with the trade accounts receivable balances, including
continued risk of loss, the facilitating entity is consolidated into our financial statements.
The facilitating entity was established solely to perform its obligations under this program and
holds a note receivable from the creditors and a note payable to our subsidiaries for the
outstanding trade accounts receivable balance at any given point in time, which is eliminated in
consolidation. The outstanding trade accounts receivable balance was $120.7 million as of March
31, 2010. Any direct borrowings will be recorded as secured borrowings. As of March 31, 2010,
there were no letters of credit or direct borrowings under this program.
(4) Net Gain on Disposal or Exchange of Assets and Other Commercial Transactions
In February 2010, we entered into an agreement to purchase certain coal mineral rights from
another coal producer. The purchase price of $10 million is included in Property, plant,
equipment and mine development on the condensed consolidated balance sheet.
In March 2010, we received approximately 13 million tons of coal mineral rights contiguous
to our Highland mining complex in the Illinois Basin in exchange for non-strategic Illinois
Basin coal reserves. We recognized a gain of $24 million on this transaction. The exchange
transaction was recorded at fair value as determined by a third-party valuation specialist. The
valuation utilized primarily Level 3 inputs, as defined by authoritative guidance, in a
discounted cash flows model including assumptions for future coal sales prices and operating
costs. Level 3 inputs were utilized 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 and location of each coal seam.
Other revenues include payments from customer settlements, royalties related to coal lease
agreements and farm income. In 2009, we agreed to release certain metallurgical and thermal
customers from receipt of committed tons in exchange for a cash settlement.
We have interests in joint ventures that are accounted for under the equity method. The
book value of our equity method investments was $20.8 million and $20.9 million as of March 31,
2010 and December 31, 2009, respectively. Our maximum exposure to loss is our book value plus
additional future capital contributions, which in total for all of our joint ventures is capped
at $9.1 million including additional commitments made during the three months ended March 31,
2010.
(5) Income Tax Provision
For the three months ended March 31, 2010, we recorded an income tax provision of $0.2
million related to certain state taxes. No federal income tax provision was recorded due to our
anticipated tax net operating loss for the year ended December 31, 2010 and the full valuation
allowance recorded against deferred tax assets. For the three months ended March 31, 2009, no
income tax provision was recorded due to our anticipated tax net operating loss for the year
ending December 31, 2009 and the full valuation allowance recorded against deferred tax assets.
The primary difference between book and taxable income for 2010 and 2009 is the treatment of the
net sales contract accretion on the below market purchase and sales contracts acquired with
Magnum in July 2008, with such amounts being included in the computation of book income but
excluded from the computation of taxable income.
(6) Earnings per Share
Basic earnings per share is computed by dividing net income 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 three months ended March 31, 2010 and 2009, the effect of dilutive securities
includes the impact of stock options and restricted stock units. For the three months ended
March 31, 2010 and 2009, 1.4 million shares and 3.3 million shares, respectively, related to
share-based compensation awards were excluded from the diluted earnings per share calculation
because they were anti-dilutive for those periods.
(7) Fair Value of Financial Instruments
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.
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Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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
March 31, 2010.
The following table summarizes the fair value of our remaining financial instruments.
March 31, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
Assets: |
||||||||
Fuel contracts, cash flow hedges |
$ | 2,515 | $ | 2,021 | ||||
Liabilities: |
||||||||
Fuel contracts, cash flow hedges |
414 | 986 | ||||||
$200 million of 3.25% Convertible Senior Notes due 2013 |
170,735 | 163,617 |
All of the instruments above were valued using Level 2 inputs as defined by authoritative
guidance. For additional disclosures regarding our fuel contracts see Note 13. The fair value of
the Convertible Senior Notes was estimated using the last traded value, as provided by a third
party.
(8) Inventories
Inventories consisted of the following:
March 31, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
Materials and supplies |
$ | 40,579 | $ | 39,285 | ||||
Saleable coal |
36,156 | 28,255 | ||||||
Raw coal |
18,783 | 13,648 | ||||||
Total |
$ | 95,518 | $ | 81,188 | ||||
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.
(9) Comprehensive Income
The following table sets forth the after-tax components of comprehensive income for the
three months ended March 31, 2010 and 2009:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Net income |
$ | 4,261 | $ | 32,143 | ||||
Accumulated actuarial loss and prior service cost
realized in net income |
8,906 | 3,816 | ||||||
Net change in fair value of diesel fuel hedge |
1,066 | 140 | ||||||
Comprehensive income |
$ | 14,233 | $ | 36,099 | ||||
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(10) Postretirement Benefit Costs
Net periodic postretirement benefit costs included the following components:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Service cost for benefits earned |
$ | 1,342 | $ | 1,022 | ||||
Interest cost on accumulated postretirement
benefit obligation |
18,950 | 17,630 | ||||||
Amortization of actuarial loss |
9,138 | 4,591 | ||||||
Amortization of prior service cost |
(138 | ) | (138 | ) | ||||
Net periodic postretirement benefit costs |
$ | 29,292 | $ | 23,105 | ||||
(11) Healthcare Legislation
In March 2010, the Patient Protection and Affordable Care Act (PPACA) was enacted,
potentially impacting our costs to provide healthcare benefits to our eligible active and
certain retired employees and workers compensation benefits related to occupational disease
resulting from coal workers pneumoconiosis (black lung disease). The PPACA has both short-term
and long-term implications on healthcare benefit plan standards. Implementation of this
legislation is planned to occur in phases, with plan standard changes taking effect beginning in
2010, but to a greater extent with the 2011 benefit plan year and extending through 2018.
Plan standard changes that could affect us in the short term include raising the maximum
age for covered dependents to receive benefits, the elimination of lifetime dollar limits per
covered individual and restrictions on annual dollar limits per covered individual, among other
standard requirements. Plan standard changes that could affect us in the long term include a tax
on high cost plans (excise tax) and the elimination of annual dollar limits per covered
individual, among other standard requirements.
Approximately 52% of our employees at our company operations were represented by an
organized labor union at March 31, 2010. The healthcare benefits that we provide to our
represented employees and retirees are stipulated by law and by labor agreements, which expire
December 31, 2011. Healthcare benefit changes required by the healthcare legislation will be
included in any new labor agreements.
One provision of the legislation changes the tax treatment for Medicare drug subsidies. We
are not impacted by this change, so this provision will have no effect on our results of
operations.
We are currently analyzing this legislation to determine the full extent of the impact of
the required plan standard changes on our employee healthcare plans and the resulting costs.
Beginning in 2018, the PPACA will impose a 40% excise tax on employers to the extent that the
value of their healthcare plan coverage exceeds certain dollar thresholds. We anticipate that
certain government agencies will provide additional regulations or interpretations concerning
the application of this excise tax. Until these regulations or interpretations are published,
it is impractical to reasonably estimate the impact of the excise tax on our future healthcare
costs or postretirement benefit obligation. Accordingly, as of March 31, 2010, we have not made
any changes to our assumptions used to determine our postretirement benefit obligation. With
the exception of the excise tax, we do not believe any other plan standard changes will be
significant to our future healthcare costs for eligible active employees and our postretirement
benefit obligation for certain retired employees. However, we will need to continue to evaluate
the impact of the PPACA in future periods as additional
information and guidance becomes available.
7
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
The PPACA also amended previous legislation related to coal workers pneumoconiosis,
providing automatic extension of awarded lifetime benefits to surviving spouses and providing
changes to the legal criteria used to assess and award claims. We were able to evaluate the
impact of these changes to our current population of beneficiaries and claimants, resulting in
an estimated $11.5 million increase to our obligation. As of March 31, 2010, we recorded this
estimate as an increase to our workers compensation liability and a decrease to our actuarial
gain included in Accumulated other comprehensive loss on our balance sheet and will adjust the
amortization of the actuarial gain on a prospective basis beginning in the second quarter of
2010. As of March 31, 2010, we were not able to estimate the impact of this legislation on our
obligations related to future claims due to uncertainty around the number of claims that will be
filed and how impactful the new award criteria will be to these claim populations.
