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 June 30, 2015
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) |
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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):
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Large accelerated filer x |
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Accelerated filer o |
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|
|
|
|
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 July 20, 2015 there were 212,916,357 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 June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
(Unaudited) |
| ||||||||||
|
Revenues |
|
$ |
644,462 |
|
$ |
713,776 |
|
$ |
1,321,467 |
|
$ |
1,449,747 |
|
|
Costs, expenses and other operating |
|
|
|
|
|
|
|
|
| ||||
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Cost of sales (exclusive of items shown separately below) |
|
566,252 |
|
622,137 |
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1,128,574 |
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1,308,451 |
| ||||
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Depreciation, depletion and amortization |
|
97,372 |
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102,464 |
|
202,246 |
|
206,887 |
| ||||
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Amortization of acquired sales contracts, net |
|
(1,644 |
) |
(3,239 |
) |
(5,034 |
) |
(6,935 |
) | ||||
|
Change in fair value of coal derivatives and coal trading activities, net |
|
1,211 |
|
(2,992 |
) |
2,431 |
|
(2,078 |
) | ||||
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Asset impairment and mine closure costs |
|
19,146 |
|
1,512 |
|
19,146 |
|
1,512 |
| ||||
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Selling, general and administrative expenses |
|
24,268 |
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29,931 |
|
46,873 |
|
59,067 |
| ||||
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Other operating (income) expense, net |
|
7,403 |
|
(232 |
) |
16,489 |
|
(8,230 |
) | ||||
|
|
|
714,008 |
|
749,581 |
|
1,410,725 |
|
1,558,674 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Loss from operations |
|
(69,546 |
) |
(35,805 |
) |
(89,258 |
) |
(108,927 |
) | ||||
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Interest expense, net |
|
|
|
|
|
|
|
|
| ||||
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Interest expense |
|
(99,574 |
) |
(97,960 |
) |
(198,826 |
) |
(194,431 |
) | ||||
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Interest and investment income |
|
962 |
|
2,036 |
|
3,335 |
|
3,879 |
| ||||
|
|
|
(98,612 |
) |
(95,924 |
) |
(195,491 |
) |
(190,552 |
) | ||||
|
Nonoperating expense |
|
|
|
|
|
|
|
|
| ||||
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Expenses related to debt restructuring |
|
(4,016 |
) |
— |
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(4,016 |
) |
— |
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|
|
|
|
|
|
|
|
|
|
| ||||
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Loss before income taxes |
|
(172,174 |
) |
(131,729 |
) |
(288,765 |
) |
(299,479 |
) | ||||
|
Benefit from income taxes |
|
(4,071 |
) |
(34,869 |
) |
(7,467 |
) |
(78,480 |
) | ||||
|
Net loss |
|
$ |
(168,103 |
) |
$ |
(96,860 |
) |
$ |
(281,298 |
) |
$ |
(220,999 |
) |
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|
|
|
|
|
|
|
|
|
| ||||
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Losses per common share |
|
|
|
|
|
|
|
|
| ||||
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Basic and diluted LPS |
|
$ |
(0.79 |
) |
$ |
(0.46 |
) |
$ |
(1.32 |
) |
$ |
(1.04 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
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Basic and diluted weighted average shares outstanding |
|
212,914 |
|
212,225 |
|
212,788 |
|
212,198 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Dividends declared per common share |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
0.01 |
|
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 June 30, |
|
Six Months Ended June 30, |
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|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
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|
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(Unaudited) |
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Net loss |
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$ |
(168,103 |
) |
$ |
(96,860 |
) |
$ |
(281,298 |
) |
$ |
(220,999 |
) |
|
|
|
|
|
|
|
|
|
|
| ||||
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Derivative instruments |
|
|
|
|
|
|
|
|
| ||||
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Comprehensive income (loss) before tax |
|
(3,199 |
) |
1,007 |
|
1,846 |
|
778 |
| ||||
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Income tax benefit (provision) |
|
1,153 |
|
(362 |
) |
(664 |
) |
(280 |
) | ||||
|
|
|
(2,046 |
) |
645 |
|
1,182 |
|
498 |
| ||||
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Pension, postretirement and other post-employment benefits |
|
|
|
|
|
|
|
|
| ||||
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Comprehensive income (loss) before tax |
|
3,474 |
|
(2,269 |
) |
3,768 |
|
(4,116 |
) | ||||
|
Income tax benefit (provision) |
|
(1,252 |
) |
817 |
|
(1,357 |
) |
1,482 |
| ||||
|
|
|
2,222 |
|
(1,452 |
) |
2,411 |
|
(2,634 |
) | ||||
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Available-for-sale securities |
|
|
|
|
|
|
|
|
| ||||
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Comprehensive income (loss) before tax |
|
68 |
|
(1,203 |
) |
359 |
|
(3,236 |
) | ||||
|
Income tax benefit (provision) |
|
(28 |
) |
433 |
|
(132 |
) |
1,165 |
| ||||
|
|
|
40 |
|
(770 |
) |
227 |
|
(2,071 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
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Total other comprehensive income (loss) |
|
216 |
|
(1,577 |
) |
3,820 |
|
(4,207 |
) | ||||
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Total comprehensive loss |
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$ |
(167,887 |
) |
$ |
(98,437 |
) |
$ |
(277,478 |
) |
$ |
(225,206 |
) |
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)
|
|
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June 30, |
