10-Q 1 aci-20190331x10q.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 March 31, 2019 
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
logoa02a01a01a01a01a15.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 April 19, 2019, there were 16,809,849 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 March 31,
 
2019
 
2018
 
(Unaudited)
Revenues
$
555,183

 
$
575,295

Costs, expenses and other operating
 
 
 
Cost of sales (exclusive of items shown separately below)
438,471

 
454,780

Depreciation, depletion and amortization
25,273

 
29,703

Accretion on asset retirement obligations
5,137

 
6,992

Amortization of sales contracts, net
65

 
3,051

Change in fair value of coal derivatives and coal trading activities, net
(12,981
)
 
(3,414
)
Selling, general and administrative expenses
24,089

 
25,948

Other operating income, net
(1,650
)
 
(6,932
)
 
478,404

 
510,128

 
 
 
 
Income from operations
76,779

 
65,167

Interest expense, net
 
 
 
Interest expense
(4,432
)
 
(5,395
)
Interest and investment income
2,143

 
1,273

 
(2,289
)
 
(4,122
)
 
 
 
 
Income before nonoperating expenses
74,490

 
61,045

 
 
 
 
Nonoperating expenses
 
 
 
Non-service related pension and postretirement benefit costs
(1,766
)
 
(1,303
)
Reorganization items, net
87

 
(301
)
 
(1,679
)
 
(1,604
)
 
 
 
 
Income before income taxes
72,811

 
59,441

Provision for (benefit from) income taxes
70

 
(544
)
Net income
$
72,741

 
$
59,985

 
 
 
 
Net income per common share
 
 
 
Basic earnings per common share
$
4.16

 
$
2.87

Diluted earnings per common share
$
3.91

 
$
2.74

 
 
 
 
Weighted average shares outstanding
 
 
 
Basic weighted average shares outstanding
17,494

 
20,901

Diluted weighted average shares outstanding
18,599

 
21,875

 
 
 
 
Dividends declared per common share
$
0.45

 
$
0.40


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 March 31,
 
 
2019
 
2018
 
 
(Unaudited)
Net income
 
$
72,741

 
$
59,985

 
 
 
 
 
Derivative instruments
 
 
 
 
Comprehensive income (loss) before tax
 
2,717

 
6,557

Income tax benefit (provision)
 

 

 
 
2,717

 
6,557

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

 

Income tax benefit (provision)
 

 

 
 

 

Available-for-sale securities
 
 
 
 
Comprehensive income (loss) before tax
 
377

 
(658
)
Income tax benefit (provision)
 

 

 
 
377

 
(658
)
 
 
 
 
 
Total other comprehensive income (loss)
 
3,094

 
5,899

Total comprehensive income
 
$
75,835

 
$
65,884

 
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)
 
March 31,
 
December 31,
 
2019
 
2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents
$
218,750

 
$
264,937

Short term investments
164,664

 
162,797

Trade accounts receivable
195,095

 
200,904

Other receivables
44,528

 
48,926

Inventories
145,607

 
125,470

Other current assets
64,192

 
75,749

Total current assets
832,836

 
878,783

Property, plant and equipment, net
848,749

 
834,828

Other assets
 

 
 

Equity investments
105,419

 
104,676

Other noncurrent assets
76,197

 
68,773

Total other assets
181,616

 
173,449

Total assets
$
1,863,201

 
$
1,887,060

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 

 
 

Accounts payable
$
138,935

 
$
128,024

Accrued expenses and other current liabilities
143,586

 
183,514

Current maturities of debt
15,210

 
17,797

Total current liabilities
297,731

 
329,335

Long-term debt
297,733

 
300,186

Asset retirement obligations
233,614

 
230,304

Accrued pension benefits
15,452

 
16,147

Accrued postretirement benefits other than pension
81,296

 
83,163

Accrued workers’ compensation
168,851

 
174,303

Other noncurrent liabilities
68,577

 
48,801

Total liabilities
1,163,254

 
1,182,239

 
 
 
 
Stockholders' equity
 

 
 

Common stock, $0.01 par value, authorized 300,000 shares, issued 25,047 shares at March 31, 2019 and December 31, 2018, respectively
250

 
250

Paid-in capital
723,143

 
717,492

Retained earnings
592,296

 
527,666

Treasury stock, 8,088 shares and 7,216 shares at March 31, 2019 and December 31, 2018, respectively, at cost
(662,132
)
 
(583,883
)
Accumulated other comprehensive income
46,390

 
43,296

Total stockholders’ equity
699,947

 
704,821

Total liabilities and stockholders’ equity
$
1,863,201

 
$
1,887,060


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) 

 
Three Months Ended March 31,
 
2019
 
2018
 
(Unaudited)
Operating activities
 

 
 

Net income
$
72,741

 
$
59,985

Adjustments to reconcile to cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
25,273

