UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2014
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: 1-13105
Arch Coal, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
43-0921172 |
|
(State or other jurisdiction |
|
(I.R.S. Employer |
|
of incorporation or organization) |
|
Identification Number) |
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One CityPlace Drive, Suite 300, St. Louis, Missouri |
|
63141 |
|
(Address of principal executive offices) |
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(Zip code) |
Registrant’s telephone number, including area code: (314) 994-2700
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 x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer x |
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Accelerated filer o |
|
|
|
|
|
Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At October 31, 2014 there were 212,274,112 shares of the registrant’s common stock outstanding.
FINANCIAL INFORMATION
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
Three Months Ended September |
|
Nine Months Ended |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
(Unaudited) |
| ||||||||||
|
Revenues |
|
$ |
742,180 |
|
$ |
791,269 |
|
$ |
2,191,927 |
|
$ |
2,294,971 |
|
|
Costs, expenses and other operating |
|
|
|
|
|
|
|
|
| ||||
|
Cost of sales (exclusive of items shown separately below) |
|
647,096 |
|
688,712 |
|
1,955,547 |
|
1,994,653 |
| ||||
|
Depreciation, depletion and amortization |
|
105,155 |
|
106,323 |
|
312,042 |
|
327,601 |
| ||||
|
Amortization of acquired sales contracts, net |
|
(3,013 |
) |
(2,568 |
) |
(9,948 |
) |
(7,587 |
) | ||||
|
Change in fair value of coal derivatives and coal trading activities, net |
|
(3,733 |
) |
9,753 |
|
(5,811 |
) |
2,053 |
| ||||
|
Asset impairment and mine closure costs |
|
5,060 |
|
200,397 |
|
6,572 |
|
220,879 |
| ||||
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Selling, general and administrative expenses |
|
28,136 |
|
28,800 |
|
87,203 |
|
96,311 |
| ||||
|
Other operating income, net |
|
(1,221 |
) |
(5,395 |
) |
(9,451 |
) |
(16,476 |
) | ||||
|
|
|
777,480 |
|
1,026,022 |
|
2,336,154 |
|
2,617,434 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Loss from operations |
|
(35,300 |
) |
(234,753 |
) |
(144,227 |
) |
(322,463 |
) | ||||
|
Interest expense, net |
|
|
|
|
|
|
|
|
| ||||
|
Interest expense |
|
(98,217 |
) |
(95,624 |
) |
(292,648 |
) |
(285,454 |
) | ||||
|
Interest and investment income |
|
1,949 |
|
697 |
|
5,828 |
|
4,749 |
| ||||
|
|
|
(96,268 |
) |
(94,927 |
) |
(286,820 |
) |
(280,705 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Loss from continuing operations before income taxes |
|
(131,568 |
) |
(329,680 |
) |
(431,047 |
) |
(603,168 |
) | ||||
|
Benefit from income taxes |
|
(34,350 |
) |
(121,913 |
) |
(112,830 |
) |
(230,734 |
) | ||||
|
Loss from continuing operations |
|
(97,218 |
) |
(207,767 |
) |
(318,217 |
) |
(372,434 |
) | ||||
|
Income from discontinued operations, net of tax |
|
— |
|
79,404 |
|
— |
|
101,816 |
| ||||
|
Net loss |
|
$ |
(97,218 |
) |
$ |
(128,363 |
) |
$ |
(318,217 |
) |
$ |
(270,618 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
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Losses per common share |
|
|
|
|
|
|
|
|
| ||||
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Basic and diluted LPS - Loss from continuing operations |
|
$ |
(0.46 |
) |
$ |
(0.98 |
) |
$ |
(1.50 |
) |
$ |
(1.76 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
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Basic and diluted LPS - Net loss |
|
$ |
(0.46 |
) |
$ |
(0.61 |
) |
$ |
(1.50 |
) |
$ |
(1.28 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Basic and diluted weighted average shares outstanding |
|
212,238 |
|
212,111 |
|
212,212 |
|
212,085 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Dividends declared per common share |
|
$ |
— |
|
$ |
0.03 |
|
$ |
0.01 |
|
$ |
0.09 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
Three Months Ended September |
|
Nine Months Ended September |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
(Unaudited) |
| ||||||||||
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Net loss |
|
$ |
(97,218 |
) |
$ |
(128,363 |
) |
$ |
(318,217 |
) |
$ |
(270,618 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative instruments |
|
|
|
|
|
|
|
|
| ||||
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Comprehensive income (loss) before tax |
|
520 |
|
1,346 |
|
1,298 |
|
(224 |
) | ||||
|
Income tax benefit (provision) |
|
(187 |
) |
(486 |
) |
(467 |
) |
82 |
| ||||
|
|
|
333 |
|
860 |
|
831 |
|
(142 |
) | ||||
|
Pension, postretirement and other post-employment benefits |
|
|
|
|
|
|
|
|
| ||||
|
Comprehensive income (loss) before tax |
|
(1,210 |
) |
1,277 |
|
(5,326 |
) |
4,981 |
| ||||
|
Income tax benefit (provision) |
|
435 |
|
(458 |
) |
1,917 |
|
(1,791 |
) | ||||
|
|
|
(775 |
) |
819 |
|
(3,409 |
) |
3,190 |
| ||||
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
| ||||
|
Comprehensive income (loss) before tax |
|
(2,401 |
) |
1,136 |
|
(5,637 |
) |
7,648 |
| ||||
|
Income tax benefit (provision) |
|
864 |
|
(448 |
) |
2,029 |
|
(2,795 |
) | ||||
|
|
|
(1,537 |
) |
688 |
|
(3,608 |
) |
4,853 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Total other comprehensive income (loss) |
|
(1,979 |
) |
2,367 |
|
(6,186 |
) |
7,901 |
| ||||
|
Total comprehensive loss |
|
$ |
(99,197 |
) |
$ |
(125,996 |
) |
$ |
(324,403 |
) |
$ |
(262,717 |
) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
(Unaudited) |
| ||||
|
Assets |
