UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________________________________
FORM 10-Q
(Mark One)
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
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) | |
One CityPlace Drive, Suite 300, St. Louis, Missouri | 63141 | |
(Address of principal executive offices) | (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 ý 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 ý 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 o | Accelerated filer o | |
Non-accelerated filer ý | Smaller reporting company o | |
(Do not check if a smaller reporting company) | ||
Emerging growth company o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o
At July 21, 2017, there were 24,310,578 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
Page | ||
2 |
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Arch Coal, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except per share data) | |||||||||||||
Successor | Predecessor | Successor | Predecessor | ||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
Revenues | $ | 549,866 | $ | 420,298 | $ | 1,150,841 | $ | 848,404 | |||||
Costs, expenses and other operating | |||||||||||||
Cost of sales (exclusive of items shown separately below) | 435,038 | 410,992 | 896,448 | 822,002 | |||||||||
Depreciation, depletion and amortization | 30,701 | 58,459 | 62,622 | 122,158 | |||||||||
Accretion on asset retirement obligations | 7,623 | 8,050 | 15,246 | 16,356 | |||||||||
Amortization of sales contracts, net | 14,352 | 1 | 29,042 | (832 | ) | ||||||||
Change in fair value of coal derivatives and coal trading activities, net | 863 | 1,158 | 1,717 | 2,368 | |||||||||
Asset impairment and mine closure costs | — | 43,701 | — | 129,221 | |||||||||
Selling, general and administrative expenses | 22,146 | 19,019 | 42,669 | 38,845 | |||||||||
Other operating income, net | (3,549 | ) | (10,561 | ) | (5,859 | ) | (12,781 | ) | |||||
507,174 | 530,819 | 1,041,885 | 1,117,337 | ||||||||||
Income (loss) from operations | 42,692 | (110,521 | ) | 108,956 | (268,933 | ) | |||||||
Interest expense, net | |||||||||||||
Interest expense | (6,003 | ) | (45,273 | ) | (15,428 | ) | (89,724 | ) | |||||
Interest and investment income | 842 | 933 | 1,369 | 2,071 | |||||||||
(5,161 | ) | (44,340 | ) | (14,059 | ) | (87,653 | ) | ||||||
Income (loss) before nonoperating expenses | 37,531 | (154,861 | ) | 94,897 | (356,586 | ) | |||||||
Nonoperating expenses | |||||||||||||
Net loss resulting from early retirement of debt and debt restructuring | (31 | ) | — | (2,061 | ) | (2,213 | ) | ||||||
Reorganization items, net | (21 | ) | (21,271 | ) | (2,849 | ) | (25,146 | ) | |||||
(52 | ) | (21,271 | ) | (4,910 | ) | (27,359 | ) | ||||||
Income (loss) before income taxes | 37,479 | (176,132 | ) | 89,987 | (383,945 | ) | |||||||
Provision for (benefit from) income taxes | 319 | (245 | ) | 1,159 | (1,356 | ) | |||||||
Net income (loss) | $ | 37,160 | $ | (175,887 | ) | $ | 88,828 | $ | (382,589 | ) | |||
Net income (loss) per common share | |||||||||||||
Basic earnings (loss) per common share | $ | 1.51 | $ | (8.26 | ) | $ | 3.58 | $ | (17.97 | ) | |||
Diluted earnings (loss) per common share | $ | 1.48 | $ | (8.26 | ) | $ | 3.52 | $ | (17.97 | ) | |||
Weighted average shares outstanding | |||||||||||||
Basic weighted average shares outstanding | 24,659 | 21,293 | 24,834 | 21,293 | |||||||||
Diluted weighted average shares outstanding | 25,082 | 21,293 | 25,245 | 21,293 | |||||||||
Dividends declared per common share | $ | 0.35 | $ | — | $ | 0.35 | $ | — | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Successor | Predecessor | Successor | Predecessor | |||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | |||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||
Net income (loss) | $ | 37,160 | $ | (175,887 | ) | $ | 88,828 | $ | (382,589 | ) | ||||
Derivative instruments | ||||||||||||||
Comprehensive income (loss) before tax | 257 | (162 | ) | 276 | (386 | ) | ||||||||
Income tax benefit (provision) | — | — | — | 81 | ||||||||||
257 | (162 | ) | 276 | (305 | ) | |||||||||
Pension, postretirement and other post-employment benefits | ||||||||||||||
Comprehensive income (loss) before tax | 3,154 | (2,749 | ) | 3,154 | (4,087 | ) | ||||||||
Income tax benefit (provision) | — | — | — | 481 | ||||||||||
3,154 | (2,749 | ) | 3,154 | (3,606 | ) | |||||||||
Available-for-sale securities | ||||||||||||||
Comprehensive income (loss) before tax | — | 504 | (387 | ) | 3,407 | |||||||||
Income tax benefit (provision) | — | — | — | (1,043 | ) | |||||||||
— | 504 | (387 | ) | 2,364 | ||||||||||
Total other comprehensive income (loss) | 3,411 | (2,407 | ) | 3,043 | (1,547 | ) | ||||||||
Total comprehensive income (loss) | $ | 40,571 | $ | (178,294 | ) | $ | 91,871 | $ | (384,136 | ) | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
June 30, | December 31, | ||||||
2017 | 2016 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 333,548 | $ | 305,372 | |||
Short term investments | 159,822 | 88,072 | |||||
Restricted cash | 41,755 | 71,050 | |||||
Trade accounts receivable | 190,256 | 184,483 | |||||
Other receivables | 21,504 | 19,877 | |||||
Inventories | 137,056 | 113,462 | |||||
Other current assets | 61,474 | 96,306 | |||||
Total current assets | 945,415 | 878,622 | |||||
Property, plant and equipment, net | 1,007,570 | 1,053,603 | |||||
Other assets | |||||||
Equity investments | 104,015 | 96,074 | |||||
Other noncurrent assets | 75,058 | 108,298 | |||||
Total other assets | 179,073 | 204,372 | |||||
Total assets | $ | 2,132,058 | $ | 2,136,597 | |||
Liabilities and Stockholders' Equity | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 127,059 | $ | 95,953 | |||
Accrued expenses and other current liabilities | 169,533 | 205,240 | |||||
Current maturities of debt | 7,414 | 11,038 | |||||
Total current liabilities | 304,006 | 312,231 | |||||
Long-term debt | 315,639 | 351,841 | |||||
Asset retirement obligations | 342,680 | 337,227 | |||||
Accrued pension benefits | 32,092 | 38,884 | |||||
Accrued postretirement benefits other than pension | 101,407 | 101,445 | |||||
Accrued workers’ compensation | 186,128 | 184,568 | |||||
Other noncurrent liabilities | 65,048 | 63,824 | |||||
Total liabilities | 1,347,000 | 1,390,020 | |||||
Stockholders' equity | |||||||
Common stock, $0.01 par value, authorized 300,000 shares, issued 25,021 shares and 25,002 shares at June 30, 2017 and December 31, 2016, respectively | 250 | 250 | |||||
Paid-in capital | 694,780 | 688,424 | |||||
Retained earnings | 113,574 | 33,449 | |||||
Treasury stock, 711 shares at June 30, 2017, at cost | (51,043 | ) | — | ||||