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December 31, |
| ||
|
|
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2015 |
|
2014 |
| ||
|
|
|
(Unaudited) |
| ||||
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Assets |
|
|
|
|
| ||
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Current assets |
|
|
|
|
| ||
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Cash and cash equivalents |
|
$ |
439,655 |
|
$ |
734,231 |
|
|
Short term investments |
|
249,754 |
|
248,954 |
| ||
|
Restricted cash |
|
43,563 |
|
5,678 |
| ||
|
Trade accounts receivable |
|
204,593 |
|
211,506 |
| ||
|
Other receivables |
|
14,948 |
|
20,511 |
| ||
|
Inventories |
|
223,929 |
|
190,253 |
| ||
|
Prepaid royalties |
|
9,006 |
|
11,118 |
| ||
|
Deferred income taxes |
|
47,277 |
|
52,728 |
| ||
|
Coal derivative assets |
|
13,358 |
|
13,257 |
| ||
|
Other current assets |
|
50,838 |
|
54,515 |
| ||
|
Total current assets |
|
1,296,921 |
|
1,542,751 |
| ||
|
Property, plant and equipment, net |
|
6,341,026 |
|
6,453,458 |
| ||
|
Other assets |
|
|
|
|
| ||
|
Prepaid royalties |
|
52,956 |
|
66,806 |
| ||
|
Equity investments |
|
227,788 |
|
235,842 |
| ||
|
Other noncurrent assets |
|
117,664 |
|
130,866 |
| ||
|
Total other assets |
|
398,408 |
|
433,514 |
| ||
|
Total assets |
|
$ |
8,036,355 |
|
$ |
8,429,723 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
|
Current liabilities |
|
|
|
|
| ||
|
Accounts payable |
|
$ |
156,725 |
|
$ |
180,113 |
|
|
Accrued expenses and other current liabilities |
|
262,958 |
|
302,396 |
| ||
|
Current maturities of debt |
|
31,763 |
|
36,885 |
| ||
|
Total current liabilities |
|
451,446 |
|
519,394 |
| ||
|
Long-term debt |
|
5,114,581 |
|
5,123,485 |
| ||
|
Asset retirement obligations |
|
409,435 |
|
398,896 |
| ||
|
Accrued pension benefits |
|
13,580 |
|
16,260 |
| ||
|
Accrued postretirement benefits other than pension |
|
34,176 |
|
32,668 |
| ||
|
Accrued workers’ compensation |
|
97,489 |
|
94,291 |
| ||
|
Deferred income taxes |
|
411,930 |
|
422,809 |
| ||
|
Other noncurrent liabilities |
|
109,693 |
|
153,766 |
| ||
|
Total liabilities |
|
6,642,330 |
|
6,761,569 |
| ||
|
Stockholders’ equity |
|
|
|
|
| ||
|
Common stock, $0.01 par value, authorized 260,000 shares, issued 214,433 shares and 213,791 shares at June 30, 2015 and December 31, 2014, respectively |
|
2,145 |
|
2,141 |
| ||
|
Paid-in capital |
|
3,051,805 |
|
3,048,460 |
| ||
|
Treasury stock, at cost, 1,517 shares at June 30, 2015 and December 31, 2014 |
|
(53,863 |
) |
(53,863 |
) | ||
|
Accumulated deficit |
|
(1,613,123 |
) |
(1,331,825 |
) | ||
|
Accumulated other comprehensive income |
|
7,061 |
|
3,241 |
| ||
|
Total stockholders’ equity |
|
1,394,025 |
|
1,668,154 |
| ||
|
Total liabilities and stockholders’ equity |
|
$ |
8,036,355 |
|
$ |
8,429,723 |
|
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)
|
|
|
Six Months Ended June 30, |
| ||||
|
|
|
2015 |
|
2014 |
| ||
|
|
|
(Unaudited) |
| ||||
|
Operating activities |
|
|
|
|
| ||
|
Net loss |
|
$ |
(281,298 |
) |
$ |
(220,999 |
) |
|
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
| ||
|
Depreciation, depletion and amortization |
|
202,246 |
|
206,887 |
| ||
|
Amortization of acquired sales contracts, net |
|
(5,034 |
) |
(6,935 |
) | ||
|
Amortization relating to financing activities |
|
12,539 |
|
7,757 |
| ||
|
Prepaid royalties expensed |
|
3,939 |
|
3,575 |
| ||
|
Employee stock-based compensation expense |
|
3,354 |
|
5,469 |
| ||
|
Asset impairment and non-cash mine closure costs |
|
17,242 |
|
1,512 |
| ||
|
Expenses related to debt restructuring |
|
4,016 |
|
— |
| ||
|
Amortization of premiums on debt securities held |
|
1,010 |
|
— |
| ||
|
Gains on disposals and divestitures, net |
|
(1,325 |
) |
(18,506 |
) | ||
|
Deferred income taxes |
|
(7,510 |
) |
(78,568 |
) | ||
|
Changes in: |
|
|
|
|
| ||
|
Receivables |
|
12,433 |
|
267 |
| ||
|
Inventories |
|
(33,743 |
) |
3,522 |
| ||
|
Accounts payable, accrued expenses and other current liabilities |
|
(56,419 |
) |
10,495 |
| ||
|
Income taxes, net |
|
(37 |
) |
(571 |
) | ||
|
Other |
|
3,012 |
|
7,749 |
| ||
|
Cash used in operating activities |
|
(125,575 |
) |
(78,346 |
) | ||
|
Investing activities |
|
|
|
|
| ||
|
Capital expenditures |
|
(99,361 |
) |
(95,746 |
) | ||
|
Additions to prepaid royalties |
|
(409 |
) |
(3,341 |
) | ||
|
Proceeds from disposals and divestitures |
|
991 |
|
43,245 |
| ||
|
Purchases of marketable securities |
|
(161,336 |
) |
(168,951 |
) | ||
|
Proceeds from sale or maturity of marketable securities and other investments |
|
157,729 |
|
166,018 |
| ||
|
Investments in and advances to affiliates |
|
(5,138 |
) |
(9,501 |
) | ||
|
Cash used in investing activities |
|
(107,524 |
) |
(68,276 |
) | ||
|
Financing activities |
|
|
|
|
| ||
|
Payments on term loan |
|
(9,750 |
) |
(9,750 |
) | ||
|
Net payments on other debt |
|
(9,826 |
) |
(9,390 |
) | ||
|
Expenses related to debt restructuring |
|
(4,016 |
) |
— |
| ||
|
Dividends paid |
|
— |
|
(2,123 |
) | ||
|
Debt financing costs |
|
— |
|
(1,957 |
) | ||
|
Withdrawals (deposits) of restricted cash |
|
(37,885 |
) |
(1,103 |
) | ||
|
Cash used in financing activities |
|
(61,477 |
) |
(24,323 |
) | ||
|
Decrease in cash and cash equivalents |
|
(294,576 |
) |
(170,945 |
) | ||
|
Cash and cash equivalents, beginning of period |
|
734,231 |
|
911,099 |
| ||
|
Cash and cash equivalents, end of period |
|
$ |
439,655 |
|
$ |
740,154 |
|
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, Maryland, Virginia, Illinois, Wyoming and Colorado. All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.
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 six months ended June 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015. 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, 2014 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
2. Accounting Policies
In April 2015, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. Amendments in this update are effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. We expect upon adoption of this guidance that the current financial statement classification of debt issuance costs will change from total assets to long-term debt on our Condensed Consolidated Balance Sheet.
