Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

(Mark One)

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2015

 

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                      .

 

Commission file number: 1-13105

 

 

Arch Coal, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

43-0921172

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

At July 20, 2015 there were 212,916,357 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

Part I FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

37

Item 4. Controls and Procedures

38

Part II OTHER INFORMATION

38

Item 1. Legal Proceedings

38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 4. Mine Safety Disclosures

42

Item 5. Other Information

42

Item 6. Exhibits

43

 

2



Table of Contents

 

Part I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

Revenues

 

$

644,462

 

$

713,776

 

$

1,321,467

 

$

1,449,747

 

Costs, expenses and other operating

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

566,252

 

622,137

 

1,128,574

 

1,308,451

 

Depreciation, depletion and amortization

 

97,372

 

102,464

 

202,246

 

206,887

 

Amortization of acquired sales contracts, net

 

(1,644

)

(3,239

)

(5,034

)

(6,935

)

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

 

1,211

 

(2,992

)

2,431

 

(2,078

)

Asset impairment and mine closure costs

 

19,146

 

1,512

 

19,146

 

1,512

 

Selling, general and administrative expenses

 

24,268

 

29,931

 

46,873

 

59,067

 

Other operating (income) expense, net

 

7,403

 

(232

)

16,489

 

(8,230

)

 

 

714,008

 

749,581

 

1,410,725

 

1,558,674

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(69,546

)

(35,805

)

(89,258

)

(108,927

)

Interest expense, net

 

 

 

 

 

 

 

 

 

Interest expense

 

(99,574

)

(97,960

)

(198,826

)

(194,431

)

Interest and investment income

 

962

 

2,036

 

3,335

 

3,879

 

 

 

(98,612

)

(95,924

)

(195,491

)

(190,552

)

Nonoperating expense

 

 

 

 

 

 

 

 

 

Expenses related to debt restructuring

 

(4,016

)

 

(4,016

)

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(172,174

)

(131,729

)

(288,765

)

(299,479

)

Benefit from income taxes

 

(4,071

)

(34,869

)

(7,467

)

(78,480

)

Net loss

 

$

(168,103

)

$

(96,860

)

$

(281,298

)

$

(220,999

)

 

 

 

 

 

 

 

 

 

 

Losses per common share

 

 

 

 

 

 

 

 

 

Basic and diluted LPS

 

$

(0.79

)

$

(0.46

)

$

(1.32

)

$

(1.04

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

212,914

 

212,225

 

212,788

 

212,198

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

 

$

 

$

0.01

 

 

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

 

3



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

Net loss

 

$

(168,103

)

$

(96,860

)

$

(281,298

)

$

(220,999

)

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) before tax

 

(3,199

)

1,007

 

1,846

 

778

 

Income tax benefit (provision)

 

1,153

 

(362

)

(664

)

(280

)

 

 

(2,046

)

645

 

1,182

 

498

 

Pension, postretirement and other post-employment benefits

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) before tax

 

3,474

 

(2,269

)

3,768

 

(4,116

)

Income tax benefit (provision)

 

(1,252

)

817

 

(1,357

)

1,482

 

 

 

2,222

 

(1,452

)

2,411

 

(2,634

)

Available-for-sale securities

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) before tax

 

68

 

(1,203

)

359

 

(3,236

)

Income tax benefit (provision)

 

(28

)

433

 

(132

)

1,165

 

 

 

40

 

(770

)

227

 

(2,071

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

216

 

(1,577

)

3,820

 

(4,207

)

Total comprehensive loss

 

$

(167,887

)

$

(98,437

)

$

(277,478

)

$

(225,206

)

 

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

 

4



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

439,655

 

$

734,231

 

Short term investments

 

249,754

 

248,954

 

Restricted cash

 

43,563

 

5,678

 

Trade accounts receivable

 

204,593

 

211,506

 

Other receivables

 

14,948

 

20,511

 

Inventories

 

223,929

 

190,253

 

Prepaid royalties

 

9,006

 

11,118

 

Deferred income taxes

 

47,277

 

52,728

 

Coal derivative assets

 

13,358

 

13,257

 

Other current assets

 

50,838

 

54,515

 

Total current assets

 

1,296,921

 

1,542,751

 

Property, plant and equipment, net

 

6,341,026

 

6,453,458

 

Other assets

 

 

 

 

 

Prepaid royalties

 

52,956

 

66,806

 

Equity investments

 

227,788

 

235,842

 

Other noncurrent assets

 

117,664

 

130,866

 

Total other assets

 

398,408

 

433,514

 

Total assets

 

$

8,036,355

 

$

8,429,723

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

156,725

 

$

180,113

 

Accrued expenses and other current liabilities

 

262,958

 

302,396

 

Current maturities of debt

 

31,763

 

36,885

 

Total current liabilities

 

451,446

 

519,394

 

Long-term debt

 

5,114,581

 

5,123,485

 

Asset retirement obligations

 

409,435

 

398,896

 

Accrued pension benefits

 

13,580

 

16,260

 

Accrued postretirement benefits other than pension

 

34,176

 

32,668

 

Accrued workers’ compensation

 

97,489

 

94,291

 

Deferred income taxes

 

411,930

 

422,809

 

Other noncurrent liabilities

 

109,693

 

153,766

 

Total liabilities

 

6,642,330

 

6,761,569

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.01 par value, authorized 260,000 shares, issued 214,433 shares and 213,791 shares at June 30, 2015 and December 31, 2014, respectively

 

2,145

 

2,141

 

Paid-in capital

 

3,051,805

 

3,048,460

 

Treasury stock, at cost, 1,517 shares at June 30, 2015 and December 31, 2014

 

(53,863

)

(53,863

)

Accumulated deficit

 

(1,613,123

)

(1,331,825

)

Accumulated other comprehensive income

 

7,061

 

3,241

 

Total stockholders’ equity

 

1,394,025

 

1,668,154

 

Total liabilities and stockholders’ equity

 

$

8,036,355

 

$

8,429,723

 

 

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

 

5



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net loss

 

$

(281,298

)

$

(220,999

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

202,246

 

206,887

 

Amortization of acquired sales contracts, net

 

(5,034

)

(6,935

)