(12) 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 three months ended March 31, 2010 and 2009, our sales to electricity
generators were 78% and 84%, respectively. Our sales to steel and coke producers were 22% and
16% for the three months ended March 31, 2010 and 2009, respectively. For the three months ended
March 31, 2010 and 2009, our revenues attributable to foreign countries, based on where the
product was shipped, were $116.6 million and $82.9 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 gains 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. We believe that in our industry such information is a relevant measurement of a
companys operating financial performance. Adjusted EBITDA is defined as net income before
deducting interest income and expense; reclamation and remediation obligation expense;
depreciation, depletion and amortization; 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 calculated the same as Adjusted EBITDA but excludes
Corporate and Other as defined above. Because Adjusted EBITDA and Segment Adjusted EBITDA are
not calculated identically by all companies, our calculation may not be comparable to similarly
titled measures of other companies.
Operating segment results for the three months ended March 31, 2010 and 2009 were as
follows:
Three Months Ended March 31, 2010 | ||||||||||||||||
Corporate | ||||||||||||||||
Appalachia | Illinois Basin | and Other | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues |
$ | 393,429 | $ | 73,828 | $ | | $ | 467,257 | ||||||||
Adjusted EBITDA |
70,863 | 6,817 | (32,444 | ) | 45,236 | |||||||||||
Additions to property, plant,
equipment and mine development |
23,642 | 11,410 | 78 | 35,130 |
8
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Three Months Ended March 31, 2009 | ||||||||||||||||
Corporate | ||||||||||||||||
Appalachia | Illinois Basin | and Other | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues |
$ | 459,554 | $ | 69,382 | $ | | $ | 528,936 | ||||||||
Adjusted EBITDA |
69,487 | 3,041 | (50,656 | ) | 21,872 | |||||||||||
Additions to property, plant,
equipment and mine development |
17,290 | 1,543 | 209 | 19,042 |
A reconciliation of Adjusted EBITDA to net income follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Total Adjusted EBITDA |
$ | 45,236 | $ | 21,872 | ||||
Depreciation, depletion and amortization |
(49,612 | ) | (54,979 | ) | ||||
Reclamation and remediation obligation
expense |
(10,846 | ) | (6,451 | ) | ||||
Sales contract accretion, net |
25,308 | 76,807 | ||||||
Interest expense |
(9,032 | ) | (8,593 | ) | ||||
Interest income |
3,442 | 3,487 | ||||||
Income tax provision |
(235 | ) | | |||||
Net income |
$ | 4,261 | $ | 32,143 | ||||
(13) 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 on the condensed 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 March 31, 2010, the
notional amounts outstanding for these swaps included 10.7 million gallons of heating oil
expiring throughout 2010 and 2.0 million gallons of heating oil expiring throughout 2011. For
the last nine months of 2010, we expect to purchase approximately 17 million gallons of diesel
fuel across all operations. For the three months ended March 31, 2010, we recognized a net loss
of $0.1 million in earnings on settled contracts. For the three months ended March 31, 2009, we
recognized a loss of $2.1 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 three months ended March 31, 2010 and 2009, resulting in less than
$0.1 million recorded directly to earnings in each of these periods.
9
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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 condensed consolidated balance sheets. See Note 9 for the impact
of our fuel hedges on comprehensive income.
March 31, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
Fair value of current fuel contracts (Prepaid expenses and
other current assets) |
$ | 2,225 | $ | 2,021 | ||||
Fair value of noncurrent fuel contracts (Investments and other assets) |
290 | | ||||||
Fair value of current fuel contracts (Trade accounts payable and
accrued expenses) |
414 | 986 | ||||||
Net unrealized gains from fuel hedges, net of tax (Accumulated
other comprehensive loss) |
2,101 | 1,035 |
We utilized New York Mercantile Exchange (NYMEX) quoted market prices for the fair value
measurement of these contracts, which reflects a Level 2 input.
(14) Commitments and Contingencies
Commitments
As of March 31, 2010, purchase commitments for capital expenditures were $22.8 million.
Other
On occasion, we become a party to claims, lawsuits, arbitration proceedings and
administrative procedures 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.
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 our NPDES permits at several
mining operations in West Virginia. The consent decree was entered by the federal district court
on April 30, 2009. The consent decree, among other things, 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. We 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
experience exceedances of 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.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
WVDEP Action
In 2007, Hobet Mining LLC (Hobet), one of our subsidiaries, was sued for exceedances of
effluent limits contained in four of its NPDES permits in state court in Boone County by the
WVDEP. We refer to this case as the WVDEP Action. 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 supplemental environmental projects,
to gradually reduce selenium discharges from our Hobet Job 21 surface mine, to achieve full
compliance with our NPDES permits by April 2010 and to study potential treatment alternatives
for selenium.
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. On December 3, 2009, the Boone County circuit court
approved and entered a modified settlement and consent order to, among other things, extend
coverage of the September 5, 2008 settlement and consent order to two additional permits and
extend the date to achieve full compliance with our NPDES permits from April 2010 to July 2012.
Selenium Matters
In 2007, Apogee Coal Company (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.
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 and it is very similar to the Federal Apogee Case.
Additionally, 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 exceedances in permitted water discharges, while the WVDEP Action addressed all
effluent limits, including selenium, established by the permits.
On March 19, 2009, the U.S. District Court approved two separate consent decrees, one
between Apogee and the plaintiffs and the other between Hobet and the plaintiffs. The consent
decrees extended the deadline to comply with water discharge limits for selenium to April 5,
2010 and added interim reporting requirements up to that date. We agreed to undertake pilot
projects at Apogee and Hobet involving reverse osmosis technology along with interim reporting
obligations and to comply with our NPDES permits water discharge limits for selenium by April
5, 2010. We continue to install treatment systems at various permitted outfalls, but we were
unable to comply with selenium discharge limits by April 5, 2010 due to the ongoing inability to
identify a treatment system that can remove selenium sustainably, consistently and uniformly
under all variable conditions experienced at our mining operations. The potential solutions to
address selenium discharges that we, and our consultants, have evaluated to date have not proven
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. On February 26, 2010 we filed a motion requesting a hearing to
discuss the modification of the March 19, 2009 consent decrees to, among other things, extend
the compliance deadlines to July 2012 in order to continue our efforts to identify viable
treatment alternatives. A hearing date has not been scheduled on this motion.
In March 2010, the U.S. District Court permitted a lawsuit to proceed that was filed in
October 2009 by OVEC and other environmental groups against Hobet, which challenged the validity
of the inclusion of one of the additional permits within the scope of the WVDEP Action modified
settlement and consent order and alleged that Hobet has in the past, and continues to, violate
effluent limitations for selenium in an NPDES permit and a Surface Mining Control and
Reclamation Act (SMCRA) permit for Surface Mine No. 22 and seeking injunctive relief. The U.S.
District Court has yet to issue final rulings in this matter.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
In addition, on April 18, 2010, the plaintiffs in the Federal Apogee Case filed a motion
asking the court to issue an order to show cause why Apogee should not be found in civil
contempt for its failure to comply with the terms and conditions of the March 19, 2009 consent
decrees. The remedies sought by the plaintiffs include the imposition of per diem and other
fines as well as an obligation to pay plaintiffs attorneys fees. A hearing date has not been
scheduled on this motion.
Any failure to meet the deadlines set forth in the March 2009 consent decrees 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.
We estimated the costs to treat our selenium discharges in excess of allowable limits at a
net present value of $98.8 million and $96.0 million at March 31, 2010 and December 31, 2009,
respectively. This liability reflects the estimated total costs of the treatment systems we have
been installing and maintaining 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. The current portion of the estimated liability 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.
We and other surface mining companies are currently operating pursuant to other NPDES
permits for which selenium limits were scheduled to go into effect on or around April 5, 2010.
We have filed administrative appeals and judicial actions which we believe effectively extend
those deadlines. Nonetheless, we have received notices of intent to file citizen suits for
violations of the Clean Water Act, SMCRA and the relevant permits from a group consisting of the
Sierra Club, OVEC and the West Virginia Highlands Conservancy. As a result of the foregoing, we
anticipate that we may become a party to additional litigation relating to selenium effluent
limits affecting our surface mining operations.
