Arch Coal (ACI)

letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

 

We use a combination of surety bonds, corporate guarantees (e.g., self bonds) and letters of credit to secure our financial obligations for reclamation, workers’ compensation, coal lease obligations and other obligations as follows as of December 31, 2009:

 

 

We have agreed to continue to provide surety bonds and letters of credit for the reclamation and retiree healthcare obligations of the properties we sold to Magnum. Patriot Coal Corporation acquired Magnum in July 2008, and, as a result, Magnum will be required to post letters of credit in our favor for the full amount of the reclamation obligation on or before February 2011. At December 31, 2009, we had $91.6 million of surety bonds related to properties sold to Magnum, which are included in the table.

 

Magnum also acquired certain coal supply contracts with customers who have not consented to the assignment of the contract to Magnum. We have committed to purchase coal from Magnum to sell to those customers at the same price we are charging the customers for the sale. In addition, certain contracts have been assigned to Magnum, but we have guaranteed Magnum’s performance under the contracts. The longest of the coal supply contracts extends to the year 2017. If Magnum is unable to supply the coal for these coal sales contracts then we would be required to purchase coal on the open market or supply contracts from our existing operations. At market prices effective at December 31, 2009, the cost of purchasing 13.0 million tons of coal to supply the contracts that have not been assigned over their duration would exceed the sales price under the contracts by approximately $423.4 million, and the cost of purchasing 2.6 million tons of coal to supply the assigned and guaranteed contracts over their duration would exceed the sales price under the contracts by approximately $52.8 million. We have also guaranteed Magnum’s performance under certain operating leases, the longest of which extends through 2011. If we were required to perform under our guarantees of the operating lease agreements, we would be required to make $2.6 million of lease payments. We do not believe that it is probable that we would have to purchase replacement coal or fulfill our obligations under the lease guarantees. If we would have to perform under these guarantees, it could potentially have a material adverse effect on our business, results of operations and financial condition.

 

In connection with the acquisition of the coal operations of ARCO and the simultaneous combination of the acquired ARCO operations and our Wyoming operations into the Arch Western joint venture, we agreed to indemnify the other member of Arch Western against certain tax liabilities in the event that such liabilities arise prior to June 1, 2013 as a result of certain actions taken, including the sale or other disposition of certain properties of Arch Western, the repurchase of certain equity interests in Arch Western by Arch Western or the reduction under certain circumstances of indebtedness incurred by Arch Western in connection with the acquisition. If we were to become liable, the maximum amount of potential future tax payments was $41.8 million at December 31, 2009. Since the indemnification is dependent upon the initiation of activities within our control and we do not intend to initiate such activities, it is remote that we will become liable for any obligation related to this indemnification. However, if such indemnification obligation were to arise, it could potentially have a material adverse effect on our business, results of operations and financial condition.

 

guarantees. If we would have to perform under these guarantees, it could potentially have a material adverse effect on our business, results of operations and financial condition.

 

In connection with the acquisition of the coal operations of ARCO and the simultaneous combination of the acquired ARCO operations and our Wyoming operations into the Arch Western joint venture, we agreed to indemnify the other member of Arch Western against certain tax liabilities in the event that such liabilities arise prior to June 1, 2013 as a result of certain actions taken, including the sale or other disposition of certain properties of Arch Western, the repurchase of certain equity interests in Arch Western by Arch Western or the reduction under certain circumstances of indebtedness incurred by Arch Western in connection with the acquisition. If we were to become liable, the maximum amount of potential future tax payments was $51.8 million at December 31, 2008. Since the indemnification is dependent upon the initiation of activities within our control and we do not intend to initiate such activities, it is remote that we will become liable for any obligation related to this indemnification. However, if such indemnification obligation were to arise, it could potentially have a material adverse effect on our business, results of operations and financial condition.

 

 

In the normal course of business, we are a party to certain
off-balance sheet arrangements. These arrangements include
guarantees, indemnifications, financial instruments with
off-balance sheet risk, such as bank letters of credit and
performance or surety bonds. Liabilities related to these
arrangements are not reflected in our consolidated balance
sheets, and we do not expect any material adverse effects on our
financial condition, results of operations or cash flows to
result from these off-balance sheet arrangements.

 

We use a combination of surety bonds, corporate guarantees
(e.g., self bonds) and letters of credit to secure our financial
obligations for reclamation, workers’ compensation, coal
lease obligations and other obligations as follows as of
December 31, 2008:

 

 

We have agreed to continue to provide surety bonds and letters
of credit for the reclamation and retiree healthcare obligations
of the properties we sold to Magnum. Patriot Coal Corporation
acquired Magnum in July 2008, and, as a result, Magnum will be
required to post letters of credit in our favor for the full
amount of the reclamation obligation on or before February 2011.
At December 31, 2008, we had approximately
$92.0 million of surety bonds related to properties sold to
Magnum, which are included in the table.