Amortization relating to financing activities

 

12,539

 

7,757

 

Prepaid royalties expensed

 

3,939

 

3,575

 

Employee stock-based compensation expense

 

3,354

 

5,469

 

Asset impairment and non-cash mine closure costs

 

17,242

 

1,512

 

Expenses related to debt restructuring

 

4,016

 

 

Amortization of premiums on debt securities held

 

1,010

 

 

Gains on disposals and divestitures, net

 

(1,325

)

(18,506

)

Deferred income taxes

 

(7,510

)

(78,568

)

Changes in:

 

 

 

 

 

Receivables

 

12,433

 

267

 

Inventories

 

(33,743

)

3,522

 

Accounts payable, accrued expenses and other current liabilities

 

(56,419

)

10,495

 

Income taxes, net

 

(37

)

(571

)

Other

 

3,012

 

7,749

 

Cash used in operating activities

 

(125,575

)

(78,346

)

Investing activities

 

 

 

 

 

Capital expenditures

 

(99,361

)

(95,746

)

Additions to prepaid royalties

 

(409

)

(3,341

)

Proceeds from disposals and divestitures

 

991

 

43,245

 

Purchases of marketable securities

 

(161,336

)

(168,951

)

Proceeds from sale or maturity of marketable securities and other investments

 

157,729

 

166,018

 

Investments in and advances to affiliates

 

(5,138

)

(9,501

)

Cash used in investing activities

 

(107,524

)

(68,276

)

Financing activities

 

 

 

 

 

Payments on term loan

 

(9,750

)

(9,750

)

Net payments on other debt

 

(9,826

)

(9,390

)

Expenses related to debt restructuring

 

(4,016

)

 

Dividends paid

 

 

(2,123

)

Debt financing costs

 

 

(1,957

)

Withdrawals (deposits) of restricted cash

 

(37,885

)

(1,103

)

Cash used in financing activities

 

(61,477

)

(24,323

)

Decrease in cash and cash equivalents

 

(294,576

)

(170,945

)

Cash and cash equivalents, beginning of period

 

734,231

 

911,099

 

Cash and cash equivalents, end of period

 

$

439,655

 

$

740,154

 

 

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

 

6



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Arch Coal, Inc. and its subsidiaries (the “Company”). The Company’s primary business is the production of thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and steel producers both in the United States and around the world. The Company currently operates mining complexes in West Virginia, Maryland, Virginia, Illinois, Wyoming and Colorado.  All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

 

2.  Accounting Policies

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. Amendments in this update are effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. We expect upon adoption of this guidance that the current financial statement classification of debt issuance costs will change from total assets to long-term debt on our Condensed Consolidated Balance Sheet.

 

3.  Accumulated Other Comprehensive Income

 

The following items are included in accumulated other comprehensive income (“AOCI”):

 

 

 

 

 

Pension,

 

 

 

 

 

 

 

 

 

Postretirement

 

 

 

 

 

 

 

 

 

and Other

 

 

 

Accumulated

 

 

 

 

 

Post-

 

 

 

Other

 

 

 

Derivative

 

Employment

 

Available-for-

 

Comprehensive

 

 

 

Instruments

 

Benefits

 

Sale Securities

 

Income

 

 

 

(In thousands)

 

Balance at December 31, 2014

 

$

2,550

 

$

2,860

 

$

(2,169

)

$

3,241

 

Unrealized gains (losses)

 

3,234

 

 

(2,445

)

789

 

Amounts reclassified from AOCI

 

(2,051

)

2,411

 

2,671

 

3,031

 

Balance at June 30, 2015

 

$

3,733

 

$

5,271

 

$

(1,943

)

$

7,061

 

 

7



Table of Contents

 

The following amounts were reclassified out of AOCI:

 

 

 

Amounts Reclassified from AOCI

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Line Item in the
Condensed Consolidated

 

Details About AOCI Components

 

2015

 

2014

 

2015

 

2014

 

Statement of Operations

 

 

 

(In thousands)

 

 

 

Derivative instruments

 

$

2,727

 

$

151

 

$

3,208

 

$

454

 

Revenues

 

 

 

(983

)

(55

)

(1,157

)

(164

)

Benefit from income taxes

 

 

 

$

1,744

 

$

96

 

$

2,051

 

$

290

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension, postretirement and other post-employment benefits

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credits (1)

 

$

2,083

 

$

2,591

 

$

4,167

 

$

5,217

 

 

 

Amortization of actuarial gains (losses), net (1)

 

(5,556

)

(321

)

(7,934

)

(1,100

)

 

 

 

 

(3,473

)

2,270

 

(3,767

)

4,117

 

 

 

 

 

1,251

 

(817

)

1,356

 

(1,482

)

Benefit from income taxes

 

 

 

$

(2,222

)

$

1,453

 

$

(2,411

)

$

2,635

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

(1,430

)

$

(1,123

)

$

(4,227

)

$

(1,679

)

Interest and investment income

 

 

 

549

 

404

 

1,556

 

604

 

Benefit from income taxes

 

 

 

$

(881

)

$

(719

)

$

(2,671

)

$

(1,075

)

Net of tax

 

 


1 Production-related benefits and workers’ compensation costs are included in inventoriable production costs.

 

4.  Divestitures

 

During the first quarter of 2014, the Company entered into agreements to sell an operating thermal coal complex and an idled thermal coal mine in Kentucky and the Company’s ADDCAR subsidiary, which manufactures a patented highwall mining system.  The sales closed in the first quarter of 2014 for total consideration of $45.3 million.  The Company received $26.3 million in cash in the first quarter of 2014, and the remainder was paid in the second and fourth quarters of 2014.  The Company recognized a net pre-tax gain of $12.8 million from these divestitures, reflected in “other operating (income) expense, net” in the Condensed Consolidated Statements of Operations.

 

5.  Asset Impairment and Mine Closure Costs

 

During the second quarter of 2015, the Company recorded $19.1 million to “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations.  An impairment charge of $12.2 million relates to the portion of an advance royalty balance on a reserve base mined at the Company’s Mountain Laurel, Spruce and Briar Branch operations that will not be recouped based on latest estimates of sales volumes and pricing through the recoupment period which runs through March 2017.  Additionally, the Company recorded a $5.6 million impairment charge related to the closure of a higher cost mining complex, Cumberland River, serving the metallurgical coal markets.

