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 March 31, 2017 
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/a8667c4a9ec8685cf4678c751446a217-logoa02a01a01a01a01a09.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 o
 
 
 
Non-accelerated filer ý
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ý  No o
At April 27, 2017, there were 25,021,079 shares of the registrant’s common stock outstanding.
 


Table of Contents

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

Part I
FINANCIAL INFORMATION
 
Item 1.    Financial Statements.
 
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data) 
 
Successor
Predecessor
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
 
(Unaudited)
(Unaudited)
Revenues
$
600,975

$
428,106

Costs, expenses and other operating
 
 
Cost of sales (exclusive of items shown separately below)
461,410

411,010

Depreciation, depletion and amortization
31,921

63,699

Accretion on asset retirement obligations
7,623

8,306

Amortization of sales contracts, net
14,690

(833
)
Change in fair value of coal derivatives and coal trading activities, net
854

1,210

Asset impairment and mine closure costs

85,520

Selling, general and administrative expenses
20,523

19,826

Other operating income, net
(2,310
)
(2,220
)
 
534,711

586,518

 
 
 
Income (loss) from operations
66,264

(158,412
)
Interest expense, net
 
 
Interest expense
(9,425
)
(44,451
)
Interest and investment income
527

1,138

 
(8,898
)
(43,313
)
 
 
 
Income (loss) before nonoperating expenses
57,366

(201,725
)
 
 
 
Nonoperating expenses
 
 
Net loss resulting from early retirement of debt and debt restructuring
(2,030
)
(2,213
)
Reorganization items, net
(2,828
)
(3,875
)
 
(4,858
)
(6,088
)
 
 
 
Income (loss) before income taxes
52,508

(207,813
)
Provision for (benefit from) income taxes
840

(1,111
)
Net income (loss)
$
51,668

$
(206,702
)
 
 
 
Net income (loss) per common share
 
 
Basic earnings (loss) per common share
$
2.07

$
(9.71
)
 
 
 
Diluted earnings (loss) per common share
$
2.03

$
(9.71
)
 
 
 
Weighted average shares outstanding
 
 
Basic weighted average shares outstanding
25,008

21,293

 
 
 
Diluted weighted average shares outstanding
25,408

21,293


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


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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

 
 
Successor
Predecessor
 
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
 
 
(Unaudited)
(Unaudited)
Net income (loss)
 
$
51,668

$
(206,702
)
 
 
 
 
Derivative instruments
 
 
 
Comprehensive income (loss) before tax
 
19

(224
)
Income tax benefit (provision)
 

81

 
 
19

(143
)
Pension, postretirement and other post-employment benefits
 
 
 
Comprehensive income (loss) before tax
 

(1,338
)
Income tax benefit (provision)
 

481

 
 

(857
)
Available-for-sale securities
 
 
 
Comprehensive income (loss) before tax
 
(387
)
2,903

Income tax benefit (provision)
 

(1,043
)
 
 
(387
)
1,860

 
 
 
 
Total other comprehensive income (loss)
 
(368
)
860

Total comprehensive income (loss)
 
$
51,300

$
(205,842
)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.


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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 
March 31,
December 31,
 
2017
2016
 
(Unaudited)
 
Assets
 
 
Current assets
 

 

Cash and cash equivalents
$
347,580

$
305,372

Short term investments
122,505

88,072

Restricted cash
68,984

71,050

Trade accounts receivable
150,399

184,483

Other receivables
22,482

19,877

Inventories
125,194

113,462

Other current assets
74,063

96,306

Total current assets
911,207

878,622

Property, plant and equipment, net
1,027,288

1,053,603

Other assets
 

 

Equity investments
104,144

96,074

Other noncurrent assets
102,277

108,298

Total other assets
206,421

204,372

Total assets
$
2,144,916

$
2,136,597

Liabilities and Stockholders' Equity
 
 
Current Liabilities
 

 

Accounts payable
$
103,130

$
95,953

Accrued expenses and other current liabilities
172,898

205,240

Current maturities of debt
7,898

11,038

Total current liabilities
283,926

312,231

Long-term debt
318,030

351,841

Asset retirement obligations
339,865

337,227

Accrued pension benefits
37,510

38,884

Accrued postretirement benefits other than pension
101,786

101,445

Accrued workers’ compensation
184,792

184,568

Other noncurrent liabilities
77,301

63,824

Total liabilities
1,343,210

1,390,020

 
 
 
Stockholders' equity
 

 

Common stock, $0.01 par value, authorized 300,000 shares, issued 25,021 shares and 25,002 shares at March 31, 2017 and December 31, 2016, respectively
250

250

Paid-in capital
692,253

688,424

Retained earnings
85,117

33,449

Accumulated other comprehensive income
24,086

24,454

Total stockholders’ equity
801,706

746,577

Total liabilities and stockholders’ equity
$
2,144,916

$
2,136,597

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

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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands) 

 
Successor
Predecessor
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
 
(Unaudited)
(Unaudited)
Operating activities
 

 

Net income (loss)
$
51,668

$
(206,702
)
Adjustments to reconcile net loss to cash used in operating activities:
 

 

Depreciation, depletion and amortization
31,921

63,699

Accretion on asset retirement obligations
7,623

8,306

Amortization of sales contracts, net
14,690

(833
)
Prepaid royalties expensed
2,281

1,286

Deferred income taxes
5,830

(429
)
Employee stock-based compensation expense
2,426

1,003

Gains on disposals and divestitures, net
(347
)
1

Asset impairment and non-cash mine closure costs

77,550

Net loss resulting from early retirement of debt and debt restructuring
2,030

2,213

Non-cash bankruptcy reorganization items

(13,892
)
Amortization relating to financing activities
535

3,150

Changes in:
 
 
Receivables
37,134

7,815

Inventories
(11,732
)
734

Accounts payable, accrued expenses and other current liabilities
(20,529
)
39,441

Income taxes, net
(4,965
)
(642
)
Other
6,964

7,202

Cash provided by (used in) operating activities
125,529

(10,098
)
Investing activities
 

 

Capital expenditures
(5,950
)
(5,926
)
Minimum royalty payments
(63
)
(71
)
Proceeds from disposals and divestitures
420


Purchases of short term investments
(78,523
)
(55,132
)
Proceeds from sales of short term investments
45,886

56,134

Investments in and advances to affiliates, net
(7,905
)
(2,156
)
Withdrawals (deposits) of restricted cash
2,066

(12,108
)
Cash used in investing activities
(44,069
)
(19,259
)
Financing activities
 

 

Proceeds from issuance of term loan due 2024
298,500


Payments to extinguish term loan due 2021
(325,684
)

Net payments on other debt
(2,810
)
(5,410
)
Debt financing costs
(7,228
)
(18,403
)
Net loss resulting from early retirement of debt and debt restructuring
(2,030
)
(2,213
)
Cash used in financing activities
(39,252
)
(26,026
)
Increase (decrease) in cash and cash equivalents
42,208

(55,383
)
Cash and cash equivalents, beginning of period
305,372

450,781

Cash and cash equivalents, end of period
$
347,580

$
395,398


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”). Unless the context indicates otherwise, the terms “Arch” and the “Company” are used interchangeably in this Quarterly Report on Form 10-Q refer to both the Predecessor and Successor 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, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017. 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, 2016 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

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”) were 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 operated 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.

Upon emergence from bankruptcy on October 5, 2016, Arch Coal applied the provisions of fresh start accounting effective October 1, 2016 which resulted in Arch becoming a new entity for financial reporting purposes. Accordingly, the consolidated financial statements and accompanying footnotes on or after October 1, 2016 are not comparable to the consolidated financial statements prior to that date. References to “Successor” in the consolidated financial statements and footnotes are in reference to reporting dates on or after October 2, 2016; references to “Predecessor” in the consolidated financial statements and footnotes are in reference to reporting dates through October 1, 2016 which includes the impact of the Plan provisions and the application of fresh start accounting.






