10-Q 1 aci-20180930x10q.htm 10-Q Document

 
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 September 30, 2018 
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
logoa02a01a01a01a01a14.jpg
 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý

 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
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 Exchange 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 October 19, 2018, there were 18,799,400 shares of the registrant’s common stock outstanding.
 



TABLE OF CONTENTS
 

2


Part I
FINANCIAL INFORMATION
 
Item 1.    Financial Statements.
 
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(in thousands, except per share data) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017

2018
 
2017
 
(Unaudited)
 
(Unaudited)
Revenues
$
633,180

 
$
613,538

 
$
1,800,824

 
$
1,764,379

Costs, expenses and other operating
 
 
 
 
 

 
 

Cost of sales (exclusive of items shown separately below)
482,029

 
494,379

 
1,411,197

 
1,389,294

Depreciation, depletion and amortization
31,775

 
31,914

 
92,027

 
94,536

Accretion on asset retirement obligations
6,992

 
7,580

 
20,977

 
22,826

Amortization of sales contracts, net
3,241

 
13,861

 
9,540

 
42,903

Change in fair value of coal derivatives and coal trading activities, net
10,418

 
1,028

 
22,142

 
2,745

Selling, general and administrative expenses
22,909

 
21,290

 
73,613

 
64,508

Gain on sale of Lone Mountain Processing, Inc.

 
(21,574
)
 

 
(21,574
)
Other operating income, net
(7,070
)
 
(8,250
)
 
(21,320
)
 
(14,078
)
 
550,294

 
540,228

 
1,608,176

 
1,581,160

 
 
 
 
 
 
 
 
Income from operations
82,886

 
73,310


192,648

 
183,219

Interest expense, net
 
 
 
 
 

 
 

Interest expense
(5,179
)
 
(5,972
)

(15,624
)
 
(21,400
)
Interest and investment income
1,801

 
720


4,626

 
2,089

 
(3,378
)
 
(5,252
)
 
(10,998
)
 
(19,311
)
 
 
 
 
 
 
 
 
Income before nonoperating expenses
79,508

 
68,058

 
181,650

 
163,908

 
 
 
 
 
 
 
 
Nonoperating expenses
 
 
 
 
 
 
 
Non-service related pension and postretirement benefit costs
(971
)
 
(821
)
 
(2,206
)
 
(1,774
)
Net loss resulting from early retirement of debt and debt restructuring

 
(486
)

(485
)
 
(2,547
)
Reorganization items, net
(560
)
 
(43
)
 
(1,601
)
 
(2,892
)
 
(1,531
)
 
(1,350
)
 
(4,292
)
 
(7,213
)
 
 
 
 
 
 
 
 
Income before income taxes
77,977

 
66,708


177,358

 
156,695

Benefit from income taxes
(45,215
)
 
(1,643
)
 
(49,125
)
 
(484
)
Net income
$
123,192

 
$
68,351


$
226,483

 
$
157,179

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 

 
 

Basic earnings per common share
$
6.40

 
$
2.90

 
$
11.27

 
$
6.44

Diluted earnings per common share
$
6.10

 
$
2.83

 
$
10.76

 
$
6.32

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic weighted average shares outstanding
19,250

 
23,580

 
20,102

 
24,416

Diluted weighted average shares outstanding
20,208

 
24,135

 
21,040

 
24,875

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.40

 
$
0.35

 
$
1.20

 
$
0.70


The accompanying notes are an integral part of the condensed consolidated financial statements.

3


Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
 
(Unaudited)
Net income
 
$
123,192

 
$
68,351

 
$
226,483

 
$
157,179

 
 
 
 
 
 
 
 
 
Derivative instruments
 
 
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
64

 
(19
)
 
(5,672
)
 
257

Income tax benefit (provision)
 

 

 

 

 
 
64

 
(19
)
 
(5,672
)
 
257

Pension, postretirement and other post-employment benefits
 
 
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
2,736

 
(8,521
)
 
6,389

 
(5,367
)
Income tax benefit (provision)
 

 

 

 

 
 
2,736

 
(8,521
)
 
6,389

 
(5,367
)
Available-for-sale securities
 
 
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
102

 

 
(379
)
 
(387
)
Income tax benefit (provision)
 

 

 

 

 
 
102

 

 
(379
)
 
(387
)
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
2,902

 
(8,540
)
 
338

 
(5,497
)
Total comprehensive income
 
$
126,094

 
$
59,811

 
$
226,821

 
$
151,682

 
The accompanying notes are an integral part of the condensed consolidated financial statements.