Accumulated other comprehensive income | 27,497 | 24,454 | |||||
Total stockholders’ equity | 785,058 | 746,577 | |||||
Total liabilities and stockholders’ equity | $ | 2,132,058 | $ | 2,136,597 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Successor | Predecessor | |||||
Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | |||||
(Unaudited) | (Unaudited) | |||||
Operating activities | ||||||
Net income (loss) | $ | 88,828 | $ | (382,589 | ) | |
Adjustments to reconcile to cash provided by operating activities: | ||||||
Depreciation, depletion and amortization | 62,622 | 122,158 | ||||
Accretion on asset retirement obligations | 15,246 | 16,356 | ||||
Amortization of sales contracts, net | 29,042 | (832 | ) | |||
Prepaid royalties expensed | 2,288 | 1,770 | ||||
Deferred income taxes | 5,996 | (418 | ) | |||
Employee stock-based compensation expense | 4,942 | 1,435 | ||||
Gains on disposals and divestitures, net | (2,005 | ) | (6,269 | ) | ||
Asset impairment and non-cash mine closure costs | — | 119,194 | ||||
Net loss resulting from early retirement of debt and debt restructuring | 2,061 | 2,213 | ||||
Non-cash bankruptcy reorganization items | — | (14,892 | ) | |||
Amortization relating to financing activities | 1,565 | 7,657 | ||||
Changes in: | ||||||
Receivables | (3,864 | ) | (7,776 | ) | ||
Inventories | (23,594 | ) | 21,152 | |||
Accounts payable, accrued expenses and other current liabilities | (89 | ) | 84,160 | |||
Income taxes, net | (3,796 | ) | (937 | ) | ||
Other | 21,557 | (22,634 | ) | |||
Cash provided by (used in) operating activities | 200,799 | (60,252 | ) | |||
Investing activities | ||||||
Capital expenditures | (16,922 | ) | (74,137 | ) | ||
Minimum royalty payments | (4,211 | ) | (217 | ) | ||
Proceeds from (consideration paid for) disposals and divestitures | 4,186 | (3,303 | ) | |||
Purchases of short term investments | (157,364 | ) | (98,750 | ) | ||
Proceeds from sales of short term investments | 85,035 | 94,589 | ||||
Investments in and advances to affiliates, net | (8,934 | ) | (2,890 | ) | ||
Withdrawals (deposits) of restricted cash | 29,295 | (4,695 | ) | |||
Cash used in investing activities | (68,915 | ) | (89,403 | ) | ||
Financing activities | ||||||
Proceeds from issuance of term loan due 2024 | 298,500 | — | ||||
Payments to extinguish term loan due 2021 | (325,684 | ) | — | |||
Payments on term loan due 2024 | (750 | ) | — | |||
Net payments on other debt | (5,207 | ) | (10,293 | ) | ||
Debt financing costs | (8,900 | ) | (18,806 | ) | ||
Net loss resulting from early retirement of debt and debt restructuring | (2,061 | ) | (2,213 | ) | ||
Dividends paid | (8,563 | ) | — | |||
Purchases of treasury stock | (51,043 | ) | — | |||
Cash used in financing activities | (103,708 | ) | (31,312 | ) | ||
Increase (decrease) in cash and cash equivalents | 28,176 | (180,967 | ) | |||
Cash and cash equivalents, beginning of period | 305,372 | 450,781 | ||||
Cash and cash equivalents, end of period | $ | 333,548 | $ | 269,814 | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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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. ("Arch Coal") and its subsidiaries (the “Company”). Unless the context indicates otherwise, the terms “Arch” and the “Company” are used interchangeably in this Quarterly Report on Form 10-Q refer to both the Predecessor and Successor 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, Kentucky, 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, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017. 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, 2016 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
On January 11, 2016 (the “Petition Date”), Arch Coal and substantially all of its wholly owned domestic subsidiaries (the “Filing Subsidiaries” and, together with Arch Coal, the “Debtors”; the Debtors, solely following the effective date of the Plan, the “Reorganized Debtors”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Missouri (the “Court”). The Debtors’ Chapter 11 Cases (collectively, the “Chapter 11 Cases”) were jointly administered under the caption In re Arch Coal, Inc., et al. Case No. 16-40120 (lead case). During the Chapter 11 Cases, each Debtor operated its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.
Upon emergence from bankruptcy on October 5, 2016, Arch Coal applied the provisions of fresh start accounting effective October 1, 2016 which resulted in Arch becoming a new entity for financial reporting purposes. Accordingly, the consolidated financial statements and accompanying footnotes on or after October 1, 2016 are not comparable to the consolidated financial statements prior to that date. References to “Successor” in the consolidated financial statements and footnotes are in reference to reporting dates on or after October 2, 2016; references to “Predecessor” in the consolidated financial statements and footnotes are in reference to reporting dates through October 1, 2016 which includes the impact of the Plan provisions and the application of fresh start accounting.
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2. Accounting Policies
Recently Adopted Accounting Guidance
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted all provisions of this new accounting standard in the first quarter of 2017 and changed its forfeiture policy to recognize the impact of forfeitures when they occur from estimating expected forfeitures in determining stock-based compensation expense. There was no material impact to the Company's financial statements.
Recent Accounting Guidance Issued Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company’s primary source of revenue is from the sale of coal through both short-term and long-term contracts with utilities, industrial customers and steel producers whereby revenue is currently recognized when risk of loss has passed to the customer. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related to its coal sales will remain consistent with its current practice. The Company is in the process of reviewing its portfolio of coal sales contracts and the various terms and clauses within each contract. Additionally, the Company is evaluating other revenue streams to determine the potential impact related to the adoption of the standard, as well as potential disclosures required by the standard. The Company will be adopting the standard under the modified retrospective approach.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in Nonoperating expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods therein; early adoption is permitted.
