Attached files
file | filename |
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EX-31.2 - EX-31.2 - Patriot Coal CORP | c54431exv31w2.htm |
EX-32.1 - EX-32.1 - Patriot Coal CORP | c54431exv32w1.htm |
EX-31.1 - EX-31.1 - Patriot Coal CORP | c54431exv31w1.htm |
EX-32.2 - EX-32.2 - Patriot Coal CORP | c54431exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended September 30, 2009
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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
12312 Olive Boulevard, Suite 400 St. Louis, Missouri |
63141 | |
(Address of principal executive offices) | (Zip Code) |
(314) 275-3600
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 90,323,753 shares of common stock with a par value of $0.01 per share outstanding on
October 30, 2009.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
PATRIOT COAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands, except share and per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Sales |
$ | 493,147 | $ | 486,171 | $ | 1,501,034 | $ | 1,093,741 | ||||||||
Other revenues |
13,042 | 3,412 | 41,087 | 19,856 | ||||||||||||
Total revenues |
506,189 | 489,583 | 1,542,121 | 1,113,597 | ||||||||||||
Costs and expenses |
||||||||||||||||
Operating costs and expenses |
469,521 | 500,270 | 1,432,458 | 1,054,835 | ||||||||||||
Depreciation, depletion and amortization |
50,413 | 42,215 | 155,749 | 81,730 | ||||||||||||
Reclamation and remediation
obligation expense |
9,206 | 5,051 | 23,268 | 11,726 | ||||||||||||
Sales contract accretion |
(93,988 | ) | (137,389 | ) | (232,516 | ) | (137,389 | ) | ||||||||
Selling and administrative expenses |
11,272 | 7,533 | 35,518 | 25,310 | ||||||||||||
Net gain on disposal or exchange of assets |
(10 | ) | (491 | ) | (4,071 | ) | (7,021 | ) | ||||||||
Operating profit |
59,775 | 72,394 | 131,715 | 84,406 | ||||||||||||
Interest expense |
10,656 | 7,378 | 28,386 | 15,496 | ||||||||||||
Interest income |
(3,723 | ) | (3,588 | ) | (13,046 | ) | (10,458 | ) | ||||||||
Income before income taxes |
52,842 | 68,604 | 116,375 | 79,368 | ||||||||||||
Income tax benefit |
| (2,595 | ) | | | |||||||||||
Net income |
$ | 52,842 | $ | 71,199 | $ | 116,375 | $ | 79,368 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
90,277,301 | 71,681,084 | 82,753,236 | 59,614,902 | ||||||||||||
Effect of dilutive securities |
794,839 | 520,595 | 558,338 | 450,362 | ||||||||||||
Diluted |
91,072,140 | 72,201,679 | 83,311,574 | 60,065,264 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.59 | $ | 0.99 | $ | 1.41 | $ | 1.33 | ||||||||
Diluted |
$ | 0.58 | $ | 0.99 | $ | 1.40 | $ | 1.32 |
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
PATRIOT COAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
September 30, 2009 | December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 48,636 | $ | 2,872 | ||||
Accounts receivable and other, net of allowance for doubtful accounts of
$141 and $540 as of September 30, 2009 and December 31, 2008, respectively |
186,815 | 163,556 | ||||||
Inventories |
88,247 | 80,953 | ||||||
Below market purchase contracts acquired |
2,319 | 8,543 | ||||||
Prepaid expenses and other current assets |
19,050 | 12,529 | ||||||
Total current assets |
345,067 | 268,453 | ||||||
Property, plant, equipment and mine development |
||||||||
Land and coal interests |
2,853,678 | 2,652,224 | ||||||
Buildings and improvements |
394,546 | 390,119 | ||||||
Machinery and equipment |
627,682 | 658,699 | ||||||
Less accumulated depreciation, depletion and amortization |
(693,921 | ) | (540,366 | ) | ||||
Property, plant, equipment and mine development, net |
3,181,985 | 3,160,676 | ||||||
Notes receivable |
113,840 | 131,066 | ||||||
Investments and other assets |
53,885 | 62,125 | ||||||
Total assets |
$ | 3,694,777 | $ | 3,622,320 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of debt |
$ | 7,794 | $ | 28,170 | ||||
Trade accounts payable and accrued expenses |
439,351 | 413,790 | ||||||
Below market sales contracts acquired |
186,869 | 324,407 | ||||||
Total current liabilities |
634,014 | 766,367 | ||||||
Long-term debt, less current maturities |
197,586 | 176,123 | ||||||
Asset retirement obligations |
237,606 | 224,180 | ||||||
Workers compensation obligations |
190,393 | 188,180 | ||||||
Accrued postretirement benefit costs |
1,010,985 | 1,003,254 | ||||||
Obligation to industry fund |
40,300 | 42,571 | ||||||
Below market sales contracts acquired, noncurrent |
191,206 | 316,707 | ||||||
Other noncurrent liabilities |
116,756 | 64,757 | ||||||
Total liabilities |
2,618,846 | 2,782,139 | ||||||
Stockholders equity |
||||||||
Common stock ($0.01 par value; 100,000,000 shares authorized; 90,329,472
and 77,383,199 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively) |
903 | 774 | ||||||
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares
outstanding at September 30, 2009 and December 31, 2008) |
| | ||||||
Series A Junior Participating Preferred Stock ($0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at September 30, 2009 and
December 31, 2008) |
| | ||||||
Additional paid-in capital |
941,803 | 842,323 | ||||||
Retained earnings |
225,740 | 109,365 | ||||||
Accumulated other comprehensive loss |
(92,515 | ) | (112,281 | ) | ||||
Total stockholders equity |
1,075,931 | 840,181 | ||||||
Total liabilities and stockholders equity |
$ | 3,694,777 | $ | 3,622,320 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
PATRIOT COAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Cash Flows From Operating Activities |
||||||||
Net income |
$ | 116,375 | $ | 79,368 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation, depletion and amortization |
155,749 | 81,730 | ||||||
Sales contract accretion |
(232,516 | ) | (137,389 | ) | ||||
Net gain on disposal or exchange of assets |
(4,071 | ) | (7,021 | ) | ||||
Stock-based compensation expense |
8,561 | 6,398 | ||||||
Changes in current assets and liabilities: |
||||||||
Accounts receivable |
527 | (6,931 | ) | |||||
Inventories |
(13,589 | ) | (998 | ) | ||||
Other current assets |
(5,514 | ) | (2,047 | ) | ||||
Accounts payable and accrued expenses |
4,228 | 7,241 | ||||||
Interest on notes receivable |
(10,540 | ) | (9,756 | ) | ||||
Reclamation and remediation obligations |
7,186 | 7,303 | ||||||
Workers compensation obligations |
437 | (4,987 | ) | |||||
Accrued postretirement benefit costs |
21,428 | 16,589 | ||||||
Obligation to industry fund |
(2,406 | ) | (2,721 | ) | ||||
Other, net |
(6,367 | ) | 5,429 | |||||
Net cash provided by operating activities |
39,488 | 32,208 | ||||||
Cash Flows From Investing Activities |
||||||||
Additions to property, plant, equipment and mine development |
(54,167 | ) | (74,079 | ) | ||||
Additions to advance mining royalties |
(11,331 | ) | (6,295 | ) | ||||
Investment in joint ventures |
| (15,385 | ) | |||||
Cash acquired in business combination |
| 21,015 | ||||||
Acquisitions |
| (8,965 | ) | |||||
Proceeds from notes receivable |
3,000 | | ||||||
Proceeds from disposal or exchange of assets |
4,768 | 1,789 | ||||||
Other |
447 | | ||||||
Net cash used in investing activities |
(57,283 | ) | (81,920 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Proceeds from equity offering, net of costs |
89,077 | | ||||||
Short-term debt payments |
(23,000 | ) | | |||||
Long-term debt payments |
(4,489 | ) | (927 | ) | ||||
Convertible notes proceeds |
| 200,000 | ||||||
Termination of Magnum debt facility |
| (136,816 | ) | |||||
Deferred financing costs |
| (10,040 | ) | |||||
Common stock issuance fees |
| (1,413 | ) | |||||
Proceeds from employee stock purchases |
1,971 | 1,002 | ||||||
Net cash provided by financing activities |
63,559 | 51,806 | ||||||
Net increase in cash and cash equivalents |
45,764 | 2,094 | ||||||
Cash and cash equivalents at beginning of period |
2,872 | 5,983 | ||||||
Cash and cash equivalents at end of period |
$ | 48,636 | $ | 8,077 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
SEPTEMBER 30, 2009
(1) Basis of Presentation
Description of Business
Patriot Coal Corporation (we, our, Patriot 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,
primarily in West Virginia and Kentucky.
We acquired Magnum Coal Company (Magnum) effective July 23, 2008. Magnum was one of the
largest coal producers in Appalachia, operating eight mining complexes with production from
surface and underground mines and controlling more than 600 million tons of proven and probable
coal reserves. See Note 5 for additional information about the acquisition.
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 12).
On June 16, 2009, we filed a Current Report on Form 8-K which included revisions to Items
6, 7, 7A and 8 of our Annual Report on Form 10-K for the year ended December 31, 2008. The
revisions reflect our adoption of new authoritative guidance discussed in Note 2. As required,
we adopted the guidance effective January 1, 2009, and retrospectively applied the impact to our
financial statements as further described in Notes 1, 3, 4, 7, 13, 21 and 24 to the Notes to
Consolidated Financial Statements included within the Form 8-K. These revisions included
adjustments to our 2008 consolidated statements of operations, balance sheets and statements of
cash flows.
The accompanying condensed consolidated financial statements as of September 30, 2009 and
for the three and nine months ended September 30, 2009 and 2008, 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 nine months ended September 30, 2009 may not
necessarily be indicative of the results for the year ending December 31, 2009. The balance
sheet information as of December 31, 2008 was derived from our audited consolidated balance
sheet, as revised in the Form 8-K mentioned above.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the 2009
presentation.
Subsequent Events
Subsequent events have been evaluated through November 6, 2009.
(2) Newly Adopted Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards CodificationTM (Codification) which has become the source of authoritative
U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature not included in
the Codification has become nonauthoritative. The Codification is meant to simplify user access
to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly
90 accounting topics within a consistent structure; its purpose is not to create new accounting
and reporting guidance. Consistent with the Codification, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. We have
reflected the Codification references in this report.
4
Table of Contents
PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Debt
In May 2008, the FASB issued new authoritative guidance which changed the accounting for
our convertible notes, specifying that issuers of convertible debt instruments that may settle
in cash upon conversion must bifurcate the proceeds from the debt issuance between debt and
equity components in a manner that reflects the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The equity component reflects the value of
the conversion feature of the notes. We adopted this authoritative guidance effective January 1,
2009, with retrospective application to the inception of our convertible notes. See Note 13 for
additional disclosures regarding the impact of adoption. Previously, this guidance was known as
FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement), but it is now incorporated
into FASB Accounting Standards Codification (FASB ASC) 470, Debt.
Earnings Per Share
In September 2008, the FASB issued new authoritative guidance which states that instruments
granted in share-based payment awards that entitle their holders to receive nonforfeitable
dividends or dividend equivalents before vesting should be considered participating securities
and need to be included in the earnings allocation in computing earnings per share under the
two-class method. The two-class method of computing earnings per share is an earnings
allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and participation rights
in undistributed earnings. We adopted this authoritative guidance effective January 1, 2009 with
all prior period earnings per share data adjusted retrospectively. The calculations of earnings
per share amounts presented in this report include all participating securities as required by
this authoritative guidance. Previously, this guidance was known as FSP EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, but it is now incorporated into FASB ASC 260, Earnings Per Share.
Business Combinations
In December 2007, the FASB issued new authoritative guidance regarding business
combinations. The guidance defines the acquirer as the entity that obtains control of one or
more businesses in the business combination and establishes the acquisition date as the date
that the acquirer achieves control instead of the date that the consideration is transferred.
The guidance also requires an acquirer in a business combination to recognize the assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited exceptions. It
also requires the recognition of assets acquired and liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured at their acquisition-date fair
values. This authoritative guidance is effective for any business combination with an
acquisition date on or after January 1, 2009. Previously, this guidance was known as SFAS No.
141(R), Business Combinations, but it is now incorporated into FASB ASC 805, Business
Combinations.
Consolidation
In December 2007, the FASB issued authoritative guidance that establishes accounting and
reporting standards for noncontrolling interests in partially-owned consolidated subsidiaries
and the loss of control of subsidiaries. A noncontrolling interest (previously referred to as
minority interest) in a consolidated subsidiary is required to be displayed in the consolidated
balance sheet as a separate component of equity, and the amount of net income attributable to
the noncontrolling interest is required to be included in consolidated net income on the face of
the consolidated statement of operations. In addition, this guidance requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. We adopted the
provisions of this guidance effective January 1, 2009, with no effect to any of the periods
presented in this report. Previously, this guidance was known as SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment to ARB 51, but it is now
incorporated into FASB ASC 810, Consolidation.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Derivatives and Hedging
In March 2008, the FASB issued authoritative guidance that expands the disclosure
requirements for derivative instruments and hedging activities. This guidance specifically
requires an entity to provide enhanced disclosures about its use of derivative instruments, the
accounting for derivatives and related hedged items, and the related effect on an entitys
financial condition, results of operations and cash flows. We adopted this guidance on January
1, 2009. See Note 14 for the required disclosures. Previously, this guidance was known as SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB
Statement No. 133, but it is now incorporated into FASB ASC 815, Derivatives and Hedging.
