Critical and Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

Accounting Policies and Standards Update

Critical and Significant Accounting Policies

3. Significant Accounting Policies

Use of Estimates

The preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates in these Consolidated Financial Statements include: assumptions about the amount and timing of future cash flows and related discount rates used in determining asset retirement obligations (“AROs”) and in testing long-lived assets and goodwill for impairment; the fair value of derivative financial instruments; the calculation of mineral reserves; equity-based compensation expense; reserves for contingencies and litigation; useful lives of long-lived assets; postretirement employee benefit obligations; the recognition and measurement of income tax benefits and related deferred tax asset valuation allowances; and allowances for inventory obsolescence and net realizable value. Actual results could differ materially from those estimates.

Revenue Recognition

We recognize revenue from a sale when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, title has transferred to the customer, and collection of the sales price is reasonably assured.

Coal sales revenue include sales to customers of coal produced at our facilities and coal purchased from other companies. Coal sales are made to our customers under the terms of coal sales agreements. Under the typical terms of these coal sales agreements, title and risk of loss transfer to the customer at the time the coal is shipped, which is the point at which revenue is recognized. Certain contracts provide for title and risk of loss transfer at the point of destination, in which case revenue is recognized when it arrives at its destination.

Coal sales agreements typically contain coal quality specifications. With coal quality specifications in place, the raw coal sold by us to the customer at the delivery point must be substantially free of magnetic material and other foreign material impurities, and crushed to a maximum size as set forth in the respective coal sales agreement. Prior to billing the customer, price adjustments are made based on quality standards that are specified in the coal sales agreement, such as Btu factor, moisture, ash, and sodium content and can result in either increases or decreases in the value of the coal shipped.

Transportation and related costs are included in Cost of product sold, and amounts we bill to our customers for transportation are included in Revenue, both of which are included in the Consolidated Statements of Operations and Comprehensive Income.

Impairment of Long-Lived Assets

The carrying amounts of our mineral properties, equipment, and other long-lived assets are sensitive to declines in domestic and international coal prices. The cash flow models that we use to assess impairment include numerous assumptions such as our current estimates of forecast coal production, management’s outlook on forward commodity prices, operating and development costs, and discount rates. If prices remain at current levels for an extended period of time or do not recover as anticipated, if regulatory changes adversely impact coal-fired electricity generation, or if we receive an unfavorable outcome of the litigation described in Note 17, we may incur impairment charges on certain of these assets.

We evaluate the recoverability of our long-lived assets when events or changes in circumstances indicate that the carrying amount of property, plant and equipment may not be recovered over its remaining service life. An asset impairment charge is recognized when the sum of estimated future cash flows associated with the operation and disposal of the asset, on an undiscounted basis, is less than the carrying amount of the asset. An impairment charge is measured as the amount by which the carrying amount of the asset exceeds its fair value. Fair value is measured using discounted cash flows based on estimates of coal reserves, coal prices, operating expenses, and capital costs or by reference to observable comparable transaction or replacement cost data. See Note 8 for a description of recent impairments of our long-lived assets.

Asset Retirement Obligations and Remediation Costs

We recognize liabilities for AROs where we have legal obligations associated with the retirement of long-lived assets. We recognize AROs at fair value at the time the obligations are incurred. Our AROs generally are incurred when a mine site is disturbed by mining activities and as the extent of disturbance increases. AROs reflect costs associated with legally required mine reclamation and closure activities, including earthwork, vegetation, and demolition and are estimated based upon detailed engineering calculations of the amount and timing of the future cash spending for a third party to perform the required work. Spending estimates are adjusted for estimated inflation and discounted at credit-adjusted, risk-free rates to arrive at a present value of estimated future reclamation costs. The ARO amount is capitalized as part of the related mining property upon initial recognition and is included in Depreciation and depletion using the units-of-production method based on proven and probable reserves. As changes in estimates occur (such as changes in estimated costs or timing of reclamation activities resulting from mine plan revisions or new LBAs), the ARO liability and related asset are adjusted to reflect the updated estimates. If a reduction of the ARO exceeds the carrying amount of the related asset retirement cost, the adjustment is recorded as a reduction to Depreciation and depletion in the Consolidated Statements of Operations and Comprehensive Income. Increases in ARO liabilities resulting from the passage of time are recognized as Accretion in the Consolidated Statements of Operations and Comprehensive Income. Other costs related to environmental remediation are charged to expense as incurred.