 
29,703

Accretion on asset retirement obligations
5,137

 
6,992

Amortization of sales contracts, net
65

 
3,051

Deferred income taxes

 
12,127

Employee stock-based compensation expense
5,651

 
3,845

(Gains) losses on disposals and divestitures, net
(475
)
 
134

Amortization relating to financing activities
907

 
1,080

Changes in:
 
 
 
Receivables
7,410

 
(28,728
)
Inventories
(20,137
)
 
(14,871
)
Accounts payable, accrued expenses and other current liabilities
(17,861
)
 
(26,052
)
Income taxes, net
76

 
11,596

Other
6,197

 
8,005

Cash provided by operating activities
84,984

 
66,867

Investing activities
 

 
 

Capital expenditures
(39,147
)
 
(9,453
)
Minimum royalty payments
(63
)
 
(62
)
Proceeds from disposals and divestitures
608

 
54

Purchases of short term investments
(27,902
)
 
(38,458
)
Proceeds from sales of short term investments
26,500

 
49,400

Investments in and advances to affiliates, net
(2,196
)
 

Cash provided by (used in) investing activities
(42,200
)
 
1,481

Financing activities
 

 
 

Payments on term loan due 2024
(750
)
 
(750
)
Net payments on other debt
(4,633
)
 
(3,431
)
Dividends paid
(7,839
)
 
(8,335
)
Purchases of treasury stock
(75,749
)
 
(38,186
)
Other

 
10

Cash used in financing activities
(88,971
)
 
(50,692
)
Increase (decrease) in cash and cash equivalents, including restricted cash
(46,187
)
 
17,656

Cash and cash equivalents, including restricted cash, beginning of period
264,937

 
273,602

Cash and cash equivalents, including restricted cash, end of period
$
218,750

 
$
291,258

 
 
 
 
Cash and cash equivalents, including restricted cash, end of period
 
 
 
Cash and cash equivalents
$
218,750

 
$
288,332

Restricted cash

 
2,926

 
$
218,750

 
$
291,258

 
 
 
 

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

6


Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands) 

 
 
 
 
 
 
 
Treasury
 
Accumulated Other
 
 
 
Common
 
Paid-In
 
Retained
 
Stock at
 
Comprehensive
 
 
 
Stock
 
Capital
 
Earnings
 
Cost
 
Income
 
Total
 
(In thousands)
Balances, January 1, 2019
$
250

 
$
717,492

 
$
527,666

 
$
(583,883
)
 
$
43,296

 
$
704,821

Dividends on common shares ($0.45/share)

 

 
(8,111
)
 

 

 
$
(8,111
)
Total comprehensive income

 

 
72,741

 

 
3,094

 
75,835

Employee stock-based compensation

 
5,651

 

 

 

 
5,651

Purchase of 872,317 shares of common stock under share repurchase program

 

 

 
(78,249
)
 

 
(78,249
)
Balances at March 31, 2019
$
250

 
$
723,143

 
$
592,296

 
$
(662,132
)
 
$
46,390

 
$
699,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, January 1, 2018
$
250

 
$
700,125

 
$
247,232

 
$
(302,109
)
 
$
20,367

 
$
665,865

Dividends on common shares ($0.40/share)

 

 
(8,553
)
 

 

 
$
(8,553
)
Total comprehensive income

 

 
59,985

 

 
5,899

 
65,884

Employee stock-based compensation

 
3,845

 

 

 

 
3,845

Purchase of 407,091 shares of common stock under share repurchase program

 

 

 
(38,589
)
 

 
(38,589
)
Warrants exercised

 
10

 

 

 
$

 
10

Balances at March 31, 2018
$
250

 
$
703,980

 
$
298,664

 
$
(340,698
)
 
$
26,266

 
$
688,462




7


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 months ended March 31, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019. 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, 2018 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 February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, “Leases” which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The ASU was subsequently amended by ASU 2018-01, “Land Easements Practical Expedient for Transition to Topic 842;” ASU 2018-10, “Codification Improvements to Topic 842, Leases;” and ASU 2018-11, “Targeted Improvements.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. 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. Leases of mineral reserves and related land leases have been exempted from the standard. The Company adopted ASU 2016-02 effective January 1, 2019 and elected the option to not restate comparative periods in transition and also elected the “package of practical expedients” within the standard which permits the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs. Additionally, the Company made an election to not separate lease and non-lease components for all leases, and will not use hindsight. Finally, the Company will continue its current policy for accounting for land easements as executory contracts. The adoption of the standard had no impact on the Company’s consolidated income statement or statement of cash flows.

In April 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The new guidance shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The new guidance does not change the accounting for purchased callable debt securities held at a discount. The Company adopted ASU 2017-08 effective January 1, 2019 with no impact on the Company’s financial statements.

In August 2017, the FASB issued ASU No. 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. The Company adopted ASU 2017-12 effective January 1, 2019 with no impact on the Company’s financial statements.

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 Company adopted ASU 2018-02 effective January 1, 2019 with no impact on the Company’s financial statements.