|
|
|
|
| ||
|
Current assets |
|
|
|
|
| ||
|
Cash and cash equivalents |
|
$ |
795,934 |
|
$ |
911,099 |
|
|
Short term investments |
|
249,067 |
|
248,414 |
| ||
|
Trade accounts receivable |
|
213,369 |
|
198,020 |
| ||
|
Other receivables |
|
32,769 |
|
31,553 |
| ||
|
Inventories |
|
209,659 |
|
264,161 |
| ||
|
Prepaid royalties |
|
11,021 |
|
8,083 |
| ||
|
Deferred income taxes |
|
48,786 |
|
49,144 |
| ||
|
Coal derivative assets |
|
15,642 |
|
14,851 |
| ||
|
Other current assets |
|
49,470 |
|
56,746 |
| ||
|
Total current assets |
|
1,625,717 |
|
1,782,071 |
| ||
|
Property, plant and equipment, net |
|
6,532,118 |
|
6,734,286 |
| ||
|
Other assets |
|
|
|
|
| ||
|
Prepaid royalties |
|
82,598 |
|
87,577 |
| ||
|
Equity investments |
|
232,077 |
|
221,456 |
| ||
|
Other noncurrent assets |
|
146,272 |
|
164,803 |
| ||
|
Total other assets |
|
460,947 |
|
473,836 |
| ||
|
Total assets |
|
$ |
8,618,782 |
|
$ |
8,990,193 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
|
Current liabilities |
|
|
|
|
| ||
|
Accounts payable |
|
$ |
173,835 |
|
$ |
176,142 |
|
|
Accrued expenses and other current liabilities |
|
342,709 |
|
278,587 |
| ||
|
Current maturities of debt |
|
29,977 |
|
33,493 |
| ||
|
Total current liabilities |
|
546,521 |
|
488,222 |
| ||
|
Long-term debt |
|
5,126,186 |
|
5,118,002 |
| ||
|
Asset retirement obligations |
|
400,935 |
|
402,713 |
| ||
|
Accrued pension benefits |
|
15,294 |
|
7,111 |
| ||
|
Accrued postretirement benefits other than pension |
|
39,127 |
|
39,255 |
| ||
|
Accrued workers’ compensation |
|
78,520 |
|
78,062 |
| ||
|
Deferred income taxes |
|
296,639 |
|
413,546 |
| ||
|
Other noncurrent liabilities |
|
181,163 |
|
190,033 |
| ||
|
Total liabilities |
|
6,684,385 |
|
6,736,944 |
| ||
|
Stockholders’ equity |
|
|
|
|
| ||
|
Common stock, $0.01 par value, authorized 260,000 shares, issued 213,791 shares and 213,792 shares at September 30, 2014 and December 31, 2013, respectively |
|
2,141 |
|
2,141 |
| ||
|
Paid-in capital |
|
3,046,302 |
|
3,038,613 |
| ||
|
Treasury stock, at cost, 1,517 shares and 1,512 shares at September 30, 2014 and December 31, 2013, respectively |
|
(53,863 |
) |
(53,848 |
) | ||
|
Accumulated deficit |
|
(1,091,689 |
) |
(771,349 |
) | ||
|
Accumulated other comprehensive income |
|
31,506 |
|
37,692 |
| ||
|
Total stockholders’ equity |
|
1,934,397 |
|
2,253,249 |
| ||
|
Total liabilities and stockholders’ equity |
|
$ |
8,618,782 |
|
$ |
8,990,193 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
Nine Months Ended September 30, |
| ||||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
(Unaudited) |
| ||||
|
Operating activities |
|
|
|
|
| ||
|
Net loss |
|
$ |
(318,217 |
) |
$ |
(270,618 |
) |
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
|
|
|
|
| ||
|
Depreciation, depletion and amortization |
|
312,042 |
|
348,863 |
| ||
|
Amortization of acquired sales contracts, net |
|
(9,948 |
) |
(7,587 |
) | ||
|
Amortization relating to financing activities |
|
12,349 |
|
18,525 |
| ||
|
Prepaid royalties expensed |
|
5,645 |
|
11,973 |
| ||
|
Employee stock-based compensation expense |
|
7,689 |
|
8,909 |
| ||
|
Asset impairment costs |
|
1,512 |
|
220,879 |
| ||
|
Amortization of premiums on debt securities held |
|
— |
|
3,679 |
| ||
|
Gains on disposals and divestitures, net |
|
(21,965 |
) |
(120,702 |
) | ||
|
Deferred income taxes |
|
(112,998 |
) |
(184,418 |
) | ||
|
Changes in: |
|
|
|
|
| ||
|
Receivables |
|
(6,779 |
) |
72,436 |
| ||
|
Inventories |
|
22,589 |
|
21,387 |
| ||
|
Accounts payable, accrued expenses and other current liabilities |
|
73,324 |
|
19,287 |
| ||
|
Income taxes, net |
|
(514 |
) |
787 |
| ||
|
Other |
|
37,261 |
|
43,192 |
| ||
|
Cash provided by operating activities |
|
1,990 |
|
186,592 |
| ||
|
Investing activities |
|
|
|
|
| ||
|
Capital expenditures |
|
(118,701 |
) |
(223,168 |
) | ||
|
Minimum royalty payments |
|
(3,604 |
) |
(10,901 |
) | ||
|
Proceeds from sale-leaseback transactions |
|
— |
|
34,919 |
| ||
|
Proceeds from disposals and divestitures |
|
50,971 |
|
431,462 |
| ||
|
Purchases of marketable securities |
|
(181,546 |
) |
(85,418 |
) | ||
|
Proceeds from sale or maturity of marketable securities and other investments |
|
178,293 |
|
67,255 |
| ||
|
Investments in and advances to affiliates |
|
(13,393 |
) |
(11,124 |
) | ||
|
Change in restricted cash |
|
— |
|
3,453 |
| ||
|
Cash provided by (used in) investing activities |
|
(87,980 |
) |
206,478 |
| ||
|
Financing activities |
|
|
|
|
| ||
|
Payments on term loan |
|
(14,625 |
) |
(12,375 |
) | ||
|
Net payments on other debt |
|
(10,187 |
) |
(13,084 |
) | ||
|
Dividends paid |
|
(2,123 |
) |
(19,105 |
) | ||
|
Debt financing costs |
|
(2,219 |
) |
— |
| ||
|
Other |
|
(21 |
) |
— |
| ||
|
Cash used in financing activities |
|
(29,175 |
) |
(44,564 |
) | ||
|
Increase (decrease) in cash and cash equivalents |
|
(115,165 |
) |
348,506 |
| ||
|
Cash and cash equivalents, beginning of period |
|
911,099 |
|
784,622 |
| ||
|
Cash and cash equivalents, end of period |
|
$ |
795,934 |
|
$ |
1,133,128 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
Arch Coal, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Arch Coal, Inc. and its subsidiaries (the “Company”). The Company’s primary business is the production of thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and steel producers both in the United States and around the world. The Company currently operates mining complexes in West Virginia, Illinois, Wyoming and Colorado. All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.