4


Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 
September 30,
 
December 31,
 
2018
 
2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents
$
245,679

 
$
273,387

Short term investments
162,530

 
155,846

Trade accounts receivable
183,318

 
172,604

Other receivables
26,972

 
29,771

Inventories
163,878

 
128,960

Other current assets
95,040

 
70,426

Total current assets
877,417

 
830,994

Property, plant and equipment, net
919,613

 
955,948

Other assets
 

 
 

Equity investments
105,325

 
106,107

Other noncurrent assets
95,267

 
86,583

Total other assets
200,592

 
192,690

Total assets
$
1,997,622

 
$
1,979,632

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 

 
 

Accounts payable
$
119,629

 
$
134,137

Accrued expenses and other current liabilities
203,667

 
184,161

Current maturities of debt
11,478

 
15,783

Total current liabilities
334,774

 
334,081

Long-term debt
302,830

 
310,134

Asset retirement obligations
319,601

 
308,855

Accrued pension benefits
5,101

 
14,036

Accrued postretirement benefits other than pension
105,400

 
102,369

Accrued workers’ compensation
180,880

 
184,835

Other noncurrent liabilities
61,896

 
59,457

Total liabilities
1,310,482

 
1,313,767

 
 
 
 
Stockholders' equity
 

 
 

Common stock, $0.01 par value, authorized 300,000 shares, issued 25,047 shares at September 30, 2018 and December 31, 2017, respectively
250

 
250

Paid-in capital
712,295

 
700,125

Retained earnings
449,122

 
247,232

Treasury stock, 6,215 shares and 3,977 shares at September 30, 2018 and December 31, 2017, respectively, at cost
(495,232
)
 
(302,109
)
Accumulated other comprehensive income
20,705

 
20,367

Total stockholders’ equity
687,140

 
665,865

Total liabilities and stockholders’ equity
$
1,997,622

 
$
1,979,632


The accompanying notes are an integral part of the condensed consolidated financial statements.

5


Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands) 

 
Nine Months Ended September 30,
 
2018
 
2017
 
(Unaudited)
Operating activities
 

 
 

Net income
$
226,483

 
$
157,179

Adjustments to reconcile to cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
92,027

 
94,536

Accretion on asset retirement obligations
20,977

 
22,826

Amortization of sales contracts, net
9,540

 
42,903

Prepaid royalties expensed
134

 
2,905

Deferred income taxes
(22,999
)
 
6,069

Employee stock-based compensation expense
12,161

 
7,485

Gains on disposals and divestitures, net
(54
)
 
(23,006
)
Net loss resulting from early retirement of debt and debt restructuring
485

 
2,547

Amortization relating to financing activities
3,300

 
2,628

Changes in:
 
 
 
Receivables
(5,983
)
 
(24,110
)
Inventories
(34,918
)
 
(13,102
)
Accounts payable, accrued expenses and other current liabilities
(24,762
)
 
5,103

Income taxes, net
(1,942
)
 
(2,430
)
Other
(8,334
)
 
20,612

Cash provided by operating activities
266,115

 
302,145

Investing activities
 

 
 

Capital expenditures
(55,742
)
 
(30,503
)
Minimum royalty payments
(522
)
 
(5,033
)
Proceeds from disposals and divestitures
512

 
11,432

Purchases of short term investments
(140,097
)
 
(191,327
)
Proceeds from sales of short term investments
133,400

 
123,996

Investments in and advances to affiliates, net
(1,817
)
 
(9,216
)
Cash used in investing activities
(64,266
)
 
(100,651
)
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
(2,250
)
 
(1,500
)
Net payments on other debt
(10,286
)
 
(5,992
)
Debt financing costs
(1,009
)
 
(10,043
)
Net loss resulting from early retirement of debt and debt restructuring
(50
)
 
(2,360
)
Dividends paid
(23,966
)
 
(16,763
)
Purchases of treasury stock
(192,221
)
 
(215,735
)
Other
10

 

Cash used in financing activities
(229,772
)
 
(279,577
)
Decrease in cash and cash equivalents, including restricted cash
(27,923
)
 
(78,083
)
Cash and cash equivalents, including restricted cash, beginning of period
273,602

 
376,422

Cash and cash equivalents, including restricted cash, end of period
$
245,679

 
$
298,339

 
 
 
 
Cash and cash equivalents, including restricted cash, end of period
 
 
 
Cash and cash equivalents
$
245,679

 
$
298,337

Restricted cash

 
2

 
$
245,679

 
$
298,339

 
 
 
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

6


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. The Company’s primary business is the production of thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and steel producers both in the United States and around the world. The Company currently operates mining complexes in West Virginia, Illinois, Wyoming and Colorado. All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018. 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, 2017 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

2. Accounting Policies

Recently Adopted Accounting Guidance

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that has superseded nearly all existing revenue recognition guidance under current U.S. GAAP and replaced it with a principle based approach for determining revenue recognition. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also requires 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. 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. During the fourth quarter of 2017, the Company finalized its assessment related to the new standard by analyzing certain contracts representative of the majority of the Company’s coal sales and determined that the timing of revenue recognition related to the Company’s coal sales will remain consistent between the new standard and the previous standard. The Company also reviewed other sources of revenue, and concluded the current basis of accounting for these items is in accordance with the new standard. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective method, and there was no cumulative adjustment to retained earnings. The Company also reviewed the disclosure requirements under the new standard and has compiled information needed for the expanded disclosures which are included within Note 19, “Revenue Recognition” in the Condensed Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The amendment requires the classification of certain cash receipts and cash payments in the statement of cash flows to reduce diversity in practice. The new guidance is effective for fiscal years beginning after December 15, 2017 and the interim periods therein, with early adoption permitted. The amendments in the classification should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, the prospective application is permitted. The Company adopted ASU 2016-15 effective January 1, 2018 with no impact on the Company’s financial statements.