8


In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718), Improvements to Non-employee Share-Based Payment Accounting.” ASU 2018-07 aligns the measurement and classification guidance for share-based payments to non-employees with the guidance for share-based payments to employees. The Company adopted ASU 2018-07 effective January 1, 2019 with no impact on the Company’s financial statements.

In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate of Hedge Accounting Purposes.” The Company adopted ASU 2018-16 effective January 1, 2019 with no impact on the Company’s financial statements.

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, 2018
$
3,328

 
$
40,311

 
$
(343
)
 
$
43,296

Unrealized gains
3,593

 

 
377

 
3,970

Amounts reclassified from AOCI
(876
)
 

 

 
(876
)
Balance at March 31, 2019
$
6,045

 
$
40,311

 
$
34

 
$
46,390

 
The following amounts were reclassified out of AOCI:

 
 
Three Months Ended March 31,
 
 
Details About AOCI Components
 
2019
 
2018
 
Line Item in the Condensed Consolidated Statement of Operations
(In thousands)
 
 
 
 
 
 
Coal hedges
 
$
361

 
$

 
Revenues
Interest rate hedges
 
515

 
140

 
Interest expense
 
 

 

 
Provision for (benefit from) income taxes
 
 
$
876

 
$
140

 
Net of tax
 
 
 
 
 
 
 
Available-for-sale securities
 
$

 
$

 
Interest and investment income
 
 

 

 
Provision for (benefit from) income taxes
 
 
$

 
$

 
Net of tax
 


9


4. Inventories
 
Inventories consist of the following: 
 
 
March 31,
 
December 31,
 
 
2019
 
2018
 
 
(In thousands)
Coal
 
$
57,147

 
$
40,982

Repair parts and supplies
 
88,460

 
84,488

 
 
$
145,607

 
$
125,470

 
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $1.2 million at March 31, 2019 and $0.6 million at December 31, 2018.
 
5. 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:
 
March 31, 2019
 
 
 
 
 
 
 
 
 
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
$
94,586

 
$
58

 
$
(37
)
 
$
94,607

 
$
94,607

 
$

Corporate notes and bonds
70,044

 
98

 
(85
)
 
70,057

 
70,057

 

Total Investments
$
164,630

 
$
156

 
$
(122
)
 
$
164,664

 
$
164,664

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
100,003

 
$
11

 
$
(126
)
 
$
99,888

 
$
99,888

 
$

Corporate notes and bonds
63,137

 
4

 
(232
)
 
62,909

 
62,909

 

Total Investments
$
163,140

 
$
15

 
$
(358
)
 
$
162,797

 
$
162,797

 
$

 
 
 
 
 
 
 
 
 
 
 
 

The aggregate fair value of investments with unrealized losses that were owned for less than a year was $31.1 million and $115.2 million at March 31, 2019 and December 31, 2018, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year was $9.0 million and $32.4 million at March 31, 2019 and December 31, 2018, respectively. The unrealized losses in the Company’s portfolio at March 31, 2019 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 March 31, 2019 have maturity dates ranging from the second quarter of 2019 through the third 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.


10


6. Sales Contracts

The sales contracts reflected in the Condensed Consolidated Balance Sheets are as follows:
 
March 31, 2019
 
December 31, 2018
 
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
(97,051
)
 
(31,098
)
 
 
 
(96,812
)
 
(30,924
)
 
 
Total
$
145

 
$
644

 
$
(499
)
 
$
384

 
$
818

 
$
(434
)
Balance Sheet classification:
 
 
 
 
 
 
 
 
 
 
 
Other current
$
145

 
$
425

 
 
 
$
384

 
$
570

 
 
Other noncurrent
$

 
$
219

 
 
 
$

 
$
248

 
 
The Company anticipates the majority of the remaining net book value of sale contracts to be amortized in 2019 based upon expected shipments.

7. 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 9, “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 47 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, purchased heating oil call options and New York Mercantile Exchange (“NYMEX”) gulf coast diesel swaps. At March 31, 2019, the Company had protected the price on the majority of its expected diesel fuel purchases for the remainder of 2019 with approximately 18 million gallons of heating oil call options with an average strike price of $2.33 per gallon and 18 million gallons of NYMEX gulf coast diesel swaps at an average price of approximately $1.91 per gallon. Additionally, the Company has protected approximately 9% of its expected 2020 purchases using heating oil call options with an average strike price of $2.31 per gallon. At March 31, 2019, the Company had outstanding heating oil call options and NYMEX gulf coast swaps of approximately 40 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 March 31, 2019, the Company held derivatives for risk management purposes that are expected to settle in the following years:
 
(Tons in thousands)
 
2019
 
2020
 
Total
Coal sales
 
2,196

 
344

 
2,540

Coal purchases
 
1,131

 
93

 
1,224

 
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.


11


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 2019 and $0.2 million of losses during 2020.