Fair Value Measurements and Disclosures
In September 2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles
and expands disclosures about fair value measures. This guidance clarifies that fair value is a
market-based measurement that should be determined based on the assumptions that market
participants would use in pricing an asset or liability. This guidance was effective for fiscal
years beginning after November 15, 2007. We elected to implement the guidance with the one-year
deferral permitted by subsequent guidance. The deferral applied to nonfinancial assets and
liabilities measured at fair value in a business combination. As of January 1, 2009, we fully
adopted the fair value guidance, including applying its provisions to nonfinancial assets and
liabilities measured at fair value in a business combination. The full adoption of this
guidance did not change the valuation approach or materially change the purchase accounting for
the Magnum acquisition, which was finalized in the second quarter of 2009. Previously, this
guidance was known as SFAS No. 157, Fair Value Measurements, but it is now incorporated into
FASB ASC 820, Fair Value Measurements and Disclosures.
Subsequent Events
In June 2009, the FASB issued authoritative guidance which establishes general standards of
accounting for and the disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Entities are required to
disclose the date through which subsequent events have been evaluated. We adopted this guidance
effective June 30, 2009. Previously, this guidance was known as SFAS No. 165, Subsequent
Events, but it is now incorporated into FASB ASC 855, Subsequent Events.
Financial Instruments
In April 2009, the FASB issued authoritative guidance which extends certain disclosure
requirements regarding financial instruments to interim financial statements of publicly traded
companies. We adopted this guidance effective June 30, 2009. See Note 8 for the required
disclosures. Previously, this guidance was known as FSP FAS No. 107-1 and APB 28-1, Interim
Disclosures About Fair Value of Financial Instruments, but it is now incorporated into FASB ASC
825, Financial Instruments.
Pending Adoption of Recent Accounting Pronouncements
Consolidation
In June 2009, the FASB issued authoritative guidance which requires a company to perform a
qualitative analysis to determine whether it has a controlling financial interest in a variable
interest entity. In addition, a company is required to assess whether it has the power to direct
the activities of the variable interest entity that most significantly impact the entitys
economic performance. This guidance is effective for fiscal years beginning after November 15,
2009. We are currently evaluating the potential impact of this guidance on our operating
results, cash flows and financial condition.
6
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(3) Gain on Disposal or Exchange of Assets and Other Commercial Transactions
In June 2009, we entered into an agreement to swap certain surface land for certain coal
mineral rights and cash with another coal producer. We recognized a gain totaling $4.2 million
on this transaction. The swap transaction was recorded at fair value. We utilized Level 3 inputs
as defined by authoritative guidance in a discounted cash flows model to calculate the fair
value of the coal reserve swap due to the lack of an active, quoted market and due to the
inability to use other transaction comparisons because of the unique nature of the surface land
provided and the coal seam received.
Other revenues include payments from customer settlements, royalties related to coal lease
agreements and farm income. During 2009, certain metallurgical and thermal customers requested
shipment deferrals on committed tons. In certain situations, we agreed to release the customers
from receipt of the tons in exchange for a cash settlement. For the three and nine months ended
September 30, 2009, these cash settlements represent a significant portion of other revenue.
In June 2008, we entered into an agreement to swap certain leasehold coal mineral rights
with another coal producer. Additionally, we sold approximately 2.7 million tons of adjacent
leasehold coal mineral rights for $1.0 million. We recognized gains totaling $6.3 million on
these transactions. The swap transaction was recorded at fair value. We utilized Level 3 inputs
as defined by authoritative guidance in a discounted cash flows model to calculate the fair
value of the coal reserve swap due to the lack of an active, quoted market and due to the
inability to use other transaction comparisons because of the unique nature of each coal seam.
Also in the second quarter of 2008, we recorded a $4.9 million gain related to a structured
settlement on a property transaction and received a $4.5 million settlement for past due coal
royalties, which had previously been fully reserved due to the uncertainty of collection.
In 2008, we entered into two joint ventures for which we contributed cash totaling $16.4
million and committed certain coal reserve rights. We hold a 49% interest in each joint venture
and account for the interests under the equity method of accounting. As of September 30, 2009,
our maximum exposure to loss is the value contributed plus additional future committed capital
contributions, which for one of the joint ventures is capped at $4.1 million. The investments in
these joint ventures were recorded in Investments and other assets in the condensed
consolidated balance sheets.
(4) Common Stock Offering
On June 16, 2009, we completed a public offering of 12 million shares of our common stock
in a registered public offering under our shelf registration at $7.90 per share. The net
proceeds from the sale of shares, after deducting fees and commissions, were $89.1 million. The
proceeds were used to repay the outstanding balance on our revolving credit facility, with the
remainder to be used for general corporate purposes.
(5) Business Combination
On July 23, 2008, Patriot consummated the acquisition of Magnum. Magnum stockholders
received 23,803,312 shares of newly-issued Patriot common stock and
cash in lieu of fractional shares. The fair value of $25.29 per share of Patriot common stock issued to the Magnum
shareholders was based on the average Patriot stock price for the five business days surrounding
and including the merger announcement date, April 2, 2008. The total consideration for the
acquisition was $739.0 million, including the assumption of $148.6 million of long-term debt, of
which $11.8 million related to capital lease obligations. In conjunction with the acquisition,
we issued convertible notes in order to repay Magnums existing senior secured indebtedness as
discussed in Note 13.
The results of operations of Magnum are included in the Appalachia Mining Operations
segment from the date of acquisition. This acquisition was accounted for using the purchase
method of accounting based on authoritative guidance for business combinations in effect prior
to January 1, 2009. Under this method of accounting, the purchase price is allocated to the fair
value of the net assets acquired.
7
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
The following table summarizes the fair values of the assets acquired and the liabilities
assumed at the date of acquisition:
(Dollars in thousands) | ||||
Cash |
$ | 21,015 | ||
Accounts receivable, net |
88,471 | |||
Inventories |
49,294 | |||
Other current assets |
39,073 | |||
Property, plant, equipment and mine development, net |
2,360,072 | |||
Other noncurrent assets |
5,193 | |||
Total assets acquired |
2,563,118 | |||
Trade accounts payable and accrued expenses |
235,505 | |||
Below market sales contracts acquired, current |
497,882 | |||
Long-term debt |
144,606 | |||
Below market sales contracts acquired, noncurrent |
447,804 | |||
Accrued postretirement benefit costs |
430,837 | |||
Other noncurrent liabilities |
195,051 | |||
Total liabilities assumed |
1,951,685 | |||
Total purchase price |
$ | 611,433 | ||
As of June 30, 2009, we finalized the valuation of all assets acquired and liabilities
assumed. Changes from preliminary purchase accounting to the final opening balance sheet
presented above primarily related to the valuation of the selenium liability discussed below and
final adjustments to certain assumptions utilized in the valuation of the coal reserves and
acquired coal purchase and sales contracts. Based on a purchase price determined at the
announcement date of the acquisition, the fair value of the net assets acquired exceeded the
purchase price by $360.3 million. This excess value over the purchase price was allocated as a
pro-rata reduction to noncurrent assets, which included property, plant, equipment and mine
development and other noncurrent assets.
Included in Property, plant, equipment and mine development, net is over 600 million tons
of coal reserves valued at $2.1 billion. To value these coal reserves, we utilized a discounted
cash flow model based on assumptions that market participants would use in the pricing of these
assets as well as projections of revenues and expenditures that would be incurred to mine or
maintain these coal reserves. A sustained or long-term decline in coal prices from those used to
estimate the fair value of the acquired assets could result in impairment to the carrying
amounts of the coal reserves and related coal mining equipment.
In connection with the valuation of the Magnum acquisition, we recorded liabilities and
assets related to below market coal sales and purchase contracts. The below market supply
contracts were recorded at their fair value when allocating the purchase price, resulting in a
liability of $945.7 million, which is being accreted into earnings as the coal is shipped over a
weighted average period of approximately three years. The below market purchase contracts were
recorded at their fair value, resulting in an asset of $37.8 million, which is being amortized
into earnings as the coal is ultimately sold, with the majority amortized within a year
subsequent to the acquisition date. Sales contract accretion in the consolidated statements of
operations represents the below market supply contract accretion, net of the below market
purchase contract amortization.
In connection with the Magnum acquisition, we assumed liabilities related to water
treatment. At the acquisition date, Magnum was in the process of testing various water
treatment alternatives related to selenium effluent limits in order to comply with certain
mining permits. Subsequent to the acquisition of Magnum, we have implemented selenium control
plans to adjust our mining processes in a manner intended to prevent future violations of the
applicable water quality standard for selenium. Uncertainty existed at the time of the
acquisition related to the exact amount of our assumed liability due to the fact there is no
proven technology to remediate our existing selenium discharges in excess of allowable limits to meet current
permit standards.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
The cost to treat the selenium discharges in excess of allowable limits was estimated at a net present value of $85.2
million at the acquisition date. This liability reflects the estimated costs of the treatment
systems to be installed and maintained with the goal of meeting the requirements of current
court orders, consent decrees and mining permits. This estimate was prepared considering the
dynamics of current legislation, capabilities of currently available technology and our planned
remediation strategy. (See Clean Water Act Permit Issues in Note 15 for additional discussion of
selenium treatment issues.)
We used a 13% discount rate in determining the net present value of the selenium liability.
The estimated aggregate undiscounted liability was $390.7 million at acquisition date. Our
estimated future payments for selenium remediation average $12 million each year over the next
five years, with the remainder to be paid in the 25 years thereafter. Our estimated selenium
liability is included in Other noncurrent liabilities and Trade accounts payable and accrued
expenses on our condensed consolidated balance sheets. Accretion of the estimated selenium
liability is included in Reclamation and remediation obligation expense in the condensed
consolidated statements of operations.
Based on the fair values set forth above as compared to the carryover tax basis in assets
and liabilities, $69.2 million of net deferred tax liability would be recorded on Magnums
opening balance sheet. As part of the business combination, these Magnum deferred tax
liabilities have impacted managements view as to the realization of our deferred tax assets,
against which a full valuation allowance had previously been recorded. In such situations,
authoritative guidance in effect at the date of the acquisition required that any reduction in
the acquiring companys valuation allowance be accounted for as part of the business
combination. As such, deferred tax liabilities have been offset against a release of $69.2
million of valuation allowance within purchase accounting.
Upon the acquisition of Magnum, we performed a comprehensive strategic review of all mining
complexes and their relative cost structures in order to optimize our performance. As a result
of this review, we announced plans to idle operations of both the acquired Jupiter and Remington
mining complexes. The Jupiter mining complex ceased operations in December 2008 and the
Remington mining complex ceased operations in March 2009. The fair value of the assets and
liabilities acquired for these two mining complexes reflects their status as idled in purchase
accounting.
The following unaudited financial information presents the combined results
of operations of Patriot and Magnum, on a pro forma basis, as though the companies had been
combined as of January 1, 2008.
Three Months Ended | Nine Months Ended | |||||||
September 30, 2008 | September 30, 2008 | |||||||
(Dollars in thousands, except per share data) | ||||||||
Revenues: |
||||||||
As reported |
$ | 489,583 | $ | 1,113,597 | ||||
Pro forma |
542,627 | 1,654,949 | ||||||
Net income: |
||||||||
As reported |
$ | 71,199 | $ | 79,368 | ||||
Pro forma |
15,282 | 204,954 | ||||||
Basic earnings per share: |
||||||||
As reported |
$ | 0.99 | $ | 1.33 | ||||
Pro forma |
$ | 0.21 | $ | 3.83 | ||||
Diluted earnings per share: |
||||||||
As reported |
$ | 0.99 | $ | 1.32 | ||||
Pro forma |
$ | 0.21 | $ | 3.81 |
The combined pro forma financial information has been adjusted to exclude non-recurring
transaction-related expenses and includes purchase accounting adjustments for fair values
impacting coal inventories, sales contract accretion, depletion of coal reserves and
depreciation of property, plant and equipment. This unaudited pro forma
financial information does not necessarily reflect the results of operations that would
have occurred had Patriot and Magnum constituted a single entity during these periods.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(6) | Income Tax Benefit |
For the three and nine months ended September 30, 2009, no income tax provision was
recorded due to our anticipated tax net operating loss for the year ending December 31, 2009 and
the full valuation allowance recorded against our net deferred tax assets. The primary
difference between book and taxable income for 2009 is the treatment of the sales contract
accretion on the below market purchase and sales contracts acquired with Magnum, with such
amounts being included in the computation of book income but excluded from the computation of
taxable income. For the three months ended September 30, 2008, we reported an income tax benefit
of $2.6 million based on the forecasted effective tax rate for 2008 which reduced the provision
to zero for the nine months ending September 30, 2008.
