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 March 31, 2016

 

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 o

 

Accelerated filer x

 

 

 

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 April 22, 2016 there were 21,293,090 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

Part 1 FINANCIAL INFORMATION

 

3

Item 1. Financial Statements

 

3

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

 

30

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

38

Item 4. Controls and Procedures

 

39

Part II OTHER INFORMATION

 

39

Item 1. Legal Proceedings

 

39

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

 

42

Item 4. Mine Safety Disclosures

 

42

Item 6. Exhibits

 

43

 

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Table of Contents

 

Part I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

Revenues

 

$

428,106

 

$

677,005

 

Costs, expenses and other operating

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

419,316

 

562,322

 

Depreciation, depletion and amortization

 

63,699

 

104,874

 

Amortization of acquired sales contracts, net

 

(833

)

(3,390

)

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

 

1,210

 

1,220

 

Asset impairment and mine closure costs

 

85,520

 

 

Selling, general and administrative expenses

 

19,826

 

22,605

 

Other operating (income) expense, net

 

(2,220

)

9,086

 

 

 

586,518

 

696,717

 

 

 

 

 

 

 

Loss from operations

 

(158,412

)

(19,712

)

Interest expense, net

 

 

 

 

 

Interest expense (contractual interest of $98,565 in 2016)

 

(44,451

)

(99,252

)

Interest and investment income

 

1,138

 

2,373

 

 

 

(43,313

)

(96,879

)

 

 

 

 

 

 

Loss before nonoperating expenses

 

(201,725

)

(116,591

)

 

 

 

 

 

 

Nonoperating expenses

 

 

 

 

 

Expenses related to proposed debt restructuring

 

(2,213

)

 

Reorganization items, net

 

(3,875

)

 

 

 

(6,088

)

 

 

 

 

 

 

 

Loss before income taxes

 

(207,813

)

(116,591

)

Benefit from income taxes

 

(1,111

)

(3,396

)

Net loss

 

$

(206,702

)

$

(113,195

)

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

Basic and diluted - Net loss per share

 

$

(9.71

)

$

(5.32

)

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

21,293

 

21,266

 

 

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

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

Net loss

 

$

(206,702

)

$

(113,195

)

 

 

 

 

 

 

Derivative instruments

 

 

 

 

 

Comprehensive income (loss) before tax

 

(224

)

5,045

 

Income tax benefit (provision)

 

81

 

(1,817

)

 

 

(143

)

3,228

 

Pension, postretirement and other post-employment benefits

 

 

 

 

 

 

Comprehensive income (loss) before tax

 

(1,338

)

294

 

Income tax benefit (provision)

 

481

 

(105

)

 

 

(857

)

189

 

Available-for-sale securities

 

 

 

 

 

Comprehensive income (loss) before tax

 

 

2,903

 

291

 

Income tax benefit (provision)

 

(1,043

)

(104

)

 

 

1,860

 

187

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

860

 

3,604

 

Total comprehensive loss

 

$

(205,842

)

$

(109,591

)

 

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

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

395,398

 

$

450,781

 

Short term investments

 

198,788

 

200,192

 

Restricted cash

 

109,650

 

97,542

 

Trade accounts receivable (net of allowance for doubtful accounts of $7.8 million for both periods, respectively

 

113,005

 

117,405

 

Other receivables

 

15,589

 

18,362

 

Inventories

 

195,987

 

196,720

 

Prepaid royalties

 

8,075

 

10,022

 

Coal derivative assets

 

5,808

 

8,035

 

Other current assets

 

44,830

 

39,866

 

Total current assets

 

1,087,130

 

1,138,925

 

Property, plant and equipment, net

 

3,487,109

 

3,619,029

 

Other assets

 

 

 

 

 

Prepaid royalties

 

20,997

 

23,671

 

Equity investments

 

201,517

 

201,877

 

Other noncurrent assets

 

58,657

 

58,379

 

Total other assets

 

281,171

 

283,927

 

Total assets

 

$

4,855,410

 

$

5,041,881

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Liabilities not subject to compromise

 

 

 

 

 

Accounts payable

 

$

70,823

 

$

128,131

 

Accrued expenses and other current liabilities

 

102,590

 

329,450

 

Current maturities of debt

 

 

5,042,353

 

Total current liabilities

 

173,413

 

5,499,934

 

Long-term debt

 

 

30,953

 

Asset retirement obligations

 

401,569

 

396,659

 

Accrued pension benefits

 

20,646

 

27,373

 

Accrued postretirement benefits other than pension

 

89,779

 

99,810

 

Accrued workers’ compensation

 

113,782

 

112,270

 

Other noncurrent liabilities

 

18,023

 

119,171

 

Total liabilities not subject to compromise

 

817,212

 

6,286,170

 

 

 

 

 

 

 

Liabilities subject to compromise

 

5,487,326

 

 

 

 

 

 

 

 

Total liabilities

 

6,304,538

 

6,286,170

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

Common stock, $0.01 par value, authorized 26,000 shares, issued 21,448 shares and 21,446 shares at March 31, 2016 and December 31, 2015, respectively

 

2,145

 

2,145

 

Paid-in capital

 

3,055,214

 

3,054,211

 

Treasury stock, at cost, 152 shares at March 31, 2016 and December 31, 2015

 

(53,863

)

(53,863

)

Accumulated deficit

 

(4,451,669

)

(4,244,967

)

Accumulated other comprehensive loss

 

(955

)

(1,815

)

Total stockholders’ deficit

 

(1,449,128

)

(1,244,289

)

Total liabilities and stockholders’ deficit

 

$

4,855,410

 

$

5,041,881

 

 

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

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net loss

 

$

(206,702

)

$

(113,195

)

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

 

 

 

 

 

Depreciation, depletion and amortization

 

63,699

 

104,874

 

Amortization of acquired sales contracts, net

 

(833

)

(3,390

)

Amortization relating to financing activities

 

3,150

 

6,219

 

Prepaid royalties expensed

 

1,286

 

1,674

 

Employee stock-based compensation expense

 

1,003

 

1,760

 

Asset impairment and non-cash mine closure costs

 

77,550

 

 

Non-cash bankruptcy reorganization items

 

(13,892

)

 

Expenses related to proposed debt restructuring

 

2,213

 

 

Gains on disposals and divestitures, net

 

1

 

(46

)

Deferred income taxes

 

