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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to .
Commission file number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification Number) |
| ||
(Address of principal executive offices) | (Zip code) | |
Registrant’s telephone number, including area code: ( (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 | ||
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.
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).
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.
☒ | 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
At July 21, 2022 there were
TABLE OF CONTENTS
2
Part I
FINANCIAL INFORMATION
Item 1.Financial Statements.
Arch Resources, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(in thousands, except per share data)
|
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Unaudited) | (Unaudited) | |||||||||||
Revenues | $ | | $ | | $ | | $ | | ||||
Costs, expenses and other operating |
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Cost of sales (exclusive of items shown separately below) |
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Depreciation, depletion and amortization |
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Accretion on asset retirement obligations |
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Change in fair value of coal derivatives and coal trading activities, net |
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Selling, general and administrative expenses |
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Other operating expense (income), net |
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| ( |
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| ( | ||||
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Income from operations |
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Interest expense, net |
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Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Interest and investment income |
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| ( |
| ( |
| ( |
| ( | |||||
Income before nonoperating expenses |
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Nonoperating expenses |
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Non-service related pension and postretirement benefit costs |
| ( |
| ( |
| ( |
| ( | ||||
Net loss resulting from early retirement of debt | ( | — | ( | — | ||||||||
| ( |
| ( |
| ( |
| ( | |||||
Income before income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | $ | | $ | | ||||
Net income per common share |
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Basic earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding |
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Basic weighted average shares outstanding |
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Diluted weighted average shares outstanding |
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Dividends declared per common share | $ | | $ | — | $ | | $ | — | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Arch Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
|
| |||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Unaudited) | (Unaudited) | |||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Derivative instruments |
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Comprehensive income before tax |
| — |
| |
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Income tax benefit (provision) |
| — |
| — |
| — |
| — | ||||
| — |
| |
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Pension, postretirement and other post-employment benefits |
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Comprehensive income (loss) before tax |
| ( |
| |
| ( |
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Income tax benefit (provision) |
| — |
| — |
| — |
| — | ||||
| ( |
| |
| ( |
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Available-for-sale securities |
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Comprehensive income (loss) before tax |
| — |
| ( |
| |
| | ||||
Income tax benefit (provision) |
| — |
| — |
| — |
| — | ||||
| — |
| ( |
| |
| | |||||
Total other comprehensive income (loss) |
| ( |
| |
| ( |
| | ||||
Total comprehensive income | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Arch Resources, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
| June 30, 2022 |
| December 31, 2021 | |||
Assets | (Unaudited) | |||||
Current assets |
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Cash and cash equivalents | $ | | $ | | ||
Short-term investments |
| — |
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Restricted cash |
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Trade accounts receivable (net of $ |
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Other receivables |
| |
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Inventories |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Other assets |
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Equity investments |
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Fund for asset retirement obligations | | | ||||
Other noncurrent assets |
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Total other assets |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
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Current maturities of debt |
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Total current liabilities |
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Long-term debt |
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Asset retirement obligations |
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Accrued pension benefits |
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Accrued postretirement benefits other than pension |
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Accrued workers’ compensation |
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Other noncurrent liabilities |
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Total liabilities |
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Stockholders' equity |
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Common stock, $ |
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Paid-in capital |
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Retained earnings |
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Treasury stock, |
| ( |
| ( | ||
Accumulated other comprehensive income |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Arch Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Operating activities |
| (Unaudited) | ||||
Net income | $ | | $ | | ||
Adjustments to reconcile to cash from operating activities: |
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Depreciation, depletion and amortization |
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Accretion on asset retirement obligations |
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Deferred income taxes |
| — |
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Employee stock-based compensation expense |
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Amortization relating to financing activities |
| |
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Gain on disposals and divestitures, net |
| ( |
| ( | ||
Reclamation work completed |
| ( |
| ( | ||
Contribution to fund for asset retirement obligations | ( | — | ||||
Changes in: |
|
| ||||
Receivables |
| ( |
| ( | ||
Inventories |
| ( |
| ( | ||
Accounts payable, accrued expenses and other current liabilities |
| |
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Income taxes, net |
| |
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Coal derivative assets and liabilities, including margin account |
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Other |
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Cash provided by operating activities |
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Investing activities |
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Capital expenditures |
| ( |
| ( | ||
Minimum royalty payments |
| ( |
| ( | ||
Proceeds from disposals and divestitures |
| |
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Proceeds from sales of short-term investments |
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Investments in and advances to affiliates, net |
| ( |
| ( | ||
Cash used in investing activities |
| ( |
| ( | ||
Financing activities |
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Payments on term loan due 2024 |
| ( |
| ( | ||
Proceeds from tax exempt bonds | — | | ||||
Payments on convertible debt |
| ( |
| — | ||
Net payments on other debt | ( | ( | ||||
Debt financing costs |
| — |
| ( | ||
Dividends paid |
| ( |
| — | ||
Payments for taxes related to net share settlement of equity awards |
| ( |
| ( | ||
Proceeds from warrants exercised | | — | ||||
Cash (used in) provided by financing activities |
| ( |
| | ||
Decrease in cash and cash equivalents, including restricted cash |
| ( |
| ( | ||
Cash and cash equivalents, including restricted cash, beginning of period | $ | | $ | | ||
Cash and cash equivalents, including restricted cash, end of period | $ | | $ | | ||
Cash and cash equivalents, including restricted cash, end of period | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted Cash | | | ||||
$ | | $ | | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
Arch Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
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| Treasury |
| Accumulated Other |
| ||||||||||
Common | Paid-In | Retained | Stock at | Comprehensive | ||||||||||||||
Stock | Capital | Earnings | Cost | Income | Total | |||||||||||||
(In thousands) | ||||||||||||||||||
Balances at January 1, 2022 |
| $ | |
| $ | | $ | | $ | ( | $ | | $ | | ||||
Cumulative effect of accounting change on convertible debt | — | ( | | — | — | ( | ||||||||||||
Dividends on common shares ($ |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Dividend Equivalents earned on RSU grants | — | — | ( | — | — | ( | ||||||||||||
Total comprehensive income |
| — |
| — |
| |
| — |
| |
| | ||||||
Employee stock-based compensation | — | | — | — | — | | ||||||||||||
Issuance of | | — | — | — | — | | ||||||||||||
Common stock withheld related to net share settlement of equity awards | — | ( | — | — | — | ( | ||||||||||||
Issuance of | — | | — | — | — | | ||||||||||||
Balances at March 31, 2022 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Dividends on common shares ($ |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Dividend equivalents earned on RSU grants | — | — | ( | — | — | ( | ||||||||||||
Employee stock-based compensation | — | | — | — | — | | ||||||||||||
Common stock withheld related to net share settlement of equity awards |
| — |
| ( |
| — |
| — |
| — |
| ( | ||||||
Total comprehensive income (loss) |
| — |
| — |
| |
| — |
| ( |
| | ||||||
Issuance of | | ( | — | — | — | ( | ||||||||||||
Issuance of |
| |
| |
| — |
| — |
| — |
| | ||||||
Balances at June 30, 2022 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
Arch Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
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| Treasury |
| Accumulated Other |
| ||||||||||
Common | Paid-In | Retained | Stock at | Comprehensive | ||||||||||||||
Stock | Capital | Earnings | Cost | (loss) | Total | |||||||||||||
(In thousands) | ||||||||||||||||||
Balances at January 1, 2021 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
Total comprehensive income (loss) |
| — |
| — |
| ( |
| — |
| |
| ( | ||||||
Employee stock-based compensation |
| — |
| |
| |
| — |
| — |
| | ||||||
Issuance of | | — | — | — | — | | ||||||||||||
Common stock withheld related to net share settlement of equity awards |
| — |
| ( |
| — |
| — |
| — |
| ( | ||||||
Balances at March 31, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
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Total comprehensive income |
| — |
| — |
| |
| — |
| |
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Employee stock-based compensation |
| — |
| |
| |
| — |
| — |
| | ||||||
Balances at June 30, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
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 underground and surface mines located throughout the United States, for sale to steel producers, utility companies, and industrial accounts both in the United States and around the world. The Company currently operates mining complexes in West Virginia, 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, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022. 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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission.
2. Accounting Policies
Recently Adopted Accounting Guidance
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. ASU 2020-06 reduces the number of accounting models for convertible debt instruments. Additionally, ASU 2020-06 amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The if-converted method assumes the conversion of convertible instruments occurs at the beginning of the reporting period and diluted weighted average shares outstanding includes the common shares issuable upon conversion of the convertible instruments. ASU 2020-06 is effective for public business entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted ASU 2020-06 on January 1, 2022 under the modified retrospective approach.