Cash and Cash Equivalents

We consider all highly-liquid investments with an original maturity of three months or less to be cash equivalents. Money market funds that meet all qualifying criteria for a money market fund under the Investment Company Act of 1940 are considered cash equivalents.

Allowance for Doubtful Accounts Receivable

We determine an allowance for doubtful accounts based on the aging of accounts receivable, historical experience, and management judgment. We write off accounts receivable against the allowance when we determine a balance is uncollectible and we no longer continue to actively pursue collection of the receivable. Based on our assessment of the above criteria, an allowance for doubtful accounts was not required as of December 31, 2017 and 2016.

Inventories, Net

Materials and Supplies

We state materials and supplies at average cost. We establish allowances for excess or obsolete materials and supplies inventory based on prior experience and estimates of future usage.

Coal Inventory

We state our coal inventory, which consists of coal stockpiles that may be sold in their current condition or may be further processed prior to shipment to a customer, at the lower of cost or net realizable value. Net realizable value represents the estimated future sales price based on spot coal prices and prices under long-term contracts, less the estimated costs to complete production and bring the product to sale. The cost of coal inventory reflects mining costs incurred up to the point of stockpiling the coal and includes labor, supplies, equipment, applicable operating overhead, and depreciation, depletion, and amortization related to mining operations.

Prepaid Freight

Our logistics business incurs freight and related charges moving coal from the Spring Creek Mine to the port, as well as terminal handling charges and demurrage. These costs are included in Other assets in the Consolidated Balance Sheets until the revenue is recognized on the associated coal.

Property, Plant and Equipment

Plant and Equipment

We state plant and equipment at cost, less accumulated depreciation. Plant and equipment used in mining operations that are expected to remain in service for the life of the related mine are depreciated using the units-of-production method based on proven and probable reserves. Depreciation of other plant and equipment is computed using the straight-line method over the following estimated useful lives:

	Buildings and improvements	5 to 25 years
	Machinery and equipment	3 to 20 years
	Furniture and fixtures	3 years

Mineral Rights

Mineral rights include both proven and probable reserves and non-reserve coal deposits. We state our mineral rights at cost, less accumulated depletion. We compute depletion of mineral rights using the units-of-production method based on proven and probable reserves. Non-reserve coal deposits are not depleted until they qualify as proven and probable reserves and the mining begins. Mineral rights are included in Property, plant and equipment, net in the Consolidated Balance Sheets.

Upon the award date of federal coal leases, pursuant to which payments are required to be made in equal annual installments, we recognize an asset for the related mineral rights in Property, plant and equipment, net and a corresponding liability for our future payment obligations in current and non-current liabilities. The amount recognized as an asset is the sum of the initial installment due at the effective date of the lease and the amount recognized in current and non-current liabilities, which reflects the present value of the remaining installments. We determine the present value of the remaining installments using an estimate of the credit-adjusted, risk-free rates that reflects our credit rating. Interest expense is recognized over the term of the lease based on the imputed interest rate that was used to determine the initial current and non-current liabilities amount on the effective date. Such interest may be capitalized while activities are in progress to prepare the acquired coal reserves for mining.

Land and Surface Rights

We purchase surface lands in order to gain access to our mineral rights. Land is typically acquired for amounts greater than its fair value as a result of the value of the coal beneath it. The value of the land is determined based on published agricultural values and is not depleted. The value of the surface rights is the amount paid in excess of the published agricultural value and is depleted over the useful life of the respective land parcel. Both land and surface rights are included in land and land improvements in Property, plant and equipment, net in the Consolidated Balance Sheets.

Capitalization of Interest

We capitalize interest costs on accumulated expenditures incurred in preparing capital projects for their intended use.