We may incur costs relating to these lawsuits and possible additional fines and penalties
relating to selenium matters. As a result of these ongoing litigation matters 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 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 its ultimate liability, if any, will not be material to our financial
condition and results of operations.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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 (the Mass Litigation Panel) 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. On April 19, 2010, the confidential settlement was finalized and
approved by the Mass Litigation Panel and the cases were dismissed.
2004 Flood Litigation
In 2006, Hobet and Catenary were named as defendants along with various other property
owners, coal companies, timbering companies and oil and natural gas companies, 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.
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.
In December 2009, Apogee was served with 165 additional lawsuits with the same allegations as
the original 77 lawsuits. 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 March 31, 2010, 44 of
the original 77 lawsuits have been dismissed. 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.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
We are a defendant in litigation involving Peabody Energy Corporation (Peabody), the parent
of certain of our subsidiaries prior to our 2007 spin-off, in relation to their 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 February 2011. The claim filed is for $40 million in actual
damages, in addition to punitive 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 1993. In March 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 before the Illinois Pollution Control Board 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 March 31, 2010, there were 139 related lawsuits
filed by approximately 366 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. The Boone County Public Service Commission is in the process of installing public water
lines and all plaintiffs should have access to public water by June 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 lawsuits have been settled subject
to court approval and are fully reserved.
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 are investigating this matter internally and we have
terminated one employee. The terminated employee subsequently admitted to falsifying
inspection records and is cooperating with the U.S. Attorneys
office. On April 21, 2010, we received a federal subpoena requesting methane detection
systems equipment used at our Federal No. 2 mine since July 2008 and the results of tests
performed on the equipment since that date.
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.
(15) 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 condensed consolidated
balance sheets. Such financial instruments are valued based on the amount of exposure under the
instrument and the likelihood of required performance. We do not expect any material losses to
result from these guarantees or off-balance-sheet instruments.
14
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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.
(16) Related Party Transactions
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 three months ended March 31,
2010 and 2009, respectively were approximately $325,000 and $110,000.
(17) Subsequent Events
In April 2010, the borrowing capacity on our accounts receivable securitization program was
expanded by $50 million, bringing our total borrowing capacity to $125 million.
In
April 2010, we received commitments to amend and restate our credit facility to, among other things,
extend the maturity date and adjust capacity, pending the realization
of certain events. The amendment and restatement is subject to
certain closing conditions.
(18) Supplemental Guarantor/Non-Guarantor Financial Information
The following tables present condensed consolidating financial information for: (a) Patriot
Coal Corporation (the Parent) on a stand-alone basis; (b) the guarantors under our shelf
registration statement (Guarantor Subsidiaries) on a combined basis and (c) the Non-Guarantor
Entity, Patriot Coal Receivables (SPV) Ltd., on a stand-alone basis. Each Guarantor Subsidiary
is wholly-owned by Patriot Coal Corporation. Any guarantees will be from each of the Guarantor
Subsidiaries and will be full, unconditional, joint and several. Accordingly, separate financial
statements of the wholly-owned Guarantor Subsidiaries are not presented because the Guarantor
Subsidiaries will be jointly, severally and unconditionally liable under the guarantees, and we
believe that separate financial statements and other disclosures regarding the Guarantor
Subsidiaries are not material to potential investors.
15
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PATRIOT
COAL CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS
Three Months Ended March 31, 2010 | ||||||||||||||||||||
Non- |
||||||||||||||||||||
Parent |
Guarantor |
Guarantor |
||||||||||||||||||
Company | Subsidiaries | Entity | Eliminations | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Revenues
|
||||||||||||||||||||
Sales
|
$ | | $ | 464,208 | $ | | $ | | $ | 464,208 | ||||||||||
Other revenues
|
| 3,049 | | | 3,049 | |||||||||||||||
Total revenues
|
| 467,257 | | | 467,257 | |||||||||||||||
Costs and expenses
|
||||||||||||||||||||
Operating costs and expenses
|
93 | 433,398 | | | 433,491 | |||||||||||||||
Income from equity affiliates
|
(25,221 | ) | (448 | ) | | 25,221 | (448 | ) | ||||||||||||
Depreciation, depletion and amortization
|
544 | 49,068 | | | 49,612 | |||||||||||||||
Reclamation and remediation obligation expense
|
| 10,846 | | | 10,846 | |||||||||||||||
Sales contract accretion
|
| (25,308 | ) | | | (25,308 | ) | |||||||||||||
Selling and administrative expenses
|
12,739 | 35 | | | 12,774 | |||||||||||||||
Net gain on disposal or exchange of assets
|
| (23,796 | ) | | | (23,796 | ) | |||||||||||||
Operating profit
|
11,845 | 23,462 | | (25,221 | ) | 10,086 | ||||||||||||||
Interest expense
|
7,586 | 1,446 | 75 | (75 | ) | 9,032 | ||||||||||||||
Interest income
|
(2 | ) | (3,440 | ) | (75 | ) | 75 | (3,442 | ) | |||||||||||
Income before income taxes
|
4,261 | 25,456 | | (25,221 | ) | 4,496 | ||||||||||||||
Income tax provision
|
| 235 | | | 235 | |||||||||||||||
Net income
|
$ | 4,261 | $ | 25,221 | $ | | $ | (25,221 | ) | $ | 4,261 | |||||||||
16
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PATRIOT
COAL CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
UNAUDITED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS
Three Months Ended March 31, 2009 | ||||||||||||||||
Parent |
Guarantor |
|||||||||||||||
Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues
|
||||||||||||||||
Sales
|
$ | | $ | 522,838 | $ | | $ | 522,838 | ||||||||
Other revenues
|
| 6,098 | | 6,098 | ||||||||||||
Total revenues
|
| 528,936 | | 528,936 | ||||||||||||
Costs and expenses
|
||||||||||||||||
Operating costs and expenses
|
| 494,977 | | 494,977 | ||||||||||||
(Income) loss from equity affiliates
|
(52,055 | ) | 231 | 52,055 | 231 | |||||||||||
Depreciation, depletion and amortization
|
549 | 54,430 | | 54,979 | ||||||||||||
Reclamation and remediation obligation expense
|
| 6,451 | | 6,451 | ||||||||||||
Sales contract accretion
|
| (77,807 | ) | | (77,807 | ) | ||||||||||
Selling and administrative expenses
|
11,784 | 1,102 | | 12,886 | ||||||||||||
Net gain on disposal or exchange of assets
|
| (30 | ) | | (30 | ) | ||||||||||
Operating profit
|
39,722 | 49,582 | (52,055 | ) | 37,249 | |||||||||||
Interest expense
|
7,581 | 1,012 | | 8,593 | ||||||||||||
Interest income
|
(2 | ) | (3,485 | ) | | (3,487 | ) | |||||||||
Income before income taxes
|
32,143 | 52,055 | (52,055 | ) | 32,143 | |||||||||||
Income tax provision
|
| | | | ||||||||||||
Net income
|
$ | 32,143 | $ | 52,055 | $ | (52,055 | ) | $ | 32,143 | |||||||
17
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PATRIOT
COAL CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
UNAUDITED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 2010 | ||||||||||||||||||||
Non- |
||||||||||||||||||||
Parent |
Guarantor |
Guarantor |
||||||||||||||||||
Company | Subsidiaries | Entity | Eliminations | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
ASSETS
|
||||||||||||||||||||
Current assets
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 26,017 | $ | 472 | $ | | $ | | $ | 26,489 | ||||||||||