7


In November 2016, FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The ASU applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The ASU should be adopted using a retrospective transition method to each period presented. The Company adopted ASU 2016-18 effective January 1, 2018 and applied the ASU retrospectively to the periods presented in the Company's Condensed Consolidated Statements of Cash Flow. As a result, net cash used in investing activities for the nine months ended September 30, 2017 was adjusted to exclude the change in restricted cash as follows:

(in thousands)
Nine Months Ended September 30, 2017
Cash used in investing activities previously reported
$
(29,603
)
Less: Withdrawals of restricted cash
71,048

Cash used in investing activities
$
(100,651
)

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 ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods therein. The ASU should be adopted using a retrospective transition method to each period presented. The Company adopted ASU 2017-07 effective January 1, 2018 and applied the ASU retrospectively to the periods presented in the Company's Condensed Consolidated Income Statements. The retrospective application resulted in a $1.0 million and $2.6 million reduction in cost of coal sales and a $0.2 million and $0.8 million increase in selling, general and administrative costs with the corresponding offset to Nonoperating expense for the three and nine months ended September 30, 2017.

Recent Accounting Guidance Issued Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, “Leases” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the term of the lease, on a generally straight line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early adoption is permitted. The Company has both operating and capital leases. The Company expects the adoption of this standard to result in the recognition of right-of-use assets and lease liabilities not currently recorded on the Company’s financial statements. The Company is currently in the process of accumulating all contractual lease arrangements in order to determine the impact on its financial statements.

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” The new guidance provides targeted improvements to the accounting for hedging activities to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early adoption is permitted. The Company anticipates early adopting the standard in the fourth quarter of 2018, although it does not expect a significant impact to the Company’s financial results.

In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the change in the U.S. federal tax rate in the Tax Cuts and Jobs Act of 2017. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods therein with early adoption permitted. The Company is currently in the process of analyzing the standard, but does not expect a significant impact to the Company’s financial statements.

8




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, 2017
$
647

 
$
19,720

 
$

 
$
20,367

Unrealized gains (losses)
(9,743
)
 
8,373

 
(355
)
 
(1,725
)
Amounts reclassified from AOCI
4,071

 
(1,984
)
 
(24
)
 
2,063

Balance at September 30, 2018
$
(5,025
)
 
$
26,109

 
$
(379
)
 
$
20,705

 
The following amounts were reclassified out of AOCI:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
Details About AOCI Components
 
2018
 
2017
 
2018
 
2017
 
Line Item in the Condensed Consolidated Statement of Operations
(In thousands)
 
 
 
 
 
 
 
 
 
 
Coal hedges
 
$
(4,824
)
 
$
(88
)
 
$
(4,824
)
 
$
(88
)
 
Revenues
Interest rate hedges
 
265

 

 
753

 

 
Interest expense
 
 
$
(4,559
)
 
$
(88
)
 
$
(4,071
)
 
$
(88
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Pension, postretirement and other post-employment benefits
 
 
 
 
 
 
 
 
 
 
Pension settlement
 
613

 
228

 
1,984

 
715

 
Non-service related pension and postretirement benefit (costs) credits
Actuarial curtailments
 

 
(773
)
 

 
(773
)
 
 
Sale of Cumberland River Pension Plan
 

 
(360
)
 

 
(360
)
 
 
 
 
$
613

 
$
(905
)
 
$
1,984

 
$
(418
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
8

 
$

 
$
24

 
$
332

 
Interest and investment income
 
 
$
8

 
$

 
$
24

 
$
332

 
Net of tax
 

9


4. Divestitures

On September 14, 2017, the Company closed on its’ definitive agreement to sell Lone Mountain Processing LLC, an operating mine complex within the Company’s metallurgical coal segment, and two idled mining companies, Cumberland River Coal LLC and Powell Mountain Energy LLC to Revelation Energy LLC. The Company received $8.3 million of proceeds offset by $1.3 million in disbursements related to landholder consent fees and professional fees; and recorded a gain of $21.6 million which is reflected as a separate line, “Gain on sale of Lone Mountain Processing, Inc.,” within the Condensed Consolidated Statement of Operations. The gain included a $4.7 million curtailment gain related to black lung liabilities accrued for active employees at these operations, $0.5 million curtailment gain related to postretirement medical claims.

