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 June 30, 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/804b4f61831f895dfb404b4a8e6e08cb-logoa02a01a01a01a01a10.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 July 21, 2017, there were 24,310,578 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

Successor
Predecessor
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016

Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
 
(Unaudited)
(Unaudited)
 
(Unaudited)
(Unaudited)
Revenues
$
549,866

$
420,298

 
$
1,150,841

$
848,404

Costs, expenses and other operating
 
 
 
 

 

Cost of sales (exclusive of items shown separately below)
435,038

410,992

 
896,448

822,002

Depreciation, depletion and amortization
30,701

58,459

 
62,622

122,158

Accretion on asset retirement obligations
7,623

8,050

 
15,246

16,356

Amortization of sales contracts, net
14,352

1

 
29,042

(832
)
Change in fair value of coal derivatives and coal trading activities, net
863

1,158

 
1,717

2,368

Asset impairment and mine closure costs

43,701

 

129,221

Selling, general and administrative expenses
22,146

19,019

 
42,669

38,845

Other operating income, net
(3,549
)
(10,561
)
 
(5,859
)
(12,781
)
 
507,174

530,819

 
1,041,885

1,117,337

 
 
 
 
 
 
Income (loss) from operations
42,692

(110,521
)

108,956

(268,933
)
Interest expense, net
 
 
 
 

 

Interest expense
(6,003
)
(45,273
)

(15,428
)
(89,724
)
Interest and investment income
842

933


1,369

2,071

 
(5,161
)
(44,340
)
 
(14,059
)
(87,653
)
 
 
 
 
 
 
Income (loss) before nonoperating expenses
37,531

(154,861
)
 
94,897

(356,586
)
 
 
 
 
 
 
Nonoperating expenses
 
 
 
 
 
Net loss resulting from early retirement of debt and debt restructuring
(31
)


(2,061
)
(2,213
)
Reorganization items, net
(21
)
(21,271
)
 
(2,849
)
(25,146
)
 
(52
)
(21,271
)
 
(4,910
)
(27,359
)
 
 
 
 
 
 
Income (loss) before income taxes
37,479

(176,132
)

89,987

(383,945
)
Provision for (benefit from) income taxes
319

(245
)
 
1,159

(1,356
)
Net income (loss)
$
37,160

$
(175,887
)

$
88,828

$
(382,589
)
 
 
 
 
 
 
Net income (loss) per common share
 
 
 
 

 

Basic earnings (loss) per common share
$
1.51

$
(8.26
)
 
$
3.58

$
(17.97
)
Diluted earnings (loss) per common share
$
1.48

$
(8.26
)
 
$
3.52

$
(17.97
)
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
Basic weighted average shares outstanding
24,659

21,293

 
24,834

21,293

Diluted weighted average shares outstanding
25,082

21,293

 
25,245

21,293

 
 
 
 
 
 
Dividends declared per common share
$
0.35

$

 
$
0.35

$


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

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Table of Contents

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

 
 
Successor
Predecessor
 
Successor
Predecessor
 
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
 
 
(Unaudited)
(Unaudited)
 
(Unaudited)
(Unaudited)
Net income (loss)
 
$
37,160

$
(175,887
)
 
$
88,828

$
(382,589
)
 
 
 
 
 
 
 
Derivative instruments
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
257

(162
)
 
276

(386
)
Income tax benefit (provision)
 


 

81

 
 
257

(162
)
 
276

(305
)
Pension, postretirement and other post-employment benefits
 
 
 
 
 
 
Comprehensive income (loss) before tax
 
3,154

(2,749
)
 
3,154

(4,087
)
Income tax benefit (provision)
 


 

481

 
 
3,154

(2,749
)
 
3,154

(3,606
)
Available-for-sale securities
 
 
 
 
 
 
Comprehensive income (loss) before tax
 

504

 
(387
)
3,407

Income tax benefit (provision)
 


 

(1,043
)
 
 

504

 
(387
)
2,364

 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
3,411

(2,407
)
 
3,043

(1,547
)
Total comprehensive income (loss)
 
$
40,571

$
(178,294
)
 
$
91,871

$
(384,136
)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.