Accounts receivable and other, net
|
152 | 157,027 | 120,764 | (120,764 | ) | 157,179 | ||||||||||||||
Inventories
|
| 95,518 | | | 95,518 | |||||||||||||||
Prepaid expenses and other current assets
|
3,300 | 20,332 | | | 23,632 | |||||||||||||||
Total current assets
|
29,469 | 273,349 | 120,764 | (120,764 | ) | 302,818 | ||||||||||||||
Property, plant, equipment and mine development
|
||||||||||||||||||||
Land and coal interests
|
| 2,902,920 | | | 2,902,920 | |||||||||||||||
Buildings and improvements
|
1,737 | 395,431 | | | 397,168 | |||||||||||||||
Machinery and equipment
|
16,434 | 636,274 | | | 652,708 | |||||||||||||||
Less accumulated depreciation, depletion and amortization
|
(12,631 | ) | (766,039 | ) | | | (778,670 | ) | ||||||||||||
Property, plant, equipment and mine development, net
|
5,540 | 3,168,586 | | | 3,174,126 | |||||||||||||||
Notes receivable
|
| 103,051 | | | 103,051 | |||||||||||||||
Investments, intercompany and other assets
|
1,349,245 | (145,394 | ) | | (1,168,623 | ) | 35,228 | |||||||||||||
Total assets
|
$ | 1,384,254 | $ | 3,399,592 | $ | 120,764 | $ | (1,289,387 | ) | $ | 3,615,223 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||||
Current liabilities
|
||||||||||||||||||||
Current portion of debt
|
$ | | $ | 7,156 | $ | | $ | | $ | 7,156 | ||||||||||
Trade accounts payable, accrued expenses and other
|
15,388 | 392,781 | 120,764 | (120,764 | ) | 408,169 | ||||||||||||||
Below market sales contracts acquired
|
| 136,155 | | | 136,155 | |||||||||||||||
Total current liabilities
|
15,388 | 536,092 | 120,764 | (120,764 | ) | 551,480 | ||||||||||||||
Long-term debt, less current maturities
|
169,573 | 28,842 | | | 198,415 | |||||||||||||||
Asset retirement obligations
|
| 248,692 | | | 248,692 | |||||||||||||||
Workers compensation obligations
|
| 207,095 | | | 207,095 | |||||||||||||||
Accrued postretirement benefit costs
|
678 | 1,172,539 | | | 1,173,217 | |||||||||||||||
Obligation to industry fund
|
| 41,325 | | | 41,325 | |||||||||||||||
Below market sales contracts acquired, noncurrent
|
| 139,157 | | | 139,157 | |||||||||||||||
Other noncurrent liabilities
|
1,738 | 110,340 | | | 112,078 | |||||||||||||||
Total liabilities
|
187,377 | 2,484,082 | 120,764 | (120,764 | ) | 2,671,459 | ||||||||||||||
Stockholders equity
|
1,196,877 | 915,510 | | (1,168,623 | ) | 943,764 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 1,384,254 | $ | 3,399,592 | $ | 120,764 | $ | (1,289,387 | ) | $ | 3,615,223 | |||||||||
18
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PATRIOT
COAL CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SUPPLEMENTAL
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2009 | ||||||||||||||||
Parent |
Guarantor |
|||||||||||||||
Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
ASSETS
|
||||||||||||||||
Current assets
|
||||||||||||||||
Cash and cash equivalents
|
$ | 26,574 | $ | 524 | $ | | $ | 27,098 | ||||||||
Accounts receivable and other, net
|
| 188,897 | | 188,897 | ||||||||||||
Inventories
|
| 81,188 | | 81,188 | ||||||||||||
Prepaid expenses and other current assets
|
2,696 | 11,670 | | 14,366 | ||||||||||||
Total current assets
|
29,270 | 282,279 | | 311,549 | ||||||||||||
Property, plant, equipment and mine development
|
||||||||||||||||
Land and coal interests
|
| 2,864,225 | | 2,864,225 | ||||||||||||
Buildings and improvements
|
1,737 | 394,712 | | 396,449 | ||||||||||||
Machinery and equipment
|
16,314 | 615,301 | | 631,615 | ||||||||||||
Less accumulated depreciation,depletion and amortization
|
(12,045 | ) | (718,990 | ) | | (731,035 | ) | |||||||||
Property, plant, equipment and mine development, net
|
6,006 | 3,155,248 | | 3,161,254 | ||||||||||||
Notes receivable
|
| 109,137 | | 109,137 | ||||||||||||
Investments, intercompany and other assets
|
1,340,392 | (160,764 | ) | (1,143,405 | ) | 36,223 | ||||||||||
Total assets
|
$ | 1,375,668 | $ | 3,385,900 | $ | (1,143,405 | ) | $ | 3,618,163 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||
Current liabilities
|
||||||||||||||||
Current portion of debt
|
$ | | $ | 8,042 | $ | | $ | 8,042 | ||||||||
Trade accounts payable and accrued expenses
|
20,083 | 386,268 | | 406,351 | ||||||||||||
Below market sales contracts acquired
|
| 150,441 | | 150,441 | ||||||||||||
Total current liabilities
|
20,083 | 544,751 | | 564,834 | ||||||||||||
Long-term debt, less current maturities
|
167,501 | 30,450 | | 197,951 | ||||||||||||
Asset retirement obligations
|
| 244,518 | | 244,518 | ||||||||||||
Workers compensation obligations
|
| 193,719 | | 193,719 | ||||||||||||
Accrued postretirement benefit costs
|
564 | 1,169,417 | | 1,169,981 | ||||||||||||
Obligation to industry fund
|
| 42,197 | | 42,197 | ||||||||||||
Below market sales contracts acquired, noncurrent
|
| 156,120 | | 156,120 | ||||||||||||
Other noncurrent liabilities
|
1,536 | 111,813 | | 113,349 | ||||||||||||
Total liabilities
|
189,684 | 2,492,985 | | 2,682,669 | ||||||||||||
Stockholders equity
|
1,185,984 | 892,915 | (1,143,405 | ) | 935,494 | |||||||||||
Total liabilities and stockholders equity
|
$ | 1,375,668 | $ | 3,385,900 | $ | (1,143,405 | ) | $ | 3,618,163 | |||||||
19
Table of Contents
PATRIOT
COAL CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
UNAUDITED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS
Three Months Ended March 31, 2010 | ||||||||||||||||||||
Non- |
||||||||||||||||||||
Parent |
Guarantor |
Guarantor |
||||||||||||||||||
Company | Subsidiaries | Entity | Eliminations | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Cash Flows From Operating Activities
|
||||||||||||||||||||
Net cash provided by (used in) operating activities
|
$ | (18,262 | ) | $ | 50,372 | $ | | $ | | $ | 32,110 | |||||||||
Cash Flows From Investing Activities
|
||||||||||||||||||||
Additions to property, plant, equipment and mine development
|
(78 | ) | (35,052 | ) | | | (35,130 | ) | ||||||||||||
Additions to advance mining royalties
|
| (5,177 | ) | | | (5,177 | ) | |||||||||||||
Proceeds from disposal or exchange of assets
|
| 400 | | | 400 | |||||||||||||||
Proceeds from notes receivable
|
| 9,500 | | | 9,500 | |||||||||||||||
Net cash used in investing activities
|
(78 | ) | (30,329 | ) | | | (30,407 | ) | ||||||||||||
Cash Flows From Financing Activities
|
||||||||||||||||||||
Long-term debt payments
|
| (2,494 | ) | | | (2,494 | ) | |||||||||||||
Deferred financing costs
|
(900 | ) | | | | (900 | ) | |||||||||||||
Proceeds from employee stock purchases
|
1,082 | | | | 1,082 | |||||||||||||||
Intercompany transactions
|
17,602 | (17,602 | ) | | | | ||||||||||||||
Net cash provided by (used in) financing activities
|
17,784 | (20,096 | ) | | | (2,312 | ) | |||||||||||||
Net decrease in cash and cash equivalents
|
(556 | ) | (53 | ) | | | (609 | ) | ||||||||||||
Cash and cash equivalents at beginning of period
|
26,574 | 524 | | | 27,098 | |||||||||||||||
Cash and cash equivalents at end of period
|
$ | 26,018 | $ | 471 | $ | | $ | | $ | 26,489 | ||||||||||
20
Table of Contents
PATRIOT
COAL CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
UNAUDITED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS
Three Months Ended March 31, 2009 | ||||||||||||||||
Parent |
Guarantor |
|||||||||||||||
Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash Flows From Operating Activities
|
||||||||||||||||
Net cash used in operating activities
|
$ | (14,288 | ) | $ | (4,908 | ) | $ | | $ | (19,196 | ) | |||||
Cash Flows From Investing Activities
|
||||||||||||||||
Additions to property, plant, equipment and mine development
|
(209 | ) | (18,833 | ) | | (19,042 | ) | |||||||||
Additions to advance mining royalties
|
| (3,101 | ) | | (3,101 | ) | ||||||||||
Proceeds from disposal or exchange of assets
|
| 3,958 | | 3,958 | ||||||||||||
Other
|
| 66 | | 66 | ||||||||||||
Net cash used in investing activities
|
(209 | ) | (17,910 | ) | | (18,119 | ) | |||||||||
Cash Flows From Financing Activities
|
||||||||||||||||
Long-term debt payments
|
| (2,024 | ) | | (2,024 | ) | ||||||||||
Proceeds from employee stock purchases
|
667 | | | 667 | ||||||||||||
Short-term borrowings
|
42,000 | | | 42,000 | ||||||||||||
Intercompany transactions
|
(24,603 | ) | 24,603 | | | |||||||||||
Net cash provided by financing activities
|
18,064 | 22,579 | | 40,643 | ||||||||||||
Net increase (decrease) in cash and cash equivalents
|
3,567 | (239 | ) | | 3,328 | |||||||||||
Cash and cash equivalents at beginning of period
|
1,957 | 915 | | 2,872 | ||||||||||||
Cash and cash equivalents at end of period
|