Mine Development Costs

We capitalize costs of developing new mines where proven and probable reserves exist. We amortize mine development costs using the units-of-production method based on proven and probable reserves that are associated with the property being developed. Costs may include construction permits and licenses; mine design; construction of access roads, slopes and main entries; and removing overburden and waste materials to access the coal ore body in a new pit prior to the production phase, which commences when saleable coal, beyond a de minimis amount, is produced. Where multiple pits exist at a mining operation, overburden removal costs are capitalized if such costs are for the development of a new area that is separate and distinct from the existing production phase mines. Overburden removal costs that relate to the enlargement of an existing pit are expensed as incurred. Overburden removal costs incurred during the production phase are included as a cost of inventory to be recognized in Cost of product sold in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the same period as the revenue from the sale of inventory. Additionally, mine development costs include the costs associated with AROs. Mine development costs are included in land, improvements, and mineral rights in Property, plant and equipment, net in the Consolidated Balance Sheets.

Repairs and Maintenance

We capitalize costs associated with major renewals and improvements. Expenditures to replace or completely rebuild major components of major equipment, which are required at predictable intervals to maintain or extend asset life or performance, are capitalized. These major components are capitalized separately from the major equipment and depreciated according to their own estimated useful life, rather than the estimated useful life of the major equipment. All other costs of repairs and maintenance are charged to expense as incurred.

Exploration Costs

We expense all direct costs incurred in identifying new resources and in converting resources to reserves at development and production stage projects. Exploration costs are included in Cost of product sold in the Consolidated Statements of Operations and Comprehensive Income (Loss) and consisted of the following for the years ended December 31 (in thousands):

			2017			2016			2015
	Exploration costs		$	985		$	1,179		$	1,778

Derivative Financial Instruments

We are exposed to various types of risk in the normal course of business, including fluctuations in the price at which we are able to sell our coal in the future and the price we are able to purchase diesel fuel used in our operations. We seek to mitigate some of the volatility of these fluctuations by using derivative financial instruments. We recognize all derivative financial instruments as assets or liabilities at their respective fair values in the Consolidated Balance Sheets. All derivative financial instruments are included in current assets or liabilities as we have the ability to settle the positions at any time. Gains or losses from changes in the fair value of derivative financial instruments are recognized immediately in the Consolidated Statements of Operations and Comprehensive Income (Loss) in Operating income (loss). Assets and liabilities with the same counterparty, where right of offset is allowed, are recorded on a net basis in the Consolidated Balance Sheets.

Our derivative financial instruments do not qualify for hedge accounting; therefore, changes in the fair value of the derivative financial instruments are recorded in Gain (loss) on derivative financial instruments in the Consolidated Statements of Operations and Comprehensive Income (Loss) each period using mark-to-market accounting.

Fair Value of Financial Instruments

Our financial instruments include cash equivalents, accounts receivable, amounts due from related parties, accounts payable, and certain current liabilities. Due to the short-term nature of these instruments, we believe that their carrying amounts approximated fair value.

Cash equivalents and derivative financial instruments are reported in our Consolidated Balance Sheets at fair value. We categorize assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. See Notes 5 and 6.

Pensions and Other Postretirement Benefits

Our employees participate in defined contribution retirement plans, which require us to make contributions based on a percentage of compensation or to match employee contributions, subject to limitations. We recognize compensation expense for our required contributions as incurred.

Our postretirement medical plan provides retiree medical benefits for our employees. We accrue costs of these benefits over the employees’ period of active service. These costs are determined on an actuarial basis. In April 2016, we communicated certain changes in our Retiree Medical Plan to employees that became effective January 1, 2017. Changes include a decrease in the number of active employees that are eligible for the plan as well as moving to a defined contribution plan away from a defined benefit plan. See Note 16.

Income Taxes

We account for income taxes using a balance sheet approach in accordance with U.S. GAAP. Deferred income taxes are provided for temporary differences arising from differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates expected to be in effect when the related taxes are expected to be paid or recovered. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies, and our overall deferred tax position. We recognize the benefit of uncertain tax positions at the greatest amount that is determined to be more likely than not of being realized. Interest and penalties related to income tax matters are included in Income tax benefit (expense) in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Non-Income Based Taxes and Royalties

We are subject to certain production, severance, and extraction taxes and royalties that are charged based on coal production or coal sales. The taxes and royalties are paid to federal, state and local governments or to private parties based on legally established methodologies, rates, and timeframes. Amounts payable within one year are classified as current liabilities and are included in Royalties and production taxes in the Consolidated Balance Sheets. Amounts payable after one year are included in Other liabilities, noncurrent, in the Consolidated Balance Sheets. We are open to federal and state audits on our non-income based taxes and royalties until statutes of limitations expire. Through the normal course of business, we receive audit findings and assessments, which may be resolved or disputed and appealed. If it is determined that it is more likely than not that adjustments to our filed positions are warranted, we record an accrual.

