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EXCEL - IDEA: XBRL DOCUMENT - Patriot Coal CORP | Financial_Report.xls |
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EX-31.1 - EX-31.1 - Patriot Coal CORP | c58716exv31w1.htm |
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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 June 30, 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 þ No o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act.
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
90,978,684 shares of common stock with a par value of $0.01 per share outstanding on
July 30, 2010.
INDEX
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
PATRIOT COAL CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands, except share and per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Sales |
$ | 533,800 | $ | 485,049 | $ | 998,008 | $ | 1,007,887 | ||||||||
Other revenues |
5,192 | 21,947 | 8,241 | 28,045 | ||||||||||||
Total revenues |
538,992 | 506,996 | 1,006,249 | 1,035,932 | ||||||||||||
Costs and expenses |
||||||||||||||||
Operating costs and expenses |
502,959 | 467,729 | 936,002 | 962,937 | ||||||||||||
Depreciation, depletion and
amortization |
50,350 | 50,357 | 99,962 | 105,336 | ||||||||||||
Reclamation and remediation
obligation expense |
11,004 | 7,611 | 21,850 | 14,062 | ||||||||||||
Sales contract accretion |
(33,735 | ) | (60,721 | ) | (59,043 | ) | (138,528 | ) | ||||||||
Restructuring and impairment charge |
14,838 | | 14,838 | | ||||||||||||
Selling and administrative expenses |
13,198 | 11,360 | 25,972 | 24,246 | ||||||||||||
Net gain on disposal or exchange
of assets |
(17,759 | ) | (4,031 | ) | (41,555 | ) | (4,061 | ) | ||||||||
Operating profit (loss) |
(1,863 | ) | 34,691 | 8,223 | 71,940 | |||||||||||
Interest expense |
14,795 | 9,137 | 23,827 | 17,730 | ||||||||||||
Interest income |
(3,249 | ) | (5,836 | ) | (6,691 | ) | (9,323 | ) | ||||||||
Income (loss) before income taxes |
(13,409 | ) | 31,390 | (8,913 | ) | 63,533 | ||||||||||
Income tax provision |
165 | | 400 | | ||||||||||||
Net income (loss) |
$ | (13,574 | ) | $ | 31,390 | $ | (9,313 | ) | $ | 63,533 | ||||||
Weighted average shares outstanding |
||||||||||||||||
Basic |
90,863,950 | 79,940,308 | 90,849,834 | 78,928,849 | ||||||||||||
Effect of dilutive securities |
1,288,633 | 138,299 | 1,284,798 | 150,417 | ||||||||||||
Diluted |
92,152,583 | 80,078,607 | 92,134,632 | 79,079,266 | ||||||||||||
Earnings (loss) per share |
||||||||||||||||
Basic |
$ | (0.15 | ) | $ | 0.39 | $ | (0.10 | ) | $ | 0.80 | ||||||
Diluted |
$ | (0.15 | ) | $ | 0.39 | $ | (0.10 | ) | $ | 0.80 |
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
PATRIOT COAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
June 30, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 239,182 | $ | 27,098 | ||||
Accounts receivable and other, net of allowance for doubtful accounts of
$141 as of June 30, 2010 and December 31, 2009 |
198,915 | 188,897 | ||||||
Inventories |
81,844 | 81,188 | ||||||
Prepaid expenses and other current assets |
20,501 | 14,366 | ||||||
Total current assets |
540,442 | 311,549 | ||||||
Property, plant, equipment and mine development |
||||||||
Land and coal interests |
2,847,392 | 2,864,225 | ||||||
Buildings and improvements |
414,852 | 396,449 | ||||||
Machinery and equipment |
660,736 | 631,615 | ||||||
Less accumulated depreciation, depletion and amortization |
(755,364 | ) | (731,035 | ) | ||||
Property, plant, equipment and mine development, net |
3,167,616 | 3,161,254 | ||||||
Notes receivable |
93,256 | 109,137 | ||||||
Investments and other assets |
54,047 | 36,223 | ||||||
Total assets |
$ | 3,855,361 | $ | 3,618,163 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of debt |
$ | 4,979 | $ | 8,042 | ||||
Trade accounts payable and accrued expenses |
408,934 | 406,351 | ||||||
Below market sales contracts acquired |
112,227 | 150,441 | ||||||
Total current liabilities |
526,140 | 564,834 | ||||||
Long-term debt, less current maturities |
448,259 | 197,951 | ||||||
Asset retirement obligations |
249,836 | 244,518 | ||||||
Workers compensation obligations |
210,347 | 193,719 | ||||||
Accrued postretirement benefit costs |
1,176,413 | 1,169,981 | ||||||
Obligation to industry fund |
40,442 | 42,197 | ||||||
Below market sales contracts acquired, noncurrent |
123,408 | 156,120 | ||||||
Other noncurrent liabilities |
138,409 | 113,349 | ||||||
Total liabilities |
2,913,254 | 2,682,669 | ||||||
Stockholders equity |
||||||||
Common stock
($0.01 par value; 300,000,000 and 100,000,000 shares authorized; 90,863,950
and 90,319,939 shares issued and outstanding at June 30, 2010 and
December 31, 2009, respectively) |
909 | 903 | ||||||
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares
outstanding at June 30, 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 June 30, 2010 and
December 31, 2009) |
| | ||||||
Additional paid-in capital |
957,464 | 947,159 | ||||||
Retained earnings |
227,295 | 236,608 | ||||||
Accumulated other comprehensive loss |
(243,561 | ) | (249,176 | ) | ||||
Total stockholders equity |
942,107 | 935,494 | ||||||
Total liabilities and stockholders equity |
$ | 3,855,361 | $ | 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
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Cash Flows From Operating Activities |
||||||||
Net income (loss) |
$ | (9,313 | ) | $ | 63,533 | |||
Adjustments to reconcile net income (loss) to net cash
provided by
operating activities: |
||||||||
Depreciation, depletion and amortization |
99,962 | 105,336 | ||||||
Sales contract accretion |
(59,043 | ) | (138,528 | ) | ||||
Impairment charge |
2,823 | | ||||||
Net gain on disposal or exchange of assets |
(41,555 | ) | (4,061 | ) | ||||
Stock-based compensation expense |
9,228 | 5,347 | ||||||
Changes in current assets and liabilities: |
||||||||
Accounts receivable |
(9,618 | ) | 8,937 | |||||
Inventories |
(656 | ) | (16,995 | ) | ||||
Other current assets |
(7,608 | ) | (11,509 | ) | ||||
Accounts payable and accrued expenses |
(12,459 | ) | 193 | |||||
Interest on notes receivable |
(6,620 | ) | (6,941 | ) | ||||
Reclamation and remediation obligations |
11,827 | 5,538 | ||||||
Workers compensation obligations |
5,020 | 890 | ||||||
Accrued postretirement benefit costs |
24,432 | 14,121 | ||||||
Obligation to industry fund |
(1,455 | ) | (1,606 | ) | ||||
Restructuring charge, noncurrent |
9,248 | | ||||||
Other, net |
6,585 | (4,618 | ) | |||||
Net cash provided by operating activities |
20,798 | 19,637 | ||||||
Cash Flows From Investing Activities |
||||||||
Additions to property, plant, equipment and mine development |
(63,692 | ) | (34,819 | ) | ||||
Additions to advance mining royalties |
(9,465 | ) | (7,081 | ) | ||||
Proceeds from disposal or exchange of assets, net of notes
receivable |
1,384 | 4,768 | ||||||
Proceeds from notes receivable |
22,100 | | ||||||
Investment in joint ventures |
(300 | ) | | |||||
Other |
| 131 | ||||||
Net cash used in investing activities |
(49,973 | ) | (37,001 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Proceeds from debt offering, net of discount |
248,198 | | ||||||
Deferred financing costs |
(20,542 | ) | | |||||
Proceeds from coal reserve financing transaction |
17,700 | | ||||||
Long-term debt payments |
(5,179 | ) | (3,103 | ) | ||||
Proceeds from equity offering, net of costs |
| 89,132 | ||||||
Short-term debt payments |
| (23,000 | ) | |||||
Proceeds from employee stock purchases |
1,082 | 667 | ||||||
Net cash provided by financing activities |
241,259 | 63,696 | ||||||
Net increase in cash and cash equivalents |
212,084 | 46,332 | ||||||
Cash and cash equivalents at beginning of period |
27,098 | 2,872 | ||||||
Cash and cash equivalents at end of period |
$ | 239,182 | $ | 49,204 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. 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 13 for our segment disclosures.
The accompanying condensed consolidated financial statements as of June 30, 2010 and for
the three and six months ended June 30, 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 and six months ended June 30, 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. We adopted this guidance effective January 1, 2010. See Note
3 for additional disclosures.
Consolidation
In June 2009, the FASB issued authoritative guidance requiring companies 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. We
adopted this guidance effective January 1, 2010. Upon adoption, we performed a qualitative
assessment of our existing interests and determined that we held no interest in 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 that time. See Note 15 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 wholly-owned bankruptcy-remote entity
(facilitating entity), which then sells an undivided interest in all of the trade receivables to
creditors as collateral for any borrowings. At the inception of the program, we had commitments
for up to $75 million of borrowing capacity. 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. Available liquidity under the program fluctuates with the
balance of our trade accounts receivables.
Based on our continuing involvement with the trade accounts receivable balances, including
continued risk of loss, the sale of the trade receivables to the creditors does not receive sale
accounting treatment. As such, the trade accounts receivable balances remain on our financial
statements until settled. Any direct borrowings will be recorded as secured debt. The
outstanding trade accounts receivable balance was $160.4 million as of June 30, 2010. As of June
30, 2010, there were no letters of credit or direct borrowings under this program.
4
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(4) Restructuring and Impairment Charge
In the second quarter of 2010, we recorded a $14.8 million restructuring and impairment
charge related to the June 2010 closure of the Harris No. 1 mine as a result of adverse geologic
conditions and further rationalization of our operations at the Rocklick mining complex based on
this early closure. The Harris No. 1 mine was nearing the end of its projected mining life and
was scheduled for closure in 2011. The charge includes a $2.8 million non-cash, impairment
component related to equipment and coal reserves that will be abandoned due to the mine closure.