$ | 5,524 | $ | 676 | $ | | $ | 6,200 | ||||||||
21
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
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:
| price volatility and demand, particularly in higher margin products; | ||
| geologic, equipment and operational risks associated with mining; | ||
| changes in general economic conditions, including coal, power and steel market conditions; | ||
| availability and costs of competing energy resources; | ||
| regulatory and court decisions including, but not limited to, those impacting permits issued pursuant to the Clean Water Act; | ||
| environmental laws and regulations and changes in the interpretation or enforcement thereof, including those affecting our operations and those affecting our customers coal usage; | ||
| 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; | ||
| coal mining laws and regulations; | ||
| labor availability and relations; | ||
| the outcome of pending or future litigation; | ||
| changes in the costs to provide healthcare to eligible active employees and certain retirees under postretirement benefit obligations; | ||
| changes to contribution requirements to multi-employer retiree healthcare and pension plans; | ||
| reductions of purchases or deferral of shipments by major customers; | ||
| availability and costs of credit, surety bonds and letters of credit; | ||
| customer performance and credit risks; | ||
| inflationary trends, including those impacting materials used in our business; | ||
| worldwide economic and political conditions; | ||
| downturns in consumer and company spending; | ||
| supplier and contract miner performance, and the availability and cost of key equipment and commodities; | ||
| availability and costs of transportation; | ||
| difficulty in implementing our business strategy; | ||
| our ability to replace proven and probable coal reserves; | ||
| the outcome of commercial negotiations involving sales contracts or other transactions; | ||
| our ability to respond to changing customer preferences; | ||
| our dependence on Peabody Energy for a significant portion of our revenues; | ||
| failure to comply with debt covenants; |
22
Table of Contents
| the effects of mergers, acquisitions and divestitures, including our ability to successfully integrate mergers and acquisitions; | ||
| weather patterns affecting energy demand; | ||
| competition in our industry; | ||
| interest rate fluctuation; | ||
| wars and acts of terrorism or sabotage; | ||
| impact of pandemic illness; and | ||
| other factors, including those discussed in Legal Proceedings set forth in Part I, Item 3 of our 2009 Annual Report on Form 10-K and Part II, Item 1 of this report. |
These factors should not be construed as exhaustive and should be read in conjunction with
the other cautionary statements that are included in our 2009 Annual Report on Form 10-K and in
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,
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.
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, 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, 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 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 the first three months of 2010, we sold 7.6 million tons of coal, of which 78% was
sold to domestic electric utilities and industrial customers and 22% was sold to domestic and
global steel and 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.
Our mining operations and coal reserves are as follows:
| 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. In Appalachia, we sold 5.9 million and 25.8 million tons of coal in the three months ended March 31, 2010 and the year ended December 31, 2009, respectively. 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. | |
| 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 1.7 million and 7.0 million tons of coal in the three months ended March 31, 2010 and the year ended December 31, 2009, respectively. 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. |
23
Table of Contents
Results of Operations
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 interest income and expense; income taxes; reclamation and
remediation obligation expense; depreciation, depletion and amortization; 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. Adjusted EBITDA is used by management primarily as a
measure of our segments operating performance. We believe that in our industry such information
is a relevant measurement of a companys operating financial performance. Because Adjusted
EBITDA and Segment Adjusted EBITDA are not calculated identically by all companies, our
calculation may not be comparable to similarly titled measures of other companies. 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. Adjusted EBITDA
is reconciled to its most comparable measure under generally accepted accounting principles in
Note 12 to our unaudited condensed consolidated financial statements.
Three Months Ended March 31, 2010 Compared to March 31, 2009
Summary
Our Segment Adjusted EBITDA for the three months ended March 31, 2010 increased compared to
the prior year primarily due to cost savings resulting from the suspension of certain higher
cost mining operations in 2009. In 2009, we implemented a strategic response to the then
weakened coal markets. As a result, we suspended certain mining operations, which in certain
circumstances remained suspended through the first quarter of 2010.
Our Federal mine temporarily suspended active mining operations for a portion of
February and March 2010, upon discovering potentially adverse atmospheric conditions in an
abandoned area of the mine. As announced on March 8, 2010, we have resumed operations.
24
Table of Contents
Segment Results of Operations
Three Months Ended March 31, | Increase (Decrease) | |||||||||||||||
2010 | 2009 | Tons/$ | % | |||||||||||||
(Dollars and tons in thousands, except per ton amounts) | ||||||||||||||||
Tons Sold |
||||||||||||||||
Appalachia Mining Operations |
5,849 | 6,639 | (790 | ) | (11.9) | % | ||||||||||
Illinois Basin Mining Operations |
1,746 | 1,819 | (73 | ) | (4.0) | % | ||||||||||
Total Tons Sold |
7,595 | 8,458 | (863 | ) | (10.2) | % | ||||||||||
Average sales price per ton sold |
||||||||||||||||
Appalachia Mining Operations |
$ | 66.74 | $ | 68.30 | $ | (1.56 | ) | (2.3) | % | |||||||
Illinois
Basin Mining Operations |
42.28 | 38.14 | 4.14 | 10.9 | % | |||||||||||
Revenue |
||||||||||||||||
Appalachia Mining Operations |
$ | 390,380 | $ | 453,456 | $ | (63,076 | ) | (13.9) | % | |||||||
Illinois Basin Mining Operations |
73,828 | 69,382 | 4,446 | 6.4 | % | |||||||||||
Appalachia Other |
3,049 | 6,098 | (3,049 | ) | (50.0) | % | ||||||||||
Total Revenues |
$ | 467,257 | $ | 528,936 | $ | (61,679 | ) | (11.7) | % | |||||||
Segment Operating Costs and Expenses(1) |
||||||||||||||||
Appalachia Mining Operations and Other |
$ | 322,566 | $ | 390,067 | $ | (67,501 | ) | (17.3) | % | |||||||
Illinois Basin Mining Operations |
67,011 | 66,341 | 670 | 1.0 | % | |||||||||||
Total Segment Operating Costs and Expenses |
$ | 389,577 | $ | 456,408 | $ | (66,831 | ) | (14.6) | % | |||||||
Segment Adjusted EBITDA |
||||||||||||||||
Appalachia Mining Operations and Other |
$ | 70,863 | $ | 69,487 | $ | 1,376 | 2.0 | % | ||||||||
Illinois Basin Mining Operations |
6,817 | 3,041 | 3,776 | 124.2 | % | |||||||||||
Total Segment Adjusted EBITDA |
$ | 77,680 | $ | 72,528 | $ | 5,152 | 7.1 | % | ||||||||
(1) | Segment Operating Costs and Expenses represent consolidated operating costs and expenses of $433.0 million and $495.2 million less past mining operations of $43.4 million and $37.8 million for the three months ended March 31, 2010 and 2009, respectively, as described below, and less back-to-back contract accretion of $1.0 million for the three months ended March 31, 2009. |
Tons Sold and Revenues
Revenues in the Appalachia segment were lower in the three months ended March 31, 2010
compared to the prior year primarily related to the 2009 suspension of various mines, including
the Samples mine, as well as other production cuts, driven by lower demand for thermal and
high-quality metallurgical coal. Additionally, we experienced lower average sales prices in the
first quarter of 2010 from metallurgical coal contracts priced in a less favorable pricing
environment. These decreases were partially offset by higher revenue in the first quarter of
2010 from crossover metallurgical coal, which was previously sold as thermal coal, primarily
from our Panther mining complex.
