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This excerpt taken from the ACI 10-K filed Mar 1, 2010. Long-Term
Coal Supply Arrangements
As is customary in the coal industry, we enter into fixed price,
fixed volume long-term supply contracts, the terms of which are
more than one year, with many of our customers. Multiple year
contracts usually have specific and possibly different volume
and pricing arrangements for each year of the contract.
Long-term
Table of Contents
contracts allow customers to secure a supply for their future
needs and provide us with greater predictability of sales volume
and sales prices. In 2009, we sold approximately 72% of our coal
under long-term supply arrangements. The majority of our supply
contracts include a fixed price for the term of the agreement or
a pre-determined escalation in price for each year. Some of our
long-term supply agreements may include a variable pricing
system. While most of our sales contracts are for terms of one
to five years, some are as short as one to 11 months and
other contracts have terms longer than 10 years. At
December 31, 2009, the average volume-weighted remaining
term of our long-term contracts was approximately
3.1 years, with remaining terms ranging from one to eight
years. At December 31, 2009, we had a sales backlog,
including a backlog subject to price re-opener or extension
provisions, of approximately 357.5 million tons.
We typically sell coal to customers under long-term arrangements
through a
“request-for-proposal”
process. The terms of our coal sales agreements result from
competitive bidding and negotiations with customers.
Consequently, the terms of these contracts vary by customer,
including base price adjustment features, price re-opener terms,
coal quality requirements, quantity parameters, permitted
sources of supply, future regulatory changes, extension options,
force majeure, termination, damages and assignment
provisions. Our long-term supply contracts generally contain
provisions to adjust the base price due to new statutes,
ordinances or regulations, such as the Mine Improvement and New
Emergency Response Act of 2006, which we refer to as the MINER
Act, that affect our costs related to performance of the
agreement. Additionally, some of our contracts contain
provisions that allow for the recovery of costs affected by
modifications or changes in the interpretations or application
of any applicable statute by local, state or federal government
authorities. These provisions only apply to the base price of
coal contained in these supply contracts. In some circumstances,
a significant adjustment in base price can lead to termination
of the contract.
Certain of our contracts contain price re-opener and index
provisions that may allow a party to commence a renegotiation of
the contract price at a pre-determined time. Price re-opener
provisions may automatically set a new price based on prevailing
market price or, in some instances, require us to negotiate a
new price, sometimes between a specified range of prices. In a
limited number of agreements, if the parties do not agree on a
new price, either party has an option to terminate the contract.
Under some of our contracts, we have the right to match lower
prices offered to our customers by other suppliers. In addition,
many of our contracts contain clauses which in some cases may
allow customers to terminate the contract in the event of
certain changes in environmental laws and regulations that
impact their operations.
Quality and volumes for the coal are stipulated in coal sales
agreements. In most cases, the annual pricing and volume
obligations are fixed, although in some cases the volume
specified may vary depending on the quality of the coal or the
customer consumption requirements. Most of our coal sales
agreements contain provisions requiring us to deliver coal
within certain ranges for specific coal characteristics such as
heat content, sulfur, ash and moisture content. Failure to meet
these specifications can result in economic penalties,
suspension or cancellation of shipments or termination of the
contracts.
Our coal sales agreements also typically contain force
majeure provisions allowing temporary suspension of
performance by us or our customers, during the duration of
events beyond the control of the affected party, including
events such as strikes, adverse mining conditions, mine closures
or serious transportation problems that affect us or
unanticipated plant outages that may affect the buyer. Our
contracts generally provide that in the event a force majeure
circumstance exceeds a certain time period the unaffected
party may have the option to terminate the purchase or sale in
whole or in part. Some contracts stipulate that this tonnage can
be made up by mutual agreement or at the discretion of the
buyer. Agreements between our customers and the railroads
servicing our mines may also contain force majeure
provisions. Generally, our coal sales agreements allow our
customer to suspend performance in the event that the railroad
fails to provide its services due to circumstances that would
constitute a force majeure.
In most of our contracts we have a right of substitution,
allowing us to provide coal from different mines, including
third-party mines, as long as the replacement coal meets quality
specifications and will be sold at the same equivalent delivered
cost.