(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 nine months ended September 30, 2009 and 2008, the effect of dilutive
securities includes the impact of stock options and restricted stock units. For the three and
nine months ended September 30, 2009, 1,232,918 shares and 1,652,288 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. For the three and nine months
ended September 30, 2008, 207,838 and 209,732 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.
The weighted average shares outstanding and earnings per share for the three and nine
months ended September 30, 2008, were revised to include 381,187 and 376,170 restricted shares,
respectively, as unvested participating securities due to the adoption of changes to earnings
per share authoritative guidance as discussed in Note 2. The inclusion of these shares in
earnings per share resulted in a decrease to basic earnings per share of $0.03 and $0.05, for
the three and nine months ended September 30, 2008, and a decrease to diluted earnings per share
of $0.02 and $0.04 for the three and nine months ended September 30, 2008.
(8) Fair Value of Financial Instruments
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
September 30, 2009.
The following table summarizes the fair value of our remaining financial instruments at
September 30, 2009.
(Dollars in thousands) | ||||
Assets: |
||||
Fuel contracts, cash flow hedges |
$ | 1,396 | ||
Liabilities: |
||||
Fuel contracts, cash flow hedges |
3,111 | |||
Fuel contracts, other |
241 | |||
$200 million of 3.25% Convertible Senior Notes due 2013 |
158,198 |
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.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(9) Inventories
Inventories consisted of the following:
September 30, 2009 | December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Materials and supplies |
$ | 43,249 | $ | 52,023 | ||||
Saleable coal |
31,782 | 15,107 | ||||||
Raw coal |
13,216 | 13,823 | ||||||
Total |
$ | 88,247 | $ | 80,953 | ||||
Materials, supplies and coal inventory are valued at the lower of average cost or market.
Saleable coal represents coal stockpiles that will be sold in current condition. Raw coal
represents coal stockpiles that may be sold in current condition or may be further processed
prior to shipment to a customer. Coal inventory costs include labor, supplies, equipment,
operating overhead and other related costs. The increase in saleable coal inventory from
December 31, 2008 to September 30, 2009 primarily resulted from the timing of customer
shipments.
(10) Comprehensive Income and Accumulated Other Comprehensive Loss
The following table sets forth the after-tax components of comprehensive income for the
three and nine months ended September 30, 2009 and 2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income |
$ | 52,842 | $ | 71,199 | $ | 116,375 | $ | 79,368 | ||||||||
Accumulated actuarial loss and prior
service cost realized in net income |
4,154 | 2,900 | 11,786 | 7,798 | ||||||||||||
Net change in fair value of diesel fuel hedge |
211 | | 7,980 | | ||||||||||||
Comprehensive income |
$ | 57,207 | $ | 74,099 | $ | 136,141 | $ | 87,166 | ||||||||
Comprehensive income differs from net income by the net amount of unrealized gains and
losses resulting from valuation changes of our diesel fuel hedges and the amortization of net
actuarial losses and prior service cost related to our workers compensation and other
postretirement benefit obligations.
A rollforward of Accumulated other comprehensive loss, net of taxes, is shown below:
Accumulated | Accumulated | |||||||||||
Diesel | Actuarial Loss | Other | ||||||||||
Fuel | and Prior | Comprehensive | ||||||||||
Hedge | Service Cost | Loss | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance at December 31, 2008 |
$ | (9,695 | ) | $ | (102,586 | ) | $ | (112,281 | ) | |||
Unrealized gains |
2,711 | | 2,711 | |||||||||
Reclassifications to earnings |
5,269 | 11,786 | 17,055 | |||||||||
Balance at September 30, 2009 |
$ | (1,715 | ) | $ | (90,800 | ) | $ | (92,515 | ) | |||
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(11) Postretirement Benefit Costs
Net periodic postretirement benefit costs included the following components:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Service cost for benefits earned |
$ | 560 | $ | 558 | $ | 2,606 | $ | 963 | ||||||||
Interest cost on accumulated
postretirement benefit obligation |
17,672 | 15,387 | 52,882 | 33,976 | ||||||||||||
Amortization of net actuarial losses |
4,928 | 3,649 | 14,110 | 10,138 | ||||||||||||
Amortization of prior service cost |
(138 | ) | (170 | ) | (413 | ) | (510 | ) | ||||||||
Net periodic postretirement benefit costs |
$ | 23,022 | $ | 19,424 | $ | 69,185 | $ | 44,567 | ||||||||
We anticipate paying approximately $64 million for retiree benefits (net of retiree
contributions) in 2009.
(12) Segment Information
We report our operations through two reportable operating segments, Appalachia and Illinois
Basin. The Appalachia and Illinois Basin segments primarily consist of our mining operations in
West Virginia and Kentucky, respectively. The principal business of the Appalachia segment is
the mining, preparation and sale of thermal coal, sold primarily to electric utilities and
metallurgical coal, sold to steel and coke producers. The principal business of the Illinois
Basin segment is the mining, preparation and sale of thermal coal, sold primarily to electric
utilities. For the nine months ended September 30, 2009, 85% of our sales were to electricity
generators and industrial customers and 15% to steel and coke producers. For the nine months
ended September 30, 2009 and 2008, our revenues attributable to foreign countries, based on
where the product was shipped, were $225.4 million and $225.9 million, respectively. We utilize
underground and surface mining methods and produce coal with high and medium Btu content. Our
operations have relatively short shipping distances from the mine to most of our domestic
utility customers and certain metallurgical coal customers. Corporate and Other includes
selling and administrative expenses, net gain on disposal or exchange of assets and costs
associated with past mining obligations.
Our chief operating decision makers use Adjusted EBITDA as the primary measure of segment
profit and loss. Adjusted EBITDA is defined as net income before deducting interest income and
expense; income taxes; reclamation and remediation obligation expense; depreciation, depletion
and amortization; and net sales contract accretion. Net sales contract accretion represents
contract accretion excluding back-to-back coal purchase and sales contracts. The contract
accretion on the back-to-back coal purchase and sales contracts reflects the accretion related
to certain coal purchase and sales contracts existing on July 23, 2008, whereby Magnum purchased
coal from third parties to fulfill tonnage
commitments on sales contracts. Because Segment Adjusted EBITDA is not calculated
identically by all companies, our calculation may not be comparable to similarly titled measures
of other companies.
Operating segment results for the three and nine months ended September 30, 2009 and 2008
were as follows:
Three Months Ended September 30, 2009 | Nine Months Ended September 30, 2009 | |||||||||||||||||||||||||||||||
Illinois | Corporate | Illinois | Corporate | |||||||||||||||||||||||||||||
Appalachia | Basin | and Other | Total | Appalachia | Basin | and Other | Total | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenues |
$ | 440,272 | $ | 65,917 | $ | | $ | 506,189 | $ | 1,336,862 | $ | 205,259 | $ | | $ | 1,542,121 | ||||||||||||||||
Adjusted EBITDA |
76,604 | 58 | (51,256 | ) | 25,406 | 214,696 | 6,972 | (143,452 | ) | 78,216 | ||||||||||||||||||||||
Additions to property,
plant, equipment and
mine development |
17,308 | 1,840 | 200 | 19,348 | 48,164 | 5,192 | 811 | 54,167 |
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Three Months Ended September 30, 2008 | Nine Months Ended September 30, 2008 | |||||||||||||||||||||||||||||||
Illinois | Corporate | Illinois | Corporate | |||||||||||||||||||||||||||||
Appalachia | Basin | and Other | Total | Appalachia | Basin | and Other | Total | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenues |
$ | 422,491 | $ | 67,092 | $ | | $ | 489,583 | $ | 904,834 | $ | 208,763 | $ | | $ | 1,113,597 | ||||||||||||||||
Adjusted EBITDA |
35,301 | 1,058 | (38,558 | ) | (2,199 | ) | 140,395 | 9,156 | (93,548 | ) | 56,003 | |||||||||||||||||||||
Additions to property,
plant, equipment and
mine development |
38,119 | 2,227 | 311 | 40,657 | 66,139 | 6,194 | 1,746 | 74,079 |
A reconciliation of Adjusted EBITDA to net income follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Total Adjusted EBITDA |
$ | 25,406 | $ | (2,199 | ) | $ | 78,216 | $ | 56,003 | |||||||
Depreciation, depletion and amortization |
(50,413 | ) | (42,215 | ) | (155,749 | ) | (81,730 | ) | ||||||||
Reclamation and remediation
obligation expense |
(9,206 | ) | (5,051 | ) | (23,268 | ) | (11,726 | ) | ||||||||
Sales contract accretion, net |
93,988 | 121,859 | 232,516 | 121,859 | ||||||||||||
Interest expense |
(10,656 | ) | (7,378 | ) | (28,386 | ) | (15,496 | ) | ||||||||
Interest income |
3,723 | 3,588 | 13,046 | 10,458 | ||||||||||||
Income tax benefit |
| 2,595 | | | ||||||||||||
Net income |
$ | 52,842 | $ | 71,199 | $ | 116,375 | $ | 79,368 | ||||||||
(13) Long-Term Debt
Our total indebtedness consisted of the following:
September 30, 2009 | December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
3.25% Convertible Senior Notes due 2013 |
$ | 165,472 | $ | 159,637 | ||||
Capital leases |
29,455 | 10,218 | ||||||
Promissory notes |
10,453 | 11,438 | ||||||
Short-term borrowings |
| 23,000 | ||||||
$ | 205,380 | $ | 204,293 | |||||
Credit Facility
Effective October 31, 2007, we entered into a $500 million, four-year revolving credit
facility, which includes a $50 million swingline sub-facility and a letter of credit
sub-facility, subsequently amended for the Magnum acquisition and the issuance of the
convertible notes. In July 2009, we increased our revolving credit facility by $22.5 million,
bringing the total credit facility to $522.5 million. This facility is available for our working
capital requirements, capital expenditures and other corporate purposes. As of September 30,
2009 and December 31, 2008, the balance of outstanding letters of credit issued against the
credit facility totaled $348.7 million and $350.8 million, respectively. There were no
outstanding short-term borrowings against this facility at September 30, 2009. Outstanding
short-term borrowings were $23.0 million as of December 31, 2008. Availability under the credit
facility was $173.8 million and $126.2 million as of September 30, 2009 and December 31, 2008,
respectively. At September 30, 2009, we were in compliance with the covenants of our amended
credit facility.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Private Convertible Notes Issuance
On May 28, 2008, Patriot completed a private offering of $200 million in aggregate
principal amount of 3.25% Convertible Senior Notes due 2013. As discussed in Note 2, we adopted
new authoritative guidance related to accounting for convertible debt effective January 1, 2009,
with retrospective application to the inception of these convertible notes. We utilized an
interest rate of 8.85% to reflect the nonconvertible market rate of our offering upon issuance,
which resulted in a $44.7 million discount to the convertible note balance and an increase to
Additional paid-in capital to reflect the value of the conversion feature. In addition, we
allocated the financing costs related to the issuance of the convertible instruments between the
debt and equity components. The debt discount is amortized over the contractual life of the
convertible notes, resulting in additional interest expense above the contractual coupon amount.
At December 31, 2008, based on the required retrospective application of the new
authoritative guidance, the principal amount of the convertible notes of $200.0 million was
adjusted for the debt discount of $40.4 million, resulting in a long-term convertible note
balance of $159.6 million. At September 30, 2009, the debt discount was $34.5 million, resulting
in a long-term convertible note balance of $165.5 million. For the three and nine months ended
September 30, 2009, interest expense for the convertible notes was $3.6 million and $10.7
million, which included debt discount amortization of $2.0 million and $5.8 million,
respectively. For the three and nine months ended September 30, 2008, interest expense for the
convertible notes was $3.5 million and $4.6 million, which included debt discount amortization
of $1.8 million and $2.4 million, respectively.
Capital Lease Obligations and Other
During the second quarter of 2009, the construction of the Blue Creek preparation plant was
completed resulting in reclassification of the construction-phase liability from Other
noncurrent liabilities to current and long-term debt.
(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 in 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 contract settles or the
relationship ceases to qualify for hedge accounting. In addition, if a portion of the change in
fair value for a cash flow hedge is deemed ineffective during a reporting period, the
ineffective portion of the change in fair value is recorded directly to earnings.