Sales volumes in the Appalachia segment decreased in the three months ended March 31, 2010
compared to the same period in 2009 primarily due to the suspension of certain mines driven by
lower demand in 2009. This decrease was partially offset by improved production volumes at our
Panther complex due to improvements from equipment installed during the third quarter of 2009
and the implementation of a revised mine plan.
Revenues in the Illinois Basin segment were higher for the three months ended March 31,
2010 compared to the prior year primarily due to higher average sales prices. Sales volumes were
comparable in the three months ended March 31, 2010 compared to the prior year.
Appalachia Other revenue was lower for the three months ended March 31, 2010 compared to
the prior year, in part due to cash settlements received in 2009 for reduced shipments as a
result of renegotiated customer agreements.
25
Table of Contents
Segment Operating Costs and Expenses
Segment operating costs and expenses for Appalachia decreased in the three months ended
March 31, 2010 as compared to the prior year primarily due to decreased contract mining costs
($19.5 million) and labor costs ($18.4 million) related to the closing or idling of certain
contractor-operated and company-operated mines in the second half of 2009. In addition, there
were decreases in maintenance and repairs ($8.8 million) and fuel and explosives costs ($4.5
million) as compared to the prior year due to reducing production to more closely align with the
demand for coal. Purchased coal expense ($8.7 million) also decreased in the first three months
of 2010 as compared to the prior year as a result of more favorable pricing.
Segment operating costs and expenses for the Illinois Basin increased in the three months
ended March 31, 2010 as compared to the prior year due to increased contract service costs for
additional repairs and maintenance.
Segment Adjusted EBITDA
Segment Adjusted EBITDA for Appalachia was slightly higher in the three months ended March
31, 2010 as compared to 2009, mainly reflecting the suspension or reduced production of certain
mining operations, in particular some of our higher cost operations, in response to the economic
recession experienced throughout much of 2009.
Segment Adjusted EBITDA for the Illinois Basin increased in the three months ended March
31, 2010 from the prior year primarily due to higher average sales prices.
Net Income
Three Months Ended March 31, | Favorable (Unfavorable) | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Segment Adjusted EBITDA |
$ | 77,680 | $ | 72,528 | $ | 5,152 | 7.1 | % | ||||||||
Corporate and Other: |
||||||||||||||||
Past mining obligation expense |
(43,466 | ) | (37,800 | ) | (5,666 | ) | (15.0) | % | ||||||||
Net gain on disposal or exchange of assets |
23,796 | 30 | 23,766 | N/A | ||||||||||||
Selling and administrative expenses |
(12,774 | ) | (12,886 | ) | 112 | 0.9 | % | |||||||||
Total Corporate and Other |
(32,444 | ) | (50,656 | ) | 18,212 | 36.0 | % | |||||||||
Depreciation, depletion and amortization |
(49,612 | ) | (54,979 | ) | 5,367 | 9.8 | % | |||||||||
Reclamation and remediation obligation expense |
(10,846 | ) | (6,451 | ) | (4,395 | ) | (68.1) | % | ||||||||
Sales contract accretion, net |
25,308 | 76,807 | (51,499 | ) | (67.0) | % | ||||||||||
Interest expense |
(9,032 | ) | (8,593 | ) | (439 | ) | (5.1) | % | ||||||||
Interest income |
3,442 | 3,487 | (45 | ) | (1.3) | % | ||||||||||
Income before income taxes |
4,496 | 32,143 | (27,647 | ) | (86.0) | % | ||||||||||
Income tax provision |
(235 | ) | - | (235 | ) | N/A | ||||||||||
Net income |
$ | 4,261 | $ | 32,143 | $ | (27,882 | ) | (86.7) | % | |||||||
Past mining obligations were higher in the three months ended March 31, 2010 than the
corresponding period in the prior year primarily due to a lower discount rate and other
unfavorable assumption changes utilized in our actuarially-based estimate for retiree healthcare
and workers compensation obligations.
Net gain on disposal or exchange of assets increased for the three months ended March 31,
2010 as compared to the corresponding period in the prior year due to a gain recorded on an
exchange transaction in which we received rights to approximately 13 million tons of coal
reserves contiguous to our Highland mining complex in the Illinois Basin. We recognized a gain
of $24 million on this transaction.
Depreciation, depletion and amortization decreased in the three months ended March 31,
2010 compared to the prior year primarily due to lower volumes associated with certain mines
being closed or suspended in the second half of 2009.
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Reclamation and remediation obligation expense increased in the three months ended
March 31, 2010 primarily due to remediation expense related to the liabilities assumed in the
July 2008 Magnum acquisition, which was first recorded in June 2009 upon finalization of
purchase accounting.
Net sales contract accretion decreased in the three months ended March 31, 2010 primarily
due to several contracts assumed in the Magnum acquisition that expired in the second half of
2009.
Interest expense increased in the three months ended March 31, 2010 primarily due to the
Blue Creek preparation plant capital lease that began in May 2009.
For the three months ended March 31, 2010, we recorded an income tax provision of $0.2
million related to certain state taxes. No federal income tax provision was recorded due to our
anticipated tax net operating loss for the year ended December 31, 2010, and the full valuation
allowance recorded against deferred tax assets. No income tax provision was recorded for the
three months ended March 31, 2009 due to our anticipated tax net operating loss for the year
ending December 31, 2009 and the full valuation allowance recorded against deferred tax assets.
The primary difference between book and taxable income for 2010 and 2009 is the treatment of the
net sales contract accretion on the below market purchase and sales contracts acquired with
Magnum, with such amounts being included in the computation of book income but excluded from the
computation of taxable income.
Outlook
Market
Market indicators are showing signs of increased strength in the metallurgical coal
markets, while the thermal coal markets continue to struggle. Metallurgical coal markets are
becoming more robust as 2010 progresses against the backdrop of growing global economies. A
shortage of metallurgical coal, particularly in the Pacific Rim, is prompting steel
manufacturers to turn to the U.S. coal producers to satisfy their coal requirements.
Thermal coal markets remain challenged. Utility thermal coal inventory levels remain higher
than their 5-year averages, and natural gas pricing continues to create competition for coal. We
anticipate as the economy continues to recover, the demand for electricity will rise. As thermal
coal demand returns, supply constraints may keep Central Appalachia thermal coal production at
reduced levels.
One potential cause of constrained supply may be the difficulty in obtaining mining
permits. The U.S. Environmental Protection Agency recently issued
comprehensive guidance relating to the issuance of surface mining
permits, including new water conductivity standards to
be used in the review of applications for future permits. This new guidance, along with the new conductivity standards, may
make future permits more difficult to secure.
Recent
developments related to underground mining are expected to result in greater regulatory
oversight, and may result in more stringent regulations and perhaps additional legislation. These developments add
further uncertainty and may cause additional supply constraints, particularly in Central
Appalachia. As the economy continues to recover, demand for power
should rise. Increased demand, coupled
with supply constraints, could result in Central Appalachia coming into balance as early as late
2010.
Patriot Operations
As discussed more fully under Item 1A. Risk Factors in our 2009 Annual Report on Form 10-K,
our results of operations in the near-term could be negatively impacted by price volatility and
demand; unforeseen adverse geologic conditions or equipment problems at mining locations;
changes in general economic conditions; availability and costs of competing energy resources;
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; existing or new environmental and coal mining laws and regulations and developments
in the interpretation or enforcement thereof; labor availability and relations; the outcome of
pending or future litigation; changes in the costs to provide healthcare to eligible active
employees and certain retirees under postretirement benefit obligations and contribution
requirements to multi-employer retiree healthcare and pension plans; reductions of purchases or
deferral of deliveries by major customers; the availability and costs of credit, surety bonds
and letters of credit; customer performance and credit risks; supplier and contract miner
performance 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 fluctuating prices of key supplies, mining
equipment and commodities. Additionally, our cost to provide healthcare to eligible active
employees and certain retirees could increase due to recent legislation.