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Table of Contents

Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 
June 30,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents
$
333,548

 
$
305,372

Short term investments
159,822

 
88,072

Restricted cash
41,755

 
71,050

Trade accounts receivable
190,256

 
184,483

Other receivables
21,504

 
19,877

Inventories
137,056

 
113,462

Other current assets
61,474

 
96,306

Total current assets
945,415

 
878,622

Property, plant and equipment, net
1,007,570

 
1,053,603

Other assets
 

 
 

Equity investments
104,015

 
96,074

Other noncurrent assets
75,058

 
108,298

Total other assets
179,073

 
204,372

Total assets
$
2,132,058

 
$
2,136,597

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 

 
 

Accounts payable
$
127,059

 
$
95,953

Accrued expenses and other current liabilities
169,533

 
205,240

Current maturities of debt
7,414

 
11,038

Total current liabilities
304,006

 
312,231

Long-term debt
315,639

 
351,841

Asset retirement obligations
342,680

 
337,227

Accrued pension benefits
32,092

 
38,884

Accrued postretirement benefits other than pension
101,407

 
101,445

Accrued workers’ compensation
186,128

 
184,568

Other noncurrent liabilities
65,048

 
63,824

Total liabilities
1,347,000

 
1,390,020

 
 
 
 
Stockholders' equity
 

 
 

Common stock, $0.01 par value, authorized 300,000 shares, issued 25,021 shares and 25,002 shares at June 30, 2017 and December 31, 2016, respectively
250

 
250

Paid-in capital
694,780

 
688,424

Retained earnings
113,574

 
33,449

Treasury stock, 711 shares at June 30, 2017, at cost
(51,043
)
 

Accumulated other comprehensive income
27,497

 
24,454

Total stockholders’ equity
785,058

 
746,577

Total liabilities and stockholders’ equity
$
2,132,058

 
$
2,136,597


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

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Table of Contents

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

 
Successor
Predecessor
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
 
(Unaudited)
(Unaudited)
Operating activities
 

 

Net income (loss)
$
88,828

$
(382,589
)
Adjustments to reconcile to cash provided by operating activities:
 

 

Depreciation, depletion and amortization
62,622

122,158

Accretion on asset retirement obligations
15,246

16,356

Amortization of sales contracts, net
29,042

(832
)
Prepaid royalties expensed
2,288

1,770

Deferred income taxes
5,996

(418
)
Employee stock-based compensation expense
4,942

1,435

Gains on disposals and divestitures, net
(2,005
)
(6,269
)
Asset impairment and non-cash mine closure costs

119,194

Net loss resulting from early retirement of debt and debt restructuring
2,061

2,213

Non-cash bankruptcy reorganization items

(14,892
)
Amortization relating to financing activities
1,565

7,657

Changes in:
 
 
Receivables
(3,864
)
(7,776
)
Inventories
(23,594
)
21,152

Accounts payable, accrued expenses and other current liabilities
(89
)
84,160

Income taxes, net
(3,796
)
(937
)
Other
21,557

(22,634
)
Cash provided by (used in) operating activities
200,799

(60,252
)
Investing activities
 

 

Capital expenditures
(16,922
)
(74,137
)
Minimum royalty payments
(4,211
)
(217
)
Proceeds from (consideration paid for) disposals and divestitures
4,186

(3,303
)
Purchases of short term investments
(157,364
)
(98,750
)
Proceeds from sales of short term investments
85,035

94,589

Investments in and advances to affiliates, net
(8,934
)
(2,890
)
Withdrawals (deposits) of restricted cash
29,295

(4,695
)
Cash used in investing activities
(68,915
)
(89,403
)
Financing activities
 

 

Proceeds from issuance of term loan due 2024
298,500


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

Payments on term loan due 2024
(750
)

Net payments on other debt
(5,207
)
(10,293
)
Debt financing costs
(8,900
)
(18,806
)
Net loss resulting from early retirement of debt and debt restructuring
(2,061
)
(2,213
)
Dividends paid
(8,563
)

Purchases of treasury stock
(51,043
)

Cash used in financing activities
(103,708
)
(31,312
)
Increase (decrease) in cash and cash equivalents
28,176

(180,967
)
Cash and cash equivalents, beginning of period
305,372

450,781

Cash and cash equivalents, end of period
$
333,548

$
269,814


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


6

Table of Contents

Arch Coal, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Arch Coal, Inc. ("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 and six months ended June 30, 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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Table of Contents