Table of Contents
Generally, under the terms of our coal supply contracts, we
agree to indemnify or reimburse our customers for damage to
their or their rail carrier’s equipment while on our
property, other than from their own negligence, and for damage
to our customer’s equipment due to non-coal materials being
included with our coal before leaving our property.
Trading. In addition to marketing and selling
coal to customers through traditional coal supply arrangements,
we seek to optimize our coal production and leverage our
knowledge of the coal industry through a variety of other
marketing, trading and asset optimization strategies. From time
to time, we may employ strategies to use coal and coal-related
commodities and contracts for those commodities in order to
manage and hedge volumes
and/or
prices associated with our coal sales or purchase commitments,
reduce our exposure to the volatility of market prices or
augment the value of our portfolio of traditional assets. These
strategies may include physical coal, as well as a variety of
forward, futures or options contracts, swap agreements or other
financial instruments.
We maintain a system of complementary processes and controls
designed to monitor and manage our exposure to market and other
risks that may arise as a consequence of these strategies. These
processes and controls seek to preserve our ability to profit
from certain marketing, trading and asset optimization
strategies while mitigating our exposure to potential losses.
You should see the section entitled “Quantitative and
Qualitative Disclosures About Market Risk” for more
information about the market risks associated with these
strategies at December 31, 2009.
Transportation. We ship our coal to domestic
customers by means of railroad, barges, vessels or trucks, or a
combination of these means of transportation. We generally sell
coal used for domestic consumption free on board at the mine or
nearest loading facility. Our domestic customers normally bear
the costs of transporting coal by rail, barge or vessel.
We generally sell coal to international customers at the export
terminal, and we are usually responsible for the cost of
transporting coal to the export terminals. We transport our coal
to Atlantic or Pacific coast terminals or terminals along the
Gulf of Mexico for transportation to international customers.
Our international customers are generally responsible for paying
the cost of ocean freight.
We own a 22% interest in Dominion Terminal Associates, a
partnership that operates a ground
storage-to-vessel
coal transloading facility in Newport News, Virginia. The
facility has a rated throughput capacity of 20 million tons
of coal per year and ground storage capacity of approximately
1.7 million tons. The facility serves international
customers, as well as domestic coal users located along the
Atlantic coast of the United States.
Historically, most domestic electricity generators have arranged
long-term shipping contracts with rail or barge companies to
assure stable delivery costs. Transportation can be a large
component of a purchaser’s total cost. Although the
purchaser pays the freight, transportation costs still are
important to coal mining companies because the purchaser may
choose a supplier largely based on cost of transportation.
Transportation costs borne by the customer vary greatly based on
each customer’s proximity to the mine and our proximity to
the loadout facilities. Trucks and overland conveyors haul coal
over shorter distances, while barges, Great Lake carriers and
ocean vessels move coal to export markets and domestic markets
requiring shipment over the Great Lakes and several river
systems.
Most coal mines are served by a single rail company, but much of
the Powder River Basin is served by two rail carriers: the
Burlington Northern-Santa Fe Railway and the Union Pacific
Railroad. In the Western Bituminous region our customers are
largely served by the Union Pacific Railroad or by truck
delivery. We generally transport coal produced at our Central
Appalachian mining complexes via the CSX Railway or the Norfolk
Southern Railway. Besides rail deliveries, some customers in the
eastern U.S. rely on a river barge system. Our Arch Coal
Terminal is located in Catlettsburg, Kentucky on a
111-acre
site on the Big Sandy River above its confluence with the Ohio
River. The terminal provides coal and other bulk material
storage and can load and offload river barges and trucks at the
facility. The terminal can provide up to 500,000 tons of storage
and can load up to six million tons of coal annually for
shipment on the inland waterways.
Table of Contents
These excerpts taken from the ACI 10-K filed Feb 27, 2009. Long-Term
Coal Supply Arrangements
As is customary in the coal industry, we enter into fixed price,
fixed volume long-term supply contracts, the terms of which are
more than one year, with many of our customers. Multiple year
contracts usually have specific and possibly different volume
and pricing arrangements for each year of the contract.