 

8



Table of Contents

 

6.  Inventories

 

Inventories consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Coal

 

$

99,691

 

$

71,901

 

Repair parts and supplies

 

124,238

 

118,352

 

 

 

$

223,929

 

$

190,253

 

 

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $6.6 million at June 30, 2015 and $6.6 million at December 31, 2014.

 

7.   Investments in Available-for-Sale Securities

 

The Company has invested in marketable debt securities, primarily highly liquid investment grade corporate bonds.  These investments are held in the custody of a major financial institution.  These securities, along with the Company’s investments in marketable equity securities, are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.

 

The Company’s investments in available-for-sale marketable securities are as follows:

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

Accumulated

 

 

 

Classification

 

 

 

 

 

Gross Unrealized

 

Fair

 

Short-Term

 

Other

 

 

 

Cost Basis

 

Gains

 

Losses

 

Value

 

Investments

 

Assets

 

 

 

(In thousands)

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

$

252,877

 

$

 

$

(3,123

)

$

249,754

 

$

249,754

 

$

 

Equity securities

 

3,910

 

1,973

 

(2,852

)

3,031

 

 

3,031

 

Total Investments

 

$

256,787

 

$

1,973

 

$

(5,975

)

$

252,785

 

$

249,754

 

$

3,031

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

Gross

 

Gross

 

 

 

Classification

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

Short-Term

 

Other

 

 

 

Cost Basis

 

Gains

 

Losses

 

Value

 

Investments

 

Assets

 

 

 

(In thousands)

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

$

253,590

 

$

 

$

(4,636

)

$

248,954

 

$

248,954

 

$

 

Equity securities

 

3,910

 

4,125

 

(2,890

)

5,145

 

 

5,145

 

Total Investments

 

$

257,500

 

$

4,125

 

$

(7,526

)

$

254,099

 

$

248,954

 

$

5,145

 

 

The aggregate fair value of investments with unrealized losses that were owned for less than a year was $187.0 million and $163.0 million at June 30, 2015 and December 31, 2014, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year, and were also in a continuous unrealized loss position during that time, was $58.9 million and $86.1 million at June 30, 2015 and December 31, 2014, respectively.  The unrealized losses in the Company’s portfolio are the result of normal market fluctuations.  The Company does not currently intend to sell these investments before recovery of their amortized cost base.

 

The debt securities outstanding at June 30, 2015 have maturity dates ranging from the third quarter of 2015 through the fourth quarter of 2016.  The Company classifies its investments as current based on the nature of the investments and their availability to provide cash for use in current operations.

 

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Table of Contents

 

8.   Derivatives

 

Diesel fuel price risk management

 

The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates purchasing approximately 57 to 62 million gallons of diesel fuel for use in its operations during 2015.  To protect the Company’s cash flows from increases in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts and purchased heating oil call options.  At June 30, 2015, the Company had protected the price of approximately 100% of its expected purchases for the remainder of the year with out-of-the-money call options with an average strike price of $3.13 per gallon.  Due to the drop in heating oil pricing in early 2015, the Company has added in 19.5 million gallons of additional call options for the second half of 2015 representing 65% of expected purchases at an average strike price of $1.92 per gallon.  Additionally, the Company has protected approximately 49%  of our expected 2016 purchases with out-of-the-money call options.  At June 30, 2015, the Company had purchased heating oil call options for approximately 66 million gallons for the purpose of managing the price risk associated with future diesel purchases.  These positions are not accounted for as hedges.

 

Coal price risk management positions

 

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.

 

At June 30, 2015, the Company held derivatives for risk management purposes that are expected to settle in the following years:

 

(Tons in thousands)

 

2015

 

2016

 

Total

 

Coal sales

 

2,405

 

280

 

2,685

 

Coal purchases

 

1,208

 

240

 

1,448

 

 

The Company has also entered into a nominal quantity of natural gas put options to protect the Company from decreases in natural gas prices, which could impact coal demand.  These options are not accounted for as hedges.

 

Coal trading positions

 

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The estimated future realization of the value of the trading portfolio is $1.1 million of gains during the remainder of 2015 and $1.3 million of gains in 2016.

 

Tabular derivatives disclosures

 

The Company has master netting agreements with all of its counterparties which allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the condensed consolidated balance sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not the net position presented in the accompanying condensed consolidated balance sheets. The fair value and location of derivatives reflected in the accompanying Condensed Consolidated Balance Sheets are as follows:

 

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Table of Contents

 

 

 

June 30, 2015

 

 

 

December 31, 2014

 

 

 

Fair Value of Derivatives

 

Asset

 

Liability

 

 

 

Asset

 

Liability

 

 

 

(In thousands)

 

Derivative

 

Derivative

 

 

 

Derivative

 

Derivative

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal

 

$

4,602

 

$

(132

)

 

 

$

6,535

 

$

(2,492

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating oil — diesel purchases

 

5,444

 

 

 

 

300

 

 

 

 

Coal — held for trading purposes

 

85,130

 

(82,582

)

 

 

96,898

 

(93,272

)

 

 

Coal — risk management

 

12,551

 

(8,035

)

 

 

8,510

 

(3,688

)

 

 

Natural gas

 

993

 

 

 

 

 

 

 

 

Total

 

104,118

 

(90,617

)

 

 

105,708

 

(96,960

)

 

 

Total derivatives

 

108,720

 

(90,749

)

 

 

112,243

 

(99,452

)

 

 

Effect of counterparty netting

 

(89,918

)

89,918

 

 

 

(98,686

)

98,686

 

 

 

Net derivatives as classified in the balance sheets

 

$

18,802

 

$

(831

)

$

17,971

 

$

13,557

 

$

(766

)

$

12,791

 

 

Net derivatives as reflected on the balance sheets (in thousands)

 

 

 

June 30, 2015

 

December 31, 2014

 

Heating oil

 

Other current assets

 

$

5,444

 

$

300

 

Coal

 

Coal derivative assets

 

13,358

 

13,257

 

 

 

Accrued expenses and other current liabilities

 

(831

)

(766

)

 

 

 

 

$

17,971

 

$

12,791

 

 

The Company had a current liability for the obligation to post cash collateral of $0.8 million and $2.4 million at June 30, 2015 and December 31, 2014, respectively. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities”, in the accompanying Condensed Consolidated Balance Sheets.