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:
 
 
 
March 31, 2019
 
 
 
December 31, 2018
 
 
Fair Value of Derivatives
 
Asset
 
Liability
 
 
 
Asset
 
Liability
 
 
(In thousands)
 
Derivative
 
Derivative
 
 
 
Derivative
 
Derivative
 
 
Derivatives Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Coal
 
$
5,461

 
$
(297
)
 
 

 
$
2,342

 
$
(805
)
 
 

 
 


 


 
 
 


 


 
 

Derivatives Not Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Heating oil -- diesel purchases
 
1,734

 
(228
)
 
 

 
532

 

 
 

Coal -- held for trading purposes
 
33,091

 
(33,932
)
 
 

 
10,329

 
(10,701
)
 
 

Coal -- risk management
 
22,552

 
(23,033
)
 
 

 
5,672

 
(19,579
)
 
 

Natural gas
 
19

 

 
 
 
4

 
(4
)
 
 
Total
 
$
57,396

 
$
(57,193
)
 
 

 
$
16,537

 
$
(30,284
)
 
 

Total derivatives
 
$
62,857

 
$
(57,490
)
 
 

 
$
18,879

 
$
(31,089
)
 
 

Effect of counterparty netting
 
(57,490
)
 
57,490

 
 

 
(17,801
)
 
17,801

 
 

Net derivatives as classified in the balance sheets
 
$
5,367

 
$

 
$
5,367

 
$
1,078

 
$
(13,288
)
 
$
(12,210
)
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Net derivatives as reflected on the balance sheets (in thousands)
 
 
 
 

Heating oil and coal
 
Other current assets
 
$
5,367

 
$
1,078

Coal
 
Accrued expenses and other current liabilities
 

 
(13,288
)
 
 
 
 
$
5,367

 
$
(12,210
)

The Company had a current asset representing cash collateral posted to a margin account for derivative positions primarily related to coal derivatives of $13.1 million and $24.7 million at March 31, 2019 and December 31, 2018, 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.


12


The effects of derivatives on measures of financial performance are as follows:
 
Derivatives used in Cash Flow Hedging Relationships (in thousands)
Three Months Ended March 31,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
2019
 
2018
 
2019
 
2018
Coal sales
(1)
$
5,237

 
$
5,231

 
$
1,044

 
$

Coal purchases
(2)
(566
)
 
(542
)
 
(683
)
 

Totals
 
$
4,671

 
$
4,689

 
$
361

 
$

 
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 March 31, 2019 and 2018.  
 
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended March 31,
 
 
Gain (Loss) Recognized
 
 
2019
 
2018
Coal  trading — realized and unrealized
(3)
$
(383
)
 
$
558

Coal risk management — unrealized
(3)
13,425

 
2,875

Natural gas  trading— realized and unrealized
(3)
(61
)
 
(19
)
Change in fair value of coal derivatives and coal trading activities, net total
 
$
12,981

 
$
3,414

 
 
 
 
 
Coal risk management— realized
(4)
$
(4,411
)
 
$
(1,031
)
Heating oil — diesel purchases
(4)
$
637

 
$
18

____________________________________________________________
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 March 31, 2019, 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 gains of approximately $4.1 million

8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
March 31,
 
December 31,
 
 
2019
 
2018
 
 
(In thousands)
Payroll and employee benefits
 
$
35,520

 
$
57,166

Taxes other than income taxes
 
70,894

 
75,017

Interest
 
225

 
156

Acquired sales contracts
 
425

 
570

Workers’ compensation
 
18,187

 
20,044

Asset retirement obligations
 
12,297

 
13,113

Other
 
6,038

 
17,448

 
 
$
143,586

 
$
183,514



13


9. Debt and Financing Arrangements
 
 
March 31,
 
December 31,
 
 
2019
 
2018
 
 
(In thousands)
Term loan due 2024 ($294.0 million face value)
 
$
292,924

 
$
293,626

Other
 
25,849

 
30,449

Debt issuance costs
 
(5,830
)
 
(6,092
)
 
 
312,943

 
317,983

Less: current maturities of debt
 
15,210

 
17,797

Long-term debt
 
$
297,733

 
$
300,186


Term Loan Facility

In 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.

During 2018, the Company entered into the Second Amendment (the “Second Amendment”) to its Credit Agreement. The Second Amendment reduced 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 reset 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.

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

14


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.

Accounts Receivable Securitization Facility

In 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 maintained the $160 million borrowing capacity and extended 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 March 31, 2019, letters of credit totaling $15.7 million were outstanding under the facility with $81.5 million available for borrowings. As a result, there was no cash collateral required to be posted in the facility.

Inventory-Based Revolving Credit Facility

In 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.

In 2018, the Company and certain subsidiaries of Arch Coal amended and extended the Inventory Facility by increasing the facility size by $10 million, bringing the total aggregate amount available to $50 million, subject to borrowing base calculations described above.

The commitments under the Inventory Facility will terminate on the date that is the earliest to occur of (i) 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 (ii) 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 2.00% to 2.50% (in the case of LIBOR loans) and 1.00% 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 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).