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2. Accounting Policies

Recently Adopted Accounting Guidance

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted all provisions of this new accounting standard in the first quarter of 2017 and changed its forfeiture policy to recognizing the impact of forfeitures when they occur from estimating expected forfeitures in determining stock-based compensation expense. There was no material impact to the Company's financial statements.

Recent Accounting Guidance Issued Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company’s primary source of revenue is from the sale of coal through both short-term and long-term contracts with utilities, industrial customers and steel producers whereby revenue is currently recognized when risk of loss has passed to the customer. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related to our coal sales will remain consistent with our current practice. The Company is currently evaluating other revenue streams to determine the potential impact related to the adoption of the standard, as well as potential disclosures required by the standard. The Company will be adopting the standard under the modified retrospective approach.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in Nonoperating expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods therein; early adoption is permitted.

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, 2016
$

 
$
24,067

 
$
387

 
$
24,454

Unrealized gains (losses)
19

 

 
(55
)
 
(36
)
Amounts reclassified from AOCI

 

 
(332
)
 
(332
)
Balance at March 31, 2017
$
19

 
$
24,067

 
$

 
$
24,086

 

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The following amounts were reclassified out of AOCI:

 
 
Successor
Predecessor
 
Line Item in the Condensed Consolidated Statement of Operations
Details About AOCI Components
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
 
(In thousands)
 
 
 
 
 
Derivative instruments
 
$

$
226

 
Revenues
 
 

(82
)
 
Provision for (benefit from) income taxes
 
 
$

$
144

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

$
2,672

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

(1,334
)
 
 
 
 

1,338

 
 
 
 

(481
)
 
Provision for (benefit from) income taxes
 
 
$

$
857

 
Net of tax
 
 
 
 
 
 
Available-for-sale securities
 
$
332

$
(2,895
)
 
Interest and investment income
 
 

1,038

 
Provision for (benefit from) income taxes
 
 
$
332

$
(1,857
)
 
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 March 31, 2017, the Company recorded a charge of $2.8 million in “Reorganization items, net” comprised of professional fee expense of $2.8 million. Net cash paid for “Reorganization items, net” totaled $3.7 million during the three months ended March 31, 2017.

During the three months ended March 31, 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 three months ended March 31, 2016.


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5. 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 included 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 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 was no longer deemed recoupable; and $2.9 million related to an other-than-temporary-impairment charge on an available-for-sale security.
  
6. Inventories
 
Inventories consist of the following: 
 
 
March 31,
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Coal
 
$
49,066

 
$
37,268

Repair parts and supplies
 
76,128

 
76,194

 
 
$
125,194

 
$
113,462

 
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $0.1 million at March 31, 2017 and $0.0 million at December 31, 2016.
 
7. Investments in Available-for-Sale Securities

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

The Company’s investments in available-for-sale marketable securities are as follows:
 
March 31, 2017
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
Classification
 
 
 
Gross Unrealized
 
Fair
 
Short-Term
 
Other
 
Cost Basis
 
Gains
 
Losses
 
Value
 
Investments
 
Assets
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
$
18,926

 
$
12

 
$

 
$
18,938

 
$
18,938

 
$

Corporate notes and bonds
103,639

 
21

 
(93
)
 
103,567

 
103,567

 

Total Investments
$
122,565

 
$
33

 
$
(93
)
 
$
122,505

 
$
122,505

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
Classification
 
 
 
Gross Unrealized
 
Fair
 
Short-Term
 
Other
 
Cost Basis
 
Gains
 
Losses
 
Value
 
Investments
 
Assets
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Corporate notes and bonds
$
88,161

 
$

 
$
(89
)
 
$
88,072

 
$
88,072

 
$

Equity securities
1,749

 
388

 

 
2,137

 

 
2,137

Total Investments
$
89,910

 
$
388

 
$
(89
)
 
$
90,209

 
$
88,072

 
$
2,137

 
 
 
 
 
 
 
 
 
 
 
 

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The aggregate fair value of investments with unrealized losses that were owned for less than a year was $59.4 million and $47.6 million at March 31, 2017 and December 31, 2016, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year was $16.0 million and $40.4 million at March 31, 2017 and December 31, 2016, respectively. The unrealized losses in the Company’s portfolio at March 31, 2017 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, 2017 have maturity dates ranging from the second quarter of 2017 through the third quarter of 2018. 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.

8. Sales Contracts

The sales contracts reflected in the consolidated balance sheets are as follows:
 
March 31, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Net Total
 
Assets
 
Liabilities
 
Net Total
 
(In thousands)
 
 
 
(In thousands)
 
 
Original fair value
$
97,196

 
$
31,742

 
 
 
$
97,196

 
$
31,742

 
 
Accumulated amortization
(44,843
)
 
(29,356
)
 
 
 
(25,625
)
 
(24,829
)
 
 
Total
$
52,353

 
$
2,386

 
$
49,967

 
$
71,571

 
$
6,913

 
$
64,658

Balance Sheet classification:
 
 
 
 
 
 
 
 
 
 
 
Other current
$
43,238

 
$
817

 
 
 
$
59,702

 
$
5,114

 
 
Other noncurrent
$
9,115

 
$
1,569

 
 
 
$
11,869

 
$
1,799

 
 
The Company anticipates amortization of sales contracts, based upon expected shipments in the next five years, to be an expense of approximately $57.3 million in 2017, $11.5 million in 2018, income of $0.6 million in 2019, and income of $0.1 million in 2020 and 2021.

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 38 to 44 million gallons of diesel fuel for use in its operations during 2017. 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, 2017, the Company had protected the price of approximately 75% of its expected diesel fuel purchases for the remainder of 2017 at an average strike price of $1.77 per gallon. Additionally, the Company has protected approximately 12% of its expected 2018 purchases with call options with an average strike price of $1.92 per gallon. At March 31, 2017, the Company had outstanding heating oil call options for approximately 30 million gallons for the purpose of managing the price risk associated with future diesel purchases. These positions are not designated as hedges for accounting purposes, and therefore, changes in the fair value are recorded immediately to earnings.

Coal price risk management positions
 
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted, index-priced sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.
 
At March 31, 2017, the Company held derivatives for risk management purposes that are expected to settle in the following years:
 
(Tons in thousands)
 
2017
 
2018
 
Total
Coal sales
 
405

 

 
405

Coal purchases
 
360

 

 
360


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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 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 immaterial during the remainder of 2017 and $0.6 million of losses during the remainder of 2018.

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, 2017
 
 
 
December 31, 2016
 
 
Fair Value of Derivatives
 
Asset
 
Liability
 
 
 
Asset
 
Liability
 
 
(In thousands)
 
Derivative
 
Derivative
 
 
 
Derivative
 
Derivative
 
 
Derivatives Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Coal
 
$
9

 
$

 
 

 
$

 
$
(15
)
 
 

 
 


 


 
 
 


 


 
 

Derivatives Not Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Heating oil -- diesel purchases
 
1,418

 

 
 

 
4,646

 

 
 

Coal -- held for trading purposes
 
43,157

 
(43,781
)
 
 

 
68,948

 
(68,740
)
 
 

Coal -- risk management
 
193

 
(271
)
 
 

 
475

 
(580
)
 
 

Natural gas
 

 

 
 
 
86

 
(13
)
 
 
Total
 
44,768

 
(44,052
)
 
 

 
74,155

 
(69,333
)
 
 

Total derivatives
 
44,777

 
(44,052
)
 
 

 
74,155

 
(69,348
)
 
 

Effect of counterparty netting
 
(43,359
)
 
43,359

 
 

 
(69,247
)
 
69,247

 
 

Net derivatives as classified in the balance sheets
 
$
1,418

 
$
(693
)
 
$
725

 
$
4,908

 
$
(101
)
 
$
4,807

 
 
 
 
 
March 31, 2017
 
December 31, 2016
Net derivatives as reflected on the balance sheets (in thousands)
 
 
 
 

Heating oil and coal
 
Other current assets
 
$
1,418

 
$
4,908

Coal
 
Accrued expenses and other current liabilities
 
(693
)
 
(101
)
 
 
 
 
$
725

 
$
4,807


The Company had a current asset for the right to reclaim cash collateral of $4.8 million at March 31, 2017 and $2.8 million at December 31, 2016, 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 March 31,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
Successor
Predecessor
 
Successor
Predecessor
 
 
2017
2016
 
2017
2016
Coal sales
(1) 
$
220

$
13

 
$

$
1,369

Coal purchases
(2) 
(201
)
(11
)
 

(1,143
)
Totals
 
$
19

$
2

 
$

$
226

 
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, 2017 and 2016.  
 