(429

)

(3,433

)

Changes in:

 

 

 

 

 

Receivables

 

7,815

 

18,252

 

Inventories

 

734

 

(49,860

)

Accounts payable, accrued expenses and other current liabilities

 

39,441

 

7,186

 

Income taxes, net

 

(642

)

40

 

Other

 

15,508

 

25,646

 

Cash used in operating activities

 

(10,098

)

(4,273

)

Investing activities

 

 

 

 

 

Capital expenditures

 

(5,926

)

(22,880

)

Additions to prepaid royalties

 

(71

)

(213

)

Proceeds from disposals and divestitures

 

 

46

 

Purchases of marketable securities

 

(55,132

)

(101,793

)

Proceeds from sale or maturity of marketable securities and other investments

 

56,134

 

99,914

 

Investments in and advances to affiliates

 

(2,156

)

(1,843

)

Deposits of restricted cash

 

(12,108

)

(3,532

)

Cash used in investing activities

 

(19,259

)

(30,301

)

Financing activities

 

 

 

 

 

Payments on term loan

 

 

(4,875

)

Net payments on other debt

 

(5,410

)

(4,810

)

Expenses related to proposed debt restructuring

 

(2,213

)

 

Debt financing costs

 

(18,403

)

 

Cash used in financing activities

 

(26,026

)

(9,685

)

Decrease in cash and cash equivalents

 

(55,383

)

(44,259

)

Cash and cash equivalents, beginning of period

 

450,781

 

734,231

 

Cash and cash equivalents, end of period

 

$

395,398

 

$

689,972

 

 

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

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

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, Kentucky, Virginia, Illinois, Wyoming and Colorado.  All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three months ended March 31, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016. 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, 2015 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

 

On August 4, 2015 we effected a 1-for-10 reverse stock split of our common stock.  Each stockholder’s percentage ownership and proportional voting power remained unchanged as a result of the reverse stock split.  All applicable share data, per share amounts and related information in the Condensed Consolidated Financial Statements and notes thereto have been adjusted retroactively to give effect to the 1-for-10 reverse stock split.

 

Filing Under Chapter 11 of the United States Bankruptcy Code

 

On January 11, 2016 (the “Petition Date”), the Company and substantially all of its wholly owned domestic subsidiaries (the “Filing Subsidiaries” and, together with Arch, the “Debtors”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Missouri (the “Court”). The Debtor’s Chapter 11 Cases (collectively, the “Chapter 11 Cases”) are being jointly administered under the caption In re Arch Coal, Inc., et al. Case No. 16-40120 (lead case). Each Debtor will continue to operate its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.

 

The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the documents governing each of its 7.00% senior notes due 2019, 9.875% senior notes due 2019, 8.00% senior secured second lien notes due 2019, 7.25% senior notes due 2020, 7.25% senior notes due 2021 (together, the “senior notes”) and senior secured first lien term loan due 2018 (the “Existing Credit Agreement”) (collectively with the senior notes, the “Debt Instruments”).  Immediately after filing the Bankruptcy Petitions, the Company began notifying all known current or potential creditors of the Debtors of the bankruptcy filings.

 

Additionally, on the Petition Date, the New York Stock Exchange (the “NYSE”) determined that the Company’s stock was no longer suitable for listing pursuant to Section 8.02.01D of the NYSE continued listing standards and trading in the Company’s common stock was suspended on January 11, 2016.  We expect that the existing common stock of the Company will be extinguished upon the Company’s emergence from Chapter 11 and existing equity holders will not receive consideration in respect of their equity interests.

 

On the Petition Date, the Debtors filed a number of motions with the Court generally designed to stabilize their operations and facilitate the Debtors’ transition into Chapter 11. Certain of these motions sought authority from the Court for the Debtors to make payments upon, or otherwise honor, certain pre-petition obligations (e.g., obligations related to certain employee wages, salaries and benefits and certain vendors and other providers essential to the Debtors’ businesses). The Court has entered orders approving the relief sought in these motions, in certain cases on an interim basis.

 

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of

 

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the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.  Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

 

As required by the Bankruptcy Code, the U.S. Trustee for the Eastern District of Missouri appointed an official committee of unsecured creditors (the “Creditors’ Committee”) on January 25, 2016. The Creditors’ Committee represents all unsecured creditors of the Debtors and has a right to be heard on all matters that come before the Court.

 

For periods subsequent to filing the Bankruptcy Petitions, the Company will apply the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations”, in preparing its consolidated financial statements.  ASC 852 requires that financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings have been recorded in a reorganization line item on the Condensed Consolidated Statement of Operations.  In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the balance sheet as liabilities subject to compromise.  These liabilities are reported as the amounts expected to be allowed by the Court, even if they may be settled for lesser amounts.

 

Restructuring Support Agreement

 

In connection with the filing of the Bankruptcy Petitions, the Company entered into a Restructuring Support Agreement, dated as of January 10, 2016 (as amended on February 25, 2016, March 28, 2016 and April 26, 2016, the “Restructuring Support Agreement”), among the Debtors and holders of over 50% of the Company’s first lien term loans under the Existing Credit Agreement (the “Supporting First Lien Creditors”), providing that the Supporting First Lien Creditors will support a restructuring of the Debtors, subject to the following terms and conditions contemplated therein, among others:

 

·                                  existing common stock of the Company would likely be extinguished upon the Company’s emergence from Chapter 11, and existing equity holders would likely not receive consideration in respect of their equity interests;

 

·                                  claims against the Debtors arising under the DIP Facility (as defined below) would be paid in full in cash or receive such other treatment as may be consented to by the holders of such claims;

 

·                                  claims against the Debtors of holders of first lien term loans would be exchanged for (a) a combination of cash and $326.5 million (principal amount) of new first lien debt that would be issued by the reorganized Company and (b) 100% of the common stock of the reorganized Company outstanding on the effective date of the plan, subject to dilution on account of a proposed new management incentive plan and the distribution to unsecured creditors of any new common stock and warrants (as described below);

 

·                                  first lien term loan deficiency claims (subject to certain exceptions) as well as second lien notes, unsecured notes and general unsecured claims against the Debtors would be exchanged for either (1) common stock in the reorganized Company and warrants or (2) the value of the unencumbered assets of the Company, if any, after giving effect to certain other payments and claims;

 

·                                  either the Company’s existing accounts receivable securitization facility would be reinstated or a new letter of credit facility would be entered into by the Company, in either case on terms acceptable to Supporting First Lien Creditors holding more than 66 2/3% of the aggregate amount of the first lien term loans held by Supporting First Lien Creditors; and

 

·                                  the board of directors of the reorganized Company would consist of seven directors, at least one of whom would be independent, including the Company’s Chief Executive Officer and six directors selected by certain of the Company’s first-lien term lenders in consultation with the Company’s Chief Executive Officer.