15


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 March 31, 2019, letters of credit totaling $35.7 million were outstanding under the facility with $14.3 million available for borrowings.
 
Interest Rate Swaps

The Company has 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 is 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 be 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 March 31, 2019:

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
$250.0
June 28, 2019
2.025%
1-month LIBOR
June 30, 2020
$200.0
June 30, 2020
2.249%
1-month LIBOR
June 30, 2021
$100.0
June 30, 2021
2.315%
1-month LIBOR
June 30, 2023

The fair value of the interest rate swaps at March 31, 2019 is an asset of $0.9 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 $0.5 million of gains during the three months ended March 31, 2019 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.



16


10. 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 March 31,
 
2019
 
2018
 
(In thousands)
Income tax provision (benefit) at statutory rate
$
15,290

 
$
12,483

Percentage depletion allowance
(4,307
)
 
(4,607
)
State taxes, net of effect of federal taxes
1,012

 
754

Change in valuation allowance
(12,513
)
 
(10,639
)
Current expense associated with uncertain tax positions
593

 
1,389

Other, net
(5
)
 
76

Provision for (benefit from) income taxes
$
70

 
$
(544
)

11. 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 March 31, 2019.
 
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: 
 
 
March 31, 2019
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Assets:
 
 

 
 

 
 

 
 

Investments in marketable securities
 
$
164,664

 
$
94,607

 
$
70,057

 
$

Derivatives
 
6,249

 
3,063

 
2,335

 
851

Total assets
 
$
170,913

 
$
97,670

 
$
72,392

 
$
851

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$

 
$

 
$

 
$

 

17


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 March 31, 2019
 
 
(In thousands)
Balance, beginning of period
 
$
532

Realized and unrealized gains recognized in earnings, net
 
(144
)
Purchases
 
463

Issuances
 

Settlements
 

Ending balance
 
$
851

 
Net unrealized losses of $0.1 million were recognized in the Condensed Consolidated Income Statements within Other operating income, net during the three months ended March 31, 2019, respectively, related to Level 3 financial instruments held on March 31, 2019.
 Fair Value of Long-Term Debt
 
At March 31, 2019 and December 31, 2018, the fair value of the Company’s debt, including amounts classified as current, was $319.8 million and $318.6 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.
 
12. 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 March 31,
 
2019
 
2018
 
(In thousands)
Weighted average shares outstanding:
 
 
 
Basic weighted average shares outstanding
17,494

 
20,901

Effect of dilutive securities
1,105

 
974

Diluted weighted average shares outstanding
18,599

 
21,875



18


13. 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 March 31,
 
2019
 
2018
 
(In thousands)
Self-insured occupational disease benefits:
 
 
 
Service cost
$
1,669

 
$
1,860

Interest cost(1)
1,354

 
1,195

Total occupational disease
$
3,023

 
$
3,055

Traumatic injury claims and assessments
2,144

 
3,011

Total workers’ compensation expense
$
5,167

 
$
6,066


(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.”

14. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
 
     Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Interest cost(1)
$
2,258

 
$
2,271

Expected return on plan assets(1)
(2,723
)
 
(3,081
)
Net benefit credit
$
(465
)
 
$
(810
)
 
The following table details the components of other postretirement benefit costs:
 
     Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Service cost
$
120

 
$
140

Interest cost(1)
876

 
918

Net benefit cost
$
996

 
$
1,058


(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

19


Nonoperating expenses in the Condensed Consolidated Income Statements on the line item “Non-service related pension and postretirement benefit costs.”

15. Commitments and Contingencies

The Company accrues for costs related to contingencies when a loss is probable and the amount is reasonably determinable. Disclosure of contingencies is included in the financial statements when it is at least reasonably possible that a material loss or an additional material loss in excess of amounts already accrued may be incurred.
 
In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. 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. The Company believes it has recorded adequate reserves for these matters.


20


16. 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.

Operating segment results for the three months ended March 31, 2019 and 2018, 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.
 
 
 
PRB
 
MET
 
Other
Thermal
 
Corporate,
Other and
Eliminations
 
Consolidated
 
 
(in thousands)
Three Months Ended March 31, 2019
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
212,729

 
$
253,262

 
$
85,978

 
$
3,214

 
$
555,183

Adjusted EBITDA
 
20,583

 
91,534

 
6,119

 
(10,982
)
 
107,254

Depreciation, depletion and amortization
 
4,865

 
16,382

 
3,435

 
591

 
25,273

Accretion on asset retirement obligation
 
3,135

 
531

 
603

 
868

 
5,137

Total assets
 
230,329

 
568,367

 
139,306

 
925,199

 
1,863,201

Capital expenditures
 
414

 
31,224

 
6,250

 
1,259

 
39,147

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
245,428

 
$
238,347

 
$
91,520

 
$

 
$
575,295

Adjusted EBITDA
 
27,502

 
83,742

 
15,669

 
(22,000
)
 