5. Reorganization items, net

In accordance with Accounting Codification Standard 852, “Reorganizations,” the income statement 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 September 30, 2018 and 2017, the Company recorded $0.6 million and near $0.0 million, respectively in “Reorganization items, net” primarily comprised of professional fee expenses. Net cash paid for “Reorganization items, net” totaled $0.6 million and $0.2 million during the three months ended September 30, 2018 and 2017, respectively.

During the nine months ended September 30, 2018 and 2017, the Company recorded $1.6 million and $2.9 million, respectively in “Reorganization items, net” primarily comprised of professional fee expenses. Net cash paid for “Reorganization items, net” totaled $1.2 million and $4.8 million during the nine months ended September 30, 2018 and 2017, respectively.

6. Inventories
 
Inventories consist of the following: 
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Coal
 
$
77,497

 
$
54,692

Repair parts and supplies
 
86,381

 
74,268

 
 
$
163,878

 
$
128,960

 
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $1.0 million at September 30, 2018 and $0.3 million at December 31, 2017.
 

10


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 are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.

The Company’s investments in available-for-sale marketable securities are as follows:
 
September 30, 2018
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
Classification
 
 
 
Gross Unrealized
 
Fair
 
Short-Term
 
Other
 
Cost Basis
 
Gains
 
Losses
 
Value
 
Investments
 
Assets
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
99,754

 
$
1

 
$
(180
)
 
$
99,575

 
$
99,575

 
$

Corporate notes and bonds
63,155

 

 
(200
)
 
62,955

 
62,955

 

Total Investments
$
162,909

 
$
1

 
$
(380
)
 
$
162,530

 
$
162,530

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
Classification
 
 
 
Gross Unrealized
 
Fair
 
Short-Term
 
Other
 
Cost Basis
 
Gains
 
Losses
 
Value
 
Investments
 
Assets
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
64,151

 
$
22

 
$
(73
)
 
$
64,100

 
$
64,100

 
$

Corporate notes and bonds
92,038

 

 
(292
)
 
91,746

 
91,746

 

Total Investments
$
156,189

 
$
22

 
$
(365
)
 
$
155,846

 
$
155,846

 
$

 
 
 
 
 
 
 
 
 
 
 
 

The aggregate fair value of investments with unrealized losses that were owned for less than a year was $151.6 million and $132.0 million at September 30, 2018 and December 31, 2017, respectively. There were no investments with unrealized losses that were owned for over a year at September 30, 2018 and December 31, 2017, respectively. The unrealized losses in the Company’s portfolio at September 30, 2018 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 September 30, 2018 have maturity dates ranging from the fourth quarter of 2018 through the second quarter of 2020. 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.


11


8. Sales Contracts

The sales contracts reflected in the Condensed Consolidated Balance Sheets are as follows:
 
September 30, 2018
 
December 31, 2017
 
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
(95,104
)
 
(30,783
)
 
 
 
(84,760
)
 
(29,979
)
 
 
Total
$
2,092

 
$
959

 
$
1,133

 
$
12,436

 
$
1,763

 
$
10,673

Balance Sheet classification:
 
 
 
 
 
 
 
 
 
 
 
Other current
$
2,091

 
$
562

 
 
 
$
12,432

 
$
934

 
 
Other noncurrent
$
1

 
$
397

 
 
 
$
4

 
$
829

 
 
The Company anticipates the majority of the remaining net book value of sale contracts to be amortized in 2018 based upon expected shipments.

9. Derivatives
 
Interest rate risk management

The Company has entered into interest rate swaps to reduce the variability of cash outflows associated with interest payments on its variable rate term loan. These swaps have been designated as cash flow hedges. For additional information on these arrangements, see Note 11, “Debt and Financing Arrangements,” in the Condensed Consolidated Financial Statements.

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 48 million gallons of diesel fuel for use in its operations annually. To protect the Company’s cash flows from increases in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts and purchased heating oil call options. At September 30, 2018, the Company had protected the price of approximately 69% of its expected diesel fuel purchases for the remainder of 2018 at an average strike price of $2.05 per gallon. Additionally, the Company has protected approximately 38% of its expected 2019 purchases with call options with an average strike price of $2.33 per gallon. At September 30, 2018, the Company had outstanding heating oil call options for approximately 26 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.

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 September 30, 2018, the Company held derivatives for risk management purposes that are expected to settle in the following years:
 
(Tons in thousands)
 
2018
 
2019
 
Total
Coal sales
 
646

 
1,620

 
2,266

Coal purchases
 
284

 
118

 
402

 
The Company has also entered into a minimal 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.


12


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 $0.4 million of losses during the remainder of 2018 and $0.7 million of losses during 2019.