Additionally, the charge includes a restructuring component totaling $12.0 million for payment
of obligations that will be made with no future economic benefit for remaining operational
contracts, which provide for the use of a beltline and rights to coal reserves. Payments of
these obligations will occur through the end of 2013. The current portion of the restructuring
liability of $2.8 million is included in Trade accounts payable and accrued expenses and the
long-term portion of $9.2 million is included in Other noncurrent liabilities.
(5) Net Gain on Disposal or Exchange of Assets and Other Commercial Transactions
Net Gain on Disposal or Exchange of Assets
In
the normal course of business, we enter into certain exchange agreements swapping
non-strategic coal mineral rights or other assets for coal mineral rights which are more
strategic to our operations.
In the second quarter of 2010, we entered into two separate agreements with other coal
producers to exchange certain of our non-strategic coal mineral rights for certain of their coal
mineral rights located near our Wells and Corridor G mining complexes. We recognized gains
totaling $14.3 million on these transactions.
Effective April 2010, we entered into an agreement to surrender our rights to non-strategic
leased coal reserves and the associated mining permits at our Rocklick mining complex in
exchange for the release of the related reclamation obligations. We
recognized a gain of $2.8
million on the April 2010 transaction as a result of transferring the reclamation liability.
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 $24.0 million on this transaction in the first
quarter of 2010.
In June 2009, we entered into an agreement to swap certain surface land for certain coal
mineral rights and cash with another coal producer. We recognized a gain totaling $4.2 million
on this transaction.
These exchange transactions were recorded at fair value in accordance with authoritative
guidance and, in some circumstances, as determined by a third-party valuation specialist. The
valuations 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 Commercial Transactions
Effective April 2010, we entered into an agreement to sell coal mineral rights at our
Federal mining complex to a third party lessor and added them to an existing lease. In
accordance with authoritative guidance, we recorded these transactions as a financing
arrangement. Therefore, we recorded the $17.7 million cash consideration as a liability, with
$1.2 million of the liability recorded in Trade accounts payable and accrued expenses and
$16.5 million recorded in Other noncurrent liabilities. The liability will be accreted through
interest expense over an expected lease term of approximately five years and will be relieved as
we make future royalty payments.
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 sheets.
Other revenues include payments from customer settlements, royalties related to coal lease
agreements and farm income. In certain situations, we agreed to release certain metallurgical
and thermal customers from receipt of committed tons in exchange for a cash settlement. In the
second quarter of 2009, these cash settlements represented a significant portion of other
revenue and operating profit.
5
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
We have interests in joint ventures that are accounted for under the equity method. The
book value of our equity method investments was $22.4 million and $20.9 million as of June 30,
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 $8.8 million including additional commitments made during the six months ended June 30, 2010.
In the second quarter of 2010, we agreed to provide a limited guaranty of the payment and
performance under a loan entered into by one of our joint ventures. The loan was obtained to
purchase equipment, which is pledged as collateral for the loan. In the event of default, we
would be required to pay a maximum of $3.5 million. The maximum term of the loan is 60 months
after August 2010 and the loan balance at June 30, 2010 was $2.5 million. At June 30, 2010,
there was no carrying amount of the liability related to this guarantee on our condensed
consolidated balance sheets based on the amount of exposure and the likelihood of required
performance.
(6) Income Tax Provision
For the three and six months ended June 30, 2010, we recorded an income tax provision of
$0.2 and $0.4 million related to certain state taxes. For the three and six months ended June
30, 2009, no income tax provision was recorded. No federal income tax provision was recorded in
2010 or 2009 due to our anticipated tax net operating loss for the respective year 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 in the July 2008 Magnum acquisition, with
such amounts being included in the computation of book income but excluded from the computation
of taxable income.
(7) 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 and six months ended June 30, 2010 and 2009, the effect of dilutive
securities includes the impact of stock options and restricted stock units. For the three and
six months ended June 30, 2010, 1.3 million shares related to share-based compensation awards
were excluded from the diluted earnings per share calculation because they were anti-dilutive
due to the net loss for those periods. For the three and six months ended June 30, 2009, 1.7
million shares and 2.1 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.
(8) Comprehensive Income (Loss)
The following table sets forth the after-tax components of comprehensive income for the
three and six months ended June 30, 2010 and 2009:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income (loss) |
$ | (13,574 | ) | $ | 31,390 | $ | (9,313 | ) | $ | 63,533 | ||||||
Accumulated actuarial loss and prior
service cost realized in net income |
9,285 | 3,816 | 18,191 | 7,632 | ||||||||||||
Unrealized loss on
actuarially-determined liability (See
Note 11) |
| | (11,500 | ) | | |||||||||||
Net change in fair value of diesel fuel hedge |
(2,142 | ) | 7,629 | (1,076 | ) | 7,769 | ||||||||||
Comprehensive income (loss) |
$ | (6,431 | ) | $ | 42,835 | $ | (3,698 | ) | $ | 78,934 | ||||||
6
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(9) Inventories
Inventories consisted of the following:
June 30, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
Materials and supplies |
$ | 43,213 | $ | 39,285 | ||||
Saleable coal |
23,111 | 28,255 | ||||||
Raw coal |
15,520 | 13,648 | ||||||
Total |
$ | 81,844 | $ | 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.
(10) Postretirement Benefit Costs
Net periodic postretirement benefit costs included the following components:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Service cost for benefits earned |
$ | 1,508 | $ | 1,024 | $ | 2,850 | $ | 2,046 | ||||||||
Interest cost on accumulated
postretirement benefit obligation |
18,950 | 17,580 | 37,900 | 35,210 | ||||||||||||
Amortization of actuarial loss |
9,200 | 4,591 | 18,400 | 9,181 | ||||||||||||
Amortization of prior service cost |
(200 | ) | (138 | ) | (400 | ) | (276 | ) | ||||||||
Net periodic postretirement
benefit costs |
$ | 29,458 | $ | 23,057 | $ | 58,750 | $ | 46,161 | ||||||||
(11) Healthcare Legislation
In March 2010, the Patient Protection and Affordable Care Act, and a companion bill, the
Health Care and Education Reconciliation Act of 2010, (collectively, the 2010 healthcare
legislation) were 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 2010
healthcare legislation has both short-term and long-term implications on healthcare benefit plan
standards. Implementation of the 2010 healthcare legislation will 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 50% of employees at our company operations were represented by an organized
labor union at June 30, 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 2010 healthcare legislation will be included in
any new labor agreements.
One provision of the 2010 healthcare 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.
7
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
We are currently analyzing the 2010 healthcare 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 2010 healthcare legislation 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 June 30, 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 2010 healthcare
legislation in future periods as additional information and guidance becomes available.
The 2010 healthcare legislation 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
the actuarial gain included in Accumulated other comprehensive loss on our balance sheet. We
adjusted the amortization of the actuarial gain beginning in the second quarter of 2010. As of
June 30, 2010, we were not able to estimate the impact of the 2010 healthcare legislation on our
obligations related to future pneumoconiosis 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) Long-Term Debt, Current and Noncurrent
Our total indebtedness consisted of the following:
June 30, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
8.25% Senior Notes due 2018 |
$ | 248,235 | $ | | ||||
3.25% Convertible Senior Notes due 2013 |
171,690 | 167,501 | ||||||
Capital leases |
23,907 | 28,039 | ||||||
Promissory notes |
9,406 | 10,453 | ||||||
Total |
453,238 | 205,993 | ||||||
Less current portion of debt |
(4,979 | ) | (8,042 | ) | ||||
Long-term debt, less current maturities |
$ | 448,259 | $ | 197,951 | ||||
Credit Facility
Effective October 31, 2007, we entered into a $500 million, four-year revolving credit
facility, which included a $50 million swingline sub-facility and a letter of credit
sub-facility, subsequently amended for the Magnum acquisition and the issuance of the
convertible notes. Effective May 5, 2010, we entered into an amended and restated Credit
Agreement, which, among other things, extended the maturity date of the revolving credit
facility and adjusted borrowing capacity. After the amendment and restatement, we have $427.5
million available under the revolving credit facility with a maturity date of December 31, 2013.
We incurred total fees of $10.6 million in relation to the new agreement. These fees as well as
the fees related to the initial agreement will be amortized over the remaining term of the
amended and restated agreement. We wrote-off $0.6 million of the fees from the initial agreement
due to changes to the syndication group.
This facility is available for our working capital requirements, capital expenditures and
other corporate purposes. As of June 30, 2010 and December 31, 2009, the balance of outstanding
letters of credit issued against the credit facility totaled $334.5 million and $352.1 million,
respectively. There were no outstanding short-term borrowings against this facility as of June
30, 2010 and December 31, 2009. Availability under the credit facility was $93.0 million and
$170.4 million as of June 30, 2010 and December 31, 2009, respectively. At June 30, 2010, we were
in compliance with the covenants of our credit facility.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
The obligations under our credit facility are secured by a first lien on substantially all
of our assets, including but not limited to certain of our mines, coal reserves and related
fixtures. The credit facility contains certain customary covenants, including financial
covenants limiting our indebtedness (maximum net debt leverage ratio of 3.00) and requiring
minimum EBITDA (as defined in the Credit Agreement) coverage of cash interest expense (minimum
interest coverage ratio on a rolling four quarter basis of 3.00 from May 5, 2010 through the
quarter ending December 31, 2010 and 3.50 for the quarter ending March 31, 2011 and thereafter),
as well as certain limitations on, among other things, additional debt, liens, investments,
acquisitions and capital expenditures, future dividends and asset sales. The credit facility
calls for quarterly reporting of compliance with financial covenants. The terms of the credit
facility also contain certain customary events of default, which give the lenders the right to
accelerate payments of outstanding debt in certain circumstances. Customary events of default
include breach of covenants, failure to maintain required ratios, failure to make principal
payments or to make interest or fee payments within a grace period, and default, beyond any
applicable grace period, on any of our other indebtedness exceeding a certain amount.
Senior Notes Issuance
On May 5, 2010, we completed a public offering of $250 million in aggregate principal
amount of 8.25% Senior Notes due 2018. The net proceeds of the offering were approximately $240
million after deducting the initial $1.8 million discount, purchasers commissions and fees, and
expenses of the offering. The net proceeds will be used for general corporate purposes, which
could include capital expenditures for development of additional metallurgical coal production
capacity, working capital, acquisitions, refinancing of other debt or other capital
transactions. The discount will be amortized over the term of the notes.