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, 2014 |
|
$ |
2,550 |
|
$ |
2,860 |
|
$ |
(2,169 |
) |
$ |
3,241 |
|
|
Unrealized gains (losses) |
|
3,234 |
|
— |
|
(2,445 |
) |
789 |
| ||||
|
Amounts reclassified from AOCI |
|
(2,051 |
) |
2,411 |
|
2,671 |
|
3,031 |
| ||||
|
Balance at June 30, 2015 |
|
$ |
3,733 |
|
$ |
5,271 |
|
$ |
(1,943 |
) |
$ |
7,061 |
|
The following amounts were reclassified out of AOCI:
|
|
|
Amounts Reclassified from AOCI |
|
|
| ||||||||||
|
|
|
Three Months Ended |
|
Six Months Ended |
|
Line Item in the |
| ||||||||
|
Details About AOCI Components |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Statement of Operations |
| ||||
|
|
|
(In thousands) |
|
|
| ||||||||||
|
Derivative instruments |
|
$ |
2,727 |
|
$ |
151 |
|
$ |
3,208 |
|
$ |
454 |
|
Revenues |
|
|
|
|
(983 |
) |
(55 |
) |
(1,157 |
) |
(164 |
) |
Benefit from income taxes |
| ||||
|
|
|
$ |
1,744 |
|
$ |
96 |
|
$ |
2,051 |
|
$ |
290 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Pension, postretirement and other post-employment benefits |
|
|
|
|
|
|
|
|
|
|
| ||||
|
Amortization of prior service credits (1) |
|
$ |
2,083 |
|
$ |
2,591 |
|
$ |
4,167 |
|
$ |
5,217 |
|
|
|
|
Amortization of actuarial gains (losses), net (1) |
|
(5,556 |
) |
(321 |
) |
(7,934 |
) |
(1,100 |
) |
|
| ||||
|
|
|
(3,473 |
) |
2,270 |
|
(3,767 |
) |
4,117 |
|
|
| ||||
|
|
|
1,251 |
|
(817 |
) |
1,356 |
|
(1,482 |
) |
Benefit from income taxes |
| ||||
|
|
|
$ |
(2,222 |
) |
$ |
1,453 |
|
$ |
(2,411 |
) |
$ |
2,635 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale securities |
|
$ |
(1,430 |
) |
$ |
(1,123 |
) |
$ |
(4,227 |
) |
$ |
(1,679 |
) |
Interest and investment income |
|
|
|
|
549 |
|
404 |
|
1,556 |
|
604 |
|
Benefit from income taxes |
| ||||
|
|
|
$ |
(881 |
) |
$ |
(719 |
) |
$ |
(2,671 |
) |
$ |
(1,075 |
) |
Net of tax |
|
1 Production-related benefits and workers’ compensation costs are included in inventoriable production costs.
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 in the first quarter of 2014 for total consideration of $45.3 million. The Company received $26.3 million in cash in the first quarter of 2014, and the remainder was paid in the second and fourth quarters of 2014. The Company recognized a net pre-tax gain of $12.8 million from these divestitures, reflected in “other operating (income) expense, net” in the Condensed Consolidated Statements of Operations.
5. Asset Impairment and Mine Closure Costs
During the second quarter of 2015, the Company recorded $19.1 million to “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations. An impairment charge of $12.2 million relates to the portion of an advance royalty balance on a reserve base mined at the Company’s Mountain Laurel, Spruce and Briar Branch operations that will not be recouped based on latest estimates of sales volumes and pricing through the recoupment period which runs through March 2017. Additionally, the Company recorded a $5.6 million impairment charge related to the closure of a higher cost mining complex, Cumberland River, serving the metallurgical coal markets.
6. Inventories
Inventories consist of the following:
|
|
|
June 30, |
|
December 31, |
| ||
|
|
|
2015 |
|
2014 |
| ||
|
|
|
(In thousands) |
| ||||
|
Coal |
|
$ |
99,691 |
|
$ |
71,901 |
|
|
Repair parts and supplies |
|
124,238 |
|
118,352 |
| ||
|
|
|
$ |
223,929 |
|
$ |
190,253 |
|
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $6.6 million at June 30, 2015 and $6.6 million at December 31, 2014.
7. Investments in Available-for-Sale Securities
The Company has invested in marketable debt securities, primarily highly liquid investment grade corporate bonds. 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:
|
|
|
June 30, 2015 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
| ||||||||
|
|
|
|
|
Accumulated |
|
|
|
Classification |
| ||||||||||
|
|
|
|
|
Gross Unrealized |
|
Fair |
|
Short-Term |
|
Other |
| ||||||||
|
|
|
Cost Basis |
|
Gains |
|
Losses |
|
Value |
|
Investments |
|
Assets |
| ||||||
|
|
|
(In thousands) |
| ||||||||||||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Corporate notes and bonds |
|
$ |
252,877 |
|
$ |
— |
|
$ |
(3,123 |
) |
$ |
249,754 |
|
$ |
249,754 |
|
$ |
— |
|
|
Equity securities |
|
3,910 |
|
1,973 |
|
(2,852 |
) |
3,031 |
|
— |
|
3,031 |
| ||||||
|
Total Investments |
|
$ |
256,787 |
|
$ |
1,973 |
|
$ |
(5,975 |
) |
$ |
252,785 |
|
$ |
249,754 |
|
$ |
3,031 |
|
|
|
|
December 31, 2014 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
| ||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
Classification |
| ||||||||
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Fair |
|
Short-Term |
|
Other |
| ||||||
|
|
|
Cost Basis |
|
Gains |
|
Losses |
|
Value |
|
Investments |
|
Assets |
| ||||||
|
|
|
(In thousands) |
| ||||||||||||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Corporate notes and bonds |
|
$ |
253,590 |
|
$ |
— |
|
$ |
(4,636 |
) |
$ |
248,954 |
|
$ |
248,954 |
|
$ |
— |
|
|
Equity securities |
|
3,910 |
|
4,125 |
|
(2,890 |
) |
5,145 |
|
— |
|
5,145 |
| ||||||
|
Total Investments |
|
$ |
257,500 |
|
$ |
4,125 |
|
$ |
(7,526 |
) |
$ |
254,099 |
|
$ |
248,954 |
|
$ |
5,145 |
|
The aggregate fair value of investments with unrealized losses that were owned for less than a year was $187.0 million and $163.0 million at June 30, 2015 and December 31, 2014, 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 $58.9 million and $86.1 million at June 30, 2015 and December 31, 2014, respectively. The unrealized losses in the Company’s portfolio are the result of normal market fluctuations. The Company does not currently intend to sell these investments before recovery of their amortized cost base.