Upon issuance of the Company's $
Additionally, upon adoption of ASU 2020-06, the treasury stock method utilized by the Company to calculate earnings per share through December 31, 2021 is no longer permitted. Accordingly, the Company has transitioned to the if-converted method utilizing the modified retrospective approach. For the three and six months ended June 30, 2022, under the previous treasury stock method, the diluted earnings per share would have been approximately $
9
Recent Accounting Guidance Issued Not Yet Effective
There are no new pronouncements issued but not yet effective expected to have a material impact on the Company’s financial position, results of operations, or liquidity.
10
3. Accumulated Other Comprehensive Income (Loss)
The following items are included in accumulated other comprehensive income (loss) (“AOCI”), net of tax:
|
| Pension, |
|
| ||||||||
Postretirement | Accumulated | |||||||||||
and Other Post- | Other | |||||||||||
Derivative | Employment | Available-for- | Comprehensive | |||||||||
Instruments | Benefits | Sale Securities | Income (loss) | |||||||||
| (In thousands) | |||||||||||
Balances at December 31, 2021 | $ | ( | $ | | $ | ( |
| $ | | |||
Unrealized gains (losses) |
| |
| ( |
| — |
|
| ( | |||
Amounts reclassified from accumulated other comprehensive income (loss) |
| |
| ( |
| |
|
| | |||
Balances at June 30, 2022 | $ | — | $ | | $ | — |
| $ | | |||
The following amounts were reclassified out of AOCI:
Three Months Ended June 30, | Six Months Ended June 30, |
|
| Line Item in the | |||||||||||
Details About AOCI Components |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| Income Statements | ||||
(In thousands) | |||||||||||||||
Interest rate hedges |
| — |
| ( |
| ( |
| ( | Interest expense | ||||||
Interest rate hedges (ineffective portion) | ( | — |
| Net loss resulting from early retirement of debt | |||||||||||
|
|
|
| |
| Provision for income taxes | |||||||||
$ | — | $ | ( | $ | ( | $ | ( |
| Net of tax | ||||||
Pension, postretirement and other post-employment benefits | |||||||||||||||
Amortization of actuarial gains (losses), net 1 | $ | | $ | ( | $ | | $ | ( |
| Non-service related pension and postretirement benefit (costs) credits | |||||
Amortization of prior service credits | | | | | Non-service related pension and postretirement benefit (costs) credits | ||||||||||
Pension settlement | |
| | |
| |
| Non-service related pension and postretirement benefit (costs) credits | |||||||
| Total before tax | ||||||||||||||
|
|
| |
|
| Provision for income taxes | |||||||||
$ | | $ | | $ | | $ | ( |
| Net of tax | ||||||
Available-for-sale securities 2 | $ | — | $ | | $ | ( | $ | |
| Interest and investment income | |||||
| |
| |
| |
| |
| Provision for income taxes | ||||||
$ | — | $ | | $ | ( | $ | |
| Net of tax | ||||||
1 Production-related benefits and workers’ compensation costs are included in costs of sales.
2 The gains and losses on sales of available-for-sale-securities are determined on a specific identification basis.
11
4. Inventories
Inventories consist of the following:
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
(In thousands) | ||||||
Coal | $ | | $ | | ||
Repair parts and supplies |
| |
| | ||
$ | | $ | | |||
The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $
5. 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 are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income. During the six months ended June 30, 2022, the Company liquidated its remaining investments.
The Company’s investments in available-for-sale marketable securities are as follows at December 31, 2021:
December 31, 2021 | |||||||||||||||
Gross | Allowance | ||||||||||||||
Unrealized | for - Credit | Fair | |||||||||||||
| Cost Basis |
| Gains |
| Losses | Losses |
| Value | |||||||
| (In thousands) | ||||||||||||||
Available-for-sale: | |||||||||||||||
U.S. government and agency securities | $ | | $ | — | $ | ( | $ | — | $ | | |||||
Corporate notes and bonds |
| |
| — |
| ( |
| — |
| | |||||
Total Investments | $ | | $ | — | $ | ( | $ | — | $ | | |||||
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.
6. 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
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
12
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, 2022, the Company held derivatives for risk management purposes that are expected to settle in the following years:
(Tons in thousands) |
| 2022 |
Coal sales |
| |
Coal purchases |
| — |
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, 2022 |
| December 31, 2021 |
| ||||||||||||||
Fair Value of Derivatives |
| Asset | Liability | Asset | Liability |
| ||||||||||||
(In thousands) | Derivative | Derivative | Derivative | Derivative | ||||||||||||||
Derivatives Not Designated as Hedging Instruments |
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| ||||||
Heating oil -- diesel purchases |
| |
| — |
|
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| |
| |
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| ||||||
Coal -- risk management |
| — |
| ( |
|
|
| |
| ( |
|
| ||||||
Total | $ | | $ | ( |
|
| $ | | $ | ( |
|
| ||||||
Total derivatives | $ | | $ | ( |
|
| $ | | $ | ( |
|
| ||||||
Effect of counterparty netting |
| — |
| — |
|
|
| ( |
| |
|
| ||||||
Net derivatives as classified in the balance sheets | $ | | $ | ( | $ | ( | $ | | $ | ( | $ | | ||||||
|
|
| June 30, |
| December 31, | |||
2022 | 2021 | |||||||
Net derivatives as reflected on the balance sheets (in thousands) |
|
|
|
|
|
| ||
Heating Oil and coal |
| Other current assets | $ | | $ | | ||
Coal |
| Accrued expenses and other current liabilities |
| ( |
| ( | ||
$ | ( | $ | | |||||
At June 30, 2022, the current open derivative positions are non-margined.
13
The effects of derivatives on measures of financial performance are as follows:
Derivatives Not Designated as Hedging Instruments (in thousands)
Three and Six Months Ended June 30,
Gain (Loss) Recognized | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Coal risk management — unrealized | (1) | $ | ( | $ | ( | ( | $ | ( | |||||
Coal risk management— realized | (2) | $ | ( | $ | ( | ( | $ | ( | |||||
Heating oil — diesel purchases | (2) | $ | | $ | — | | $ | — | |||||
Location in income statements:
| (1) | — Change in fair value of coal derivatives and coal trading activities, net |
| (2) | — Other operating expense (income), net |
At June 30, 2022 and December 31, 2021, the Company did not have any derivative contracts designated as hedging instruments, respectively.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
| June 30, |
| December 31, | |||
2022 | 2021 | |||||
(In thousands) | ||||||
Payroll and employee benefits | $ | | $ | | ||
Taxes other than income taxes |
| |
| | ||
Interest |
| |
| | ||
Workers’ compensation |
| |
| | ||
Asset retirement obligations |
| |
| | ||
Coal derivatives | | | ||||
Other |
| |
| | ||
$ | | $ | | |||
8. Debt and Financing Arrangements
| June 30, |
| December 31, | |||
2022 | 2021 | |||||
| (In thousands) | |||||
Term loan due 2024 ($ | $ | | $ | | ||
Tax Exempt Bonds ($ | | | ||||
Convertible Debt ($ | | | ||||
Other |
| |
| | ||
Debt issuance costs |
| ( |
| ( | ||
| | |||||
Less: current maturities of debt |
| |
| | ||
Long-term debt | $ | | $ | | ||
14
Term Loan Facility
In 2017, the Company entered into a senior secured term loan credit agreement in an aggregate principal amount of $
The 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 Resources, the “Loan Parties”), subject to customary exceptions, and is secured by first priority security interests on substantially all assets of the Loan Parties, including
During the first half of 2022, the Company repaid $
Accounts Receivable Securitization Facility
On September 30, 2020, the Company amended and extended 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 Resources (“Arch Receivable”) (the “Securitization Facility”), which supports the issuance of letters of credit and requests for cash advances. The amendment to the Securitization Facility reduced the size of the facility from $
Under the Securitization Facility, Arch Receivable, Arch Resources and certain of Arch Resources’s subsidiaries party to the Securitization Facility have granted to the administrator of the 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, 2022, letters of credit totaling $
Inventory-Based Revolving Credit Facility
On September 30, 2020, Arch Resources amended the senior secured inventory-based revolving credit facility in an aggregate principal amount of $
The amendment of the Inventory Facility extended the maturity of the facility to September 29, 2023; eliminated the provision that accelerated maturity upon Liquidity (as defined in the Inventory Facility) falling below a specified level; and reduced the minimum Liquidity requirement from $
The 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
15
requirements that are customary for asset-based credit facilities. The Inventory Facility also includes a requirement to maintain liquidity equal to or exceeding $
Equipment Financing
On March 4, 2020, the Company entered into an equipment financing arrangement accounted for as debt. The Company received $
On July 29, 2021, the Company entered into an additional equipment financing arrangement accounted for as debt. The Company received $
Tax Exempt Bonds
On July 2, 2020, the West Virginia Economic Development Authority (the “Issuer”) issued $
The Tax Exempt Bonds bear interest payable each January 1 and July 1, commencing January 1, 2021 for the Series 2020 and July 1, 2021 for the Series 2021, and have a final maturity of July 1, 2045; however, the Tax Exempt Bonds are subject to mandatory tender on July 1, 2025 at a purchase price equal to
Convertible Debt
On November 3, 2020, the Company issued $
The Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of
16
The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a conversion of the Convertible Notes made following certain fundamental changes and under other circumstances set forth in the Indenture such as a declaration of a dividend.
