Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________________________________ 
FORM 10-Q 
(Mark One)
ý      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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
https://cdn.kscope.io/9c4cfbc4e52cd252a7a416cff82489b6-logoa02a01a01a01a01a06.jpg
 Arch Coal, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
43-0921172
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification Number)
One CityPlace Drive, Suite 300, St. Louis, Missouri
 
63141
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code: (314) 994-2700 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically 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 ý  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 ý
 
 
 
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 ý



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Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ý  No o
At November 1, 2016, there were 24,999,358 shares of the registrant’s common stock outstanding.
 


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TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 

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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 September 30,

Nine Months Ended September 30,
 
2016
 
2015

2016
 
2015
 
(Unaudited)
Revenues
$
550,305

 
$
688,544

 
$
1,398,709

 
$
2,010,011

Costs, expenses and other operating
 
 
 
 
 

 
 

Cost of sales (exclusive of items shown separately below)
450,427

 
540,192

 
1,288,785


1,668,766

Depreciation, depletion and amortization
69,423

 
103,965

 
191,581


306,211

Amortization of acquired sales contracts, net
104

 
(1,994
)
 
(728
)

(7,028
)
Change in fair value of coal derivatives and coal trading activities, net
488

 
(3,559
)
 
2,856


(1,128
)
Asset impairment and mine closure costs
46

 
2,120,292

 
129,267

 
2,139,438

Losses from disposed operations resulting from Patriot Coal bankruptcy

 
149,314

 

 
149,314

Selling, general and administrative expenses
20,498

 
25,731

 
59,343


72,604

Other operating (income) expense, net
(2,476
)
 
(8,625
)
 
(15,257
)

7,864

 
538,510

 
2,925,316

 
1,655,847

 
4,336,041

 
 
 
 
 
 
 
 
Income (loss) from operations
11,795

 
(2,236,772
)

(257,138
)

(2,326,030
)
Interest expense, net
 
 
 
 
 

 
 

Interest expense (contractual interest of $101,520 and $300,852 for the three and nine months ended September 30, 2016)
(46,164
)
 
(99,759
)

(135,888
)

(298,585
)
Interest and investment income
582

 
672


2,653


4,007

 
(45,582
)
 
(99,087
)
 
(133,235
)
 
(294,578
)
 
 
 
 
 
 
 
 
Loss before nonoperating expenses
(33,787
)
 
(2,335,859
)
 
(390,373
)
 
(2,620,608
)
 
 
 
 
 
 
 
 
Nonoperating expenses
 
 
 
 
 
 
 
Expenses related to proposed debt restructuring

 
(7,482
)

(2,213
)

(11,498
)
Reorganization items, net
(20,904
)
 

 
(46,050
)
 

 
(20,904
)
 
(7,482
)
 
(48,263
)
 
(11,498
)
 
 
 
 
 
 
 
 
Loss before income taxes
(54,691
)
 
(2,343,341
)

(438,636
)

(2,632,106
)
Benefit from income taxes
(3,270
)
 
(343,865
)
 
(4,626
)

(351,332
)
Net loss
$
(51,421
)
 
$
(1,999,476
)

$
(434,010
)

$
(2,280,774
)
 
 
 
 
 
 
 
 
Net loss per common share
 
 
 
 
 

 
 

Basic and diluted - Net loss per share
$
(2.41
)
 
$
(93.91
)
 
$
(20.38
)
 
$
(107.16
)
 
 
 
 
 
 
 
 
Basic and diluted weighted average shares outstanding
21,293

 
21,292

 
21,293

 
21,283

 
 
 
 
 
 
 
 

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 September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
Net loss
 
$
(51,421
)
 
$
(1,999,476
)
 
$
(434,010
)
 
$
(2,280,774
)
 
 
 
 
 
 
 
 
 
Derivative instruments
 
 
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
(149
)
 
(2,527
)
 
(535
)
 
(681
)
Income tax benefit (provision)
 

 
910

 
81

 
246

 
 
(149
)
 
(1,617
)
 
(454
)
 
(435
)
Pension, postretirement and other post-employment benefits
 
 
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
2,243

 
1,182

 
(1,844
)
 
4,950

Income tax benefit (provision)
 

 
(425
)
 
481

 
(1,782
)
 
 
2,243

 
757

 
(1,363
)
 
3,168

Available-for-sale securities
 
 
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
(438
)
 
(362
)
 
2,969

 
(3
)
Income tax benefit (provision)
 

 
128

 
(1,043
)
 
(4
)
 
 
(438
)
 
(234
)
 
1,926

 
(7
)
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
1,656

 
(1,094
)
 
109

 
2,726

Total comprehensive loss
 
$
(49,765
)
 
$
(2,000,570
)
 
$
(433,901
)
 
$
(2,278,048
)
 
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)
 
September 30,
 
December 31,
 
2016
 
2015
 
(Unaudited)
Assets
Current assets
 

 
 

Cash and cash equivalents
$
400,205

 
$
450,781

Short term investments
111,451

 
200,192

Restricted cash
81,563

 
97,542

Trade accounts receivable (net of allowance for doubtful accounts of $0 and $7.8 million, respectively)
165,522