The debt securities outstanding at June 30, 2015 have maturity dates ranging from the third quarter of 2015 through the fourth quarter of 2016. 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 62 million gallons of diesel fuel for use in its operations during 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 June 30, 2015, the Company had protected the price of approximately 100% of its expected purchases for the remainder of the year with out-of-the-money call options with an average strike price of $3.13 per gallon. Due to the drop in heating oil pricing in early 2015, the Company has added in 19.5 million gallons of additional call options for the second half of 2015 representing 65% of expected purchases at an average strike price of $1.92 per gallon. Additionally, the Company has protected approximately 49% of our expected 2016 purchases with out-of-the-money call options. At June 30, 2015, the Company had purchased heating oil call options for approximately 66 million gallons for the purpose of managing the price risk associated with future diesel purchases. These 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 June 30, 2015, the Company held derivatives for risk management purposes that are expected to settle in the following years:
|
(Tons in thousands) |
|
2015 |
|
2016 |
|
Total |
|
|
Coal sales |
|
2,405 |
|
280 |
|
2,685 |
|
|
Coal purchases |
|
1,208 |
|
240 |
|
1,448 |
|
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 $1.1 million of gains during the remainder of 2015 and $1.3 million of gains in 2016.
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:
|
|
|
June 30, 2015 |
|
|
|
December 31, 2014 |
|
|
| ||||||||||
|
Fair Value of Derivatives |
|
Asset |
|
Liability |
|
|
|
Asset |
|
Liability |
|
|
| ||||||
|
(In thousands) |
|
Derivative |
|
Derivative |
|
|
|
Derivative |
|
Derivative |
|
|
| ||||||
|
Derivatives Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Coal |
|
$ |
4,602 |
|
$ |
(132 |
) |
|
|
$ |
6,535 |
|
$ |
(2,492 |
) |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Derivatives Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Heating oil — diesel purchases |
|
5,444 |
|
— |
|
|
|
300 |
|
— |
|
|
| ||||||
|
Coal — held for trading purposes |
|
85,130 |
|
(82,582 |
) |
|
|
96,898 |
|
(93,272 |
) |
|
| ||||||
|
Coal — risk management |
|
12,551 |
|
(8,035 |
) |
|
|
8,510 |
|
(3,688 |
) |
|
| ||||||
|
Natural gas |
|
993 |
|
— |
|
|
|
— |
|
— |
|
|
| ||||||
|
Total |
|
104,118 |
|
(90,617 |
) |
|
|
105,708 |
|
(96,960 |
) |
|
| ||||||
|
Total derivatives |
|
108,720 |
|
(90,749 |
) |
|
|
112,243 |
|
(99,452 |
) |
|
| ||||||
|
Effect of counterparty netting |
|
(89,918 |
) |
89,918 |
|
|
|
(98,686 |
) |
98,686 |
|
|
| ||||||
|
Net derivatives as classified in the balance sheets |
|
$ |
18,802 |
|
$ |
(831 |
) |
$ |
17,971 |
|
$ |
13,557 |
|
$ |
(766 |
) |
$ |
12,791 |
|
|
Net derivatives as reflected on the balance sheets (in thousands) |
|
|
|
June 30, 2015 |
|
December 31, 2014 |
| ||
|
Heating oil |
|
Other current assets |
|
$ |
5,444 |
|
$ |
300 |
|
|
Coal |
|
Coal derivative assets |
|
13,358 |
|
13,257 |
| ||
|
|
|
Accrued expenses and other current liabilities |
|
(831 |
) |
(766 |
) | ||
|
|
|
|
|
$ |
17,971 |
|
$ |
12,791 |
|
The Company had a current liability for the obligation to post cash collateral of $0.8 million and $2.4 million at June 30, 2015 and December 31, 2014, respectively. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities”, 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 June 30,
|
|
|
|
|
Gain (Loss) Recognized in |
|
Gains (Losses) Reclassified |
| ||||||||
|
|
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
Coal sales |
|
(1) |
|
$ |
(1,163 |
) |
$ |
1,870 |
|
$ |
4,990 |
|
$ |
223 |
|
|
Coal purchases |
|
(2) |
|
687 |
|
(712 |
) |
(2,263 |
) |
(72 |
) | ||||
|
Totals |
|
|
|
$ |
(476 |
) |
$ |
1,158 |
|
$ |
2,727 |
|
$ |
151 |
|
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 June 30, 2015 and 2014.
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended June 30,
|
|
|
|
|
Gain (Loss) Recognized |
| ||||
|
|
|
|
|
2015 |
|
2014 |
| ||
|
Coal — unrealized |
|
(3) |
|
$ |
(875 |
) |
$ |
147 |
|
|
Coal — realized |
|
(4) |
|
$ |
826 |
|
$ |
1,318 |
|
|
Natural gas — unrealized |
|
(3) |
|
$ |
(221 |
) |
$ |
(267 |
) |
|
Heating oil — diesel purchases |
|
(4) |
|
$ |
628 |
|
$ |
— |
|
|
Heating oil — fuel surcharges |
|
(4) |
|
$ |
— |
|
$ |
(47 |
) |
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)
Six Months Ended June 30,
|
|
|
|
|
Gain (Loss) Recognized in |
|
Gains (Losses) Reclassified |
| ||||||||
|
|
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
Coal sales |
|
(1) |
|
9,102 |
|
$ |
1,355 |
|
$ |
5,872 |
|
$ |
930 |
| |
|
Coal purchases |
|
(2) |
|
(4,051 |
) |
(123 |
) |
(2,664 |
) |
(476 |
) | ||||
|
Totals |
|
|
|
$ |
5,051 |
|
$ |
1,232 |
|
$ |
3,208 |
|
$ |
454 |
|
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 six month periods ended June 30, 2015 and 2014.