During the second quarter of 2022, the conversion price was revalued to $
During the second quarter of 2022, the common stock sale condition of the Convertible Notes was satisfied. As described in the Indenture, this condition is satisfied when the closing stock price exceeds
In May 2022, the Company entered into a negotiated exchange (the “exchanges”) of $
In connection with the exchanges in the second quarter of 2022, the Company recognized a total loss of $
As of June 30, 2022, $
Total interest expense related to the Convertible Debt for the three months ended June 30, 2022 was $
Capped Call Transactions
In connection with the offering of the Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions (collectively, the “Capped Call Transactions”). The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Convertible Notes.
The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset any cash payments the Company is required to make in excess of the principal amount due upon conversion of the Convertible Notes in the event that the market price of the Company’s common stock is greater than the strike price of the Capped Call Transactions, which was initially $
As of June 30, 2022, the Capped Call Transaction remain outstanding and have an intrinsic value of $
17
Interest Rate Swaps
The Company entered into a series of interest rate swaps to fix a portion of the LIBOR interest payments due under the Term Loan Debt Facility. Through the date of the prepayment, the interest rate swaps qualified for cash flow hedge accounting treatment, and as such, the change in the fair value of the interest rate swaps was recorded on the Company’s Condensed Consolidated Balance Sheets 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. Due to the Company repaying the majority of the Term Loans in the first quarter of 2022, the interest rate swaps no longer qualify for cash flow hedge accounting and are considered ineffective. As a result, the Company reclassified $
The fair value of the interest rate swaps at June 30, 2022 is an asset of $
9. Income Taxes
A reconciliation of the federal income tax provision at the statutory rate to the actual provision for income taxes follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Income tax provision at statutory rate | $ | | $ | | $ | | $ | | ||||
Percentage depletion and other permanent items |
| ( |
| ( |
| ( |
| ( | ||||
State taxes, net of effect of federal taxes |
| |
| |
| |
| | ||||
Change in valuation allowance |
| ( |
| ( |
| ( |
| ( | ||||
Current expense associated with uncertain tax positions | | | | | ||||||||
Other, net |
| ( |
| ( |
| ( |
| ( | ||||
Provision for income taxes | $ | | $ | | $ | | $ | | ||||
10. 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 may include available-for-sale securities, U.S. Treasury securities, and coal swaps and 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 may include U.S. government agency securities, coal commodity contracts, and interest rate swaps with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes. |
18
| ● | 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 may include the Company’s commodity option contracts (coal and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. |
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, 2022 | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(In thousands) | ||||||||||||
Assets: |
|
|
|
|
|
|
|
| ||||
Investments in marketable securities | $ | — | $ | | $ | — | $ | | ||||
Derivatives |
| |
| |
| |
| | ||||
Total assets | $ | | $ | | $ | | $ | | ||||
Liabilities: |
|
|
|
| ||||||||
Derivatives | $ | | $ | | $ | | $ | | ||||
The Company’s contracts with its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying Condensed Consolidated Balance Sheet, based on this counterparty netting.
The following table summarizes the change in fair values of financial instruments categorized as Level 3.
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||
(In thousands) | ||||||
Balance, beginning of period | $ | | $ | | ||
Realized and unrealized gains (losses) recognized in earnings, net |
| |
| | ||
Purchases |
| |
| | ||
Settlements |
| ( |
| ( | ||
Ending balance | $ | | $ | | ||
Fair Value of Long-Term Debt
At June 30, 2022 and December 31, 2021, the fair value of the Company’s debt, including amounts classified as current, was $
11. Earnings 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, and convertible debt. The dilutive effect of outstanding warrants and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method whereas the convertible debt uses the if converted method.
19
The following table provides the basic and diluted earnings per share by reconciling the numerators and denominators of the computations:
|
| |||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In Thousands) | ||||||||||||
Net income attributable to common shares |
| $ |
| $ | |
| $ |
| $ | | ||
Adjustment of interest expense attributable to Convertible Notes | — | — | ||||||||||
Adjustment for inducement payments | — | — | ||||||||||
Diluted net income attributable to common stockholders | | | ||||||||||
Basic weighted average shares outstanding | ||||||||||||
Effect of dilutive securities | ||||||||||||
Convertible Notes (a) | — | — | ||||||||||
Diluted weighted average shares outstanding |
| |
| |
|
| | |||||
| (a) | Diluted weighted average common shares outstanding includes the dilutive effect had the Company's Convertible Notes been converted at the beginning of the year ended December 31, 2022. If converted by the holder, the Company may settle in cash, shares of the Company's common stock or a combination thereof, at the Company's election. The Capped Call Transaction is anti-dilutive and is excluded from the calculation of diluted earnings per share. |
12. 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 actuarially computed present and future liabilities for such benefits over the employees’ applicable years of service.
In October 2019, the Company filed an application with the Office of Workers’ Compensation Programs (“OWCP”) within the Department of Labor for reauthorization to self-insure federal black lung benefits. In February 2020, the Company received a reply from the OWCP confirming Arch’s status to remain self-insured contingent upon posting additional collateral of $
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.
20
Workers’ compensation expense consists of the following components:
| ||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Self-insured occupational disease benefits: |
|
|
|
|
|
|
|
| ||||
Service cost | $ | | $ | | $ | | $ | | ||||
Interest cost(1) |
| |
| |
| |
| | ||||
Net amortization(1) |
| |
| |
| |
| | ||||
Total occupational disease | $ | | $ | | $ | | $ | | ||||
Traumatic injury claims and assessments |
| |
| |
| |
| | ||||
Total workers’ compensation expense | $ | | $ | | $ | | $ | | ||||
| (1) | In accordance with the adoption of ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” these costs are recorded within Nonoperating expenses in the Condensed Consolidated Statements of Operations on the line item “Non-service related pension and postretirement benefit costs.” |
13. Employee Benefit Plans
The following table details the components of pension benefit costs (credits):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Interest cost(1) | $ | | $ | | $ | | $ | | ||||
Expected return on plan assets(1) |
| ( | ( | ( | ( | |||||||
Pension settlement(1) | ( |
| ( |
| ( |
| ( | |||||
Amortization of prior service credits (1) |
| ( |
| ( |
| ( |
| ( | ||||
Net benefit credit | $ | ( | $ | ( | $ | ( | $ | ( | ||||
The following table details the components of other postretirement benefit cost (credit):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Service cost | $ | | $ | | $ | | $ | | ||||
Interest cost(1) |
| |
| |
| |
| | ||||
Amortization of other actuarial gains (1) |
| ( |
| — |
| ( |
| | ||||
Net benefit (credit) cost | $ | ( | $ | | $ | ( | $ | | ||||
| (1) | In accordance with the adoption of ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” these costs are recorded within Nonoperating expenses in the Condensed Consolidated Income Statements on the line item “Non-service related pension and postretirement benefit costs.” |
| (1) |
14. 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.
21
The Company is a party to numerous claims and lawsuits with respect to various matters. The ultimate resolution of any such legal matter could result in outcomes that may be materially different from amounts the Company has accrued for such matters. The Company believes it has recorded adequate reserves for these matters.
In the normal course of business, the Company is a party to certain financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds, and other guarantees and indemnities related to the obligations of affiliated entities which are not reflected in the Company’s Condensed Consolidated Balance Sheets. However, the underlying liabilities that they secure, such as asset retirement obligations, workers’ compensation liabilities, and other obligations, are reflected in the Company’s Condensed Consolidated Balance Sheets.
As of June 30, 2022, the Company had outstanding surety bonds with a face amount of $
As of June 30, 2022, the Company’s reclamation-related obligations of $
15. Segment Information
The Company’s reportable business segments are based on
Reporting segment results for the three and six months ended June 30, 2022 and 2021 are presented below. The Corporate, Other, and Eliminations grouping includes these charges: idle operations; 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.