 

The effects of derivatives on measures of financial performance are as follows:

 

Derivatives used in Cash Flow Hedging Relationships (in thousands)

Three Months Ended June 30,

 

 

 

 

 

Gain (Loss) Recognized in
Other Comprehensive Income
(Effective Portion)

 

Gains (Losses) Reclassified
from Other Comprehensive
Income into Income
(Effective Portion)

 

 

 

 

 

2015

 

2014

 

2015

 

2014

 

Coal sales

 

(1)

 

$

(1,163

)

$

1,870

 

$

4,990

 

$

223

 

Coal purchases

 

(2)

 

687

 

(712

)

(2,263

)

(72

)

Totals

 

 

 

$

(476

)

$

1,158

 

$

2,727

 

$

151

 

 

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended June 30, 2015 and 2014.

 

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Derivatives Not Designated as Hedging Instruments (in thousands)

Three Months Ended June 30,

 

 

 

 

 

Gain (Loss) Recognized

 

 

 

 

 

2015

 

2014

 

Coal — unrealized

 

(3)

 

$

(875

)

$

147

 

Coal — realized

 

(4)

 

$

826

 

$

1,318

 

Natural gas — unrealized

 

(3)

 

$

(221

)

$

(267

)

Heating oil — diesel purchases

 

(4)

 

$

628

 

$

 

Heating oil — fuel surcharges

 

(4)

 

$

 

$

(47

)

 


Location in statement of operations:

(1) — Revenues

(2) — Cost of sales

(3) — Change in fair value of coal derivatives and coal trading activities, net

(4) — Other operating income, net

 

Derivatives used in Cash Flow Hedging Relationships (in thousands)

Six Months Ended June 30,

 

 

 

 

 

Gain (Loss) Recognized in
Other Comprehensive Income
(Effective Portion)

 

Gains (Losses) Reclassified
from Other Comprehensive
Income into Income
(Effective Portion)

 

 

 

 

 

2015

 

2014

 

2015

 

2014

 

Coal sales

 

(1)

 

9,102

 

$

1,355

 

$

5,872

 

$

930

 

Coal purchases

 

(2)

 

(4,051

)

(123

)

(2,664

)

(476

)

Totals

 

 

 

$

5,051

 

$

1,232

 

$

3,208

 

$

454

 

 

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the six month periods ended June 30, 2015 and 2014.

 

Derivatives Not Designated as Hedging Instruments (in thousands)

Six Months Ended June 30,

 

 

 

 

 

Gain (Loss) Recognized

 

 

 

 

 

2015

 

2014

 

Coal — unrealized

 

(3)

 

$

(1,286

)

$

(1,155

)

Coal — realized

 

(4)

 

$

1,917

 

$

4,197

 

Natural gas — unrealized

 

(3)

 

$

(62

)

$

(259

)

Heating oil — diesel purchases

 

(4)

 

$

(1,737

)

$

(2,963

)

Heating oil — fuel surcharges

 

(4)

 

$

 

$

(301

)

 


Location in statement of operations:

(1) — Revenues

(2) — Cost of sales

(3) — Change in fair value of coal derivatives and coal trading activities, net

(4) — Other operating income, net

 

Based on fair values at June 30, 2015, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $4.2 million are expected to be reclassified from other comprehensive income into earnings during the next twelve months.

 

Related to its trading portfolio, the Company recognized net unrealized and realized losses of $0.1 million and $3.1 million of net unrealized and realized gains during the three months ended June 30, 2015 and 2014, respectively; and net unrealized and realized losses of $1.1 million and net unrealized and realized gains of $3.5 million during the six months ended June 30, 2015 and 2014.  Gains and losses from trading activities are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying Condensed Consolidated Statements of Operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.

 

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Table of Contents

 

9.   Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Payroll and employee benefits

 

$

50,429

 

$

73,362

 

Taxes other than income taxes

 

110,666

 

114,598

 

Interest

 

30,452

 

30,384

 

Acquired sales contracts

 

6,167

 

12,453

 

Workers’ compensation

 

17,220

 

16,714

 

Asset retirement obligations

 

19,210

 

19,222

 

Other

 

28,814

 

35,663

 

 

 

$

262,958

 

$

302,396

 

 

10.  Debt and Financing Arrangements

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Term loan due 2018 ($1.9 billion face value)

 

$

1,883,109

 

$

1,890,846

 

7.00% senior notes due 2019 at par

 

1,000,000

 

1,000,000

 

9.875% senior notes due 2019 ($375.0 million face value)

 

364,517

 

363,493

 

8.00% senior secured notes due 2019 at par

 

350,000

 

350,000

 

7.25% senior notes due 2020 at par

 

500,000

 

500,000

 

7.25% senior notes due 2021 at par

 

1,000,000

 

1,000,000

 

Other

 

48,718

 

56,031

 

 

 

5,146,344

 

5,160,370

 

Less current maturities of debt

 

31,763

 

36,885

 

Long-term debt

 

$

5,114,581

 

$

5,123,485

 

 

Financial covenant requirements may restrict the amount of unused capacity available to the Company for borrowings and letters of credit under credit facilities.  The credit facility amendment on December 17, 2013 amended financial maintenance covenants to include only a minimum liquidity covenant of $550 million until June 2015, at which time a maximum secured leverage ratio covenant of 5.0 times trailing twelve months earnings before interest, taxes, depreciation and amortization (“EBITDA”) takes effect.   As of June 30, 2015, we are in compliance with the covenants.

 

At June 30, 2015, the available borrowing capacity under the Company’s lines of credit was approximately $117.7 million.

 

11.    Income Taxes

 

During the first half of 2015, the Company determined it was more likely than not that the federal and state net operating losses it expects to generate in 2015 will not be realized based on projections of future taxable income.  Accordingly, the estimated annual effective rate for the year ended December 31, 2015 includes a valuation allowance.   In applying the estimated annual effective rate to earnings for the three months ended June 30, 2015, the Company increased its valuation allowance by $59.3 million for the federal net operating losses and $3.3 million for the state net operating losses; and $104.6 million for federal net operating losses and $5.8 million for state net operating losses for the six months ended June 30, 2015.