Derivatives Not Designated as Hedging Instruments (in thousands)
Six Months Ended June 30,
|
|
|
|
|
Gain (Loss) Recognized |
| ||||
|
|
|
|
|
2015 |
|
2014 |
| ||
|
Coal — unrealized |
|
(3) |
|
$ |
(1,286 |
) |
$ |
(1,155 |
) |
|
Coal — realized |
|
(4) |
|
$ |
1,917 |
|
$ |
4,197 |
|
|
Natural gas — unrealized |
|
(3) |
|
$ |
(62 |
) |
$ |
(259 |
) |
|
Heating oil — diesel purchases |
|
(4) |
|
$ |
(1,737 |
) |
$ |
(2,963 |
) |
|
Heating oil — fuel surcharges |
|
(4) |
|
$ |
— |
|
$ |
(301 |
) |
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 June 30, 2015, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $4.2 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 losses of $0.1 million and $3.1 million of net unrealized and realized gains during the three months ended June 30, 2015 and 2014, respectively; and net unrealized and realized losses of $1.1 million and net unrealized and realized gains of $3.5 million during the six months ended June 30, 2015 and 2014. 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:
|
|
|
June 30, |
|
December 31, |
| ||
|
|
|
2015 |
|
2014 |
| ||
|
|
|
(In thousands) |
| ||||
|
Payroll and employee benefits |
|
$ |
50,429 |
|
$ |
73,362 |
|
|
Taxes other than income taxes |
|
110,666 |
|
114,598 |
| ||
|
Interest |
|
30,452 |
|
30,384 |
| ||
|
Acquired sales contracts |
|
6,167 |
|
12,453 |
| ||
|
Workers’ compensation |
|
17,220 |
|
16,714 |
| ||
|
Asset retirement obligations |
|
19,210 |
|
19,222 |
| ||
|
Other |
|
28,814 |
|
35,663 |
| ||
|
|
|
$ |
262,958 |
|
$ |
302,396 |
|
10. Debt and Financing Arrangements
|
|
|
June 30, |
|
December 31, |
| ||
|
|
|
2015 |
|
2014 |
| ||
|
|
|
(In thousands) |
| ||||
|
Term loan due 2018 ($1.9 billion face value) |
|
$ |
1,883,109 |
|
$ |
1,890,846 |
|
|
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) |
|
364,517 |
|
363,493 |
| ||
|
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 |
|
48,718 |
|
56,031 |
| ||
|
|
|
5,146,344 |
|
5,160,370 |
| ||
|
Less current maturities of debt |
|
31,763 |
|
36,885 |
| ||
|
Long-term debt |
|
$ |
5,114,581 |
|
$ |
5,123,485 |
|
Financial covenant requirements may restrict the amount of unused capacity available to the Company for borrowings and letters of credit under credit facilities. The credit facility amendment on December 17, 2013 amended financial maintenance covenants to include only a minimum liquidity covenant of $550 million until June 2015, at which time a maximum secured leverage ratio covenant of 5.0 times trailing twelve months earnings before interest, taxes, depreciation and amortization (“EBITDA”) takes effect. As of June 30, 2015, we are in compliance with the covenants.
At June 30, 2015, the available borrowing capacity under the Company’s lines of credit was approximately $117.7 million.
11. Income Taxes
During the first half of 2015, the Company determined it was more likely than not that the federal and state net operating losses it expects to generate in 2015 will not be realized based on projections of future taxable income. Accordingly, the estimated annual effective rate for the year ended December 31, 2015 includes a valuation allowance. In applying the estimated annual effective rate to earnings for the three months ended June 30, 2015, the Company increased its valuation allowance by $59.3 million for the federal net operating losses and $3.3 million for the state net operating losses; and $104.6 million for federal net operating losses and $5.8 million for state net operating losses for the six months ended June 30, 2015.
During the first half of 2014, the Company increased its valuation allowance for the portion of the federal and state net operating losses it expected to generate in 2014. The Company increased its valuation allowance by $38.1 million for the federal net operating losses and $3.9 million for the 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 June 30, 2015.
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:
|
|
|
June 30, 2015 |
| ||||||||||
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
| ||||
|
Investments in marketable securities |
|
$ |
252,785 |
|
$ |
3,031 |
|
$ |
249,754 |
|
$ |
— |
|
|
Derivatives |
|
18,802 |
|
9,134 |
|
1,828 |
|
7,840 |
| ||||
|
Total assets |
|
$ |
271,587 |
|
$ |
12,165 |
|
$ |
251,582 |
|
$ |
7,840 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Derivatives |
|
$ |
831 |
|
$ |
— |
|
$ |
831 |
|
$ |
— |
|
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 |
|
Six Months Ended |
| ||
|
|
|
(In thousands) |
|
|
| ||
|
Balance, beginning of period |
|
$ |
9,270 |
|
$ |
3,040 |
|
|
Realized and unrealized losses recognized in earnings, net |
|
(481 |
) |
(1,828 |
) | ||
|
Realized and unrealized gains recognized in other comprehensive income, net |
|
(2,791 |
) |
(1,341 |
) | ||
|
Purchases |
|
1,842 |
|
9,625 |
| ||
|
Issuances |
|
— |
|
(1,656 |
) | ||
|
Ending balance |
|
$ |
7,840 |
|
$ |
7,840 |
|
Net unrealized gains of $0.2 million and net unrealized losses of $1.6 million were recognized during the three and six months ended June 30, 2015, respectively, related to level 3 financial instruments held on June 30, 2015.
Fair Value of Long-Term Debt
At June 30, 2015 and December 31, 2014, the fair value of the Company’s debt, including amounts classified as current, was $1.9 billion and $2.7 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 that were excluded from the calculation of diluted weighted average shares outstanding because the exercise price or grant price of the securities exceeded the average market price of the Company’s common stock were: 9.1 million shares and 8.7 million shares of common stock for the three and six months ended June 30, 2015, respectively; and 7.0 million shares of common stock for both the three and six months ended June 30, 2014. 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 six months ended June 30, 2015 were 1.7 million and 2.1 million, respectively; and 2.9 million and 2.2 million shares for the three and six months ended June 30, 2014, respectively.
14. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
1 |
|
$ |
5,477 |
|
$ |
5 |
|
$ |
11,401 |
|
|
Interest cost |
|
3,695 |
|
4,192 |
|
7,265 |
|
8,556 |
| ||||
|
Expected return on plan assets |
|
(4,467 |
) |
(5,879 |
) |
(10,231 |
) |
(11,857 |
) | ||||
|
Amortization of prior service costs (credits) |
|
— |
|
(53 |
) |
— |
|
(107 |
) | ||||
|
Amortization of other actuarial losses |
|
3,185 |
|
532 |
|
5,243 |
|
1,480 |
| ||||
|
Net benefit cost |
|
$ |
2,414 |
|
$ |
4,269 |
|
$ |
2,282 |
|
$ |
9,473 |
|
The following table details the components of other postretirement benefit costs (credits):
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
(In thousands) |
| ||||||||||
|
Service cost |
|
$ |
200 |
|
$ |
440 |
|
$ |
433 |
|
$ |
884 |
|
|
Interest cost |
|
308 |
|
457 |
|
643 |
|
921 |
| ||||
|
Amortization of prior service credits |
|
(2,083 |
) |
(2,501 |
) |
(4,167 |
) |
(5,002 |
) | ||||
|
Amortization of other actuarial losses (gains) |
|
(599 |
) |
(210 |
) |
(1,055 |
) |
(380 |
) | ||||
|
Net benefit credit |
|
$ |
(2,174 |
) |
$ |
(1,814 |
) |
$ |
(4,146 |
) |
$ |
(3,577 |
) |
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 on February 16, 2015 awarded Allegheny $7.5 million plus interest for the future damages. On April 6, 2015, the parties entered into a settlement agreement pursuant to which Wolf Run agreed to pay $15 million and both parties agreed to release and discharge the other party from any further contractual liability. As a result, the Company accrued an additional $2.8 million for the three months ended March 31, 2015 to bring the total amount accrued up to the settlement amount. The expense associated with the accrual is reflected in the line item “Cost of sales”. In April 2015, the Company idled the Sycamore No. 2 mine.
In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. As of June 30, 2015 and December 31, 2014, the Company had accrued $3.7 million and $22.3 million, respectively, for all legal matters, including $3.7 million and $10.1 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 adjusted EBITDA, 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.
Operating segment results for the three and six months ended June 30, 2015 and 2014 are presented below. The Company uses Adjusted EBITDA to assess the operating segments’ performance and to allocate resources. The Company’s management believes that Adjusted EBITDA presents a useful measure of our ability to service existing debt and incur additional debt based on ongoing operations. Corporate, Other and Eliminations includes 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 trans-actions.
|
|
|
PRB |
|
APP |
|
Other |
|
Corporate, |
|
Consolidated |
| |||||
|
|
|
(in thousands) |
| |||||||||||||
|
Three Months Ended June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
342,480 |
|
$ |
224,298 |
|
$ |
77,684 |
|
$ |
— |
|
$ |
644,462 |
|
|
Adjusted EBITDA |
|
56,654 |
|
11,427 |
|
7,456 |
|
(30,209 |
) |
45,328 |
| |||||
|
Depreciation, depletion and amortization |
|
42,711 |
|
42,203 |
|
10,834 |
|
1,624 |
|
97,372 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(761 |
) |
(883 |
) |
— |
|
— |
|
(1,644 |
) | |||||
|
Capital expenditures |
|
4,425 |
|
7,948 |
|
1,668 |
|
62,440 |
|
76,481 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Three Months Ended June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
358,265 |
|
$ |
280,961 |
|
$ |
74,550 |
|
$ |
— |
|
$ |
713,776 |
|
|
Adjusted EBITDA |
|
42,546 |
|
27,040 |
|
17,463 |
|
(22,117 |
) |
64,932 |
| |||||
|
Depreciation, depletion and amortization |
|
41,036 |
|
51,232 |
|
9,583 |
|
613 |
|
102,464 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(785 |
) |
(2,477 |
) |
23 |
|
— |
|
(3,239 |
) | |||||
|
Capital expenditures |
|
6,962 |
|
11,036 |
|
2,358 |
|
60,936 |
|
81,292 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Six Months Ended June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
733,686 |
|
$ |
447,737 |
|
$ |
140,044 |
|
$ |
— |
|
$ |
1,321,467 |
|
|
Adjusted EBITDA |
|
128,716 |
|
51,234 |
|
9,147 |
|
(61,997 |
) |
127,100 |
| |||||
|
Depreciation, depletion and amortization |
|
87,072 |
|
90,930 |
|
20,889 |
|
3,355 |
|
202,246 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(2,046 |
) |
(2,988 |
) |
— |
|
— |
|
(5,034 |
) | |||||
|
Capital expenditures |
|
21,394 |
|
11,333 |
|
4,310 |
|
62,324 |
|
99,361 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Six Months Ended June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Revenues |
|
$ |
716,872 |
|
$ |
560,098 |
|
$ |
170,839 |
|
$ |
1,938 |
|
$ |
1,449,747 |
|
|
Adjusted EBITDA |
|
72,365 |
|
55,467 |
|
21,595 |
|
(56,890 |
) |
92,537 |
| |||||
|
Depreciation, depletion and amortization |
|
80,281 |
|
106,220 |
|
19,102 |
|
1,284 |
|
206,887 |
| |||||
|
Amortization of acquired sales contracts, net |
|
(1,574 |
) |
(5,451 |
) |
90 |
|
— |
|
(6,935 |
) | |||||
|
Capital expenditures |
|
9,056 |
|
19,193 |
|
3,948 |
|
63,549 |
|
95,746 |
| |||||
A reconciliation of adjusted EBITDA to consolidated loss before income taxes follows:
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
(In thousands) |
|
|
|
|
| ||||||
|
Adjusted EBITDA |
|
$ |
45,328 |
|
$ |
64,932 |
|
$ |
127,100 |
|
$ |
92,537 |
|
|
Depreciation, depletion and amortization |
|
(97,372 |
) |
(102,464 |
) |
(202,246 |
) |
(206,887 |
) | ||||
|
Amortization of acquired sales contracts, net |
|
1,644 |
|
3,239 |
|
5,034 |
|
6,935 |
| ||||
|
Asset impairment and mine closure costs |
|
(19,146 |
) |
(1,512 |
) |
(19,146 |
) |
(1,512 |
) | ||||
|
Interest expense, net |
|
(98,612 |
) |
(95,924 |
) |
(195,491 |
) |
(190,552 |
) | ||||
|
Other nonoperating expense |
|
$ |
(4,016 |
) |
$ |
— |
|
(4,016 |
) |
— |
| ||
|
Loss before income taxes |
|
$ |
(172,174 |
) |
$ |
(131,729 |
) |
$ |
(288,765 |
) |
$ |
(299,479 |
) |
17. Subsequent Events
Customer Contract Termination
On September 20, 2012, Patriot Coal Corporation (“Patriot”) filed a motion with the U.S. Bankruptcy Court for the Southern District of New York to reject a master coal sales agreement entered into on December 31, 2005 between the Company and Magnum Coal Company (“Magnum”) which was acquired by Patriot in July 2008. The master coal sales agreement was established in order to meet obligations under a coal sales agreement with a customer who did not consent to the assignment of their contract to Magnum. On December 18, 2012, the court accepted Patriot’s motion to reject the master coal sales agreement. As a result of the court’s decision, the Company accrued $58.3 million, which represented the discounted cash flows of the remaining monthly buyout amounts under the underlying coal sales agreement. Subsequent to June 30, 2015, the Company has entered into a definite agreement to terminate the contract after payment of $12.5 million of which $3.5 million will be paid upon execution of the agreement with the remaining $9.0 million to be paid on October 1, 2015. The termination of the contract will generate an approximate $25.0 million pre-tax gain which will be recorded in the Company’s third quarter results.