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended March 31,
 
 
Gain (Loss) Recognized
 
 
Successor
Predecessor
 
 
2017
2016
Coal — unrealized
(3) 
$
26

$
(1,115
)
Coal — realized
(4) 
$

$
163

Natural gas  — unrealized
(3) 
$
(469
)
$
(469
)
Heating oil — diesel purchases
(4) 
$
(3,578
)
$
(443
)
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, 2017, 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 losses of $0.7 million and net unrealized and realized gains of $0.1 million during the three months ended March 31, 2017 and 2016, 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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10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
March 31,
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Payroll and employee benefits
 
$
41,663

 
$
58,468

Taxes other than income taxes
 
88,418

 
92,733

Interest
 
202

 
8,032

Acquired sales contracts
 
817

 
5,114

Workers’ compensation
 
16,046

 
15,184

Asset retirement obligations
 
19,340

 
19,515

Other
 
6,412

 
6,194

 
 
$
172,898

 
$
205,240


11. Debt and Financing Arrangements
 
 
March 31,
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Term loan due 2024 ($300.0 million face value)
 
298,512

 

Term loan due 2021 ($325.7 million face value)
 

 
325,684

Other
 
34,424

 
37,195

Debt issuance costs
 
(7,008
)
 

 
 
325,928

 
362,879

Less: current maturities of debt
 
7,898

 
11,038

Long-term debt
 
$
318,030

 
$
351,841


On March 7, 2017, the Company entered into a new senior secured term loan credit agreement in an aggregate principal amount of $300 million (the “New Term Loan Debt Facility) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent (in such capacities, the “Agent”), and the other financial institutions from time to time party thereto (collectively, the “Lenders”). The New Term Loan Debt Facility was issued at 99.50% of the face amount and will mature on March 7, 2024.

Borrowings under the New Term Loan Debt Facility bear interest at a per annum rate equal to, at the Company’s option, either (i) a London interbank offered rate plus an applicable margin of 4%, subject to a 1% LIBOR floor (the “LIBOR Rate”), or (ii) a base rate plus an applicable margin of 3%. Interest payments will be payable in cash. The term loans provided under the New Term Loan Debt Facility (the “Term Loans”) are subject to quarterly principal amortization payments in an amount equal to $750,000.

The New Term Loan Debt Facility is guaranteed by all existing and future wholly owned domestic subsidiaries of the Company (collectively, the “Subsidiary Guarantors” and, together with Arch Coal, the “Loan Parties”), subject to customary exceptions, and is secured by first priority security interests on substantially all assets of the Loan Parties, including 100% of the voting equity interests of directly owned domestic subsidiaries and 65% of the voting equity interests of directly owned foreign subsidiaries, subject to customary exceptions.

The Company has the right to prepay Term Loans at any time and from time to time in whole or in part without premium or penalty, upon written notice, except that any prepayment of Term Loans that bear interest at the LIBOR Rate other than at the end of the applicable interest periods therefor shall be made with reimbursement for any funding losses and redeployment costs of the Lenders resulting therefrom.

The New Term Loan Debt Facility is subject to certain usual and customary mandatory prepayment events, including 100% of net cash proceeds of (i) debt issuances (other than debt permitted to be incurred under the terms of the New Term Loan Debt Facility) and (ii) non-ordinary course asset sales or dispositions, subject to customary thresholds, exceptions and reinvestment rights.


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Table of Contents

The New Term Loan Debt Facility contains customary affirmative covenants and representations.

The New Term Loan Debt Facility also contains customary negative covenants, which, among other things, and subject to certain exceptions, include restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The New Term Loan Debt Facility does not contain any financial maintenance covenant.

The New Term Loan Debt Facility contains customary events of default, subject to customary thresholds and exceptions, including, among other things, (i) nonpayment of principal and nonpayment of interest and fees, (ii) a material inaccuracy of a representation or warranty at the time made, (iii) a failure to comply with any covenant, subject to customary grace periods in the case of certain affirmative covenants, (iv) cross-events of default to indebtedness of at least $50 million, (v) cross-events of default to surety, reclamation or similar bonds securing obligations with an aggregate face amount of at least $50 million, (vi) uninsured judgments in excess of $50 million, (vii) any loan document shall cease to be a legal, valid and binding agreement, (viii) uninsured losses or proceedings against assets with a value in excess of $50 million, (ix) certain ERISA events, (x) a change of control or (xi) bankruptcy or insolvency proceedings relating to the Company or any material subsidiary of the Company.

On the effective date of the New Term Loan Debt Facility, all outstanding obligations under the Company’s previously existing term loan credit agreement, dated as of October 5, 2016, among the Company, as borrower, the lender party thereto and Wilmington Trust, National Association, as administrative agent and collateral agent (the “Previous First Lien Debt Facility”), other than indemnification and other contingent obligations, were paid in cash in full and the related transaction documents were terminated (other than with respect to certain provisions that customarily survive termination); there was no gain or loss recognized on the extinguishment of the previously existing term loan credit agreement. All liens on property of the Company and the guarantors thereunder arising out of or related to the Previous First Lien Debt Facility were terminated.

Financing Costs

The Company paid financing costs of $7.2 million during the three months ended March 31, 2017 related to the issuance of the New Term Loan Debt facility discussed above. These issuance costs were capitalized and will be amortized using the effective interest method over the term of the facility. During the three months ended March 31, 2016, the Company paid $18.4 million primarily related to the Superpriority Secured Debtor-in-Possession Credit Agreement related to the Company’s bankruptcy filing.

The Company incurred $2.0 million of legal and financial advisory fees associated with debt refinancing activities during the three months ended March 31, 2017; $1.0 million relates to fees associated with the extinguishment of the “Previous First Lien Debt Facility” while the remaining amount relates to financing fees incurred from our initial efforts to replace the existing accounts receivable securitization facility. The Company also incurred $2.2 million in debt restructuring costs during the three months ended March 31, 2016 related to debt restructuring activities prior to the Company’s Chapter 11 filing..

Contractual Interest Expense

The Company has recorded interest expense of $9.4 million for the three months ended March 31, 2017 compared to $44.5 million for the three months ended March 31, 2016, respectively. The reduction in interest expense in the current year is due to the Company’s bankruptcy filing during the prior year period. The contractual interest expense disclosed represents interest expense that the Company was obligated to pay prior to the bankruptcy filing.


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Table of Contents

12. Income Taxes

A reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual provision for (benefit from) income taxes follows:

 
Successor
Predecessor
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
(In thousands)
 
 
Income tax provision (benefit) at statutory rate
$
18,378

$
(72,735
)
Percentage depletion allowance
(7,039
)
(25,667
)
State taxes, net of effect of federal taxes
483

(4,490
)
Change in valuation allowance
(11,902
)
100,562

Other, net
920

1,219

 
$
840

$
(1,111
)


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, 2017.
 
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, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Assets:
 
 

 
 

 
 

 
 

Investments in marketable securities
 
$
122,505

 
$
18,938

 
$
103,567

 
$

Derivatives
 
1,418

 

 

 
1,418

Total assets
 
$
123,923

 
$
18,938

 
$
103,567

 
$
1,418

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
693

 
$
644

 
$

 
$
49

 
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

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Table of Contents

the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying Condensed Consolidated Balance Sheet, based on this counterparty netting.

The following table summarizes the change in the fair values of financial instruments categorized as Level 3.
 