 
117,405

Other receivables
17,227

 
18,362

Inventories
159,410


196,720

Prepaid royalties
4,805

 
10,022

Coal derivative assets
2,180

 
8,035

Other current assets
36,960

 
39,866

Total current assets
979,323

 
1,138,925

Property, plant and equipment, net
3,434,941

 
3,619,029

Other assets
 

 
 

Prepaid royalties
20,997

 
23,671

Equity investments
164,232

 
201,877

Other noncurrent assets
58,569

 
58,379

Total other assets
243,798

 
283,927

Total assets
$
4,658,062

 
$
5,041,881

Liabilities and Stockholders' Deficit
 
 
 
Liabilities not subject to compromise
 

 
 

Accounts payable
$
89,966

 
$
128,131

Accrued expenses and other current liabilities
223,780


329,450

Current maturities of debt
3,398

 
5,042,353

Total current liabilities
317,144

 
5,499,934

Long-term debt
30,037

 
30,953

Asset retirement obligations
394,699

 
396,659

Accrued pension benefits
23,716

 
27,373

Accrued postretirement benefits other than pension
87,123

 
99,810

Accrued workers’ compensation
119,828

 
112,270

Other noncurrent liabilities
65,824

 
119,171

Total liabilities not subject to compromise
1,038,371

 
6,286,170

 
 
 
 
Liabilities subject to compromise
5,295,785

 

 
 
 
 
Total liabilities
6,334,156

 
6,286,170

 
 
 
 
Stockholders' deficit
 

 
 

Common stock, $0.01 par value, authorized 26,000 shares, issued 21,448 shares and 21,446 shares at September 30, 2016 and December 31, 2015, respectively
2,145

 
2,145

Paid-in capital
3,056,307

 
3,054,211

Treasury stock, at cost, 152 shares at September 30, 2016 and December 31, 2015
(53,863
)
 
(53,863
)
Accumulated deficit
(4,678,977
)
 
(4,244,967
)
Accumulated other comprehensive loss
(1,706
)
 
(1,815
)
Total stockholders’ deficit
(1,676,094
)
 
(1,244,289
)
Total liabilities and stockholders’ deficit
$
4,658,062

 
$
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) 

 
Nine Months Ended September 30,
 
2016
 
2015
 
(Unaudited)
Operating activities
 

 
 

Net loss
$
(434,010
)
 
$
(2,280,774
)
Adjustments to reconcile net loss to cash used in operating activities:
 

 
 

Depreciation, depletion and amortization
191,581

 
306,211

Amortization of acquired sales contracts, net
(728
)
 
(7,028
)
Amortization relating to financing activities
12,800

 
18,960

Prepaid royalties expensed
4,791

 
6,661

Employee stock-based compensation expense
2,096

 
4,459

Asset impairment and non-cash mine closure costs
119,194

 
2,136,610

Non-cash bankruptcy reorganization items
(16,634
)
 

Losses from disposed operations resulting from Patriot Coal bankruptcy

 
149,314

Expenses related to proposed debt restructuring
2,213

 
11,498

Gains on disposals and divestitures, net
(6,628
)
 
(1,191
)
Deferred income taxes
(419
)
 
(347,180
)
Changes in:
 
 
 
Receivables
(42,787
)
 
(3,165
)
Inventories
34,604

 
(48,848
)
Accounts payable, accrued expenses and other current liabilities
90,920

 
(19,338
)
Income taxes, net
(4,217
)
 
(4,303
)
Other
15,990

 
(1,568
)
Cash used in operating activities
(31,234
)

(79,682
)
Investing activities
 

 
 

Capital expenditures
(82,434
)
 
(109,250
)
Additions to prepaid royalties
(305
)
 
(5,808
)
Proceeds from (consideration paid for) disposals and divestitures
(2,921
)
 
1,020

Purchases of marketable securities
(98,750
)
 
(203,094
)
Proceeds from sale or maturity of marketable securities and other investments
187,006

 
248,362

Investments in and advances to affiliates
(3,440
)
 
(7,944
)
Withdrawals (deposits) of restricted cash
15,979

 
(44,732
)
Cash provided by (used in) investing activities
15,135


(121,446
)
Financing activities
 

 
 

Payments on term loan

 
(14,625
)
Net payments on other debt
(12,083
)
 
(12,192
)
Expenses related to proposed debt restructuring
(2,213
)
 
(11,498
)
Debt financing costs
(20,181
)
 

Cash used in financing activities
(34,477
)
 
(38,315
)
Decrease in cash and cash equivalents
(50,576
)
 
(239,443
)
Cash and cash equivalents, beginning of period
450,781

 
734,231

Cash and cash equivalents, end of period
$
400,205

 
$
494,788


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. ("Arch Coal") 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 and nine months ended September 30, 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 the Company affected a 1-for-10 reverse stock split of its 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”), Arch Coal and substantially all of its wholly owned domestic subsidiaries (the “Filing Subsidiaries” and, together with Arch Coal, the “Debtors”; the Debtors, solely following the effective date of the Plan, the “Reorganized 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 Debtors’ 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). During the Chapter 11 Cases, each Debtor continues 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.  
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 the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.

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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. During the Chapter 11 Cases, 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.