Tabular derivatives disclosures
 
The Company has master netting agreements with all of its counterparties which allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the Condensed Consolidated Balance Sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not the net position presented in the accompanying Condensed Consolidated Balance Sheets. The fair value and location of derivatives reflected in the accompanying Condensed Consolidated Balance Sheets are as follows:
 
 
 
September 30, 2018
 
 
 
December 31, 2017
 
 
Fair Value of Derivatives
 
Asset
 
Liability
 
 
 
Asset
 
Liability
 
 
(In thousands)
 
Derivative
 
Derivative
 
 
 
Derivative
 
Derivative
 
 
Derivatives Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Coal
 
$
310

 
$
(7,979
)
 
 

 
$
942

 
$
(2,146
)
 
 

 
 


 


 
 
 


 


 
 

Derivatives Not Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Heating oil -- diesel purchases
 
6,240

 

 
 

 
5,354

 

 
 

Coal -- held for trading purposes
 
38,895

 
(40,006
)
 
 

 
44,088

 
(45,221
)
 
 

Coal -- risk management
 
5,057

 
(31,397
)
 
 

 
5,139

 
(9,892
)
 
 

Natural gas
 
24

 
(24
)
 
 
 
27

 

 
 
Total
 
$
50,216

 
$
(71,427
)
 
 

 
$
54,608

 
$
(55,113
)
 
 

Total derivatives
 
$
50,526

 
$
(79,406
)
 
 

 
$
55,550

 
$
(57,259
)
 
 

Effect of counterparty netting
 
(42,851
)
 
42,851

 
 

 
(50,042
)
 
50,042

 
 

Net derivatives as classified in the balance sheets
 
$
7,675

 
$
(36,555
)
 
$
(28,880
)
 
$
5,508

 
$
(7,217
)
 
$
(1,709
)
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Net derivatives as reflected on the balance sheets (in thousands)
 
 
 
 

Heating oil and coal
 
Other current assets
 
$
7,675

 
$
5,508

Coal
 
Accrued expenses and other current liabilities
 
(36,555
)
 
(7,217
)
 
 
 
 
$
(28,880
)
 
$
(1,709
)

The Company had a current asset representing cash collateral posted to a margin account for derivative positions primarily related to coal derivatives of $54.6 million and $16.2 million at September 30, 2018 and December 31, 2017, 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.


13


The effects of derivatives on measures of financial performance are as follows:
 
Derivatives used in Cash Flow Hedging Relationships (in thousands)
Three Months Ended September 30,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
2018
 
2017
 
2018
 
2017
Coal sales
(1)
$
(4,631
)
 
$
(169
)
 
$
(6,996
)
 
$

Coal purchases
(2)
424

 
152

 
2,171

 

Totals
 
$
(4,207
)
 
$
(17
)
 
$
(4,825
)
 
$

 
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended September 30, 2018 and 2017.  
 
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended September 30,
 
 
Gain (Loss) Recognized
 
 
2018
 
2017
Coal  trading — realized and unrealized
(3)
$
(928
)
 
$
(696
)
Coal risk management — unrealized
(3)
(9,486
)
 
(212
)
Natural gas  trading— realized and unrealized
(3)
(4
)
 
(120
)
Change in fair value of coal derivatives and coal trading activities, net total
 
$
(10,418
)
 
$
(1,028
)
 
 
 
 
 
Coal risk management— realized
(4)
$
(2,537
)
 
$

Heating oil — diesel purchases
(4)
$
719

 
$
822

____________________________________________________________
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


Derivatives used in Cash Flow Hedging Relationships (in thousands)
Nine Months Ended September 30,
 
 
 
Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
2018
 
2017
 
2018
 
2017
Coal sales
(1)
$
(14,862
)
 
$
100

 
$
(6,996
)
 
$

Coal purchases
(2)
2,587

 
(82
)
 
2,171

 

Totals
 
$
(12,275
)
 
$
18

 
$
(4,825
)
 
$

 
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the nine month periods ended September 30, 2018 and 2017.  


14


Derivatives Not Designated as Hedging Instruments (in thousands)
Nine Months Ended September 30,
 
 
Gain (Loss) Recognized
 
 
2018
 
2017
Coal  trading — realized and unrealized
(3)
$
14

 
$
(2,190
)
Coal risk management — unrealized
(3)
(22,116
)
 
(186
)
Natural gas  trading— realized and unrealized
(3)
(40
)
 
(369
)
Change in fair value of coal derivatives and coal trading activities, net total
 
$
(22,142
)
 
$
(2,745
)
 
 
 
 
 
Coal risk management— realized
(4)
$
(5,217
)
 
$

Heating oil — diesel purchases
(4)
$
4,394

 
$
(3,903
)
____________________________________________________________
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 September 30, 2018, 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 losses of approximately $5.5 million

10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Payroll and employee benefits
 
$
48,961

 
$
53,149

Taxes other than income taxes
 
72,095

 
77,017

Interest
 
237

 
246

Acquired sales contracts
 
562

 
934

Workers’ compensation
 
19,787

 
18,782

Asset retirement obligations
 
19,840

 
19,840

Coal derivative liability
 
36,555

 
7,217

Other
 
5,630

 
6,976

 
 