 
Three Months Ended March 31, 2017
 
 
(In thousands)
Balance, beginning of period
 
$
4,537

Realized and unrealized gains recognized in earnings, net
 
(4,068
)
Purchases
 
1,395

Issuances
 
(182
)
Settlements
 
(313
)
Ending balance
 
$
1,369

 
Net unrealized losses of $2.8 million were recognized in the Condensed Consolidated Statement of Operations within Other operating income, net during the three months ended March 31, 2017 related to Level 3 financial instruments held on March 31, 2017.

 Fair Value of Long-Term Debt
 
At March 31, 2017 and December 31, 2016, the fair value of the Company’s debt, including amounts classified as current, was $334.4 million and $362.9 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. Earnings (loss) per Common Share
  
The Company computes basic net income per share using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities may consist of warrants, restricted stock units or other contingently issuable shares. The dilutive effect of outstanding warrants, restricted stock units and other contingently issuable shares is reflected in diluted earnings per share by application of the treasury stock method.

The following table provides the basis for basic and diluted earnings (loss) per share by reconciling the numerators and denominators of the computations:

 
Successor
Predecessor
 
March 31, 2017
March 31, 2016
(In Thousands)
 
 
Weighted average shares outstanding:
 
 
Basic weighted average shares outstanding
25,008

21,293

Effect of dilutive securities
400


 
 
 
Diluted weighted average shares outstanding
25,408

21,293



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Table of Contents

15. Workers Compensation Expense

The Company is liable under the Federal Mine Safety and Health Act of 1969, as subsequently amended, to provide for pneumoconiosis (occupational disease) benefits to eligible employees, former employees and dependents. The Company currently provides for federal claims principally through a self-insurance program. The Company is also liable under various state workers’ compensation statutes for occupational disease benefits. The occupational disease benefit obligation represents the present value of the of the actuarially computed present and future liabilities for such benefits over the employees’ applicable years of service.

In addition, the Company is liable for workers’ compensation benefits for traumatic injuries which are calculated using actuarially-based loss rates, loss development factors and discounted based on a risk free rate. Traumatic workers’ compensation claims are insured with varying retentions/deductibles, or through state-sponsored workers’ compensation programs.

Workers’ compensation expense consists of the following components:
 
Successor
Predecessor
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
(In thousands)
 
 
Self-insured occupational disease benefits:
 
 
Service cost
$
1,558

$
1,105

Interest cost
1,169

1,057

Net amortization

1,141

Total occupational disease
$
2,727

$
3,303

Traumatic injury claims and assessments
2,878

2,967

Total workers’ compensation expense
$
5,605

$
6,270


16. Employee Benefit Plans
The following table details the components of pension benefit costs:
 
Successor
Predecessor
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
(In thousands)
 
 
Interest cost
2,991

3,338

Expected return on plan assets
(4,497
)
(4,538
)
Amortization of other actuarial losses

757

Net benefit credit
$
(1,506
)
$
(443
)
 


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Table of Contents

The following table details the components of other postretirement benefit costs (credits):
 
Successor
Predecessor
 
Three Months Ended March 31, 2017
Three Months Ended March 31, 2016
(In thousands)
 
 
Service cost
$
170

$
160

Interest cost
1,058

1,134

Amortization of prior service credits

(2,673
)
Amortization of other actuarial losses (gains)

(566
)
Net benefit cost (credit)
$
1,228

$
(1,945
)

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 March 31, 2017 and December 31, 2016, the Company had accrued $1.3 million and $2.2 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.


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Table of Contents

18. Segment Information  

The Company’s reportable business segments are based on two distinct lines of business, metallurgical and thermal, and may include a number of mine complexes. The Company manages its coal sales by market, not by individual mining complex. Geology, coal transportation routes to customers, and regulatory environments also have a significant impact on the Company’s marketing and operations management. Mining operations are evaluated based on Adjusted EBITDAR, per-ton cash operating costs (defined as including all mining costs except depreciation, depletion, amortization, accretion on asset retirements obligations, and pass-through transportation expenses), and on other non-financial measures, such as safety and environmental performance. Adjusted EBITDAR is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDAR are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDAR should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. The Company uses Adjusted EBITDAR to measure the operating performance of its segments and allocate resources to the segments. Furthermore, analogous measures are used by industry analysts and investors to evaluate the Company’s operating performance. Investors should be aware that the Company’s presentation of Adjusted EBITDAR may not be comparable to similarly titled measures used by other companies. The Company reports its results of operations primarily through the following reportable segments: Powder River Basin (PRB) segment containing the Company’s primary thermal operations in Wyoming; the Metallurgical (MET) segment, containing the Company’s metallurgical operations in West Virginia, Kentucky, and Virginia, and the Other Thermal segment containing the Company’s supplementary thermal operations in Colorado, Illinois, and West Virginia. Periods presented in this note have been recast for comparability.
 
Operating segment results for the Successor period, the three months ended March 31, 2017, and the Predecessor period, the three months ended March 31, 2016, are presented below. The Company measures its segments based on “adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirements obligations, and reorganization items, net (Adjusted EBITDAR).” Adjusted EBITDAR does not reflect mine closure or impairment costs, since those are not reflected in the operating income reviewed by management. See Note 5, “Asset Impairment and Mine Closure Costs” for discussion of these costs. The Corporate, Other and Eliminations grouping includes these charges, as well as the change in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management activities; other support functions; and the elimination of intercompany transactions.
 
 
 
PRB
 
MET
 
Other
Thermal
 
Corporate,
Other and
Eliminations
 
Consolidated
Successor Period
 
(in thousands)
Three Months Ended March 31, 2017
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
273,428

 
$
225,582

 
$
101,906

 
$
59

 
$
600,975

Adjusted EBITDAR
 
48,006

 
68,310

 
27,242

 
(23,060
)
 
120,498

Depreciation, depletion and amortization
 
9,510

 
18,764

 
3,200

 
447

 
31,921

Accretion on asset retirement obligation
 
5,040

 
528

 
540

 
1,515

 
7,623

Capital expenditures
 
128

 
4,610

 
741

 
471

 
5,950

 
 
 
 
 
 
 
 
 
 
 
Predecessor Period
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
223,122

 
$
136,583

 
$
56,132

 
$
12,269

 
$
428,106

Adjusted EBITDAR
 
12,728

 
6,352

 
3,151

 
(23,951
)
 
(1,720
)
Depreciation, depletion and amortization
 
32,760

 
19,345

 
9,891

 
1,703

 
63,699

Accretion on asset retirement obligation
 
5,647

 
588

 
663

 
1,408

 
8,306

Capital expenditures
 
10

 
3,604

 
1,945

 
367

 
5,926




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Table of Contents

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

 
 
Successor
Predecessor
 
 
Three Months Ended March 31,
Three Months Ended March 31,
 
 
2017
2016
(In thousands)
 
 
 
Adjusted EBITDAR
 
$
120,498

$
(1,720
)
Depreciation, depletion and amortization
 
(31,921
)
(63,699
)
Accretion on asset retirement obligations
 
(7,623
)
(8,306
)
Amortization of sales contracts, net
 
(14,690
)
833

Asset impairment and mine closure costs
 

(85,520
)
Interest expense, net
 
(8,898
)
(43,313
)
Net loss resulting from early retirement of debt and debt restructuring
 
(2,030
)
(2,213
)
Reorganization items, net
 
(2,828
)
(3,875
)
Income (loss) before income taxes
 
$
52,508

$
(207,813
)
       

19. Subsequent Events

New Inventory Facility

On April 27, 2017, the Company and certain subsidiaries of Arch Coal entered into a new senior secured inventory-based revolving credit facility in an aggregate principal amount of $40 million (the “New Inventory Facility”) with Regions Bank (“Regions”) as administrative agent and collateral agent (in such capacities, the “Agent”), as lender and swingline lender (in such capacities, the “Lender”) and as letter of credit issuer. Availability under the New Inventory Facility is subject to a borrowing base consisting of (i) 85% of the net orderly liquidation value of eligible coal inventory, (ii) the lesser of (x) 85% of the net orderly liquidation value of eligible parts and supplies inventory and (y) 35% of the amount determined pursuant to clause (i), and (iii) 100% of Arch Coal’s Eligible Cash (defined in the New Inventory Facility), subject to reduction for reserves imposed by Regions.