104,913

Depreciation, depletion and amortization
 
8,423

 
16,986

 
3,835

 
459

 
29,703

Accretion on asset retirement obligation
 
4,885

 
469

 
565

 
1,073

 
6,992

Total assets
 
383,823

 
548,804

 
130,132

 
913,919

 
1,976,678

Capital expenditures
 
698

 
5,829

 
1,206

 
1,720

 
9,453




21


A reconciliation of net income to adjusted EBITDA follows:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(In thousands)
Net income
 
$
72,741

 
$
59,985

Provision for (benefit from) income taxes
 
70

 
(544
)
Interest expense, net
 
2,289

 
4,122

Depreciation, depletion and amortization
 
25,273

 
29,703

Accretion on asset retirement obligations
 
5,137

 
6,992

Amortization of sales contracts, net
 
65

 
3,051

Non-service related pension and postretirement benefit costs
 
1,766

 
1,303

Reorganization items, net
 
(87
)
 
301

Adjusted EBITDA
 
$
107,254

 
$
104,913




22


17. Revenue Recognition

ASC 606-10-50-5 requires that entities disclose disaggregated revenue information in categories (such as type of good or service, geography, market, type of contract, etc.) that depict how the nature, amount, timing, and uncertainty of revenue and cash flow are affected by economic factors. ASC 606-10-55-89 explains that the extent to which an entity’s revenue is disaggregated depends on the facts and circumstances that pertain to the entity’s contracts with customers and that some entities may need to use more than one type of category to meet the objective for disaggregating revenue.

In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of its coal and customer relationships and provides meaningful disaggregation of each segment’s results. The company has further disaggregated revenue between North America and Seaborne revenues which depicts the pricing and contract differences between the two. North America revenue is characterized by contracts with a term of one year or longer and typically the pricing is fixed; whereas Seaborne revenue generally is derived by spot or short term contracts with an indexed based pricing mechanism.
 
PRB
MET
Other
Thermal
Corporate,
Other and
Eliminations
Consolidated
 
(in thousands)
Three Months Ended March 31, 2019
 
 
 
 
 
North America revenues
$
212,729

$
44,666

$
46,529

$
3,214

$
307,138

Seaborne revenues

208,596

39,449


248,045

 
 
 
 
 
 
Total revenues
$
212,729

$
253,262

$
85,978

$
3,214

$
555,183

 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
North America revenues
$
244,360

$
29,678

$
43,667

$

$
317,705

Seaborne revenues
1,068

208,669

47,853


257,590

 
 
 
 
 
 
Total revenues
$
245,428

$
238,347

$
91,520

$

$
575,295



As of March 31, 2019, the Company has outstanding performance obligations for the remainder of 2019 of 59.3 million tons of fixed price contracts and 4.0 million tons of variable price contracts. Additionally, the Company has outstanding performance obligations beyond 2019 of approximately 41.9 million tons of fixed price contracts and 4.6 million tons of variable price contracts.

23


18. Leases

The Company has operating leases for mining equipment, office equipment and office space with remaining lease terms ranging from less than 1 year to approximately 8 years. Some of these leases include both lease and non-lease components which are accounted for as a single lease component as the Company has elected the practical expedient to combine these components for all leases. As most of the leases do not provide an implicit rate, the Company calculated the right-of-use assets and lease liabilities using its’ secured incremental borrowing rate at the lease commencement date. The Company currently does not have any finance leases outstanding.

Information related to leases was as follows:

 
Three Months Ended March 31, 2019
 
(In thousands)
Operating lease information:
 
Operating lease cost
$
917

Operating cash flows from operating leases
871

Weighted average remaining lease term in years
5.06

Weighted average discount rate
5.6
%

Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows:

Year
Amount
 
(In thousands)
2019
$
2,412

2020
2,456

2021
2,207

2022
2,203

2023
2,172

Thereafter
7,504

Total minimum lease payments
$
18,954

Less imputed interest
(3,601
)
 

Total operating lease liability
$
15,353

 
 
As reflected on balance sheet:
 
Accrued expenses and other current liabilities
$
2,353

Other noncurrent liabilities
13,000

 
 
Total operating lease liability
$
15,353


At March 31, 2019, the Company had a $14.7 million right-of-use operating lease asset recorded within “Other noncurrent assets” on the Condensed Consolidated Balance Sheet.



24


19. Subsequent Events

On April 22, 2019, the board of directors of Arch Coal authorized an incremental $300 million increase to the share repurchase program bringing the total authorization to $1.05 billion. The timing of any future share purchases, and the ultimate number of shares to be purchased, will depend on a number of factors, including business and market conditions, or the Company’s future financial performance, and other capital priorities. The shares will be acquired in the open market or through private transactions in accordance with Securities and Exchange Commission requirements. As of March 31, 2019, the Company had repurchased 8,088,147 shares at an average share price of $81.86 per share for an aggregate purchase price of approximately $662.1 million since inception of the stock repurchase program. At March 31, 2019, with the increase noted above, the Company has $388 million remaining under its existing authorization.