22
|
|
| Corporate, |
| ||||||||
Other and | ||||||||||||
(In thousands) | MET | Thermal | Eliminations | Consolidated | ||||||||
Three Months Ended June 30, 2022 |
|
|
|
|
|
|
|
| ||||
Revenues | $ | | $ | | $ | — |
| $ | | |||
Adjusted EBITDA |
| |
| |
| ( |
|
| | |||
Depreciation, depletion and amortization |
| |
| |
| |
|
| | |||
Accretion on asset retirement obligation |
| |
| |
| |
|
| | |||
Total assets |
| |
| |
| |
|
| | |||
Capital expenditures |
| |
| |
| |
|
| | |||
Three Months Ended June 30, 2021 |
|
|
|
|
| |||||||
Revenues | $ | | $ | | $ | | $ | | ||||
Adjusted EBITDA |
| |
| |
| ( |
| | ||||
Depreciation, depletion and amortization |
| |
| |
| |
| | ||||
Accretion on asset retirement obligation |
| |
| |
| |
| | ||||
Total assets |
| |
| |
| |
| | ||||
Capital expenditures |
| |
| |
| |
| | ||||
Six Months Ended June 30, 2022 |
|
|
|
| ||||||||
Revenues | $ | | $ | | $ | — |
| $ | | |||
Adjusted EBITDA |
| |
| |
| ( |
|
| | |||
Depreciation, depletion and amortization |
| |
| |
| |
|
| | |||
Accretion on asset retirement obligation |
| |
| |
| |
|
| | |||
Total assets |
| |
| |
| |
|
| | |||
Capital expenditures |
| |
| |
| |
|
| | |||
Six Months Ended June 30, 2021 |
|
|
|
|
| |||||||
Revenues | $ | | $ | | $ | | $ | | ||||
Adjusted EBITDA |
| |
| |
| ( |
| | ||||
Depreciation, depletion and amortization |
| |
| |
| |
| | ||||
Accretion on asset retirement obligation |
| |
| |
| |
| | ||||
Total assets |
| |
| |
| |
| | ||||
Capital expenditures |
| |
| |
| |
| | ||||
A reconciliation of net income to adjusted EBITDA and segment Adjusted EBITDA from coal operations follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
(In thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income | $ | | $ | | $ | | $ | | |||||
Provision for income taxes | | | | | |||||||||
Interest expense, net |
| |
| |
| |
| | |||||
Depreciation, depletion and amortization |
| |
| |
| |
| | |||||
Accretion on asset retirement obligations |
| |
| |
| |
| | |||||
Non-service related pension and postretirement benefit costs |
| |
| |
| |
| | |||||
Net loss resulting from early retirement of debt | | — | | — | |||||||||
Adjusted EBITDA | $ | | $ | | $ | | $ | | |||||
EBITDA from idled or otherwise disposed operations | | | | | |||||||||
Selling, general and administrative expenses | | | | | |||||||||
Other | ( | | | | |||||||||
Segment Adjusted EBITDA from coal operations | $ | | $ | | $ | | $ | | |||||
23
16. Revenue Recognition
ASC 606-10-50-5 requires that entities disclose disaggregated revenue information in categories (such as type of goods or services, geography, market, type of contract, etc.) that depict how the nature, amount, timing, and uncertainty of revenue and cash flow are affected by economic factors. ASC 606-10-55-89 explains that the extent to which an entity’s revenue is disaggregated depends on the facts and circumstances that pertain to the entity’s contracts with customers and that some entities may need to use more than one type of category to meet the objective for disaggregating revenue.
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of its coal and customer relationships and provides meaningful disaggregation of each segment’s results. The Company has further disaggregated revenue between North America and Seaborne revenues which depicts the pricing and contract differences between the two. North America revenue is characterized by contracts with a term of one year or longer and typically the pricing is fixed; whereas Seaborne revenue generally is derived by spot or short term contracts with an index-based pricing mechanism.
|
|
| Corporate, |
| ||||||||
Other and | ||||||||||||
MET | Thermal | Eliminations | Consolidated | |||||||||
| (in thousands) | |||||||||||
Three Months Ended June 30, 2022 |
|
|
|
|
|
|
|
| ||||
North America revenues | $ | | $ | | $ | | $ | | ||||
Seaborne revenues |
| |
| |
| |
| | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Three Months Ended June 30, 2021 |
|
|
|
| ||||||||
North America revenues | $ | | $ | | $ | | $ | | ||||
Seaborne revenues |
| |
| |
| |
| | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Six Months Ended June 30, 2022 |
|
|
|
| ||||||||
North America revenues | $ | | $ | | $ | | $ | | ||||
Seaborne revenues |
| |
| |
| |
| | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Six Months Ended June 30, 2021 |
|
|
|
| ||||||||
North America revenues | $ | | $ | | $ | | $ | | ||||
Seaborne revenues |
| |
| |
| |
| | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
As of June 30, 2022, the Company has outstanding performance obligations for the remainder of 2022 of
24
17. Leases
The Company has operating and financing leases for mining equipment, office equipment, office space and transloading terminals with remaining lease terms ranging from less than
As of June 30, 2022 and December 31, 2021, the Company had the following ROU assets and lease liabilities within the Company’s Condensed Consolidated Balance Sheets:
|
|
| June 30, |
| December 31, | |||
2022 | 2021 | |||||||
Assets |
| Balance Sheet Classification |
|
|
|
| ||
Operating lease right-of-use assets |
| $ | | $ | | |||
Financing lease right-of-use assets |
| | | |||||
Total Lease Assets | $ | | $ | | ||||
Liabilities | Balance Sheet Classification | |||||||
Financing lease liabilities - current | $ | | $ | | ||||
Operating lease liabilities - current | | | ||||||
Financing lease liabilities - long-term | | | ||||||
Operating lease liabilities - long-term | | | ||||||
$ | | $ | | |||||
Weighted average remaining lease term in years | ||||||||
Operating leases | ||||||||
Finance leases | ||||||||
Weighted average discount rate | ||||||||
Operating leases | ||||||||
Finance leases | ||||||||
Information related to leases was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2022 |
| 2021 | 2022 |
| 2021 | |||||||||||
| (In thousands) | (In thousands) | ||||||||||||||
Operating lease information: |
|
|
| |||||||||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||||||
Operating cash flows from operating leases |
| | |
| | | ||||||||||
Financing lease information: |
|
|
| |||||||||||||
Financing lease cost | $ | | $ | | $ | | $ | | ||||||||
Operating cash flows from financing leases |
| | |
| | | ||||||||||
25
Future minimum lease payments under non-cancellable leases as of June 30, 2022 were as follows:
| Operating | Finance | |||||
Year | Leases | Leases | |||||
| (In thousands) | ||||||
2022 | $ | | $ | | |||
2023 |
| |
| | |||
2024 |
| |
| | |||
2025 |
| |
| | |||
2026 |
| |
| — | |||
Thereafter |
| |
| — | |||
Total minimum lease payments | $ | | $ | | |||
Less imputed interest |
| ( |
| ( | |||
Total lease liabilities | $ | | $ | | |||
18. Subsequent Event
On July 28, 2022, the Company announced the board approval of a quarterly fixed and variable dividend of $
26
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, all references in this report to “Arch,” the “Company,” “we,” “us,” or “our” are to Arch Resources, Inc. and its subsidiaries.