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 recognize 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 its coal sales will remain consistent with its current practice. The Company is in the process of reviewing its portfolio of coal sales contracts and the various terms and clauses within each contract. Additionally, the Company is 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)
276

 
3,641

 
(55
)
 
3,862

Amounts reclassified from AOCI

 
(487
)
 
(332
)
 
(819
)
Balance at June 30, 2017
$
276

 
$
27,221

 
$

 
$
27,497


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Table of Contents

 
The following amounts were reclassified out of AOCI:

 
 
Successor
Predecessor
 
Successor
Predecessor
 
Line Item in the Condensed Consolidated Statement of Operations
Details About AOCI Components
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
 
(In thousands)
 
 
 
 
 
 
 
 
Derivative instruments
 
$

$
96

 
$

$
321

 
Revenues
 
 


 

(81
)
 
Provision for (benefit from) income taxes
 
 
$

$
96

 
$

$
240

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

$
2,672

 
$

$
5,344

 
 
Amortization of actuarial gains (losses), net
 

77

 

(1,257
)
 
 
Pension settlement
 
487


 
487


 
 
 
 
487

2,749

 
487

4,087

 
 
 
 


 

(481
)
 
Provision for (benefit from) income taxes
 
 
$
487

$
2,749

 
$
487

$
3,606

 
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
 

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 June 30, 2017 and 2016, the Company recorded a minimal charge in the current quarter and $21.3 million, respectively in “Reorganization items, net” primarily comprised of professional fee expenses. Net cash paid for “Reorganization items, net” totaled $0.9 million and $13.6 million during the three months ended June 30, 2017 and 2016, respectively.

During the six months ended June 30, 2017 and 2016, the Company recorded a charge of $2.8 million and $25.1 million, respectively, in “Reorganization items, net.” The 2017 amount is primarily comprised of professional fees and 2016 is comprised of $40.0 million in professional fees, partially offset by non-cash gains on rejected contracts of $14.9 million. Net cash paid for “Reorganization items, net” totaled $4.7 million and $15.1 million during the six months ended June 30, 2017 and 2016.


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Table of Contents

5. Asset Impairment and Mine Closure Costs

During the second quarter of 2016, the Company recorded $43.7 million of “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations. The amount included the following: a $38.0 million impairment of the Company’s equity investment in a brownfield bulk commodity terminal on the Columbia River in Longview, Washington as the Company relinquished its ownership rights in exchange for future throughput rights; $3.6 million curtailment charge related to the Company’s pension, postretirement health and black lung actuarial liabilities due to headcount reductions in the first half of 2016; and $2.1 million of severance expense related to headcount reductions during the quarter.

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: 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Coal
 
$
60,887

 
$
37,268

Repair parts and supplies
 
76,169

 
76,194

 
 
$
137,056

 
$
113,462

 
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $0.1 million at June 30, 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 U.S. Treasury securities and investment grade corporate bonds. These investments are held in the custody of a major financial institution. These securities, along with the Company’s investments in marketable equity securities, are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.

The Company’s investments in available-for-sale marketable securities are as follows:
 
June 30, 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
$
57,382

 
$
32

 
$
(24
)
 
$
57,390

 
$
57,390

 
$

Corporate notes and bonds
102,497

 
10

 
(75
)
 
102,432

 
102,432

 

Total Investments
$
159,879

 
$
42

 
$
(99
)
 
$
159,822

 
$
159,822

 
$

 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
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

 
 
 
 
 
 
 
 
 
 
 
 

The aggregate fair value of investments with unrealized losses that were owned for less than a year was $92.0 million and $47.6 million at June 30, 2017 and December 31, 2016, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year was $20.7 million and $40.4 million at June 30, 2017 and December 31, 2016, respectively. The unrealized losses in the Company’s portfolio at June 30, 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 June 30, 2017 have maturity dates ranging from the third 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:
 
June 30, 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
(59,408
)
 
(29,569
)
 
 
 
(25,625
)
 
(24,829
)
 
 
Total
$
37,788

 
$
2,173

 
$
35,615

 
$
71,571

 
$
6,913

 
$
64,658

Balance Sheet classification:
 