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, 2016 | $ | — | $ | 24,067 | $ | 387 | $ | 24,454 | |||||||
Unrealized gains (losses) | 276 | 3,641 | (55 | ) | 3,862 | ||||||||||
Amounts reclassified from AOCI | — | (487 | ) | (332 | ) | (819 | ) | ||||||||
Balance at June 30, 2017 | $ | 276 | $ | 27,221 | $ | — | $ | 27,497 | |||||||
8 |
The following amounts were reclassified out of AOCI:
Successor | Predecessor | Successor | Predecessor | Line Item in the Condensed Consolidated Statement of Operations | ||||||||||||
Details About AOCI Components | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||||||||
(In thousands) | ||||||||||||||||
Derivative instruments | $ | — | $ | 96 | $ | — | $ | 321 | Revenues | |||||||
— | — | — | (81 | ) | Provision for (benefit from) income taxes | |||||||||||
$ | — | $ | 96 | $ | — | $ | 240 | Net of tax | ||||||||
Pension, postretirement and other post-employment benefits | ||||||||||||||||
Amortization of prior service credits | $ | — | $ | 2,672 | $ | — | $ | 5,344 | ||||||||
Amortization of actuarial gains (losses), net | — | 77 | — | (1,257 | ) | |||||||||||
Pension settlement | 487 | — | 487 | — | ||||||||||||
487 | 2,749 | 487 | 4,087 | |||||||||||||
— | — | — | (481 | ) | Provision for (benefit from) income taxes | |||||||||||
$ | 487 | $ | 2,749 | $ | 487 | $ | 3,606 | Net of tax | ||||||||
Available-for-sale securities | $ | — | $ | — | $ | 332 | $ | (2,895 | ) | Interest and investment income | ||||||
— | — | — | 1,038 | Provision for (benefit from) income taxes | ||||||||||||
$ | — | $ | — | $ | 332 | $ | (1,857 | ) | Net of tax | |||||||
4. Reorganization items, net
In accordance with Accounting Codification Standard 852, “Reorganizations,” the statement of operations shall portray the results of operations of the reporting entity while it is in Chapter 11. Revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from reorganization and restructuring of the business shall be reported separately as reorganization items.
During the three months ended June 30, 2017 and 2016, the Company recorded a minimal charge in the current quarter and $21.3 million, respectively in “Reorganization items, net” primarily comprised of professional fee expenses. Net cash paid for “Reorganization items, net” totaled $0.9 million and $13.6 million during the three months ended June 30, 2017 and 2016, respectively.
During the six months ended June 30, 2017 and 2016, the Company recorded a charge of $2.8 million and $25.1 million, respectively, in “Reorganization items, net.” The 2017 amount is primarily comprised of professional fees and 2016 is comprised of $40.0 million in professional fees, partially offset by non-cash gains on rejected contracts of $14.9 million. Net cash paid for “Reorganization items, net” totaled $4.7 million and $15.1 million during the six months ended June 30, 2017 and 2016.
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5. Asset Impairment and Mine Closure Costs
During the second quarter of 2016, the Company recorded $43.7 million of “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations. The amount included the following: a $38.0 million impairment of the Company’s equity investment in a brownfield bulk commodity terminal on the Columbia River in Longview, Washington as the Company relinquished its ownership rights in exchange for future throughput rights; $3.6 million curtailment charge related to the Company’s pension, postretirement health and black lung actuarial liabilities due to headcount reductions in the first half of 2016; and $2.1 million of severance expense related to headcount reductions during the quarter.
During the first quarter of 2016, the Company recorded $85.5 million of “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations. The amount included the following: a $74.1 million impairment of coal reserves and surface land in Kentucky that are being leased to a mining company that idled its mining operations related to those reserves during the quarter; $5.1 million of severance expense related to headcount reductions at Company operations; $3.4 million related to an impairment charge on the portion of an advance royalty balance on a reserve base mined at the Company’s Mountain Laurel operation that was no longer deemed recoupable; and $2.9 million related to an other-than-temporary-impairment charge on an available-for-sale security.
6. Inventories
Inventories consist of the following:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Coal | $ | 60,887 | $ | 37,268 | ||||
Repair parts and supplies | 76,169 | 76,194 | ||||||
$ | 137,056 | $ | 113,462 | |||||
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $0.1 million at June 30, 2017 and $0.0 million at December 31, 2016.
7. Investments in Available-for-Sale Securities
The Company has invested in marketable debt securities, primarily highly liquid U.S. Treasury securities and 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, 2017 | |||||||||||||||||||||||
Balance Sheet | |||||||||||||||||||||||
Classification | |||||||||||||||||||||||
Gross Unrealized | Fair | Short-Term | Other | ||||||||||||||||||||
Cost Basis | Gains | Losses | Value | Investments | Assets | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available-for-sale: | |||||||||||||||||||||||
U.S. treasury securities | $ | 57,382 | $ | 32 | $ | (24 | ) | $ | 57,390 | $ | 57,390 | $ | — | ||||||||||
Corporate notes and bonds | 102,497 | 10 | (75 | ) | 102,432 | 102,432 | — | ||||||||||||||||
Total Investments | $ | 159,879 | $ | 42 | $ | (99 | ) | $ | 159,822 | $ | 159,822 | $ | — | ||||||||||
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December 31, 2016 | |||||||||||||||||||||||
Balance Sheet | |||||||||||||||||||||||
Classification | |||||||||||||||||||||||
Gross Unrealized | Fair | Short-Term | Other | ||||||||||||||||||||
Cost Basis | Gains | Losses | Value | Investments | Assets | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available-for-sale: | |||||||||||||||||||||||
Corporate notes and bonds | $ | 88,161 | $ | — | $ | (89 | ) | $ | 88,072 | $ | 88,072 | $ | — | ||||||||||
Equity securities | 1,749 | 388 | — | 2,137 | — | 2,137 | |||||||||||||||||
Total Investments | $ | 89,910 | $ | 388 | $ | (89 | ) | $ | 90,209 | $ | 88,072 | $ | 2,137 | ||||||||||
The aggregate fair value of investments with unrealized losses that were owned for less than a year was $92.0 million and $47.6 million at June 30, 2017 and December 31, 2016, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year was $20.7 million and $40.4 million at June 30, 2017 and December 31, 2016, respectively. The unrealized losses in the Company’s portfolio at June 30, 2017 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, 2017 have maturity dates ranging from the third quarter of 2017 through the third quarter of 2018. 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. Sales Contracts
The sales contracts reflected in the consolidated balance sheets are as follows:
June 30, 2017 | December 31, 2016 | ||||||||||||||||||||||
Assets | Liabilities | Net Total | Assets | Liabilities | Net Total | ||||||||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||||||||
Original fair value | $ | 97,196 | $ | 31,742 | $ | 97,196 | $ | 31,742 | |||||||||||||||
Accumulated amortization | (59,408 | ) | (29,569 | ) | (25,625 | ) | (24,829 | ) | |||||||||||||||
Total | $ | 37,788 | $ | 2,173 | $ | 35,615 | $ | 71,571 | $ | 6,913 | $ | 64,658 | |||||||||||
Balance Sheet classification: | |||||||||||||||||||||||
Other current | $ | 31,670 | $ | 827 | $ | 59,702 | $ | 5,114 | |||||||||||||||
Other noncurrent | $ | 6,118 | $ | 1,346 | $ | 11,869 | $ | 1,799 | |||||||||||||||
The Company anticipates amortization of sales contracts, based upon expected shipments in the next five years, to be an expense of approximately $54.4 million in 2017, $11.1 million in 2018, income of $0.6 million in 2019, and income of $0.1 million in 2020 and 2021.