Interest on the notes is payable semi-annually in arrears on April 30 and October 30 of
each year, beginning October 30, 2010. The notes mature on April 30, 2018, unless redeemed in
accordance with their terms prior to such date. The notes are senior unsecured obligations and
rank equally with all of our existing and future senior debt and are senior to any subordinated
debt. The notes are guaranteed by the majority of our wholly-owned subsidiaries.
The indenture governing the notes contains customary covenants that, among other things,
limit our ability to incur additional indebtedness and issue preferred equity, pay dividends or
distributions, repurchase equity or repay subordinated indebtedness, make investments or certain
other restricted payments, create liens, sell assets, enter into agreements that restrict
dividends, distributions or other payments from subsidiaries, enter into transactions with
affiliates, and consolidate, merge or transfer all or substantially all of our assets. The
indenture also contains certain customary events of default, which give the lenders the right to
accelerate payments of outstanding debt in certain circumstances. Customary events of default
include breach of covenants, failure to make principal payments or to make interest payments
within a grace period, and default, beyond any applicable grace period, on any of our other
indebtedness exceeding a certain amount.
(13) 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 six months ended June 30, 2010 and 2009, our sales to electricity generators
were 77% and 86%, respectively. Our sales to steel and coke producers were 23% and 14% for the
six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010
and 2009, our revenues attributable to foreign countries, based on where the product was
shipped, were $274.5 million and $145.0 million, respectively. We utilize underground and
surface mining methods and produce coal with high and medium Btu content. Our operations have
relatively short shipping distances from the mine to most of our domestic utility customers and
certain metallurgical coal customers. Corporate and Other includes selling and administrative
expenses, net gain on disposal or exchange of assets and costs associated with past mining
obligations.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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 (loss)
before deducting interest income and expense; reclamation and remediation obligation expense;
depreciation, depletion and amortization; restructuring and impairment charge; and net sales
contract accretion. Net sales contract accretion represents contract accretion excluding
back-to-back coal purchase and sales contracts. The contract accretion on the back-to-back coal
purchase and sales contracts reflects the accretion related to certain coal purchase and sales
contracts existing on July 23, 2008, whereby Magnum purchased coal from third parties to fulfill
tonnage commitments on sales contracts. Segment Adjusted EBITDA is 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 and six months ended June 30, 2010 and 2009 were as
follows:
Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | |||||||||||||||||||||||||||||||
Illinois | Corporate | Illinois | Corporate | |||||||||||||||||||||||||||||
Appalachia | Basin | and Other | Total | Appalachia | Basin | and Other | Total | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenues |
$ | 469,993 | $ | 68,999 | $ | | $ | 538,992 | $ | 863,422 | $ | 142,827 | $ | | $ | 1,006,249 | ||||||||||||||||
Adjusted EBITDA |
82,041 | (1,533 | ) | (39,914 | ) | 40,594 | 152,904 | 5,284 | (72,358 | ) | 85,830 | |||||||||||||||||||||
Additions to property,
plant, equipment and
mine development |
25,351 | 3,115 | 96 | 28,562 | 48,993 | 14,525 | 174 | 63,692 |
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||||||||||||||||||||||||||
Illinois | Corporate | Illinois | Corporate | |||||||||||||||||||||||||||||
Appalachia | Basin | and Other | Total | Appalachia | Basin | and Other | Total | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenues |
$ | 437,036 | $ | 69,960 | $ | | $ | 506,996 | $ | 896,590 | $ | 139,342 | $ | | $ | 1,035,932 | ||||||||||||||||
Adjusted EBITDA |
68,605 | 3,873 | (41,540 | ) | 30,938 | 138,092 | 6,914 | (92,196 | ) | 52,810 | ||||||||||||||||||||||
Additions to property,
plant, equipment and
mine development |
13,566 | 1,809 | 402 | 15,777 | 30,856 | 3,352 | 611 | 34,819 |
A reconciliation of Adjusted EBITDA to net income (loss) follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Total Adjusted EBITDA |
$ | 40,594 | $ | 30,938 | $ | 85,830 | $ | 52,810 | ||||||||
Depreciation, depletion and
amortization |
(50,350 | ) | (50,357 | ) | (99,962 | ) | (105,336 | ) | ||||||||
Reclamation and remediation
obligation expense |
(11,004 | ) | (7,611 | ) | (21,850 | ) | (14,062 | ) | ||||||||
Sales contract accretion, net |
33,735 | 61,721 | 59,043 | 138,528 | ||||||||||||
Restructuring and impairment
charge |
(14,838 | ) | | (14,838 | ) | | ||||||||||
Interest expense |
(14,795 | ) | (9,137 | ) | (23,827 | ) | (17,730 | ) | ||||||||
Interest income |
3,249 | 5,836 | 6,691 | 9,323 | ||||||||||||
Income tax provision |
(165 | ) | | (400 | ) | | ||||||||||
Net income (loss) |
$ | (13,574 | ) | $ | 31,390 | $ | (9,313 | ) | $ | 63,533 | ||||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(14) 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 June 30, 2010, the
notional amounts outstanding for these swaps included 7.1 million gallons of heating oil
expiring throughout the remainder of 2010 and 5.0 million gallons of heating oil expiring
throughout 2011. For the last six months of 2010, we expect to purchase approximately 11 million
gallons of diesel fuel across all operations. For the three and six months ended June 30, 2010,
we recognized a net gain of $0.1 million in earnings on settled contracts for both periods. For
the three and six months ended June 30, 2009, we recognized a loss of $1.4 million and a loss of
$3.5 million in earnings on settled contracts, respectively. 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 and six months ended June 30, 2010 and 2009, resulting in less than
$0.1 million recorded directly to earnings in each of these periods.
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 8 for the impact
of our fuel hedges on comprehensive income.
June 30, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
Fair value of current fuel contracts (Prepaid expenses and
other current assets) |
$ | 936 | $ | 2,021 | ||||
Fair value of noncurrent fuel contracts (Investments and other
assets) |
117 | | ||||||
Fair value of current fuel contracts (Trade accounts payable and
accrued expenses) |
1,046 | 986 | ||||||
Fair value of noncurrent fuel contracts (Other noncurrent
liabilities) |
48 | | ||||||
Net unrealized gains from fuel hedges, net of tax (Accumulated
other comprehensive loss) |
(41 | ) | 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.
(15) 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.
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
June 30, 2010.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
The following table summarizes the fair value of our remaining financial instruments.
June 30, 2010 | December 31, 2009 | |||||||
(Dollars in thousands) | ||||||||
Assets: |
||||||||
Fuel contracts, cash flow hedges |
$ | 1,053 | $ | 2,021 | ||||
Liabilities: |
||||||||
Fuel contracts, cash flow hedges |
1,094 | 986 | ||||||
$200 million of 3.25% Convertible Senior
Notes due 2013 |
168,256 | 163,617 | ||||||
$250 million of 8.25% Senior Notes due 2018 |
239,375 | |
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 14. The fair value of
the Convertible Senior Notes and the 8.25% Senior Notes was estimated using the last traded
value on June 30, as provided by a third party.
(16) Commitments and Contingencies
Commitments
As of June 30, 2010, purchase commitments for capital expenditures were $29.9 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 (CWA) 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 CWA 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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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 in the WVDEP
Action 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
Federal Apogee Case and Federal Hobet Case
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 CWA). 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 compliance with the limits of
the NPDES permit, fines and penalties as well as injunctive relief 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 CWA). 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
original 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 with respect to
the permits covered by the Federal Apogee Case and the Federal Hobet Case 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.
As a result, we may incur additional costs beyond what we have
projected in our current estimates.
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. 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
decree. The remedies sought by the plaintiffs include compliance with
the terms of the consent decree, the imposition of per diem and other fines
as well as an obligation to pay plaintiffs attorneys fees. A hearing has been scheduled on
these motions for August 9, 2010.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
Federal Hobet Surface Mine No. 22 Case
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, alleging 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. We refer to this as the Federal Hobet Surface Mine No. 22 Case. In June 2010
the U.S. District Court denied Hobets motion to dismiss the case and ruled in favor of the
plaintiffs, finding that Hobet had violated its NPDES and SMCRA permits at Hobet Surface Mine
No. 22 and that the plaintiffs were entitled to injunctive relief. A hearing to address the
scope and terms of the injunctive relief has been scheduled for August 9, 2010.
Catenary WVDEP Action
On April 23, 2010, WVDEP filed a lawsuit against Catenary Coal Company,
LLC (Catenary), one
of our subsidiaries, in the Boone County circuit court. We refer to this case as the Catenary
WVDEP Action. This lawsuit alleged that Catenary had discharged selenium from its surface mining
operations in violation of certain of its NPDES and surface mining permits. WVDEP is seeking
fines and penalties as well as injunctions prohibiting Catenary from discharging pollutants,
including selenium, in violation of laws and its NPDES permits.
Although we intend to defend ourselves vigorously against these
allegations, we may consider alternative resolutions to this matter
if they would be in the best interest of the Company.
Federal Catenary/ Hobet Case
In addition, on June 18, 2010, OVEC and three other environmental groups filed a lawsuit
against Hobet and Catenary in the U.S. District Court under the citizen suit provisions of the
CWA and SMCRA. We refer to this case as the Federal Catenary/Hobet Case. The plaintiffs allege
that Hobet and Catenary have discharged, and continue to discharge selenium in violation of
their NPDES and surface mining permits. The Federal Catenary/Hobet Case involves the same two
NPDES permits that are the subject of the Catenary WVDEP Action and the same four NPDES permits
that are the subject of the WVDEP Action and the Federal Hobet Case. The plaintiffs seek, among
other remedies, immediate compliance with the limits of the NPDES
permits, the imposition of fines and penalties, as well as injunctions prohibiting Hobet
and Catenary from further violating laws and their permits. We are unable to predict the
likelihood of success of the plaintiffs claims. Although we intend to defend ourselves vigorously
against all claims, we may consider alternative resolutions to this matter
if they would be in the best interest of the Company.
General Selenium Matters
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.
The WVDEP published a notice to extend the compliance deadlines, but the EPA objected to the
extensions. We have filed administrative appeals and judicial actions which we believe
effectively stayed any enforcement of the effective dates for the
selenium limits. With respect to any selenium-related matters,
including the specific matters discussed above, 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 $101.8 million and $96.0 million at June 30, 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 our mining permits, current court
orders, and consent decrees. This estimate was prepared considering the dynamics
of current legislation, capabilities of currently available technology and our planned
remediation strategy. Future changes to legislation, compliance with
judicial rulings, consent decrees and regulatory requirements, 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 condensed consolidated balance sheets.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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.