The Plan (as defined below) was confirmed by the Bankruptcy Court on September 13, 2016 and the Debtors emerged from bankruptcy on October 5, 2016. For further information, see Note 19, “Subsequent Events.”

Restructuring Support Agreement 

As previously disclosed, prior to the Petition Date, certain of the Debtors entered into a Restructuring Support Agreement, dated as of January 10, 2016, which agreement was amended (on February 25, 2016, March 28, 2016, April 26, 2016, May 5, 2016, June 10, 2016 and June 23, 2016). On July 5, 2016, the Debtors entered into an Amended and Restated Restructuring Support Agreement (the “Amended and Restated RSA”) with lenders holding more than 75% of the aggregate principal amount of loans outstanding under Arch’s pre-petition first lien credit facility, the statutory committee of unsecured creditors appointed in the Chapter 11 Cases pursuant to Section 1102 of the Bankruptcy Code (the “Committee”) and certain members of the Committee. On September 29, 2016, the Amended and Restated RSA was amended to extend the deadline for substantial consummation of the Plan to coincide with the Company’s emergence from bankruptcy on October 5, 2016.

Confirmation of Plan of Reorganization

On September 13, 2016, the Bankruptcy Court entered an order, Docket No. 1324 (the “Confirmation Order”) confirming the Debtors’ Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated September 11, 2016 (the “Plan”), which order was amended on September 15, 2016, Docket No. 1334.

The Plan’s effectiveness is subject to certain conditions being satisfied or waived, including, (a) the documents governing the Reorganized Debtors’ new $326.5 million first lien debt facility (the “New First Lien Debt Facility”) shall have been duly executed and delivered by the Reorganized Debtors parties thereto, and all conditions precedent to the consummation of the New First Lien Debt Facility shall have been waived or satisfied in accordance with the terms thereof, and the closing of the New First Lien Debt Facility shall have occurred; (b) the Debtors’ existing securitization facility shall be reinstated on terms substantially as set forth in the Plan Supplement; (c) all documents and agreements necessary to implement the Plan, including the Plan Supplement and the Confirmation Order, shall have been executed; and (d) the Debtors shall have received all authorizations, consents, regulatory approvals, rulings, letters, no-action letters, opinions or documents that are necessary to implement the Plan and that are required by law, regulation or order. The date on which all conditions to the effectiveness of the Plan have been satisfied or waived is the “Effective Date” of the Plan. The Company satisfied all conditions contemplated by the Plan on October 5, 2016, which is the Effective Date of the Plan and the date which the Debtors emerged from bankruptcy. For further information, see Note 19, “Subsequent Events.”

The following is a summary of certain provisions of the Plan, as confirmed by the Bankruptcy Court pursuant to the Confirmation Order, and is not intended to be a complete description of the Plan.


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Treatment of Claims

The Plan contemplates that:

Holders of allowed administrative expense claims, priority claims (other than administrative expense claims and priority tax claims) and secured claims (other than claims arising under priority claims, the prepetition first lien credit facility and prepetition second lien notes) will be paid in full.

Holders of allowed claims arising under the Debtors’ prepetition first lien credit facility (“First Lien Credit Facility”) will receive their pro rata distribution of (i) total cash payments equal to the greater of (A) $144,796,527.78 less the amount of the adequate protection payments and (B) $30,000,000; (ii) $326.5 million in principal amount of New First Lien Debt Facility; and (iii) 94% of the common stock of Reorganized Arch Coal (the “New Common Stock”), subject to dilution on account of (a) any Class A Common Stock (as defined below) issued upon exercise of the warrants (the “New Warrants”) issued pursuant to the Plan to purchase up to 12% of the fully diluted Class A Common Stock as of the Effective Date and exercisable at any time for a period of 7 years from the Effective Date at a strike price calculated based on a total equity capitalization of $1.425 billion and (b) the issuance of New Common Stock in an amount of up to 10% of the New Common Stock, on a fully diluted basis, pursuant to a management incentive plan (the “Management Incentive Plan”).

Holders of allowed claims on account of prepetition second lien or unsecured notes (the “Prepetition Notes”) will receive their pro rata distribution of (i) $22.636 million in cash, (ii) at such holder’s election, either (A) such holder’s pro rata share of the New Warrants or (B) such holder’s pro rata share of $25 million in cash and (iii) 6% of the New Common Stock (subject to dilution on account of any exercise of the New Warrants and pursuant to the Management Incentive Plan).

Holders of allowed general unsecured claims against Debtors (other than claims on account of the First Lien Credit Facility or Prepetition Notes) will receive their pro rata distribution of $7.364 million cash, less fees and expenses incurred by any professionals retained by a claims oversight committee up to $200,000.

The Reorganized Debtors will waive and release any claims or causes of action that they have, had, or may have that are based on sections 502(d), 544, 545, 547, 548, 549, 550, 551, 553(b) and 724(a) of the Bankruptcy Code and analogous non- bankruptcy law for all purposes against (i) prepetition trade creditors and (ii) officers, directors, employees or representatives of the Debtors or the Reorganized Debtors and all agents and representatives of all of the foregoing. However, the Reorganized Debtors will retain the right to assert any said claims as defenses or counterclaims in any cause of action brought by any creditor.