 

The Restructuring Support Agreement, if utilized as the basis for a plan of reorganization, is expected to reduce the Company’s long-term debt by more than $4.5 billion.

 

Debtor-In-Possession Financing

 

On January 21, 2016, the Superpriority Secured Debtor-in-Possession Credit Agreement (as amended on March 4, 2016, March 28, 2016 and April 26, 2016, the “DIP Credit Agreement”) was entered into by and among the Company, as borrower, certain of the Debtors, as guarantors (the “Guarantors” and, together with the Company, the “Loan Parties”), the lenders from

 

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time to time party thereto (the “DIP Lenders”) and Wilmington Trust, National Association, as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”).

 

The DIP Credit Agreement, which has been approved by the Court on a final basis, provides for a super-priority senior secured debtor-in-possession credit facility (the “DIP Facility”) consisting of term loans (collectively, the “DIP Term Loan”) in the aggregate principal amount of up to $275 million that may be funded in not more than two draws not later than six months after the effective date of the DIP Facility (such six month period, the “Availability Period”).  Any portion of the DIP Term Loan commitment that has not been funded on or prior to the end of the Availability Period will be permanently cancelled.

 

The maturity date of the DIP Facility is the earliest of (i) January 31, 2017, (ii) the date of the substantial consummation of a plan of reorganization that is confirmed pursuant to an order of the Court, (iii) the consummation of the sale of all or substantially all of the assets of the Loan Parties pursuant to Section 363 of the Bankruptcy Code and (iv) the date the obligations under the DIP Facility are accelerated pursuant to the terms of the DIP Credit Agreement.  Borrowings under the DIP Facility bear interest at an interest rate per annum equal to, at the Company’s option (i) LIBOR plus 9.00%, subject to a 1.00% LIBOR floor or (ii) the base rate plus 8.00%.

 

At a hearing held on February 23, 2016 in the Chapter 11 Cases, the Court approved the DIP Facility on a final basis, overruling the objections of the Creditors’ Committee and certain other parties who asserted, among other things, that the DIP Facility was unnecessary and argued that the Debtors should enter into an alternate debtor-in-possession financing facility proposed by certain members of the Creditors’ Committee.

 

Securitization Agreement

 

On January 13, 2016, the Company agreed with its securitization financing providers (the “Securitization Financing Providers”) that, subject to certain amendments (the “Amendments”), they will continue the $200 million trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a non-debtor special-purpose entity that is a wholly owned subsidiary of the Company (“Arch Receivable”) (the “Securitization Facility”).

 

Pursuant to the Amendments, which have been approved by the Court on a final basis, the Debtors agreed to a revised schedule of fees payable to the administrator and the Securitization Financing Providers.  The cost of an advance backstopping a letter of credit issued under the Securitization Facility is determined by two factors: (a) a program fee of 2.65% per year and payable on each settlement date to each Securitization Financing Provider deemed to have made such an advance and (b) the “discount,” which is calculated based on each Securitization Financing Provider’s costs, including its cost of the issuance and placement of short term promissory notes to fund such an advance.

 

Going Concern

 

As a result of extremely challenging current market conditions, the Company believes it will require a significant restructuring of its balance sheet in order to continue as a going concern in the long term. The Company’s ability to continue as a going concern is dependent upon, among other things, improvement in current market conditions, its ability to become profitable and maintain profitability and its ability to successfully implement its Chapter 11 plan strategy.  As a result of the Bankruptcy Petitions, the realization of the Debtors’ assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Chapter 11 plan is likely to materially change the amounts and classifications of assets and liabilities reported in the Company’s Condensed Consolidated Financial Statements.

 

The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern.  The Company’s ability to continue as a going concern is contingent upon the Company’s ability to restructure its balance sheet with the various creditor parties; there can be no assurance that these efforts will results in any such agreement.  The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

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2.  Accounting Policies

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued 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.  The company adopted ASU 2015-03 in the first quarter of 2016 as mandated by the standard.  Previously reported “other current assets” and “current maturities of debt” have been revised to reflect the retrospective application of the standard.

 

The following reflects the retrospective application:

 

 

 

December 31,

 

 

 

2015

 

 

 

(in thousands)

 

Other current assets, prior to revision

 

$

104,723

 

Revision of debt issuance costs

 

(64,857

)

 

 

 

 

Other current assets, as revised

 

$

39,866

 

 

 

 

 

Current maturities of debt, prior to revision

 

$

5,107,210

 

Revision of debt issuance costs

 

(64,857

)

 

 

 

 

Current maturities of debt, as revised

 

$

5,042,353

 

 

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, 2015

 

$

325

 

$

(721

)

$

(1,419

)

$

(1,815

)

Unrealized gains (losses)

 

1

 

 

3

 

4

 

Amounts reclassified from AOCI

 

(144

)

(857

)

1,857

 

856

 

Balance at March 31, 2016

 

$

182

 

$

(1,578

)

$

441

 

$

(955

)

 

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Table of Contents

 

The following amounts were reclassified out of AOCI:

 

 

 

Amounts Reclassified
from AOCI

 

 

 

 

 

Three Months Ended
March 31,

 

Line Item in the
Condensed Consolidated

 

Details About AOCI Components

 

2016

 

2015

 

Statement of Operations

 

 

 

(In thousands)

 

 

 

Derivative instruments

 

$

226

 

$

481

 

Revenues

 

 

 

(82

)

(174

)

Benefit from income taxes

 

 

 

$

144

 

$

307

 

Net of tax

 

 

 

 

 

 

 

 

 

Pension, postretirement and other post-employment benefits

 

 

 

 

 

 

 

Amortization of prior service credits (1)

 

$

2,672

 

$

2,084

 

 

 

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

 

(1,334

)

(2,378

)

 

 

 

 

1,338

 

(294

)

 

 

 

 

(481

)

105

 

Benefit from income taxes

 

 

 

$

857

 

$

(189

)

Net of tax

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

(2,895

)

$

(2,797

)

Interest and investment income

 

 

 

1,038

 

1,007

 

Benefit from income taxes

 

 

 

$

(1,857

)

$

(1,790

)

Net of tax

 

 


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

 

4.  Reorganization items, net

 

In accordance with Accounting Codification Standard 852, “Reorganizations,” the statement of operations shall portray the results of operations of the reporting entity while it is in Chapter 11.  Revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from reorganization and restructuring of the business shall be reported separately as reorganization items.

