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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

or

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

Graphic

Arch Resources, 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

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock, $.01 par value

ARCH

New York Stock Exchange

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   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 Exchange Act.

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

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   No 

At October 19, 2020 there were 15,147,289 shares of the registrant’s common stock outstanding.

Table of Contents

TABLE OF CONTENTS

Page

Part I FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

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

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

49

Item 4. Controls and Procedures

50

Part II OTHER INFORMATION

51

Item 1. Legal Proceedings

51

Item 1A. Risk Factors

52

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

52

Item 4. Mine Safety Disclosures

53

Item 6. Exhibits

54

Signatures

59

2

Table of Contents

Part I

FINANCIAL INFORMATION

Item 1.Financial Statements.

Arch Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

(Unaudited)

(Unaudited)

Revenues

$

382,261

$

619,467

$

1,107,014

$

1,744,872

Costs, expenses and other operating

 

 

  

 

 

  

 

Cost of sales (exclusive of items shown separately below)

 

345,539

 

491,004

 

1,036,886

 

1,380,563

 

Depreciation, depletion and amortization

 

32,630

 

30,249

 

94,105

 

82,122

 

Accretion on asset retirement obligations

 

4,947

 

5,137

 

14,939

 

15,411

 

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

 

2,649

 

1,530

 

3,263

 

(19,851)

 

Selling, general and administrative expenses

 

21,541

 

24,566

 

64,024

 

73,864

 

Costs related to proposed joint venture with Peabody Energy

 

4,423

 

3,754

 

15,938

 

6,772

 

Asset impairment

163,088

163,088

Severance costs related to voluntary separation plan

 

18

 

 

13,283

 

 

Gain on property insurance recovery related to Mountain Laurel longwall

 

 

 

(23,518)

 

 

(Gain) loss on divestitures

 

 

 

(1,369)

 

4,304

 

Preference Rights Lease Application settlement income

(39,000)

(39,000)

Other operating income, net

 

(4,894)

 

(4,254)

 

(16,768)

 

(9,143)

 

 

569,941

 

512,986

 

1,363,871

 

1,495,042

 

Income (loss) from operations

 

(187,680)

 

106,481

 

(256,857)

 

249,830

 

Interest expense, net

 

  

 

  

 

  

 

  

 

Interest expense

 

(2,989)

 

(4,049)

 

(9,900)

 

(12,856)

 

Interest and investment income

 

459

 

3,709

 

3,511

 

7,940

 

 

(2,530)

 

(340)

 

(6,389)

 

(4,916)

 

Income (loss) before nonoperating expenses

 

(190,210)

 

106,141

 

(263,246)

 

244,914

 

Nonoperating (expenses) income

 

  

 

  

 

  

 

  

 

Non-service related pension and postretirement benefit (costs) credits

 

(878)

 

975

 

(3,076)

 

(2,127)

 

Reorganization items, net

 

 

 

26

 

71

 

 

(878)

 

975

 

(3,050)

 

(2,056)

 

Income (loss) before income taxes

 

(191,088)

 

107,116

 

(266,296)

 

242,858

 

Provision for (benefit from) income taxes

 

379

 

347

 

(206)

 

508

 

Net income (loss)

$

(191,467)

$

106,769

$

(266,090)

$

242,350

Net income (loss) per common share

 

  

 

  

 

  

 

  

Basic earnings (loss) per share

$

(12.64)

$

6.79

$

(17.57)

$

14.61

Diluted earnings (loss) per share

$

(12.64)

$

6.34

$

(17.57)

$

13.66

Weighted average shares outstanding

 

  

 

  

 

  

 

  

Basic weighted average shares outstanding

 

15,147

 

15,736

 

15,144

 

16,591

Diluted weighted average shares outstanding

 

15,147

 

16,852

 

15,144

 

17,744

Dividends declared per common share

$

$

0.45

$

0.50

$

1.35

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

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Arch Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

(Unaudited)

(Unaudited)

Net income (loss)

$

(191,467)

$

106,769

$

(266,090)

$

242,350

Derivative instruments

 

  

 

  

 

  

 

  

 

Comprehensive income (loss) before tax

 

476

 

(2,360)

 

(1,830)

 

(2,421)

 

Income tax benefit (provision)

 

 

 

 

 

 

476

 

(2,360)

 

(1,830)

 

(2,421)

 

Pension, postretirement and other post-employment benefits

 

  

 

  

 

  

 

  