The Company completed the sale of Canyon Fuel Company, LLC (“Canyon Fuel”) on August 16, 2013. The results of Canyon Fuel have been segregated from continuing operations and are reflected, net of tax, as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
2. Accounting Policies
In May 2014, the FASB issued comprehensive authoritative guidance for the recognition and presentation of revenue from contracts with customers. The revenue recognition model is based on changes in contract assets (right to receive consideration) and liabilities (obligations to provide a good or perform a service). The guidance also requires comprehensive quantitative and qualitative disclosures intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flows. This guidance will be effective for the Company in the first quarter of 2017, with early adoption not permitted. The Company is currently assessing the impact the guidance will have upon adoption, but expects no significant changes to its existing revenue recognition policies.
3. Accumulated Other Comprehensive Income
The following items are included in accumulated other comprehensive income (“AOCI”):
|
|
|
|
|
Pension, |
|
|
|
|
| ||||
|
|
|
|
|
Postretirement |
|
|
|
|
| ||||
|
|
|
|
|
and Other |
|
|
|
Accumulated |
| ||||
|
|
|
|
|
Post- |
|
|
|
Other |
| ||||
|
|
|
Derivative |
|
Employment |
|
Available-for- |
|
Comprehensive |
| ||||
|
|
|
Instruments |
|
Benefits |
|
Sale Securities |
|
Income |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Balance at December 31, 2013 |
|
$ |
565 |
|
$ |
31,112 |
|
$ |
6,015 |
|
$ |
37,692 |
|
|
Unrealized gains (losses) |
|
1,692 |
|
— |
|
(4,775 |
) |
(3,083 |
) | ||||
|
Amounts reclassified from AOCI |
|
(861 |
) |
(3,409 |
) |
1,167 |
|
(3,103 |
) | ||||
|
Balance at September 30, 2014 |
|
$ |
1,396 |
|
$ |
27,703 |
|
$ |
2,407 |
|
$ |
31,506 |
|
The following amounts were reclassified out of AOCI:
|
|
|
Amounts Reclassified from AOCI |
|
|
| ||||||||||
|
Details About AOCI |
|
Three Months Ended |
|
Nine Months Ended |
|
Line Item in the |
| ||||||||
|
Components |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Statement of Operations |
| ||||
|
|
|
(In thousands) |
|
|
| ||||||||||
|
Derivative instruments |
|
$ |
892 |
|
$ |
692 |
|
$ |
1,346 |
|
$ |
2,093 |
|
Revenues |
|
|
|
|
(321 |
) |
(249 |
) |
(485 |
) |
(754 |
) |
Benefit from income taxes |
| ||||
|
|
|
$ |
571 |
|
$ |
443 |
|
$ |
861 |
|
$ |
1,339 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Pension, postretirement and other post-employment benefits |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Amortization of prior service credits (1) |
|
$ |
1,759 |
|
$ |
5,573 |
|
$ |
6,976 |
|
$ |
11,154 |
|
|
|
|
Amortization of actuarial gains |
|
(550 |
) |
(3,823 |
) |
(1,650 |
) |
(13,108 |
) |
|
| ||||
|
|
|
1,209 |
|
1,750 |
|
5,326 |
|
(1,954 |
) |
|
| ||||
|
|
|
(435 |
) |
(631 |
) |
(1,917 |
) |
702 |
|
Benefit from income taxes |
| ||||
|
|
|
$ |
774 |
|
$ |
1,119 |
|
$ |
3,409 |
|
$ |
(1,252 |
) |
Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale securities (2) |
|
$ |
(145 |
) |
$ |
(4 |
) |
$ |
(1,824 |
) |
$ |
(313 |
) |
Interest and investment income |
|
|
|
|
53 |
|
2 |
|
657 |
|
113 |
|
Benefit from income taxes |
| ||||
|
|
|
$ |
(92 |
) |
$ |
(2 |
) |
$ |
(1,167 |
) |
$ |
(200 |
) |
Net of tax |
|
1 Production-related benefits and workers’ compensation costs are included in inventoriable production costs.
2 The gains and losses on sales of available-for-sale-securities are determined on a specific identification basis.
4. Divestitures
During the first quarter of 2014, the Company entered into agreements to sell an operating thermal coal complex and an idled thermal coal mine in Kentucky and the Company’s ADDCAR subsidiary, which manufactures a patented highwall mining system. The sales closed during the first quarter of 2014 for total consideration of $45.3 million. The Company has received $35.7 million in cash, and the remaining $11.0 million is payable on December 31, 2014. The Company recognized a net pre-tax gain of $14.3 million from these divestitures, reflected in “other operating income, net” in the condensed consolidated statement of operations. The following table summarizes the assets and liabilities of these divested operations reflected in the December 31, 2013 consolidated balance sheet (in thousands):
|
|
|
|
| |
|
Inventories |
|
$ |
33,283 |
|
|
Other current assets |
|
1,032 |
| |
|
Net property, plant & equipment |
|
104,587 |
| |
|
Other noncurrent assets |
|
139 |
| |
|
Accounts payable and accrued expenses |
|
13,005 |
| |
|
Other noncurrent liabilities |
|
24,276 |
| |
The following table summarizes the results of Canyon Fuel, reflected as discontinued operations in the condensed consolidated statement of operations through the date of disposition:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||
|
|
|
(in thousands) |
| ||||
|
Total revenues |
|
$ |
45,763 |
|
$ |
219,002 |
|
|
|
|
|
|
|
| ||
|
Income from discontinued operations before income taxes |
|
$ |
3,429 |
|
$ |
32,166 |
|
|
Gain on disposition |
|
115,679 |
|
115,679 |
| ||
|
Less: income tax expense |
|
39,704 |
|
46,029 |
| ||
|
Income from discontinued operations |
|
$ |
79,404 |
|
$ |
101,816 |
|
|
Basic and diluted earnings per common share from discontinued operations |
|
$ |
0.37 |
|
$ |
0.48 |
|
5. Impairment Charges
In the face of weak coal markets, the Company idled a higher-cost mining complex in the third quarter of 2014 in order to concentrate on metallurgical coal production from its lowest-cost and highest-margin operations. Closure charges of $5.1 million were recognized during the three months ended September 30, 2014 relating to the idling.
As a result of the weak thermal coal markets in Appalachia, the Company assessed in the third quarter of 2013 whether the carrying values of certain assets were recoverable through future cash flows. The Company determined that the carrying amounts of certain assets associated with the Hazard mining complex in Kentucky and the Company’s ADDCAR subsidiary, which manufactures and sells its patented highwall mining system, could not be recovered through future cash flows expected to be generated from use of the assets and their ultimate disposal. An impairment loss of $142.8 million was recognized to write the carrying value of the assets to their fair value of $71.3 million.