Long-term contracts allow customers to secure a supply for their
future needs and provide us with greater predictability of sales
volume and sales prices. In 2008, we sold approximately 76% of
our coal under long-term supply arrangements. Most of our supply
contracts include a fixed price for the term of the agreement or
a pre-determined escalation in price for each year. Some of our
long-term supply agreements may include a variable pricing
system. While most of our sales contracts are for terms of one
to five years, some are as short as one to 11 months and
other contracts have terms longer than 10 years. At
December 31, 2008, the average volume-weighted remaining
term of our long-term contracts was approximately
3.4 years, with remaining terms ranging from one to nine
years. At December 31, 2008, we had a sales backlog,
including a backlog subject to price reopener or extension
provisions, of approximately 311.7 million tons.
We typically sell coal to customers under long-term arrangements
through a “request-for-proposal” process. The terms of
our coal sales agreements result from competitive bidding and
extensive negotiations with customers. Consequently, the terms
of these contracts vary by customer, including base price
adjustment features,
Table of Contents
price reopener terms, coal quality requirements, quantity
parameters, permitted sources of supply, future regulatory
changes, extension options, force majeure, termination
and assignment provisions. Our long-term supply contracts
generally contain provisions to adjust the base price due to new
statutes, ordinances or regulations, such as the Mine
Improvement and New Emergency Response Act of 2006, which we
refer to as the MINER Act, that affect our costs related to
performance of the agreement. Additionally, some of our
contracts contain provisions that allow for the recovery of
costs affected by modifications or changes in the
interpretations or application of any applicable statute by
local, state or federal government authorities. These provisions
only apply to the base price of coal contained in these supply
contracts. In some circumstances, a significant adjustment in
base price can lead to termination of the contract.
Certain of our contracts contain price re-opener and index
provisions that may allow a party to commence a renegotiation of
the contract price at a pre-determined time. Price re-opener
provisions may automatically set a new price based on prevailing
market price or, in some instances, require us to negotiate a
new price, sometimes between a specified range of prices. In a
limited number of agreements, if the parties do not agree on a
new price, either party has an option to terminate the contract.
Under some of our contracts, we have the right to match lower
prices offered to our customers by other suppliers. In addition,
many of our contracts contain clauses which in some cases may
allow customers to terminate the contract in the event of
certain changes in environmental laws and regulations that
impact their operations.
Quality and volumes for the coal are stipulated in coal sales
agreements. In most cases, the annual pricing and volume
obligations are fixed although in some cases the volume
specified may vary depending on the quality of the coal. Most of
our coal sales agreements contain provisions requiring us to
deliver coal within certain ranges for specific coal
characteristics such as heat content, sulfur, ash and moisture
content. Failure to meet these specifications can result in
economic penalties, suspension or cancellation of shipments or
termination of the contracts.
Our coal sales agreements also typically contain force
majeure provisions allowing temporary suspension of
performance by us, or our customers, during the duration of
events beyond the control of the affected party, including
events such as strikes, adverse mining conditions, mine closures
or serious transportation problems that affect us or
unanticipated plant outages that may affect the buyer. Our
contracts generally provide that in the event a force majeure
circumstance exceeds a certain time period the unaffected
party may have the option to terminate the sale in whole or in
part. Some contracts stipulate that this tonnage can be made up
by mutual agreement or at the discretion of the buyer.
Agreements between our customers and the railroads servicing our
mines may also contain force majeure provisions.
Generally, our coal sales agreements allow our customer to
suspend performance in the event that the railroad fails to
provide its services due to circumstances that would constitute
a force majeure.
In most of our contracts, we have a right of substitution,
allowing us to provide coal from different mines, including
third-party mines, as long as the replacement coal meets quality
specifications and will be sold at the same delivered cost.
Generally, under the terms of our coal supply contracts, we
agree to indemnify or reimburse our customers for damage to
their or their rail carrier’s equipment while on our
property, other than from their own negligence, and for damage
to our customer’s equipment due to non-coal materials being
included with our coal before leaving our property.