New First Lien Debt Facility

Pursuant to the Plan and a condition to its effectiveness, holders of allowed claims on account of the First Lien Credit Facility will receive their pro rata share of the New First Lien Debt Facility to be entered into on the Effective Date in an aggregate original principal amount of $326.5 million. The New First Lien Debt Facility will mature on the date that is five years after the Effective Date. Wilmington Trust, National Association will serve as administrative agent and collateral agent thereunder. Borrowings under the New First Lien Debt Facility will bear interest at a per annum rate equal to, at the option of Arch Coal, either (i) a London interbank offered rate (“LIBOR”) plus an applicable margin of 9%, subject to a 1% LIBOR floor, or (ii) a base rate plus an applicable margin of 8%. Interest payments will be payable quarterly in cash, unless the Debtors’ liquidity (as defined therein) after giving effect to the applicable interest payment would not exceed $300 million, in which case interest may be payable in kind at the Company’s option. The New First Lien Debt Facility will be guaranteed by all existing and future wholly owned domestic subsidiaries of Arch Coal subject to customary exceptions, and will be secured by first priority security interests on substantially all assets of each Reorganized Debtor, including 100% of the voting equity interests of directly owned domestic subsidiaries and 65% of the voting equity interests of directly owned foreign subsidiaries, subject to customary exceptions.

Pursuant to the Plan, the Company entered into the New First Lien Debt Facility on October 5, 2016. For further information, see Note 19, “Subsequent Events.”


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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. On May 9, 2016, the Securitization Facility was amended to exclude account receivables in respect of certain disposed mining operations of one of the Debtors and to effect the release of certain liens relating to such account receivables.

On the Effective Date, the Company expects to extend and amend the existing $200 million trade accounts receivable securitization facility provided to Arch Receivable (the “Extended Securitization Facility”), which will continue to support the issuance of letters of credit and will also reinstate Arch Receivable’s ability to request cash advances as existed prior to the Petition Date. The Extended Securitization Facility will terminate at the earliest of (i) three years from the Effective Date, (ii) if Liquidity (defined in the Extended Securitization Facility) is less than $175,000,000 for a period of 60 consecutive days, the date that is the 364th day after the first day of such 60 consecutive day period and (iii) the occurrence of certain predefined events substantially consistent with the existing transaction documents. Under the Extended Securitization Facility, Arch Receivable and certain of the Reorganized Debtors party to the Extended Securitization Facility will grant to the administrator of the Extended Securitization Facility a first priority security interest in eligible trade accounts receivable generated by such Debtors from the sale of coal and all proceeds thereof.

The Company extended and amended the Securitization Facility on October 5, 2016. For further information, see Note 19, “Subsequent Events.”

Going Concern

The Company’s previously issued consolidated financial statements included cautionary language about its ability to continue as a going concern due to the Chapter 11 Cases. The Company emerged from Chapter 11 protection on October 5, 2016 and believes it has sufficient liquidity to fund its operations. For further information, see Note 19, “Subsequent Events.”




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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)
(138
)
 

 
701

 
563

Amounts reclassified from AOCI
(316
)
 
(1,363
)
 
1,225

 
(454
)
Balance at September 30, 2016
$
(129
)
 
$
(2,084
)
 
$
507

 
$
(1,706
)
 

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The following amounts were reclassified out of AOCI:

 
 
Amounts Reclassified from AOCI
 
Line Item in the Condensed Consolidated Statement of Operations
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Details About AOCI Components
 
2016
 
2015
 
2016
 
2015
 
 
 
(In thousands)
 
 
 
 
 
 
Derivative instruments
 
$
76

 
$
3,598

 
$
397

 
$
6,806

 
Revenues
 
 

 
(1,295
)
 
(81
)
 
(2,452
)
 
Benefit from income taxes
 
 
$
76

 
$
2,303

 
$
316

 
$
4,354

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Pension, postretirement and other post-employment benefits
 
 
 
 
 
 
 
 
 
 
Amortization of prior service credits (1)
 
$
2,510

 
$
2,083

 
$
7,854

 
$
6,250

 
 
Amortization of actuarial gains (losses), net (1)
 
(4,753
)
 
(3,266
)
 
(6,010
)
 
(11,200
)
 
 
 
 
(2,243
)
 
(1,183
)
 
1,844

 
(4,950
)
 
 
 
 

 
426

 
(481
)
 
1,782

 
Benefit from income taxes
 
 
$
(2,243
)
 
$
(757
)
 
$
1,363

 
$
(3,168
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
632

 
$
(1,081
)
 
$
(2,263
)
 
$
(5,308
)
 
Interest and investment income
 
 

 
358

 
1,038

 
1,914

 
Benefit from income taxes
 
 
$
632

 
$
(723
)
 
$
(1,225
)
 
$
(3,394
)
 
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 three months ended September 30, 2016, the Company recorded a charge of $20.9 million in “Reorganization items, net” comprised of professional fee expense of $22.6 million, partially offset by non-cash gains on rejected contracts of $1.7 million. Net cash paid for “Reorganization items, net” totaled $16.0 million during the three months ended September 30, 2016.