Comprehensive income (loss) before tax

 

4,164

 

(4,019)

 

(12,439)

 

(1,117)

 

Income tax benefit (provision)

 

 

 

 

 

 

4,164

 

(4,019)

 

(12,439)

 

(1,117)

 

Available-for-sale securities

 

  

 

  

 

  

 

  

 

Comprehensive income (loss) before tax

 

(255)

 

(98)

 

(189)

 

553

 

Income tax benefit (provision)

 

 

 

 

 

 

(255)

 

(98)

 

(189)

 

553

 

Total other comprehensive income (loss)

 

4,385

 

(6,477)

 

(14,458)

 

(2,985)

 

Total comprehensive income (loss)

$

(187,082)

$

100,292

$

(280,548)

$

239,365

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

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Arch Resources, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

    

September 30, 2020

    

December 31, 2019

(Unaudited)

Assets

Current assets

 

  

 

  

Cash and cash equivalents

$

156,655

$

153,020

Short-term investments

 

63,128

 

135,667

Restricted cash

 

13,919

 

Trade accounts receivable (net of $1,303 allowance at September 30, 2020)

 

127,292

 

168,125

Other receivables

 

2,880

 

21,143

Inventories

 

143,396

 

130,898

Other current assets

 

55,712

 

97,894

Total current assets

 

562,982

 

706,747

Property, plant and equipment, net

 

964,472

 

984,509

Other assets

 

  

 

  

Equity investments

 

70,275

 

105,588

Other noncurrent assets

 

55,608

 

70,912

Total other assets

 

125,883

 

176,500

Total assets

$

1,653,337

$

1,867,756

Liabilities and Stockholders' Equity

 

  

 

  

Current Liabilities

 

  

 

  

Accounts payable

$

99,110

$

133,060

Accrued expenses and other current liabilities

 

141,021

 

157,167

Current maturities of debt

 

25,987

 

20,753

Total current liabilities

 

266,118

 

310,980

Long-term debt

 

368,278

 

290,066

Asset retirement obligations

 

239,614

 

242,432

Accrued pension benefits

 

6,108

 

5,476

Accrued postretirement benefits other than pension

 

85,642

 

80,567

Accrued workers’ compensation

 

219,851

 

215,599

Other noncurrent liabilities

 

102,080

 

82,100

Total liabilities

 

1,287,691

 

1,227,220

Stockholders' equity

 

  

 

  

Common stock, $0.01 par value, authorized 300,000 shares, issued 25,235 and 25,220 shares at September 30, 2020 and December 31, 2019, respectively

 

252

 

252

Paid-in capital

 

744,112

 

730,551

Retained earnings

 

457,432

 

731,425

Treasury stock, 10,088 shares at September 30, 2020 and December 31, 2019, respectively, at cost

 

(827,381)

 

(827,381)

Accumulated other comprehensive income (loss)

 

(8,769)

 

5,689

Total stockholders’ equity

 

365,646

 

640,536

Total liabilities and stockholders’ equity

$

1,653,337

$

1,867,756

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

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Arch Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Nine Months Ended September 30, 

    

2020

    

2019

(Unaudited)

Operating activities

 

  

 

  

Net income (loss)

$

(266,090)

$

242,350

Adjustments to reconcile to cash from operating activities:

 

  

 

  

Depreciation, depletion and amortization

 

94,105

 

82,122

Accretion on asset retirement obligations

 

14,939

 

15,411

Deferred income taxes

 

14,227

 

13,680

Employee stock-based compensation expense

 

13,907

 

17,305

Amortization relating to financing activities

 

3,189

 

2,757

Gain on property insurance recovery related to Mountain Laurel longwall

 

(23,518)

 

Gains on disposals and divestitures, net

 

(3,460)

 

(818)

Asset impairment

 

163,088

 

Preference Rights Lease Application settlement income

(39,000)

Changes in:

 

  

 

Receivables

 

47,416

 

(4,622)

Inventories

 

(12,499)

 

(46,073)

Accounts payable, accrued expenses and other current liabilities

 

(50,474)

 

1,569

Income taxes, net

22,855

32,440

Other

 

38,229

 

16,932

Cash provided by operating activities

 

55,914

 

334,053

Investing activities

 

  

 

  

Capital expenditures

 

(205,661)

 

(137,396)

Minimum royalty payments

 

(1,186)

 

(1,187)

Proceeds from disposals and divestitures

 

856

 