The commitments under the New Inventory Facility will terminate on the date that is the earliest to occur of (i) the third anniversary of the Inventory Facility Closing Date, (ii) the date, if any, that is 364 days following the first day that Liquidity (defined in the New Inventory Facility and consistent with the definition in the Extended Securitization Facility (as defined below)) is less than $250 million for a period of 60 consecutive days and (iii) the date, if any, that is 60 days following the maturity, termination or repayment in full of the Extended Securitization Facility.

Revolving loan borrowings under the New Inventory Facility bear interest at a per annum rate equal to, at the option of Arch Coal, either at the base rate or the London interbank offered rate plus, in each case, a margin ranging from 2.25% to 2.50% (in the case of LIBOR loans) and 1.25% to 1.50% (in the case of base rate loans) determined using a Liquidity-based grid. Letters of credit under the New Inventory Facility are subject to a fee in an amount equal to the applicable margin for LIBOR loans, plus customary fronting and issuance fees.

All existing and future direct and indirect domestic subsidiaries of Arch Coal, subject to customary exceptions, will either constitute co-borrowers under or guarantors of the New Inventory Facility (collectively with Arch Coal, the “Loan Parties”). The New Inventory Facility is secured by first priority security interests in the ABL Priority Collateral (defined in the New Inventory Facility) of the Loan Parties and second priority security interests in substantially all other assets of the Loan Parties, subject to customary exceptions (including an exception for the collateral that secures the Extended Securitization Facility).

Arch Coal has the right to prepay borrowings under the New Inventory Facility at any time and from time to time in whole or in part without premium or penalty, upon written notice, except that any prepayment of such borrowings that bear interest at the LIBOR rate other than at the end of the applicable interest periods therefor shall be made with reimbursement for any funding losses and redeployment costs of the Lender resulting therefrom.


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Table of Contents

The New Inventory Facility is subject to certain usual and customary mandatory prepayment events, including non-ordinary course asset sales or dispositions, subject to customary thresholds, exceptions (including exceptions for required prepayments under Arch Coal’s term loan facility) and reinvestment rights.

The New Inventory Facility contains certain customary affirmative and negative covenants; events of default, subject to customary thresholds and exceptions; and representations, including certain cash management and reporting requirements that are customary for asset-based credit facilities. The New Inventory Facility also includes a requirement to maintain Liquidity equal to or exceeding $175 million at all times.
 
Securitization Facility

On April 27, 2017, the Company extended and amended its existing trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a special-purpose entity that is a wholly owned subsidiary of Arch Coal (“Arch Receivable”) (the “Extended Securitization Facility”), which supports the issuance of letters of credit and requests for cash advances. The amendment to the Extended Securitization Facility decreases the borrowing capacity from $200 million to $160 million and extends the maturity date to the date that is three years after the Securitization Facility Closing Date. Pursuant to the Extended Securitization Facility, Arch Receivable also agreed to a revised schedule of fees payable to the administrator and the providers of the Extended Securitization Facility.

The Extended Securitization Facility will terminate at the earliest of (i) three years from the Securitization Facility Closing Date, (ii) if the Liquidity (defined in the Extended Securitization Facility and consistent with the definition in the New Inventory Facility) is less than $175 million for a period of 60 consecutive days, the date that is the 364th day after the first day of such 60 consecutive day period and (iii) the occurrence of certain predefined events substantially consistent with the existing transaction documents. Under the Extended Securitization Facility, Arch Receivable, Arch Coal and certain of Arch Coal’s subsidiaries party to the Extended Securitization Facility have granted to the administrator of the Extended Securitization Facility a first priority security interest in eligible trade accounts receivable generated by such parties from the sale of coal and all proceeds thereof.

Share Repurchase and Common Stock Dividend

On April 27, 2017, the board of directors of Arch Coal authorized a new share repurchase program for up to $300 million of its common stock, effective April 27, 2017. The timing of any purchases, and the ultimate number of shares to be purchased, will depend on market conditions. The shares will be acquired in the open market or through private transactions in accordance with Securities and Exchange Commission requirements. The Company had 25,021,079 common shares outstanding as of April 27, 2017.

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

On April 27, 2017, the board of directors also authorized a new quarterly common stock cash dividend of $0.35 per share. The dividend will be paid on June 15, 2017 to stockholders of record on May 31, 2017.



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

Overview

Our results for the first quarter of 2017 benefited from strength in both the thermal and metallurgical markets. The domestic thermal coal market was supported by resilient natural gas pricing despite warmer than normal winter temperatures. Reduced natural gas production levels and increased natural gas export demand kept natural gas pricing at levels where thermal coal, particularly Powder River Basin coal, remained economically competitive for electrical generation during the period. Additionally, pricing in certain international thermal markets remained strong enough for some of our operations to be able to ship coal economically in these markets in the period.

Metallurgical coal markets remained strong in the first quarter of 2017 even as prompt international pricing declined from multi-year highs. Removal of Chinese restrictions on domestic supply and resolution of certain Australian supply disruptions began to temper the acute supply shortage; however, years of under investment in the industry and supply rationalization in North America continued to support the market. On March 28th, tropical cyclone Debbie made landfall in Queensland, Australia, and significantly damaged the railroad infrastructure that supports the largest seaborne coking coal supply region in the world. While the size and duration of this event’s impact on metallurgical markets remains uncertain, prompt international pricing increased subsequent to March 31st but has since moderated.

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”) were 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 operated 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.

Upon emergence from bankruptcy on October 5, 2016, Arch Coal applied the provisions of fresh start accounting effective October 1, 2016 which resulted in Arch becoming a new entity for financial reporting purposes. Accordingly, the consolidated financial statements and accompanying footnotes on or after October 1, 2016 are not comparable to the consolidated financial statements prior to that date. References to “Successor” in the consolidated financial statements and footnotes are in reference to reporting dates on or after October 2, 2016; references to “Predecessor” in the consolidated financial statements and footnotes are in reference to reporting dates through October 1, 2016 which includes the impact of the Plan provisions and the application of fresh start accounting.





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Results of Operations - Successor

Three Months Ended March 31, 2017  

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

Coal Sales. The following table summarizes information about our coal sales during the three months ended March 31, 2017:
 
 
Successor
 
 
Three Months Ended March 31,
 
 
2017
 
 
(In thousands)
Coal sales
 
$
600,975

Tons sold
 
25,678

 
On a consolidated basis, coal sales in the first quarter of 2017 by segment were approximately 45% Powder River Basin, 38% Metallurgical, and 17% Other. Tons sold for the period by segment were approximately 83% Powder River Basin, 8% Metallurgical, and 9% Other. See discussion in “Regional Performance” for further information about regional results.

Costs, expenses and other.  The following table summarizes costs, expenses and other components of operating income during the three months ended March 31, 2017:
 
 
Successor
 
Three Months Ended March 31,
 
2017
 
(In thousands)
Cost of sales (exclusive of items shown separately below)
$
461,410

Depreciation, depletion and amortization
31,921

Accretion on asset retirement obligations
7,623

Amortization of sales contracts, net
14,690

Change in fair value of coal derivatives and coal trading activities, net
854

Selling, general and administrative expenses
20,523

Other operating income, net
(2,310
)
Total costs, expenses and other
$
534,711

 
Cost of sales.  Our cost of sales for the first quarter of 2017, consisted primarily of labor related costs (approximately 26%), repairs and supplies (approximately 37%), operating taxes and royalties (approximately 22%), and and transportation costs (approximately 14%). See discussion in “Regional Performance” for further information about regional results.
 
Depreciation, depletion and amortization.  Our depreciation, depletion, and amortization costs for the first quarter of 2017 consist of depreciation of plant and equipment (approximately 60%), depletion of reserves (approximately 18%), and amortization of development costs (approximately 22%). This reflects the application of fresh start accounting. For further information on fresh start accounting, please see Note 1 to the Consolidated Financial Statements, “Basis of Presentation.”