 

During the first quarter of 2016, the Company recorded a charge of $3.9 million in “Reorganization items, net” comprised of professional fee expense of $17.8 million, partially offset by non-cash gains on rejected contracts of $13.9 million.  Net cash paid for “Reorganization items, net” totaled $1.5 million during the first quarter of 2016.

 

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5.  Liabilities Subject to Compromise

 

Liabilities subject to compromise include unsecured or under-secured liabilities incurred prior to the Chapter 11 filing.  These liabilities represent the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 proceedings and remain subject to future adjustments based on negotiated settlements with claimants, actions of the Court, rejection of executory contracts, proofs of claims or other events.  Additionally, liabilities subject to compromise also include certain items that may be assumed under a plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed.

 

Liabilities subject to compromise consists of the following:

 

Previously Reported Balance Sheet Line

 

March 31, 2016

 

 

 

(in thousands)

 

Debt

 

$

5,067,938

 

Accrued expenses and current liabilities

 

213,667

 

Accounts payable

 

106,590

 

Noncurrent liabilities

 

93,709

 

Accrued pension benefits

 

5,422

 

 

 

 

 

Total Liabilities Subject to Compromise

 

$

5,487,326

 

 

The debt balance included above is net of debt issuance costs of $64.9 million; for additional information on debt, see Note 11, “Debt and Financing Arrangements.”

 

6.  Asset Impairment and Mine Closure Costs

 

During the first quarter of 2016, the company recorded $85.5 million of “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations.  The amount includes the following:  a $74.1 million impairment of coal reserves and surface land in Kentucky that are being leased to a mining company that announced plans to idle its current mining operations related to those reserves during the quarter; $5.1 million of severance expense related to headcount reductions at Company operations; $3.4 million related to an impairment charge on the portion of an advance royalty balance on a reserve base mined at the Company’s Mountain Laurel operation that will not be recouped; and $2.9 million related to an other-than-temporary-impairment charge on an available-for-sale security.

 

7.  Inventories

 

Inventories consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Coal

 

$

85,987

 

$

85,043

 

Repair parts and supplies

 

110,000

 

111,677

 

 

 

$

195,987

 

$

196,720

 

 

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $6.4 million at March 31, 2016 and $6.0 million at December 31, 2015.

 

8.  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.

 

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Table of Contents

 

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

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Classification

 

 

 

 

 

Gross Unrealized

 

Fair

 

Short-Term

 

Other

 

 

 

Cost Basis

 

Gains

 

Losses

 

Value

 

Investments

 

Assets

 

 

 

(In thousands)

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

47,001

 

$

66

 

$

 

$

47,067

 

$

47,067

 

$

 

Corporate notes and bonds

 

$

151,782

 

$

38

 

$

(99

)

$

151,721

 

$

151,721

 

$

 

Equity securities

 

1,049

 

676

 

 

1,725

 

 

1,725

 

Total Investments

 

$

199,832

 

$

780

 

$

(99

)

$

200,513

 

$

198,788

 

$

1,725

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Classification

 

 

 

 

 

Gross Unrealized

 

Fair

 

Short-Term

 

Other

 

 

 

Cost Basis

 

Gains

 

Losses

 

Value

 

Investments

 

Assets

 

 

 

(In thousands)

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

10,007

 

$

 

$

(12

)

$

9,995

 

$

9,995

 

$

 

Corporate notes and bonds

 

$

190,496

 

$

 

$

(299

)

$

190,197

 

$

190,197

 

$

 

Equity securities

 

3,938

 

668

 

(2,888

)

1,718

 

 

1,718

 

Total Investments

 

$

204,441

 

$

668

 

$

(3,199

)

$

201,910

 

$

200,192

 

$

1,718

 

 

The aggregate fair value of investments with unrealized losses that were owned for less than a year was $78.5 million and $184.6 million at March 31, 2016 and December 31, 2015, 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 $8.0 million and $15.8 million at March 31, 2016 and December 31, 2015, respectively.  During the quarter, the Company identified and recorded an other-than-temporary impairment charge of $2.9 million which represented the unrealized loss in accumulated other comprehensive income related to an individual available-for-sale security.  This charge is included in the line item “Asset impairment and mine closure costs” within the Condensed Consolidated Statement of Operations.  The unrealized losses in the Company’s portfolio at March 31, 2016 are the result of normal market fluctuations.  The Company does not currently intend to sell these investments before recovery of their amortized cost base.

 

The debt securities outstanding at March 31, 2016 have maturity dates ranging from the second quarter of 2016 through the third quarter of 2017.  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.

 

9.  Derivatives

 

Diesel fuel price risk management

 

The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates purchasing approximately 50 to 55 million gallons of diesel fuel for use in its operations during 2016.  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 March 31, 2016, the Company had protected the price of approximately 66% of its expected purchases for the remainder of the year with out-of-the-money call options with an average strike price of $2.26 per gallon.  Due to the drop in heating oil prices, the Company has layered in 16.5 million gallons of at-the-money call options for the remainder of 2016 representing 42% of expected purchases at an average strike price of $1.30 per gallon.  Additionally, the Company has protected approximately 5%  of our expected 2017 purchases with out-of-the-money call options with an average strike price of $1.40 per gallon.  At March 31, 2016, the Company had outstanding heating oil call options for approximately 29 million gallons for the purpose of managing the price risk associated with future diesel purchases.  These positions are not accounted for as hedges.