During the second quarter of 2013, Tenaska Trailblazer Partners, LLC announced that it was discontinuing its development plans for the Trailblazer Energy Center in Texas. As a result, the Company recorded a $20.5 million impairment charge, which consisted of its 35% equity investment of $15.3 million and a $5.2 million receivable balance related to reimbursements for development work.
The Company recorded an impairment charge of $57.7 million in the third quarter of 2013 related to its investment in DKRW Advanced Fuels, LLC (“DKRW”), a company engaged in developing coal-to-liquids facilities. DKRW had previously entered into an Engineering, Procurement and Construction Agreement with a Chinese company to construct and commission the Medicine Bow coal-to-liquids facility. The project did not progress to the next stage of development, and the impairment charge included the Company’s 24% equity investment of $13.7 million and a $44.0 million loan receivable balance.
The impairment and closure charges are included on the line “Asset impairment and mine closure costs” in the condensed consolidated statement of operations.
6. Inventories
Inventories consist of the following:
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
(In thousands) |
| ||||
|
Coal |
|
$ |
83,708 |
|
$ |
117,531 |
|
|
Repair parts and supplies |
|
125,951 |
|
137,497 |
| ||
|
Work-in-process |
|
— |
|
9,133 |
| ||
|
|
|
$ |
209,659 |
|
$ |
264,161 |
|
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $8.7 million at September 30, 2014 and $8.4 million at December 31, 2013.
7. Investments in Available-for-Sale Securities
The Company has invested in marketable debt securities, primarily highly liquid AA-rated corporate bonds and U.S. government and government agency securities. These investments are held in the custody of a major financial institution. These securities, along with the Company’s investments in marketable equity securities, are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.
The Company’s investments in available-for-sale marketable securities are as follows:
|
|
|
September 30, 2014 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
| ||||||||
|
|
|
|
|
Accumulated |
|
|
|
Classification |
| ||||||||||
|
|
|
|
|
Gross Unrealized |
|
Fair |
|
Short-Term |
|
Other |
| ||||||||
|
|
|
Cost Basis |
|
Gains |
|
Losses |
|
Value |
|
Investments |
|
Assets |
| ||||||
|
|
|
(In thousands) |
| ||||||||||||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
U.S. government and agency securities |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Corporate notes and bonds |
|
$ |
252,813 |
|
$ |
1 |
|
$ |
(3,747 |
) |
$ |
249,067 |
|
$ |
249,067 |
|
$ |
— |
|
|
Equity securities |
|
5,420 |
|
10,257 |
|
(2,759 |
) |
12,918 |
|
— |
|
12,918 |
| ||||||
|
Total Investments |
|
$ |
258,233 |
|
$ |
10,258 |
|
$ |
(6,506 |
) |
$ |
261,985 |
|
$ |
249,067 |
|
$ |
12,918 |
|
|
|
|
December 31, 2013 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
| ||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
Classification |
| ||||||||
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Fair |
|
Short-Term |
|
Other |
| ||||||
|
|
|
Cost Basis |
|
Gains |
|
Losses |
|
Value |
|
Investments |
|
Assets |
| ||||||
|
|
|
(In thousands) |
| ||||||||||||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
U.S. government and agency securities |
|
$ |
65,002 |
|
$ |
11 |
|
$ |
(75 |
) |
$ |
64,938 |
|
$ |
64,938 |
|
$ |
— |
|
|
Corporate notes and bonds |
|
184,773 |
|
7 |
|
(1,304 |
) |
183,476 |
|
183,476 |
|
— |
| ||||||
|
Equity securities |
|
5,271 |
|
13,660 |
|
(2,902 |
) |
16,029 |
|
— |
|
16,029 |
| ||||||
|
Total Investments |
|
$ |
255,046 |
|
$ |
13,678 |
|
$ |
(4,281 |
) |
$ |
264,443 |
|
$ |
248,414 |
|
$ |
16,029 |
|
The aggregate fair value of investments with unrealized losses that were owned for less than a year was $230.3 million and $164.3 million at September 30, 2014 and December 31, 2013, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year, and were also in a continuous unrealized loss position during that time, was $17.1 million and $48.7 million at September 30, 2014 and December 31, 2013, respectively.
The debt securities outstanding at September 30, 2014 have maturity dates ranging from the fourth quarter of 2014 through the fourth quarter of 2015. The Company classifies its investments as current based on the nature of the investments and their availability to provide cash for use in current operations.
8. Derivatives
Diesel fuel price risk management
The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates purchasing approximately 57 to 67 million gallons of diesel fuel for use in its operations during 2014 and 2015. To protect the Company’s cash flows from increases in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts and purchased heating oil call options. At September 30, 2014, the Company had protected the price of approximately 87% of its expected purchases for the remainder of 2014 and 83% of its expected 2015 purchases. At September 30, 2014, the Company had purchased heating oil call options for approximately 69 million gallons for the purpose of managing the price risk associated with future diesel purchases.
The Company has also purchased heating oil call options to manage the price risk associated with fuel surcharges on its barge and rail shipments, which cover increases in diesel fuel prices for the respective carriers. At September 30, 2014, the Company held heating oil call options for 1.3 million gallons that will settle in the fourth quarter of 2014 for the purpose of managing the fluctuations in cash flows associated with fuel surcharges on future shipments.
These positions reduce the Company’s risk of cash flow fluctuations related to these surcharges but the positions are not accounted for as hedges.
Coal price risk management positions
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.
At September 30, 2014, the Company held derivatives for risk management purposes that are expected to settle in the following years:
|
(Tons in thousands) |
|
2014 |
|
2015 |
|
2016 |
|
Total |
|
|
Coal sales |
|
1,156 |
|
2,340 |
|
160 |
|
3,656 |
|
|
Coal purchases |
|
751 |
|
825 |
|
— |
|
1,576 |
|
The Company has also entered into a nominal quantity of natural gas put options to protect the Company from decreases in natural gas prices, which could impact coal demand. These options are not accounted for as hedges.
Coal trading positions
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The estimated future realization of the value of the trading portfolio is $4.7 million of gains during the remainder of 2014 and $4.2 million of gains in 2015.