Accretion on asset retirement obligation. Approximately 66% of the accretion on our asset retirement obligation is attributable to our large surface operations in the Powder River Basin.

Amortization of sales contracts, net.  Our amortization of sales contracts, net is primarily related to the application of fresh start accounting to Powder River Basin supply contracts that were above market prices upon our emergence from reorganization. For further information on fresh start accounting, please see Note 1 to the Consolidated Financial Statements, “Basis of Presentation.”


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Selling, general and administrative expenses.  Total selling, general and administrative expenses consisted primarily of compensation costs of $12.6 million, and professional services and usage and maintenance agreements of $4.9 million.

Other operating income, net. Other operating income, net consists primarily of miscellaneous revenues including royalties and net gains on asset sales of $5.6 million and net income from equity investments of $1.9 million, partially offset by mark to market charges on heating oil derivatives of $3.6 million and miscellaneous expenses primarily related to our land company of $1.6 million.


Nonoperating Expense.  The following table summarizes our nonoperating expense during the three months ended March 31, 2017:
 
 
Successor
 
Three Months Ended March 31,
 
2017
 
(In thousands)
Net loss resulting from early retirement of debt and debt restructuring
$
(2,030
)
Reorganization items, net
(2,828
)
Total nonoperating expense
$
(4,858
)

Nonoperating expenses in the first quarter of 2017 are related to the replacement of our securitization facility and expenses associated with our Chapter 11 reorganization. See further discussion in Note 4, “Reorganization Items, Net”, and Note 11, “Debt and Financing Arrangements”, to the condensed consolidated financial statements.

Provision for income taxes. The following table summarizes our provision from income taxes during the three months ended March 31, 2017:

 
Successor
 
Three Months Ended March 31,
 
2017
 
(In thousands)
Provision for income taxes
$
840


See further discussion in Note 12, “Income Taxes”, to the condensed consolidated financial statements.



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Operational Performance - Successor

Three Months Ended March 31, 2017

Our mining operations are evaluated based on Adjusted EBITDAR, per-ton cash operating costs (defined as including all mining costs except depreciation, depletion, amortization, accretion on asset retirements obligations, and pass-through transportation expenses), and on other non-financial measures, such as safety and environmental performance. Adjusted EBITDAR is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, the accretion on asset retirement obligations, and reorganization items, net. Adjusted EBITDAR may also be adjusted for items that may not reflect the trend of future results. Adjusted EBITDAR is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDAR are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDAR should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Furthermore, analogous measures are used by industry analysts and investors to evaluate the Company’s operating performance. Investors should be aware that our presentation of Adjusted EBITDAR may not be comparable to similarly titled measures used by other companies.

The following table shows results by operating segment for the three months ended March 31, 2017.

 
Successor
 
Three Months Ended March 31,
 
2017
Powder River Basin
 
Tons sold (in thousands)
21,326

Coal sales per ton sold
$
12.57

Cash cost per ton sold
$
10.33

Cash operating margin per ton sold
$
2.24

Adjusted EBITDAR (in thousands)
$
48,006

Metallurgical
 
Tons sold (in thousands)
2,060

Coal sales per ton sold
$
90.84

Cash cost per ton sold
$
57.67

Cash operating margin per ton sold
$
33.17

Adjusted EBITDAR (in thousands)
$
68,310

Other Thermal
 
Tons sold (in thousands)
2,291

Coal sales per ton sold
$
35.51

Cash cost per ton sold
$
23.82

Cash operating margin per ton sold
$
11.69

Adjusted EBITDAR (in thousands)
$
27,242


This table reflects numbers reported under a basis that differs from U.S. GAAP. See the “Reconciliation of Non-GAAP measures” below for explanation and reconciliation of these amounts to the nearest GAAP figures. Other companies may calculate these per ton amounts differently, and our calculation may not be comparable to other similarly titled measures.  
    
Powder River Basin — Adjusted EBITDAR for the three months ended March 31, 2017, benefited from favorable natural gas pricing that maintained the competitiveness of Powder River Basin coal for electric generation versus the competing fuel. Despite unfavorably warm winter temperatures, natural gas prices maintained favorable levels due to increased natural gas exports, both pipeline and liquefied natural gas, and slightly declining natural gas production levels.


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Metallurgical —Adjusted EBITDAR for the three months ended March 31, 2017, benefited from continued strength in pricing for metallurgical coal. As discussed above, Chinese removal of restrictions on its domestic supply and the end of some specific international supply disruptions, eased the acute shortage experienced in the second half of 2016 that drove prompt international coking coal prices to multi-year highs. Although prompt international pricing declined from these highs, supply rationalization in North America and years of global underinvestment in the industry sustained metallurgical coal prices at favorable levels through the current period. We were able to take advantage of these favorable prices in the current period as much, but not all, of our metallurgical volume was open or repriced during the period. Our metallurgical segment sold 1.5 million tons of coking coal, 0.1 million tons of PCI Coal, and 0.5 million tons of associated thermal coal in the period. Longwall operations accounted for approximately 57% of our shipment volume in the period.

Other Thermal— Adjusted EBITDAR for the three months ended March 31, 2017, benefited from the favorable natural gas pricing discussed in the Powder River Basin segment discussion above, and international thermal prices that supported certain export sales. These benefits were primarily recognized at our low cost West Elk longwall operation where domestic and export opportunities were economic.



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Results of Operations - Predecessor

Three Months Ended March 31, 2016  

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

Coal Sales. The following table summarizes information about our coal sales during the three months ended March 31, 2016:
 
 
Predecessor
 
 
Three Months Ended March 31,
 
 
2016
 
 
(In thousands)
Coal sales
 
$
428,106

Tons sold
 
20,149

 
On a consolidated basis, coal sales in the first quarter of 2016, by segment were approximately 52% Powder River Basin, 32% Metallurgical, and 13% Other. Tons sold for the period by segment were approximately 82% Powder River Basin, 11% Metallurgical, and 6% Other. See discussion in “Regional Performance” for further information about regional results.

Costs, expenses and other.  The following table summarizes costs, expenses and other components of operating income during the three months ended March 31, 2016:
 
 
Predecessor
 
Three Months Ended March 31,
 
2016
 
(In thousands)
Cost of sales (exclusive of items shown separately below)
$
411,010

Depreciation, depletion and amortization
63,699

Accretion on asset retirement obligations
8,306

Amortization of sales contracts, net
(833
)
Change in fair value of coal derivatives and coal trading activities, net
1,210

Asset impairment and mine closure costs
85,520

Selling, general and administrative expenses
19,826

Other operating income, net
(2,220
)
Total costs, expenses and other
$
586,518

 
Cost of sales.  Our cost of sales for the first quarter of 2016, consisted primarily of labor related costs (approximately 30%), repairs and supplies (approximately 36%), operating taxes and royalties (approximately 20%), and and transportation costs (approximately 9%). See discussion in “Regional Performance” for further information about regional results.
 
Depreciation, depletion and amortization.  Our depreciation, depletion, and amortization costs for the first quarter of 2016 consist of depreciation of plant and equipment (approximately 57%), depletion of reserves (approximately 34%), and amortization of development costs (approximately 9%).

Accretion on asset retirement obligation. Approximately 68% of the accretion on our asset retirement obligation is attributable to our large surface operations in the Powder River Basin.

Asset impairment and mine closure costs.  During the first quarter of 2016 we received notification of intent to idle operations by a third party to whom we leased certain Appalachian reserves. As a result of the idling and weakness in the thermal coal market we determined the value of these reserves was impaired.

Selling, general and administrative expenses.  Total selling, general and administrative expenses consisted primarily of compensation costs of $12.8 million, and professional services and usage and maintenance agreements of $4.0 million.

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Other operating income, net. Other operating income, net consists primarily of miscellaneous revenues including royalties and net gains on asset sales of $5.1 million and net income from equity investments of $1.5 million, partially offset by liquidated damages on logistics contracts of $1.6 million and miscellaneous expenses primarily related to our land company of $2.0 million.