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Potential legislation, regulation, treaties and accords at the local, state, federal and
international level, and changes in the interpretation or enforcement of existing laws and
regulations, have created uncertainty and could have a significant impact on demand for coal and
our future operational and financial results. For example, increased scrutiny of surface mining
could make it difficult to receive permits or could otherwise 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 imminent regulation
of carbon dioxide and other greenhouse gas 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 included in this report and in our 2009 Annual Report on Form 10-K 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 have the ability to adjust our future production levels as demand increases. We are
currently finalizing plans to open the Black Oak metallurgical mine this fall. We have also
advanced plans for additional metallurgical coal production, which will be processed through our
existing infrastructure at our Rocklick, Kanawha Eagle and Logan County mining complexes.
In 2010, we anticipate annual sales volumes in the range of 33.0 to 35.0 million tons,
including approximately 7.5 million tons of metallurgical coal. This anticipated sales volume
incorporates the impact of extended mid-year moves to relocate both the Federal and the Panther
longwalls to new areas within each mine.
Actual events and results may vary significantly from those included in, contemplated or
implied by the forward-looking statements under Outlook. The guidance provided under the caption
Outlook should be read in conjunction with the section entitled Cautionary Notice Regarding
Forward Looking Statements and Item 1A. Risk Factors included in the report. For additional
information regarding the risks and uncertainties that affect our business, see Item 1A. Risk
Factors in our 2009 Annual Report on Form 10-K.
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. 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 all of our capital
expenditure requirements with cash generated from operations or borrowed funds as necessary.
Net cash provided by operating activities was $32.1 million for the three months ended
March 31, 2010, compared to net cash used in operating activities of $19.2 million in the same
period of 2009. The increase in cash provided by operating activities primarily related to
changes in working capital of $43.6 million, primarily due to increased collections on accounts
receivable.
Net cash used in investing activities was $30.4 million for the three months ended March
31, 2010, compared to $18.1 million in the same period of 2009. The increase in cash used
reflected an increase in capital expenditures of $16.1 million, additional advance mining
royalties of $2.1 million and a decrease in cash proceeds from the disposal or exchange of
assets of $3.6 million. These increases in cash used in investing activities were partially
offset by additional proceeds from notes receivable of $9.5 million.
Net cash used by financing activities was $2.3 million for the three months ended March 31,
2010, compared to net cash provided by financing activities of $40.6 million in the same period
of 2009. The decrease in cash provided was primarily due to no short-term borrowings at March
31, 2010.
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Receivables Securitization
In March 2010, we entered into a $125 million accounts receivable securitization program,
which provides for the issuance of letters of credit and direct borrowings. Trade accounts
receivable are sold, on a revolving basis, to a bankruptcy-remote entity (facilitating entity),
which then sells an undivided interest in all of the trade receivables to the creditors as
collateral for any borrowings. As of the inception of the program and at March 31, 2010, we had
commitments for up to $75 million of borrowing capacity. The availability under the program
fluctuates with the balance of our trade accounts receivables. In April 2010, the borrowing
capacity under the program was expanded by $50 million, bringing our total borrowing capacity to
$125 million.
Based on our continuing involvement with the trade accounts receivable balances, including
continued risk of loss, the facilitating entity is consolidated into our financial statements.
The facilitating entity was established solely to perform its obligations under this program and
holds a note receivable from the creditors and a note payable to our subsidiaries for the
outstanding trade accounts receivable balance at any given point in time, which is eliminated in
consolidation. The outstanding trade accounts receivable balance was $120.7 million as of March
31, 2010. Any direct borrowings will be recorded as secured borrowings. As of March 31, 2010,
there were no letters of credit or direct borrowings under this program.
Credit Facility
On 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. 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 working capital requirements, capital
expenditures and other corporate purposes. As of March 31, 2010, the balance of outstanding
letters of credit issued against the credit facility totaled $359.5 million. There were no
outstanding short-term borrowings on this facility as of March 31, 2010. Availability under the
credit facility as of March 31, 2010 was $163.0 million. At March 31, 2010, we were in
compliance with the covenants of our amended credit facility.
Private Convertible Notes Issuance
On May 28, 2008, Patriot completed a private offering of $200 million in aggregate
principal amount of 3.25% Convertible Senior Notes due 2013. 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. We are amortizing the debt
discount over the contractual life of the convertible notes, resulting in additional interest
expense above the contractual coupon amount.
At March 31, 2010, the debt discount was $30.4 million, resulting in a long-term
convertible note balance of $169.6 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 three
months ended March 31, 2010, interest expense for the convertible notes was $3.7 million, which
included debt discount amortization of $2.1 million. For the three months ended March 31, 2009,
interest expense for the convertible notes was $3.5 million, which included debt discount
amortization of $1.9 million.
Newly Adopted Accounting Pronouncements
Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance
regarding the accounting for transfers of financial assets, which requires enhanced disclosures
about the continuing risk exposure to a transferor resulting from its continuing involvement
with transferred financial assets. This guidance is effective for fiscal years beginning after
November 15, 2009. See the description of our asset securitization program in Liquidity and
Capital Resources above.
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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, including an assessment of the companys 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. Upon adoption, we
performed a qualitative assessment of our existing interests in joint ventures and determined
that the joint ventures were not variable interest entities.
Fair Value Disclosures
In January 2010, the FASB issued authoritative guidance which requires additional
disclosures and clarifies certain existing disclosure requirements regarding fair value
measurements. This guidance is effective for interim and annual reporting periods beginning
after December 15, 2009. We adopted this guidance effective January 1, 2010. However, none of
the specific additional disclosures were applicable at this time. See Note 7 for our fair value
measurement disclosures.
Item 3. 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 March 31, 2010 our total unpriced planned production for 2010 was up to 2.0 million tons.
Unpriced volumes for 2011 will depend on finalization of production plans, taking into account
demand and pricing.
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 March 31, 2010, the
notional amounts outstanding for these swaps included 10.7 million gallons of heating oil
expiring throughout 2010 and 2.0 million gallons of heating oil expiring throughout 2011. For
the last nine months of 2010, we expect to purchase approximately 17 million gallons of diesel
fuel across all operations. Aside from these hedging activities, a $0.10 per gallon change in
the price of diesel fuel would impact our operating costs for the remainder of 2010 by
approximately $1.7 million.
Credit Risk
For the three months ended March 31, 2010, approximately 19% of our revenue was 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 primarily 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.
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.
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Additionally, as of March 31, 2010, we had $136.3 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 4. Controls and Procedures.
Our disclosure controls and procedures are designed to, among other things, provide
reasonable assurance that material information, both financial and non-financial, and other
information required under the securities laws to be disclosed is accumulated and communicated
to senior management, including the Chief Executive Officer and Chief Financial Officer, on a
timely basis. Under the direction of the Chief Executive Officer and Chief Financial Officer,
management has evaluated our disclosure controls and procedures as of March 31, 2010, and has
concluded that the disclosure controls and procedures were adequate and effective as of such
date.
There have not been any significant changes in our internal control over financial
reporting during the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 14 to the unaudited condensed consolidated financial statements included in Part
I, Item 1 of this report relating to certain legal proceedings, which information is
incorporated by reference herein.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the risk factors
disclosed under Item 1A. Risk Factors in our 2009 Annual Report on Form 10-K for the year ended
December 31, 2009. The information below updates, and should be read in conjunction with, the
risk factors and information disclosed under Item 1A. Risk Factors in the Form 10-K.
Recent developments related to the regulation of surface coal mining operations could make
it more difficult or increase our costs to receive new permits to mine coal in Appalachia.
In March 2010, the U.S. Environmental Protection Agency (EPA) proposed a veto of a federal
Clean Water Act permit held by another coal mining company for a surface mine in Appalachia. In
explaining its position, the EPA cited significant and irreversible damage to wildlife and
fishery resources and severe degradation of water quality caused by mining pollution. If the
EPAs proposed action is finalized, the permit will be invalidated. While our operations are
not directly impacted, this could be an indication that other surface mining water permits could
be subject to more substantial review in the future.