Trading. In addition to marketing and selling
coal to customers through traditional coal supply arrangements,
we seek to optimize our coal production and leverage our
knowledge of the coal industry through a variety of other
marketing, trading and asset optimization strategies. From time
to time, we may employ strategies to use coal and coal-related
commodities and contracts for those commodities in order to
manage and hedge fixed price coal sales or purchase commitments,
reduce our exposure to the volatility of market prices or
augment the value of our portfolio of traditional assets. These
strategies may include physical coal, as well as a variety of
forward, futures or options contracts, swap agreements or other
financial instruments.
We maintain a system of complementary processes and controls
designed to monitor and manage our exposure to market and other
risks that may arise as a consequence of these strategies. These
processes and
Table of Contents
controls seek to preserve our ability to profit from certain
marketing, trading and asset optimization strategies while
mitigating our exposure to potential losses. You should see the
section entitled “Quantitative and Qualitative Disclosures
About Market Risk” beginning on page 67 for more
information about the market risks associated with these
strategies at December 31, 2008.
Transportation. We ship our coal to domestic
customers by means of railroad, barges or trucks, or a
combination of these means of transportation. We generally sell
coal used for domestic consumption free on board at the mine or
nearest loading facility. Our domestic customers normally bear
the costs of transporting coal by rail or barge.
We generally sell coal to international customers at the export
terminal, and we are usually responsible for the cost of
transporting coal to the export terminals. We transport our coal
to Atlantic or Pacific coast terminals or terminals along the
Gulf of Mexico for transportation to international customers.
Our international customers are generally responsible for paying
the cost of ocean freight.
We own a 22% interest in Dominion Terminal Associates, which
leases and operates a ground storage-to-vessel coal transloading
facility in Newport News, Virginia. The facility has a rated
throughput capacity of 20 million tons of coal per year and
ground storage capacity of approximately 1.7 million tons.
The facility serves international customers, as well as domestic
coal users located along the Atlantic coast of the
United States.
Historically, most domestic electricity generators have arranged
long-term shipping contracts with rail or barge companies to
assure stable delivery costs. Transportation can be a large
component of a purchaser’s total cost. Although the
purchaser pays the freight, transportation costs still are
important to coal mining companies because the purchaser may
choose a supplier largely based on cost of transportation.
Transportation costs borne by the customer vary greatly based on
each customer’s proximity to the mine and our proximity to
the loadout facilities. Trucks and overland conveyors haul coal
over shorter distances, while barges, Great Lake carriers and
ocean vessels move coal to export markets and domestic markets
requiring shipment over the Great Lakes and several river
systems.
Most coal mines are served by a single rail company, but much of
the Powder River Basin is served by two rail carriers: the
Burlington Northern Santa Fe Railway and the Union Pacific
Railroad. In the Western Bituminous region, our customers are
largely served by the Union Pacific Railroad. We generally
transport coal produced at our Central Appalachian mining
complexes via the CSX Railway or the Norfolk Southern Railway.
Besides rail deliveries, some customers in the eastern
U.S. rely on a river barge system. Our Arch Coal Terminal
is located in Catlettsburg, Kentucky on a
111-acre
site on the Big Sandy River above its confluence with the Ohio
River. The terminal provides coal and other bulk material
storage and can load and offload river barges and trucks at the
facility. The terminal can provide up to 500,000 tons of storage
and can load up to six million tons of coal annually for
shipment on the inland waterways.