9. 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 40 to 45 million gallons of diesel fuel for use in its operations during 2017. 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, 2017, the Company had protected the price of approximately 70% of its expected diesel fuel purchases for the remainder of 2017 at an average strike price of $1.82 per gallon. Additionally, the Company has protected approximately 25% of its expected 2018 purchases with call options with an average strike price of $1.81 per gallon. At June 30, 2017, the Company had outstanding heating oil call options for approximately 27 million gallons for the purpose of managing the price risk associated with future diesel purchases. These positions are not designated as hedges for accounting purposes, and therefore, changes in the fair value are recorded immediately to earnings.
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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, index-priced 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, 2017, the Company held derivatives for risk management purposes that are expected to settle in the following years:
(Tons in thousands) | 2017 | 2018 | Total | ||||||
Coal sales | 371 | — | 371 | ||||||
Coal purchases | 363 | — | 363 | ||||||
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 thermal coal demand. These options are not designated as hedges. Additionally, the Company has also entered into a nominal quantity of foreign currency put options protecting for decreases in the Australian to United States dollar exchange rate, which could impact metallurgical coal demand. These options are not designated 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 $0.6 million of losses during the remainder of 2017 and $0.8 million of losses during 2018.
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, 2017 | December 31, 2016 | |||||||||||||||||||||||
Fair Value of Derivatives | Asset | Liability | Asset | Liability | ||||||||||||||||||||
(In thousands) | Derivative | Derivative | Derivative | Derivative | ||||||||||||||||||||
Derivatives Designated as Hedging Instruments | ||||||||||||||||||||||||
Coal | $ | 17 | $ | — | $ | — | $ | (15 | ) | |||||||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||||||
Heating oil -- diesel purchases | 661 | — | 4,646 | — | ||||||||||||||||||||
Coal -- held for trading purposes | 41,813 | (43,157 | ) | 68,948 | (68,740 | ) | ||||||||||||||||||
Coal -- risk management | 67 | (146 | ) | 475 | (580 | ) | ||||||||||||||||||
Natural gas | 103 | (71 | ) | 86 | (13 | ) | ||||||||||||||||||
Total | 42,644 | (43,374 | ) | 74,155 | (69,333 | ) | ||||||||||||||||||
Total derivatives | 42,661 | (43,374 | ) | 74,155 | (69,348 | ) | ||||||||||||||||||
Effect of counterparty netting | (41,947 | ) | 41,947 | (69,247 | ) | 69,247 | ||||||||||||||||||
Net derivatives as classified in the balance sheets | $ | 714 | $ | (1,427 | ) | $ | (713 | ) | $ | 4,908 | $ | (101 | ) | $ | 4,807 | |||||||||
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June 30, 2017 | December 31, 2016 | |||||||||
Net derivatives as reflected on the balance sheets (in thousands) | ||||||||||
Heating oil and coal | Other current assets | $ | 714 | $ | 4,908 | |||||
Coal | Accrued expenses and other current liabilities | (1,427 | ) | (101 | ) | |||||
$ | (713 | ) | $ | 4,807 | ||||||
The Company had a current asset for the right to reclaim cash collateral of $4.6 million at June 30, 2017 and $2.8 million at December 31, 2016, respectively. These amounts are not included with the derivatives presented in the table above and are included in “other current assets” 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 Other Comprehensive Income(Effective Portion) | Gains (Losses) Reclassified from Other Comprehensive Income into Income (Effective Portion) | |||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Coal sales | (1) | $ | 49 | $ | (73 | ) | $ | — | $ | 157 | ||||
Coal purchases | (2) | (34 | ) | 6 | — | (61 | ) | |||||||
Totals | $ | 15 | $ | (67 | ) | $ | — | $ | 96 | |||||
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, 2017 and 2016.
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended June 30,
Gain (Loss) Recognized | |||||||
Successor | Predecessor | ||||||
2017 | 2016 | ||||||
Coal — unrealized | (3) | $ | — | $ | 19 | ||
Coal — realized | (4) | $ | — | $ | (180 | ) | |
Natural gas — unrealized | (3) | $ | (27 | ) | $ | 235 | |
Heating oil — diesel purchases | (4) | $ | (1,147 | ) | $ | 2,039 | |
Foreign currency | (4) | $ | — | $ | 34 | ||
____________________________________________________________
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) expense, net
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Derivatives used in Cash Flow Hedging Relationships (in thousands)
Six Months Ended June 30,
Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion) | Gains (Losses) Reclassified from Other Comprehensive Income into Income (Effective Portion) | |||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Coal sales | (1) | $ | 269 | $ | (60 | ) | $ | — | $ | 1,526 | ||||
Coal purchases | (2) | (234 | ) | (5 | ) | — | (1,205 | ) | ||||||
Totals | $ | 35 | $ | (65 | ) | $ | — | $ | 321 | |||||
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, 2017 and 2016.