Equity-Based Compensation

We grant restricted stock units and performance-based share units to certain officers, employees and non-employee directors under our Long-Term Incentive Plan (LTIP) and have granted stock options in the past. We measure the cost of equity-based employee compensation based on the fair value of the award and recognize that cost over the period during which the recipient is required to provide services in exchange for the award, typically the vesting period. Awards granted to employees generally cliff vest over a three-year period while awards granted to non-employee directors vest upon their separation of service. The granting of restricted stock units results in recognition of compensation cost measured at the grant-date market price. Compensation cost for stock options is measured based on grant-date fair value of the award using the Black-Scholes option valuation model and for equity settled performance-based share units, a Monte Carlo simulation is utilized. For performance-based share units that are expected to be settled in cash upon any vesting, such as the 2016 grant, which may vest in March 2019 subject to achievement of the performance criteria over the three-year performance period, compensation cost is equal to its fair value as of the period-end based upon the share price and our relative total stockholder return. These awards are classified as a liability and included within Other liabilities in the Consolidated Balance Sheets.

Earnings per Share

We compute basic earnings per share by dividing Net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of shares of common and potential dilutive common stock outstanding during the period. We apply the treasury stock method to determine potential dilutive common shares related to our stock options and non-vested stock awards.

Contingent Liabilities

We account for contingent liabilities related to litigation, claims, and assessments based on the specific facts and circumstances and our experience with similar matters. We record our best estimate of a loss when the loss is considered probable and the amount of loss is reasonably estimable. When a loss is probable and there is a range of the estimated loss with no best estimate in the range, we record our estimate of the minimum liability. As additional information becomes available, we revise our estimates as appropriate.

Recently Issued Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance will not be material to our Consolidated Financial Statements upon adoption.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation – Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about the types of changes to terms or conditions of a share-based payment award that would require an entity to apply modification accounting. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We have adopted the new standard as of January 1, 2018.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost (“ASU 2017-07”), which requires separate presentation of service costs and all other components of net benefit costs on the income statement. Under ASU 2017-07, service cost is included in the same line item as other compensation costs arising from services rendered by employees during the period, with all other components of net benefit costs on the income statement outside of income from operations. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied retrospectively. We have adopted the new standard as of January 1, 2018. We expect the standard to reduce 2016 and 2017 operating income by $4.1 million and $6.4 million, respectively, due to the removal of the non-service component of our postretirement medical plan, and to increase non-operating income by the same amount, with no impact to Net income (loss) in both periods.

In January 2017, the FASB issued ASU 2017-04, Goodwill — Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the second step in the goodwill impairment test whereby a company measures an impairment loss by calculating the implied fair value of goodwill of a reporting unit and comparing it against its carrying value. As a result, a goodwill impairment loss will be calculated by comparing the fair value of a reporting unit with its carrying amount. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and management is currently evaluating the timing of adoption. The amendments in this update should be applied prospectively, with added disclosure regarding the nature of and reason for the change in accounting principal.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows – Restricted Cash (“ASU 2016-18”), which requires the statement of cash flows to explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. We have adopted the new standard as of January 1, 2018.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes — Intra-Entity Asset Transfers of Assets other than Inventory (“ASU 2016-16”), which would require the recognition of the tax expense from the sale of an asset other than inventory when the transfer occurs, rather than when the asset is sold to a third party or otherwise recovered through use. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We have adopted the new standard as of January 1, 2018. We completed a review of our intra-entity asset transfers as of December 31, 2017, and have determined that ASU 2016-16 will not have an impact on our Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which standardizes cash flow statement classification of certain transactions, including cash payments for debt prepayment or extinguishment, proceeds from insurance claim settlements, and distributions received from equity method investments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. If impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. We have adopted the new standard as of January 1, 2018.