1,799

Purchases of short-term investments

 

(76,593)

 

(158,578)

Proceeds from sales of short-term investments

 

148,670

 

146,170

Investments in and advances to affiliates, net

 

(1,549)

 

(4,810)

Proceeds from property insurance recovery related to Mountain Laurel longwall

23,518

Cash used in investing activities

 

(111,945)

 

(154,002)

Financing activities

 

  

 

  

Payments on term loan due 2024

 

(2,250)

 

(2,250)

Proceeds from equipment financing

53,611

Proceeds from tax exempt bonds

53,090

Net payments on other debt

 

(19,347)

 

(12,077)

Debt financing costs

 

(3,528)

 

Dividends paid

 

(7,645)

 

(22,264)

Purchases of treasury stock

 

 

(232,999)

Payments for taxes related to net share settlement of equity awards

 

(346)

 

Other

 

 

30

Cash provided by (used in) financing activities

 

73,585

 

(269,560)

Increase (decrease) in cash and cash equivalents, including restricted cash

 

17,554

 

(89,509)

Cash and cash equivalents, including restricted cash, beginning of period

 

153,020

 

264,937

Cash and cash equivalents, including restricted cash, end of period

$

170,574

$

175,428

Cash and cash equivalents, including restricted cash, end of period

Cash and cash equivalents

$

156,655

$

175,428

Restricted cash

13,919

$

170,574

$

175,428

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

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Arch Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

    

    

    

    

    

Treasury

    

Accumulated Other

    

Common

Paid-In

Stock at

Comprehensive

Stock

Capital

Retained Earnings

Cost

Income (loss)

Total

(In thousands)

Balances, January 1, 2020

 

$

252

 

$

730,551

$

731,425

$

(827,381)

$

5,689

$

640,536

Dividends on common shares ($0.50/share)

 

 

 

(7,834)

 

 

 

(7,834)

Total comprehensive income (loss)

 

 

 

(25,299)

 

 

(17,403)

 

(42,702)

Employee stock-based compensation

4,045

4,045

Common stock withheld related to net share settlement of equity awards

(281)

(281)

Balances at March 31, 2020

$

252

$

734,315

$

698,292

$

(827,381)

$

(11,714)

$

593,764

Total comprehensive income (loss)

 

 

 

(49,324)

 

 

(1,440)

 

(50,764)

Employee stock-based compensation

 

 

4,891

 

 

 

 

4,891

Common stock withheld related to net share settlement of equity awards

 

 

(50)

 

 

 

 

(50)

Dividend Equivalents earned on RSU grants

(59)

(59)

Balances at June 30, 2020

$

252

$

739,156

$

648,909

$

(827,381)

$

(13,154)

$

547,782

Total comprehensive income (loss)

 

 

 

(191,467)

 

 

4,385

(187,082)

Employee stock-based compensation

 

 

4,971

 

 

 

4,971

Common stock withheld related to net share settlement of equity awards

 

 

(15)

 

 

 

(15)

Dividend Equivalents earned on RSU grants

 

 

(10)

 

 

 

(10)

Balances at September 30, 2020

$

252

$

744,112

$

457,432

$

(827,381)

$

(8,769)

$

365,646

Arch Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

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Treasury

    

Accumulated Other

    

Common

Paid-In

Stock at

Comprehensive

Stock

Capital

Retained Earnings

Cost

Income

Total

(In thousands)

Balances, January 1, 2019

    

$

250

    

$

717,492

    

$

527,666

    

$

(583,883)

    

$

43,296

    

$

704,821

Dividends on common shares ($0.45/share)

 

 

 

(8,111)

 

 

 

(8,111)

Total comprehensive income

 

 

 

72,741

 

 

3,094

 

75,835

Employee stock-based compensation

5,651

5,651

Purchase of 872,317 shares of common stock under share repurchase program

 

 

 

 

(78,249)

 

 

(78,249)

Balances at March 31, 2019

$

250

$

723,143

$

592,296

$

(662,132)

$

46,390

$

699,947

           

                            

                         

Dividends on common shares ($0.45/share)

 

 

 

(7,696)

 

 

 

(7,696)

Total comprehensive income

 

 

 

62,840

 

 

398

 

63,238

Employee stock-based compensation

 

 

5,822

 

 

 

 

5,822

Purchase of 697,255 shares of common stock under share repurchase program

 

 

 

 

(63,392)

 

 

(63,392)

Warrants exercised

 

 

31

 