 
 
 
 
 
 
 
 
 
 
Other current
$
31,670

 
$
827

 
 
 
$
59,702

 
$
5,114

 
 
Other noncurrent
$
6,118

 
$
1,346

 
 
 
$
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 $54.4 million in 2017, $11.1 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 40 to 45 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 June 30, 2017, the Company had protected the price of approximately 70% of its expected diesel fuel purchases for the remainder of 2017 at an average strike price of $1.82 per gallon. Additionally, the Company has protected approximately 25% of its expected 2018 purchases with call options with an average strike price of $1.81 per gallon. At June 30, 2017, the Company had outstanding heating oil call options for approximately 27 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.


11

Table of Contents

Coal price risk management positions
 
The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted, 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 June 30, 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
 
371

 

 
371

Coal purchases
 
363

 

 
363

 
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 $0.6 million of losses during the remainder of 2017 and $0.8 million of losses during 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:
 
 
 
June 30, 2017
 
 
 
December 31, 2016
 
 
Fair Value of Derivatives
 
Asset
 
Liability
 
 
 
Asset
 
Liability
 
 
(In thousands)
 
Derivative
 
Derivative
 
 
 
Derivative
 
Derivative
 
 
Derivatives Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Coal
 
$
17

 
$

 
 

 
$

 
$
(15
)
 
 

 
 


 


 
 
 


 


 
 

Derivatives Not Designated as Hedging Instruments
 
 

 
 

 
 

 
 

 
 

 
 

Heating oil -- diesel purchases
 
661

 

 
 

 
4,646

 

 
 

Coal -- held for trading purposes
 
41,813

 
(43,157
)
 
 

 
68,948

 
(68,740
)
 
 

Coal -- risk management
 
67

 
(146
)
 
 

 
475

 
(580
)
 
 

Natural gas
 
103

 
(71
)
 
 
 
86

 
(13
)
 
 
Total
 
42,644

 
(43,374
)
 
 

 
74,155

 
(69,333
)
 
 

Total derivatives
 
42,661

 
(43,374
)
 
 

 
74,155

 
(69,348
)
 
 

Effect of counterparty netting
 
(41,947
)
 
41,947

 
 

 
(69,247
)
 
69,247

 
 

Net derivatives as classified in the balance sheets
 
$
714

 
$
(1,427
)
 
$
(713
)
 
$
4,908

 
$
(101
)
 
$
4,807

 

12

Table of Contents

 
 
 
 
June 30, 2017
 
December 31, 2016
Net derivatives as reflected on the balance sheets (in thousands)
 
 
 
 

Heating oil and coal
 
Other current assets
 
$
714

 
$
4,908

Coal
 
Accrued expenses and other current liabilities
 
(1,427
)
 
(101
)
 
 
 
 
$
(713
)
 
$
4,807


The Company had a current asset for the right to reclaim cash collateral of $4.6 million at June 30, 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.

The effects of derivatives on measures of financial performance are as follows:
 
Derivatives used in Cash Flow Hedging Relationships (in thousands)
Three Months Ended June 30,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
Successor
Predecessor
 
Successor
Predecessor
 
 
2017
2016
 
2017
2016
Coal sales
(1) 
$
49

$
(73
)
 
$

$
157

Coal purchases
(2) 
(34
)
6

 

(61
)
Totals
 
$
15

$
(67
)
 
$

$
96

 
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended June 30, 2017 and 2016.  
 
Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended June 30,
 
 
Gain (Loss) Recognized
 
 
Successor
Predecessor
 
 
2017
2016
Coal — unrealized
(3) 
$

$
19

Coal — realized
(4) 
$

$
(180
)
Natural gas  — unrealized
(3) 
$
(27
)
$
235

Heating oil — diesel purchases
(4) 
$
(1,147
)
$
2,039

Foreign currency
(4) 
$

$
34

____________________________________________________________
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


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Table of Contents

Derivatives used in Cash Flow Hedging Relationships (in thousands)
Six Months Ended June 30,  
 
 
Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)
 
Gains (Losses) Reclassified from Other Comprehensive Income into Income
(Effective Portion)
 
 
Successor
Predecessor
 
Successor
Predecessor
 
 
2017
2016
 
2017
2016
Coal sales
(1) 
$
269

$
(60
)
 
$

$
1,526

Coal purchases
(2) 
(234
)
(5
)
 

(1,205
)
Totals
 
$
35

$
(65
)
 
$

$
321

 
No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the six month periods ended June 30, 2017 and 2016.  
 