 

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Table of Contents

 

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 March 31, 2016, the Company held derivatives for risk management purposes that are expected to settle in the following years:

 

(Tons in thousands)

 

2016

 

Coal sales

 

325

 

Coal purchases

 

225

 

 

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.  Additionally, the company has also entered into a nominal quantity of foreign currency put options protecting for decreases in the Australian to United States dollar exchange rate, which could impact 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 $4.9 million of gains during the remainder of 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:

 

 

 

March 31, 2016

 

 

 

December 31, 2015

 

 

 

Fair Value of Derivatives

 

Asset

 

Liability

 

 

 

Asset

 

Liability

 

 

 

(In thousands)

 

Derivative

 

Derivative

 

 

 

Derivative

 

Derivative

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal

 

$

2

 

$

 

 

 

$

4

 

$

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating oil — diesel purchases

 

1,173

 

 

 

 

1,017

 

 

 

 

Coal — held for trading purposes

 

76,276

 

(71,370

)

 

 

110,653

 

(104,814

)

 

 

Coal — risk management

 

1,531

 

(681

)

 

 

3,912

 

(1,947

)

 

 

Natural gas

 

61

 

(11

)

 

 

494

 

(247

)

 

 

Foreign currency

 

208

 

 

 

 

 

 

 

 

Total

 

79,249

 

(72,062

)

 

 

116,076

 

(107,008

)

 

 

Total derivatives

 

79,251

 

(72,062

)

 

 

116,080

 

(107,028

)

 

 

Effect of counterparty netting

 

(72,062

)

72,062

 

 

 

(107,028

)

107,028

 

 

 

Net derivatives as classified in the balance sheets

 

$

7,189

 

$

 

$

7,189

 

$

9,052

 

$

 

$

9,052

 

 

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Table of Contents

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

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

 

 

 

 

 

 

 

Heating oil and foreign currency

 

Other current assets

 

$

1,381

 

$

1,017

 

Coal and natural gas

 

Coal derivative assets

 

5,808

 

8,035

 

 

 

Accrued expenses and other current liabilities

 

 

 

 

 

 

 

$

7,189

 

$

9,052

 

 

The Company had a current liability for the obligation to post cash collateral of $0.9 million at March 31, 2016 and the right to reclaim cash collateral of $1.7 million at December 31, 2015, respectively. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” and “other current assets”, respectively, 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 March 31,

 

 

 

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

 

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

 

 

 

2016

 

2015

 

2016

 

2015

 

Coal sales

(1)

$

13

 

$

10,265

 

$

1,369

 

$

882

 

Coal purchases

(2)

(11

)

(4,738

)

(1,143

)

(401

)

Totals

 

$

2

 

$

5,527

 

$

226

 

$

481

 

 

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended March 31, 2016 and 2015.

 

Derivatives Not Designated as Hedging Instruments (in thousands)

Three Months Ended March 31,

 

 

 

Gain (Loss) Recognized

 

 

 

2016

 

2015

 

Coal — unrealized

(3)

$

(1,115

)

$

(411

)

Coal — realized

(4)

$

163

 

$

1,091

 

Natural gas — unrealized

(3)

$

(469

)

$

159

 

Heating oil — diesel purchases

(4)

$

(443

)

$

(2,365

)

Foreign currency

(4)

$

(171

)

$

 

 


Location in statement of operations:

 

(1) — Revenues

(2) — Cost of sales

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

(4) — Other operating (income) expense, net

 

Based on fair values at March 31, 2016, amounts on derivative contracts designated as hedge instruments in cash flow hedges to be reclassified from other comprehensive income into earnings during the next twelve months are immaterial.

 

Related to its trading portfolio, the Company recognized net unrealized and realized gains of $0.1 million and net unrealized and realized losses of $1.0 million during the three months ended March 31, 2016 and 2015, respectively.  Gains and losses from trading activities are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying Condensed Consolidated Statements of Operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.

 

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Table of Contents

 

10.  Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Payroll and employee benefits

 

$

52,458

 

$

58,423

 

Taxes other than income taxes

 

97,361

 

104,755

 

Interest

 

127,773

 

119,785

 

Acquired sales contracts

 

543

 

3,852

 

Workers’ compensation

 

15,429

 

16,875

 

Asset retirement obligations

 

13,788

 

13,795

 

Other

 

8,905

 

11,965

 

 

 

$

316,257

 

$

329,450

 

Less: liabilities subject to compromise

 

(213,667

)

 

 

 

$

102,590

 

$

329,450

 

 

11.  Debt and Financing Arrangements

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Term loan due 2018 ($1.9 billion face value)

 

$

1,875,429

 

$

1,875,429

 

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)

 

365,600

 

365,600

 

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

 

41,766

 

47,134

 

Debt issuance costs

 

(64,857

)

(64,857

)

 

 

5,067,938

 

5,073,306

 

Less: liabilities subject to compromise

 

5,067,938

 

 

Less: current maturities of debt

 

 

5,042,353

 

Long-term debt

 

$

 

$

30,953

 

 

Acceleration of Debt Obligations; Automatic Stay

 

The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the documents governing each of its 7.00% senior notes due 2019, 9.875% senior notes due 2019, 8.00% senior secured second lien notes due 2019, 7.25% senior notes due 2020, 7.25% senior notes due 2021 (together, the “senior notes”) and senior secured first lien term loan due 2018.  Immediately after filing the Bankruptcy Petitions, the Company began notifying all known current or potential creditors of the Debtors of the bankruptcy filings.

 

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.  Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

 

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Table of Contents

 

Securitization Agreement

 

On January 13, 2016, the Company agreed with its securitization financing providers (the “Securitization Financing Providers”) that, subject to certain amendments (the “Amendments”), they will continue the $200 million trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a non-debtor special-purpose entity that is a wholly owned subsidiary of the Company (“Arch Receivable”) (the “Securitization Facility”).

 

Pursuant to the Amendments, which have been approved by the Court on a final basis, the Debtors agreed to a revised schedule of fees payable to the administrator and the Securitization Financing Providers.  The cost of an advance backstopping a letter of credit issued under the Securitization Facility is determined by two factors: (a) a program fee of 2.65% per year and payable on each settlement date to each Securitization Financing Provider deemed to have made such an advance and (b) the “discount,” which is calculated based on each Securitization Financing Provider’s costs, including its cost of the issuance and placement of short term promissory notes to fund such an advance.

 

In connection with the Securitization Facility, Arch Receivable has granted to the administrator (for the benefit of the securitization purchasers) a first priority security interest in all of its assets, including all outstanding accounts receivable generated by the Debtors from the sale of coal and sold through the Securitization Facility (including collections, proceeds and certain other interests related thereto) (the “Receivables”) and all proceeds thereof.