Nonoperating Expense.  The following table summarizes our nonoperating expense during the three months ended March 31, 2016:
 
 
Predecessor
 
Three Months Ended March 31,
 
2016
 
(In thousands)
Net loss resulting from early retirement of debt and debt restructuring
$
(2,213
)
Reorganization items, net
(3,875
)
Total nonoperating expense
$
(6,088
)

Nonoperating expenses in the first quarter of 2016 are related to our proposed debt restructuring activities and costs associated with our Chapter 11 reorganization. See further discussion in Note 4, “Reorganization Items, Net”.

Provision for (benefit from) income taxes. The following table summarizes our provision from income taxes during the three months ended March 31, 2016:

 
Predecessor
 
Three Months Ended March 31,
 
2016
 
(In thousands)
Provision for (benefit from) income taxes
$
(1,111
)

See further discussion in Note 12, “Income Taxes”, to the condensed consolidated financial statements.



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Operational Performance - Predecessor

Three Months Ended March 31, 2016

Our mining operations are evaluated based on Adjusted EBITDAR, per-ton cash operating costs (defined as including all mining costs except depreciation, depletion, amortization, accretion on asset retirements obligations, and pass-through transportation expenses), and on other non-financial measures, such as safety and environmental performance. Adjusted EBITDAR is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, the accretion on asset retirement obligations, and reorganization items, net. Adjusted EBITDAR may also be adjusted for items that may not reflect the trend of future results. Adjusted EBITDAR is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDAR are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDAR should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Furthermore, analogous measures are used by industry analysts and investors to evaluate the Company’s operating performance. Investors should be aware that our presentation of Adjusted EBITDAR may not be comparable to similarly titled measures used by other companies.

The following table shows results by operating segment for the three months ended March 31, 2016.

 
Predecessor
 
Three Months Ended March 31,
 
2016
Powder River Basin
 
Tons sold (in thousands)
16,506

Coal sales per ton sold
$
13.24

Cash cost per ton sold
$
12.46

Cash operating margin per ton sold
$
0.78

Adjusted EBITDAR (in thousands)
$
12,728

Metallurgical
 
Tons sold (in thousands)
2,165

Coal sales per ton sold
$
51.10

Cash cost per ton sold
$
48.19

Cash operating margin per ton sold
$
2.91

Adjusted EBITDAR (in thousands)
$
6,352

Other Thermal
 
Tons sold (in thousands)
1,276

Coal sales per ton sold
$
39.80

Cash cost per ton sold
$
37.32

Cash operating margin per ton sold
$
2.48

Adjusted EBITDAR (in thousands)
$
3,151


This table reflects numbers reported under a basis that differs from U.S. GAAP. See the “Reconciliation of Non-GAAP measures” below for explanation and reconciliation of these amounts to the nearest GAAP figures. Other companies may calculate these per ton amounts differently, and our calculation may not be comparable to other similarly titled measures.  
    
Powder River Basin — Adjusted EBITDAR for the three months ended March 31, 2016, was negatively impacted by historically low natural gas pricing that made Powder River Basin coal economically uncompetitive for electric generation versus the competing fuel for many of our customers. Unfavorably warm 2015-2016 winter season temperatures and increased natural gas production levels from shale resources drove the price of the competing fuel to unsustainably low levels.


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Metallurgical —Adjusted EBITDAR for the three months ended March 31, 2016, was negatively impacted by multi-year lows in pricing for metallurgical coal. Persistent oversupply from significant investments early in the decade, particularly in Australia, long term anemic economic growth in OECD nations, and slowing economic growth in China led to a multi-year cyclical downturn in metallurgical coal pricing. Our metallurgical segment sold 1.5 million tons of coking coal, 0.1 million tons of PCI coal, and 0.6 million tons of associated thermal coal in the period. Longwall operations accounted for approximately 71% of our shipment volume in the period.
 

Other Thermal— Adjusted EBITDAR for the three months ended March 31, 2016, was negatively impacted by the low natural gas pricing discussed in the Powder River Basin segment discussion above. Furthermore and international thermal prices did not support thermal export sales at any of our operations in this period.



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Reconciliation of Non-GAAP measures

Segment coal sales per ton sold

Segment coal sales per ton sold are calculated as the segment's coal sales revenues divided by segment tons sold. The segments' sales per tons sold are adjusted for transportation costs, and may be adjusted for other items that, due to accounting rules, are classified in "other operating (income) expense, net" on the statement of operations, but relate to price protection on the sale of coal. Segment sales per ton sold is not a measure of financial performance in accordance with generally accepted accounting principles. We believe segment sales per ton sold better reflects our revenue for the quality of coal sold and our operating results by including all income from coal sales. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Therefore, segment coal sales revenues should not be considered in isolation, nor as an alternative to coal sales revenues under generally accepted accounting principles.

 
Successor
Predecessor
 
Three Months Ended March 31,
Three Months Ended March 31,
 
2017
2016
 
 
 
(In thousands)
 
 
Reported segment coal sales revenues
$
536,564

$
379,888

Coal risk management derivative settlements classified in “other (income) expense, net”

146

Coal sales revenues from idled or otherwise disposed operations not included in segments
52

10,573

Transportation costs
64,359

37,499

Revenues in the condensed consolidated statements of operations
$
600,975

$
428,106


Segment cost per ton sold

Segment costs per ton sold are calculated as the segment’s cost of tons sold divided by segment tons sold. The segments’ cost of tons sold are adjusted for transportation costs, and may be adjusted for other items that, due to accounting rules, are classified in “other (income) expense, net” on the statement of operations, but relate directly to the costs incurred to produce coal. Segment cost of tons sold is not a measure of financial performance in accordance with generally accepted accounting principles. We believe segment cost of tons sold better reflects our controllable costs and our operating results by including all costs incurred to produce coal. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Therefore, segment cost of tons sold should not be considered in isolation, nor as an alternative to cost of sales under generally accepted accounting principles.

 
Successor
Predecessor
 
Three Months Ended March 31,
Three Months Ended March 31,
 
2017
2016
 
 
 
(In thousands)
 
 
Reported segment cash cost of tons sold
$
393,734

$
357,629

Diesel fuel risk management derivative settlements classified in “other (income) expense, net”
(604
)
(1,334
)
Transportation costs
64,359

37,499

Coal sales revenues from idled or otherwise disposed operations not included in segments
3,447

16,318

Other (operating overhead, certain actuarials, etc.)
474

898

Cost of sales in the condensed consolidated statements of operations
$
461,410

$
411,010





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Reconciliation of Segment Adjusted EBITDAR to Net Income
 
The discussion in “Results of Operations” above includes references to our Adjusted EBITDAR for each of our reportable segments. Adjusted EBITDAR is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, the accretion on asset retirement obligations, and reorganization items, net. Adjusted EBITDAR may also be adjusted for items that may not reflect the trend of future results. We use Adjusted EBITDAR to measure the operating performance of our segments and allocate resources to our segments. Adjusted EBITDAR is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDAR are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDAR should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Investors should be aware that our presentation of Adjusted EBITDAR may not be comparable to similarly titled measures used by other companies. The table below shows how we calculate Adjusted EBITDAR.

 
 
Successor
Predecessor
 
Three Months Ended March 31,
Three Months Ended March 31,
 
2017
2016
(In thousands)
 
 
Reported Segment Adjusted EBITDAR
$
143,558

$
22,231

EBITDA from idled or otherwise disposed operations
(2,236
)
(4,626
)
Selling, general, and administrative expenses
(20,523
)
(19,826
)
Other
(301
)
501

Adjusted EBITDAR
120,498

(1,720
)
Provision for (benefit from) income taxes
(840
)
1,111

Interest expense, net
(8,898
)
(43,313
)
Depreciation, depletion and amortization
(31,921
)
(63,699
)
Accretion on asset retirement obligations
(7,623
)
(8,306
)
Amortization of sales contracts, net
(14,690
)
833

Asset impairment and mine closure costs

(85,520
)
Net loss resulting from early retirement of debt and debt restructuring
(2,030
)
(2,213
)
Reorganization items, net
(2,828
)
(3,875
)
Net income (loss)
$
51,668

$
(206,702
)
 

Other includes primarily income from our equity investments, certain actuarial adjustments, and certain changes in the fair value of coal derivatives and coal trading activities.
    