Cautionary Notice Regarding Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “should,” “could,” “appears,” “estimates,” “expects,” “anticipates,” “intends,” “may,” “plans,” “predicts,” “projects,” “believes,” “seeks,” or “will.” Actual results may vary significantly from those anticipated due to many factors, including: impacts of the COVID-19 pandemic; changes in coal prices, which may be caused by numerous factors beyond our control, including changes in the domestic and foreign supply of and demand for coal and the domestic and foreign demand for steel and electricity; volatile economic and market conditions; operating risks beyond our control, including risks related to mining conditions, mining, processing and plant equipment failures or maintenance problems, weather and natural disasters, the unavailability of raw materials, equipment or other critical supplies, mining accidents, and other inherent risks of coal mining that are beyond our control; loss of availability, reliability and cost-effectiveness of transportation facilities and fluctuations in transportation costs; inflationary pressures and availability and price of mining and other industrial supplies; the effects of foreign and domestic trade policies, actions or disputes on the level of trade among the countries and regions in which we operate, the competitiveness of our exports, or our ability to export; competition, both within our industry and with producers of competing energy sources, including the effects from any current or future legislation or regulations designed to support, promote or mandate renewable energy sources; alternative steel production technologies that may reduce demand for our coal; the loss of key personnel or the failure to attract additional qualified personnel and the availability of skilled employees and other workforce factors; our ability to secure new coal supply arrangements or to renew existing coal supply arrangements; the loss of, or significant reduction in, purchases by our largest customers; disruptions in the supply of coal from third parties; risks related to our international growth; our relationships with, and other conditions affecting our customers and our ability to collect payments from our customers; the availability and cost of surety bonds; including potential collateral requirements; additional demands for credit support by third parties and decisions by banks, surety bond providers, or other counterparties to reduce or eliminate their exposure to the coal industry; inaccuracies in our estimates of our coal reserves; defects in title or the loss of a leasehold interest; losses as a result of certain marketing and asset optimization strategies; cyber-attacks or other security breaches that disrupt our operations, or that result in the unauthorized release of proprietary, confidential or personally identifiable information; our ability to acquire or develop coal reserves in an economically feasible manner; our ability to comply with the restrictions imposed by our Term Loan Debt Facility (as defined below) and other financing arrangements; our ability to service our outstanding indebtedness and raise funds necessary to repurchase Convertible Notes (as defined below) for cash following a fundamental change or to pay any cash amounts due upon conversion; existing and future legislation and regulations affecting both our coal mining operations and our customers’ coal usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; increased pressure from political and regulatory authorities, along with environmental and climate change activist groups, and lending and investment policies adopted by financial institutions and insurance companies to address concerns about the environmental impacts of coal combustion; increased attention to environmental, social or governance matters (“ESG”); our ability to obtain and renew various permits necessary for our mining operations; risks related to regulatory agencies ordering certain of our mines to be temporarily or permanently closed under certain circumstances; risks related to extensive environmental regulations that impose significant costs on our mining operations, and could result in litigation or material liabilities; the accuracy of our estimates of reclamation and other mine closure obligations; the existence of hazardous substances or other environmental contamination on property owned or used by us; and risks related to tax legislation and our ability to use net operating losses and certain tax credits; and our ability to pay base or variable dividends in accordance with our announced capital return program. All forward-looking statements in this report, as well as all other written and oral forward-looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. These factors are not necessarily all of the important factors that could affect us. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking
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statements. These forward-looking statements speak only as of the date on which such statements were made, and we do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by the federal securities laws. For a description of some of the risks and uncertainties that may affect our future results, you should see the “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequent Form 10-Q filings.
COVID-19
In the first quarter of 2020, COVID-19 emerged as a global pandemic. The continuing responses to the COVID-19 outbreak include actions that have a significant impact on domestic and global economies, including travel restrictions, gathering bans, stay at home orders, and many other restrictive measures. All of our operations have been classified as essential in the states in which we operate. We instituted many policies and procedures, in alignment with CDC guidelines along with state and local mandates, to protect our employees during the COVID-19 outbreak. These policies and procedures included, but were not limited to, staggering shift times to limit the number of people in common areas at one time, limiting meetings and meeting sizes, continual cleaning and disinfecting of high touch and high traffic areas, including door handles, bathrooms, bathhouses, access elevators, mining equipment, and other areas, limiting contractor access to our properties, limiting business travel, and instituting work from home for administrative employees. We continue to encourage vaccination among our workforce and adjust our COVID-19 responses. We continually evaluate our policies and procedures, in accordance with CDC, state, and local guidelines, and make any necessary adjustments to respond to the particular circumstances in the areas in which we operate.
We recognize that the COVID-19 outbreak and responses thereto also continue to impact both our customers and suppliers. We continue to communicate with them and closely monitor their developments to ensure we have access to the goods and services required to maintain our operations. In early 2022 increased case rates contributed to rail service issues that negatively impacted our export shipment volumes. During the second quarter of 2022, the elevated case rates appear to have subsided; however, rail service has not improved to desired levels. We remain in close communication with our rail service providers, and work diligently with them to mitigate potential delays. Our current view of our customer demand and logistics situations are discussed in greater detail in the “Overview” section below.
Overview
Our results for the second quarter of 2022 benefited from continued strength in global metallurgical and thermal coal markets. The first half of 2022 was impacted by numerous events, particularly the Russian invasion of Ukraine, and the subsequent European energy crisis. These events continue to evolve and impact our business environment.
On February 24, 2022, Russia invaded Ukraine. Among the many humanitarian and economic impacts from the invasion, the significant disruption in global coal and energy supplies has had a significant upward impact on both coking and thermal coal indices. Russia was the third largest coal supplier to the international markets in 2021, and bans on the import of Russian coal by the European Union, the United Kingdom, Japan, and other nations is disrupting previously existing trading patterns, creating logistical issues, and pressuring availability of supply to these markets. In particular, the European Union’s announced ban on importation of Russian coal, which has already significantly impacted thermal and coking coal markets, is expected to further impact these markets when it becomes effective on August 10, 2022. Over the course of the second quarter of 2022, the impact on wider energy markets, particularly constraints on the import of Russian natural gas supplies into Europe, has continued to put upward pressure on international thermal coal indices. At the same time, fear of global economic contraction has begun to negatively impact current demand, and future demand expectations for coking coal, leading to declines from historical highs in coking coal indices, although they currently remain above long-term historical averages. Recently, values of certain indices for high quality thermal coal have exceeded values of coking coal indices. If this inversion of the historical price relationship persists, we believe available coking coal will begin to be directed into thermal markets.
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As expected, the December 30, 2021 explosion at the Curtis Bay Terminal, one of two United States East Coast terminals we utilize to export our coking coal product overseas, coupled with the increased COVID-19 case rates and general labor shortages our rail service providers experienced, negatively impacted our volume of coking coal shipments in the first quarter of 2022. Rail service in our Metallurgical Segment improved in the second quarter of 2022. However, continued improvement will be required to meet our annual shipment volume forecasts. We continue working diligently with our rail service provider, and work to secure alternative vessel loading opportunities to attain our shipment forecasts. We currently expect second half of 2022 coking coal shipments to increase approximately forty percent over the first half of 2022. Our ability to meet this expectation will, at least in part, be based on factors that are outside of our direct control.
China’s ban on importation of Australian coal remains in place, and we believe the supply of previously impounded Australian coal that was released during the fourth quarter of 2021 has been effectively exhausted. Russian coking coal, offered at discounts to published indices, has become a larger share of Chinese and Indian imports, but logistical, financial, and quality constraints exist as barriers to further increase in Russian supplies to these markets. Australian and North American coking coal supplies remain constrained compared to pre-COVID-19 levels, despite coking coal index values staying persistently above long-term historical averages. Recently, there have been reports that China’s ban on importation of Australian coal might be lifted in the near future. If this occurs, trading patterns may shift again, and volatility should be expected.
Some new coal supplies have been added to the market, in particular, our new Leer South longwall operation. However, some production and logistical disruptions remain and constrain supply. The duration of specific supply disruptions is unknown. We believe that underinvestment in the sector in recent years underlies both the current and longer-term market dynamics. In the current environment, we expect coking coal prices to remain volatile, and the expectation of reduced demand may continue to put downward pressure on coking coal indices in the near term. Longer term, we believe continued limited global capital investment in new coking coal production capacity, normal reserve depletion, and a return to economic growth will provide support to coking coal markets.
Domestic thermal coal consumption remains supported by continued high natural gas prices during the first half of 2022. Our thermal segment shipment volume increased significantly year-over-year, but was constrained by rail service capacity. Longer term, we continue to believe thermal coal demand in the United States will remain pressured by continuing increases in subsidized renewable generation sources, particularly wind and solar, and planned retirements of coal fueled generating facilities. Currently, however, domestic natural gas prices remain at levels that provide a significant economic advantage for coal fired electricity generation. We believe coal generator stockpiles are likely below desired levels at many United States power stations. In the wake of the Russian invasion of Ukraine, and the associated disruption of European natural gas supplies, international thermal coal market indices increased too, and have remained at historical highs. While we are effectively completely committed for 2022 Thermal Segment sales at planned production levels, we do have some export volume that remains open to pricing based on these indices.
We continue to pursue other strategic alternatives for our thermal assets, including, among other things, potential divestiture. Currently, we will exercise our operational flexibility to maximize cash generation from our thermal operations, and we are currently setting aside significant funds in our thermal reclamation fund to be utilized in final mine reclamation. Longer term, we will maintain our focus on aligning our thermal production rates with the secular decline in domestic thermal coal demand, while adjusting our thermal operating plans to minimize future cash requirements and maintain flexibility to react to future short-term market fluctuations.
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Results of Operations
Three Months Ended June 30, 2022 and 2021
Revenues. Our revenues include sales to customers of coal produced at our operations and coal purchased from third parties. Transportation costs are included in cost of coal sales and amounts billed by us to our customers for transportation are included in revenues.