With the acquisition of Magnum in 2008, our commodity risk related to diesel fuel increased
significantly. 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 September 30, 2009, the notional amounts outstanding for these swaps included
2.4 million gallons of heating oil expiring through the remainder of 2009 and 12.0 million
gallons of heating oil expiring throughout 2010. In 2010, we expect to purchase approximately 18
million gallons of diesel fuel annually across all operations. Aside from the hedging
activities, a $0.10 per gallon change in the price of diesel fuel would impact our annual
operating costs by approximately $1.8 million. For the three and nine months ended September 30,
2009, we recognized a loss of $0.9 million and $4.6 million in earnings on the settled
contracts. Based on the analysis required by authoritative guidance, a portion of the fair value
for the cash flow hedges was deemed ineffective for the three and nine months ended September
30, 2009, resulting in less than $0.1 million recorded directly to earnings. We did not have any
similar hedges as of or during the three and nine months ended September 30, 2008. Due to the
suspension of the Samples surface mine in August 2009, which utilized a significant amount of
diesel fuel, we discontinued certain cash flow hedge relationships resulting in a loss of $0.2
million recognized in income related to forecasted transactions that no longer are expected to
occur. The suspension of these operations was unanticipated when the contracts were entered into
in 2008.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
The following table presents the fair values of our derivatives and the amounts of
unrealized losses, net of tax, included in Accumulated other comprehensive loss related to
fuel hedges in the condensed consolidated balance sheets. See Note 10 for a rollforward of
Accumulated other comprehensive loss for our fuel hedges.
September 30, 2009 | December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Fair value of current fuel contracts (Prepaid expenses and
other current assets) |
$ | 982 | $ | | ||||
Fair value of noncurrent fuel contracts (Investments and other assets) |
414 | | ||||||
Fair value of current fuel contracts (Trade accounts payable and
accrued expenses) |
2,696 | 5,915 | ||||||
Fair value of noncurrent fuel contracts (Other noncurrent liabilities) |
415 | 3,780 | ||||||
Net unrealized losses from fuel hedges, net of tax (Accumulated
other comprehensive loss) |
(1,715 | ) | (9,695 | ) |
We utilized New York Mercantile Exchange (NYMEX) quoted market prices for the fair value
measurement of these contracts, which reflects a Level 2 fair value input as defined in
authoritative guidance.
(15) Commitments and Contingencies
Commitments
As of September 30, 2009, purchase commitments for capital expenditures were $33.3 million.
Other
On occasion, we become a party to claims, lawsuits, arbitration proceedings and
administrative proceedings 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.
Flood Litigation
2001 Flood Litigation
One of our subsidiaries, Catenary Coal Company, LLC (Catenary), has been named as a
defendant, along with various other property owners, coal companies, timbering companies and oil
and natural gas companies, in connection with alleged damages arising from flooding that
occurred on July 8, 2001 in various watersheds, primarily located in southern West Virginia
(referred to as the 2001 flood litigation). Pursuant to orders from the West Virginia Supreme
Court of Appeals, the cases are being handled as mass litigation, and a panel of three judges
was appointed to handle the matters that have been divided between the judges pursuant to the
various watersheds.
One of the cases, in the Upper Guyandotte River watershed, went to trial against two
defendants, both of which were land holding companies, to determine whether the plaintiffs could
establish liability. The jury found in favor of the plaintiffs, but the judge in this matter set
aside the verdict stating he committed reversible error by allowing certain testimony of the
plaintiffs experts. The judge addressed in his order the core foundation necessary to prevail
in the 2001 flood litigation, which is whether the plaintiffs can scientifically establish that
a certain flood event caused and/or contributed to injury and, if so, who caused the injury and
what persons were injured by such conduct. An appeal of this order was filed with the West
Virginia Supreme Court of Appeals. The West Virginia Supreme Court issued its decision
reversing the trial judges order and remanded the matter to the Mass Litigation Panel for
further disposition.
In another case regarding flooding in the Coal River watershed, another judge on the panel
provided an opportunity for the plaintiffs to amend their complaints to more specifically
identify, among other things, the defendants specific injury-causing conduct and the amount of
damages sustained by each plaintiff. The plaintiffs were unable to meet the pleading standard
announced by the judge and in January 2007, the judge entered an order that granted defendants
motions to dismiss with prejudice. An appeal of this order was filed with the West Virginia
Supreme Court of Appeals. The West Virginia Supreme Court issued its decision reversing the
trial judges order and remanded the matter to the Mass Litigation Panel for further
disposition.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Pursuant to the purchase and sale agreement related to Magnum, Arch Coal, Inc. (Arch)
indemnifies us against claims arising from certain pending litigation proceedings, including the
2001 flood litigation, which will continue indefinitely. The failure of Arch to satisfy its
indemnification obligations under the purchase agreement could have a material adverse effect on
us.
2004 Flood Litigation
In 2006, Hobet Mining, LLC (Hobet) and Catenary, two of our subsidiaries, were named as
defendants along with various other property owners, coal companies, timbering companies and oil
and natural gas companies, in lawsuits arising from flooding that occurred on May 30, 2004 in
various watersheds, primarily located in southern West Virginia. This litigation is pending
before two different judges in the Circuit Court of Logan County, West Virginia. In the first
action, the plaintiffs have asserted that (i) Hobet failed to maintain an approved drainage
control system for a pond on land near, on, and/or contiguous to the sites of flooding; and (ii)
Hobet participated in the development of plans to grade, blast, and alter the land near, on,
and/or contiguous to the sites of the flooding. Hobet has filed a motion to dismiss both claims
based upon the assertion that insufficient facts have been stated to support the claims of the
plaintiffs.
In the second action, motions to dismiss have been filed, asserting that the allegations
asserted by the plaintiffs are conclusory in nature and likely deficient as a matter of law.
Most of the other defendants also filed motions to dismiss. Both actions were stayed during the
pendency of the appeals to the West Virginia Supreme Court of Appeals in the 2001 flood
litigation.
The outcome of the West Virginia flood litigation is subject to numerous uncertainties.
Based on our evaluation of the issues and their potential impact, the amount of any future loss
cannot be reasonably estimated. However, based on current information, we believe this matter is
likely to be resolved without a material adverse effect on our financial condition, results of
operations and cash flows.
Clean Water Act Permit Issues
The federal Clean Water Act and corresponding state and local laws and regulations affect
coal mining operations by restricting the discharge of pollutants, including dredged or fill
materials, into waters of the United States. In particular, the Clean Water Act requires
effluent limitations and treatment standards for wastewater discharge through the National
Pollution Discharge Elimination System (NPDES) program. NPDES permits, which we must obtain for
both active and historical mining operations, govern the discharge of pollutants into water,
require regular monitoring and reporting, and set forth performance standards. States are
empowered to develop and enforce in-stream water quality standards, which are subject to
change and must be approved by the Environmental Protection Agency (EPA). In-stream standards
vary from state to state.
Environmental claims and litigation in connection with our various NPDES permits, and
related Clean Water Act issues, include the following:
EPA Consent Decree
In February 2009, we entered into a consent decree with the EPA and the West Virginia
Department of Environmental Protection (WVDEP) to resolve certain claims under the Clean Water
Act and the West Virginia Water Pollution Control Act relating to NPDES permits at several
Magnum mining operations in West Virginia that existed prior to our acquisition of these
operations. The consent decree was entered by the federal district court on April 30,
2009. Under the terms of the consent decree, we paid a civil penalty of $6.5 million in
June 2009. We also could be subject to stipulated penalties in the future for failure to comply
with certain permit requirements as well as certain other terms of the consent decree. Because
our operations are complex and periodically exceed our permit limitations, it
is possible that we will have to pay stipulated penalties in the future, but we do not expect
the amounts of any such penalties to be material. The civil penalty of $6.5 million was accrued
as part of the Magnum acquisition purchase accounting described in Note 5. The consent decree
also requires us to implement an enhanced company-wide environmental management system, which
will include regular compliance audits, electronic tracking and reporting, and annual training
for all employees and contractors with environmental responsibilities. In addition, we will
complete several stream restoration projects in consultation with the EPA and WVDEP. These
latter requirements could result in incremental operating costs in addition to the $6.5 million
civil penalty. We anticipate the incremental costs will be between $5 million and $10 million.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
In a separate administrative proceeding with the WVDEP, we paid a civil penalty of $315,000
for past violations of other NPDES permits held by certain subsidiaries in the second quarter of
2009.
Apogee Coal Company, LLC (Apogee)
In 2007, Apogee, one of our subsidiaries, was sued in the U.S. District Court for the
Southern District of West Virginia (U.S. District Court) by the Ohio Valley Environmental
Coalition, Inc. (OVEC) and another environmental group (pursuant to the citizen suit provisions
of the Clean Water Act). We refer to this lawsuit as the Federal Apogee Case. This lawsuit
alleged that Apogee had violated water discharge limits for selenium set forth in one of its
NPDES permits. The lawsuit sought fines and penalties as well as injunctions prohibiting Apogee
from further violating laws and its permit.
On March 19, 2009, the U.S. District Court approved a consent decree between Apogee, Hobet
and the plaintiffs. The consent decree extended the compliance deadline to April 5, 2010 and
added interim reporting requirements up to that date. Under the terms of the March 2009 consent
decree, we paid a $50,000 penalty to the U.S. Treasury and $325,000 in attorneys fees in the
second quarter of 2009. We also agreed to spend approximately $350,000 to implement a pilot
project using certain reverse osmosis technology to determine whether the technology can
effectively treat selenium discharges from mining outfalls, and to undertake interim reporting
obligations. Finally, we agreed to comply with our NPDES permits water discharge limits for
selenium by April 5, 2010. In addition to implementing the pilot project required by the March
2009 consent decree, we are actively engaged in studying potential solutions to controlling
selenium discharges and are installing treatment systems at various permitted outfalls in an
effort to comply with the deadline established in the March 2009 consent decree.
Currently, available technology has not been fully tested or proven effective at addressing
selenium discharges in excess of allowable limits in mining outfalls similar to ours and alternative technology is still in
the research stage of development. The potential solutions identified to date, including the
technology we are currently utilizing, have not been proven to be effective at all scales of
operation, and otherwise may not be feasible, particularly at larger scale operations, due to a
range of problems concerning technological issues, prohibitive implementation costs and other
issues. While we are actively continuing to explore options, there can be no assurance as to
when a definitive solution will be identified and implemented.
Legislative developments in West Virginia have created the potential for selenium
compliance deadlines to be extended from 2010 to 2012. On May 13, 2009, the Governor of West
Virginia signed a bill that allowed the WVDEP to extend selenium compliance deadlines to 2012
and appropriated state funds for selenium research. The bill cites concerns within West
Virginia regarding the applicability of the research underlying the federal selenium criteria to
a state such as West Virginia which has high precipitation rates and free-flowing streams and
that the alleged environmental impacts that were documented in the applicable federal research
have not been observed in West Virginia. As a result of this bill, the WVDEP is required to
perform research that will assist in better defining and developing state laws and regulations
addressing selenium discharges.
We have estimated the costs to treat our selenium discharges in excess of allowable limits
at a net present value of
$85.2 million at the Magnum acquisition date. This liability reflects the estimated costs of the
treatment systems necessary to be installed and maintained with the goal of meeting the requirements of current court orders, consent
decrees and mining permits. This estimate was prepared considering the dynamics of current
legislation, capabilities of currently available technology and our planned remediation
strategy. Future changes to legislation, findings from current research initiatives and the pace
of future technological progress could result in costs that differ from our current estimates,
which could have a material adverse affect on our results of operations, cash flows and
financial condition. Additionally, any failure to meet the deadlines set forth in the March
2009 consent decree or established by the federal government or the State of West Virginia or to
otherwise comply with selenium limits in our permits could result in further litigation against
us, an inability to obtain new permits or to maintain existing permits, and the imposition of
significant and material fines and penalties or other costs and could otherwise materially
adversely affect our results of operations, cash flows and financial condition.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Hobet Mining, LLC
In
2007, Hobet was sued for exceeding effluent limits contained in its NPDES permits
in state court in Boone County by the WVDEP. We refer to this case as the WVDEP Action. In
2008, OVEC and another environmental group filed a lawsuit against Hobet and WVDEP in the U.S.
District Court (pursuant to the citizen suit provisions of the Clean Water Act). We refer to
this case as the Federal Hobet Case. The Federal Hobet Case involved the same four NPDES
permits that were the subject of the WVDEP Action in state court. However, the Federal Hobet
Case focused exclusively on selenium exceeding allowable limits in permitted water discharges, while the WVDEP
Action addressed all effluent limits, including selenium, established by the permits. The
Federal Hobet Case was included in the same March 19, 2009 consent decree that addressed the
Federal Apogee Case discussed above, and the terms of that consent decree, including the April
5, 2010 deadline to comply with the selenium effluent limits established by our permits, also
apply to Hobet.
The WVDEP Action was resolved by a settlement and consent order entered in the Boone County
circuit court on September 5, 2008. As part of the settlement, we paid approximately $1.5
million in civil penalties, with the final payment made in July 2009. The settlement also
required us to complete five supplemental environmental projects estimated to cost approximately
$2.6 million, many of which focus on identifying methods for treatment of selenium discharges
and studying the effects of selenium on aquatic wildlife. Finally, we agreed to make gradual
reductions in the selenium discharges from our Hobet Job 21 Surface Mine, to achieve full
compliance with our NPDES permits by April 2010, and to study potential treatments for
wastewater runoff.