 

During the first half of 2014, the Company increased its valuation allowance for the portion of the federal and state net operating losses it expected to generate in 2014.  The Company increased its valuation allowance by $38.1 million for the federal net operating losses and $3.9 million for the state net operating losses.

 

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Table of Contents

 

12.  Fair Value Measurements

 

The hierarchy of fair value measurements assigns a level to fair value measurements based on the inputs used in the respective valuation techniques. The levels of the hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

 

·    Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities, U.S. Treasury securities, and coal futures that are submitted for clearing on the New York Mercantile Exchange.

 

·    Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s level 2 assets and liabilities include U.S. government agency securities and commodity contracts (coal and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

 

·    Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (coal, natural gas and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at June 30, 2015.

 

The table below sets forth, by level, the Company’s financial assets and liabilities that are recorded at fair value in the accompanying condensed consolidated balance sheet:

 

 

 

June 30, 2015

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments in marketable securities

 

$

252,785

 

$

3,031

 

$

249,754

 

$

 

Derivatives

 

18,802

 

9,134

 

1,828

 

7,840

 

Total assets

 

$

271,587

 

$

12,165

 

$

251,582

 

$

7,840

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

$

831

 

$

 

$

831

 

$

 

 

The Company’s contracts with its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying Condensed Consolidated Balance Sheet, based on this counterparty netting.

 

The following table summarizes the change in the fair values of financial instruments categorized as level 3.

 

 

 

Three Months Ended
June 30, 2015

 

Six Months Ended
June 30, 2015

 

 

 

(In thousands)

 

 

 

Balance, beginning of period

 

$

9,270

 

$

3,040

 

Realized and unrealized losses recognized in earnings, net

 

(481

)

(1,828

)

Realized and unrealized gains recognized in other comprehensive income, net

 

(2,791

)

(1,341

)

Purchases

 

1,842

 

9,625

 

Issuances

 

 

(1,656

)

Ending balance

 

$

7,840

 

$

7,840

 

 

Net unrealized gains of $0.2 million and net unrealized losses of $1.6 million were recognized during the three and six months ended June 30, 2015, respectively, related to level 3 financial instruments held on June 30, 2015.

 

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Table of Contents

 

Fair Value of Long-Term Debt

 

At June 30, 2015 and December 31, 2014, the fair value of the Company’s debt, including amounts classified as current, was $1.9 billion and $2.7 billion, respectively. Fair values are based upon observed prices in an active market, when available, or from valuation models using market information, which fall into Level 2 in the fair value hierarchy.

 

13.   Loss Per Common Share

 

The effect of options, restricted stock and restricted stock units that were excluded from the calculation of diluted weighted average shares outstanding because the exercise price or grant price of the securities exceeded the average market price of the Company’s common stock were:  9.1 million shares and 8.7 million shares of common stock for the three and six months ended June 30, 2015, respectively; and 7.0 million shares of common stock for both the three and six months ended June 30, 2014.  The weighted average share impacts of options, restricted stock and restricted stock units that were excluded from the calculation of weighted average shares due to the Company’s incurring a net loss for the three and six months ended June 30, 2015 were 1.7 million and 2.1 million, respectively; and 2.9 million and 2.2 million shares for the three and six months ended June 30, 2014, respectively.

 

14.  Employee Benefit Plans

 

The following table details the components of pension benefit costs (credits):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Service cost

 

$

1

 

$

5,477

 

$

5

 

$

11,401

 

Interest cost

 

3,695

 

4,192

 

7,265

 

8,556

 

Expected return on plan assets

 

(4,467

)

(5,879

)

(10,231

)

(11,857

)

Amortization of prior service costs (credits)

 

 

(53

)

 

(107

)

Amortization of other actuarial losses

 

3,185

 

532

 

5,243

 

1,480

 

Net benefit cost

 

$

2,414

 

$

4,269

 

$

2,282

 

$

9,473

 

 

The following table details the components of other postretirement benefit costs (credits):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Service cost

 

$

200

 

$

440

 

$

433

 

$

884

 

Interest cost

 

308

 

457

 

643

 

921

 

Amortization of prior service credits

 

(2,083

)

(2,501

)

(4,167

)

(5,002

)

Amortization of other actuarial losses (gains)

 

(599

)

(210

)

(1,055

)

(380

)

Net benefit credit

 

$

(2,174

)

$

(1,814

)

$

(4,146

)

$

(3,577

)

 

15.   Commitments and Contingencies

 

The Company accrues for costs related to contingencies when a loss is probable and the amount is reasonably determinable. Disclosure of contingencies is included in the financial statements when it is at least reasonably possible that a material loss or an additional material loss in excess of amounts already accrued may be incurred.

 

Allegheny Energy Supply (“Allegheny”), the sole customer of coal produced at the Company’s subsidiary Wolf Run Mining Company’s (“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. (“Hunter Ridge”), and ICG in state court in Allegheny County, Pennsylvania on December 28, 2006, and amended its complaint on April 23, 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract.  The Sycamore No. 2 mine was idled after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped.

 

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Table of Contents

 

After extensive searching for gas wells and rehabilitation of the mine, it was re-opened in 2007, but with notice to Allegheny that it would necessarily operate at reduced volumes in order to safely and effectively avoid the many gas wells within the reserve.  The amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract in early 2005. Allegheny voluntarily dropped the breach of representation claims later.  Allegheny claimed that it would incur costs in excess of $100 million to purchase replacement coal over the life of the contract.  ICG, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining claims.

 

On November 3, 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other things, fraudulent inducement and conspiracy.  On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to ICG, which was not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract.  No new substantive claims were asserted.  ICG answered the second amended complaint on October 13, 2009, denying all of the new claims.  The Company’s counterclaim was dismissed on motion for summary judgment entered on May 11, 2010.  Allegheny’s claims against ICG were also dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not.  The court conducted a non-jury trial of this matter beginning on January 10, 2011 and concluding on February 1, 2011.