Liquidity and Capital Resources
 
Our primary sources of liquidity are proceeds from coal sales to customers and certain financing arrangements. Excluding significant investing activity, we intend to satisfy our working capital requirements and fund capital expenditures and debt-service obligations with cash generated from operations and cash on hand. Our focus is protecting the balance sheet and prudently managing costs, including capital expenditures.

On April 27, 2017, our Board of Directors authorized a new share repurchase program for up to $300 million of our common stock, and a new quarterly common stock cash dividend of $0.35 per share. The timing of any share purchases, and the ultimate number of shares to be purchased, will depend on market conditions. The shares will be acquired in the open market or through private transactions in accordance with Securities and Exchange Commission requirements. For further information regarding the share repurchase program and the common stock cash dividend see Note 19 to the Condensed Consolidated Financial Statements “Subsequent Events”.

Given the volatile nature of coal markets, we believe it is important to take a prudent approach to managing our balance sheet and liquidity. Our dividend policy and share repurchase program will be implemented in a manner that will result in maintaining cash levels similar to those we have seen over the past two quarters. In the future, we will continue to evaluate

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our capital allocation initiatives in light of the current state of and our outlook for coal markets; the amount of our planned production that has been committed and priced; the capital needs of the business; and other strategic opportunities.

On March 7, 2017, we entered into a new senior secured term loan credit agreement in an aggregate principal amount of $300 million (the “New Term Loan Debt Facility”) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent (in such capacities, the “Agent”), and the other financial institutions from time to time party thereto (collectively, the “Lenders”). The New Term Loan Debt Facility was issued at 99.50% of the face amount and will mature on March 7, 2024. Proceeds from The New Term Loan Debt Facility were used to repay all outstanding obligations under our previously existing term loan credit agreement, dated as of October 5, 2016.

Borrowings under the New Term Loan Debt Facility bear interest at a per annum rate equal to, at our option, either (i) a London interbank offered rate plus an applicable margin of 4%, subject to a 1% LIBOR floor (the “LIBOR Rate”), or (ii) a base rate plus an applicable margin of 3%. Interest payments will be payable in cash. The term loans provided under the New Term Loan Debt Facility (the “Term Loans”) are subject to quarterly principal amortization payments in an amount equal to $750,000. For further information regarding the Previous First Lien Debt Facility and the New Term Loan Debt Facility see Note 11 to the Condensed Consolidated Financial Statements “Debt and Financing Arrangements”.

On April 27, 2017, we entered into a new senior secured inventory-based revolving credit facility in an aggregate principal amount of $40 million (the “New Inventory Facility”) with Regions Bank (“Regions”) as administrative agent and collateral agent (in such capacities, the “Agent”), as lender and swingline lender (in such capacities, the “Lender”) and as letter of credit issuer. Availability under the New Inventory Facility is subject to a borrowing base consisting of (i) 85% of the net orderly liquidation value of eligible coal inventory, (ii) the lesser of (x) 85% of the net orderly liquidation value of eligible parts and supplies inventory and (y) 35% of the amount determined pursuant to clause (i), and (iii) 100% of our Eligible Cash (defined in the New Inventory Facility), subject to reduction for reserves imposed by Regions.

The commitments under the New Inventory Facility will terminate on the date that is the earliest to occur of (i) the third anniversary of the Inventory Facility Closing Date, (ii) the date, if any, that is 364 days following the first day that Liquidity (defined in the New Inventory Facility and consistent with the definition in the Extended Securitization Facility (as defined below)) is less than $250 million for a period of 60 consecutive days and (iii) the date, if any, that is 60 days following the maturity, termination or repayment in full of the Extended Securitization Facility.

Revolving loan borrowings under the New Inventory Facility bear interest at a per annum rate equal to, at our option, either at the base rate or the London interbank offered rate plus, in each case, a margin ranging from 2.25% to 2.50% (in the case of LIBOR loans) and 1.25% to 1.50% (in the case of base rate loans) determined using a Liquidity-based grid. Letters of credit under the New Inventory Facility are subject to a fee in an amount equal to the applicable margin for LIBOR loans, plus customary fronting and issuance fees. For further information regarding the New Inventory Facility see Note 19 to the Condensed Consolidated Financial Statements “Subsequent Events”.

On April 27, 2017, we extended and amended our existing trade accounts receivable securitization facility which supports the issuance of letters of credit and requests for cash advances. The amendment to the Extended Securitization Facility decreases the borrowing capacity from $200 million to $160 million and extends the maturity date to three years after the Securitization Facility Closing Date. Pursuant to the Extended Securitization Facility, we also agreed to a revised schedule of fees payable to the administrator and the providers of the Extended Securitization Facility. For further information regarding the Extended Securitization Facility see Note 19 to the Condensed Consolidated Financial Statements “Subsequent Events”.

On a pro-forma basis, if the New Inventory Facility and Amended Securitization Facility had been in place at March 31, 2017 to issue letters of credit, our borrowing capacity would have grown from $84 million to $114 million, allowing our unrestricted cash balance to be $30 million higher.

    

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The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2017 and 2016:
 
 
Successor
Predecessor
 
 
Three Months Ended March 31,
Three Months Ended March 31,
 
 
2017
2016
(In thousands)
 
 
 
Cash provided by (used in):
 
 

 

Operating activities
 
$
125,529

$
(10,098
)
Investing activities
 
(44,069
)
(19,259
)
Financing activities
 
(39,252
)
(26,026
)
 
Cash Flow - Successor

Cash provided by operating activities in the three months ended March 31, 2017 resulted from improved market conditions for most of our products and solid operating cost performance across all of our segments discussed in the Operational Performance section above. In addition, low cash interest expense contributed to the cash provided by operating activities.

Cash used in investing activities in the three months ended March 31, 2017 resulted from the net purchase of short term investments, additional investment in our equity holding of Dominion Terminal Associates of approximately $7 million, and capital expenditures of approximately $6 million.

Cash used in financing activities in the Successor period resulted primarily from the repayment of the Previous First Lien Debt Facility with proceeds from the New Term Loan Debt Facility. Additionally, financing costs associated with the New Term Loan Debt Facility added to cash used in financing activities.

Cash Flow - Predecessor

Cash used in operating activities in the three months ended March 31, 2016, resulted from difficult market conditions for all of our products as discussed in the Operational Performance section above. In addition significant cash interest expense and cash restructuring costs contributed to cash used in operating activities.

Cash used in investing activities in the three months ended March 31, 2016 resulted from additions to restricted cash of approximately $12 million as collateral requirements under the Predecessor securitization facility increased over the period and capital expenditures of approximately $6 million.

Cash used in financing activities in the three months ended March 31, 2016 resulted from financing costs associated with the previous DIP facility and securitization facility, insurance premium financing payments, and expenses related to pre-filing debt restructuring costs.



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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
We manage our commodity price risk for our non-trading, thermal coal sales through the use of long-term coal supply agreements, and to a limited extent, through the use of derivative instruments.  Sales commitments in the metallurgical coal market are typically not long term in nature, and we are therefore subject to fluctuations in market pricing. 
 
Our sales commitments for 2017 and 2018 were as follows as of May 2, 2017:
 
 
 
2017
 
2018
 
 
Tons
 
$ per ton
 
Tons
 
$ per ton
Metallurgical
 
(in millions)
 
 

 
(in millions)
 
 

Committed, Priced Coking
 
4.1

 
$
96.06

 

 
$

Committed, Unpriced Coking
 
1.9

 
 

 
1.9

 
 

 
 
 
 
 
 
 
 
 
Committed, Priced PCI
 
0.7

 
65.40

 

 

Committed, Unpriced PCI
 

 
 
 

 
 
 
 
 
 
 
 
 
 
 
Committed, Priced Thermal
 
1.3

 
40.33

 
0.4

 
30.58

Committed, Unpriced Thermal