Flood Litigation
2001 Flood Litigation
One of our subsidiaries, 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 with no material impact to our financial statements.
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 2004 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.
15
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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 June 30, 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.
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 were filed by Peabody and Patriot and were denied. 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 June 30, 2010, there were approximately 140 related
lawsuits. 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 most of the
plaintiffs have access to public water. 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 have
terminated one employee. The terminated employee subsequently admitted to falsifying inspection
records and has been 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. We have
provided the equipment and information as required by the subpoena.
16
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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.
(17) 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.
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 these leases are equal to the respective future minimum lease payments,
assuming no amounts could be recovered from third parties.
(18) Related Party Transactions
ArcLight Energy Partners Fund I L.P. (ArcLight) is a 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 and six months ended June 30,
2010 were approximately $245,000 and $570,000, respectively. Royalty payments to ArcLight for
the three and six months ended June 30, 2009 were approximately $345,000 and $450,000,
respectively.
(19) 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 subsidiary guarantors of our
8.25% Senior Notes due 2018 (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. The guarantees from each of
the Guarantor Subsidiaries are full, unconditional, joint and several. Accordingly, separate
financial statements of the wholly-owned Guarantor Subsidiaries are not presented because the
Guarantor Subsidiaries are 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.
17
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2010 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantor | Guarantor | ||||||||||||||||||
Company | Subsidiaries | Entity | Eliminations | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales |
$ | | $ | 533,800 | $ | | $ | | $ | 533,800 | ||||||||||
Other revenues |
| 5,192 | | | 5,192 | |||||||||||||||
Total revenues |
| 538,992 | | | 538,992 | |||||||||||||||
Costs and expenses |
||||||||||||||||||||
Operating costs and expenses |
93 | 504,111 | | | 504,204 | |||||||||||||||
Income from equity affiliates |
(13,059 | ) | (1,245 | ) | | 13,059 | (1,245 | ) | ||||||||||||
Depreciation, depletion and
amortization |
531 | 49,819 | | | 50,350 | |||||||||||||||
Reclamation and remediation
obligation expense |
| 11,004 | | | 11,004 | |||||||||||||||
Sales contract accretion |
| (33,735 | ) | | | (33,735 | ) | |||||||||||||
Restructuring and impairment charge |
| 14,838 | | | 14,838 | |||||||||||||||
Selling and administrative expenses |
13,242 | (44 | ) | | | 13,198 | ||||||||||||||
Net gain on disposal or
exchange of assets |
| (17,759 | ) | | | (17,759 | ) | |||||||||||||
Operating profit (loss) |
(807 | ) | 12,003 | | (13,059 | ) | (1,863 | ) | ||||||||||||
Interest expense |
12,768 | 2,027 | 195 | (195 | ) | 14,795 | ||||||||||||||
Interest income |
(1 | ) | (3,248 | ) | (195 | ) | 195 | (3,249 | ) | |||||||||||
Income (loss) before income taxes |
(13,574 | ) | 13,224 | | (13,059 | ) | (13,409 | ) | ||||||||||||
Income tax provision |
| 165 | | | 165 | |||||||||||||||
Net income (loss) |
$ | (13,574 | ) | $ | 13,059 | $ | | $ | (13,059 | ) | $ | (13,574 | ) | |||||||
18
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2010 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantor | Guarantor | ||||||||||||||||||
Company | Subsidiaries | Entity | Eliminations | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Revenues |
||||||||||||||||||||
Sales |
$ | | $ | 998,008 | $ | | $ | | $ | 998,008 | ||||||||||
Other revenues |
| 8,241 | | | 8,241 | |||||||||||||||
Total revenues |
| 1,006,249 | | | 1,006,249 | |||||||||||||||
Costs and expenses |
||||||||||||||||||||
Operating costs and expenses |
186 | 937,509 | | | 937,695 | |||||||||||||||
Income from equity affiliates |
(38,280 | ) | (1,693 | ) | | 38,280 | (1,693 | ) | ||||||||||||
Depreciation, depletion and
amortization |
1,075 | 98,887 | | | 99,962 | |||||||||||||||
Reclamation and remediation
obligation expense |
| 21,850 | | | 21,850 | |||||||||||||||
Sales contract accretion |
| (59,043 | ) | | | (59,043 | ) | |||||||||||||
Restructuring and impairment charge |
| 14,838 | | | 14,838 | |||||||||||||||
Selling and administrative expenses |
25,981 | (9 | ) | | | 25,972 | ||||||||||||||
Net gain on disposal or
exchange of assets |
| (41,555 | ) | | | (41,555 | ) | |||||||||||||
Operating profit (loss) |
11,038 | 35,465 | | (38,280 | ) | 8,223 | ||||||||||||||
Interest expense |
20,354 | 3,473 | 270 | (270 | ) | 23,827 | ||||||||||||||
Interest income |
(3 | ) | (6,688 | ) | (270 | ) | 270 | (6,691 | ) | |||||||||||
Income (loss) before income taxes |
(9,313 | ) | 38,680 | | (38,280 | ) | (8,913 | ) | ||||||||||||
Income tax provision |
| 400 | | | 400 | |||||||||||||||
Net income (loss) |
$ | (9,313 | ) | $ | 38,280 | $ | | $ | (38,280 | ) | $ | (9,313 | ) | |||||||
19
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2009 | ||||||||||||||||
Parent | Guarantor | |||||||||||||||
Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues |
||||||||||||||||
Sales |
$ | | $ | 485,049 | $ | | $ | 485,049 | ||||||||
Other revenues |
| 21,947 | | 21,947 | ||||||||||||
Total revenues |
| 506,996 | | 506,996 | ||||||||||||
Costs and expenses |
||||||||||||||||
Operating costs and expenses |
| 467,960 | | 467,960 | ||||||||||||
(Income) loss from equity affiliates |
(50,611 | ) | (231 | ) | 50,611 | (231 | ) | |||||||||
Depreciation, depletion and
amortization |
474 | 49,883 | | 50,357 | ||||||||||||
Reclamation and remediation
obligation expense |
| 7,611 | | 7,611 | ||||||||||||
Sales contract accretion |
| (60,721 | ) | | (60,721 | ) | ||||||||||
Selling and administrative expenses |
11,218 | 142 | | 11,360 | ||||||||||||
Net gain on disposal or
exchange of assets |
| (4,031 | ) | | (4,031 | ) | ||||||||||
Operating profit |
38,919 | 46,383 | (50,611 | ) | 34,691 | |||||||||||
Interest expense |
7,562 | 1,575 | | 9,137 | ||||||||||||
Interest income |
(33 | ) | (5,803 | ) | | (5,836 | ) | |||||||||
Income before income taxes |
31,390 | 50,611 | (50,611 | ) | 31,390 | |||||||||||
Income tax provision |
| | | | ||||||||||||
Net income |
$ | 31,390 | $ | 50,611 | $ | (50,611 | ) | $ | 31,390 | |||||||
20
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2009 | ||||||||||||||||
Parent | Guarantor | |||||||||||||||
Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues |
||||||||||||||||
Sales |
$ | | $ | 1,007,887 | $ | | $ | 1,007,887 | ||||||||
Other revenues |
| 28,045 | | 28,045 | ||||||||||||
Total revenues |
| 1,035,932 | | 1,035,932 | ||||||||||||
Costs and expenses |
||||||||||||||||
Operating costs and expenses |
| 962,937 | | 962,937 | ||||||||||||
(Income) loss from equity affiliates |
(102,666 | ) | | 102,666 | | |||||||||||
Depreciation, depletion and
amortization |
1,023 | 104,313 | | 105,336 | ||||||||||||
Reclamation and remediation
obligation expense |
| 14,062 | | 14,062 | ||||||||||||
Sales contract accretion |
| (138,528 | ) | | (138,528 | ) | ||||||||||
Selling and administrative expenses |
23,002 | 1,244 | | 24,246 | ||||||||||||
Net gain on disposal or
exchange of assets |
| (4,061 | ) | | (4,061 | ) | ||||||||||
Operating profit |
78,641 | 95,965 | (102,666 | ) | 71,940 | |||||||||||
Interest expense |
15,143 | 2,587 | | 17,730 | ||||||||||||
Interest income |
(35 | ) | (9,288 | ) | | (9,323 | ) | |||||||||
Income before income taxes |
63,533 | 102,666 | (102,666 | ) | 63,533 | |||||||||||
Income tax provision |
| | | | ||||||||||||
Net income |
$ | 63,533 | $ | 102,666 | $ | (102,666 | ) | $ | 63,533 | |||||||
21
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2010 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantor | Guarantor | ||||||||||||||||||
Company | Subsidiaries | Entity | Eliminations | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 238,706 | $ | 476 | $ | | $ | | $ | 239,182 | ||||||||||
Accounts receivable and other, net |
134 | 198,781 | 160,430 | (160,430 | ) | 198,915 | ||||||||||||||
Inventories |
| 81,844 | | | 81,844 | |||||||||||||||
Prepaid expenses and other current assets |
1,713 | 18,788 | | | 20,501 | |||||||||||||||
Total current assets |
240,553 | 299,889 | 160,430 | (160,430 | ) | 540,442 | ||||||||||||||
Property, plant, equipment and mine development |
||||||||||||||||||||
Land and coal interests |
| 2,847,392 | | | 2,847,392 | |||||||||||||||
Buildings and improvements |
1,737 | 413,115 | | | 414,852 | |||||||||||||||
Machinery and equipment |
16,601 | 644,135 | | | 660,736 | |||||||||||||||
Less accumulated depreciation,
depletion and amortization |
(13,119 | ) | (742,245 | ) | | | (755,364 | ) | ||||||||||||
Property, plant, equipment and
mine development, net |
5,219 | 3,162,397 | | | 3,167,616 | |||||||||||||||
Notes receivable |
| 93,256 | | | 93,256 | |||||||||||||||
Investments, intercompany and other assets |
1,385,297 | (149,568 | ) | | (1,181,682 | ) | 54,047 | |||||||||||||
Total assets |
$ | 1,631,069 | $ | 3,405,974 | $ | 160,430 | $ | (1,342,112 | ) | $ | 3,855,361 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Current portion of debt |
$ | | $ | 4,979 | $ | | $ | | $ | 4,979 | ||||||||||
Trade
accounts payable and accrued
expenses |
22,400 | 386,534 | 160,430 | (160,430 | ) | 408,934 | ||||||||||||||
Below market sales contracts acquired |
| 112,227 | | | 112,227 | |||||||||||||||
Total current liabilities |
22,400 | 503,740 | 160,430 | (160,430 | ) | 526,140 | ||||||||||||||
Long-term debt, less current maturities |
419,925 | 28,334 | | | 448,259 | |||||||||||||||
Asset retirement obligations |
| 249,836 | | | 249,836 | |||||||||||||||
Workers compensation obligations |
| 210,347 | | | 210,347 | |||||||||||||||
Accrued postretirement benefit costs |
990 | 1,175,423 | | | 1,176,413 | |||||||||||||||
Obligation to industry fund |
| 40,442 | | | 40,442 | |||||||||||||||
Below market sales contracts acquired, noncurrent |
| 123,408 | | | 123,408 | |||||||||||||||
Other noncurrent liabilities |
1,852 | 136,557 | | | 138,409 | |||||||||||||||
Total liabilities |
445,167 | 2,468,087 | 160,430 | (160,430 | ) | 2,913,254 | ||||||||||||||
Stockholders equity |
1,185,902 | 937,887 | | (1,181,682 | ) | 942,107 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,631,069 | $ | 3,405,974 | $ | 160,430 | $ | (1,342,112 | ) | $ | 3,855,361 | |||||||||