On October 8, 2009, a motion to enter a modified settlement and consent order was submitted
to the Boone County circuit court. This motion to modify the settlement and consent order was
jointly filed by Patriot and the WVDEP. The motion includes, among other term modifications, an
extension of the date to achieve full compliance with our NPDES permits from April 2010 to July
2012. Approval and entry of the modified settlement and consent order by the Boone County
circuit court is subject to a public notice by the WVDEP and a comment period.
As a result of ongoing litigation and federal regulatory initiatives related to water
quality standards that affect valley fills, impoundments and other mining practices, including
the selenium discharge matters described above, the process of applying for new permits has
become more time-consuming and complex, the review and approval process is taking longer, and in
certain cases, new permits may not be issued.
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
CERCLA and similar state laws create liability for investigation and remediation in
response to releases of hazardous substances in the environment and for damages to natural
resources. Under CERCLA and many similar state statutes, joint and several liability may be
imposed on waste generators, site owners and operators and others regardless of fault. These
regulations could require us to do some or all of the following: (i) remove or mitigate the
effects on the environment at various sites from the disposal or release of certain substances;
(ii) perform remediation work at such sites; and (iii) pay damages for loss of use and non-use
values.
Although waste substances generated by coal mining and processing are generally not
regarded as hazardous substances for the purposes of CERCLA and similar legislation, and are
generally covered by the Surface Mining Control and Reclamation Act (SMCRA), some products used
by coal companies in operations, such as chemicals, and the disposal of these products are
governed by CERCLA. Thus, coal mines currently or previously owned or operated by us, and sites
to which we have sent waste materials, may be subject to liability under CERCLA and similar
state laws. A predecessor of one of our subsidiaries has been named as a potentially responsible
party at a third-party site, but given the large number of entities involved at the site and our
anticipated share of expected cleanup costs, we believe that its ultimate liability, if any,
will not be material to our financial condition and results of operations.
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PATRIOT COAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Other Environmental Litigation
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 are identical except for the named plaintiff. They each allege
personal injury occasioned by exposure to dioxin generated by a plant owned and operated by
certain of the other defendants during production of a chemical, 2,4,5-T, from 1949-1969. As of
September 30, 2009, 44 of the 77 lawsuits have been dismissed. 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. 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.
A predecessor of one of the our subsidiaries operated the Eagle No. 2 mine located near
Shawneetown, Illinois from 1969 until closure of the mine in July of 1993. In 1999, the State of
Illinois brought a proceeding before the Illinois Pollution Control Board against the subsidiary
alleging that groundwater contamination due to leaching from a coal waste pile at the mine site
violated state standards. The subsidiary has developed a remediation plan with the State of
Illinois and is in litigation with the Illinois Attorney Generals office with respect to its
claim for a civil penalty of $1.3 million.
Beginning December 31, 2008 and through September 30, 2009, 109 related lawsuits have been
filed by approximately 267 plaintiffs against several coal companies, including one of our
subsidiaries, in the Circuit Court of Boone County, West Virginia. The plaintiffs in each case
allege contamination of their drinking water wells 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. Because of the early
stage of the lawsuits, we are unable to predict the likelihood of success of the plaintiffs
claims, though we intend to vigorously defend against all claims.
The outcome of this environmental 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 these matters are likely
to be resolved without a material adverse effect on our financial condition, results of
operations and cash flows.
(16) 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.
(17) Related Party Transactions
ArcLight Energy Partners Fund I L.P. (ArcLight) is a significant stockholder of Patriot due
to its former ownership of Magnum. In January 2007, ArcLight purchased from a third party rights to a royalty
stream based on coal mined on certain properties and then leased the rights to one of Magnums
operations. Royalty payments to ArcLight for the three and nine months ended September 30, 2009
were approximately $166,000 and $618,000, respectively. Royalty payments to ArcLight for the
period from July 23, 2008 to September 30, 2008 were approximately $200,000.
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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:
| difficulty in implementing our business strategy; | ||
| geologic, equipment and operational risks associated with mining; | ||
| changes in general economic conditions, including coal and power market conditions; | ||
| reductions of purchases or deferral of deliveries by major customers; | ||
| customer performance and credit risks; | ||
| the outcome of commercial negotiations involving sales contracts or other transactions; | ||
| regulatory and court decisions including, but not limited to, those impacting permits issued pursuant to the Clean Water Act; | ||
| environmental laws and regulations including those affecting our operations and those affecting our customers coal usage; | ||
| developments in greenhouse gas emission regulation and treatment, including any development of commercially successful carbon capture and storage techniques or market-based mechanisms, such as a cap-and-trade system, for regulating greenhouse gas emissions; | ||
| coal mining laws and regulations; | ||
| availability and costs of credit, surety bonds and letters of credit; | ||
| economic strength and political stability of countries in which we serve customers; | ||
| 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; | ||
| worldwide economic and political conditions; | ||
| labor availability and relations; | ||
| our ability to replace proven and probable coal reserves; | ||
| the effects of mergers, acquisitions and divestitures, including our ability to successfully integrate mergers and acquisitions; | ||
| our ability to respond to changing customer preferences; | ||
| our dependence on Peabody Energy for a significant portion of our revenues; | ||
| price volatility and demand, particularly in higher margin products; | ||
| failure to comply with debt covenants; | ||
| the outcome of pending or future litigation; | ||
| weather patterns affecting energy demand; | ||
| competition in our industry; | ||
| changes in postretirement benefit obligations; |
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| changes to contribution requirements to multi-employer benefit funds; | ||
| availability and costs of competing energy resources; | ||
| interest rate fluctuation; | ||
| inflationary trends, including those impacting materials used in our business; | ||
| 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 2008 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 2008 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
or contemplated or implied by our forward-looking statements. We do not undertake any obligation
(and expressly disclaim any such obligation) to update or revise the forward-looking statements,
except as required by federal securities laws.
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. In the first nine months of 2009, we sold 24.6 million tons of coal, of which 85% was
sold to domestic electric utilities and industrial customers and 15% was sold to domestic and
global steel and coke producers. In 2008, we sold 28.5 million tons of coal, of which 79% was
sold to electric utilities and 21% was sold to domestic and global steel producers. 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.
Our operations consist of fourteen current mining complexes, which include company-operated
mines, contractor-operated mines and coal preparation facilities. The Appalachia and Illinois
Basin segments consist of our operations in West Virginia and Kentucky, respectively. We ship
coal to electric utilities, industrial users and metallurgical coal customers. Coal is shipped
via various company-owned and third-party loading facilities, multiple rail and river
transportation routes and ocean-going vessels.
Effective July 23, 2008, we acquired Magnum Coal Company (Magnum). Magnum was one of the
largest coal producers in Appalachia, operating eight mining complexes with production from
surface and underground mines and controlling more than 600 million tons of proven and probable
coal reserves. Upon the completion of the acquisition, we performed a strategic review of all
our operations, resulting in the decision to cease operations at two Magnum mining complexes.
The Jupiter complex ceased operations in December 2008 and the Remington complex ceased
operations in March 2009.
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 19.3 million and 20.6 million tons of coal in the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively. As of December 31, 2008, we controlled 1.18 billion tons of proven and probable coal reserves in Appalachia, of which 468 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 5.3 million and 7.9 million tons of coal in the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively. As of December 31, 2008, we controlled 655 million tons of proven and probable coal reserves in the Illinois Basin, of which 136 million tons were assigned to current operations. |
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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 before deducting interest income and expense; income taxes; reclamation and
remediation obligation expense; depreciation, depletion and amortization; and net sales
contract accretion. Net sales contract accretion represents contract accretion excluding
back-to-back coal purchase and sales contracts. The contract accretion on the back-to-back coal
purchase and sales contracts reflects the accretion related to certain coal purchase and sales
contracts existing on July 23, 2008, whereby Magnum purchased coal from third parties to fulfill
tonnage commitments on sales contracts. Segment Adjusted EBITDA is used by management primarily
as a measure of our segments operating performance. Because Segment Adjusted EBITDA is not
calculated identically by all companies, our calculation may not be comparable to similarly
titled measures of other companies. Adjusted EBITDA is reconciled to its most comparable measure
under generally accepted accounting principles in Note 12 to our unaudited condensed
consolidated financial statements. Segment Adjusted EBITDA excludes selling, general and
administrative expenses, past mining obligation expense and gain on disposal or exchange of
assets and is reconciled to its most comparable measure below under Three and Nine Months Ended
September 30, 2009 Compared to September 30, 2008 Net Income.
Three and Nine Months Ended September 30, 2009 Compared to September 30, 2008
Summary
Beginning
in the third quarter of 2008, the global recession resulted in decreased worldwide demand
for steel and electricity, leading to weakened coal markets. Early in 2009, we
implemented a Management Action Plan as a strategic response to the
weakened coal markets. The
Management Action Plan included output and cost reductions, workforce and capital redeployment
and sales contract renegotiations. As a result of this plan, during the first nine months of
2009 we suspended certain company-owned and contract mines, including suspension of operations
at our Samples surface mine, deferred production start up at one newly-developed mining complex
and cancelled certain operating shifts at various mining complexes. Additionally, we have
restructured certain below-market legacy coal supply agreements.
Our
2009 results reflect the inclusion of the Magnum operations, which
were acquired on
July 23, 2008. The increased revenue from the acquired Magnum
operations was partially offset by lower customer demand
and increased customer deferrals during the three and nine months ended September 30, 2009.
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Tons Sold and Revenues
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||
September 30, | Increase (Decrease) | September 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||
2009 | 2008 | Tons/$ | % | 2009 | 2008 | Tons/$ | % | ||||||||||||||||||||||||||
(Dollars and tons in thousands, except per ton amounts) | |||||||||||||||||||||||||||||||||
Tons Sold: |
|||||||||||||||||||||||||||||||||
Appalachia |
|||||||||||||||||||||||||||||||||
Mining Operations |
6,124 | 6,365 | (241 | ) | (3.8 | )% | 19,261 | 13,268 | 5,993 | 45.2 | % | ||||||||||||||||||||||
Illinois Basin |
|||||||||||||||||||||||||||||||||
Mining Operations |
1,710 | 1,805 | (95 | ) | (5.3 | )% | 5,300 | 5,848 | (548 | ) | (9.4 | )% | |||||||||||||||||||||
Total Tons Sold |
7,834 | 8,170 | (336 | ) | (4.1 | )% | 24,561 | 19,116 | 5,445 | 28.5 | % | ||||||||||||||||||||||
Revenue: |
|||||||||||||||||||||||||||||||||
Appalachia |
|||||||||||||||||||||||||||||||||
Mining Operations |
$ | 427,230 | $ | 419,079 | $ | 8,151 | 1.9 | % | $ | 1,295,775 | $ | 884,978 | $ | 410,797 | 46.4 | % | |||||||||||||||||
Illinois Basin |
|||||||||||||||||||||||||||||||||
Mining Operations |
65,917 | 67,092 | (1,175 | ) | (1.8 | )% | 205,259 | 208,763 | (3,504 | ) | (1.7 | )% | |||||||||||||||||||||
Appalachia Other |
13,042 | 3,412 | 9,630 | 282.2 | % | 41,087 | 19,856 | 21,231 | 106.9 | % | |||||||||||||||||||||||
Total Revenues |
$ | 506,189 | $ | 489,583 | $ | 16,606 | 3.4 | % | $ | 1,542,121 | $ | 1,113,597 | $ | 428,524 | 38.5 | % | |||||||||||||||||
Average
sales price per ton sold: |
|||||||||||||||||||||||||||||||||
Appalachia |
$ | 69.76 | $ | 65.84 | $ | 3.92 | 6.0 | % | $ | 67.27 | $ | 66.70 | $ | 0.57 | 0.9 | % | |||||||||||||||||
Illinois Basin |
38.55 | 37.17 | 1.38 | 3.7 | % | 38.73 | 35.70 | 3.03 | 8.5 | % |
Revenues in the Appalachia segment were higher in the three months ended September 30, 2009
compared to the same period in 2008 due to higher average selling prices, including the effects
from the restructuring of certain below-market legacy coal supply agreements. These increases
were partially offset by lower sales volumes, primarily due to the overall decline in customer
demand caused by the weak economic conditions.
Revenues in the Appalachia segment were higher in the nine months ended September 30, 2009
compared to the same period in 2008 primarily related to the incremental $373.6 million of
revenue from the acquired Magnum operations as well as higher sales prices at certain complexes.
These increases were partially offset by lower customer demand and increased customer
deferrals.
Sales volumes in the Appalachia segment increased in the nine months ended September 30,
2009, primarily from the incremental 7.1 million tons sold from the acquired Magnum operations,
partially offset by the overall decline in customer demand and lower metallurgical sales due to
customer shipment deferrals and settlements. The overall decline in customer demand led to the
suspension of certain operations and decreased operating shifts at other operations.
Revenues in the Illinois Basin segment were lower for the three months ended September 30,
2009 compared to the prior year primarily due to lower spot sales resulting from lower customer
demand and increased downtime due to regulatory inspections and belt repairs, partially offset
by higher average sales prices.