During the nine months ended September 30, 2016, the Company recorded a charge of $46.1 million in “Reorganization items, net” comprised of professional fee expense of $62.7 million, partially offset by non-cash gains on rejected contracts of $16.6 million. Net cash paid for “Reorganization items, net” totaled $31.1 million during the nine months ended September 30, 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 consist of the following:

 
 
September 30, 2016
 
 
(in thousands)
Previously Reported Balance Sheet Line
 
 
Debt
 
$
5,026,806

Accrued expenses and current liabilities
 
138,253

Accounts payable
 
90,926

Noncurrent liabilities
 
39,800

 
 
 
Total Liabilities Subject to Compromise
 
$
5,295,785


The debt balance included above is net of debt issuance costs of $64.9 million; for additional information on debt, see Note 12, “Debt and Financing Arrangements.”

6. Asset Impairment and Mine Closure Costs

During the third quarter of 2016, the Company recorded an immaterial amount of severance expense to “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations bringing the year-to-date total to $129.3 million. 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 idled its mining operations; a $38.0 million impairment of the Company’s equity investment in a brownfield bulk commodity terminal on the Columbia River in Longview, Washington as the Company relinquished its ownership rights in exchange for future throughput rights; $7.2 million of severance expense related to headcount reductions during the year; a $3.6 million curtailment charge related to the Company’s pension, postretirement health and black lung actuarial liabilities due to headcount reductions in the first half of the year; $3.4 million 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.

During the third quarter of 2015, the Company recorded $2,120.3 million of “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations due to the continued deterioration in thermal and metallurgical coal markets and projections for a muted pricing recovery. The Company determined that the further weakening of the pricing environment in the third quarter and the projected operating losses represented indicators of impairment with respect to certain of its long-lived assets or asset groups. Using current pricing expectations which reflected marketplace participant assumptions, life of mine cash flows were used to determine if the undiscounted cash flows exceeded the current asset values for certain operating complexes in the Company’s Appalachia segment. Discounted cash flows were then utilized to reduce the carrying value of those assets to fair value. The discount rate used reflected the current financial difficulties present in the commodities sector in general and coal mining specifically; the perceived risk of financing coal mining in light of industry defaults; and the lack of an active market for buying or selling coal mining assets.  Additionally, the Company determined that the current market conditions represented an indicator of impairment for certain undeveloped coal properties that were acquired in times of significantly higher coal prices. Current prices and the significant capital outlay that would be required to develop these reserves indicated that the carrying value was not recoverable. 

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Table of Contents

7. Losses from disposed operations resulting from Patriot Coal bankruptcy

On December 31, 2005, the Company entered into a purchase and sale agreement with Magnum to sell certain operations. On July 23, 2008, Patriot acquired Magnum. On May 12, 2015, Patriot and certain of its wholly owned subsidiaries (“Debtors”), including Magnum, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the U.S. Bankruptcy Court for the Eastern District of Virginia. Subsequently, on October 28, 2015, Patriot’s Plan of Reorganization was approved, including an authorization to reject their collective bargaining agreements and modify certain union-related retiree benefits. As a result of the Plan of Reorganization, the Company became statutorily responsible for retiree medical benefits pursuant to Section 9711 of the Coal Industry Retiree Health Benefit Act of 1992 for certain retirees of Magnum who retired prior to October 1, 1994. In addition, the Company has provided surety bonds to Patriot related to permits that were sold to an affiliate of Virginia Conservation Legacy Fund, Inc. (“VCLF”). Should VCLF not perform the required reclamation, the Company would incur losses under the bonds and related indemnity agreements. During the third quarter of 2015, the Company recognized $149.3 million in losses related to the previously disposed operations as a result of the Patriot Coal bankruptcy.

8. Inventories
 
Inventories consist of the following: 
 
 
September 30,
 
December 31,
 
 
2016
 
2015
 
 
(In thousands)
Coal
 
$
51,426

 
$
85,043

Repair parts and supplies
 
107,984

 
111,677

 
 
$
159,410

 
$
196,720

 
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $5.1 million at September 30, 2016 and $6.0 million at December 31, 2015.
 
9. 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:
 
September 30, 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
$

 
$

 
$

 
$

 
$

 
$

Corporate notes and bonds
111,545

 
8

 
(102
)
 
111,451

 
111,451

 

Equity securities
913

 
786

 

 
1,699

 

 
1,699

Total Investments
$
112,458

 
$
794

 
$
(102
)
 
$
113,150

 
$
111,451

 
$
1,699

 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
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 $73.0 million and $184.6 million at September 30, 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 $28.6 million and $15.8 million at September 30, 2016 and December 31, 2015, respectively. The unrealized losses in the Company’s portfolio at September 30, 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 September 30, 2016 have maturity dates ranging from the third quarter of 2016 through the fourth 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.

10. 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 41 to 46 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. The Company has purchased 8.4 million gallons of call options for the remainder of 2016 representing 65% of expected purchases at an average strike price of $1.40 per gallon. Additionally, the Company has protected approximately 49% of its expected 2017 purchases with call options with an average strike price of $1.66 per gallon. At September 30, 2016, the Company had outstanding heating oil call options for approximately 22 million gallons for the purpose of managing the price risk associated with future diesel purchases. These positions are not designated as hedges for accounting purposes, and therefore, changes in the fair value are recorded immediately to earnings.

Coal price risk management positions
 
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted, index-priced sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.
 