Coal sales. The following table summarizes information about our coal sales during the three months ended June 30, 2022 and 2021:
Three Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| (Decrease) / Increase | ||||
(In thousands) | |||||||||
Coal sales | $ | 1,133,358 | $ | 450,389 | $ | 682,969 | |||
Tons sold |
| 19,905 |
| 17,214 |
| 2,691 | |||
On a consolidated basis, coal sales in the second quarter of 2022 were approximately $683.0 million, or 151.6%, more than in the second quarter of 2021, while tons sold increased approximately 2.7 million tons, or 15.6%. Coal sales from Metallurgical operations increased approximately $505.0 million, primarily due to higher realized pricing. Thermal coal sales increased approximately $178.1 million due to increased pricing and volume. See the discussion in “Operational Performance” for further information about segment results.
Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income during the three months ended June 30, 2022 and 2021:
Three Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| Increase (Decrease) | ||||
(In thousands) | |||||||||
Cost of sales (exclusive of items shown separately below) | $ | 639,760 | $ | 355,329 | $ | (284,431) | |||
Depreciation, depletion and amortization |
| 32,780 |
| 27,884 |
| (4,896) | |||
Accretion on asset retirement obligations |
| 4,430 |
| 5,437 |
| 1,007 | |||
Change in fair value of coal derivatives and coal trading activities, net |
| 1,877 |
| 8,762 |
| 6,885 | |||
Selling, general and administrative expenses |
| 26,516 |
| 24,119 |
| (2,397) | |||
Other operating expense (income), net |
| 5,238 |
| (4,347) |
| (9,585) | |||
Total costs, expenses and other | $ | 710,601 | $ | 417,184 | $ | (293,417) | |||
Cost of sales. Our cost of sales for the second quarter of 2022 increased approximately $284.4 million, or 80.1%, versus the second quarter of 2021. The increase in cost of sales is directly attributable to higher sales volumes, increased sales realization, and general inflationary pressure on most goods and services, which consists of increased transportation costs of approximately $97.3 million, increased repairs and supplies costs of approximately $95.1 million, increased operating taxes and royalties resulting from higher sales prices of approximately $46.3 million, and increased compensation costs of approximately $13.2 million. See discussion in “Operational Performance” for further information about segment results.
Depreciation, depletion and amortization. The increase in depreciation, depletion, and amortization in the second quarter of 2022 versus the second quarter of 2021 is primarily due to the increased depreciation of plant and equipment and amortization of development in our Metallurgical Segment of approximately $8.7 million, specifically at the Leer South mine, as development has been completed. This increase is partially offset by reduced depletion expense from lower depletion rates in our Metallurgical segment of approximately $3.8 million.
Accretion on asset retirement obligations. The decrease in accretion expense in the second quarter of 2022 versus the second quarter of 2021 is primarily related to the timing of reclamation work completed at our Thermal operations, specifically at the Coal Creek mine.
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Change in fair value of coal derivatives and coal trading activities, net. The costs in both the second quarter of 2022 and 2021 are primarily related to mark-to-market losses on coal derivatives that are used to hedge our price risk for international thermal coal shipments.
Selling, general and administrative expenses. Selling, general and administrative expenses in the second quarter of 2022 increased versus the second quarter of 2021, primarily due to increased compensation costs of approximately $1.4 million, primarily related to higher incentive compensation accruals recorded in the second quarter of 2022.
Other operating expense (income), net. The expense in other operating expense (income), net in the second quarter of 2022 versus the income in the second quarter of 2021, consists primarily of the net unfavorable impact of certain coal derivative settlements of approximately $16.7 million, partially offset by the favorable impact of mark to market movements on heating oil positions of approximately $6.7 million.
Nonoperating expenses. The following table summarizes our nonoperating expenses during the three months ended June 30, 2022 and 2021:
Three Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| Increase (Decrease) | ||||
(In thousands) | |||||||||
Non-service related pension and postretirement benefit costs | $ | (459) | $ | (539) | $ | 80 | |||
Net loss resulting from early retirement of debt | (9,629) | — | (9,629) | ||||||
Total nonoperating expenses | $ | (10,088) | $ | (539) | $ | (9,549) | |||
Net loss resulting from early retirement of debt. In the second quarter of 2022, we entered into privately negotiated exchange agreements with a limited number of holders of our 5.25% convertible senior notes due 2025 (“Convertible Notes” or “Convertible Debt”) to exchange (the “exchanges”) approximately $125.2 million principal amount of our Convertible Notes for aggregate consideration consisting of $130.1 million in cash and approximately 2.6 million shares of our common stock. As a result of the exchanges, we recorded a loss of $9.6 million resulting from early debt extinguishment. For further information regarding the Convertible Notes exchanges, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
Provision for income taxes. The following table summarizes our provision for income taxes for the three months ended June 30, 2022 and 2021:
Three Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| Increase (Decrease) | ||||
(In thousands) | |||||||||
Provision for income taxes | $ | 496 | $ | 2,006 | $ | 1,510 | |||
See Note 9, “Income Taxes” to the Condensed Consolidated Financial Statements for a reconciliation of the federal income tax provision at the statutory rate to the actual provision for income taxes.
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Six Months Ended June 30, 2022 and 2021
Revenues. Our revenues include sales to customers of coal produced at our operations and coal purchased from third parties. Transportation costs are included in cost of coal sales and amounts billed by us to our customers for transportation are included in revenues.
Coal sales. The following table summarizes information about our coal sales during the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| (Decrease) / Increase | ||||
(In thousands) | |||||||||
Coal sales | $ | 2,001,294 | $ | 807,932 | $ | 1,193,362 | |||
Tons sold |
| 39,643 |
| 31,257 |
| 8,386 | |||
On a consolidated basis, coal sales in the first half of 2022 were approximately $1.2 billion, or 147.7%, more than in the first half of 2021, while tons sold increased approximately 8.4 million tons, or 26.8%. Coal sales from Metallurgical operations increased approximately $798.4 million primarily due to higher realized pricing. Thermal coal sales increased approximately $396.3 million due to increased pricing and volume. See the discussion in “Operational Performance” for further information about segment results.
Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income during the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, | |||||||||
2022 |
| 2021 |
| Increase (Decrease) | |||||
(In thousands) | |||||||||
Cost of sales (exclusive of items shown separately below) | $ | 1,147,985 | $ | 665,235 | $ | (482,750) | |||
Depreciation, depletion and amortization |
| 64,990 | 53,681 | (11,309) | |||||
Accretion on asset retirement obligations |
| 8,860 | 10,874 | 2,014 | |||||
Change in fair value of coal derivatives and coal trading activities, net |
| 17,396 | 9,290 | (8,106) | |||||
Selling, general and administrative expenses |
| 53,164 | 45,599 | (7,565) | |||||
Other operating expense (income), net |
| 1,799 |
| (9,615) |
| (11,414) | |||
Total costs, expenses and other | $ | 1,294,194 | $ | 775,064 | $ | (519,130) | |||
Cost of sales. Our cost of sales for the first half of 2022 increased approximately $482.8 million, or 72.6%, versus the first half of 2021. The increase in cost of sales is directly attributable to higher sales volumes, increased sales realization, and general inflationary pressure on most goods and services, which consists of increased repairs and supplies costs of approximately $170.5 million, increased transportation costs of approximately $168.5 million, increased operating taxes and royalties resulting from higher sales prices of approximately $93.8 million, and increased compensation costs of approximately $23.0 million. See discussion in “Operational Performance” for further information about segment results.
Depreciation, depletion, and amortization. The increase in depreciation, depletion, and amortization in the first half of 2022 versus the first half of 2021 is primarily due to the increased depreciation of plant and equipment and amortization of development in our Metallurgical Segment of approximately $18.0 million, specifically at the Leer South mine, as development has been completed. This increase is partially offset by reduced depletion expense from lower depletion rates in our Metallurgical segment of approximately $6.7 million.
Accretion on asset retirement obligations. The decrease in accretion expense in the first half of 2022 versus the first half of 2021 is primarily related to the timing of reclamation work completed at our Thermal operations, specifically at the Coal Creek mine.
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Change in fair value of coal derivatives and coal trading activities, net. The costs in both the first half of 2022 and 2021 are primarily related to mark-to-market losses on coal derivatives that we used to hedge our price risk for international thermal coal shipments.
Selling, general and administrative expenses. Selling, general and administrative expenses in the first half of 2022 increased versus the first half of 2021, primarily due to increased compensation costs of approximately $6.5 million, primarily related to higher incentive compensation accruals recorded in the first half of 2022.