Derivatives Not Designated as Hedging Instruments (in thousands)
Six Months Ended June 30,
Gain (Loss) Recognized | |||||||
Successor | Predecessor | ||||||
2017 | 2016 | ||||||
Coal — unrealized | (3) | $ | 26 | $ | (1,096 | ) | |
Coal — realized | (4) | $ | — | $ | (343 | ) | |
Natural gas — unrealized | (3) | $ | (496 | ) | $ | (384 | ) |
Heating oil — diesel purchases | (4) | $ | (4,725 | ) | $ | 1,596 | |
Foreign currency | (4) | $ | — | $ | (137 | ) | |
____________________________________________________________
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) expense, net
Based on fair values at June 30, 2017, amounts on derivative contracts designated as hedge instruments in cash flow hedges to be reclassified from other comprehensive income into earnings during the next twelve months are immaterial.
Related to its trading portfolio, the Company recognized net unrealized and realized losses of $0.8 million and $1.0 million during the three months ended June 30, 2017 and 2016, respectively; and net unrealized and realized losses of $1.5 million and $1.0 million during the six months ended June 30, 2017 and 2016, 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.
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10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Payroll and employee benefits | $ | 51,400 | $ | 58,468 | ||||
Taxes other than income taxes | 78,132 | 92,733 | ||||||
Interest | 130 | 8,032 | ||||||
Acquired sales contracts | 827 | 5,114 | ||||||
Workers’ compensation | 15,926 | 15,184 | ||||||
Asset retirement obligations | 17,817 | 19,515 | ||||||
Other | 5,301 | 6,194 | ||||||
$ | 169,533 | $ | 205,240 | |||||
11. Debt and Financing Arrangements
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Term loan due 2024 ($299.3 million face value) | $ | 297,808 | $ | — | ||||
Term loan due 2021 ($325.7 million face value) | — | 325,684 | ||||||
Other | 32,065 | 37,195 | ||||||
Debt issuance costs | (6,820 | ) | — | |||||
323,053 | 362,879 | |||||||
Less: current maturities of debt | 7,414 | 11,038 | ||||||
Long-term debt | $ | 315,639 | $ | 351,841 | ||||
Term Loan Facility
On March 7, 2017, the Company entered into a new senior secured term loan credit agreement in an aggregate principal amount of $300 million (the “New Term Loan Debt Facility) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent (in such capacities, the “Agent”), and the other financial institutions from time to time party thereto (collectively, the “Lenders”). The New Term Loan Debt Facility was issued at 99.50% of the face amount and will mature on March 7, 2024.
Borrowings under the New Term Loan Debt Facility bear interest at a per annum rate equal to, at the Company’s option, either (i) a London interbank offered rate plus an applicable margin of 4%, subject to a 1% LIBOR floor (the “LIBOR Rate”), or (ii) a base rate plus an applicable margin of 3%. The term loans provided under the New Term Loan Debt Facility (the “Term Loans”) are subject to quarterly principal amortization payments in an amount equal to $750,000.
The New Term Loan Debt Facility is guaranteed by all existing and future wholly owned domestic subsidiaries of the Company (collectively, the “Subsidiary Guarantors” and, together with Arch Coal, the “Loan Parties”), subject to customary exceptions, and is secured by first priority security interests on substantially all assets of the Loan Parties, including 100% of the voting equity interests of directly owned domestic subsidiaries and 65% of the voting equity interests of directly owned foreign subsidiaries, subject to customary exceptions.
The Company has the right to prepay Term Loans at any time and from time to time in whole or in part without premium or penalty, upon written notice, except that any prepayment of Term Loans that bear interest at the LIBOR Rate other than at the end of the applicable interest periods therefor shall be made with reimbursement for any funding losses and redeployment costs of the Lenders resulting therefrom.
The New Term Loan Debt Facility is subject to certain usual and customary mandatory prepayment events, including 100% of net cash proceeds of (i) debt issuances (other than debt permitted to be incurred under the terms of the New Term Loan Debt Facility) and (ii) non-ordinary course asset sales or dispositions, subject to customary thresholds, exceptions and reinvestment rights.
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The New Term Loan Debt Facility contains customary affirmative covenants and representations.
The New Term Loan Debt Facility also contains customary negative covenants, which, among other things, and subject to certain exceptions, include restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The New Term Loan Debt Facility does not contain any financial maintenance covenant.
The New Term Loan Debt Facility contains customary events of default, subject to customary thresholds and exceptions, including, among other things, (i) nonpayment of principal and nonpayment of interest and fees, (ii) a material inaccuracy of a representation or warranty at the time made, (iii) a failure to comply with any covenant, subject to customary grace periods in the case of certain affirmative covenants, (iv) cross-events of default to indebtedness of at least $50 million, (v) cross-events of default to surety, reclamation or similar bonds securing obligations with an aggregate face amount of at least $50 million, (vi) uninsured judgments in excess of $50 million, (vii) any loan document shall cease to be a legal, valid and binding agreement, (viii) uninsured losses or proceedings against assets with a value in excess of $50 million, (ix) certain ERISA events, (x) a change of control or (xi) bankruptcy or insolvency proceedings relating to the Company or any material subsidiary of the Company.
On the effective date of the New Term Loan Debt Facility, all outstanding obligations under the Company’s previously existing term loan credit agreement, dated as of October 5, 2016, among the Company, as borrower, the lender party thereto and Wilmington Trust, National Association, as administrative agent and collateral agent (the “Previous First Lien Debt Facility”), other than indemnification and other contingent obligations, were paid in cash in full and the related transaction documents were terminated (other than with respect to certain provisions that customarily survive termination); there was no gain or loss recognized on the extinguishment of the previously existing term loan credit agreement. All liens on property of the Company and the guarantors thereunder arising out of or related to the Previous First Lien Debt Facility were terminated.
Inventory-Based Revolving Credit Facility
On April 27, 2017, the Company and certain subsidiaries of Arch Coal entered into a new senior secured inventory-based revolving credit facility in an aggregate principal amount of $40 million (the “New Inventory Facility”) with Regions Bank (“Regions”) as administrative agent and collateral agent (in such capacities, the “Agent”), as lender and swingline lender (in such capacities, the “Lender”) and as letter of credit issuer. Availability under the New Inventory Facility is subject to a borrowing base consisting of (i) 85% of the net orderly liquidation value of eligible coal inventory, (ii) the lesser of (x) 85% of the net orderly liquidation value of eligible parts and supplies inventory and (y) 35% of the amount determined pursuant to clause (i), and (iii) 100% of Arch Coal’s Eligible Cash (defined in the New Inventory Facility), subject to reduction for reserves imposed by Regions.