Reverse Stock Split
On August 4, 2015, the Company’s common stock is expected to begin trading on the New York Stock Exchange (“NYSE”) on a split-adjusted basis following a one-for-ten reverse stock split originally announced on July 20, 2015. Every ten shares of issued and outstanding common stock, including treasury shares, will be exchanged into one share of the Company’s common stock. As a result of the reverse stock split, the number of outstanding shares of the Company’s common stock will be reduced from approximately 213 million to 21.3 million. No fractional shares will be issued in connection with the reverse stock split; instead, stockholders who otherwise would have received fractional shares will receive, in lieu of such fractional shares, an amount of cash based on the volume weighted average price of the Company’s common stock for the date of the reverse stock split, which is expected to be August 3, 2015.
Debt Restructuring
On July 2, 2015, the Company launched two private debt exchange offers in an effort to de-lever the balance sheet and improve our liquidity profile.
The first offer exchanges, for each $1,000 of outstanding 7.25% Senior Notes due 2020 (the “2020 Notes”), $418.69 of new 6.25% Trust Certificates due 2021 (the “Trust Certificates”) and a $60 cash payment for holders that tendered before July 17, 2015, or a $30 cash payment for holders who tendered thereafter and before expiration of the offer (July 31, 2015, unless extended by us). The Trust Certificates represent a fractional undivided interest in Arch Pass Through Trust, a Delaware statutory trust (the “Trust”) whose only assets will be (i) senior secured term loans due 2021 (the “New Term Loans”) issued as incremental debt under Arch’s existing credit agreement and (ii) senior secured revolving commitments (the “New Revolving Loans”). The New Revolving Loans will be transferred to the Trust by the assignment of existing revolving commitments. The aggregate principal amount of New Term Loans and New Revolving Loans outstanding at any time may not exceed $404 million, and will be equal to the principal amount of Trust Certificates issued in the offers described herein. In conjunction with the exchange offer, the Company has solicited consents (the “Consent
Solicitation”) from holders of the 2020 Notes to certain proposed amendments (the “Proposed 2020 Notes Amendments”) to the indenture governing the 2020 Notes. The Proposed 2020 Notes Amendments modify certain restrictive covenants contained in such indenture to conform to the Company’s other indentures, including with respect to the issuance of additional secured debts. Holders who tender their 2020 Notes are deemed to consent to the Proposed 2020 Notes Amendments, and holders may not deliver consents to the Proposed 2020 Notes Amendments without tendering their 2020 Notes in the exchange offer. The consummation of the exchange offer is conditioned upon, among other things, and the Proposed 2020 Notes Amendments require, the receipt of consents pursuant to the Consent Solicitation from the holders of a majority in aggregate principal amount of outstanding 2020 Notes not owned by the Company or any of its affiliates. The offer is only available to holders of 2020 Notes that are qualified institutional buyers pursuant to Rule 144A and qualified purchasers pursuant to Section 2(a)(51) of the Investment Company Act. Holders that are therefore not eligible have been offered new 8.0% Secured Notes due 2022 (the “New 2022 Secured Notes) (which will be secured by liens on our assets ranking junior to the liens securing our credit agreement and senior to the liens securing our existing second lien notes and the new 2023 Secured Notes) at a rate of $837.38 per $1,000 of 2020 Notes plus the same cash payment referred to above. As of July 29, 2015, holders of $414.4 million of 2020 Notes have tendered in the offer and an additional $32.7 million have tendered in the offer for non-eligible holders. Withdrawal rights for the offer have expired, and we have executed a supplemental indenture containing the Proposed Amendments, although the Proposed Amendments will not be operative until the offer is consummated.
The second offer exchanges Trust Certificates, New 2022 Secured Notes and 12.0% Senior Secured Second Lien Notes due 2023 (the “New 2023 Secured Notes”) for outstanding 7.00% Senior Notes due 2019 (“Old 7.00% 2019 Notes”), 9.875% Senior Notes due 2019 (“Old 9.875% 2019 Notes”) and 7.25% Senior Notes due 2021 (“Old 7.25% 2021 Notes”). Each holder of Old Notes will have to elect (subject to the acceptance priority, allocation and proration mechanics described in the Offering Memorandum referred to below) whether it wishes to receive exchange consideration in the form of Trust Certificates, New 2022 Secured Notes or New 2023 Secured Notes in exchange for each $1,000 principal amount of Old Notes validly tendered and accepted for exchange. The aggregate principal amount of New Securities received by tendering holders of a series of Old Notes per $1,000 principal amount tendered will be the same with respect to all holders of such series of Old Notes ($400 in the case of Old 7% 2019 Notes and Old 7.25% 2021 Notes and $450 in the case of Old 9.875% 2019 Notes, in each case if tendered at or prior to the Early Tender Time (currently August 4, 2015)), irrespective of the form of consideration elected, even though the Trust Certificates are expected to be more valuable than the New 2022 Secured Notes, which are in turn expected to be more valuable than the New 2023 Secured Notes, as a result of the different priorities of the liens securing (or underlying ) the New Securities. The aggregate principal amount of New Securities to be issued pursuant to the Exchange Offer will be determined in accordance with the Acceptance Priority Level (as defined below), the Maximum Exchange Amount (as defined below), the tender caps referred to in the immediately succeeding sentence and certain other terms and conditions, and may also be based on when Old Notes are tendered, as described in the Offering Memorandum referred to below. The tender caps will limit the aggregate principal amount of New Securities to be issued in the Exchange Offer to: (i) in the case of the Trust Certificates, $404.0 million, minus the aggregate principal amount of Trust Certificates issued pursuant to the exchange offer referred to above, (ii) in the case of New 2022 Secured Notes, $200.0 million, minus the aggregate principal amount of New 2022 Secured Notes issued pursuant to the ineligible holders offer referred to above, and (iii) in the case of the New 2023 Secured Notes, $150.0 million. The “Maximum Exchange Amount” refers to the sum of the tender caps. The consummation of the Exchange Offer is conditioned upon, among other things, the completion of the exchange offer and consent solicitation referred to above. As of July 29, 2015, holders of $487.2 million of Old 7.00% 2019 Notes, holders of $169.2 million of Old 9.875% 2019 Notes and holders of $398.1 million of Old 7.25% 2021 Notes have tendered in the offer. Withdrawal rights for the exchange offer have expired. Based on the tenders to date, the Trust would issue $404 million of Trust Certificates and we would issue $200 million of New 2022 Secured Notes and $27.1 million of New 2023 Secured Notes and we would achieve debt reduction of $870 million and reduce annual interest expense by $67.6 million.