 

 

 

31

Balances at June 30, 2019

$

250

$

728,996

$

647,440

$

(725,524)

$

46,788

$

697,950

Dividends on common shares ($0.45/share)

 

 

 

(7,281)

 

 

(7,281)

Total comprehensive income

 

 

 

106,769

 

 

(6,477)

100,292

Employee stock-based compensation

 

 

5,833

 

 

 

 

5,833

Purchase of 1,169,597 shares of common stock under share repurchase program

 

 

 

 

(91,358)

 

 

(91,358)

Balances at September 30, 2019

$

250

$

734,829

$

746,928

$

(816,882)

$

40,311

$

705,436

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Arch Resources, 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 Resources, Inc. (“Arch Resources”) and its subsidiaries (“Arch” or the “Company”). Unless the context indicates otherwise, the terms “Arch” and the “Company” are used interchangeably in this Quarterly Report on Form 10-Q. The Company’s primary business is the production of metallurgical and thermal coal from surface and underground mines located throughout the United States, for sale to steel producers, utility companies, industrial accounts both in the United States and around the world. The Company currently operates mining complexes in West Virginia, Illinois, Wyoming and Colorado. All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020. 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, 2019 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

Effective May 15, 2020, Arch Coal, Inc. announced that its name changed to Arch Resources, Inc.

2. Accounting Policies

Recently Adopted Accounting Guidance

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05. The standard modifies the measurement approach for credit losses on financial instruments, including trade receivables, from an incurred loss method to a current expected credit loss method, otherwise known as “CECL.” The standard requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions and a forecast that is supportable. The Company adopted the standard in the first quarter of 2020, with minimal impact to the Company’s financial results.

As part of the adoption, the Company reviewed its portfolio of available-for-sale debt securities in an unrealized loss position, and assessed whether it intends to sell, or it is more likely than not that it will be required to sell before recovery of its amortized cost basis. The Company determined that it currently does not intend to sell these securities before recovery of their amortized cost basis. Additionally, the Company evaluated whether the decline in fair value has resulted from credit losses or other factors by considering the extent to which the fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the Company compares the present value of the cash flows expected to be collected against the amortized cost basis. A credit loss is recorded if the present value of the cash flows is less than the amortized cost basis, limited by the amount that the fair value is less than the amortized cost basis. Upon adoption, the Company did not record an allowance for credit losses on its available-for-sale debt securities.

Additionally, the Company reviewed its open trade receivables arising from contractual coal sales. As part of its analysis, the Company performs periodic credit reviews of all active customers, reviews all trade receivables greater than 90 days past due, calculates historical loss rates and reviews current payment trends of all customers.

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Recent Accounting Guidance Issued Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU is effective for public companies for fiscal years beginning after December 15, 2020, and interim periods therein with early adoption permitted. The Company is reviewing the provisions of the standard but does not expect a significant impact to the Company's financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the optional expedients provided by the new standard.

3. Joint Venture with Peabody Energy

On June 18, 2019, Arch Coal, Inc. (now Arch Resources) entered into a definitive implementation agreement (the “Implementation Agreement”) with Peabody Energy Corporation (“Peabody”), to establish a joint venture that would have combined the respective Powder River Basin and Colorado mining operations of Arch Resources and Peabody. Pursuant to the terms of the Implementation Agreement, Arch Resources would have held a 33.5% economic interest, and Peabody would have held a 66.5% economic interest in the joint venture.

On February 26, 2020, the Federal Trade Commission (“FTC”) filed an administrative complaint challenging the proposed joint venture alleging the transaction will eliminate competition between Arch Resources and Peabody, the two major competitors in the market for thermal coal in the Southern Powder River Basin and the two largest coal-mining companies in the United States. The FTC filed a temporary restraining order and preliminary injunction in the U.S. District Court for the Eastern District of Missouri, to maintain the status quo pending an administrative trial on the merits.

Between July 14 and July 23, 2020, the U.S. District Court conducted an evidentiary hearing, during which both sides further presented their evidence and arguments. On September 29, 2020, the U.S. District Court upheld the FTC’s decision to block the joint venture. Subsequently, the Company and Peabody jointly terminated the joint venture.

The Company has incurred expenses of $4.4 million and $15.9 million for the three and nine months ended September 30, 2020, respectively, associated with the regulatory approval process related to the joint venture. Costs of $3.8 million and $6.8 million were incurred for the three and nine months ended September 30, 2019, respectively.