$
203,667

 
$
184,161



15


11. Debt and Financing Arrangements
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Term loan due 2024 ($295.5 million face value)
 
$
294,327

 
$
296,435

Other
 
26,338

 
36,514

Debt issuance costs
 
(6,357
)
 
(7,032
)
 
 
314,308

 
325,917

Less: current maturities of debt
 
11,478

 
15,783

Long-term debt
 
$
302,830

 
$
310,134


Term Loan Facility

On March 7, 2017, the Company entered into a senior secured term loan credit agreement (the “Credit Agreement) in an aggregate principal amount of $300 million (the “Term Loan Debt Facility) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and the other financial institutions from time to time party thereto (collectively, the “Lenders”). The Term Loan Debt Facility was issued at 99.50% of the face amount and will mature on March 7, 2024. The term loans provided under the Term Loan Debt Facility (the “Term Loans”) are subject to quarterly principal amortization payments in an amount equal to $750,000.

On September 25, 2017, the Company entered into the First Amendment (the “First Amendment”) to its Credit Agreement. The First Amendment reduced the interest rate on the $300 million Term Loan Debt Facility to, at the option of Arch Coal, either (i) the London interbank offered rate (“LIBOR”) plus an applicable margin of 3.25%, subject to a 1.00% LIBOR floor, or (ii) a base rate plus an applicable margin of 2.25%. The First Amendment also reset the 1.00% call premium to apply to repricing events that occur on or prior to March 26, 2018.

The 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 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 Term Loan Debt Facility) and (ii) non-ordinary course asset sales or dispositions, subject to customary thresholds, exceptions and reinvestment rights.

The Term Loan Debt Facility contains customary affirmative covenants and representations.

The 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 Term Loan Debt Facility does not contain any financial maintenance covenant.

The 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

16


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.

Second Amendment to Term Loan Facility

On April 3, 2018, the Company entered into the Second Amendment (the “Second Amendment”) to its Credit Agreement. The Second Amendment further reduces the interest rate on its Term Loan Debt Facility to, at the option of Arch Coal, either (i) the London interbank offered rate (“LIBOR”) plus an applicable margin of 2.75%, subject to a 1.00% LIBOR floor, or (ii) a base rate plus an applicable margin of 1.75%. The Second Amendment also resets the 1.00% call premium to apply to repricing events that occur on or prior to October 3, 2018. The LIBOR floor remains at 1.00%. There is no change to the maturities as a result of the Second Amendment.

Accounts Receivable Securitization Facility

On August 27, 2018, 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 maintains the $160 million borrowing capacity and extends the maturity date to the date that is three years after the Securitization Facility Closing Date. Additionally, the amendment provided the Company the opportunity to use credit insurance to increase the pool of eligible receivables for borrowing. 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 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 September 30, 2018, letters of credit totaling $75.0 million were outstanding under the facility which had a borrowing base of $83.3 million. As a result, there was no cash collateral required to be posted in the facility.

Inventory-Based Revolving Credit Facility

On April 27, 2017, the Company and certain subsidiaries of Arch Coal entered into a senior secured inventory-based revolving credit facility in an aggregate principal amount of $40 million (the “Inventory Facility”) with Regions Bank (“Regions”) as administrative agent and collateral agent, as lender and swingline lender (in such capacities, the “Lender”) and as letter of credit issuer. Availability under the 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 Inventory Facility), subject to reduction for reserves imposed by Regions.

The commitments under the 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 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 Inventory Facility bear interest at a per annum rate equal to, at the option of Arch Coal, either 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 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

17


constitute co-borrowers under or guarantors of the Inventory Facility (collectively with Arch Coal, the “Loan Parties”). The Inventory Facility is secured by first priority security interests in the ABL Priority Collateral (defined in the 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).

Arch Coal has the right to prepay borrowings under the 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 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 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 Inventory Facility also includes a requirement to maintain Liquidity equal to or exceeding $175 million at all times. As of September 30, 2018, letters of credit totaling $35.7 million were outstanding under the facility with $4.3 million available 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 2.75% which is the spread on the revised 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.

Below is a summary of the Company’s outstanding interest rate swap agreements designated as hedges as of September 30, 2018:

Notional Amount (in millions)
Effective Date
Fixed Rate
Receive Rate
Expiration Date
 
 
 
 
 
$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 September 30, 2018 is an asset of $3.6 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 Company realized $0.3 million and $0.8 million of gains during the three and nine months ended September 30, 2018, respectively, related to settlements of the interest rate swaps which was recorded to interest expense on the Company’s Condensed Consolidated Income Statements. The interest rate swaps are classified as level 2 within the fair value hierarchy.

Financing Costs

The Company paid $1.0 million of financing costs during the nine months ended September 30, 2018; $0.5 million related to the amendment of the Accounts Receivable Securitization Facility, with the remaining $0.5 million related to the Second Amendment to the Term Loan Facility. During the nine months ended September 30, 2017, the Company paid $10.0 million of financing costs primarily related to the issuance of the Term Loan Debt facility discussed above. These issuance costs were capitalized and amortized using the effective interest method over the term of the facility.