22
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 | |||||||
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 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 |
$ | (27,230 | ) | $ | 48,028 | $ | | $ | | $ | 20,798 | |||||||||
Cash Flows From Investing Activities |
||||||||||||||||||||
Additions to property, plant, equipment and mine development |
(288 | ) | (63,404 | ) | | | (63,692 | ) | ||||||||||||
Additions to advance mining royalties |
| (9,465 | ) | | | (9,465 | ) | |||||||||||||
Proceeds
from disposal or exchange of assets, net of notes receivable |
| 1,384 | | | 1,384 | |||||||||||||||
Proceeds
from coal reserve notes receivable |
| 22,100 | | | 22,100 | |||||||||||||||
Investment in joint venture |
| (300 | ) | | | (300 | ) | |||||||||||||
Net cash used in investing activities |
(288 | ) | (49,685 | ) | | | (49,973 | ) | ||||||||||||
Cash Flows From Financing Activities |
||||||||||||||||||||
Proceeds from debt offering, net of discount |
248,198 | | | | 248,198 | |||||||||||||||
Deferred financing costs |
(20,542 | ) | | | | (20,542 | ) | |||||||||||||
Proceeds from coal reserve financing transaction |
| 17,700 | | | 17,700 | |||||||||||||||
Long-term debt payments |
| (5,179 | ) | | | (5,179 | ) | |||||||||||||
Proceeds from employee stock purchases |
1,082 | | | | 1,082 | |||||||||||||||
Intercompany transactions |
10,912 | (10,912 | ) | | | | ||||||||||||||
Net cash provided by financing activities |
239,650 | 1,609 | | | 241,259 | |||||||||||||||
Net increase (decrease) in cash and cash
equivalents |
212,132 | (48 | ) | | | 212,084 | ||||||||||||||
Cash and cash equivalents at beginning of period |
26,574 | 524 | | | 27,098 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 238,706 | $ | 476 | $ | | $ | | $ | 239,182 | ||||||||||
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2009 | ||||||||||||||||
Parent | Guarantor | |||||||||||||||
Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash Flows From Operating Activities |
||||||||||||||||
Net cash provided by (used in)
operating activities |
$ | (23,577 | ) | $ | 43,214 | $ | | $ | 19,637 | |||||||
Cash Flows From Investing Activities |
||||||||||||||||
Additions to property, plant, equipment
and mine development |
(610 | ) | (34,209 | ) | | (34,819 | ) | |||||||||
Additions to advance mining royalties |
| (7,081 | ) | | (7,081 | ) | ||||||||||
Proceeds
from disposal or exchange of assets, net of notes receivable |
| 4,768 | | 4,768 | ||||||||||||
Other |
| 131 | | 131 | ||||||||||||
Net cash used in investing activities |
(610 | ) | (36,391 | ) | | (37,001 | ) | |||||||||
Cash Flows From Financing Activities |
||||||||||||||||
Proceeds from equity offering, net of costs |
89,132 | | | 89,132 | ||||||||||||
Long-term debt payments |
| (3,103 | ) | | (3,103 | ) | ||||||||||
Proceeds from employee stock purchases |
667 | | | 667 | ||||||||||||
Short-term debt
payments |
(23,000 | ) | | | (23,000 | ) | ||||||||||
Intercompany transactions |
3,814 | (3,814 | ) | | | |||||||||||
Net cash provided by (used in)
financing activities |
70,613 | (6,917 | ) | | 63,696 | |||||||||||
Net increase (decrease) in cash and cash
equivalents |
46,426 | (94 | ) | | 46,332 | |||||||||||
Cash and cash equivalents at beginning of period |
1,957 | 915 | | 2,872 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 48,383 | $ | 821 | $ | | $ | 49,204 | ||||||||
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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; | ||
| changes in the interpretation, enforcement or application of existing and potential coal mining laws and regulations; | ||
| 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; | ||
| 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 more than 10% of our revenues; | ||
| failure to comply with debt covenants; |
26
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 six months of 2010, we sold 15.7 million tons of coal, of which 77% was
sold to domestic electric utilities and industrial customers and 23% 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 12.3 million and 25.8 million tons of coal in the six months ended June 30, 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 mining complexes located in Union and Henderson counties in western Kentucky. In the Illinois Basin, we sold 3.4 million and 7.0 million tons of coal in the six months ended June 30, 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. |
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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; restructuring and
impairment charge; and net sales contract accretion. Net sales contract accretion represents
contract accretion excluding back-to-back coal purchase and sales contracts. The contract
accretion on the back-to-back coal purchase and sales contracts reflects the accretion related
to certain coal purchase and sales contracts existing on July 23, 2008, whereby Magnum purchased
coal from third parties to fulfill tonnage commitments on sales contracts. 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 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 (Loss). Adjusted EBITDA is reconciled to its most comparable measure under generally accepted
accounting principles in Note 13 to our unaudited condensed consolidated financial statements.
Three and Six Months Ended June 30, 2010 Compared to June 30, 2009
Summary
Our Segment Adjusted EBITDA for the three months ended June 30, 2010 increased compared to
the prior year primarily due to higher average sales prices. This increase was partially offset
by higher costs due to longwall moves at the Federal and Panther mining complexes, lower
production as a result of more comprehensive regulatory inspections and related ventilation
adjustments at certain of our mines, as well as roof falls at the Harris and Highland
mines.
Our Segment Adjusted EBITDA for the six months ended June 30, 2010 increased compared to
the prior year primarily due to higher average sales prices and cost savings resulting from the
suspension of certain higher cost mining operations in 2009. These increases were partially
offset by decreased sales volumes. 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 half of 2010.
In
June 2010, we announced the closure of the Harris No. 1
mine due to the roof fall on the
primary conveyor belt and adverse geologic conditions in the travel entries of the mine. The
Harris No. 1 mine was nearing the end of its projected mining life and was scheduled for closure
in 2011. We recorded a $14.8 million restructuring and impairment charge related to the closure
of the Harris No. 1 mine and further rationalization of our operations at the Rocklick mining
complex.
Our
Federal mine temporarily suspended active mining operations in late February 2010, upon discovering potentially adverse atmospheric conditions in an abandoned area of the
mine.
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Table of Contents
Tons Sold and Revenues
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Increase (Decrease) | June 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
2010 | 2009 | Tons/$ | % | 2010 | 2009 | Tons/$ | % | |||||||||||||||||||||||||
(Dollars and tons in thousands, except per ton amounts) | ||||||||||||||||||||||||||||||||
Tons Sold |
||||||||||||||||||||||||||||||||
Appalachia
Mining Operations |
6,431 | 6,498 | (67 | ) | (1.0 | )% | 12,280 | 13,137 | (857 | ) | (6.5 | )% | ||||||||||||||||||||
Illinois Basin
Mining Operations |
1,635 | 1,771 | (136 | ) | (7.7 | )% | 3,381 | 3,590 | (209 | ) | (5.8 | )% | ||||||||||||||||||||
Total Tons Sold |
8,066 | 8,269 | (203 | ) | (2.5 | )% | 15,661 | 16,727 | (1,066 | ) | (6.4 | )% | ||||||||||||||||||||
Average sales price
per ton sold |
||||||||||||||||||||||||||||||||
Appalachia
Mining Operations |
$ | 72.28 | $ | 63.88 | $ | 8.40 | 13.1 | % | $ | 69.64 | $ | 66.11 | $ | 3.53 | 5.3 | % | ||||||||||||||||
Illinois Basin
Mining Operations |
42.20 | 39.50 | 2.70 | 6.8 | % | 42.24 | 38.81 | 3.43 | 8.8 | % | ||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||||||||||
Appalachia
Mining Operations |
$ | 464,801 | $ | 415,089 | $ | 49,712 | 12.0 | % | $ | 855,181 | $ | 868,545 | $ | (13,364 | ) | (1.5 | )% | |||||||||||||||
Illinois Basin
Mining Operations |
68,999 | 69,960 | (961 | ) | (1.4 | )% | 142,827 | 139,342 | 3,485 | 2.5 | % | |||||||||||||||||||||
Appalachia Other |
5,192 | 21,947 | (16,755 | ) | (76.3 | )% | 8,241 | 28,045 | (19,804 | ) | (70.6 | )% | ||||||||||||||||||||
Total Revenues |
$ | 538,992 | $ | 506,996 | $ | 31,996 | 6.3 | % | $ | 1,006,249 | $ | 1,035,932 | $ | (29,683 | ) | (2.9 | )% | |||||||||||||||
Segment Operating
Costs and Expenses(1) |
||||||||||||||||||||||||||||||||
Appalachia Mining
Operations and Other |
$ | 387,952 | $ | 368,431 | $ | 19,521 | 5.3 | % | $ | 710,518 | $ | 758,498 | $ | (47,980 | ) | (6.3 | )% | |||||||||||||||
Illinois Basin
Mining Operations |
70,532 | 66,087 | 4,445 | 6.7 | % | 137,543 | 132,428 | 5,115 | 3.9 | % | ||||||||||||||||||||||
Total Segment Operating
Costs and Expenses |
$ | 458,484 | $ | 434,518 | $ | 23,966 | 5.5 | % | $ | 848,061 | $ | 890,926 | $ | (42,865 | ) | (4.8 | )% | |||||||||||||||
Segment Adjusted EBITDA |
||||||||||||||||||||||||||||||||
Appalachia Mining
Operations and Other |
$ | 82,041 | $ | 68,605 | $ | 13,436 | 19.6 | % | $ | 152,904 | $ | 138,092 | $ | 14,812 | 10.7 | % | ||||||||||||||||
Illinois Basin
Mining Operations |
(1,533 | ) | 3,873 | (5,406 | ) | (139.6 | )% | 5,284 | 6,914 | (1,630 | ) | (23.6 | )% | |||||||||||||||||||
Total Segment
Adjusted EBITDA |
$ | 80,508 | $ | 72,478 | $ | 8,030 | 11.1 | % | $ | 158,188 | $ | 145,006 | $ | 13,182 | 9.1 | % | ||||||||||||||||
(1) | Segment Operating Costs and Expenses represent consolidated operating costs and expenses of $503.0 million and $467.7 million less past mining operations of $44.5 million and $34.2 million for the three months ended June 30, 2010 and 2009, respectively, as described below, plus back-to-back contract accretion of $1.0 million for the three months ended June 30, 2009. Segment Operating Costs and Expenses represent consolidated operating costs and expenses of $936.0 million and $962.9 million less past mining operations of $87.9 million and $72.0 million for the six months ended June 30, 2010 and 2009, respectively. |
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Table of Contents
Revenues in the Appalachia segment were higher in the three months ended June 30, 2010
compared to the same period in 2009 primarily due to higher average sales price per ton for both
thermal and metallurgical coal and an increased mix of metallurgical tons sold. Increased sales
of metallurgical coal from our Panther and Winchester mines drove the higher metallurgical sales
volume. Total sales volumes were comparable for the three months ended June 30, 2010 compared to
the prior year due to the decrease in thermal sales resulting from the weakened thermal coal
market, which was mostly offset by the increase in metallurgical sales.