 

The agreements governing the Securitization Facility provide for the grant of analogous security interests by certain Debtors that generate Receivables from the sale of coal (such Debtors, the “Originators”). The agreements expressly state that the transfers of Receivables from the Originators to Arch and from Arch to Arch Receivable are intended to be true sales of the Receivables. However, if, against the intent of the parties (and notwithstanding entry of an order by the Court which provides that the transfers of the Receivables constitute true sales), any such transfer is recharacterized as a loan or extension of credit, each Originator has granted a first priority prepetition security interest in the Receivables and certain related collateral, pursuant to the agreements governing the Securitization Facility, for the ultimate benefit of the administrator and the Securitization Financing Providers (the “Liens”). The Debtors have agreed, in connection with the Amendments, to effectively extend such Liens to cover Receivables generated on or after the Petition Date.

 

The Originators do not guarantee the collection of Receivables that have been transferred to Arch Receivable. However, the Originators are obligated to reimburse Arch Receivable for inaccuracy of certain representations and warranties, dilution items with respect to Receivables and certain other limited indemnities (such obligations, the “Repayment Amounts”). Under the agreements governing the Securitization Facility, Arch Receivable is entitled to apply Repayment Amounts to amounts owed under the Securitization Facility.

 

Further, the Company has executed a performance guarantee through which it has promised to fulfill, or cause Arch Receivable, the designated servicer and each Originator to fulfill, each of their obligations under the agreements governing the Securitization Facility. In addition, as contemplated by the Amendments, the Originators have also executed a performance guarantee promising to fulfill obligations of all Originators under the agreements.

 

In addition, in connection with the Amendments, the Debtors have granted superpriority claims against the Debtors and in favor of Arch Receivable, the administrator and the Securitization Financing Providers in respect of certain of the Debtors’ obligations under the agreements governing the Securitization Facility, including the Repayment Amounts and certain other limited indemnification and other obligations of the Debtors under the agreements.

 

Debtor-In-Possession Financing

 

On January 21, 2016, the Superpriority Secured Debtor-in-Possession Credit Agreement (as amended on March 4, 2016, March 28, 2016 and April 26, 2016, the “DIP Credit Agreement”) was entered into by and among the Company, as borrower, certain of the Debtors, as guarantors (the “Guarantors” and, together with the Company, the “Loan Parties”), the lenders from time to time party thereto (the “DIP Lenders”) and Wilmington Trust, National Association, as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”).

 

The DIP Credit Agreement, which has been approved by the Court on a final basis, provides for a super-priority senior secured debtor-in-possession credit facility (the “DIP Facility”) consisting of term loans (collectively, the “DIP Term Loan”) in the aggregate principal amount of up to $275 million that may be funded in not more than two draws not later than six months after the effective date of the DIP Facility (such six month period, the “Availability Period”).  Any portion of the DIP Term Loan commitment that has not been funded on or prior to the end of the Availability Period will be permanently cancelled.

 

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Table of Contents

 

The maturity date of the DIP Facility is the earliest of (i) January 31, 2017, (ii) the date of the substantial consummation of a plan of reorganization that is confirmed pursuant to an order of the Court, (iii) the consummation of the sale of all or substantially all of the assets of the Loan Parties pursuant to Section 363 of the Bankruptcy Code and (iv) the date the obligations under the DIP Facility are accelerated pursuant to the terms of the DIP Credit Agreement.  Borrowings under the DIP Facility bear interest at an interest rate per annum equal to, at the Company’s option (i) LIBOR plus 9.00%, subject to a 1.00% LIBOR floor or (ii) the base rate plus 8.00%.

 

Obligations under the DIP Credit Agreement are guaranteed on a super-priority senior secured basis by all existing and future wholly-owned domestic subsidiaries of Arch, and all newly created or acquired wholly-owned domestic subsidiaries of Arch, subject to customary limited exceptions.

 

The lenders under the DIP Credit Agreement have a first priority lien on all encumbered and unencumbered assets of the Loan Parties (the “DIP Lien”), subject to a $75 million carve-out for super-priority claims relating to the Debtors’ self-bonding obligations in Wyoming, a customary professional fees carve-out and certain exceptions.

 

The Loan Parties are subject to certain financial maintenance covenants under the DIP Credit Agreement, including, without limitation, (i) maximum capital expenditures and (ii) minimum liquidity (defined as unrestricted cash and cash equivalents of the Company and its domestic subsidiaries (other than any securitization subsidiary or bonding subsidiary), plus withdrawable funds from brokerage accounts of the Company and its domestic subsidiaries (other than any securitization subsidiary or bonding subsidiary) plus any unused commitments that are available to be drawn by the Company pursuant to the terms of the DIP Credit Agreement) of (A) $300 million prior to the entry of the Final Order and (B) $500 million following the entry of the Final Order, in each case tested on a monthly basis.  The DIP Credit Agreement contains customary affirmative and negative covenants and representations for debtor-in-possession financings.  In addition to customary events of default for debtor-in-possession financings, the DIP Credit Agreement contains milestones relating to the Chapter 11 Cases and any failure to comply with such milestones constitutes an event of default.

 

The DIP Facility is subject to certain usual and customary prepayment events, including 100% of net cash proceeds of (i) debt issuances (other than debt permitted to be incurred under the terms of the DIP Credit Agreement), (ii) non-ordinary course asset sales or dispositions in excess of $50 million in the aggregate (with no individual asset sale or disposition in excess of $7.5 million) and (iii) any casualty event in excess of $50 million in the aggregate, subject to customary reinvestment rights, in each case to be applied to prepay the DIP Term Loan.  At a hearing held on February 23, 2016 in the Chapter 11 Cases, the Court approved the DIP Facility on a final basis, overruling the objections of the Creditors’ Committee and certain other parties who asserted, among other things, that the DIP Facility was unnecessary and argued that the Debtors should enter into an alternate debtor-in-possession financing facility proposed by certain members of the Creditors’ Committee.

 

The Company entered into an amendment to the DIP Credit Agreement, dated as of April 26, 2016, which extended the deadline for the filing of a plan of reorganization and accompanying disclosure statement from April 26, 2016 to May 5, 2016. See Note 18, “Subsequent Events.”