18



The Company incurred $2.4 million of legal and financial advisory fees associated with debt refinancing activities during the nine months ended September 30, 2017 related to the extinguishment of its previously existing first lien debt facility and initial efforts to replace the accounts receivable securitization facility.

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:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Income tax provision (benefit) at statutory rate
$
16,375

 
$
23,347

 
$
37,245

 
$
54,843

Percentage depletion allowance
(5,964
)
 
(7,708
)
 
(13,059
)
 
(20,439
)
State taxes, net of effect of federal taxes
4,528

 
728

 
5,865

 
1,619

Change in valuation allowance
(44,278
)
 
(19,118
)
 
(62,234
)
 
(39,336
)
Current expense associated with uncertain tax positions
511

 
1,127

 
(599
)
 
2,762

Impact of Tax Cut and Jobs Act of 2017
(19,780
)
 

 
(19,780
)
 

Other, net
3,393

 
(19
)
 
3,437

 
67

Benefit from income taxes
$
(45,215
)
 
$
(1,643
)
 
$
(49,125
)
 
$
(484
)

During the quarter, the IRS completed an audit of AMT NOL carryback claims the Company filed in prior periods. In addition, the Company filed an amended 2016 return which changed the amount of available tax attributes and the mix used to offset its bankruptcy cancellation of indebtedness income as of January 1, 2017. As a result, the Company increased available alternative minimum tax (“AMT”) credits and reduced other tax attributes as of that date that were available for attribute reduction. The AMT credits do not require a valuation allowance to be recorded against them due to the law changes enacted as part of the Tax Cut and Jobs Act of 2017 (the “Act”), while the Company’s other tax attributes are fully offset by a valuation allowance. The associated valuation allowance release related to the shift in attributes reflects what the Company believes will be realized upon audit of the amended return filing. The Company anticipates all AMT credits, net of sequestration, will be converted to cash in the next five years as provided by the Act. In total, these changes resulted in a recorded benefit from income taxes of $45.2 million, which was net of a $24.9 million uncertain tax position charge.
On December 22, 2017 the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the elimination of the corporate AMT regime effective for tax years beginning after December 31, 2017, implementation of a process whereby corporations with unused AMT credits will be refunded during 2018-2022, the transition of U.S. international taxation from a worldwide tax system to a territorial system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, further limitation on the deductibility of certain executive compensation, allowance for immediate capital expensing of certain qualified property, and limitations on the amount of interest expense deductible beginning in 2018.
The Company has not completed its analysis for the income tax effects of the Act but has provided its best estimate of the impact of the Act for 2017 in its year-end income tax provision in accordance with the guidance and interpretations available at that time as provided under SAB 118. During the quarter, the Company estimated the tax rate change impact of the Act on the 2016 amended return items. The Company has also recorded provisional adjustments under SAB 118 as part of the forecasted effective tax rate for 2018. The Company will finalize the analysis for the estimate by December 22, 2018, within the one year measurement period under SAB 118.


19


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 U.S. Treasury securities, and coal swaps and 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, coal commodity contracts and interest rate swaps with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.
 
·    Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (coal, natural gas and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at September 30, 2018.
 
The table below sets forth, by level, the Company’s financial assets and liabilities that are recorded at fair value in the accompanying Condensed Consolidated Balance Sheet: 
 
 
September 30, 2018
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Assets:
 
 

 
 

 
 

 
 

Investments in marketable securities
 
$
162,530

 
$
99,575

 
$
62,955

 
$

Derivatives
 
11,284

 

 
5,044

 
6,240

Total assets
 
$
173,814

 
$
99,575

 
$
67,999

 
$
6,240

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
36,555

 
$
34,838

 
$
709

 
$
1,008

 
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 September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
(In thousands)
Balance, beginning of period
 
$
6,083

 
$
5,426

Realized and unrealized gains recognized in earnings, net
 
749

 
4,402

Purchases
 
825

 
2,481

Issuances
 
(70
)
 
(724
)
Settlements
 
(2,355
)
 
(6,353
)
Ending balance
 
$
5,232

 
$
5,232

 
Net unrealized gains of $0.8 million and $2.6 million were recognized in the Condensed Consolidated Income Statements within Other operating income, net during the three and nine months ended September 30, 2018, respectively, related to Level 3 financial instruments held on September 30, 2018.