Completion of the offers is subject to various conditions and requires execution of certain documents by the administrative agents under the existing credit agreement. On July 28, 2015, certain unidentified term loan lenders under the credit agreement purporting to hold more than 50% of the term loans under the credit agreement delivered a letter to the term loan administrative agent directing it to refrain from executing documentation relating to the exchange offers. In addition, the letter includes certain other assertions regarding the exchange offers and the existence of a default under the Credit Agreement. Arch Coal has evaluated the assertions made in the letter and believes they are without merit. While Arch Coal believes that the assertions and directions set forth above are without merit, and intends to contest them vigorously, it cannot predict what effect the assertions and direction set forth in the letter, or any future claims, might have on the exchange offers. In particular, if the term loan administrative agent elects to follow the direction embodied in the letter, the exchange offers would not be consummated.
18. 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 June 30, 2015
|
|
|
Parent/Issuer |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
(In thousands) |
| |||||||||||||
|
Revenues |
|
$ |
— |
|
$ |
644,462 |
|
$ |
— |
|
$ |
— |
|
$ |
644,462 |
|
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Cost of sales (exclusive of items shown separately below) |
|
5,908 |
|
561,191 |
|
— |
|
(847 |
) |
566,252 |
| |||||
|
Depreciation, depletion and amortization |
|
1,013 |
|
96,359 |
|
— |
|
— |
|
97,372 |
| |||||
|
Amortization of acquired sales contracts, net |
|
— |
|
(1,644 |
) |
— |
|
— |
|
(1,644 |
) | |||||
|
Change in fair value of coal derivatives and coal trading activities, net |
|
— |
|
1,211 |
|
— |
|
— |
|
1,211 |
| |||||
|
Asset impairment and mine closure costs |
|
1,225 |
|
17,921 |
|
— |
|
— |
|
19,146 |
| |||||
|
Selling, general and administrative expenses |
|
17,166 |
|
6,270 |
|
1,325 |
|
(493 |
) |
24,268 |
| |||||
|
Other operating (income) expense, net |
|
(138 |
) |
7,483 |
|
(1,282 |
) |
1,340 |
|
7,403 |
| |||||
|
|
|
25,174 |
|
688,791 |
|
43 |
|
— |
|
714,008 |
| |||||
|
Loss from investment in subsidiaries |
|
(30,462 |
) |
— |
|
— |
|
30,462 |
|
— |
| |||||
|
Loss from operations |
|
(55,636 |
) |
(44,329 |
) |
(43 |
) |
30,462 |
|
(69,546 |
) | |||||
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Interest expense |
|
(119,231 |
) |
(6,576 |
) |
(1,127 |
) |
27,360 |
|
(99,574 |
) | |||||
|
Interest and investment income |
|
6,675 |
|
20,256 |
|
1,391 |
|
(27,360 |
) |
962 |
| |||||
|
|
|
(112,556 |
) |
13,680 |
|
264 |
|
— |
|
(98,612 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Expenses related to debt restructuring |
|
(4,016 |
) |
— |
|
— |
|
— |
|
(4,016 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Income (loss) from continuing operations before income taxes |
|
(172,208 |
) |
(30,649 |
) |
221 |
|
30,462 |
|
(172,174 |
) | |||||
|
Provision for (benefit from) income taxes |
|
(4,105 |
) |
— |
|
34 |
|
— |
|
(4,071 |
) | |||||
|
Net income (loss) |
|
$ |
(168,103 |
) |
$ |
(30,649 |
) |
$ |
187 |
|
$ |
30,462 |
|
$ |
(168,103 |
) |
|
Total comprehensive income (loss) |
|
$ |
(167,887 |
) |
$ |
(30,811 |
) |
$ |
187 |
|
$ |
30,624 |
|
$ |
(167,887 |
) |
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2014
|
|
|
Parent/Issuer |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
(In thousands) |
| |||||||||||||
|
Revenues |
|
$ |
— |
|
$ |
713,776 |
|
$ |
— |
|
$ |
— |
|
$ |
713,776 |
|
|
Costs, expenses and other |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Cost of sales (exclusive of items shown separately below) |
|
3,547 |
|
619,470 |
|
— |
|
(880 |
) |
622,137 |
| |||||
|
Depreciation, depletion and amortization |
|
1,346 |
|
101,109 |
|
9 |
|
— |
|
102,464 |
| |||||
|
Amortization of acquired sales contracts, net |
|
— |
|
(3,239 |
) |
— |
|
— |
|
(3,239 |
) | |||||
|
Change in fair value of coal derivatives and coal trading activities, net |
|
— |
|
(2,992 |
) |
— |
|
— |
|
(2,992 |
) | |||||
|
Asset impairment and mine closure costs |
|
1,512 |
|
— |
|
— |
|
— |
|
1,512 |
| |||||
|
Selling, general and administrative expenses |
|
21,729 |
|
7,250 |
|
1,489 |
|
(537 |
) |
29,931 |
| |||||
|
Other operating (income) expense, net |
|
(1,883 |
) |
1,554 |
|
(1,320 |
) |
1,417 |
|
(232 |
) | |||||
|
|
|
26,251 |
|
723,152 |
|
178 |
|
— |
|
749,581 |
| |||||
|
Income from investment in subsidiaries |
|
2,502 |
|
— |
|
— |
|
(2,502 |
) |
— |
| |||||
|
Loss from operations |
|
(23,749 |
) |
(9,376 |
) |
(178 |
) |
(2,502 |
) |
(35,805 |
) | |||||
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Interest expense |
|
(116,084 |
) |
(6,565 |
) |
(1,092 |
) |
25,781 |
|
(97,960 |
) | |||||
|
Interest and investment income |
|
8,125 |
|
18,341 |
|
1,351 |
|
(25,781 |
) |
2,036 |
| |||||
|
|
|
(107,959 |
) |
11,776 |
|
259 |
|
— |
|
(95,924 |
) | |||||
|
|
|
|
|
|
| |||||||||||