4. Gain on Property Insurance Recovery Related to Mountain Laurel Longwall

The Company recorded a $23.5 million gain related to a property insurance recovery on the longwall shields at its Mountain Laurel operation during the nine months ended September 30, 2020. As a result of geologic conditions in the final longwall panel, Mountain Laurel was unable to recover 123 of the longwall system’s 176 hydraulic shields. All of the cash associated with the insurance recovery was received by the end of the second quarter of 2020.

5. Severance Costs Related To Voluntary Separation Plan

The Company recorded $13.3 million of employee severance expense related to a voluntary separation plan during the nine months ended September 30, 2020. During the first and second quarters of 2020, 53 members of the corporate staff and 201 employees from the Company’s thermal operations accepted the voluntary separation package.

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6. Divestitures

During the second quarter of 2020, various Dal-Tex and Briar Branch properties in West Virginia were sold to Condor Holdings, LLC. No consideration was received for the sale and a gain of $1.4 million was recorded representing the net liabilities sold.

On September 14, 2017, the Company sold Lone Mountain Processing, LLC and two idled mining companies, Cumberland River Coal LLC and Powell Mountain Energy LLC to Revelation Energy LLC, and recorded a gain on the transaction in that year of $21.3 million. Under the terms of the purchase agreement, Revelation assumed certain traumatic workers compensation claims and pneumoconiosis (occupational disease) benefits. On July 1, 2019, Blackjewel LLC and four affiliates, including Revelation Energy LLC filed for Chapter 11 bankruptcy. As a result of the bankruptcy, the Company recorded a $4.3 million charge for these claims as of September 30, 2019.

7. Preference Rights Lease Application Settlement Income

The Company recorded a $39 million gain during the third quarter of 2019 related to a settlement with the United States Department of Interior over a long-standing dispute, dating back to the 1970’s, on the valuation and disposition of Preference Rights Lease Applications that Arch controlled in northwestern New Mexico with a joint venture partner. As part of the settlement, Arch received $67.0 million in the form of royalty credits on its federal coal leases which will be used to settle 50% of the Company’s monthly royalty obligations. The Company expects to realize the royalty credits beginning in September 2019 through the next 18-24 months depending on market conditions. Additionally, as part of the settlement, the Company made a one-time payment of $27.0 million during October 2019 to its’ partner in the venture for its ownership interest in the underlying mineral reserves, as well as paid $1.0 million in closing fees.

As of September 30, 2020, the Company realized $8.7 million and $25.8 million towards its royalty obligations for the three months and nine months ended September 30, 2020. The Company realized a credit of $5 million towards its royalty obligations during the quarter ended September 30, 2019. The remaining receivable balance outstanding at September 30, 2020 is $27.8 million which is expected to be received over the next three quarters.

8. Asset Impairment

The following table summarizes the amounts reflected on the line “Asset impairment” in the Condensed Consolidated Statements of Operations:

    

September 30, 

Description

2020

(In thousands)

Coal lands and mineral rights

$

33,197

Plant and equipment

 

43,197

Deferred development

50,527

Equity Investment

36,167

$

163,088

The Company’s thermal coal segments have experienced reduced demand as a result of sustained low natural gas pricing, reduced utilization and retirement of coal-fired power plants, the increased use of renewable energy sources, and the impact of COVID-19. The reduced demand has led to lower production levels, higher unit costs, and lower realized prices, which have contributed to operating losses at certain of the mine complexes. Further, on September 29, 2020 the U.S. District Court upheld the FTC’s decision to block the Company’s proposed joint venture. These conditions have resulted in changes to the Company’s expectations for projected future volume levels and the overall longevity of the mines. During the third quarter of 2020, the Company determined that these conditions represented indicators of impairment with respect to certain of its long-lived assets or asset groups. As a result, the Company recorded impairment charges during the three and nine months ended September 30, 2020 of $51.8 million related to the Coal Creek Mine within the Powder River Basin Mining segment, $33.5 million related to the Viper Mine within the Other Thermal Segment, $41.6 million related to the West Elk Mine within the Other Thermal segment and $36.2 million related to the Company’s equity method investment in Knight Hawk Holdings, LLC. The impairment charges were based upon

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estimated discounted cash flows that were based on estimates of future sales volumes, coal prices for unpriced volumes, production costs and a risk-adjusted cost of capital. These estimates generally constitute unobservable Level 3 inputs under the fair value hierarchy.