Revenues and sales volume in the Appalachia segment were lower for the six months ended
June 30, 2010 compared to the same period in 2009 primarily related to the 2009 suspension of
various mines, including the Samples mine in the second half of 2009, as well as other
production cuts, driven by the lower demand for thermal coal. In addition, production decreased
at certain mines due to roof falls and other adverse geologic conditions in 2010. These
decreases were partially offset by higher average sales prices in the first six months of 2010,
as a result of crossover metallurgical coal and recovering markets.
Revenues in the Illinois Basin segment were lower for the three months ended June 30, 2010
as compared to the same period in 2009 primarily due to slightly lower sales volumes, partially
offset by higher average sales prices.
Revenues in the Illinois Basin segment were higher for the six months ended June 30, 2010
compared to the prior year primarily due to higher average sales prices.
In the Illinois Basin, sales volumes were lower in the three and six months ended June 30,
2010 compared to the prior year due to the roof fall at our Highland
mine and
more comprehensive regulatory inspections in the second quarter of 2010.
Appalachia Other Revenue was lower for the three and six months ended June 30, 2010
primarily due to cash settlements received for reduced shipments in the first half of 2009 as a
result of renegotiated customer agreements.
Segment Operating Costs and Expenses
Segment operating costs and expenses for Appalachia increased in the three months ended
June 30, 2010 as compared to the same period in 2009 due to increased purchased coal ($25.0
million), increased repairs and maintenance activity primarily related to longwall moves and
equipment rebuilds ($7.2 million), and higher mix of metallurgical coal production which yields
a higher cost per ton mined. The increased purchased coal costs included purchases of thermal
coal to cover certain sales commitments at our Panther mining complex, where production is now
being sold as a metallurgical product. Additionally, increased purchased coal costs included
purchases of metallurgical coal resulting from brokerage activity generated by an improving
metallurgical coal market in 2010. The increased metallurgical coal tons sold from Panther and
Winchester mines resulted in higher costs related to royalties and taxes. These increases were
partially offset by decreased contract mining costs ($6.7 million) and labor costs ($3.8
million) related to the closing or idling of certain mines in the second half of 2009.
Segment operating costs and expenses for Appalachia decreased in the six months ended June
30, 2010 as compared to the prior year primarily due to decreased contract mining costs ($26.2
million) and labor costs ($22.3 million) related to the closing or idling of certain mines in
the second half of 2009. In addition, there were decreases in maintenance and repair activity
($7.0 million) and sales-related taxes ($6.0 million) as compared to the prior year due to
reducing production and sales to more closely align with the demand for coal. These decreases
were partially offset by increased purchased coal ($16.3 million).
Segment operating costs and expenses for the Illinois Basin increased in the three and six
months ended June 30, 2010 as compared to the prior year due to increased repairs and
maintenance activity primarily related to belting ($1.7 and $3.6 million, respectively),
increased labor due to increased shifts and higher wages ($1.2 and $1.5 million, respectively)
and increased fuel expense primarily related to higher prices ($0.6 million and $1.3 million,
respectively). Production volume was negatively impacted by
heightened regulatory inspections and the roof fall at our Highland
mine.
Segment Adjusted EBITDA
Our Segment Adjusted EBITDA for Appalachia was higher in the three months ended June 30,
2010 compared to the prior year primarily due to higher average sales prices, which were
partially offset by higher costs.
30
Table of Contents
Our Segment Adjusted EBITDA for Appalachia was higher in the six months ended June 30, 2010
compared to the prior year primarily due to higher average sales prices and lower costs
resulting from suspended or reduced production at certain mining operations, in particular some
of our higher cost operations, in response to the economic recession experienced throughout
2009. These increases were partially offset by decreased sales volumes in 2010.
Segment Adjusted EBITDA for the Illinois Basin decreased in the three and six months ended
June 30, 2010 from the prior year primarily due to increased operating costs.
Net Income (Loss)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Favorable (Unfavorable) | June 30, | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009 | $ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Segment Adjusted EBITDA |
$ | 80,508 | $ | 72,478 | $ | 8,030 | 11.1 | % | $ | 158,188 | $ | 145,006 | $ | 13,182 | 9.1 | % | ||||||||||||||||
Corporate and Other: |
||||||||||||||||||||||||||||||||
Past mining
obligation expense |
(44,475 | ) | (34,211 | ) | (10,264 | ) | (30.0 | )% | (87,941 | ) | (72,011 | ) | (15,930 | ) | (22.1 | )% | ||||||||||||||||
Net gain on disposal
or exchange of assets |
17,759 | 4,031 | 13,728 | 340.6 | % | 41,555 | 4,061 | 37,494 | 923.3 | % | ||||||||||||||||||||||
Selling and
administrative expenses |
(13,198 | ) | (11,360 | ) | (1,838 | ) | (16.2 | )% | (25,972 | ) | (24,246 | ) | (1,726 | ) | (7.1 | )% | ||||||||||||||||
Total Corporate and Other |
(39,914 | ) | (41,540 | ) | 1,626 | 3.9 | % | (72,358 | ) | (92,196 | ) | 19,838 | 21.5 | % | ||||||||||||||||||
Depreciation, depletion
and amortization |
(50,350 | ) | (50,357 | ) | 7 | 0.0 | % | (99,962 | ) | (105,336 | ) | 5,374 | 5.1 | % | ||||||||||||||||||
Sales contract accretion, net |
33,735 | 61,721 | (27,986 | ) | (45.3 | )% | 59,043 | 138,528 | (79,485 | ) | (57.4 | )% | ||||||||||||||||||||
Reclamation and remediation
obligation expense |
(11,004 | ) | (7,611 | ) | (3,393 | ) | (44.6 | )% | (21,850 | ) | (14,062 | ) | (7,788 | ) | (55.4 | )% | ||||||||||||||||
Restructuring and
impairment charge |
(14,838 | ) | | (14,838 | ) | n/a | (14,838 | ) | | (14,838 | ) | n/a | ||||||||||||||||||||
Interest expense |
(14,795 | ) | (9,137 | ) | (5,658 | ) | (61.9 | )% | (23,827 | ) | (17,730 | ) | (6,097 | ) | (34.4 | )% | ||||||||||||||||
Interest income |
3,249 | 5,836 | (2,587 | ) | (44.3 | )% | 6,691 | 9,323 | (2,632 | ) | (28.2 | )% | ||||||||||||||||||||
Income (loss)
before income taxes |
(13,409 | ) | 31,390 | (44,799 | ) | (142.7 | )% | (8,913 | ) | 63,533 | (72,446 | ) | (114.0 | )% | ||||||||||||||||||
Income tax provision |
(165 | ) | | (165 | ) | n/a | (400 | ) | | (400 | ) | n/a | ||||||||||||||||||||
Net income (loss) |
$ | (13,574 | ) | $ | 31,390 | $ | (44,964 | ) | (143.2 | )% | $ | (9,313 | ) | $ | 63,533 | $ | (72,846 | ) | (114.7 | )% | ||||||||||||
Past mining obligations were higher in the three and six months ended June 30, 2010
than the corresponding periods in the prior year primarily due to changes in assumptions related
to our actuarially-determined liabilities for retiree healthcare and workers compensation
obligations, with approximately one-half of the cost increase arising from the change to the
discount rate. The increase also included higher costs in 2010 related to suspended operations.
Net gain on disposal or exchange of assets increased in the three and six months ended June
30, 2010 as compared to the corresponding periods in the prior year. In 2010, net gain on
disposal or exchange of assets included gains of $14.3 million on two mineral interest exchange
transactions in the second quarter and a gain of $24.0 million on an exchange transaction for
mineral interests in the first quarter. In 2009, net gain on disposal or exchange of assets
included a $4.2 million gain on the exchange of surface land for certain mineral interests.
Selling and administrative expenses increased for the three and six months ended June 30,
2010 as compared to the corresponding periods in the prior year primarily due to increased
share-based compensation, reflecting additional grants in 2010 and a higher forfeiture rate in
2009.