The commitments under the New Inventory Facility will terminate on the date that is the earliest to occur of (i) the third anniversary of the Inventory Facility Closing Date, (ii) the date, if any, that is 364 days following the first day that Liquidity (defined in the New Inventory Facility and consistent with the definition in the Extended Securitization Facility (as defined below)) is less than $250 million for a period of 60 consecutive days and (iii) the date, if any, that is 60 days following the maturity, termination or repayment in full of the Extended Securitization Facility.
Revolving loan borrowings under the New Inventory Facility bear interest at a per annum rate equal to, at the option of Arch Coal, either at the base rate or the London interbank offered rate plus, in each case, a margin ranging from 2.25% to 2.50% (in the case of LIBOR loans) and 1.25% to 1.50% (in the case of base rate loans) determined using a Liquidity-based grid. Letters of credit under the New Inventory Facility are subject to a fee in an amount equal to the applicable margin for LIBOR loans, plus customary fronting and issuance fees.
All existing and future direct and indirect domestic subsidiaries of Arch Coal, subject to customary exceptions, will either constitute co-borrowers under or guarantors of the New Inventory Facility (collectively with Arch Coal, the “Loan Parties”). The New Inventory Facility is secured by first priority security interests in the ABL Priority Collateral (defined in the New Inventory Facility) of the Loan Parties and second priority security interests in substantially all other assets of the Loan Parties, subject to customary exceptions (including an exception for the collateral that secures the Extended Securitization Facility).
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Arch Coal has the right to prepay borrowings under the New Inventory Facility at any time and from time to time in whole or in part without premium or penalty, upon written notice, except that any prepayment of such borrowings that bear interest at the LIBOR rate other than at the end of the applicable interest periods therefore shall be made with reimbursement for any funding losses and redeployment costs of the Lender resulting therefrom.
The New Inventory Facility is subject to certain usual and customary mandatory prepayment events, including non-ordinary course asset sales or dispositions, subject to customary thresholds, exceptions (including exceptions for required prepayments under Arch Coal’s term loan facility) and reinvestment rights.
The New Inventory Facility contains certain customary affirmative and negative covenants; events of default, subject to customary thresholds and exceptions; and representations, including certain cash management and reporting requirements that are customary for asset-based credit facilities. The New Inventory Facility also includes a requirement to maintain Liquidity equal to or exceeding $175 million at all times. As of June 30, 2017, letters of credit totaling $21.2 million were outstanding under the facility.
Accounts Receivable Securitization Facility
On April 27, 2017, the Company extended and amended its existing trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a special-purpose entity that is a wholly owned subsidiary of Arch Coal (“Arch Receivable”) (the “Extended Securitization Facility”), which supports the issuance of letters of credit and requests for cash advances. The amendment to the Extended Securitization Facility decreases the borrowing capacity from $200 million to $160 million and extends the maturity date to the date that is three years after the Securitization Facility Closing Date. Pursuant to the Extended Securitization Facility, Arch Receivable also agreed to a revised schedule of fees payable to the administrator and the providers of the Extended Securitization Facility.
The Extended Securitization Facility will terminate at the earliest of (i) three years from the Securitization Facility Closing Date, (ii) if the Liquidity (defined in the Extended Securitization Facility and consistent with the definition in the New Inventory Facility) is less than $175 million for a period of 60 consecutive days, the date that is the 364th day after the first day of such 60 consecutive day period and (iii) the occurrence of certain predefined events substantially consistent with the existing transaction documents. Under the Extended Securitization Facility, Arch Receivable, Arch Coal and certain of Arch Coal’s subsidiaries party to the Extended Securitization Facility have granted to the administrator of the Extended Securitization Facility a first priority security interest in eligible trade accounts receivable generated by such parties from the sale of coal and all proceeds thereof. As of June 30, 2017, letters of credit totaling $130.4 million were outstanding under the facility which had a borrowing base of $88.7 million. As a result, cash collateral of $41.7 million has been placed in the facility and there is no availability for borrowings.
Interest Rate Swaps
During the second quarter of 2017, the Company entered into a series of interest rate swaps to fix a portion of the LIBOR interest rate within the term loan. The interest rate swaps qualify for cash flow hedge accounting treatment and as such, the change in the fair value of the interest rate swaps are recorded on the Company’s Condensed Consolidated Balance Sheet as an asset or liability with the effective portion of the gains or losses reported as a component of accumulated other comprehensive income and the ineffective portion reported in earnings. As interest payments are made on the term loan, amounts in accumulated other comprehensive income will be reclassified into earnings through interest expense to reflect a net interest on the term loan equal to the effective yield of the fixed rate of the swap plus 4% which is the spread on the LIBOR term loan. In the event that an interest rate swap is terminated prior to maturity, gains or losses in accumulated other comprehensive income will remain deferred and reclassified into earnings in the periods which the hedged forecasted transaction affects earnings.
17 |
Below is a summary of the Company’s outstanding interest rate swap agreements designated as hedges as of June 30, 2017:
Notional Amount (in millions) | Effective Date | Fixed Rate | Receive Rate | Expiration Date | |||
$ | 250.0 | June 30, 2017 | 1.372 | % | 1-month LIBOR | June 29, 2018 | |
$ | 250.0 | June 29, 2018 | 1.662 | % | 1-month LIBOR | June 28, 2019 | |
$ | 200.0 | June 28, 2019 | 1.952 | % | 1-month LIBOR | June 30, 2020 | |
$ | 100.0 | June 30, 2020 | 2.182 | % | 1-month LIBOR | June 30, 2021 | |
The fair value of the interest rate swaps at June 30, 2017 is an asset of $0.2 million which is recorded within Other noncurrent assets with the offset to accumulated other comprehensive income on the Company’s Condensed Consolidated Balance Sheet. The interest rate swaps are classified as level 2 within the fair value hierarchy.
Financing Costs
The Company paid financing costs of $8.9 million during the six months ended June 30, 2017; $7.2 million of which related to the issuance of the New Term Loan Debt facility discussed above. These issuance costs were capitalized during the first quarter and will be amortized using the effective interest method over the term of the facility. An additional $1.7 million is related to the inventory-based revolving credit facility and accounts receivable securitization facility. These issuance costs will be amortized on a straight-line basis over the term of the facility. During the six months ended June 30, 2016, the Company paid $18.8 million primarily related to the Superpriority Secured Debtor-in-Possession Credit Agreement related to the Company’s bankruptcy filing.