Derivatives Not Designated as Hedging Instruments (in thousands)
Six Months Ended June 30,
 
 
Gain (Loss) Recognized
 
 
Successor
Predecessor
 
 
2017
2016
Coal — unrealized
(3) 
$
26

$
(1,096
)
Coal — realized
(4) 
$

$
(343
)
Natural gas  — unrealized
(3) 
$
(496
)
$
(384
)
Heating oil — diesel purchases
(4) 
$
(4,725
)
$
1,596

Foreign currency
(4) 
$

$
(137
)
____________________________________________________________
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 June 30, 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 $0.8 million and $1.0 million during the three months ended June 30, 2017 and 2016, respectively; and net unrealized and realized losses of $1.5 million and $1.0 million during the six months ended June 30, 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.


14

Table of Contents

10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
June 30,
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Payroll and employee benefits
 
$
51,400

 
$
58,468

Taxes other than income taxes
 
78,132

 
92,733

Interest
 
130

 
8,032

Acquired sales contracts
 
827

 
5,114

Workers’ compensation
 
15,926

 
15,184

Asset retirement obligations
 
17,817

 
19,515

Other
 
5,301

 
6,194

 
 
$
169,533

 
$
205,240


11. Debt and Financing Arrangements
 
 
June 30,
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Term loan due 2024 ($299.3 million face value)
 
$
297,808

 
$

Term loan due 2021 ($325.7 million face value)
 

 
325,684

Other
 
32,065

 
37,195

Debt issuance costs
 
(6,820
)
 

 
 
323,053

 
362,879

Less: current maturities of debt
 
7,414

 
11,038

Long-term debt
 
$
315,639

 
$
351,841


Term Loan Facility

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%. 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.

15

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.

Inventory-Based Revolving Credit 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).


16

Table of Contents

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 therefore shall be made with reimbursement for any funding losses and redeployment costs of the Lender resulting therefrom.

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. As of June 30, 2017, letters of credit totaling $21.2 million were outstanding under the facility.
 
Accounts Receivable 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. As of June 30, 2017, letters of credit totaling $130.4 million were outstanding under the facility which had a borrowing base of $88.7 million. As a result, cash collateral of $41.7 million has been placed in the facility and there is no availability for borrowings.

Interest Rate Swaps

During the second quarter of 2017, the Company entered into a series of interest rate swaps to fix a portion of the LIBOR interest rate within the term loan. The interest rate swaps qualify for cash flow hedge accounting treatment and as such, the change in the fair value of the interest rate swaps are recorded on the Company’s Condensed Consolidated Balance Sheet as an asset or liability with the effective portion of the gains or losses reported as a component of accumulated other comprehensive income and the ineffective portion reported in earnings. As interest payments are made on the term loan, amounts in accumulated other comprehensive income will be reclassified into earnings through interest expense to reflect a net interest on the term loan equal to the effective yield of the fixed rate of the swap plus 4% which is the spread on the LIBOR term loan. In the event that an interest rate swap is terminated prior to maturity, gains or losses in accumulated other comprehensive income will remain deferred and reclassified into earnings in the periods which the hedged forecasted transaction affects earnings.


17

Table of Contents

Below is a summary of the Company’s outstanding interest rate swap agreements designated as hedges as of June 30, 2017:

Notional Amount (in millions)
Effective Date
Fixed Rate
Receive Rate
Expiration Date
 
 
 
 
 
$
250.0

June 30, 2017
1.372
%
1-month LIBOR
June 29, 2018
$
250.0

June 29, 2018
1.662
%
1-month LIBOR
June 28, 2019
$
200.0

June 28, 2019
1.952
%
1-month LIBOR
June 30, 2020
$
100.0

June 30, 2020
2.182
%
1-month LIBOR
June 30, 2021

The fair value of the interest rate swaps at June 30, 2017 is an asset of $0.2 million which is recorded within Other noncurrent assets with the offset to accumulated other comprehensive income on the Company’s Condensed Consolidated Balance Sheet. The interest rate swaps are classified as level 2 within the fair value hierarchy.