Tabular derivatives disclosures
The Company has master netting agreements with all of its counterparties which allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the condensed consolidated balance sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not the net position presented in the accompanying condensed consolidated balance sheets. The fair value and location of derivatives reflected in the accompanying condensed consolidated balance sheets are as follows:
|
|
|
September 30, 2014 |
|
|
|
December 31, 2013 |
|
|
| ||||||||||
|
Fair Value of Derivatives |
|
Asset |
|
Liability |
|
|
|
Asset |
|
Liability |
|
|
| ||||||
|
(In thousands) |
|
Derivative |
|
Derivative |
|
|
|
Derivative |
|
Derivative |
|
|
| ||||||
|
Derivatives Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Coal |
|
$ |
1,680 |
|
$ |
— |
|
|
|
$ |
909 |
|
$ |
(26 |
) |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Heating oil — diesel purchases |
|
1,440 |
|
— |
|
|
|
4,681 |
|
— |
|
|
| ||||||
|
Heating oil — fuel surcharges |
|
1 |
|
— |
|
|
|
422 |
|
— |
|
|
| ||||||
|
Coal — held for trading purposes |
|
75,061 |
|
(66,137 |
) |
|
|
55,327 |
|
(45,763 |
) |
|
| ||||||
|
Coal — risk management |
|
7,707 |
|
(2,861 |
) |
|
|
6,342 |
|
(1,950 |
) |
|
| ||||||
|
Natural gas |
|
225 |
|
(90 |
) |
|
|
— |
|
— |
|
|
| ||||||
|
Total |
|
84,434 |
|
(69,088 |
) |
|
|
66,772 |
|
(47,713 |
) |
|
| ||||||
|
Total derivatives |
|
86,114 |
|
(69,088 |
) |
|
|
67,681 |
|
(47,739 |
) |
|
| ||||||
|
Effect of counterparty netting |
|
(69,032 |
) |
69,032 |
|
|
|
(47,727 |
) |
47,727 |
|
|
| ||||||
|
Net derivatives as classified in the balance sheets |
|
$ |
17,082 |
|
$ |
(56 |
) |
$ |
17,026 |
|
$ |
19,954 |
|
$ |
(12 |
) |
$ |
19,942 |
|
|
|
|
|
September 30, |
|
December 31, |
| |||
|
Net derivatives as reflected on the balance sheets |
|
|
|
|
|
|
| ||
|
Heating oil |
|
Other current assets |
|
$ |
1,440 |
|
$ |
5,103 |
|
|
Coal |
|
Coal derivative assets |
|
15,642 |
|
14,851 |
| ||
|
|
|
Accrued expenses and other current liabilities |
|
(56 |
) |
(12 |
) | ||
|
|
|
|
|
$ |
17,026 |
|
$ |
19,942 |
|
The Company had a current liability for the obligation to post cash collateral of $3.8 million at September 30, 2014 and a current asset for the right to reclaim cash collateral of $2.2 million at December 31, 2013. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” and “other current assets”, respectively, in the accompanying condensed consolidated balance sheets.
The effects of derivatives on measures of financial performance are as follows:
Derivatives used in Cash Flow Hedging Relationships (in thousands)
Three Months Ended September 30,
|
|
|
|
|
Gain (Loss) Recognized in Other |
|
Gains (Losses) Reclassified from |
| ||||||||
|
|
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
Coal sales |
|
(1) |
|
$ |
3,449 |
|
$ |
3,132 |
|
$ |
1,639 |
|
$ |
911 |
|
|
Coal purchases |
|
(2) |
|
(2,041 |
) |
(942 |
) |
(747 |
) |
123 |
| ||||
|
Totals |
|
|
|
$ |
1,408 |
|
$ |
2,190 |
|
$ |
892 |
|
$ |
1,034 |
|
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended September 30, 2014 and 2013.
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended September 30,
|
|
|
|
|
Gain (Loss) Recognized |
| ||||
|
|
|
|
|
2014 |
|
2013 |
| ||
|
Coal — unrealized |
|
(3) |
|
$ |
1,610 |
|
$ |
(10,668 |
) |
|
Coal — realized |
|
(4) |
|
$ |
502 |
|
$ |
9,929 |
|
|
Natural gas — unrealized |
|
(3) |
|
$ |
238 |
|
$ |
— |
|
|
Heating oil — diesel purchases |
|
(4) |
|
$ |
(3,746 |
) |
$ |
(288 |
) |
|
Heating oil — fuel surcharges |
|
(4) |
|
$ |
(104 |
) |
$ |
(222 |
) |
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating income, net
Derivatives used in Cash Flow Hedging Relationships (in thousands)
Nine Months Ended September 30,
|
|
|
|
|
Gain (Loss) Recognized in Other |
|
Gains (Losses) Reclassified from |
| ||||||||
|
|
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
Coal sales |
|
(1) |
|
$ |
4,806 |
|
$ |
2,308 |
|
$ |
2,568 |
|
$ |
2,822 |
|
|
Coal purchases |
|
(2) |
|
(2,162 |
) |
(511 |
) |
(1,222 |
) |
(633 |
) | ||||
|
Totals |
|
|
|
$ |
2,644 |
|
$ |
1,797 |
|
$ |
1,346 |
|
$ |
2,189 |
|
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the nine month periods ended September 30, 2014 and 2013.
Derivatives Not Designated as Hedging Instruments (in thousands)
Nine Months Ended September 30,
|
|
|
|
|
Gain (Loss) Recognized |
| ||||
|
|
|
|
|
2014 |
|
2013 |
| ||
|
Coal — unrealized |
|
(3) |
|
$ |
455 |
|
$ |
(5,089 |
) |
|
Coal — realized |
|
(4) |
|
$ |
4,699 |
|
$ |
25,725 |
|
|
Natural gas — unrealized |
|
(3) |
|
$ |
(21 |
) |
$ |
— |
|
|
Heating oil — diesel purchases |
|
(4) |
|
$ |
(6,709 |
) |
$ |
(9,760 |
) |
|
Heating oil — fuel surcharges |
|
(4) |
|
$ |
(405 |
) |
$ |
(817 |
) |
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating income, net
Based on fair values at September 30, 2014, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $2.0 million are expected to be reclassified from other comprehensive income into earnings during the next twelve months.