Revenues in the Illinois Basin segment were lower for the nine months ended September 30,
2009 compared to the prior year primarily due to lower sales volume caused by lower customer
demand, unfavorable weather conditions, adverse roof conditions and increased downtime due to
regulatory inspections. Lower sales volumes were partially offset by higher average sales
prices.
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Appalachia Other Revenue was higher for the three and nine months ended September 30, 2009
primarily due to cash settlements received for reduced shipments as a result of renegotiated
customer agreements. In addition to royalties, Appalachia Other Revenue for the nine months
ended September 30, 2008 included a structured settlement on a property transaction, a
settlement for past due coal royalties, which had previously been fully reserved due to the
uncertainty of collection, and gains on the sale of purchased coal in the first quarter.
Segment Adjusted EBITDA
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Increase (Decrease) | September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
2009 | 2008 | $ | % | 2009 | 2008 | $ | % | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Appalachia Mining
|
||||||||||||||||||||||||||||||||
Operations and Other |
$ | 76,604 | $ | 35,301 | $ | 41,303 | 117.0 | % | $ | 214,696 | $ | 140,395 | $ | 74,301 | 52.9 | % | ||||||||||||||||
Illinois Basin
|
||||||||||||||||||||||||||||||||
Mining Operations |
58 | 1,058 | (1,000 | ) | (94.5 | )% | 6,972 | 9,156 | (2,184 | ) | (23.9 | )% | ||||||||||||||||||||
Segment Adjusted EBITDA |
$ | 76,662 | $ | 36,359 | $ | 40,303 | 110.8 | % | $ | 221,668 | $ | 149,551 | $ | 72,117 | 48.2 | % | ||||||||||||||||
Segment Adjusted EBITDA for Appalachia was higher in the three and nine months ended
September 30, 2009 as compared to 2008, primarily due to the contribution from the additional
volume associated with the acquired Magnum operations. Additionally, during the three and nine months
ended September 30, 2009, we received cash settlements for reduced shipments. These cash
settlements approximated the financial impact associated with deferred or cancelled customer
commitments. These increases were partially offset by lower customer demand for metallurgical
and thermal coal, difficult geologic conditions, including hard cutting conditions at certain
locations and higher costs related to contract mining, which were the result of contract
increases in mid- to late- 2008. Operating expenses also increased due to difficult geologic
conditions at Federal (primarily in the third quarter) and equipment rebuilds at various
locations, partially offset by lower diesel fuel and explosives costs and usage.
Segment Adjusted EBITDA for the Illinois Basin decreased in the three months ended
September 30, 2009 from the prior year primarily due to lower sales volume and increased repair
and maintenance costs. The higher repair and maintenance costs were primarily due to major
non-recurring repairs related to belting in the third quarter of 2009. This decrease was
partially offset by higher average sales prices and decreased fuel
and explosives costs.
Segment Adjusted EBITDA for the Illinois Basin decreased in the nine months ended September
30, 2009 from the prior year primarily due to lower production volumes attributable to lower
customer demand, severe winter storms, fewer production days and increased repair and
maintenance costs. The higher repair and maintenance costs were primarily due to major
non-recurring repairs including rebuilds, belt repairs and unit moves in 2009. These decreases
were partially offset by higher average sales prices and lower diesel
fuel and explosives costs.
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Net Income
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Increase (Decrease) | September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
2009 | 2008 | $ | % | 2009 | 2008 | $ | % | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Segment Adjusted EBITDA |
$ | 76,662 | $ | 36,359 | $ | 40,303 | 110.8 | % | $ | 221,668 | $ | 149,551 | $ | 72,117 | 48.2 | % | ||||||||||||||||
Corporate and Other: |
||||||||||||||||||||||||||||||||
Past mining
obligation expense |
(39,994 | ) | (31,516 | ) | (8,478 | ) | (26.9 | )% | (112,005 | ) | (75,259 | ) | (36,746 | ) | (48.8 | )% | ||||||||||||||||
Net gain on disposal
or exchange of assets |
10 | 491 | (481 | ) | (98.0 | )% | 4,071 | 7,021 | (2,950 | ) | (42.0 | )% | ||||||||||||||||||||
Selling and
administrative expenses |
(11,272 | ) | (7,533 | ) | (3,739 | ) | (49.6 | )% | (35,518 | ) | (25,310 | ) | (10,208 | ) | (40.3 | )% | ||||||||||||||||
Total Corporate and Other |
(51,256 | ) | (38,558 | ) | (12,698 | ) | (32.9 | )% | (143,452 | ) | (93,548 | ) | (49,904 | ) | (53.3 | )% | ||||||||||||||||
Depreciation, depletion
and amortization |
(50,413 | ) | (42,215 | ) | (8,198 | ) | (19.4 | )% | (155,749 | ) | (81,730 | ) | (74,019 | ) | (90.6 | )% | ||||||||||||||||
Reclamation and remediation
obligation expense |
(9,206 | ) | (5,051 | ) | (4,155 | ) | (82.3 | )% | (23,268 | ) | (11,726 | ) | (11,542 | ) | (98.4 | )% | ||||||||||||||||
Sales contract accretion, net |
93,988 | 121,859 | (27,871 | ) | (22.9 | )% | 232,516 | 121,859 | 110,657 | 90.8 | % | |||||||||||||||||||||
Interest expense |
(10,656 | ) | (7,378 | ) | (3,278 | ) | (44.4 | )% | (28,386 | ) | (15,496 | ) | (12,890 | ) | (83.2 | )% | ||||||||||||||||
Interest income |
3,723 | 3,588 | 135 | 3.8 | % | 13,046 | 10,458 | 2,588 | 24.7 | % | ||||||||||||||||||||||
Income before income taxes |
52,842 | 68,604 | (15,762 | ) | (23.0 | )% | 116,375 | 79,368 | 37,007 | 46.6 | % | |||||||||||||||||||||
Income tax benefit |
| 2,595 | (2,595 | ) | n/a | | | | n/a | |||||||||||||||||||||||
Net income |
$ | 52,842 | $ | 71,199 | $ | (18,357 | ) | (25.8 | )% | $ | 116,375 | $ | 79,368 | $ | 37,007 | 46.6 | % | |||||||||||||||
Past mining obligation expenses were higher in the three months ended September 30, 2009
than the corresponding period in the prior year primarily due to the suspension of additional
mines resulting in higher costs and the addition of retiree healthcare liabilities from the
acquired Magnum operations. Past mining obligation expenses from the suspension of additional
mines were primarily associated with the reduction-in-workforce costs related to the Samples
surface mine. Past mining obligations were higher in the nine months ended September 30, 2009
than the corresponding period in the prior year primarily due to the addition of retiree
healthcare liabilities from the acquired Magnum operations, costs related to suspended mines,
primarily Samples, and higher subsidence expense.
Net gain on disposal or exchange of assets was lower in the three and nine months ended
September 30, 2009 compared to the prior year. 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. In 2008, net gain on disposal or exchange of assets included a $6.3 million gain on
the exchange of certain leasehold mineral interests.
Selling and administrative expenses increased for the three and nine months ended September
30, 2009 as compared to the corresponding period in the prior year primarily related to
increased headcount and expenses due to the addition and integration of Magnum operations,
beginning in July 2008.
Depreciation, depletion and amortization increased in the three and nine months ended
September 30, 2009 compared to the prior year, primarily due to the addition of the Magnum
assets.
Reclamation and remediation obligation expense increased in the three and nine months ended
September 30, 2009 primarily due to the acquisition of Magnum.
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Net sales contract accretion resulted from the below market coal sale and purchase
contracts acquired in the Magnum transaction and recorded at fair value in purchase accounting.
The net liability generated from applying fair value to these contracts is being accreted over
the life of the contracts as the coal is shipped. Net sales contract accretion was lower in the
three months ended September 30, 2009 compared to the prior year due to decreased shipments of
the below market coal sale and purchase contracts acquired. The three months ended September
30, 2009 included $25.0 million of additional accretion related to the cash settlements of
customer agreements referred to above. Net sales contract accretion was higher for the nine
months ended September 30, 2009 than the prior year due to the timing of the Magnum acquisition
on July 23, 2008.
Interest expense increased in the three and nine months ended September 30, 2009 primarily
due to interest and debt discount expense related to our convertible notes that were issued in
May 2008 and higher letter of credit fees related to the Magnum acquisition. In the nine months
ended September 30, 2009, the increase in interest expense was partially offset by the
commitment fee expensed due to the termination of a bridge loan facility related to our
assumption of Magnums debt during the second quarter of 2008.
As further explained in Liquidity and Capital Resources Private Convertible Notes
Issuance, we adopted a new accounting standard, effective January 1, 2009, and retrospectively
applied the impact of the adoption to the inception of the notes. Based on this new guidance, we
recorded a discount to the face value of the notes, reflecting the fair value of the notes
without a conversion feature. The debt discount is amortized over the contractual life of the
notes, resulting in interest expense higher than the coupon interest rate. For the three and
nine months ended September 30, 2009, interest expense for the convertible notes was $3.6
million and $10.7 million, which included debt discount amortization of $2.0 million and $5.8
million, respectively. For the three and nine months ended September 30, 2008, interest expense
for the convertible notes was $3.5 million and $4.6 million, which included debt discount
amortization of $1.8 million and $2.4 million, respectively.
Interest income increased in the nine months ended September 30, 2009 compared to the prior
year due to the collection of certain Black Lung excise tax refunds, and related interest,
allowed by the Economic Stimulus Act of 2008.
For the three and nine months ended September 30, 2009, no income tax provision was
recorded due to our anticipated tax net operating loss for the year ending December 31, 2009 and
the full valuation allowance recorded against our net deferred tax assets. The primary
difference between book and taxable income for 2009 is the treatment of the net sales contract
accretion on the below market purchase and sales contracts acquired with Magnum, with such
amounts being included in the computation of book income but excluded from the computation of
taxable income. Based on the forecasted effective tax rate for 2008, we reported income tax
benefit of $2.6 million, for the three months ended September 30, 2008, which resulted in no
income tax benefit or provision being recorded for the nine months ended September 30, 2008.
Outlook
Market
The metallurgical coal market showed signs of recovery in the third quarter. The domestic
steel industry began a slow recovery in the second quarter, and has steadily improved every week
since then. Utilization at U.S. steel mills has increased over the
last six months and now stands at 63%,
an increase from 50% in the previous quarter. Internationally, higher fixed asset investments in
China have led to higher steel production and increased metallurgical coal imports. While U.S.
coal producers have not historically shipped large quantities of metallurgical coal to China,
there have been a number of U.S. exports to China in recent months.
We see signs of recovery in the thermal coal markets as well. Recent indicators predict
that natural gas pricing in 2010 will be at levels where utilities will again operate their
coal-fueled plants ahead of natural gas generating plants. A continuation of the below normal
fall temperatures experienced in the U.S., coupled with the effects of reduced natural gas
exploration, would drive this coal demand. Additionally, improving domestic and world economies
would result in higher industrial production and electricity usage, which should result in
higher thermal demand both in the U.S. and overseas. Higher demand will naturally draw down the
current high levels of thermal coal inventory.
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As markets rebound, we believe that supply will not be able to keep up with demand,
particularly in Central Appalachia. In addition to publicly announced production cuts, we
believe production has been taken off-line by private producers in Central Appalachia. We
believe that some of these public and private company production cuts
will remain out of the market for
an extended period of time. Additionally, further constraining supply, the delay in issuance of
surface mining permits in Central Appalachia during 2008 and 2009 will likely have a meaningful
negative impact on surface production in 2010.
Patriot Operations
As discussed more fully under Item 1A. Risk Factors in this report and in our 2008 Annual
Report on Form 10-K, our results of operations in the near-term could be negatively impacted by
unforeseen adverse geologic conditions or equipment problems at mining locations; customer
performance and credit risks; the economic recession; reductions of purchases or deferral of
deliveries by major customers; the passage of new or expanded regulations that could limit our
ability to mine, increase our mining costs, or limit our customers ability to utilize coal as
fuel for electricity generation; environmental and coal mining laws and regulations; the
availability and costs of credit, surety bonds and letters of credit; the inability of contract
miners to fulfill delivery terms of their contracts; delays in obtaining or the inability to
obtain required permits for new mining operations; and the unavailability of transportation for
coal shipments. On a long-term basis, our results of operations could also be impacted by our
ability to secure or acquire high-quality coal reserves; our ability to attract and retain
skilled employees and contract miners; our ability to find replacement buyers for coal under
contracts with comparable terms to existing contracts; and rising prices of key supplies, mining
equipment and commodities. If upward pressure on costs exceeds our ability to realize sales
increases, or if we experience unanticipated operating or transportation difficulties, our
operating margins would be negatively impacted. Management has continued to focus on controlling
costs, optimizing performance and responding quickly to market changes.