Financing Costs

The Company paid financing costs of $8.9 million during the six months ended June 30, 2017; $7.2 million of which related to the issuance of the New Term Loan Debt facility discussed above. These issuance costs were capitalized during the first quarter and will be amortized using the effective interest method over the term of the facility. An additional $1.7 million is related to the inventory-based revolving credit facility and accounts receivable securitization facility. These issuance costs will be amortized on a straight-line basis over the term of the facility. During the six months ended June 30, 2016, the Company paid $18.8 million primarily related to the Superpriority Secured Debtor-in-Possession Credit Agreement related to the Company’s bankruptcy filing.

The Company incurred $2.1 million of legal and financial advisory fees associated with debt refinancing activities during the six months ended June 30, 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 initial efforts to replace the existing accounts receivable securitization facility. The Company also incurred $2.2 million in debt restructuring costs during the six months ended June 30, 2016 related to debt restructuring activities prior to the Company’s Chapter 11 filing.

Contractual Interest Expense During Bankruptcy

Upon the filing of bankruptcy, the Company discontinued recording interest expense on unsecured debt that was classified as a liability subject to compromise. Contractual interest expense during the three and six months ended June 30, 2016 was $100.8 million and $199.3 million.

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
 
Successor
Predecessor
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
(In thousands)
 
 
 
 
 
Income tax provision (benefit) at statutory rate
$
13,118

$
(61,645
)
 
$
31,496

$
(134,380
)
Percentage depletion allowance
(5,692
)
5,909

 
(12,731
)
(19,758
)
State taxes, net of effect of federal taxes
408

(2,571
)
 
891

(7,061
)
Change in valuation allowance
(8,316
)
58,665

 
(20,218
)
159,227

Other, net
801

(603
)
 
1,721

616

 
$
319

$
(245
)
 
$
1,159

$
(1,356
)


18

Table of Contents

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, interest rate swaps and commodity contracts (coal and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.
 
·    Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (coal, natural gas and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at June 30, 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: 
 
 
June 30, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Assets:
 
 

 
 

 
 

 
 

Investments in marketable securities
 
$
159,822

 
$
57,390

 
$
102,432

 
$

Derivatives
 
963

 

 
302

 
661

Total assets
 
$
160,785

 
$
57,390

 
$
102,734

 
$
661

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
1,427

 
$
1,434

 
$
30

 
$
(37
)
 
The Company’s contracts with its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying Condensed Consolidated Balance Sheet, based on this counterparty netting.

The following table summarizes the change in the fair values of financial instruments categorized as Level 3.
 
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
 
(In thousands)
Balance, beginning of period
 
$
1,369

 
$
4,537

Realized and unrealized gains recognized in earnings, net
 
(1,332
)
 
(5,400
)
Purchases
 
1,158

 
2,553

Issuances
 
(317
)
 
(499
)
Settlements
 
(180
)
 
(493
)
Ending balance
 
$
698

 
$
698

 

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Net unrealized losses of $1.5 million and $1.3 million were recognized in the Condensed Consolidated Statement of Operations within Other operating income, net during the three and six months ended June 30, 2017 related to Level 3 financial instruments held on June 30, 2017.

 Fair Value of Long-Term Debt
 
At June 30, 2017 and December 31, 2016, the fair value of the Company’s debt, including amounts classified as current, was $331.3 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
 
Successor
Predecessor
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
(In Thousands)
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic weighted average shares outstanding
24,659

21,293

 
24,834

21,293

Effect of dilutive securities
423


 
411


 
 
 
 
 
 
Diluted weighted average shares outstanding
25,082

21,293

 
25,245

21,293



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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
 
Successor
Predecessor
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
(In thousands)
 
 
 
 
 
Self-insured occupational disease benefits:
 
 
 
 
 
Service cost
$
1,559

$
1,310

 
$
3,117

$
2,415

Interest cost
1,168

1,029

 
2,337

2,086

Net amortization

1,006

 

2,147

Curtailments
$

$
4,156

 
$

$
4,156

Total occupational disease
$
2,727

$
7,501

 
$
5,454

$
10,804

Traumatic injury claims and assessments
2,532

1,246

 
5,410

4,213

Total workers’ compensation expense
$
5,259

$
8,747

 
$
10,864

$
15,017


16. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
 
Successor
Predecessor
 
Successor
Predecessor
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
(In thousands)
 