Other operating expense (income), net. The expense in other operating expense (income), net in the first half of 2022 versus the income in first half of 2021 is primarily due to the net unfavorable impact of certain coal derivative settlements of approximately $25.9 million, partially offset by the favorable impact of mark to market movements on heating oil positions of approximately $13.5 million.
Nonoperating expenses. The following table summarizes our nonoperating expenses during the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| Increase (Decrease) | ||||
(In thousands) | |||||||||
Non-service related pension and postretirement benefit costs | $ | (1,332) | $ | (2,066) | $ | 734 | |||
Net loss resulting from early retirement of debt | (13,749) | — | (13,749) | ||||||
Total non-operating expenses | $ | (15,081) | $ | (2,066) | $ | (13,015) | |||
Non-service related pension and postretirement benefit costs. The reduction in non-service related pension and postretirement benefit costs in the first half of 2022 versus the first half of 2021 is primarily due to the postretirement benefit gain amortization recorded in the first half of 2022, partially offset by the decreased pension settlement recorded in first half of 2022 compared to the first half of 2021.
Net loss resulting from early retirement of debt. In the first half of 2022, we repaid $272.3 million of our Term Loan and entered into privately negotiated exchanges for approximately $125.2 million principal amount of our Convertible Notes. As a result of these transactions, we recorded losses of $13.7 million resulting from early debt extinguishment expenses. For further information regarding the Convertible Notes exchanges, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
Provision for income taxes. The following table summarizes our provision for income taxes during the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| Increase (Decrease) | ||||
(In thousands) | |||||||||
Provision for income taxes | $ | 951 | $ | 2,383 | $ | 1,432 | |||
See Note 9, “Income Taxes” to the Condensed Consolidated Financial Statements for a reconciliation of the federal income tax provision at the statutory rate to the actual provision for income taxes.
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Operational Performance
Three and Six Months Ended June 30, 2022 and 2021
Our mining operations are evaluated based on Adjusted EBITDA, per-ton cash operating costs (defined as including all mining costs except depreciation, depletion, amortization, accretion on asset retirements obligations, and pass-through transportation expenses, divided by segment tons sold), and on other non-financial measures, such as safety and environmental performance. Adjusted EBITDA is defined as net income attributable to us before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, the accretion on asset retirement obligations and nonoperating expenses. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results by excluding transactions that are not indicative of our core operating performance. Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDA are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDA should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Furthermore, analogous measures are used by industry analysts and investors to evaluate our operating performance. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.
The following table shows results by operating segment for the three and six months ended June 30, 2022 and June 30, 2021.
| Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||||||||
2022 | 2021 | Variance | 2022 |
| 2021 |
| Variance | |||||||||||
Metallurgical |
|
|
|
|
|
| ||||||||||||
Tons sold (in thousands) |
| 2,114 |
| 2,007 |
| 107 |
| 3,657 |
| 3,727 |
| (70) | ||||||
Coal sales per ton sold | $ | 286.40 | $ | 89.71 | $ | 196.69 | $ | 273.36 | $ | 86.97 | $ | 186.39 | ||||||
Cash cost per ton sold | $ | 98.95 | $ | 59.37 | $ | (39.58) | $ | 94.35 | $ | 59.49 | $ | (34.86) | ||||||
Cash margin per ton sold | $ | 187.45 | $ | 30.34 | $ | 157.11 | $ | 179.02 | $ | 27.48 | $ | 151.54 | ||||||
Adjusted EBITDA (in thousands) | $ | 396,426 | $ | 61,246 | $ | 335,180 | $ | 655,429 | $ | 102,843 | $ | 552,586 | ||||||
Thermal |
|
|
|
|
|
| ||||||||||||
Tons sold (in thousands) |
| 17,792 |
| 15,204 |
| 2,588 |
| 35,987 |
| 27,496 |
| 8,491 | ||||||
Coal sales per ton sold | $ | 19.62 | $ | 13.50 | $ | 6.12 | $ | 19.23 | $ | 13.35 | $ | 5.88 | ||||||
Cash cost per ton sold | $ | 14.48 | $ | 10.88 | $ | (3.60) | $ | 13.95 | $ | 11.46 | $ | (2.49) | ||||||
Cash margin per ton sold | $ | 5.14 | $ | 2.62 | $ | 2.52 | $ | 5.28 | $ | 1.89 | $ | 3.39 | ||||||
Adjusted EBITDA (in thousands) | $ | 93,336 | $ | 41,772 | $ | 51,564 | $ | 193,836 | $ | 54,853 | $ | 138,983 | ||||||
This table reflects numbers reported under a basis that differs from U.S. GAAP. See “Reconciliation of Non-GAAP measures” below for explanation and reconciliation of these amounts to the nearest GAAP measures. Other companies may calculate these per ton amounts differently, and our calculation may not be comparable to other similarly titled measures.
Metallurgical — Adjusted EBITDA for the three and six months ended June 30, 2022 increased from the three and six months ended June 30, 2021 due to increased coal sales per ton sold, partially offset by increased cash cost per ton sold. The improvement in coal sales per ton sold over the prior year period is due to significantly higher coking coal index prices. As discussed previously in the Overview, coking coal indices remained elevated throughout the first half of 2022 due to supply constraints and a lack of investment in the industry globally. Our volume of tons sold increased in the second quarter of 2022 versus the second quarter of 2021, and versus the first quarter of 2022, which was negatively impacted by rail service issues, including those related to increased COVID-19 case rates and general labor shortages experienced by our rail service provider, and the disruption at Curtis Bay. Cash cost per ton sold increased due to increased taxes and royalties that are based on a percentage of coal sales per ton sold, general inflationary pressure on most goods and services, and lower than planned production in our Metallurgical segment, particularly from our Leer South operation.
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While the initial ramp up of our Leer South longwall operation is effectively complete, we have encountered localized areas of adverse geologic conditions in our second longwall panel after a successful move in May that have negatively impacted our productivity in these areas. We are currently mining through one such area and expect to have worked through it by the end of August 2022. Longer term, we expect these conditions to subside, and productivity to reach planned levels. We continue to expect the addition of this second longwall operation to our Metallurgical Segment will significantly increase our future volumes and strengthen our low average segment cost structure relative to our peers.
Our Metallurgical Segment sold 2.1 million tons of coking coal and 0.1 million tons of associated thermal coal in the three months ended June 30, 2022, compared to 1.8 million tons of coking coal and 0.2 million tons of associated thermal coal in the three months ended June 30, 2021. We also sold 3.5 million tons of coking coal and 0.2 million tons of associated thermal coal in the six months ended June 30, 2022, compared to 3.3 million tons of coking coal and 0.4 million tons of associated thermal coal in the six months ended June 30, 2021. Longwall operations accounted for approximately 76% and 75% of our Metallurgical Segment shipment volume in the three and six months ended June 30, 2022, respectively, compared to approximately 64% and 61% of our shipment volume in the three and six months ended June 30, 2021, respectively, which was prior to the startup of our Leer South operation.
Thermal — Adjusted EBITDA for the three and six months ended June 30, 2022 increased versus the three and six months ended June 30, 2021, due to increased tons sold and coal sales per ton sold, partially offset by increased cash cost per ton sold. The improvement in coal sales per ton sold and tons sold in the current year period is due to the significant quantity of high-priced domestic business we were able to contract during the second half of 2021, when the prices of domestic thermal coal increased to historically high levels due to high natural gas prices and a lack of investment in the industry. Coal sales per ton sold in the current year periods also benefitted from historically high international thermal coal indices upon which most of our export thermal sales are priced. In the near term, elevated natural gas pricing continues to support domestic coal-based electricity generation and international thermal coal indices. Cash cost per ton sold increased due to increased taxes and royalties that are based on a percentage of coal sales per ton sold, and general inflationary pressure on most goods and services, particularly diesel fuel, partially offset by the increased sales volume.