Related to its trading portfolio, the Company recognized net unrealized and realized gains of $1.9 million and $0.9 million during the three months ended September 30, 2014 and 2013, respectively; and net unrealized and realized gains of $5.4 million and $3.0 million during the nine months ended September 30, 2014 and 2013, respectively. Gains and losses from trading activities are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated statements of operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
(In thousands) |
| ||||
|
Payroll and employee benefits |
|
$ |
72,116 |
|
$ |
67,621 |
|
|
Taxes other than income taxes |
|
114,183 |
|
114,664 |
| ||
|
Interest |
|
77,564 |
|
18,528 |
| ||
|
Acquired sales contracts |
|
12,690 |
|
14,373 |
| ||
|
Workers’ compensation |
|
16,085 |
|
12,434 |
| ||
|
Asset retirement obligations |
|
22,681 |
|
24,940 |
| ||
|
Other |
|
27,390 |
|
26,027 |
| ||
|
|
|
$ |
342,709 |
|
$ |
278,587 |
|
10. Debt and Financing Arrangements
|
|
|
September 30, |
|
December 31, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
(In thousands) |
| ||||
|
Term loan due 2018 ($1.91 billion and $1.93 billion face value, respectively) |
|
$ |
1,894,794 |
|
$ |
1,906,975 |
|
|
7.00% senior notes due 2019 at par |
|
1,000,000 |
|
1,000,000 |
| ||
|
9.875% senior notes due 2019 ($375.0 million face value) |
|
363,173 |
|
362,358 |
| ||
|
8.00% senior secured notes due 2019 at par |
|
350,000 |
|
350,000 |
| ||
|
7.25% senior notes due 2020 at par |
|
500,000 |
|
500,000 |
| ||
|
7.25% senior notes due 2021 at par |
|
1,000,000 |
|
1,000,000 |
| ||
|
Other |
|
48,196 |
|
32,162 |
| ||
|
|
|
5,156,163 |
|
5,151,495 |
| ||
|
Less current maturities of debt |
|
29,977 |
|
33,493 |
| ||
|
Long-term debt |
|
$ |
5,126,186 |
|
$ |
5,118,002 |
|
At September 30, 2014, the available borrowing capacity under the Company’s lines of credit was approximately $260.8 million.
11. Income taxes
During the first quarter of 2014, the Company determined it was more likely than not that a portion of the federal and state net operating losses it expects to generate in 2014 will not be realized based on projections of future taxable income. Accordingly, the estimated annual effective rate for the year ended December 31, 2014 includes a valuation allowance for that portion. In applying the estimated annual effective rate to earnings, the Company increased its valuation allowance by $15.8 million for the three months ended September 30, 2014 and $57.9 million for the nine months ended September 30, 2014 relating to federal and state net operating losses.
12. Fair Value Measurements
The hierarchy of fair value measurements assigns a level to fair value measurements based on the inputs used in the respective valuation techniques. The levels of the hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
· Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities, U.S. Treasury securities, and coal futures that are submitted for clearing on the New York Mercantile Exchange.
· Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s level 2 assets and liabilities include U.S. government agency securities and commodity contracts (coal and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.
· Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (coal, natural gas and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at September 30, 2014.
The table below sets forth, by level, the Company’s financial assets and liabilities that are recorded at fair value in the accompanying condensed consolidated balance sheet:
|
|
|
September 30, 2014 |
| ||||||||||
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
| ||||
|
Investments in marketable securities |
|
$ |
261,985 |
|
$ |
12,918 |
|
$ |
249,067 |
|
$ |
— |
|
|
Derivatives |
|
17,082 |
|
12,144 |
|
392 |
|
4,546 |
| ||||
|
Total assets |
|
$ |
297,067 |
|
$ |
25,062 |
|
$ |
249,459 |
|
$ |
4,546 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Derivatives |
|
$ |
56 |
|
$ |
— |
|
$ |
49 |
|
$ |
7 |
|
The Company’s contracts with its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying condensed consolidated balance sheet, based on this counterparty netting.
The following table summarizes the change in the fair values of financial instruments categorized as level 3.
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||
|
|
|
(In thousands) |
| ||||
|
Balance, beginning of period |
|
$ |
6,037 |
|
$ |
4,946 |
|
|
Realized and unrealized losses recognized in earnings, net |
|
(2,131 |
) |
(4,851 |
) | ||
|
Purchases |
|
1,080 |
|
4,891 |
| ||
|
Issuances |
|
(447 |
) |
(447 |
) | ||
|
Ending balance |
|
$ |
4,539 |
|
$ |
4,539 |
|
Net unrealized losses of $1.8 million and losses of $1.7 million were recognized during the three and nine months ended September 30, 2014, respectively, related to level 3 financial instruments held on September 30, 2014.
Fair Value of Long-Term Debt
At September 30, 2014 and December 31, 2013, the fair value of the Company’s debt, including amounts classified as current, was $3.6 billion and $4.6 billion, respectively. Fair values are based upon observed prices in an active market, when available, or from valuation models using market information, which fall into Level 2 in the fair value hierarchy.
13. Loss Per Common Share
The effect of options, restricted stock and restricted stock units equaling 8.3 million shares and 7.4 million shares of common stock were excluded from the calculation of diluted weighted average shares outstanding for the three and nine months ended September 30, 2014 and 7.0 million and 7.9 million shares for the three and nine months ended September 30, 2013, respectively, because the exercise price or grant price of the securities exceeded the average market price of the Company’s common stock for these periods. The weighted average share impacts of options, restricted stock and restricted stock units that were excluded from the calculation of weighted average shares due to the Company’s incurring a net loss for the three and nine months ended September 30, 2014 were 1.6 million and 2.0 million, respectively. The weighted average share impacts of options, restricted stock and restricted stock units that were excluded from the calculation of weighted average shares due to the Company’s incurring a net loss for the three and nine months ended September 30, 2013 were not significant.
14. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
4,910 |
|
$ |
6,672 |
|
$ |
16,311 |
|
$ |
21,162 |
|
|
Interest cost |
|
4,278 |
|
3,994 |
|
12,834 |
|
11,796 |
| ||||
|
Expected return on plan assets |
|
(5,929 |
) |
(5,848 |
) |
(17,786 |
) |
(17,690 |
) | ||||
|
Curtailments |
|
1,504 |
|
47 |
|
1,504 |
|
47 |
| ||||
|
Amortization of prior service costs (credits) |
|
(51 |
) |
(51 |
) |
(158 |
) |
(152 |
) | ||||
|
Amortization of other actuarial losses |
|
741 |
|
3,617 |
|
2,221 |
|
12,430 |
| ||||
|
Net benefit cost |
|
$ |
5,453 |
|
$ |
8,431 |
|
$ |
14,926 |
|
$ |
27,593 |
|
The following table details the components of other postretirement benefit costs (credits):
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
383 |
|
$ |
497 |
|
$ |
1,267 |
|
$ |
1,591 |
|
|
Interest cost |
|
460 |
|
427 |
|
1,381 |
|
1,273 |
| ||||
|
Curtailments |
|
— |
|
(5,444 |
) |
— |
|
(5,444 |
) | ||||
|
Amortization of prior service credits |
|
(2,500 |
) |
(2,641 |
) |
(7,502 |
) |
(8,121 |
) | ||||
|
Amortization of other actuarial losses (gains) |
|
(191 |
) |
(55 |
) |
(571 |
) |
(53 |
) | ||||
|
Net benefit credit |
|
$ |
(1,848 |
) |
$ |
(7,216 |
) |
$ |
(5,425 |
) |
$ |
(10,754 |
) |
15. Commitments and Contingencies
The Company accrues for costs related to contingencies when a loss is probable and the amount is reasonably determinable. Disclosure of contingencies is included in the financial statements when it is at least reasonably possible that a material loss or an additional material loss in excess of amounts already accrued may be incurred.