 
 
 
 
Interest cost
$
2,991

$
3,197

 
$
5,982

$
6,535

Expected return on plan assets
(4,499
)
(4,444
)
 
(8,996
)
(8,982
)
Pension settlement
(487
)
454

 
(487
)
454

Amortization of other actuarial losses

924

 

1,681

Net benefit cost (credit)
$
(1,995
)
$
131

 
$
(3,501
)
$
(312
)
 
During the second quarter of 2017 the Company recorded a pension settlement related to its cash balance pension plan as the qualifying distributions from the plan exceeded the annual service and interest costs of the plan. Additionally, in accordance with accounting guidance, the Company revalued the cash balance pension liability which reduced the liability by approximately $3.6 million with the offset to accumulated other comprehensive income. The discount rate used for the revaluation was 3.59%.

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The following table details the components of other postretirement benefit costs (credits):
 
Successor
Predecessor
 
Successor
Predecessor
 
Three Months Ended June 30, 2017
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2017
Six Months Ended June 30, 2016
(In thousands)
 
 
 
 
 
Service cost
$
171

$
105

 
$
341

$
265

Interest cost
1,059

1,138

 
2,117

2,272

Curtailments

(970
)
 

(970
)
Amortization of prior service credits

(2,672
)
 

(5,345
)
Amortization of other actuarial losses (gains)

(566
)
 

(1,132
)
Net benefit cost (credit)
$
1,230

$
(2,965
)
 
$
2,458

$
(4,910
)

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 June 30, 2017 and December 31, 2016, the Company had accrued $0.2 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 retirement 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 and six months ended June 30, 2017, and the Predecessor period, the three and six months ended June 30, 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.
 

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Table of Contents

 
 
PRB
 
MET
 
Other
Thermal
 
Corporate,
Other and
Eliminations
 
Consolidated
Successor Periods
 
(in thousands)
Three Months Ended June 30, 2017
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
230,579

 
$
227,649

 
$
91,639

 
$
(1
)
 
$
549,866

Adjusted EBITDAR
 
31,789

 
62,552

 
26,910

 
(25,883
)
 
95,368

Depreciation, depletion and amortization
 
8,574

 
18,385

 
3,285

 
457

 
30,701

Accretion on asset retirement obligation
 
5,040

 
528

 
540

 
1,515

 
7,623

Capital expenditures
 
822

 
6,825

 
1,899

 
1,426

 
10,972

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
504,007

 
$
453,232

 
$
193,545

 
$
57

 
$
1,150,841

Adjusted EBITDAR
 
79,794

 
130,862

 
54,152

 
(48,942
)
 
215,866

Depreciation, depletion and amortization
 
18,085

 
37,149

 
6,485

 
903

 
62,622

Accretion on asset retirement obligation
 
10,080

 
1,057

 
1,080

 
3,029

 
15,246

Capital expenditures
 
950

 
11,436

 
2,640

 
1,896

 
16,922

 
 
 
 
 
 
 
 
 
 
 
Predecessor Periods
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 

 
 

 
 

 
 

Revenues
 
$
207,735

 
$
147,499

 
$
60,032

 
$
5,032

 
$
420,298

Adjusted EBITDAR
 
21,578

 
(3,593
)
 
(408
)
 
(17,887
)
 
(310
)
Depreciation, depletion and amortization
 
30,145

 
17,330

 
9,907

 
1,077

 
58,459

Accretion on asset retirement obligation
 
5,647

 
588

 
663

 
1,152

 
8,050

Capital expenditures
 
489

 
6,726

 
949

 
60,047

 
68,211

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
430,857

 
$
284,083

 
$
116,164

 
$
17,300

 
$
848,404

Adjusted EBITDAR
 
34,306

 
2,759

 
2,743

 
(41,838
)
 
(2,030
)
Depreciation, depletion and amortization
 
62,905

 
36,675

 
19,798

 
2,780

 
122,158

Accretion on asset retirement obligation
 
11,293

 
1,177

 
1,325

 
2,561

 
16,356

Capital expenditures
 
499