 

At the trial, Allegheny presented its evidence for breach of contract and claimed that it is entitled to past and future damages in the aggregate of between $228 million and $377 million.  Wolf Run and Hunter Ridge presented their defense of the claims, including evidence with respect to the existence of force majeure conditions and excuse under the contract and applicable law.  Wolf Run and Hunter Ridge presented evidence that Allegheny’s damages calculations were significantly inflated because it did not seek to determine damages as of the time of the breach and in some instances artificially assumed future nondelivery or did not take into account the apparent requirement to supply coal in the future.  On May 2, 2011, the trial court entered a Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure.  The trial court awarded total damages and interest in the amount of $104.1 million, which consisted of $13.8 million for past damages, and $90.3 million for future damages.  ICG and Allegheny filed post-verdict motions in the trial court and on August 23, 2011, the court denied the parties’ motions.  The court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included pre-judgment interest.

 

The parties appealed the lower court’s decision to the Superior Court of Pennsylvania.  On August 13, 2012, the Superior Court of Pennsylvania affirmed the award of past damages, but ruled that the lower court should have calculated future damages as of the date of breach, and remanded the matter back to the lower court with instructions to recalculate that portion of the award. On November 19, 2012, Allegheny filed a Petition for Allowance of Appeal with the Supreme Court of Pennsylvania and Wolf Run and Hunter Ridge filed an Answer.  On July 2, 2013, the Supreme Court of Pennsylvania denied the Petition of Allowance.  As this action finalized the past damage award, Wolf Run paid $15.6 million for the past damage amount, including interest, to Allegheny in July 2013.  Testimony on the future damage award in the lower court concluded on May 19, 2014, and post-trial briefs and responses were submitted on August 8, 2014.  The court held a hearing on this matter on November 5, 2014 and on February 16, 2015 awarded Allegheny $7.5 million plus interest for the future damages.  On April 6, 2015, the parties entered into a settlement agreement pursuant to which Wolf Run agreed to pay $15 million and both parties agreed to release and discharge the other party from any further contractual liability.  As a result, the Company accrued an additional $2.8 million for the three months ended March 31, 2015 to bring the total amount accrued up to the settlement amount.  The expense associated with the accrual is reflected in the line item “Cost of sales”.  In April 2015, the Company idled the Sycamore No. 2 mine.

 

In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. As of June 30, 2015 and December 31, 2014, the Company had accrued $3.7 million and $22.3 million, respectively, for all legal matters, including $3.7 million and $10.1 million, respectively, classified as current.  The ultimate resolution of any such legal matter could result in outcomes which may be materially different from amounts the Company has accrued for such matters.

 

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Table of Contents

 

16.  Segment Information

 

The Company’s reportable business segments are based on the major coal producing basins in which the Company operates and may include a number of mine complexes. The Company manages its coal sales by coal basin, not by individual mining complex. Geology, coal transportation routes to customers, regulatory environments and coal quality or type are characteristic to a basin, and, accordingly, market and contract pricing have developed by coal basin. Mining operations are evaluated based on adjusted EBITDA, as well as on other non-financial measures, such as safety and environmental performance. The Company’s reportable segments are the Powder River Basin (PRB) segment, with operations in Wyoming; and the Appalachia (APP) segment, with operations primarily in West Virginia.  The “Other” category combines other operating segments and includes the Company’s coal mining operations in Colorado and Illinois.

 

Operating segment results for the three and six months ended June 30, 2015 and 2014 are presented below. The Company uses Adjusted EBITDA to assess the operating segments’ performance and to allocate resources.  The Company’s management believes that Adjusted EBITDA presents a useful measure of our ability to service existing debt and incur additional debt based on ongoing operations.  Corporate, Other and Eliminations includes the change in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management; other support functions; and the elimination of intercompany trans-actions.

 

 

 

PRB

 

APP

 

Other
Operating
Segments

 

Corporate,
Other and
Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

342,480

 

$

224,298

 

$

77,684

 

$

 

$

644,462

 

Adjusted EBITDA

 

56,654

 

11,427

 

7,456

 

(30,209

)

45,328

 

Depreciation, depletion and amortization

 

42,711

 

42,203

 

10,834

 

1,624

 

97,372

 

Amortization of acquired sales contracts, net

 

(761

)

(883

)

 

 

(1,644

)

Capital expenditures

 

4,425

 

7,948

 

1,668

 

62,440

 

76,481

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

358,265

 

$

280,961

 

$

74,550

 

$

 

$

713,776

 

Adjusted EBITDA

 

42,546

 

27,040

 

17,463

 

(22,117

)

64,932

 

Depreciation, depletion and amortization

 

41,036

 

51,232

 

9,583

 

613

 

102,464

 

Amortization of acquired sales contracts, net

 

(785

)

(2,477

)

23

 

 

(3,239

)

Capital expenditures

 

6,962

 

11,036

 

2,358

 

60,936

 

81,292

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

733,686

 

$

447,737

 

$

140,044

 

$

 

$

1,321,467

 

Adjusted EBITDA

 

128,716

 

51,234

 

9,147

 

(61,997

)

127,100

 

Depreciation, depletion and amortization

 

87,072

 

90,930

 

20,889

 

3,355

 

202,246

 

Amortization of acquired sales contracts, net

 

(2,046

)

(2,988

)

 

 

(5,034

)

Capital expenditures

 

21,394

 

11,333

 

4,310

 

62,324

 

99,361

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

716,872

 

$

560,098

 

$

170,839

 

$

1,938

 

$

1,449,747

 

Adjusted EBITDA

 

72,365

 

55,467

 

21,595

 

(56,890

)

92,537

 

Depreciation, depletion and amortization

 

80,281

 

106,220

 

19,102

 

1,284

 

206,887

 

Amortization of acquired sales contracts, net

 

(1,574

)

(5,451

)

90

 

 

(6,935

)

Capital expenditures

 

9,056

 

19,193

 

3,948

 

63,549

 

95,746

 

 

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A reconciliation of adjusted EBITDA to consolidated loss before income taxes follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

45,328

 

$

64,932

 

$

127,100

 

$

92,537

 

Depreciation, depletion and amortization

 

(97,372

)