At September 30, 2016, the Company held derivatives for risk management purposes that are expected to settle in the following years:
 
(Tons in thousands)
 
2016
 
2017
 
Total
Coal sales
 
55

 
540

 
595

Coal purchases
 
60

 
480

 
540

 
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 thermal coal demand. These options are not designated as hedges. Additionally, the

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Table of Contents

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 metallurgical coal demand. These options are not designated 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 $1.5 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:
 
 
 
September 30, 2016
 
 
 
December 31, 2015
 
 
Fair Value of Derivatives
 
Asset
 
Liability
 
 
 
Asset
 
Liability
 
 
(In thousands)
 
Derivative
 
Derivative
 
 
 
Derivative
 
Derivative
 
 
Derivatives Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Coal
 
$

 
$
(14
)
 
 

 
$
4

 
$
(20
)
 
 

 
 


 


 
 
 


 


 
 

Derivatives Not Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Heating oil -- diesel purchases
 
3,964

 

 
 

 
1,017

 

 
 

Coal -- held for trading purposes
 
66,156

 
(64,730
)
 
 

 
110,653

 
(104,814
)
 
 

Coal -- risk management
 
879

 
(576
)
 
 

 
3,912

 
(1,947
)
 
 

Natural gas
 
110

 

 
 
 
494

 
(247
)
 
 
Foreign currency
 
9

 

 
 
 

 

 
 
Total
 
71,118

 
(65,306
)
 
 

 
116,076

 
(107,008
)
 
 

Total derivatives
 
71,118

 
(65,320
)
 
 

 
116,080

 
(107,028
)
 
 

Effect of counterparty netting
 
(64,965
)
 
64,965

 
 

 
(107,028
)
 
107,028

 
 

Net derivatives as classified in the balance sheets
 
$
6,153

 
$
(355
)
 
$
5,798

 
$
9,052

 
$

 
$
9,052

 
 
 
 
 
September 30, 2016
 
December 31, 2015
Net derivatives as reflected on the balance sheets (in thousands)
 
 
 
 

Heating oil and foreign currency
 
Other current assets
 
$
3,973

 
$
1,017

Coal and natural gas
 
Coal derivative assets
 
2,180

 
8,035

 
 
Accrued expenses and other current liabilities
 
(355
)
 

 
 
 
 
$
5,798

 
$
9,052


The Company had a current asset for the right to reclaim cash collateral of $1.4 million at September 30, 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 “other current assets” in the accompanying Condensed Consolidated Balance Sheets.


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Table of Contents

The effects of derivatives on measures of financial performance are as follows:
 
Derivatives used in Cash Flow Hedging Relationships (in thousands)
Three Months Ended September 30,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
2016
 
2015
 
2016
 
2015
Coal sales
(1) 
$
(612
)
 
$
3,636

 
$
108

 
$
6,683

Coal purchases
(2) 
541

 
(2,561
)
 
(32
)
 
(3,084
)
Totals
 
$
(71
)
 
$
1,075

 
$
76

 
$
3,599

 
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended September 30, 2016 and 2015.  
 
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended September 30,
 
 
Gain (Loss) Recognized
 
 
2016
 
2015
Coal — unrealized
(3) 
$
(566
)
 
$
(809
)
Coal — realized
(4) 
$
(133
)
 
$
511

Natural gas  — unrealized
(3) 
$
(79
)
 
$
(16
)
Heating oil — diesel purchases
(4) 
$
(770
)
 
$
(5,525
)
Foreign currency
(4) 
$
(314
)
 
$
(602
)
____________________________________________________________
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating (income) expense, net

Derivatives used in Cash Flow Hedging Relationships (in thousands)
Nine Months Ended September 30,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
2016
 
2015
 
2016
 
2015
Coal sales
(1) 
$
(672
)
 
$
12,738

 
$
1,634

 
$
12,555

Coal purchases
(2) 
536

 
(6,612
)
 
(1,237
)
 
(5,748
)
Totals
 
$
(136
)
 
$
6,126

 
$
397

 
$
6,807

 
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the nine month periods ended September 30, 2016 and 2015.  
 

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Table of Contents

Derivatives Not Designated as Hedging Instruments (in thousands)
Nine Months Ended September 30,
 
 
Gain (Loss) Recognized
 
 
2016
 
2015
Coal — unrealized
(3) 
$
(1,662
)
 
$
(2,095
)
Coal — realized
(4) 
$
(476
)
 
$
2,428

Natural gas  — unrealized
(3) 
$
(463
)
 
$
(78
)
Heating oil — diesel purchases
(4) 
$
826

 
$
(7,262
)
Foreign currency
(4) 
$
(451
)
 
$
(602
)
____________________________________________________________
Location in statement of operations:
(1) — Revenues
(2) — Cost of sales
(3) — Change in fair value of coal derivatives and coal trading activities, net
(4) — Other operating (income) expense, net

Based on fair values at September 30, 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 gains of $4.4 million during the three months ended September 30, 2016 and 2015, respectively; and net unrealized and realized losses of $0.9 million and net unrealized and realized gains of $3.3 million during the nine months ended September 30, 2016 and 2015. 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.