The purchases under the share repurchase program may be made in the open market or through privately negotiated transactions from time to time and in accordance with applicable laws, rules and regulations. Repurchases may also be made pursuant to a Rule 10b5-1 plan, which permits shares to be repurchased in accordance with pre-determined criteria when the Company might otherwise be prohibited from doing so under insider trading laws or because of self-imposed trading blackout periods. The share repurchase program may be amended, suspended or discontinued at any time and does not commit the Company to repurchase shares of its common stock. The actual number and value of the shares to be purchased will depend on the performance of the Company’s stock price and other market conditions.
    

25


Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Cautionary Notice Regarding Forward-Looking Statements

This report contains “forward-looking statements” - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from our emergence from Chapter 11 bankruptcy protection; changes in the demand for our coal by the electric generation and steel industries; from legislation and regulations relating to the Clean Air Act and other environmental initiatives; from competition within our industry and with producers of competing energy sources; from our ability to successfully acquire or develop coal reserves; from operational, geological, permit, labor and weather-related factors, from the Tax Cuts and Jobs Act and other tax reforms; from the effects of foreign and domestic trade policies, actions or disputes; from fluctuations in the amount of cash we generate from operations which could impact, among other things, our ability to pay dividends or repurchase shares in accordance with our announced capital allocation plan; from our ability to successfully integrate the operations that we acquire; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For a more detailed description of some of the risks and uncertainties that may affect our future results, you should see the “Risk Factors” in Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2018 and subsequent Form 10-Q filings.

Overview

Our results for the first quarter of 2019 benefited from continued strength in the metallurgical coal markets, while domestic and international thermal coal markets faced headwinds. Metallurgical coal markets remained strong in the first quarter of 2019, as economic growth moderated but continued, and supply constraints remain supportive of international coking coal prices. We believe both Atlantic and Pacific coking coal markets remain well balanced, and supported by continued strong global steel production. Some additional coking coal supply has come back into the market from existing and formerly idled operations, and some new development has occurred and is occurring. At the same time, normal depletion and disruptive events have removed some significant production sources. Overall, global capital investment in new production capacity appears to be limited. We also believe that this long term limited capital investment in the industry has increased the sensitivity of global coking coal markets to supply disruptions. Steel tariffs appear to have had little impact on coking coal pricing or demand to date, but longer term implications for coking coal markets and the global economy as a whole remain less certain.

Initially strong seasonal demand for domestic thermal coal in the current period was negatively impacted by off-site flooding in the high plains and downstream that disrupted rail transportation. Powder River Basin coal, in particular, was impacted by these disruptions. We believe the impacts from these disruptions will continue into the second quarter of 2019. Natural gas pricing began the current quarter at levels favorable to increased coal fired generation due to low levels of storage for the competing fuel. These elevated prices declined through the current quarter as natural gas production levels have increased significantly versus the prior year quarter, and seasonal demand moderated. Generator coal stockpiles are near historically normal levels based on days of burn. International thermal coal market pricing declined significantly during the current quarter; however, the forward positions we entered into in previous periods allowed certain of our operations to continue to economically ship coal into these markets throughout the current quarter.



26


Results of Operations

Three Months Ended March 31, 2019 and 2018 

Revenues. Our revenues include sales to customers of coal produced at our operations and coal purchased from third parties. Transportation costs are included in cost of coal sales and amounts billed by us to our customers for transportation are included in revenues.

Coal Sales. The following table summarizes information about our coal sales during the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
(Decrease) / Increase
 
 
(In thousands)
Coal sales
 
$
555,183

 
$
575,295

 
$
(20,112
)
Tons sold
 
20,725

 
23,664

 
(2,939
)
 
On a consolidated basis, coal sales in the first quarter of 2019 was approximately $20.1 million or 3.5% less than in the first quarter 2018, while tons sold decreased approximately 2.9 million tons or 12.4%. Coal sales from Metallurgical operations increased approximately $14.9 million on increased pricing and shipment volume. Powder River Basin coal sales decreased approximately $32.7 million primarily due to decreased volume, and Other Thermal coal sales decreased approximately $5.5 million due to decreased volume partially offset by increased pricing. See discussion in “Operational Performance” for further information about segment results.