(102,464

)

(202,246

)

(206,887

)

Amortization of acquired sales contracts, net

 

1,644

 

3,239

 

5,034

 

6,935

 

Asset impairment and mine closure costs

 

(19,146

)

(1,512

)

(19,146

)

(1,512

)

Interest expense, net

 

(98,612

)

(95,924

)

(195,491

)

(190,552

)

Other nonoperating expense

 

$

(4,016

)

$

 

(4,016

)

 

Loss before income taxes

 

$

(172,174

)

$

(131,729

)

$

(288,765

)

$

(299,479

)

 

17.  Subsequent Events

 

Customer Contract Termination

 

On September 20, 2012, Patriot Coal Corporation (“Patriot”) filed a motion with the U.S. Bankruptcy Court for the Southern District of New York to reject a master coal sales agreement entered into on December 31, 2005 between the Company and Magnum Coal Company (“Magnum”) which was acquired by Patriot in July 2008.  The master coal sales agreement was established in order to meet obligations under a coal sales agreement with a customer who did not consent to the assignment of their contract to Magnum.  On December 18, 2012, the court accepted Patriot’s motion to reject the master coal sales agreement.  As a result of the court’s decision, the Company accrued $58.3 million, which represented the discounted cash flows of the remaining monthly buyout amounts under the underlying coal sales agreement.  Subsequent to June 30, 2015, the Company has entered into a definite agreement to terminate the contract after payment of $12.5 million of which $3.5 million will be paid upon execution of the agreement with the remaining $9.0 million to be paid on October 1, 2015.  The termination of the contract will generate an approximate $25.0 million pre-tax gain which will be recorded in the Company’s third quarter results.

 

Reverse Stock Split

 

On August 4, 2015, the Company’s common stock is expected to begin trading on the New York Stock Exchange (“NYSE”) on a split-adjusted basis following a one-for-ten reverse stock split originally announced on July 20, 2015.  Every ten shares of issued and outstanding common stock, including treasury shares, will be exchanged into one share of the Company’s common stock.  As a result of the reverse stock split, the number of outstanding shares of the Company’s common stock will be reduced from approximately 213 million to 21.3 million.  No fractional shares will be issued in connection with the reverse stock split; instead, stockholders who otherwise would have received fractional shares will receive, in lieu of such fractional shares, an amount of cash based on the volume weighted average price of the Company’s common stock for the date of the reverse stock split, which is expected to be August 3, 2015.

 

Debt Restructuring

 

On July 2, 2015, the Company launched two private debt exchange offers in an effort to de-lever the balance sheet and improve our liquidity profile.

 

The first offer exchanges, for each $1,000 of outstanding 7.25% Senior Notes due 2020 (the “2020 Notes”), $418.69 of new 6.25% Trust Certificates due 2021 (the “Trust Certificates”) and a $60 cash payment for holders that tendered before July 17, 2015, or a $30 cash payment for holders who tendered thereafter and before expiration of the offer (July 31, 2015, unless extended by us).  The Trust Certificates represent a fractional undivided interest in Arch Pass Through Trust, a Delaware statutory trust (the “Trust”) whose only assets will be (i) senior secured term loans due 2021 (the “New Term Loans”) issued as incremental debt under Arch’s existing credit agreement and (ii) senior secured revolving commitments (the “New Revolving Loans”). The New Revolving Loans will be transferred to the Trust by the assignment of existing revolving commitments.  The aggregate principal amount of New Term Loans and New Revolving Loans outstanding at any time may not exceed $404 million, and will be equal to the principal amount of Trust Certificates issued in the offers described herein.  In conjunction with the exchange offer, the Company has solicited consents (the “Consent

 

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Solicitation”) from holders of the 2020 Notes to certain proposed amendments (the “Proposed 2020 Notes Amendments”) to the indenture governing the 2020 Notes.  The Proposed 2020 Notes Amendments modify certain restrictive covenants contained in such indenture to conform to the Company’s other indentures, including with respect to the issuance of additional secured debts.  Holders who tender their 2020 Notes are deemed to consent to the Proposed 2020 Notes Amendments, and holders may not deliver consents to the Proposed 2020 Notes Amendments without tendering their 2020 Notes in the exchange offer.  The consummation of the exchange offer is conditioned upon, among other things, and the Proposed 2020 Notes Amendments require, the receipt of consents pursuant to the Consent Solicitation from the holders of a majority in aggregate principal amount of outstanding 2020 Notes not owned by the Company or any of its affiliates.  The offer is only available to holders of 2020 Notes that are qualified institutional buyers pursuant to Rule 144A and qualified purchasers pursuant to Section 2(a)(51) of the Investment Company Act.  Holders that are therefore not eligible have been offered new 8.0% Secured Notes due 2022 (the “New 2022 Secured Notes) (which will be secured by liens on our assets ranking junior to the liens securing our credit agreement and senior to the liens securing our existing second lien notes and the new 2023 Secured Notes)  at a rate of $837.38 per $1,000 of 2020 Notes plus the same cash payment referred to above.  As of July 29, 2015, holders of $414.4 million of 2020 Notes have tendered in the offer and an additional $32.7 million have tendered in the offer for non-eligible holders.  Withdrawal rights for the offer have expired, and we have executed a supplemental indenture containing the Proposed Amendments, although the Proposed Amendments will not be operative until the offer is consummated.