11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
September 30,
 
December 31,
 
 
2016
 
2015
 
 
(In thousands)
Payroll and employee benefits
 
$
58,855

 
$
58,423

Taxes other than income taxes
 
100,737

 
104,755

Interest
 
162,895

 
119,785

Acquired sales contracts
 

 
3,852

Workers’ compensation
 
13,639

 
16,875

Asset retirement obligations
 
17,290

 
13,795

Other
 
8,617

 
11,965

 
 
$
362,033

 
$
329,450

Less: liabilities subject to compromise
 
(138,253
)
 

 
 
$
223,780

 
$
329,450



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Table of Contents

12. Debt and Financing Arrangements
 
 
September 30,
 
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
 
34,069

 
47,134

Debt issuance costs
 
(64,857
)
 
(64,857
)
 
 
5,060,241

 
5,073,306

Less: liabilities subject to compromise
 
5,026,806

 

Less: current maturities of debt
 
3,398

 
5,042,353

Long-term debt
 
$
30,037

 
$
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 (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.

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.

The Debtors emerged from bankruptcy on October 5, 2016 and, as a result, the Company’s outstanding obligations under the Debt Instruments were discharged. For further information, see Note 19, “Subsequent Events.”

Securitization Agreement

On January 13, 2016, the Company agreed with the Securitization Financing Providers that, subject to 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

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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. On May 9, 2016, the Securitization Facility was amended to exclude account receivables in respect of certain disposed mining operations of one of the Debtors and to effect the release of certain liens relating to such account receivables.

The Company extended and amended the Securitization Facility on October 5, 2016. For further information, see Note 19, “Subsequent Events.”

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, April 26, 2016, June 10, 2016, June 23, 2016, July 20, 2016 and September 28, 2016, the “DIP Credit Agreement”) was entered into by and among Arch Coal, as borrower, certain of the Debtors, as guarantors (the “Guarantors” and, together with the Company, the “DIP 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.

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 DIP 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 Coal, and all newly created or acquired wholly-owned domestic subsidiaries of Arch Coal, subject to customary limited exceptions.
 

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The lenders under the DIP Credit Agreement have a first priority lien on all encumbered and unencumbered assets of the DIP 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 DIP 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 Arch Coal and its domestic subsidiaries (other than any securitization subsidiary or bonding subsidiary), plus withdrawable funds from brokerage accounts of Arch Coal 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 (as defined below) 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 issued an order approving the DIP Facility on a final basis (the “Final Order”), 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.

Arch Coal entered into an amendment to the DIP Credit Agreement, dated as of July 20, 2016 which extended the availability period to borrow under the DIP Facility from July 21, 2016 to the earlier to occur of (i) September 30, 2016 and (ii) the termination of the DIP Facility with a corresponding extension to the period during which the 5% per annum unused commitment fee is applicable.

Arch Coal entered into an amendment to the DIP Credit Agreement, dated as of September 28, 2016, which (i) extended the availability period to borrow under the DIP Facility and (ii) extended the deadline for the Plan to become effective, in each case, to coincide with the Company’s emergence from bankruptcy on October 5, 2016, with a corresponding extension to the period during which the 5% per annum unused commitment fee is applicable.

The Company paid $17.0 million in financing fees related to the DIP Facility which have been deferred and are being amortized over the term of the DIP Facility.

The Debtors emerged from bankruptcy on October 5, 2016 and all commitments under the DIP Credit Agreement were terminated. For further information, see Note 19, “Subsequent Events.”

Contractual Interest Expense

The Company has recorded interest expense of $46.2 million and $135.9 million for the three and nine months ended September 30, 2016, respectively, compared to $99.8 million and $298.6 million for the three and nine months ended September 30, 2015, respectively. The reduction in interest expense in the current year is due to the Company’s bankruptcy filing. The contractual interest expense parenthetically disclosed on the face of the income statement represents interest expense that the Company was obligated to pay prior to the bankruptcy filing.

13. Income Taxes

During 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 nine months ended September 30, 2016, the Company realized a net tax benefit of $4.6 million, which included an expense to increase the valuation allowance of $181.9 million for federal net operating losses and tax credits and $9.3 million for the state net operating losses.


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During the nine months ended September 30, 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 $616.0 million for the federal net operating losses and $29.4 million for the state net operating losses.

14. 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 September 30, 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: 
 
 
September 30, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Assets:
 
 

 
 

 
 

 
 

Investments in marketable securities
 
$
113,150

 
$
1,699

 
$
111,451

 
$

Derivatives
 
6,153

 
1,960

 
220

 
3,973

Total assets
 
$
119,303

 
$
3,659

 
$
111,671

 
$
3,973

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
355

 
$
224

 
$

 
$
131

 
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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The following table summarizes the change in the fair values of financial instruments categorized as Level 3.
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
 
(In thousands)
Balance, beginning of period
 
$
4,771

 
$
2,432

Realized and unrealized gains recognized in earnings, net
 
(1,888
)
 
(1,686
)
Realized and unrealized gains recognized in other comprehensive income, net
 

 

Purchases
 
1,586

 
5,021

Issuances
 

 
(488
)
Settlements
 
(627
)
 
(1,437
)
Ending balance
 
$
3,842

 
$
3,842

 
Net unrealized losses of $0.5 million and $0.0 million were recognized in the Condensed Consolidated Statement of Operations during the three and nine months ended September 30, 2016 related to Level 3 financial instruments held on September 30, 2016.
 