 

Magnum also acquired certain coal supply contracts with
customers who have not consented to the assignment of the
contract to Magnum. We have committed to purchase coal from
Magnum to sell to those customers at the same price we are
charging the customers for the sale. In addition, certain
contracts have been assigned to Magnum, but we have guaranteed
Magnum’s performance under the contracts. The longest of
the coal supply contracts extends to the year 2017. If Magnum is
unable to supply the coal for these coal sales contracts then we
would be required to purchase coal on the open market or supply
contracts from our existing operations. At market prices
effective at December 31, 2008, the cost of purchasing
14.1 million tons of coal to supply the contracts that have
not been assigned over their duration would exceed the sales
price under the contracts by approximately $200.7 million,
and the cost of purchasing 3.7 million tons of coal to
supply the assigned and guaranteed contracts over their duration
would exceed the sales price under the contracts by
approximately $104.7 million. We have also guaranteed
Magnum’s performance under certain operating leases, the
longest of which extends through 2011. If we were required to
perform under our guarantees of the operating lease agreements,
we would be required to make $6.1 million of lease
payments. We do not believe that it is probable that we would
have to purchase replacement coal or fulfill our obligations
under the lease

guarantees. If we would have to perform under these guarantees,
it could potentially have a material adverse effect on our
business, results of operations and financial condition.

 

In connection with the acquisition of the coal operations of
ARCO and the simultaneous combination of the acquired ARCO
operations and our Wyoming operations into the Arch Western
joint venture, we agreed to indemnify the other member of Arch
Western against certain tax liabilities in the event that such
liabilities arise prior to June 1, 2013 as a result of
certain actions taken, including the sale or other disposition
of certain properties of Arch Western, the repurchase of certain
equity interests in Arch Western by Arch Western or the
reduction under certain circumstances of indebtedness incurred
by Arch Western in connection with the acquisition. If we were
to become liable, the maximum amount of potential future tax
payments was $51.8 million at December 31, 2008. Since
the indemnification is dependent upon the initiation of
activities within our control and we do not intend to initiate
such activities, it is remote that we will become liable for any
obligation related to this indemnification. However, if such
indemnification obligation were to arise, it could potentially
have a material adverse effect on our business, results of
operations and financial condition.

 

our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

 

We use a combination of surety bonds, corporate guarantees (e.g., self bonds) and letters of credit to secure our financial obligations for reclamation, workers’ compensation, coal lease obligations and other obligations as follows as of December 31, 2007:

 

 

We have agreed to continue to provide surety bonds and letters of credit for the reclamation and retiree healthcare obligations of the properties we sold to Magnum in order to facilitate an orderly transition. Magnum is required to reimburse us for costs related to the surety bonds and letters of credit until it can replace these items. If the surety bonds and letters of credit related to the reclamation obligations are not replaced by Magnum within a specified period of time, then Magnum must post a letter of credit in our favor in the amount of the obligations. At December 31, 2007, we had $92.0 million of surety bonds related to properties sold to Magnum, which are included in the table.

 

Magnum also acquired certain coal supply contracts with customers who have not consented to the assignment of the contract to Magnum. We have committed to purchase coal from Magnum to sell to those customers at the same price we are charging the customers for the sale. In addition, certain contracts have been assigned to Magnum, but we have guaranteed Magnum’s performance under the contracts. The longest of the coal supply contracts extends to the year 2017. If Magnum is unable to supply the coal for these coal sales contracts then we would be required to purchase coal on the open market or supply contracts from our existing operations. At market prices effective at December 31, 2007, the cost of purchasing 15.4 million tons of coal to supply the contracts that have not been assigned over their duration would exceed the sales price under the contracts by approximately $265.7 million, and the cost of purchasing 5.0 million tons of coal to supply the assigned and guaranteed contracts over their duration would exceed the sales price under the contracts by approximately $97.4 million. We have also guaranteed Magnum’s performance under certain operating leases, the longest of which extends through 2011. If we were required to perform under our guarantees of the operating lease agreements, we would be required to make $10.3 million of lease payments. We do not believe that it is probable that we would have to purchase replacement coal or fulfill our obligations under the lease guarantees and therefore, no liability has been recorded for these potential losses as of December 31, 2007. However, if we would have to perform under these guarantees, it could potentially have a material adverse effect on our business, results of operations and financial condition.

 

In connection with the acquisition of the coal operations of Atlantic Richfield Company, which we refer to as ARCO, and the simultaneous combination of the acquired ARCO operations and our Wyoming operations into the Arch Western joint venture, we agreed to indemnify the other member of Arch Western against certain tax liabilities in the event that such liabilities arise prior to June 1, 2013 as a result of certain actions taken, including the sale or other disposition of certain properties of Arch Western, the repurchase of certain equity interests in Arch Western by Arch Western or the reduction under certain circumstances of indebtedness incurred by Arch Western in connection with the acquisition. If we were to become liable, the maximum amount of potential future tax payments was $61.0 million at December 31, 2007, of which none is recorded as a liability in our financial statements. Since the indemnification is dependent upon the initiation of activities within our control and we do not intend to initiate such activities, it is remote that we will become liable for any obligation related to this indemnification. However, if such indemnification obligation were to arise, it could potentially have a material adverse effect on our business, results of operations and financial condition.