The Company incurred $2.1 million of legal and financial advisory fees associated with debt refinancing activities during the six months ended June 30, 2017; $1.0 million relates to fees associated with the extinguishment of the “Previous First Lien Debt Facility” while the remaining amount relates to financing fees incurred from initial efforts to replace the existing accounts receivable securitization facility. The Company also incurred $2.2 million in debt restructuring costs during the six months ended June 30, 2016 related to debt restructuring activities prior to the Company’s Chapter 11 filing.
Contractual Interest Expense During Bankruptcy
Upon the filing of bankruptcy, the Company discontinued recording interest expense on unsecured debt that was classified as a liability subject to compromise. Contractual interest expense during the three and six months ended June 30, 2016 was $100.8 million and $199.3 million.
12. Income Taxes
A reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual provision for (benefit from) income taxes follows:
Successor | Predecessor | Successor | Predecessor | ||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||||||
(In thousands) | |||||||||||||
Income tax provision (benefit) at statutory rate | $ | 13,118 | $ | (61,645 | ) | $ | 31,496 | $ | (134,380 | ) | |||
Percentage depletion allowance | (5,692 | ) | 5,909 | (12,731 | ) | (19,758 | ) | ||||||
State taxes, net of effect of federal taxes | 408 | (2,571 | ) | 891 | (7,061 | ) | |||||||
Change in valuation allowance | (8,316 | ) | 58,665 | (20,218 | ) | 159,227 | |||||||
Other, net | 801 | (603 | ) | 1,721 | 616 | ||||||||
$ | 319 | $ | (245 | ) | $ | 1,159 | $ | (1,356 | ) | ||||
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13. 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, interest rate swaps 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, 2017.
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, 2017 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Investments in marketable securities | $ | 159,822 | $ | 57,390 | $ | 102,432 | $ | — | ||||||||
Derivatives | 963 | — | 302 | 661 | ||||||||||||
Total assets | $ | 160,785 | $ | 57,390 | $ | 102,734 | $ | 661 | ||||||||
Liabilities: | ||||||||||||||||
Derivatives | $ | 1,427 | $ | 1,434 | $ | 30 | $ | (37 | ) | |||||||
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 June 30, 2017 | Six Months Ended June 30, 2017 | |||||||
(In thousands) | ||||||||
Balance, beginning of period | $ | 1,369 | $ | 4,537 | ||||
Realized and unrealized gains recognized in earnings, net | (1,332 | ) | (5,400 | ) | ||||
Purchases | 1,158 | 2,553 | ||||||
Issuances | (317 | ) | (499 | ) | ||||
Settlements | (180 | ) | (493 | ) | ||||
Ending balance | $ | 698 | $ | 698 | ||||
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Net unrealized losses of $1.5 million and $1.3 million were recognized in the Condensed Consolidated Statement of Operations within Other operating income, net during the three and six months ended June 30, 2017 related to Level 3 financial instruments held on June 30, 2017.
Fair Value of Long-Term Debt
At June 30, 2017 and December 31, 2016, the fair value of the Company’s debt, including amounts classified as current, was $331.3 million and $362.9 million, 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.
14. Earnings (loss) per Common Share
The Company computes basic net income per share using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities may consist of warrants, restricted stock units or other contingently issuable shares. The dilutive effect of outstanding warrants, restricted stock units and other contingently issuable shares is reflected in diluted earnings per share by application of the treasury stock method.
The following table provides the basis for basic and diluted earnings (loss) per share by reconciling the numerators and denominators of the computations:
Successor | Predecessor | Successor | Predecessor | ||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||
(In Thousands) | |||||||||
Weighted average shares outstanding: | |||||||||
Basic weighted average shares outstanding | 24,659 | 21,293 | 24,834 | 21,293 | |||||
Effect of dilutive securities | 423 | — | 411 | — | |||||
Diluted weighted average shares outstanding | 25,082 | 21,293 | 25,245 | 21,293 | |||||
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15. Workers Compensation Expense
The Company is liable under the Federal Mine Safety and Health Act of 1969, as subsequently amended, to provide for pneumoconiosis (occupational disease) benefits to eligible employees, former employees and dependents. The Company currently provides for federal claims principally through a self-insurance program. The Company is also liable under various state workers’ compensation statutes for occupational disease benefits. The occupational disease benefit obligation represents the present value of the of the actuarially computed present and future liabilities for such benefits over the employees’ applicable years of service.
In addition, the Company is liable for workers’ compensation benefits for traumatic injuries which are calculated using actuarially-based loss rates, loss development factors and discounted based on a risk free rate. Traumatic workers’ compensation claims are insured with varying retentions/deductibles, or through state-sponsored workers’ compensation programs.
Workers’ compensation expense consists of the following components:
Successor | Predecessor | Successor | Predecessor | ||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||||||
(In thousands) | |||||||||||||
Self-insured occupational disease benefits: | |||||||||||||
Service cost | $ | 1,559 | $ | 1,310 | $ | 3,117 | $ | 2,415 | |||||
Interest cost | 1,168 | 1,029 | 2,337 | 2,086 | |||||||||
Net amortization | — | 1,006 | — | 2,147 | |||||||||
Curtailments | $ | — | $ | 4,156 | $ | — | $ | 4,156 | |||||
Total occupational disease | $ | 2,727 | $ | 7,501 | $ | 5,454 | $ | 10,804 | |||||
Traumatic injury claims and assessments | 2,532 | 1,246 | 5,410 | 4,213 | |||||||||
Total workers’ compensation expense | $ | 5,259 | $ | 8,747 | $ | 10,864 | $ | 15,017 | |||||
16. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
Successor | Predecessor | Successor | Predecessor | ||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||||||
(In thousands) | |||||||||||||
Interest cost | $ | 2,991 | $ | 3,197 | $ | 5,982 | $ | 6,535 | |||||
Expected return on plan assets | (4,499 | ) | (4,444 | ) | (8,996 | ) | (8,982 | ) | |||||
Pension settlement | (487 | ) | 454 | (487 | ) | 454 | |||||||
Amortization of other actuarial losses | — | 924 | — | 1,681 | |||||||||
Net benefit cost (credit) | $ | (1,995 | ) | $ | 131 | $ | (3,501 | ) | $ | (312 | ) | ||
During the second quarter of 2017 the Company recorded a pension settlement related to its cash balance pension plan as the qualifying distributions from the plan exceeded the annual service and interest costs of the plan. Additionally, in accordance with accounting guidance, the Company revalued the cash balance pension liability which reduced the liability by approximately $3.6 million with the offset to accumulated other comprehensive income. The discount rate used for the revaluation was 3.59%.