 

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12.    Income Taxes

 

During the first quarter of 2016, the Company determined it was more likely than not that the federal and state net operating losses it expects to generate in 2016 will not be realized based on projections of future taxable income.  Accordingly, the estimated annual effective rate for the year ended December 31, 2016 includes the impact of recording a valuation allowance against these attributes.  During the three months ended March 31, 2016, the Company realized a net tax benefit of $1.1 million, which included a valuation allowance of $96.1 million for federal net operating losses and tax credits and $4.5 million for the state net operating losses.

 

During the first three months of 2015, the Company increased its valuation allowance for the portion of the federal and state net operating losses it expected to generate in 2015.  The Company increased its valuation allowance by $45.3 million for the federal net operating losses and $2.6 million for the state net operating losses.

 

13.  Fair Value Measurements

 

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

 

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

 

·    Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s level 2 assets and liabilities include U.S. government agency securities 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 March 31, 2016.

 

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

 

 

 

March 31, 2016

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments in marketable securities

 

$

200,513

 

$

48,792

 

$

151,721

 

$

 

Derivatives

 

7,189

 

4,487

 

 

2,702

 

Total assets

 

$

207,702

 

$

53,279

 

$

151,721

 

$

2,702

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

$

 

$

 

$

 

$

 

 

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.

 

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Table of Contents

 

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

 

 

 

Three Months Ended
March 31, 2016

 

 

 

(In thousands)

 

Balance, beginning of period

 

$

2,432

 

Realized and unrealized losses recognized in earnings, net

 

(859

)

Realized and unrealized gains recognized in other comprehensive income, net

 

 

Purchases

 

1,362

 

Issuances

 

(233

)

Ending balance

 

$

2,702

 

 

Net unrealized losses of $0.6 million were recognized in the Condensed Consolidated Statement of Operations during the three months ended March 31, 2016 related to Level 3 financial instruments held on March 31, 2016.

 

Fair Value of Long-Term Debt

 

At March 31, 2016 and December 31, 2015, the fair value of the Company’s debt, including amounts classified as current, was $712.7 million and $937.1 million, respectively. Fair values are based upon observed prices in an active market, when available, or from valuation models using market information, which fall into Level 2 in the fair value hierarchy.

 

14.   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 immaterial for both the three months ended March 31, 2016, and 2015, respectively.  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 were immaterial for both the three months ended March 31, 2016 and 2015, respectively.

 

15.  Employee Benefit Plans

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Service cost

 

$

 

$

4

 

Interest cost

 

3,338

 

3,570

 

Expected return on plan assets

 

(4,538

)

(5,764

)

Amortization of other actuarial losses

 

757

 

2,058

 

Net credit

 

$

(443

)

$

(132

)

 

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Table of Contents

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Service cost

 

$

160

 

$

233

 

Interest cost

 

1,134

 

335

 

Amortization of prior service credits

 

(2,673

)

(2,084

)

Amortization of other actuarial losses (gains)

 

(566

)

(456

)

Net credit

 

$

(1,945

)

$

(1,972

)

 

16.   Commitments and Contingencies

 

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

 

In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. As of March 31, 2016 and December 31, 2015, the Company had accrued $2.8 million and $2.8 million, respectively, for all legal matters, of which all amounts are classified as current.  The ultimate resolution of any such legal matter could result in outcomes which may be materially different from amounts the Company has accrued for such matters.

 

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property.  Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.  Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

 

17.  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 months ended March 31, 2016 and 2015 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 the Company’s 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 transactions.

 

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Table of Contents

 

 

 

PRB

 

APP

 

Other
Operating
Segments

 

Corporate,
Other and
Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

223,122

 

$

173,618

 

$

31,366

 

$

 

$

428,106

 

Adjusted EBITDA

 

7,010

 

7,607

 

(3,328

)

(21,315

)

(10,026

)

Depreciation, depletion and amortization

 

32,760

 

22,329

 

7,932

 

678

 

63,699

 

Amortization of acquired sales contracts, net

 

(46

)

(787

)

 

 

(833

)

Capital expenditures

 

10

 

3,630

 

1,961

 

325

 

5,926

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

391,206

 

$

223,439

 

$

62,360

 

$

 

$

677,005

 

Adjusted EBITDA

 

72,062

 

39,807

 

1,691

 

(31,788

)

81,772

 

Depreciation, depletion and amortization

 

44,361

 

50,832

 

10,055

 

(374

)

104,874

 

Amortization of acquired sales contracts, net

 

(1,285

)

(2,105

)

 

 

(3,390

)

Capital expenditures

 

16,969

 

3,385

 

2,642

 

(116

)

22,880

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Adjusted EBITDA

 

$

(10,026

)

$

81,772

 

Depreciation, depletion and amortization

 

(63,699

)

(104,874

)

Amortization of acquired sales contracts, net

 

833

 

3,390

 

Asset impairment and mine closure costs

 

(85,520

)

 

Interest expense, net

 

(43,313

)

(96,879

)

Nonoperating expenses

 

(6,088

)

 

Loss before income taxes

 

$

(207,813

)

$

(116,591

)

 

18.  Subsequent Events

 

Bankruptcy Items

 

The Company entered into an amendment to the Restructuring Support Agreement on April 26, 2016 (the “RSA Amendment”), which provides for the waiver of the termination event that would have occurred on April 10, 2016 as a result of the Debtors not having obtained Court approval of the assumption of the Restructuring Support Agreement within 90 days of the Petition Date. Following entry into the RSA Amendment, the Debtors are required to obtain Court approval of the assumption of the Restructuring Support Agreement prior to June 10, 2016 or such later date as may be agreed to by the Majority Consenting Lenders under the Restructuring Support Agreement.

 

The RSA Amendment further waives any termination event arising out of the Debtors’ failure to file the plan of reorganization and accompanying disclosure statement no later than 90 days after the Petition Date, so long as the Debtors: (i) file the plan and disclosure statement no later than May 5, 2016 or such later date as may be agreed to by the Majority Consenting Lenders, and (ii) obtain Court approval of the disclosure statement no later than June 10, 2016.

 

The RSA Amendment also provides for an extension of the date after which the Debtors and the Majority Consenting Lenders may modify the proposed distributions to holders of unsecured claims if holders of more than $1.6125 billion of unsecured claims against the Debtors have not executed a restructuring support agreement substantially in the form of the Restructuring Support Agreement from April 22, 2016 to June 10, 2016. The Restructuring Support Agreement was further amended on May 5, 2016 to remove the right of holders of unsecured claims to elect to receive a distribution in the form of common stock and warrants issued by the reorganized Debtors.