Long-Term Coal Supply Arrangements As is customary in the coal industry, we enter into fixed price, fixed volume long-term supply contracts, the terms of which are more than one year, with many of our customers. Multiple year contracts usually have specific and possibly different volume and pricing arrangements for each year of the contract. Long-term contracts allow customers to secure a supply for their future needs and provide us with greater predictability of sales volume and sales prices. In 2008, we sold approximately 76% of our coal under long-term supply arrangements. Most of our supply contracts include a fixed price for the term of the agreement or a pre-determined escalation in price for each year. Some of our long-term supply agreements may include a variable pricing system. While most of our sales contracts are for terms of one to five years, some are as short as one to 11 months and other contracts have terms longer than 10 years. At December 31, 2008, the average volume-weighted remaining term of our long-term contracts was approximately 3.4 years, with remaining terms ranging from one to nine years. At December 31, 2008, we had a sales backlog, including a backlog subject to price reopener or extension provisions, of approximately 311.7 million tons. We typically sell coal to customers under long-term arrangements through a “request-for-proposal” process. The terms of our coal sales agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary by customer, including base price adjustment features,
Table of Contentsprice reopener terms, coal quality requirements, quantity parameters, permitted sources of supply, future regulatory changes, extension options, force majeure, termination and assignment provisions. Our long-term supply contracts generally contain provisions to adjust the base price due to new statutes, ordinances or regulations, such as the Mine Improvement and New Emergency Response Act of 2006, which we refer to as the MINER Act, that affect our costs related to performance of the agreement. Additionally, some of our contracts contain provisions that allow for the recovery of costs affected by modifications or changes in the interpretations or application of any applicable statute by local, state or federal government authorities. These provisions only apply to the base price of coal contained in these supply contracts. In some circumstances, a significant adjustment in base price can lead to termination of the contract. Certain of our contracts contain price re-opener and index provisions that may allow a party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions may automatically set a new price based on prevailing market price or, in some instances, require us to negotiate a new price, sometimes between a specified range of prices. In a limited number of agreements, if the parties do not agree on a new price, either party has an option to terminate the contract. Under some of our contracts, we have the right to match lower prices offered to our customers by other suppliers. In addition, many of our contracts contain clauses which in some cases may allow customers to terminate the contract in the event of certain changes in environmental laws and regulations that impact their operations. Quality and volumes for the coal are stipulated in coal sales agreements. In most cases, the annual pricing and volume obligations are fixed although in some cases the volume specified may vary depending on the quality of the coal. Most of our coal sales agreements contain provisions requiring us to deliver coal within certain ranges for specific coal characteristics such as heat content, sulfur, ash and moisture content. Failure to meet these specifications can result in economic penalties, suspension or cancellation of shipments or termination of the contracts. Our coal sales agreements also typically contain force majeure provisions allowing temporary suspension of performance by us, or our customers, during the duration of events beyond the control of the affected party, including events such as strikes, adverse mining conditions, mine closures or serious transportation problems that affect us or unanticipated plant outages that may affect the buyer. Our contracts generally provide that in the event a force majeure circumstance exceeds a certain time period the unaffected party may have the option to terminate the sale in whole or in part. Some contracts stipulate that this tonnage can be made up by mutual agreement or at the discretion of the buyer. Agreements between our customers and the railroads servicing our mines may also contain force majeure provisions. Generally, our coal sales agreements allow our customer to suspend performance in the event that the railroad fails to provide its services due to circumstances that would constitute a force majeure. In most of our contracts, we have a right of substitution, allowing us to provide coal from different mines, including third-party mines, as long as the replacement coal meets quality specifications and will be sold at the same delivered cost. Generally, under the terms of our coal supply contracts, we agree to indemnify or reimburse our customers for damage to their or their rail carrier’s equipment while on our property, other than from their own negligence, and for damage to our customer’s equipment due to non-coal materials being included with our coal before leaving our property. Trading. In addition to marketing and selling coal to customers through traditional coal supply arrangements, we seek to optimize our coal production and leverage our knowledge of the coal industry through a variety of other marketing, trading and asset optimization strategies. From time to time, we may employ strategies to use coal and coal-related commodities and contracts for those commodities in order to manage and hedge fixed price coal sales or purchase commitments, reduce our exposure to the volatility of market prices or augment the value of our portfolio of traditional assets. These strategies may include physical coal, as well as a variety of forward, futures or options contracts, swap agreements or other financial instruments. We maintain a system of complementary processes and controls designed to monitor and manage our exposure to market and other risks that may arise as a consequence of these strategies. These processes and