Early in 2009, we implemented a Management Action Plan in response to the weakened coal
markets. In January 2009, we announced the idling of our Black Oak mine. On April 2, 2009, we
announced additional contract mine suspensions, the deferral of the opening of the Blue Creek
complex and the cancellation of certain operating shifts at various mining complexes. In
addition, on August 3, 2009, we announced the suspension of our Samples surface mine due to its
higher cost structure relative to our other operations. Previously, we had performed a
comprehensive strategic review of our mining complexes and their relative cost structures in
conjunction with the Magnum acquisition. As a result, we idled our Jupiter mining complex
effective December 31, 2008 and the Remington complex effective March 31, 2009.
Both the Federal and Panther longwalls operated at less than their normalized levels during
the quarter. The Federal longwall experienced a rock parting in the coal seam. In addition,
adverse roof conditions were encountered which had not been experienced in the parting area of
previous panels. By the end of the third quarter, the longwall was operating in more favorable
geology and running near its normalized level. In the next panel, which will be the final panel
of the current mining area, we have further refined the mine plan in an attempt to avoid this
adverse geology.
At Panther, the longwall move during the quarter included significant upgrades to
components of the longwall mining equipment. Downtime related to the longwall move, together
with time required to fully integrate the new equipment, caused Panthers output to be lower in
the quarter. Importantly, by quarter-end, the longwall was operating near its normalized
run-rate.
In light of the recent weak coal markets and high utility inventory levels, as well as
ongoing surface mining permit delays, we continue to evaluate various operating scenarios in
order to quickly respond to challenges and opportunities as they arise. We are seeing positive
results from our ongoing emphasis on cash and cost control, as well as rationalization of
higher-cost production. We are also benefiting from our commercial initiatives, as we work
closely with our customers to restructure certain contracts. We are no longer receiving
customer requests for significant deferrals of coal shipments.
Actual events and results may vary significantly from those included in, or 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 2008 Annual Report on Form 10-K.
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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 $39.5 million for the nine months ended
September 30, 2009, compared to $32.2 million in the same period of 2008. The increase in cash
provided by operating activities primarily relates to the higher cash operating results.
Net cash used in investing activities was $57.3 million for the nine months ended September
30, 2009, compared to $81.9 million in the same period of 2008. The decrease in cash used
primarily reflected a $19.9 million decrease in capital expenditures and $15.4 million less in
joint venture investments, partially offset by the net cash acquired in the Magnum acquisition
in July 2008.
Net cash provided by financing activities was $63.6 million for the nine months ended
September 30, 2009, compared to $51.8 million in the same period of 2008. The increase in cash
provided was primarily due to our common stock offering in June 2009, partially offset by the
repayment of the outstanding balance of our revolving credit facility.
Shelf Registration
On March 3, 2009, we filed a shelf registration statement with the Securities and Exchange
Commission on Form S-3, which allowed us to sell up to $300 million in various types of
securities from time to time. The specific terms of any offering would be established at the
time of the offering and provided in a prospectus supplement. On May 6, 2009, the shelf
registration statement was declared effective.
Common Stock Offering
On June 16, 2009 we completed a public offering of 12 million shares of our common stock in
a registered public offering under our shelf registration at $7.90 per share. The net proceeds
from the sale of shares, after deducting fees and commissions, were $89.1 million. The proceeds
were used to repay the outstanding balance on our revolving credit facility, with the remainder
to be used for general corporate purposes.
Credit Facility
On October 31, 2007, we entered into a $500 million, four-year revolving credit facility,
which includes a $50 million swingline sub-facility and a letter of credit sub-facility,
subsequently amended for the Magnum acquisition and the issuance of the convertible notes. In
July 2009, we increased our credit facility by $22.5 million, bringing the total credit facility
to $522.5 million. This facility is available for our working capital requirements, capital
expenditures and other corporate purposes. As of September 30, 2009 and December 31, 2008, the
balance of outstanding letters of credit issued against the credit facility totaled $348.7
million and $350.8 million, respectively. There were no outstanding short-term borrowings on
this facility at September 30, 2009. Outstanding short-term borrowings were $23.0 million as of
December 31, 2008. Availability under the credit facility was $173.8 million and $126.2 million
as of September 30, 2009 and December 31, 2008, respectively. At September 30, 2009, we were in
compliance with the covenants of our amended credit facility.
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Private Convertible Notes Issuance
On May 28, 2008, Patriot completed a private offering of $200 million in aggregate
principal amount of 3.25% Convertible Senior Notes due 2013. Also in May 2008, the Financial
Accounting Standards Board (FASB) issued authoritative guidance which specifies that issuers of
convertible debt instruments that may settle in cash upon conversion must bifurcate the proceeds
from the debt issuance between debt and equity components in a manner that reflects the entitys
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The
equity component reflects the value of the conversion feature of the notes.
We adopted this authoritative guidance effective January 1, 2009, with retrospective
application to the inception of these convertible notes. We utilized an interest rate of 8.85%
to reflect the nonconvertible market rate of our offering upon issuance, which resulted in a
$44.7 million discount to the convertible note balance and an increase to Additional paid-in
capital to reflect the value of the conversion feature. In addition, we allocated the financing
costs related to the issuance of the convertible instruments between the debt and equity
components. The debt discount is amortized over the contractual life of the convertible notes,
resulting in additional interest expense above the contractual coupon amount.
At December 31, 2008, based on the required retrospective application of the authoritative
guidance, the principal amount of the convertible notes of $200.0 million was adjusted for the
debt discount of $40.4 million, resulting in a long-term convertible note balance of $159.6
million. At September 30, 2009, the debt discount was $34.5 million, resulting in a long-term
convertible note balance of $165.5 million. See discussion in Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations Net Income for the impact of
this guidance on interest expense for the three and nine months ended September 30, 2009 and
2008.
Capital Lease Obligations and Other
During the second quarter of 2009, the construction of the Blue Creek preparation plant was
completed resulting in reclassification of the construction-phase liability from Other
noncurrent liabilities to current and long-term debt.
Newly Adopted Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the FASB issued The FASB Accounting
Standards CodificationTM (Codification) which has become the source of authoritative
U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature not included in
the Codification has become nonauthoritative. The Codification is meant to simplify user access
to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly
90 accounting topics within a consistent structure; its purpose is not to create new accounting
and reporting guidance. Consistent with the Codification, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. We have
reflected the Codification references in this report.
Debt
As disclosed in Liquidity and Capital Resources Private Convertible Notes Issuance, we
adopted new guidance related to our convertible notes now incorporated into FASB Accounting
Standards Codification (FASB ASC) 470, Debt, effective January 1, 2009.
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Earnings Per Share
In September 2008, the FASB issued new authoritative guidance which states that instruments
granted in share-based payment awards that entitle their holders to receive nonforfeitable
dividends or dividend equivalents before vesting should be considered participating securities
and need to be included in the earnings allocation in computing earnings per share under the
two-class method. The two-class method of computing earnings per share is an earnings
allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and participation rights
in undistributed earnings. We adopted this authoritative guidance effective January 1, 2009 with
all prior period earnings per share data adjusted retrospectively. The calculations of earnings
per share amounts presented in this report include all participating securities as required by
this authoritative guidance. Previously, this guidance was known as FSP EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, but it is now incorporated into FASB ASC 260, Earnings Per Share.
Business Combinations
In December 2007, the FASB issued new authoritative guidance regarding business
combinations. The guidance defines the acquirer as the entity that obtains control of one or
more businesses in the business combination and establishes the acquisition date as the date
that the acquirer achieves control instead of the date that the consideration is transferred.
The guidance also requires an acquirer in a business combination to recognize the assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited exceptions. It
also requires the recognition of assets acquired and liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured at their acquisition-date fair
values. This authoritative guidance is effective for any business combination with an
acquisition date on or after January 1, 2009. Previously, this guidance was known as SFAS No.
141(R), Business Combinations, but it is now incorporated into FASB ASC 805, Business
Combinations.
Consolidation
In December 2007, the FASB issued authoritative guidance that establishes accounting and
reporting standards for noncontrolling interests in partially-owned consolidated subsidiaries
and the loss of control of subsidiaries. A noncontrolling interest (previously referred to as
minority interest) in a consolidated subsidiary is required to be displayed in the consolidated
balance sheet as a separate component of equity, and the amount of net income attributable to
the noncontrolling interest is required to be included in consolidated net income on the face of
the consolidated statement of operations. In addition, this guidance requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. We adopted the
provisions of this guidance effective January 1, 2009, with no effect to any of the periods
presented in this report. Previously, this guidance was known as SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment to ARB 51, but it is now
incorporated into FASB ASC 810, Consolidation.
Derivatives and Hedging
In March 2008, the FASB issued authoritative guidance that expands the disclosure
requirements for derivative instruments and hedging activities. This guidance specifically
requires an entity to provide enhanced disclosures about its use of derivative instruments, the
accounting for derivatives and related hedged items, and the related effect on an entitys
financial condition, results of operations and cash flows. We adopted this guidance on January
1, 2009. See Note 14 for the required disclosures. Previously, this guidance was known as SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of
FASB Statement No. 133, but it is now incorporated into FASB ASC 815, Derivatives and
Hedging.
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Fair Value Measurements and Disclosures
In September 2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles
and expands disclosures about fair value measures. This guidance clarifies that fair value is a
market-based measurement that should be determined based on the assumptions that market
participants would use in pricing an asset or liability. This guidance was effective for fiscal
years beginning after November 15, 2007. We elected to implement the guidance with the one-year
deferral permitted by subsequent guidance. The deferral applied to nonfinancial assets and
liabilities measured at fair value in a business combination. As of January 1, 2009, we fully
adopted the fair value guidance, including applying its provisions to nonfinancial assets and
liabilities measured at fair value in a business combination. The full adoption of this
guidance did not change the valuation approach or materially change the purchase accounting for
the Magnum acquisition, which was finalized in the second quarter of 2009. Previously, this
guidance was known as SFAS No. 157, Fair Value Measurements, but it is now incorporated into
FASB ASC 820, Fair Value Measurements and Disclosures.
Subsequent Events
In June 2009, the FASB issued authoritative guidance which establishes general standards of
accounting for and the disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Entities are required to
disclose the date through which subsequent events have been evaluated. We adopted this guidance
effective June 30, 2009. Previously, this guidance was known as SFAS No. 165, Subsequent
Events, but it is now incorporated into FASB ASC 855, Subsequent Events.
Financial Instruments
In April 2009, the FASB issued authoritative guidance which extends certain disclosure
requirements regarding financial instruments to interim financial statements of publicly traded
companies. We adopted this guidance effective June 30, 2009. See Note 8 for the required
disclosures. Previously, this guidance was known as FSP FAS No. 107-1 and APB 28-1, Interim
Disclosures About Fair Value of Financial Instruments, but it is now incorporated into FASB ASC
825, Financial Instruments.
Pending Adoption of Recent Accounting Pronouncements
Consolidation
In June 2009, the FASB issued authoritative guidance which requires a company to perform a
qualitative analysis to determine whether it has a controlling financial interest in a variable
interest entity. In addition, a company is required to assess whether it has the power to direct
the activities of the variable interest entity that most significantly impact the entitys
economic performance. This guidance is effective for fiscal years beginning after November 15,
2009. We are currently evaluating the potential impact of this guidance on our operating
results, cash flows and financial condition.
Item 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
78% and 84% of our sales volume under coal supply agreements with terms of one year or more
during the year ended December 31, 2008 and the nine months ended September 30, 2009,
respectively. We continue to evaluate production levels for 2010 and future years based on
demand and pricing. Unpriced volumes for 2010 will depend on the finalization of production
plans, taking into account demand, pricing, our cost structure and the availability of mining
permits.
In connection with our October 31, 2007 spin-off from Peabody Energy Corporation (Peabody),
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.
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With the addition of Magnum, our commodity risk profile changed as our annual usage of
diesel fuel has increased significantly. To manage a portion of 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 September 30, 2009,
the notional amounts outstanding for these swaps included 2.4 million gallons of heating oil
expiring through the remainder of 2009 and 12.0 million gallons of heating oil expiring
throughout 2010. In 2010, we expect to purchase approximately 18 million gallons of diesel fuel
annually across all operations. Aside from these hedging activities, a $0.10 per gallon change
in the price of diesel fuel would impact our annual operating costs by approximately $1.8
million. Due to the suspension of the Samples surface mine in August 2009, which utilized a
significant amount of diesel fuel, we discontinued certain cash flow hedge relationships
resulting in a loss of $0.2 million recognized in income related to forecasted transactions that
no longer are expected to occur.
Credit Risk
For the nine months ended September 30, 2009, approximately 22% of our revenue was
generated through sales to a marketing affiliate of Peabody. We 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. One of these arrangements with
Peabody provides for the adjustment of a major existing coal sales agreement sourced from
Patriots operations to increase the price paid to us thereunder. The term of the last
pre-existing customer arrangement between Patriot and Peabody will expire on December 31, 2012.