Fair Value of Long-Term Debt
 
At September 30, 2016 and December 31, 2015, the fair value of the Company’s debt, including amounts classified as current, was $1.5 billion 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.
 
15. 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 was immaterial for both the three and nine months ended September 30, 2016, and 2015, respectively. The weighted average share impact 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 was immaterial for both the three and nine months ended September 30, 2016 and 2015, respectively.

16. Employee Benefit Plans
The following table details the components of pension benefit costs:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Service cost
$

 
$
2

 
$

 
$
7

Interest cost
2,803

 
3,688

 
9,338

 
10,953

Expected return on plan assets
(4,641
)
 
(5,044
)
 
(13,623
)
 
(15,275
)
Curtailments

 
526

 
454

 
526

Amortization of other actuarial losses
2,292

 
1,395

 
3,973

 
6,638

Net costs
$
454

 
$
567

 
$
142

 
$
2,849

 


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The following table details the components of other postretirement benefit costs (credits):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Service cost
$
128

 
$
216

 
$
393

 
$
649

Interest cost
951

 
321

 
3,223

 
964

Curtailments

 

 
(970
)
 

Amortization of prior service credits
(2,509
)
 
(2,084
)
 
(7,854
)
 
(6,251
)
Amortization of other actuarial losses (gains)
283

 
(527
)
 
(849
)
 
(1,582
)
Net credit
$
(1,147
)
 
$
(2,074
)
 
$
(6,057
)
 
$
(6,220
)

17. Commitments and Contingencies

The Company accrues for costs related to contingencies when a loss is probable and the amount is reasonably determinable. Disclosure of contingencies is included in the financial statements when it is at least reasonably possible that a material loss or an additional material loss in excess of amounts already accrued may be incurred.
 
In addition, the Company is a party to numerous other claims and lawsuits with respect to various matters. As of September 30, 2016 and December 31, 2015, the Company had accrued $2.9 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.

The Debtors emerged from bankruptcy on October 5, 2016 and, as a result, the automatic stay described above no longer applies, and all actions are permanently enjoined and precluded from proceeding to the extent they seek monetary compensation or claim breach of an obligation that gives rise to a right to payment, except to the extent that the claimant seeks payment solely from the proceeds of insurance coverage, and with respect to certain actions by governmental entities, in each case, as set forth in the Plan.  For further information, see Note 19, “Subsequent Events” to this Form 10-Q.


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18. 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 EBITDAR, 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 nine months ended September 30, 2016 and 2015 are presented below. The Company uses Adjusted EBITDAR to assess the operating segments’ performance and to allocate resources. 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. 
 
 
PRB
 
APP
 
Other
Operating
Segments
 
Corporate,
Other and
Eliminations
 
Consolidated
 
 
(in thousands)
Three Months Ended September 30, 2016
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
295,891

 
$
190,704

 
$
63,710

 
$

 
$
550,305

Adjusted EBITDAR
 
73,299

 
11,616

 
20,963

 
(24,510
)
 
81,368

Depreciation, depletion and amortization
 
37,246

 
20,749

 
10,635

 
793

 
69,423

Amortization of acquired sales contracts, net
 
104

 

 

 

 
104

Capital expenditures
 
113

 
7,043

 
1,000

 
140

 
8,296

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
390,360

 
$
205,573

 
$
92,611

 
$

 
$
688,544

Adjusted EBITDAR
 
86,204

 
41,754

 
12,927

 
(6,080
)
 
134,805

Depreciation, depletion and amortization
 
47,321

 
44,098

 
11,193

 
1,353

 
103,965

Amortization of acquired sales contracts, net
 
(1,124
)
 
(870
)
 

 

 
(1,994
)
Capital expenditures
 
869

 
3,990

 
2,889

 
2,141

 
9,889

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
726,747

 
$
535,262

 
$
136,700

 
$

 
$
1,398,709

Adjusted EBITDAR
 
96,242

 
13,261

 
18,230

 
(64,751
)
 
62,982

Depreciation, depletion and amortization
 
100,151

 
62,500

 
26,678

 
2,252

 
191,581

Amortization of acquired sales contracts, net
 
134

 
(862
)
 

 

 
(728
)
Capital expenditures
 
612

 
17,413

 
3,910

 
60,499

 
82,434

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,124,046

 
$
653,310

 
$
232,655

 
$

 
$
2,010,011

Adjusted EBITDAR
 
214,920

 
92,988

 
22,074

 
(68,077
)
 
261,905

Depreciation, depletion and amortization
 
134,393

 
135,028

 
32,082

 
4,708

 
306,211

Amortization of acquired sales contracts, net
 
(3,170
)
 
(3,858
)
 

 

 
(7,028
)
Capital expenditures
 
22,263

 
15,323

 
7,199

 
64,465

 
109,250




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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Adjusted EBITDAR
 
$
81,368

 
$
134,805

 
$
62,982

 
$
261,905

Depreciation, depletion and amortization
 
(69,423
)
 
(103,965
)
 
(191,581
)
 
(306,211
)
Amortization of acquired sales contracts, net
 
(104
)
 
1,994