Table of Contentscontrols seek to preserve our ability to profit from certain marketing, trading and asset optimization strategies while mitigating our exposure to potential losses. You should see the section entitled “Quantitative and Qualitative Disclosures About Market Risk” beginning on page 67 for more information about the market risks associated with these strategies at December 31, 2008. Transportation. We ship our coal to domestic customers by means of railroad, barges or trucks, or a combination of these means of transportation. We generally sell coal used for domestic consumption free on board at the mine or nearest loading facility. Our domestic customers normally bear the costs of transporting coal by rail or barge. We generally sell coal to international customers at the export terminal, and we are usually responsible for the cost of transporting coal to the export terminals. We transport our coal to Atlantic or Pacific coast terminals or terminals along the Gulf of Mexico for transportation to international customers. Our international customers are generally responsible for paying the cost of ocean freight. We own a 22% interest in Dominion Terminal Associates, which leases and operates a ground storage-to-vessel coal transloading facility in Newport News, Virginia. The facility has a rated throughput capacity of 20 million tons of coal per year and ground storage capacity of approximately 1.7 million tons. The facility serves international customers, as well as domestic coal users located along the Atlantic coast of the United States. Historically, most domestic electricity generators have arranged long-term shipping contracts with rail or barge companies to assure stable delivery costs. Transportation can be a large component of a purchaser’s total cost. Although the purchaser pays the freight, transportation costs still are important to coal mining companies because the purchaser may choose a supplier largely based on cost of transportation. Transportation costs borne by the customer vary greatly based on each customer’s proximity to the mine and our proximity to the loadout facilities. Trucks and overland conveyors haul coal over shorter distances, while barges, Great Lake carriers and ocean vessels move coal to export markets and domestic markets requiring shipment over the Great Lakes and several river systems. Most coal mines are served by a single rail company, but much of the Powder River Basin is served by two rail carriers: the Burlington Northern Santa Fe Railway and the Union Pacific Railroad. In the Western Bituminous region, our customers are largely served by the Union Pacific Railroad. We generally transport coal produced at our Central Appalachian mining complexes via the CSX Railway or the Norfolk Southern Railway. Besides rail deliveries, some customers in the eastern U.S. rely on a river barge system. Our Arch Coal Terminal is located in Catlettsburg, Kentucky on a 111-acre site on the Big Sandy River above its confluence with the Ohio River. The terminal provides coal and other bulk material storage and can load and offload river barges and trucks at the facility. The terminal can provide up to 500,000 tons of storage and can load up to six million tons of coal annually for shipment on the inland waterways. These excerpts taken from the ACI 10-K filed Feb 29, 2008. Long-Term
Coal Supply Arrangements
We sell coal both under long-term contracts, the terms of which
are more than one year, and on a current market or spot basis
with terms of one year or less. In 2007, we sold approximately
73.6% of our coal under long-term supply arrangements. At
December 31, 2007, the average volume-weighted remaining
term of our long-term contracts was approximately
3.8 years, with remaining terms ranging from one to ten
years.
We expect to sell a significant portion of our coal under
long-term supply arrangements. We selectively renew or enter
into new long-term supply arrangements when we can do so at
prices that we believe are favorable. When our coal sales
contracts expire or are terminated, we are exposed to the risk
of having to sell coal into the spot market, where demand is
variable and prices are subject to greater volatility.
Provisions permitting renegotiation or modification of coal sale
prices are present in some of our more recently negotiated
long-term contracts and usually occur midway through a contract
or every two to three years, depending upon the length of the
contract. In some circumstances, either we have or our customer
has the option to terminate the contract if the parties cannot
agree on a new price.
We participate in the
“over-the-counter
market” for a small portion of our sales.
Long-Term Coal Supply Arrangements We sell coal both under long-term contracts, the terms of which are more than one year, and on a current market or spot basis with terms of one year or less. In 2007, we sold approximately 73.6% of our coal under long-term supply arrangements. At December 31, 2007, the average volume-weighted remaining term of our long-term contracts was approximately 3.8 years, with remaining terms ranging from one to ten years. We expect to sell a significant portion of our coal under long-term supply arrangements. We selectively renew or enter into new long-term supply arrangements when we can do so at prices that we believe are favorable. When our coal sales contracts expire or are terminated, we are exposed to the risk of having to sell coal into the spot market, where demand is variable and prices are subject to greater volatility. Provisions permitting renegotiation or modification of coal sale prices are present in some of our more recently negotiated long-term contracts and usually occur midway through a contract or every two to three years, depending upon the length of the contract. In some circumstances, either we have or our customer has the option to terminate the contract if the parties cannot agree on a new price. We participate in the “over-the-counter market” for a small portion of our sales. | EXCERPTS ON THIS PAGE:
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