Depreciation, depletion and amortization decreased in the six months ended June 30, 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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Net sales contract accretion decreased in the three and six months ended June 30, 2010 as
compared to the prior year due to the expiration of several contracts assumed in the Magnum
acquisition in the second half of 2009.
Reclamation and remediation obligation expense increased in the three and six months ended
June 30, 2010 primarily due to remediation expense related to the selenium liabilities assumed
in the July 2008 Magnum acquisition, which was first recorded in June 2009 upon finalization of
purchase accounting.
Restructuring and impairment charge increased in 2010 related to the closure of the Harris
No. 1 mine in June. The charge includes a $2.8 million impairment charge related to equipment
and coal reserves that will be abandoned due to the mine closure and a restructuring component
of $12.0 million for payment of obligations that will be made with no future economic benefit
for remaining operational contracts.
Interest expense increased in the three and six months ended June 30, 2010 primarily due to
the $250 million of Senior Notes issued on May 5, 2010 as well as the increased amortization of
deferred financing costs related to the new notes, accounts receivable securitization program,
and the amended and restated credit agreement entered into in May 2010. In addition, we incurred
additional interest expense in 2010 due to the Blue Creek preparation plant capital lease that
began in May 2009.
Interest income decreased in the three and six months ended June 30, 2010 compared to the
prior year due to the collection of certain Black Lung excise tax refunds and related interest
during 2009.
For the three and six months ended June 30, 2010, we recorded an income tax provision of
$0.2 and $0.4 million related to certain state taxes. For the three and six months ended June
30, 2009, no income tax provision was recorded. No federal income tax provision was recorded in
2010 or 2009 due to our anticipated tax net operating loss for the respective year 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 in the July 2008 Magnum acquisition, with
such amounts being included in the computation of book income but excluded from the computation
of taxable income.
Outlook
Market
Metallurgical
coal markets show continued strength, particularly in the higher grades. Grade A
high-volatility metallurgical coal remains in short supply and continues to command a very
favorable price. Supply of grade B metallurgical coal is currently not as tight, causing pricing
to ease somewhat from a few months ago. However, pricing remains very favorable compared to
historical levels.
In thermal markets, cooling degree days in the eastern U.S. in May and June were more than
40% above normal levels, which has lowered coal inventories. Additionally, higher natural gas
prices in 2010 compared to 2009 will likely result in coal regaining market share this year.
We believe increasing customer demand and lower inventory levels, coupled with supply constraints in
Central Appalachia, may result in improved thermal markets.
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; changes in the
interpretation, enforcement or application of existing and potential
coal mining laws and regulations; 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 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.
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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.
Potential legislation, regulation, treaties and accords at the local, state, federal and
international level, and changes in the interpretation, enforcement
or application 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. Additionally, the
imminent regulation of carbon dioxide and other greenhouse gas emissions and coal combustion
by-products 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.
Congress is currently considering enhancements of mine safety laws, which could result in
additional or enhanced mine safety equipment, procedure and training requirements, more
frequent mine inspections, higher penalties for certain violations of safety rules and increased
authority for the Mine Safety and Health Administration (MSHA). The House Committee on Labor and
Education (HCLE) has requested copies of certain safety-related documents from us and various
other coal producers and has met with representatives of those companies regarding HCLEs
investigation of mining safety. West Virginia regulatory authorities are also considering
enhanced mine safety laws which could result in similar equipment and procedure requirements.
If upward pressure on costs exceeds our ability to realize revenue increases, or if we
experience unanticipated operating or transportation difficulties, our operating margins would
be negatively impacted. Management continues to focus on controlling costs, optimizing
performance and responding quickly to market changes. Increased scrutiny by regulators has
resulted in more comprehensive inspections which has caused decreased production and increased
costs. We expect this heightened regulatory oversight to continue.
We have the ability to adjust our future production levels as demand increases. We intend
to open the Black Oak mine later in 2010, installing the initial continuous miner unit by the
end of the third quarter. We expect the second continuous miner unit to be operational in early
2011. We expect production from our Black Oak mine, as well as incremental Panther mining
complex production sold as metallurgical coal, to offset the loss of tons at the Harris No. 1
mine.
In addition to incremental Panther mining complex production available to be sold as
metallurgical coal and the start-up of the Black Oak mine, we have a
number of organic metallurgical coal projects in various stages of
development, which will use our existing
infrastructure at our Rocklick, Kanawha Eagle and Logan County mining
complexes. We expect to move forward on these
projects in a disciplined manner.
In 2010, we anticipate annual sales volumes in the range of 32.0 to 34.0 million tons, with
sales of 16.0 to 18.0 million tons for the July to December period. This includes metallurgical
coal sales of approximately 7.5 million tons for the year.
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 this 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 $20.8 million for the six months ended June
30, 2010, compared to $19.6 million in the same period of 2009.
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Net cash used in investing activities was $50.0 million for the six months ended June 30,
2010, compared to $37.0 million in the same period of 2009. The increase in cash used reflected
higher capital expenditures of $28.9 million, additional advance mining royalties of $2.4
million and a decrease in proceeds from the disposal or exchange of assets of $3.4 million.
These increases in cash used were partially offset by higher cash proceeds of $22.1 million from
notes receivable related to the 2006 and 2007 sales of coal reserves and surface land.
Net cash provided by financing activities was $241.3 million for the six months ended June
30, 2010, compared to $63.7 million in the same period of 2009. The increase in cash provided
was primarily due to our debt offering, net of discount, of $248.2 million in 8.25% Senior Notes
in May 2010, as well as $17.7 million from a coal reserve financing transaction in June 2010 and
a decrease in short-term debt payments of $23.0 million. These increases were partially offset
by the decrease in proceeds from the equity offering of $89.1 million, that occurred in June
2009, and additional deferred financing costs in 2010 of $20.5 million related to the May 2010
debt offering, the May 2010 credit facility restatement and amendment and the accounts
receivable securitization program.
Effective April 2010, we entered into an agreement to sell coal mineral rights at our
Federal mining complex to a third party lessor and added them to an existing lease. In
accordance with authoritative guidance, we recorded this transaction as a financing arrangement
and accordingly recorded the $17.7 million cash consideration as a liability, with $1.2 million
of the liability recorded in Trade accounts payable and accrued expenses and $16.5 million
recorded in Other noncurrent liabilities as of June 30, 2010. The liability will be accreted
through interest expense over an expected lease term of approximately five years and will be
relieved as we make future royalty payments.
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 wholly-owned bankruptcy-remote entity
(facilitating entity), which then sells an undivided interest in all of the trade receivables to
creditors as collateral for any borrowings. At the inception of the program, we had commitments
for up to $75 million of borrowing capacity. 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. Available liquidity under the program fluctuates with the
balance of our trade accounts receivables.
Based on our continuing involvement with the trade accounts receivable balances, including
continued risk of loss, the sale of the trade receivables to the creditors does not receive sale
accounting treatment. As such, the trade accounts receivable balances remain on our financial
statements until settled. Any direct borrowings will be recorded as secured debt. The
outstanding trade accounts receivable balance was $160.4 million as of June 30, 2010. As of June
30, 2010, there were no letters of credit or direct borrowings under this program.
Credit Facility
Effective October 31, 2007, we entered into a $500 million, four-year revolving credit
facility, which included a $50 million swingline sub-facility and a letter of credit
sub-facility, subsequently amended for the Magnum acquisition and the issuance of the
convertible notes. Effective May 5, 2010, we entered into an amended and restated Credit
Agreement, which, among other things, extended the maturity date of the revolving credit
facility and adjusted borrowing capacity. After the amendment and restatement, we have $427.5
million available under the revolving credit facility with a maturity date of December 31, 2013.
This facility is available for our working capital requirements, capital expenditures and other
corporate purposes. As of June 30, 2010 and December 31, 2009, the balance of outstanding
letters of credit issued against the credit facility totaled $334.5 million and $352.1 million,
respectively. There were no outstanding short-term borrowings against this facility as of June
30, 2010 and December 31, 2009. Availability under the credit facility was $93.0 million and
$170.4 million as of June 30, 2010 and December 31, 2009, respectively. At June 30, 2010, we
were in compliance with the covenants of our credit facility.
The obligations under our credit facility are secured by a first lien on substantially all
of our assets, including but not limited to certain of our mines, coal reserves and related
fixtures. The credit facility contains certain customary covenants, including financial
covenants limiting our indebtedness (maximum net debt leverage ratio of 3.00) and requiring
minimum EBITDA (as defined in the Credit Agreement) coverage of cash interest expense (minimum
interest coverage ratio on a rolling four quarter basis of 3.00 from May 5, 2010 through the
quarter ending December 31, 2010 and 3.50 for the quarter ending March 31, 2011 and thereafter),
as well as certain limitations on, among other things, additional debt, liens, investments,
acquisitions and capital expenditures, future dividends and asset sales. The credit facility
calls for quarterly reporting of compliance with financial covenants. The terms of the credit
facility also contain certain customary events of default, which give the lenders the right to
accelerate payments of outstanding debt in certain circumstances. Customary events of default include breach of covenants, failure to
maintain required ratios, failure to make principal payments or to make interest or fee payments
within a grace period, and default, beyond any applicable grace period, on any of our other
indebtedness exceeding a certain amount.
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Senior Notes Issuance
On May 5, 2010, we completed a public offering of $250 million in aggregate principal
amount of 8.25% Senior Notes due 2018. The net proceeds of the offering were approximately $240
million after deducting the initial $1.8 million discount, purchasers commissions and fees, and
expenses of the offering. The net proceeds will be used for general corporate purposes, which
could include capital expenditures for development of additional metallurgical coal production
capacity, working capital, acquisitions, refinancing of other debt or other capital
transactions. The discount will be amortized over the term of the notes.
Interest on the notes is payable semi-annually in arrears on April 30 and October 30 of
each year, beginning October 30, 2010. The notes mature on April 30, 2018, unless redeemed in
accordance with their terms prior to such date. The notes are senior unsecured obligations and
rank equally with all of our existing and future senior debt and are senior to any subordinated
debt. The notes are guaranteed by the majority of our wholly-owned subsidiaries.