Costs, expenses and other.  The following table summarizes costs, expenses and other components of operating income during the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended March 31,
 
2019
 
2018
 
Increase (Decrease) in Net Income
 
(In thousands)
Cost of sales (exclusive of items shown separately below)
$
438,471

 
$
454,780

 
$
16,309

Depreciation, depletion and amortization
25,273

 
29,703

 
4,430

Accretion on asset retirement obligations
5,137

 
6,992

 
1,855

Amortization of sales contracts, net
65

 
3,051

 
2,986

Change in fair value of coal derivatives and coal trading activities, net
(12,981
)
 
(3,414
)
 
9,567

Selling, general and administrative expenses
24,089

 
25,948

 
1,859

Other operating income, net
(1,650
)
 
(6,932
)
 
(5,282
)
Total costs, expenses and other
$
478,404

 
$
510,128


$
31,724

 
Cost of sales.  Our cost of sales for the first quarter of 2019 decreased approximately $16.3 million or 3.6% versus the first quarter of 2018. The decrease consists primarily of reductions of approximately $20.3 million in operating taxes and royalties, $7.9 million in repairs and supplies, and $2.7 million in purchased coal costs. These cost decreases were partially offset by increases of approximately $11.0 million in transportation costs and $4.8 million in labor related costs. See discussion in “Operational Performance” for further information about segment results.

Depreciation, depletion, and amortization.  The decrease in depreciation, depletion, and amortization in the first quarter of 2019 versus the first quarter of 2018 is primarily due to reduced depreciation and development amortization in our Powder River Basin segment.

Accretion on asset retirement obligations.  The decrease in accretion on asset retirement obligations in the first quarter of 2019 versus the first quarter of 2018 is related to the significant reduction in our Powder River Basin asset retirement obligation liability at the end of 2018 due to mine plan changes.


27


Amortization of sales contracts, net.  The decrease in amortization of sales contracts, net in the first quarter of 2019 versus the first quarter of 2018 is primarily related to the value of certain Powder River Basin supply contracts being fully amortized at the end of 2018.

Change in fair value of coal derivatives and coal trading activities, net.  The increased benefit in the first quarter of 2019 versus the prior year period is primarily related to mark-to-market gains on coal derivatives that we have entered to hedge our price risk for anticipated international thermal coal shipments. As international thermal markets declined during the current quarter, the market value of these positions increased.

Selling, general and administrative expenses.  The decrease in selling, general and administrative expenses in the first quarter of 2019 versus the first quarter of 2018 is primarily due to reduced compensation costs (approximately $1.0 million) and reduced contractor services (approximately $1.3 million).

Other operating income, net. The decreased benefit from other operating income, net in the first quarter of 2019 versus the first quarter of 2018 consists primarily of reduced income from equity investments (approximately $2.8 million), and the unfavorable impact of coal derivative settlements in the current period (approximately $3.4 million), partially offset by the benefit from heating oil positions (approximately $0.6 million).

Nonoperating Expense.  The following table summarizes our nonoperating expense during the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended March 31,
 
2019
 
2018
 
Increase (Decrease) in Net Income
 
(In thousands)
Non-service related pension and postretirement benefit costs
$
(1,766
)
 
$
(1,303
)
 
$
(463
)
Reorganization items, net
87

 
(301
)
 
388

Total nonoperating expense
$
(1,679
)
 
$
(1,604
)
 
$
(75
)

Nonoperating expenses increased slightly in the first quarter of 2019 versus the first quarter of 2018 due to an increase in non-service related pension and postretirement benefit costs partially offset by a small benefit in the current period from Chapter 11 reorganization costs.

Provision for (Benefit from) income taxes. The following table summarizes our Benefit from income taxes during the three months ended March 31, 2019 and 2018:

 
Three Months Ended March 31,
 
2019
 
2018
 
Increase (Decrease) in Net Income
 
(In thousands)
Provision for (Benefit from) income taxes
$
70

 
$
(544
)
 
$
(614
)

See Note 10, “Income Taxes,” to the Condensed Consolidated Financial Statements for a reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual provision for/(benefit from) income taxes.





28


Operational Performance

Three Months Ended March 31, 2019 and 2018 

Our 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 retirements obligations, and pass-through transportation expenses), and on other non-financial measures, such as safety and environmental performance. Adjusted EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, the accretion on asset retirement obligations and nonoperating expenses. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results by excluding transactions that are not indicative of our core operating 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 our 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. Furthermore, analogous measures are used by industry analysts and investors to evaluate the Company’s operating performance. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

The following table shows results by operating segment for the three months ended March 31, 2019 and March 31, 2018.

 
Three Months Ended March 31,
 
2019
 
2018
 
Variance
Powder River Basin
 
 
 
 
 

Tons sold (in thousands)
17,141

 
19,744

 
(2,603
)
Coal sales per ton sold
$
12.18

 
$
12.15

 
$
0.03

Cash cost per ton sold
$
10.98

 
$
10.77

 
$
(0.21
)
Cash margin per ton sold
$
1.20

 
$
1.38

 
$
(0.18
)
Adjusted EBITDA (in thousands)
$
20,583

 
$
27,502

 
$
(6,919
)
Metallurgical
 
 
 
 
 

Tons sold (in thousands)
1,793

 
1,754

 
39

Coal sales per ton sold
$
118.22

 
$
115.97

 
$
2.25

Cash cost per ton sold
$
67.27

 
$
68.33

 
$
1.06

Cash margin per ton sold
$
50.95

 
$
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