Allegheny Energy Supply (“Allegheny”), the sole customer of coal produced at the Company’s subsidiary Wolf Run Mining Company’s (“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. (“Hunter Ridge”), and ICG in state court in Allegheny County, Pennsylvania on December 28, 2006, and amended its complaint on April 23, 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract. The Sycamore No. 2 mine was idled after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped.
After extensive searching for gas wells and rehabilitation of the mine, it was re-opened in 2007, but with notice to Allegheny that it would necessarily operate at reduced volumes in order to safely and effectively avoid the many gas wells within the reserve. The amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract in early 2005. Allegheny voluntarily dropped the breach of representation claims later. Allegheny claimed that it would incur costs in excess of $100 million to purchase replacement coal over the life of the contract. ICG, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining claims.
On November 3, 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other things, fraudulent inducement and conspiracy. On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to ICG, which was not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract. No new substantive claims were asserted. ICG answered the second amended complaint on October 13, 2009, denying all of the new claims. The Company’s counterclaim was dismissed on motion for summary judgment entered on May 11, 2010. Allegheny’s claims against ICG were also dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not. The court conducted a non-jury trial of this matter beginning on January 10, 2011 and concluding on February 1, 2011.
At the trial, Allegheny presented its evidence for breach of contract and claimed that it is entitled to past and future damages in the aggregate of between $228 million and $377 million. Wolf Run and Hunter Ridge presented their defense of the claims, including evidence with respect to the existence of force majeure conditions and excuse under the contract and applicable law. Wolf Run and Hunter Ridge presented evidence that Allegheny’s damages calculations were significantly inflated because it did not seek to determine damages as of the time of the breach and in some instances artificially assumed future nondelivery or did not take into account the apparent requirement to supply coal in the future. On May 2, 2011, the trial court entered a Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. The trial court awarded total damages and interest in the amount of $104.1 million, which consisted of $13.8 million for past damages, and $90.3 million for future damages. ICG and Allegheny filed post-verdict motions in the trial court and on August 23, 2011, the court denied the parties’ motions. The court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included pre-judgment interest.
The parties appealed the lower court’s decision to the Superior Court of Pennsylvania. On August 13, 2012, the Superior Court of Pennsylvania affirmed the award of past damages, but ruled that the lower court should have calculated future damages as of the date of breach, and remanded the matter back to the lower court with instructions to recalculate that portion of the award. On November 19, 2012, Allegheny filed a Petition for Allowance of Appeal with the Supreme Court of Pennsylvania and Wolf Run and Hunter Ridge filed an Answer. On July 2, 2013, the Supreme Court of Pennsylvania denied the Petition of Allowance. As this action finalized the past damage award, Wolf Run paid $15.6 million for the past damage amount, including interest, to Allegheny in July 2013. Testimony on the future damage award in the lower court concluded on May 19, 2014, and post-trial briefs and responses were submitted on August 8, 2014. The court held a hearing on this matter on November 5, 2014 and the parties are awaiting further determination by the court.
In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. As of September 30, 2014 and December 31, 2013, the Company had accrued $22.5 million and $30.4 million, respectively, for all legal matters, including $10.3 million and $11.7 million, respectively, classified as current. The ultimate resolution of any such
legal matter could result in outcomes which may be materially different from amounts the Company has accrued for such matters.
16. Segment Information
The Company’s reportable business segments are based on the major coal producing basins in which the Company operates and may include a number of mine complexes. The Company manages its coal sales by coal basin, not by individual mining complex. Geology, coal transportation routes to customers, regulatory environments and coal quality or type are characteristic to a basin, and, accordingly, market and contract pricing have developed by coal basin. Mining operations are evaluated based on their per-ton operating costs (defined as including all mining costs but excluding pass-through transportation expenses), as well as on other non-financial measures, such as safety and environmental performance. The Company’s reportable segments are the Powder River Basin (PRB) segment, with operations in Wyoming; and the Appalachia (APP) segment, with operations primarily in West Virginia. The “Other” category combines other operating segments and includes the Company’s coal mining operations in Colorado and Illinois and its ADDCAR subsidiary, which the Company sold in the first quarter of 2014.
Operating segment results for the three and nine months ended September 30, 2014 and 2013 are presented below. Results for the reportable segments include all direct costs of mining, including all depreciation, depletion and amortization related to the mining operations, even if the assets are not recorded at the operating segment level. These reportable segment results do not reflect impairment charges, since those are not reflected in the operating income reviewed by management. Corporate, Other and Eliminations includes these charges, as well as the change in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management; other support functions; and the elimination of intercompany transactions. The operating segment results and capital expenditures reflect only those from continuing operations, and exclude the results of Canyon Fuel, since they are classified as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013. Because the condensed consolidated statement of cash flows includes cash flows from discontinued operations, capital expenditures from discontinued operations are included in “Corporate, Other and Eliminations” below.