In March 2016, the FASB issued ASU 2016-09, Improvements to Share Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for stock-based compensation transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this standard on January 1, 2017. ASU 2016-09 allowed an accounting policy election to either estimate expected forfeitures, which was previously required under U.S. GAAP, or recognize forfeitures as they occurred, as of the adoption date of this ASU. We have elected a policy of estimating expected forfeitures, which is consistent with past practices.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which would require the lessee to recognize the assets and liabilities on all leases that may have not been recognized in the past. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We will adopt the new standard on January 1, 2019. In 2017, we began the evaluation of our contracts with our vendors under ASU 2016-02. We will continue to evaluate our contracts throughout 2018. However, based upon our initial reviews and the future payments under operating leases disclosed in Note 17, we do not currently anticipate that adoption of this standard will have a material impact on our results of operations, financial condition, and cash flows.

From May 2014 through December 2016, the FASB issued several ASUs related to Revenue from Contracts with Customers (“ASC 606”). These ASUs are intended to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for interim and annual periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have adopted the new standard as of January 1, 2018 and utilize the modified retrospective method. This approach allows us to apply the new standard to (1) all new contracts entered into after January 1, 2018 and (2) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance as of January 1, 2018 through a cumulative adjustment to equity. Consolidated revenue presented in our comparative financial statements for periods prior to January 1, 2018 would not be revised.

During 2016 and 2017, we evaluated our contracts with customers under ASC 606. The impact of adopting ASC 606 on our results of operations, financial condition, and cash flows is not material. For the significant majority of our contracts related to our Owned and Operated Mines segment, there is no change to timing or method of recognizing revenue. We have also determined that there would be no change to timing or method of recognizing revenue for our Logistics and Related Activities segment. The impact of adopting ASC 606 primarily relates to customers where title and risk of loss transfer at different points. Under current guidance, revenue is recognized when title passes to the customer at their destination. However, control (as defined in ASC 606) passes when risk of loss transfers to these customers at the mine, and as such, revenue recognition will be accelerated under the new standard. The impact to our results is not material because the analysis of our contracts under ASC 606 supports the recognition of revenue at a point in time, which is consistent with our current revenue recognition model. Because control does not continuously pass to our customers during the mining and transportation process, revenue will continue to be recognized at a point in time. For the majority of the contracts in our Owned and Operated Mines segment, this is supported by the fact that title and risk of loss pass to the customer once coal is loaded onto the railcar at the mine, and the customer obtains the significant risk and rewards of ownership of the coal. This is also the point at which we have transferred physical possession of the coal. Similarly, for our contracts in our Logistics and Related Activities segment, title and risk of loss pass to the customer once the coal reaches an agreed-upon destination, at which point the customer obtains the significant risk and rewards of ownership of the coal, as well as physical possession of the coal. Furthermore, our analysis of our performance obligations under ASC 606 is not materially different from our current revenue recognition model. Lastly, our analysis on the transaction price is also not materially different from our current revenue recognition model.

The following table reflects the adoption of ASC 606 on our Consolidated Balance Sheets as of January 1, 2018 (in thousands):

	Balance as of December 31, 2017		Adjustment Due to ASC 606		Balance as of January 1, 2018
Assets
Accounts receivable	$	50,075	$	781	$	50,856
Inventories, net		72,904		(660)		72,244

Equity
Retained Earnings	$	347,046	$	121	$	347,167

We also do not expect ASC 606 to have a material impact on other areas of our Consolidated Balance Sheets. All amounts that are due from our customers are known at the time of invoicing, at which time a receivable is recognized as well as the corresponding revenue. We do not currently have any contracts in place where we would transfer coal in advance of knowing the final price of the coal sold, and thus would not have any contract assets that we would record at this point in time. In infrequent situations, we have required advance payment from our customers, and record this payment as deferred revenue. We currently only have one contract where we received an upfront payment from the customer. However, all of the deferred revenue related to this contract has been recognized as of December 31, 2017. As such, we do not expect any impact on our Consolidated Balance Sheets related to contract liabilities.

ASC 606 includes expanded disclosure requirements, including the disaggregation of revenue, significant judgments made with regard to revenue recognition and reconciliation of contract balances, among other disclosures. Although the impact of adoption is expected to be immaterial on our financial statements, we do anticipate adding additional detail to our revenue disclosures.