Our remaining sales are primarily made directly to electric utilities, industrial companies and
steelmakers. Therefore, our concentration of credit risk is with Peabody, as well as electric
utilities and steelmakers.
Our policy is to independently evaluate each customers creditworthiness prior to entering
into transactions and to constantly monitor the credit extended. In the event that we engage in
a transaction with a counterparty that does not meet our credit standards, we will protect our
position by requiring the counterparty to provide appropriate credit enhancement. When
appropriate (as determined by our credit management function), we have taken steps to mitigate
our credit exposure to customers or counterparties whose credit has deteriorated and who may
pose a higher risk of failure to perform under their contractual obligations. These steps may
include obtaining letters of credit or cash collateral, requiring prepayments for shipments or
the creation of customer trust accounts held for our benefit to serve as collateral in the event
of a failure to pay. While the current 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 September 30, 2009, we had $149.0 million in notes receivable
outstanding, arising out of the sale of coal reserves and surface land discussed in Note 6 of
our 2008 Annual Report on Form 10-K at December 31, 2008. Of this amount, $35.2 million is
included in Accounts receivable and other and the remaining $113.8 million is recorded in
Notes receivable on the condensed consolidated balance sheet. Of the total notes receivable
outstanding, 98% is from a single counterparty. Each of these notes contains a
cross-collaterization provision secured primarily by the underlying coal reserves and surface
land.
Item 4. Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out
an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer have each concluded that our disclosure controls and procedures were designed, and were
effective, to ensure that information required to be disclosed in our reports under the
Securities Exchange Act of 1934, as amended, (the Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms.
There have not been any significant changes in our internal control over financial
reporting 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 15 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 2008 Annual Report on Form 10-K for the year ended
December 31, 2008. 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 increased focus by regulatory authorities on the effects of surface coal mining on
the environment may materially adversely affect us.
Section 404 of the Clean Water Act requires mining companies to obtain U.S. Army Corps of
Engineers (ACOE) permits to place material in streams for the purpose of creating slurry ponds,
water impoundments, refuse areas, valley fills or other mining activities. As is the case with
other coal mining companies operating in Appalachia, our construction and mining activities,
including our surface mining operations, frequently require Section 404 permits. ACOE issues two
types of permits pursuant to Section 404 of the Clean Water Act: nationwide (or general) and
individual permits. Nationwide permits are issued to streamline the permitting process for
dredging and filling activities that have minimal adverse environmental impacts. An individual
permit typically requires a more comprehensive application process, including public notice and
comment.
The issuance of permits to construct valley fills and refuse impoundments under Section 404
of the Clean Water Act, whether general permits commonly described as the Nationwide Permit 21
(NWP 21), or individual permits, has been the subject of many recent court cases and increased
regulatory oversight, the results of which may increase our permitting and operating costs,
result in permitting delays, suspend current operations or prevent the opening of new mines.
For instance, on June 11, 2009, the White House Council on Environmental Quality announced
that the Environmental Protection Agency (EPA), the Department of the Interior (DOI) and the
ACOE had entered into a Memorandum of Understanding and Interagency Action Plan on Appalachian
Surface Coal Mining (IAP) which is designed to coordinate actions between the agencies and to
increase federal scrutiny and oversight of state permitting, enforcement and other activities
affecting Appalachian surface mining, all with the stated goal of reducing the environmental
impacts of surface coal mining in West Virginia and other Appalachian states. Among other
things, the IAP set forth a proposal to prohibit use of the general NWP 21 for surface coal
mining operations and a commitment by the DOI to issue guidance clarifying the rules on the use
of valley fills within a set distance of a stream. The IAP also states that there will be a
general review of how surface mining is evaluated, authorized and regulated under the Clean
Water Act, which may lead to further changes to relevant laws or enforcement thereof.
On July 15, 2009, the ACOE announced it is soliciting public comments on proposals related
to the use of NWP 21 pursuant to the IAP. The proposals are to modify NWP 21 to prohibit its use
in the Appalachian region for surface coal mining operations and to suspend the use of NWP 21 in
West Virginia and other Appalachian states while the ACOE completes the process of modifying it.
In the absence of NWP 21, individual permits will be required for surface coal mining projects.
We have converted any pending permit applications that were submitted under NWP 21 to individual
permit applications and believe a prohibition on NWP 21 permits would have a minimal effect on
our future production.
We have a number of individual permit applications pending, including in particular a
permit application relating to the Hobet mine that was originally submitted in December 2007. We
expect to complete mining with the dragline equipment under our current Hobet permit in mid-2010
and after that we cannot continue mining with the dragline equipment without receipt of this
pending permit. Dragline mining is the most efficient method for the Hobet reserves and if we
are unable to continue dragline mining, our cost structure would be adversely affected. As of
September 30, 2009, we estimate that we will experience at least three months with no dragline
production due to permit delays, as additional land development will be required to continue
dragline mining. Each additional month without receipt of this pending permit will result in
additional downtime.
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In July 2009, the EPA requested that the West Virginia Department of Environmental
Protection (WVDEP) provide copies of draft National Pollution Discharge Elimination System
(NPDES) permits for discharges associated with surface coal mining operations and announced its
plans to conduct Permit Quality Reviews of mining permits in West Virginia. In September 2009,
the EPA announced that the proposed mining related to certain pending permits in Appalachia
would require additional review under the Clean Water Act due to the potential water quality
impacts. Seventy-nine permit applications were identified for further, detailed reviews,
including our Hobet mine permit application and five of our other permit applications. The EPA
and the ACOE will perform the reviews pursuant to the IAP to ensure compliance with the Clean
Water Act.
In addition, Region 3 of the EPA, which covers West Virginia, has asked the EPAs Office of
Research & Development (ORD) to provide expert advice on a draft assessment of the ecological
impacts associated with surface coal mining involving valley fills. ORDs assessment will cover
loss of headwater streams, downstream water quality, subsequent effects on in-stream biota,
cumulative ecological impacts and an evaluation of restoration and recovery methods used by
mining companies to address the foregoing.
It is unknown what other future changes will be implemented to the permitting review and
issuance process or to other aspects of surface mining operations, but the increased regulatory
focus, the announced changes and reviews and any additional future changes could adversely
affect all coal mining companies operating in Appalachia, including us. In particular, we could
be unable to obtain new permits or maintain existing permits, we could be required to change
operations in a manner that could be costly, and we could incur fines, penalties and other
costs, any of which could materially adversely affect our business.
Certain of our customers have deferred contracted shipments of coal, which could affect our
results of operations and liquidity.
In the first half of 2009, as the ongoing global economic recession caused the price of,
and demand for, coal to decline, certain of our thermal and metallurgical coal customers delayed
shipments or requested deferrals pursuant to our existing long-term coal supply agreements. As
of October 2009, we have been able to negotiate settlements for the majority of these requested
deferrals from the first half of 2009.
Significant customer deferrals, if agreed to, could materially affect the amount of revenue
we recognize. Customer deferrals could adversely affect our results of operations and liquidity
if we do not receive equivalent value from such customers and we are unable to sell committed
coal at the contracted prices under our existing coal supply agreements.
In an effort to curtail further excess coal production and limit costs, we have cancelled
certain operating shifts, idled certain existing mining complexes and delayed the opening of an
additional mining complex. See Part I, Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations Outlook Patriot Operations for more information.
Certain of our contracts establish prices and terms that allow us to expect relatively
higher levels of profitability than other contracts, assuming both we and our customer perform
under the terms of these agreements. From time to time, our profitability may be impacted by
negotiated customer settlements, rather than the delivery of the volume of coal. To the extent
we or a customer do not fully perform under one of these relatively more profitable contracts,
our results of operations and operating profit in the reporting period during which such
nonperformance occurs would be materially and adversely affected.
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New developments in the regulation of greenhouse gas emissions could materially adversely
affect our customers demand for coal and our results of operations, cash flows and financial
condition.
One by-product of burning coal is carbon dioxide, which has been linked in certain studies
as a contributor to climate change. Recently, legislators have been considering the passage of
significant new laws, regulators have been considering using existing laws to limit carbon
dioxide emissions, and other measures are being imposed or proposed, with the ultimate goal of
reducing carbon dioxide and other greenhouse gas emissions.
On April 17, 2009, the EPA issued a proposed finding that emissions of carbon dioxide and
other greenhouse gases contribute to air pollution and endanger human health and welfare (the
Endangerment Finding). If this finding were ultimately adopted, it would permit the EPA to begin
regulating greenhouse gas emissions under the Clean Air Act. On October 27, 2009, the EPA
published a proposed rule referred to as the Greenhouse Gas Tailoring Rule (GHG Tailoring Rule),
in which it indicated that it anticipates finalizing the Endangerment Finding by the end of
March 2010. If this occurs, the emission of greenhouse gases from certain stationary sources,
including coal-fueled power plants, would become subject to existing permitting and other
requirements under the Clean Air Act. The GHG Tailoring Rule could require the installation of
best available control technologies in certain existing facilities and any new facilities that
may be considered major sources of greenhouse gas emissions.
In addition to the potential for the EPA to impose regulations on carbon dioxide emissions,
the U.S. House of Representatives recently passed, and the U.S. Senate is currently considering,
carbon dioxide legislation that would, among other things, impose a nationwide cap on carbon
dioxide emissions and require major sources, including coal-fueled power plants, to obtain
emission allowances to meet that cap. The current administration has also expressed support
for such legislation.
Further, there have been several public nuisance lawsuits brought against power, coal and
oil and gas companies alleging that their operations are contributing to climate change. At
least two U.S. federal appellate courts have permitted these lawsuits to proceed. The
plaintiffs are seeking various remedies, including punitive and compensatory damages and
injunctive relief.
Demand for and use of coal may be limited by any global treaties that place restrictions on
carbon dioxide emissions. As part of the United Nations Framework Convention on Climate Change,
representatives from 187 nations met in Bali, Indonesia in December 2007 to discuss a program to
limit greenhouse gas emissions after 2012. The United States participated in the conference. The
convention adopted what is called the Bali Action Plan. The Bali Action Plan contains no
binding commitments, but concludes, deep cuts in global emissions will be required and
provides a timetable for two years of talks to shape the first formal addendum to the 1992
United Nations Framework Convention on Climate Change treaty since the Kyoto Protocol. The next
meeting of the parties to the Bali Action Plan will be in Copenhagen, Denmark in December 2009,
where participating nations are expected to consider whether to commit to binding greenhouse gas
emissions reductions.
These current, potential and any future international, federal, state, regional or local
laws, regulations or court orders addressing greenhouse gas emissions will likely require
additional controls on coal-fueled power plants and industrial boilers and may cause some users
of coal to close existing facilities, reduce construction of new facilities or switch from coal
to alternative fuels. These ongoing and future developments may have a material adverse impact
on the global supply and demand for coal, and as a result could materially adversely affect our
results of operations, cash flows and financial condition.
Item 6. Exhibits.
See Exhibit Index on page 37 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: November 6, 2009 | 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 | |
2.1
|
Separation Agreement, Plan of Reorganization and Distribution, dated October 22, 2007, between Peabody Energy Corporation and Patriot Coal Corporation (Incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). | |
2.2
|
Agreement and Plan of Merger, dated as of April 2, 2008, by and among Magnum Coal Company, Patriot Coal Corporation, Colt Merger Corporation, and ArcLight Energy Partners Fund I, L.P. and ArcLight Energy Partners Fund II, L.P., acting jointly, as Stockholder Representative (Incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K, filed on April 8, 2008). | |
3.1
|
Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). | |
3.2
|
Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). | |
4.1
|
Rights Agreement, dated October 22, 2007, between Patriot Coal Corporation and American Stock Transfer & Trust Company (Incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K, filed on October 25, 2007). | |
4.2
|
Certificate of Designations of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K, filed on November 6, 2007). | |
4.3
|
First Amendment to Rights Agreement, dated as of April 2, 2008, to the Rights Agreement, dated as of October 22, 2007 between Patriot Coal Corporation and American Stock Transfer & Trust Company, as Rights Agent (Incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K, filed on April 8, 2008). | |
4.4
|
Indenture dated as of May 28, 2008, by and between Patriot Coal Corporation, as Issuer, and U.S. Bank National Association, as trustee (including form of 3.25% Convertible Senior Notes due 2013) (Incorporated by reference to the Registrants Current Report on Form 8-K, dated May 29, 2008). | |
10.1
|
Letter Agreement between Arclight Energy Partners Fund I, L.P., Arclight Energy Partners Fund II, L.P. and Paul Vining dated August 7, 2009. (Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 10-Q, filed on August 7, 2009). | |
31.1*
|
Certification of periodic financial report by Patriot Coal Corporations Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of periodic financial report by Patriot Coal Corporations Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Patriot Coal Corporations Chief Executive Officer. | |
32.2*
|
Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Patriot Coal Corporations Chief Financial Officer. | |
99.1
|
Patriot Coal Corporation Rights Adjustment Certificate dated July 28, 2008 (Incorporated by reference to Exhibit 99.4 of the Registrants Current Report on Form 8-K, filed on July 28, 2008). |
37