|
|
|
PRB |
|
APP |
|
Other |
|
Corporate, |
|
Consolidated |
| |||||
|
|
|
(in thousands) |
| |||||||||||||
|
Three Months Ended September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
389,386 |
|
$ |
272,354 |
|
$ |
80,440 |
|
$ |
— |
|
$ |
742,180 |
|
|
Income (loss) from operations |
|
18,797 |
|
(35,888 |
) |
17,912 |
|
(36,121 |
) |
(35,300 |
) | |||||
|
Depreciation, depletion and amortization |
|
43,962 |
|
48,867 |
|
10,499 |
|
1,827 |
|
105,155 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(1,200 |
) |
(1,815 |
) |
2 |
|
— |
|
(3,013 |
) | |||||
|
Asset impairment and mine closure costs |
|
— |
|
5,060 |
|
— |
|
— |
|
5,060 |
| |||||
|
Capital expenditures |
|
8,174 |
|
9,039 |
|
4,678 |
|
1,064 |
|
22,955 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Three Months Ended September 30, 2013 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
420,521 |
|
$ |
263,189 |
|
$ |
107,559 |
|
$ |
— |
|
$ |
791,269 |
|
|
Income (loss) from operations |
|
20,694 |
|
(157,883 |
) |
56 |
|
(97,620 |
) |
(234,753 |
) | |||||
|
Depreciation, depletion and amortization |
|
46,619 |
|
46,530 |
|
11,958 |
|
1,216 |
|
106,323 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(864 |
) |
(2,691 |
) |
987 |
|
— |
|
(2,568 |
) | |||||
|
Asset impairment and mine closure costs |
|
— |
|
126,449 |
|
16,280 |
|
57,668 |
|
200,397 |
| |||||
|
Capital expenditures |
|
1,695 |
|
44,624 |
|
7,122 |
|
663 |
|
54,104 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Nine Months Ended September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
1,106,258 |
|
$ |
832,452 |
|
253,217 |
|
$ |
— |
|
$ |
2,191,927 |
| |
|
Income (loss) from operations |
|
19,001 |
|
(79,890 |
) |
34,640 |
|
(117,978 |
) |
(144,227 |
) | |||||
|
Depreciation, depletion and amortization |
|
124,243 |
|
155,087 |
|
29,601 |
|
3,111 |
|
312,042 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(2,774 |
) |
(7,266 |
) |
92 |
|
— |
|
(9,948 |
) | |||||
|
Asset impairment and mine closure costs |
|
— |
|
5,060 |
|
— |
|
1,512 |
|
6,572 |
| |||||
|
Capital expenditures |
|
17,230 |
|
28,232 |
|
8,837 |
|
64,402 |
|
118,701 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Nine Months Ended September 30, 2013 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
1,135,892 |
|
$ |
883,485 |
|
$ |
275,594 |
|
$ |
— |
|
$ |
2,294,971 |
|
|
Income (loss) from operations |
|
53,244 |
|
(190,278 |
) |
23,359 |
|
(208,788 |
) |
(322,463 |
) | |||||
|
Depreciation, depletion and amortization |
|
130,993 |
|
157,867 |
|
34,319 |
|
4,422 |
|
327,601 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(3,004 |
) |
(7,975 |
) |
3,392 |
|
— |
|
(7,587 |
) | |||||
|
Asset impairment and mine closure costs |
|
— |
|
126,449 |
|
16,280 |
|
78,150 |
|
220,879 |
| |||||
|
Capital expenditures |
|
5,671 |
|
137,390 |
|
17,923 |
|
62,184 |
|
223,168 |
| |||||
A reconciliation of segment income (loss) from operations to consolidated loss before income taxes follows:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
(In thousands) |
|
|
|
|
| ||||||
|
Loss from operations |
|
$ |
(35,300 |
) |
$ |
(234,753 |
) |
$ |
(144,227 |
) |
$ |
(322,463 |
) |
|
Interest expense |
|
(98,217 |
) |
(95,624 |
) |
(292,648 |
) |
(285,454 |
) | ||||
|
Interest and investment income |
|
1,949 |
|
697 |
|
5,828 |
|
4,749 |
| ||||
|
Loss from continuing operations before income taxes |
|
$ |
(131,568 |
) |
$ |
(329,680 |
) |
$ |
(431,047 |
) |
$ |
(603,168 |
) |
17. Supplemental Consolidating Financial Information
Pursuant to the indentures governing Arch Coal, Inc.’s senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present condensed
consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors under the senior notes (Arch Receivable Company, LLC and the Company’s subsidiaries outside the United States):
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2014
|
|
|
Parent/Issuer |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
(In thousands) |
| |||||||||||||
|
Revenues |
|
$ |
— |
|
$ |
742,180 |
|
$ |
— |
|
$ |
— |
|
$ |
742,180 |
|
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Cost of sales (exclusive of items shown separately below) |
|
2,442 |
|
645,672 |
|
— |
|
(1,018 |
) |
647,096 |
| |||||
|
Depreciation, depletion and amortization |
|
1,175 |
|
103,971 |
|
9 |
|
— |
|
105,155 |
| |||||
|
Amortization of acquired sales contracts, net |
|
— |
|
(3,013 |
) |
— |
|
— |
|
(3,013 |
) | |||||
|
Change in fair value of coal derivatives and coal trading activities, net |
|
— |
|
(3,733 |
) |
— |
|
— |
|
(3,733 |
) | |||||
|
Asset impairment and mine closure costs |
|
— |
|
5,060 |
|
— |
|
— |
|
5,060 |
| |||||
|
Selling, general and administrative expenses |
|
19,542 |
|
7,427 |
|
1,679 |
|
(512 |
) |
28,136 |
| |||||
|
Other operating income, net |
|
1,562 |
|
(2,942 |
) |
(1,371 |
) |
1,530 |
|
(1,221 |
) | |||||
|
|
|
24,721 |
|
752,442 |
|
317 |
|
— |
|
777,480 |
| |||||
|
Income from investment in subsidiaries |
|
2,005 |
|
— |
|
— |
|
(2,005 |
) |
— |
| |||||
|
Loss from operations |
|
(22,716 |
) |
(10,262 |
) |
(317 |
) |
(2,005 |
) |
(35,300 |
) | |||||
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Interest expense |
|
(116,742 |
) |
(6,577 |
) |
(1,116 |
) |
26,218 |
|
(98,217 |
) | |||||
|
Interest and investment income |
|
7,872 |
|
18,987 |
|
1,308 |
|
(26,218 |
) |
1,949 |
| |||||
|
|
|
(108,870 |
) |
12,410 |
|
192 |
|
— |
|
(96,268 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Income (loss) from continuing operations before income taxes |
|
(131,586 |
) |
2,148 |
|
(125 |
) |
(2,005 |
) |
(131,568 |
) | |||||
|
Benefit from income taxes |
|
(34,368 |
) |
— |
|
18 |
|
— |
|
(34,350 |
) | |||||
|
Net income (loss) |
|
$ |
(97,218 |
) |
$ |
2,148 |
|
$ |
(143 |
) |
$ |
(2,005 |
) |
$ |
(97,218 |
) |
|
Total comprehensive income (loss) |
|
$ |
(99,197 |
) |
$ |
1,717 |
|
$ |
(143 |
) |
$ |
(1,574 |
) |
$ |
(99,197 |
) |
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2013
|
|
|
Parent/Issuer |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
(In thousands) |
| |||||||||||||
|
Revenues |
|
$ |
— |
|
$ |
|||||||||||