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The following table details the components of other postretirement benefit costs (credits):
Successor | Predecessor | Successor | Predecessor | ||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 | ||||||||||
(In thousands) | |||||||||||||
Service cost | $ | 171 | $ | 105 | $ | 341 | $ | 265 | |||||
Interest cost | 1,059 | 1,138 | 2,117 | 2,272 | |||||||||
Curtailments | — | (970 | ) | — | (970 | ) | |||||||
Amortization of prior service credits | — | (2,672 | ) | — | (5,345 | ) | |||||||
Amortization of other actuarial losses (gains) | — | (566 | ) | — | (1,132 | ) | |||||||
Net benefit cost (credit) | $ | 1,230 | $ | (2,965 | ) | $ | 2,458 | $ | (4,910 | ) | |||
17. 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.
In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. As of June 30, 2017 and December 31, 2016, the Company had accrued $0.2 million and $2.2 million, respectively, for all legal matters, of which all amounts are 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.
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18. Segment Information
The Company’s reportable business segments are based on two distinct lines of business, metallurgical and thermal, and may include a number of mine complexes. The Company manages its coal sales by market, not by individual mining complex. Geology, coal transportation routes to customers, and regulatory environments also have a significant impact on the Company’s marketing and operations management. Mining operations are evaluated based on Adjusted EBITDAR, per-ton cash operating costs (defined as including all mining costs except depreciation, depletion, amortization, accretion on asset retirement obligations, and pass-through transportation expenses), and on other non-financial measures, such as safety and environmental performance. Adjusted EBITDAR is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDAR are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDAR should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. The Company uses Adjusted EBITDAR to measure the operating performance of its segments and allocate resources to the segments. Furthermore, analogous measures are used by industry analysts and investors to evaluate the Company’s operating performance. Investors should be aware that the Company’s presentation of Adjusted EBITDAR may not be comparable to similarly titled measures used by other companies. The Company reports its results of operations primarily through the following reportable segments: Powder River Basin (PRB) segment containing the Company’s primary thermal operations in Wyoming; the Metallurgical (MET) segment, containing the Company’s metallurgical operations in West Virginia, Kentucky, and Virginia, and the Other Thermal segment containing the Company’s supplementary thermal operations in Colorado, Illinois, and West Virginia. Periods presented in this note have been recast for comparability.
Operating segment results for the Successor period, the three and six months ended June 30, 2017, and the Predecessor period, the three and six months ended June 30, 2016, are presented below. The Company measures its segments based on “adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirements obligations, and reorganization items, net (Adjusted EBITDAR).” Adjusted EBITDAR does not reflect mine closure or impairment costs, since those are not reflected in the operating income reviewed by management. See Note 5, “Asset Impairment and Mine Closure Costs” for discussion of these costs. The Corporate, Other and Eliminations grouping includes these charges, as well as the change in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management activities; other support functions; and the elimination of intercompany transactions.
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PRB | MET | Other Thermal | Corporate, Other and Eliminations | Consolidated | ||||||||||||||||
Successor Periods | (in thousands) | |||||||||||||||||||
Three Months Ended June 30, 2017 | ||||||||||||||||||||
Revenues | $ | 230,579 | $ | 227,649 | $ | 91,639 | $ | (1 | ) | $ | 549,866 | |||||||||
Adjusted EBITDAR | 31,789 | 62,552 | 26,910 | (25,883 | ) | 95,368 | ||||||||||||||
Depreciation, depletion and amortization | 8,574 | 18,385 | 3,285 | 457 | 30,701 | |||||||||||||||
Accretion on asset retirement obligation | 5,040 | 528 | 540 | 1,515 | 7,623 | |||||||||||||||
Capital expenditures | 822 | 6,825 | 1,899 | 1,426 | 10,972 | |||||||||||||||
Six Months Ended June 30, 2017 | ||||||||||||||||||||
Revenues | $ | 504,007 | $ | 453,232 | $ | 193,545 | $ | 57 | $ | 1,150,841 | ||||||||||
Adjusted EBITDAR | 79,794 | 130,862 | 54,152 | (48,942 | ) | 215,866 | ||||||||||||||
Depreciation, depletion and amortization | 18,085 | 37,149 | 6,485 | 903 | 62,622 | |||||||||||||||
Accretion on asset retirement obligation | 10,080 | 1,057 | 1,080 | 3,029 | 15,246 | |||||||||||||||
Capital expenditures | 950 | 11,436 | 2,640 | 1,896 | 16,922 | |||||||||||||||
Predecessor Periods | ||||||||||||||||||||
Three Months Ended June 30, 2016 | ||||||||||||||||||||
Revenues | $ | 207,735 | $ | 147,499 | $ | 60,032 | $ | 5,032 | $ | 420,298 | ||||||||||
Adjusted EBITDAR | 21,578 | (3,593 | ) | (408 | ) | (17,887 | ) | (310 | ) | |||||||||||
Depreciation, depletion and amortization | 30,145 | 17,330 | 9,907 | 1,077 | 58,459 | |||||||||||||||
Accretion on asset retirement obligation | 5,647 | 588 | 663 | 1,152 | 8,050 | |||||||||||||||
Capital expenditures | 489 | 6,726 | 949 | 60,047 | 68,211 | |||||||||||||||
Six Months Ended June 30, 2016 | ||||||||||||||||||||
Revenues | $ | 430,857 | $ | 284,083 | $ | 116,164 | $ | 17,300 | $ | 848,404 | ||||||||||
Adjusted EBITDAR | 34,306 | 2,759 | 2,743 | (41,838 | ) | (2,030 | ) | |||||||||||||
Depreciation, depletion and amortization | 62,905 | 36,675 | 19,798 | 2,780 | 122,158 | |||||||||||||||
Accretion on asset retirement obligation | 11,293 | 1,177 | 1,325 | 2,561 | 16,356 | |||||||||||||||
Capital expenditures | 499 | 10,330 | 2,895 | 60,413 | 74,137 | |||||||||||||||
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A reconciliation of adjusted EBITDAR to consolidated loss before income taxes follows:
Successor | Predecessor | Successor | Predecessor | |||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
(In thousands) | ||||||||||||||
Adjusted EBITDAR | $ | |||||||||||||