20


 Fair Value of Long-Term Debt
 
At September 30, 2018 and December 31, 2017, the fair value of the Company’s debt, including amounts classified as current, was $322.6 million and $336.1 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 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 per share by reconciling the denominators of the computations:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
19,250

 
23,580

 
20,102

 
24,416

Effect of dilutive securities
958

 
555

 
938

 
459

Diluted weighted average shares outstanding
20,208

 
24,135

 
21,040

 
24,875



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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 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:
 
         Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Self-insured occupational disease benefits:
 
 
 
 
 
 
 
Service cost
$
1,860

 
$
1,558

 
$
5,580

 
$
4,675

Interest cost(1)
1,196

 
1,169

 
3,585

 
3,506

Curtailments
$

 
$
(4,660
)
 
$

 
$
(4,660
)
Total occupational disease
$
3,056

 
$
(1,933
)
 
$
9,165

 
$
3,521

Traumatic injury claims and assessments
(2,069
)
 
3,077

 
3,130

 
8,487

Total workers’ compensation expense
$
987

 
$
1,144

 
$
12,295

 
$
12,008


During the third quarter of 2018, the Company recorded a $4.0 million reduction to its workers’ compensation liability with the offset to “Cost of Sales” in the Condensed Consolidated Income Statements. The liability was revalued using current claims data discounted at 3.08%.

(1) In accordance with the adoption of ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” these costs are recorded within Nonoperating expenses in the Condensed Consolidated Income Statements on the line item “Non-service related pension and postretirement benefit costs.” For additional information about the adoption of the standard, see Note 2, “Accounting Policies” in the Condensed Consolidated Financial Statements.

16. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
 
     Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Interest cost(1)
$
2,376

 
$
2,736

 
$
6,917

 
$
8,718

Expected return on plan assets(1)
(2,906
)
 
(3,913
)
 
(9,067
)
 
(12,909
)
Pension settlement(1)
(613
)
 
(229
)
 
(1,984
)
 
(716
)
Net benefit credit
$
(1,143
)
 
$
(1,406
)
 
$
(4,134
)
 
$
(4,907
)
 
During the third quarter of 2018, 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 plan liability which reduced the liability by approximately $3.3 million with the offset to accumulated other comprehensive income. The discount rate used for the revaluation was 4.17%.


22


The following table details the components of other postretirement benefit costs:
 
     Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Service cost
$
140

 
$
170

 
$
419

 
$
511

Interest cost(1)
918

 
1,058

 
2,755

 
3,175

Curtailments

 
(520
)
 

 
(520
)
Net benefit cost
$
1,058

 
$
708

 
$
3,174

 
$
3,166


(1) In accordance with the adoption of ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” these costs are recorded within Nonoperating expenses in the Condensed Consolidated Income Statements on the line item “Non-service related pension and postretirement benefit costs.” For additional information about the adoption of the standard, see Note 2, “Accounting Policies” in the Condensed Consolidated Financial Statements.

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 September 30, 2018 and December 31, 2017, the Company had accrued $0.4 million and $0.2 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.


23


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 EBITDA, 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 EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDA are significant in understanding and assessing the Company’s financial condition. Therefore, Adjusted EBITDA 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 EBITDA 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 EBITDA 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, 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.

On September 14, 2017, the Company closed on its’ definitive agreement to sell Lone Mountain Processing LLC, an operating mine complex within the Company’s metallurgical coal segment. Through this transaction the Company divested all active operations in the states of Kentucky and Virginia.
 
Operating segment results for the three and nine months ended September 30, 2018 and 2017, are presented below. The Company measures its segments based on “adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirements obligations, and nonoperating expenses (Adjusted EBITDA).” Adjusted EBITDA does not reflect mine closure or impairment costs, since those are not reflected in the operating income reviewed by management. 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.
 

24


 
 
PRB
 
MET
 
Other
Thermal
 
Corporate,
Other and
Eliminations
 
Consolidated
 
 
(in thousands)
Three Months Ended September 30, 2018
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
261,927

 
$
236,328

 
$
130,663

 
$
4,262

 
$
633,180

Adjusted EBITDA
 
48,646

 
81,250

 
25,200

 
(30,202
)
 
124,894

Depreciation, depletion and amortization
 
9,114

 
18,106

 
3,924

 
631

 
31,775

Accretion on asset retirement obligation
 
4,885

 
469

 
565

 
1,073

 
6,992

Total assets
 
374,092

 
561,989

 
127,904

 
933,637

 
1,997,622

Capital expenditures
 
3,458

 
17,827

 
3,332

 
1,076

 
25,693

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
276,000

 
$
238,946

 
$
93,859

 
$
4,733

 
$
613,538

Adjusted EBITDA
 
48,768

 
53,346

 
21,217

 
(18,240
)
 
105,091

Depreciation, depletion and amortization
 
9,577

 
18,479

 
3,465

 
393

 
31,914

Accretion on asset retirement obligation
 
5,040

 
511

 
540

 
1,489

 
7,580

Total assets
 
419,162

 
538,637

 
130,729

 
934,005

 
2,022,533

Capital expenditures
 
2,047

 
4,597

 
4,013

 
2,924

 
13,581

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
737,233

 
$
733,707

 
$
321,997

 
$
7,887

 
$
1,800,824

Adjusted EBITDA
 
102,639

 
251,649

 
52,710

 
(91,806
)
 
315,192

Depreciation, depletion and amortization
 
25,841