On April 1, 2010 the EPA issued comprehensive guidance to provide clarification as to the
water quality standards that should apply when reviewing Clean Water Act permit applications for
Appalachian surface coal mining operations and of the EPAs roles and expectations, in
coordinating with their federal and state partners, to assure more consistent, effective and
timely compliance by Appalachian surface coal mining operations with the provisions of the Clean
Water Act, National Environmental Policy Act, and the Environmental Justice Executive Order.
This guidance establishes threshold conductivity levels to be used as a basis for evaluating
compliance with narrative water quality standards. Conductivity is a measure that reflects
levels of salt, sulfides and other chemical constituents present in water. In order to obtain
federal Clean Water Act permits for surface coal mining in Appalachia, as defined in the
guidance, applicants must perform an evaluation to determine if a reasonable potential exists
that the proposed mining would cause a violation of water quality standards, including narrative
standards. The EPA Administrator has stated that these water quality standards may be difficult
for most surface mining operations to meet. Additionally, the guidance contains requirements for
avoidance and minimization of environmental impacts, mitigation of mining impacts, consideration
of the full range of potential impacts on the environment, human health, and communities,
including low-income or minority populations, and provision of meaningful opportunities for
public participation in the permit process. In the future, to obtain necessary permits, we and
other mining companies will be required to meet these requirements. We have begun to incorporate
these new requirements into some of our current permit applications, however there can be no
guarantee that we will be able to meet these or any other new standards with respect to our
future permit applications.
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The U.S. Department of the Interior is also actively considering establishing, in
the context of new permit applications under the Surface Mining
Control and Reclamation Act (SMCRA), new standards for restoring mountaintops
affected by surface mining, removing the rights of states to revise or grant exemptions to
federal restoration standards and developing a federal definition of material damage to be
used in the context of existing watershed area protections. It is also considering requiring
surface mining companies to collect more information on the environmental health of watersheds
near their operations, to monitor conditions before and after mining, and to change or close
operations if unpermitted damage to the watersheds occurs.
We are currently evaluating the impact of these recent developments on our current and
future surface mining operations. These developments may make it more difficult or increase our
costs to obtain future or maintain existing permits necessary to perform our surface mining
operations, which could adversely affect our financial conditions, results of operations and
cash flows.
Recent healthcare legislation could adversely affect our financial condition and results of
operations.
In March 2010, the Patient Protection and Affordable Care Act (PPACA) was enacted,
potentially impacting our costs to provide healthcare benefits to our eligible active and
certain retired employees and workers compensation benefits related to occupational disease
resulting from coal workers pneumoconiosis (black lung disease). The PPACA has both short-term
and long-term implications on benefit plan standards. Implementation of this legislation is
planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a
greater extent with the 2011 benefit plan year and extending through 2018.
In the short term, our healthcare costs could increase due to raising the maximum age for
covered dependents to receive benefits, changes to benefits for occupational disease related
illnesses, the elimination of lifetime dollar limits per covered individual and restrictions of
annual dollar limits per covered individual, among other standard requirements. In the long
term, our healthcare costs could increase due to a tax on high cost plans (excise tax) and the
elimination of annual dollar limits per covered individual, among other standard requirements.
Approximately 52% of our employees at our company operations were represented by an
organized labor union at March 31, 2010. The healthcare benefits that we provide to our
represented employees and retirees are stipulated by law and by labor agreements, which expire
December 31, 2011. Healthcare benefit changes required by the healthcare legislation will be
included in any new labor agreements.
We are currently analyzing this legislation to determine the full extent of the impact of
the required plan standard changes on our employee healthcare plans and the resulting costs.
Beginning in 2018, the PPACA will impose a 40% excise tax on employers to the extent that the
value of their healthcare plan coverage exceeds certain dollar thresholds. We anticipate that
certain government agencies will provide additional regulations or interpretations concerning
the application of this excise tax. Until these regulations or interpretations are published, it
is impractical to reasonably estimate the impact of the excise tax on our future healthcare
costs or postretirement benefit obligation. Accordingly, as of March 31, 2010, we have not made
any changes to our assumptions used to determine our postretirement benefit obligation. With the
exception of the excise tax, we do not believe any other plan standard changes will be
significant to our future healthcare costs for eligible active employees and our postretirement
benefit obligation for certain retired employees. However, we will need to continue to evaluate
the impact of the PPACA in future periods as additional information and guidance becomes
available.
While we anticipate that costs to provide healthcare to eligible active employees and
certain retired employees will increase in future years, it is uncertain at this time how
significant the increase will be. It is unknown what future changes will be implemented to the
healthcare legislation, but the current legislation and any future laws could materially affect
the cost to provide healthcare benefits for all employers, including us.
The PPACA also amended previous legislation related to coal workers pneumoconiosis,
providing automatic extension of awarded lifetime benefits to surviving spouses and providing
changes to the legal criteria used to assess and award claims. We were able to evaluate the
impact of these changes to our current population of beneficiaries and claimants, resulting in
an estimated $11.5 million increase to our obligation. As of March 31, 2010, we recorded this
estimate as an increase to our workers compensation liability and a decrease to our actuarial
gain included in Accumulated other comprehensive loss on our balance sheet and will adjust the
amortization of the actuarial gain on a prospective basis beginning in the second quarter of
2010. As of March 31, 2010, we were not able to estimate the impact of this legislation on our
obligations related to future claims due to uncertainty around the number of claims that will be
filed and how impactful the new award criteria will be to these claim populations.
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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. Federal and state authorities inspect our operations, and
given a recent accident at a competitors underground mine in Central Appalachia and related
announcements by government authorities, we anticipate a significant increase in the frequency
and scope of these inspections. 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.
In
response to the accident mentioned above, federal and West Virginia authorities have announced
special inspections of coal mines for, among other safety concerns, the accumulation of coal
dust and the proper ventilation of gases such as methane. Certain of
these inspections have already occurred. In addition, both the federal
government and the state of West Virginia have announced that they are considering changes to
mine safety rules and regulations, which could potentially result in or require additional or
enhanced safety equipment, more frequent mine inspections, stricter enforcement practices and
enhanced reporting requirements.
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 regarding falsified readings of certain
atmospheric conditions at our Federal No. 2 mine. We are investigating this matter internally
and we have terminated one employee. The terminated employee subsequently admitted to
falsifying inspection records and is cooperating with the U.S.
Attorneys office. On April 21, 2010, we received a federal subpoena requesting methane
detection systems equipment used at our Federal No. 2 mine since July 2008 and the results of
tests performed on the equipment since that date.
The costs, liabilities and requirements associated with addressing the outcome of
inspections and complying with these environmental, health and safety
requirements are often significant and time-consuming and
may delay commencement or continuation of exploration or production. New or revised legislation
or administrative regulations (or new judicial or administrative interpretations or enforcement
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. Additionally, the Mine Safety and Health Administration (MSHA) may order the temporary
closure of mines in the event of certain violations of safety rules. 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. These factors could have a material adverse effect on our results of
operations, cash flows and financial condition.
Item 6. Exhibits.
See Exhibit Index on page 35 of this report.
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SIGNATURE
Pursuant to the requirements 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.
PATRIOT COAL CORPORATION |
||||
Date: April 26, 2010 | By: | /s/ MARK N. SCHROEDER | ||
Mark N. Schroeder | ||||
Senior Vice President and Chief Financial Officer (On behalf of the registrant and as Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation
S-K.
Exhibit No. | Description of Exhibit | |
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). | |
10.1
|
Purchase and Sale Agreement, dated as of March 2, 2010, among the Originators referred to therein, as sellers, Patriot Coal Corporation and Patriot Coal Receivables (SPV) Ltd. (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed on March 4, 2010). | |
10.2
|
Receivables Purchase Agreement, dated as of March 2, 2010, among Patriot Coal Receivables (SPV) Ltd., Patriot Coal Corporation, as Servicer, the LC Participants, Related Committed Purchasers, Uncommitted Purchasers and Purchaser Agents parties thereto from time to time and Fifth Third Bank, as Administrator and as issuer of letters of credit (Incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K, filed on March 4, 2010). | |
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. |
* | Filed herewith. |
35