The indenture governing the notes contains customary covenants that, among other things,
limit our ability to incur additional indebtedness and issue preferred equity, pay dividends or
distributions, repurchase equity or repay subordinated indebtedness, make investments or certain
other restricted payments, create liens, sell assets, enter into agreements that restrict
dividends, distributions or other payments from subsidiaries, enter into transactions with
affiliates, and consolidate, merge or transfer all or substantially all of our assets. The
indenture also contains certain customary events of default, which give the lenders the right to
accelerate payments of outstanding debt in certain circumstances. Customary events of default
include breach of covenants, failure to make principal payments or to make interest payments
within a grace period, and default, beyond any applicable grace period, on any of our other
indebtedness exceeding a certain amount.
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. We adopted this guidance effective January 1, 2010. See the
description of our asset securitization program in Liquidity and Capital Resources above.
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. We
adopted this guidance effective January 1, 2010. Upon adoption, we performed a qualitative
assessment of our existing interests and determined that we held no interest in 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 that time. See Note 15 for our fair value
measurement disclosures.
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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 June 30, 2010 our total unpriced planned production for
2010 was approximately 0.5 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 heating oil swap contracts with financial institutions. These derivative contracts
have been designated as cash flow hedges of anticipated diesel fuel purchases. As of June 30,
2010, the notional amounts outstanding for these swaps included 7.1 million gallons of heating
oil expiring throughout the remainder of 2010 and 5.0 million gallons of heating oil expiring
throughout 2011. For the last six months of 2010, we expect to purchase approximately 11 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 $1.1 million.
Credit Risk
For the six months ended June 30, 2010, approximately 17% 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 enhancements. When
appropriate (as determined by our credit management function), we have taken steps to mitigate
our credit exposure to customers or counterparties whose credit has deteriorated and who may
pose a higher risk of failure to perform under their contractual obligations. These steps may
include obtaining letters of credit or cash collateral, requiring prepayments for shipments or
the creation of customer trust accounts held for our benefit to serve as collateral in the event
of a failure to pay. While the economic recession may affect our customers, we do not anticipate
that it will significantly affect our overall credit risk profile due to our credit policies.
Additionally, as of June 30, 2010, we had $126.5 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 to be disclosed under the securities laws 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 June 30, 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.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
See Note 16 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.
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.
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Recent healthcare legislation could adversely affect our financial condition and results of
operations.
In March 2010, the Patient Protection and Affordable Care Act, and a companion bill, the
Health Care and Education Reconciliation Act of 2010, (collectively, the 2010 healthcare
legislation) were 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 2010
healthcare legislation has both short-term and long-term implications on healthcare benefit plan
standards. Implementation of the 2010 healthcare legislation will 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 50% of employees at our company operations were represented by an organized
labor union at June 30, 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 2010 healthcare legislation will be included in
any new labor agreements.
We are currently analyzing the 2010 healthcare 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 2010 healthcare legislation 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 June 30, 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 2010 healthcare
legislation in future periods as additional information and guidance becomes available.
The 2010 healthcare legislation 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
the actuarial gain included in Accumulated other comprehensive loss on our balance sheet. We
adjusted the amortization of the actuarial gain beginning in the second quarter of 2010. As of
June 30, 2010, we were not able to estimate the impact of the 2010 healthcare legislation on our
obligations related to future pneumoconiosis 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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Recent developments relating to the environmental, health and safety regulation of our
mining operations could result in significant costs and liabilities and 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
in the aftermath of the April 5, 2010 accident at a competitors underground mine in Central
Appalachia, we and other mining companies have experienced, and may in the future continue to
experience, 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
instituted 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, Congress is currently considering legislation to enhance
mine safety laws which could result in additional or enhanced mine safety equipment and
procedure requirements, more frequent mine inspections, stricter enforcement practices,
enhanced reporting and miner training requirements, higher penalties for certain violations of
safety rules and increased authority for the Mine Safety and Health Administration (MSHA).
Additionally, the proposed legislation includes, among other things, higher fines and increased
monitoring for mines found to be in a pattern of violations status and an expansion of MSHAs
ability to order the temporary closure of mines. West Virginia regulatory authorities are also
considering enhanced mine safety laws, which could potentially result in similar equipment and
procedure 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 terminated one employee. The terminated employee subsequently admitted to falsifying
inspection records and has been 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. We have provided the equipment and information as requested by the subpoena.
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, 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.
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Item 5. Other Information.
Section 1503. Reporting Requirements Regarding Coal Or Other Mine Safety.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act)
was enacted. Section 1503 of the Act contains new reporting requirements regarding coal or
other mine safety.
Patriot is committed to providing a safe workplace for all of our employees. Our focus on
safety resulted in 2009 being the safest year on record for our operations. We continue to
engage proactively with federal and state agencies in support of measures which can
legitimately improve the safety and well-being of our employees.
The operation of our mines is subject to regulation by the federal Mine Safety and Health
Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (the Mine Act). MSHA
inspects our mines on a regular basis and issues various citations and orders when it believes
a violation has occurred under the Mine Act. We present information below regarding certain
mining safety and health citations which MSHA has issued with respect to our coal mining
operations. In evaluating this information, consideration should be given to factors such as:
(i) the number of citations and orders will vary depending on the size of the coal mine, (ii)
the number of citations issued will vary from inspector to inspector and mine to mine, and
(iii) citations and orders can be contested and appealed, and in that process, may be reduced
in severity and amount, and are sometimes dismissed.
The table below includes references to specific sections of the Mine Act. We are providing
the information in the table by mining complex because that is how we manage and operate our
business.
For the three months ended June 30, 2010, except for pending legal actions, which are as of June 30, 2010:
(1) | For each coal or other mine, of which the issuer or a subsidiary of the issuer is an operator (number of occurrences, except for proposed assessment dollar values) |
(A) | (B) | (C) | (D) | (E) | (F) | (G) | (H) | |||||||||||||||||||||||||
Pending | ||||||||||||||||||||||||||||||||
Section | Section | Section | Section | Section | Proposed | Legal | ||||||||||||||||||||||||||
104 | 104(b) | 104(d) | 110(b)(2) | 107(a) | Assessments | Fatalities | Action | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Mining Complex |
||||||||||||||||||||||||||||||||
Big Mountain |
23 | | 1 | | 1 | $ | 62.4 | | 23 | |||||||||||||||||||||||
Blue Creek |
6 | | | | 1 | 4.0 | | | ||||||||||||||||||||||||
Bluegrass |
24 | | | | | 49.6 | | 13 | ||||||||||||||||||||||||
Campbells Creek |
1 | | | | | 6.4 | | 5 | ||||||||||||||||||||||||
Corridor G |
4 | | | | | | | | ||||||||||||||||||||||||
Dodge Hill |
22 | | | | | 36.6 | | 13 | ||||||||||||||||||||||||
Federal |
76 | | 11 | | | 39.9 | | 35 | ||||||||||||||||||||||||
Highland |
28 | | 1 | | | 161.2 | | 63 | ||||||||||||||||||||||||
Jupiter |
| | | | | 0.1 | | 17 | ||||||||||||||||||||||||
Logan County |
| | | | | 27.8 | | 3 | ||||||||||||||||||||||||
Paint Creek |
7 | | | | | 5.5 | | 8 | ||||||||||||||||||||||||
Panther |
21 | | | | 1 | 117.8 | | 31 | ||||||||||||||||||||||||
Remington |
| | | | | | | 15 | ||||||||||||||||||||||||
Rocklick |
28 | 3 | 1 | | 1 | 185.0 | | 52 | ||||||||||||||||||||||||
Wells |
13 | | | | | 7.0 | | 5 | ||||||||||||||||||||||||
Other Closed Operations |
| | | | | 0.2 | | 1 |
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(A) | The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Safety and Health Act of 1977 (30 U.S.C. 814) for which the operator received a citation from the Mine Safety and Health Administration | |
(B) | The total number of orders issued under section 104(b) of such Act (30 U.S.C. 814(b)) | |
(C) | The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of such Act (30 U.S.C. 814(d)) | |
(D) | The total number of flagrant violations under section 110(b)(2) of such Act (30 U.S.C. 820(b)(2)) | |
(E) | The total number of imminent danger orders issued under section 107(a) of such Act (30 U.S.C. 817(a)) | |
(F) | The total dollar value of proposed assessments from the Mine Safety and Health Administration under such Act (30 U.S.C. 801 et seq.) | |
(G) | The total number of mining-related fatalities | |
(H) | Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine | |
The number of pending legal actions includes three cases that are currently under appellate review by the Federal Mine Safety and Health Review Commission. The remaining matters are pending before the Office of Administrative Law Judges of the Federal Mine Safety and Health Review Commission. |
(2) | A list of such coal or other mines, of which the issuer or a subsidiary of the issuer is an operator, that
receive written notice from the Mine Safety and Health Administration of (A) a pattern of
violations of mandatory health or safety standards that are of such nature as could have significantly
and substantially contributed to the cause and effect of coal or other mine health and safety hazards
under section 104(e) of such Act (30 U.S.C. 814 (e)); or (B) the potential to have such a pattern.
None |
|
(3) | Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine. See footnote (H) in the table above. |
Item 6. | Exhibits. |
See Exhibit Index on page 43 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: August 6, 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 May 13, 2010). | |
3.2
|
Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). | |
4.1
|
Indenture dated as of May 5, 2010 between Patriot Coal Corporation and Wilmington Trust Company, as trustee (Incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K, filed on May 5, 2010). | |
4.2
|
First Supplemental Indenture dated May 5, 2010 among Patriot Coal Corporation, the guarantors party thereto and Wilmington Trust Company, trustee (Incorporated by reference to Exhibit 4.2 of the Registrants Current Report on Form 8-K, filed on May 5, 2010). | |
4.3
|
Second Supplemental Indenture dated May 5, 2010 among Patriot Coal Corporation, the guarantors party thereto and Wilmington Trust Company, trustee (Incorporated by reference to Exhibit 4.3 of the Registrants Current Report on Form 8-K, filed on May 5, 2010). | |
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). | |
10.3
|
Amended and Restated Credit Agreement dated as of May 5, 2010 among Patriot Coal Corporation, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed on May 5, 2010). | |
10.4
|
Amendment No. 1 to Voting and Standstill Agreement, dated as of June 14, 2010, among Patriot Coal Corporation, the stockholders whose names appear on the signature page thereto, Arclight Energy Partners Fund I, L.P. and ArcLight Energy Partners Fund II, L.P., acting jointly, as stockholder representative (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, filed on June 14, 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. | |
101** |
Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009, (ii) the Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements. |
* | Filed herewith. | |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
43