 

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Table of Contents

 

The Company entered into an amendment to the DIP Credit Agreement, dated as of April 26, 2016, which extended the deadline for the filing of a plan of reorganization and accompanying disclosure statement from April 26, 2016 to May 5, 2016.

 

On May 5, 2016, the Company filed its plan of reorganization and accompanying disclosure statement with the Court.

 

19. 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 Company and the subsidiaries which are guarantors under the senior notes are Debtors in the Chapter 11 Cases. The following tables present condensed consolidating financial information for (i) the Company (Debtor), (ii) the issuer of the senior notes (Debtor), (iii) the guarantors under the senior notes (Debtor), 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) (Non-Debtors). These tables provide substantially the same information as would be presented pursuant to the disclosure requirements of ASC 852 with respect to condensed combined financial statements of entities in reorganization proceedings.

 

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Table of Contents

 

Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2016

 

 

 

Parent/Issuer

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Revenues

 

$

 

$

428,106

 

$

 

$

 

$

428,106

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

2,186

 

417,677

 

 

(547

)

419,316

 

Depreciation, depletion and amortization

 

755

 

62,944

 

 

 

63,699

 

Amortization of acquired sales contracts, net

 

 

(833

)

 

 

(833

)

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

 

 

1,210

 

 

 

1,210

 

Asset impairment and mine closure costs

 

3,229

 

82,291

 

 

 

85,520

 

Selling, general and administrative expenses

 

13,540

 

5,382

 

1,272

 

(368

)

19,826

 

Other operating (income) expense, net

 

(1,098

)

(1,151

)

(886

)

915

 

(2,220

)

 

 

18,612

 

567,520

 

386

 

 

586,518

 

Loss from investment in subsidiaries

 

(123,988

)

 

 

123,988

 

 

Loss from operations

 

(142,600

)

(139,414

)

(386

)

123,988

 

(158,412

)

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

Interest expense (contractual interest of $98,565 in 2016)

 

(66,239

)

(6,365

)

(2,229

)

30,382

 

(44,451

)

Interest and investment income

 

7,110

 

23,292

 

1,118

 

(30,382

)

1,138

 

 

 

(59,129

)

16,927

 

(1,111

)

 

(43,313

)

 

 

 

 

 

 

 

 

 

 

 

 

Expenses related to proposed debt restructuring

 

(2,213

)

 

 

 

(2,213

)

Reorganization items, net

 

(3,875

)

 

 

 

(3,875

)

 

 

(6,088

)

 

 

 

(6,088

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(207,817

)

(122,487

)

(1,497

)

123,988

 

(207,813

)

Provision for (benefit from) income taxes

 

(1,115

)

 

4

 

 

(1,111

)

Net income (loss)

 

$

(206,702

)

$

(122,487

)

$

(1,501

)

$

123,988

 

$

(206,702

)

Total comprehensive income (loss)

 

$

(205,842

)

$

(123,489

)

$

(1,501

)

$

124,990

 

$

(205,842

)

 

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Table of Contents

 

Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2015

 

 

 

Parent/Issuer

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Revenues

 

$

 

$

677,005

 

$

 

$

 

$

677,005

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

7,470

 

555,686

 

 

(834

)

562,322

 

Depreciation, depletion and amortization

 

1,060

 

103,812

 

2

 

 

104,874

 

Amortization of acquired sales contracts, net

 

 

(3,390

)

 

 

(3,390

)

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

 

 

1,220

 

 

 

1,220

 

Selling, general and administrative expenses

 

15,439

 

6,243

 

1,448

 

(525

)

22,605

 

Other operating (income) expense, net

 

3,700

 

5,278

 

(1,251

)

1,359

 

9,086

 

 

 

27,669

 

668,849

 

199

 

 

696,717

 

Income from investment in subsidiaries

 

21,050

 

 

 

(21,050

)

 

Loss from operations

 

(6,619

)

8,156

 

(199

)

(21,050

)

(19,712

)

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(118,056

)

(6,763

)

(1,275

)

26,842

 

(99,252

)

Interest and investment income

 

8,072

 

19,774

 

1,369

 

(26,842

)

2,373

 

 

 

(109,984

)

13,011

 

94

 

 

(96,879

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(116,603

)

21,167

 

(105

)

(21,050

)

(116,591

)

Provision for (benefit from) income taxes

 

(3,408

)

 

12

 

 

(3,396

)

Net income (loss)

 

$

(113,195

)

$

21,167

 

$

(117

)

$

(21,050

)

$

(113,195

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(109,591

)

$

24,407

 

$

(117

)

$

(24,290

)

$

(109,591

)

 

25



Table of Contents

 

Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidating Balance Sheets

March 31, 2016

 

 

 

Parent/Issuer

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

283,309

 

$

100,432

 

$

11,657

 

$

 

$

395,398

 

Short term investments

 

198,788

 

 

 

 

198,788

 

Restricted cash

 

 

 

109,650

 

 

109,650

 

Receivables

 

12,756

 

394

 

120,359

 

(4,915

)

128,594

 

Inventories

 

 

195,987

 

 

 

195,987

 

Other

 

26,272

 

29,886

 

2,555

 

 

58,713

 

Total current assets

 

521,125

 

326,699

 

244,221

 

(4,915

)

1,087,130

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

7,036

 

3,479,653

 

 

420

 

3,487,109

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in subsidiaries

 

4,729,318

 

 

 

(4,729,318

)

 

Intercompany receivables

 

 

2,283,438

 

 

(2,283,438

)

 

Note receivable from Arch Western

 

675,000

 

 

 

(675,000

)

 

Other

 

38,578

 

240,872

 

1,721

 

 

281,171

 

Total other assets

 

5,442,896

 

2,524,310

 

1,721

 

(7,687,756

)

281,171

 

Total assets

 

$

5,971,057

 

$

6,330,662

 

$

245,942

 

$

(7,692,251

)

$

4,855,410

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

 

 

 

Liabilities not subject to compromise

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

22,369

 

$

48,446

 

$

8

 

$

 

$

70,823

 

Accrued expenses and other current liabilities

 

26,357

 

80,396

 

752

 

(4,915

)