 

The second offer exchanges Trust Certificates, New 2022 Secured Notes and 12.0% Senior Secured Second Lien Notes due 2023 (the “New 2023 Secured Notes”) for outstanding 7.00% Senior Notes due 2019 (“Old 7.00% 2019 Notes”), 9.875% Senior Notes due 2019 (“Old 9.875% 2019 Notes”) and 7.25% Senior Notes due 2021 (“Old 7.25% 2021 Notes”).  Each holder of Old Notes will have to elect (subject to the acceptance priority, allocation and proration mechanics described in the Offering Memorandum referred to below) whether it wishes to receive exchange consideration in the form of Trust Certificates, New 2022 Secured Notes or New 2023 Secured Notes in exchange for each $1,000 principal amount of Old Notes validly tendered and accepted for exchange.  The aggregate principal amount of New Securities received by tendering holders of a series of Old Notes per $1,000 principal amount tendered will be the same with respect to all holders of such series of Old Notes ($400 in the case of Old 7% 2019 Notes and Old 7.25% 2021 Notes and $450 in the case of Old 9.875% 2019 Notes, in each case if tendered at or prior to the Early Tender Time (currently August 4, 2015)), irrespective of the form of consideration elected, even though the Trust Certificates are expected to be more valuable than the New 2022 Secured Notes, which are in turn expected to be more valuable than the New 2023 Secured Notes, as a result of the different priorities of the liens securing (or underlying ) the New Securities.  The aggregate principal amount of New Securities to be issued pursuant to the Exchange Offer will be determined in accordance with the Acceptance Priority Level (as defined below), the Maximum Exchange Amount (as defined below), the tender caps referred to in the immediately succeeding sentence and certain other terms and conditions, and may also be based on when Old Notes are tendered, as described in the Offering Memorandum referred to below.  The tender caps will limit the aggregate principal amount of New Securities to be issued in the Exchange Offer to:  (i) in the case of the Trust Certificates, $404.0 million, minus the aggregate principal amount of Trust Certificates issued pursuant to the exchange offer referred to above, (ii) in the case of New 2022 Secured Notes, $200.0 million, minus the aggregate principal amount of New 2022 Secured Notes issued pursuant to the ineligible holders offer referred to above, and (iii) in the case of the New 2023 Secured Notes, $150.0 million.  The “Maximum Exchange Amount” refers to the sum of the tender caps.  The consummation of the Exchange Offer is conditioned upon, among other things, the completion of the exchange offer and consent solicitation referred to above.  As of July 29, 2015, holders of $487.2 million of Old 7.00% 2019 Notes, holders of $169.2 million of Old 9.875% 2019 Notes and holders of $398.1 million of Old 7.25% 2021 Notes have tendered in the offer.  Withdrawal rights for the exchange offer have expired.  Based on the tenders to date, the Trust would issue $404 million of Trust Certificates and we would issue $200 million of New 2022 Secured Notes and $27.1 million of New 2023 Secured Notes and we would achieve debt reduction of $870 million and reduce annual interest expense by $67.6 million.

 

Completion of the offers is subject to various conditions and requires execution of certain documents by the administrative agents under the existing credit agreement.  On July 28, 2015, certain unidentified term loan lenders under the credit agreement purporting to hold more than 50% of the term loans under the credit agreement delivered a letter to the term loan administrative agent directing it to refrain from executing documentation relating to the exchange offers.  In addition, the letter includes certain other assertions regarding the exchange offers and the existence of a default under the Credit Agreement.  Arch Coal has evaluated the assertions made in the letter and believes they are without merit.  While Arch Coal believes that the assertions and directions set forth above are without merit, and intends to contest them vigorously, it cannot predict what effect the assertions and direction set forth in the letter, or any future claims, might have on the exchange offers.  In particular, if the term loan administrative agent elects to follow the direction embodied in the letter, the exchange offers would not be consummated.

 

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18. Supplemental Consolidating Financial Information

 

Pursuant to the indentures governing Arch Coal, Inc.’s senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors under the senior notes (Arch Receivable Company, LLC and the Company’s subsidiaries outside the United States):

 

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Table of Contents

 

Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2015

 

 

 

Parent/Issuer

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Revenues

 

$

 

$

644,462

 

$

 

$

 

$

644,462

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

5,908

 

561,191

 

 

(847

)

566,252

 

Depreciation, depletion and amortization

 

1,013

 

96,359

 

 

 

97,372

 

Amortization of acquired sales contracts, net

 

 

(1,644

)

 

 

(1,644

)

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

 

 

1,211

 

 

 

1,211

 

Asset impairment and mine closure costs

 

1,225

 

17,921

 

 

 

19,146

 

Selling, general and administrative expenses

 

17,166

 

6,270

 

1,325

 

(493

)

24,268

 

Other operating (income) expense, net

 

(138

)

7,483

 

(1,282

)

1,340

 

7,403

 

 

 

25,174

 

688,791

 

43

 

 

714,008

 

Loss from investment in subsidiaries

 

(30,462

)

 

 

30,462

 

 

Loss from operations

 

(55,636

)

(44,329

)

(43

)

30,462

 

(69,546

)

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(119,231

)

(6,576

)

(1,127

)

27,360

 

(99,574

)

Interest and investment income

 

6,675

 

20,256

 

1,391

 

(27,360

)

962

 

 

 

(112,556

)

13,680

 

264

 

 

(98,612

)

 

 

 

 

 

 

 

 

 

 

 

 

Expenses related to debt restructuring

 

(4,016

)

 

 

 

(4,016

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(172,208

)

(30,649

)

221

 

30,462

 

(172,174

)

Provision for (benefit from) income taxes

 

(4,105

)

 

34

 

 

(4,071

)

Net income (loss)

 

$

(168,103

)

$

(30,649

)

$

187

 

$

30,462

 

$

(168,103

)

Total comprehensive income (loss)

 

$

(167,887

)

$

(30,811

)

$

187

 

$

30,624

 

$

(167,887

)

 

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Table of Contents

 

Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2014

 

 

 

Parent/Issuer

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Revenues

 

$

 

$

713,776

 

$

 

$

 

$

713,776

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

3,547

 

619,470

 

 

(880

)

622,137

 

Depreciation, depletion and amortization

 

1,346

 

101,109

 

9

 

 

102,464

 

Amortization of acquired sales contracts, net

 

 

(3,239

)

 

 

(3,239

)

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

 

 

(2,992

)

 

 

(2,992

)

Asset impairment and mine closure costs

 

1,512

 

 

 

 

1,512

 

Selling, general and administrative expenses

 

21,729

 

7,250

 

1,489

 

(537

)

29,931

 

Other operating (income) expense, net

 

(1,883

)

1,554

 

(1,320

)

1,417

 

(232

)

 

 

26,251

 

723,152

 

178

 

 

749,581

 

Income from investment in subsidiaries

 

2,502

 

 

 

(2,502

)

 

Loss from operations

 

(23,749

)

(9,376

)

(178

)

(2,502

)

(35,805

)

Interest expense, net