 

In addition, tax reporting applied to this transaction by the other member of Arch Western was audited by the Internal Revenue Service, which we refer to as the IRS. We do not believe that we are bound by the outcome

of this audit. We have begun negotiations with the IRS as to adjustments, if any, of Arch Western’s tax reporting. The outcome of these negotiations when settled could result in adjustments to the basis of the partnership assets, and it is possible we may be required to adjust our deferred income taxes associated with our investment in Arch Western. The outcome of the negotiations is uncertain, however, any change that impacts us related to an IRS negotiation may result in a non-cash decrease in deferred income tax assets that could fall within a range of zero to $25.0 million.

 

 

In the normal course of business, we are a party to certain
off-balance sheet arrangements. These arrangements include
guarantees, indemnifications, financial instruments with
off-balance sheet risk, such as bank letters of credit and
performance or surety bonds. Liabilities related to these
arrangements are not reflected in

our consolidated balance sheets, and we do not expect any
material adverse effects on our financial condition, results of
operations or cash flows to result from these off-balance sheet
arrangements.

 

We use a combination of surety bonds, corporate guarantees
(e.g., self bonds) and letters of credit to secure our financial
obligations for reclamation, workers’ compensation, coal
lease obligations and other obligations as follows as of
December 31, 2007:

 

 

We have agreed to continue to provide surety bonds and letters
of credit for the reclamation and retiree healthcare obligations
of the properties we sold to Magnum in order to facilitate an
orderly transition. Magnum is required to reimburse us for costs
related to the surety bonds and letters of credit until it can
replace these items. If the surety bonds and letters of credit
related to the reclamation obligations are not replaced by
Magnum within a specified period of time, then Magnum must post
a letter of credit in our favor in the amount of the
obligations. At December 31, 2007, we had
$92.0 million of surety bonds related to properties sold to
Magnum, which are included in the table.

 

Magnum also acquired certain coal supply contracts with
customers who have not consented to the assignment of the
contract to Magnum. We have committed to purchase coal from
Magnum to sell to those customers at the same price we are
charging the customers for the sale. In addition, certain
contracts have been assigned to Magnum, but we have guaranteed
Magnum’s performance under the contracts. The longest of
the coal supply contracts extends to the year 2017. If Magnum is
unable to supply the coal for these coal sales contracts then we
would be required to purchase coal on the open market or supply
contracts from our existing operations. At market prices
effective at December 31, 2007, the cost of purchasing
15.4 million tons of coal to supply the contracts that have
not been assigned over their duration would exceed the sales
price under the contracts by approximately $265.7 million,
and the cost of purchasing 5.0 million tons of coal to
supply the assigned and guaranteed contracts over their duration
would exceed the sales price under the contracts by
approximately $97.4 million. We have also guaranteed
Magnum’s performance under certain operating leases, the
longest of which extends through 2011. If we were required to
perform under our guarantees of the operating lease agreements,
we would be required to make $10.3 million of lease
payments. We do not believe that it is probable that we would
have to purchase replacement coal or fulfill our obligations
under the lease guarantees and therefore, no liability has been
recorded for these potential losses as of December 31,
2007. However, if we would have to perform under these
guarantees, it could potentially have a material adverse effect
on our business, results of operations and financial condition.

 

In connection with the acquisition of the coal operations of
Atlantic Richfield Company, which we refer to as ARCO, and the
simultaneous combination of the acquired ARCO operations and our
Wyoming operations into the Arch Western joint venture, we
agreed to indemnify the other member of Arch Western against
certain tax liabilities in the event that such liabilities arise
prior to June 1, 2013 as a result of certain actions taken,
including the sale or other disposition of certain properties of
Arch Western, the repurchase of certain equity interests in Arch
Western by Arch Western or the reduction under certain
circumstances of indebtedness incurred by Arch Western in
connection with the acquisition. If we were to become liable,
the maximum amount of potential future tax payments was
$61.0 million at December 31, 2007, of which none is
recorded as a liability in our financial statements. Since the
indemnification is dependent upon the initiation of activities
within our control and we do not intend to initiate such
activities, it is remote that we will become liable for any
obligation related to this indemnification. However, if such
indemnification obligation were to arise, it could potentially
have a material adverse effect on our business, results of
operations and financial condition.

 

In addition, tax reporting applied to this transaction by the
other member of Arch Western was audited by the Internal Revenue
Service, which we refer to as the IRS. We do not believe that we
are bound by the outcome

of this audit. We have begun negotiations with the IRS as to
adjustments, if any, of Arch Western’s tax reporting. The
outcome of these negotiations when settled could result in
adjustments to the basis of the partnership assets, and it is
possible we may be required to adjust our deferred income taxes
associated with our investment in Arch Western. The outcome of
the negotiations is uncertain, however, any change that impacts
us related to an IRS negotiation may result in a non-cash
decrease in deferred income tax assets that could fall within a
range of zero to $25.0 million.