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Reconciliation of Non-GAAP measures
Segment coal sales per ton sold
Non-GAAP Segment coal sales per ton sold is calculated as segment coal sales revenues divided by segment tons sold. Segment coal sales revenues are adjusted for transportation costs, and may be adjusted for other items that, due to generally accepted accounting principles, are classified in “other income” on the income statements, but relate to price protection on the sale of coal. Segment coal sales per ton sold is not a measure of financial performance in accordance with generally accepted accounting principles. We believe segment coal sales per ton sold provides useful information to investors as it better reflects our revenue for the quality of coal sold and our operating results by including all income from coal sales. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Therefore, segment coal sales revenues should not be considered in isolation, nor as an alternative to coal sales revenues under generally accepted accounting principles.
|
|
| Idle and |
| ||||||||
Three Months Ended June 30, 2022 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) |
|
|
|
|
|
|
|
| ||||
GAAP Revenues in the Condensed Consolidated Income Statements | $ | 724,492 | $ | 408,866 | $ | — | $ | 1,133,358 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue |
|
|
|
|
|
|
|
| ||||
Coal risk management derivative settlements classified in other income |
| — |
| 17,385 |
| — |
| 17,385 | ||||
Coal sales revenues from idled or otherwise disposed operations not included in segments |
| — |
| — |
| — |
| — | ||||
Transportation costs |
| 119,157 |
| 42,349 |
| — |
| 161,506 | ||||
Non-GAAP Segment coal sales revenues | $ | 605,335 | $ | 349,132 | $ | — | $ | 954,467 | ||||
Tons sold |
| 2,114 |
| 17,792 |
|
|
| |||||
Coal sales per ton sold | $ | 286.40 | $ | 19.62 |
|
| ||||||
|
|
| Idle and |
| ||||||||
Three Months Ended June 30, 2021 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) | ||||||||||||
GAAP Revenues in the Condensed Consolidated Income Statements | $ | 219,448 | $ | 230,759 | $ | 182 | $ | 450,389 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue |
|
|
|
|
|
|
|
| ||||
Coal risk management derivative settlements classified in other income |
| — |
| 651 |
| — |
| 651 | ||||
Coal sales revenues from idled or otherwise disposed operations not included in segments |
| — |
| — |
| 181 |
| 181 | ||||
Transportation costs |
| 39,348 |
| 24,899 |
| 1 |
| 64,248 | ||||
Non-GAAP Segment coal sales revenues | $ | 180,100 | $ | 205,209 | $ | — | $ | 385,309 | ||||
Tons sold |
| 2,007 |
| 15,204 |
|
|
|
| ||||
Coal sales per ton sold | $ | 89.71 | $ | 13.50 |
|
|
|
| ||||
36
|
|
| Idle and |
| ||||||||
Six Months Ended June 30, 2022 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) |
|
|
|
|
|
|
|
| ||||
GAAP Revenues in the Consolidated Income Statements | $ | 1,196,664 | $ | 804,630 | $ | — | $ | 2,001,294 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue |
|
|
|
|
|
|
|
| ||||
Coal risk management derivative settlements classified in other income |
| — |
| 26,458 |
| — |
| 26,458 | ||||
Coal sales revenues from idled or otherwise disposed operations not included in segments |
| — |
| — |
| — |
| — | ||||
Transportation costs |
| 197,021 |
| 86,093 |
| — |
| 283,114 | ||||
Non-GAAP Segment coal sales revenues | $ | 999,643 | $ | 692,079 | $ | — | $ | 1,691,722 | ||||
Tons sold |
| 3,657 |
| 35,987 |
|
|
| |||||
Coal sales per ton sold | $ | 273.36 | $ | 19.23 |
|
| ||||||
|
|
| Idle and |
| ||||||||
Six Months Ended June 30, 2021 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) | ||||||||||||
GAAP Revenues in the Consolidated Income Statements | $ | 398,231 | $ | 408,297 | $ | 1,404 | $ | 807,932 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue |
|
|
|
|
|
|
|
| ||||
Coal risk management derivative settlements classified in other income |
| (690) |
| 1,203 |
| — |
| 513 | ||||
Coal sales revenues from idled or otherwise disposed operations not included in segments |
| — |
| — |
| 1,397 |
| 1,397 | ||||
Transportation costs |
| 74,837 |
| 40,065 |
| 7 |
| 114,909 | ||||
Non-GAAP Segment coal sales revenues | $ | 324,084 | $ | 367,029 | $ | — | $ | 691,113 | ||||
Tons sold |
| 3,727 |
| 27,496 |
|
|
| |||||
Coal sales per ton sold | $ | 86.97 | $ | 13.35 |
|
|
|
| ||||
37
Segment cash cost per ton sold
Non-GAAP Segment cash cost per ton sold is calculated as segment cash cost of coal sales divided by segment tons sold. Segment cash cost of coal sales is adjusted for transportation costs, and may be adjusted for other items that, due to generally accepted accounting principles, are classified in “other income” on the income statements, but relate directly to the costs incurred to produce coal. Segment cash cost per ton sold is not a measure of financial performance in accordance with generally accepted accounting principles. We believe segment cash cost per ton sold better reflects our controllable costs and our operating results by including all costs incurred to produce coal. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Therefore, segment cash cost of coal sales should not be considered in isolation, nor as an alternative to cost of sales under generally accepted accounting principles.
|
|
| Idle and |
| ||||||||
Three Months Ended June 30, 2022 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) |
|
|
|
|
|
|
|
| ||||
GAAP Cost of sales in the Condensed Consolidated Income Statements | $ | 328,302 | $ | 303,970 | $ | 7,488 | $ | 639,760 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales |
|
|
|
|
|
|
|
| ||||
Diesel fuel risk management derivative settlements classified in other income |
| — |
| 3,939 |
| — |
| 3,939 | ||||
Transportation costs |
| 119,157 |
| 42,349 |
| — |
| 161,506 | ||||
Cost of coal sales from idled or otherwise disposed operations not included in segments |
| — |
| — |
| 4,331 |
| 4,331 | ||||
Other (operating overhead, certain actuarial, etc.) |
| — |
| — |
| 3,157 |
| 3,157 | ||||
Non-GAAP Segment cash cost of coal sales | $ | 209,145 | $ | 257,682 | $ | — | $ | 466,827 | ||||
Tons sold |
| 2,114 |
| 17,792 |
|
|
| |||||
Cash Cost Per Ton Sold | $ | 98.95 | $ | 14.48 |
|
| ||||||
|
|
| Idle and |
| ||||||||
Three Months Ended June 30, 2021 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) |
|
|
|
|
|
|
|
| ||||
GAAP Cost of sales in the Condensed Consolidated Income Statements | $ | 158,539 | $ | 190,245 | $ | 6,545 | $ | 355,329 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales |
|
|
|
|
|
|
|
| ||||
Diesel fuel risk management derivative settlements classified in other income |
| — |
| — |
| — |
| — | ||||
Transportation costs |
| 39,348 |
| 24,899 |
| 1 |
| 64,248 | ||||
Cost of coal sales from idled or otherwise disposed operations not included in segments |
| — |
| — |
| 4,354 |
| 4,354 | ||||
Other (operating overhead, certain actuarial, etc.) |
| — |
| — |
| 2,190 |
| 2,190 | ||||
Non-GAAP Segment cash cost of coal sales | $ | 119,191 | $ | 165,346 | $ | — | $ | 284,537 | ||||
Tons sold |
| 2,007 |
| 15,204 |
|
|
| |||||
Cash Cost Per Ton Sold | $ | 59.37 | $ | 10.88 |
|
| ||||||
38
|
|
| Idle and |
| ||||||||
Six Months Ended June 30, 2022 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) |
|
|
|
|
|
|
|
| ||||
GAAP Cost of sales in the Consolidated Income Statements | $ | 542,032 | $ | 592,054 | $ | 13,899 | $ | 1,147,985 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales |
|
|
|
|
|
|
| |||||
Diesel fuel risk management derivative settlements classified in other income |
|
| 3,966 |
| — |
| 3,966 | |||||
Transportation costs |
| 197,021 |
| 86,093 |
| — |
| 283,114 | ||||
Cost of coal sales from idled or otherwise disposed operations not included in segments |
| — |
| — |
| 8,035 |
| 8,035 | ||||
Other (operating overhead, certain actuarial, etc.) |
| — |
| — |
| 5,864 |
| 5,864 | ||||
Non-GAAP Segment cash cost of coal sales | $ | 345,011 | $ | 501,995 | $ |
| — | $ | 847,006 | |||
Tons sold |
| 3,657 |
| 35,987 |
|
| ||||||
Cash Cost Per Ton Sold | $ | 94.35 | $ | 13.95 |
|
| ||||||
|
|
| Idle and |
| ||||||||
Six Months Ended June 30, 2021 | Metallurgical | Thermal | Other | Consolidated | ||||||||
(In thousands) |
|
|
|
|
|
|
|
| ||||
GAAP Cost of sales in the Consolidated Income Statements | $ | 296,541 | $ | 355,185 | $ | 13,509 | $ | 665,235 | ||||
Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales |
|
|
|
|
|
|
|
| ||||
Diesel fuel risk management derivative settlements classified in other income |
| — |
| — |
| — |
| — | ||||
Transportation costs |
| 74,837 |
| 40,065 |
| 7 |
| 114,909 | ||||
Cost of coal sales from idled or otherwise disposed operations not included in segments |
| — |
| — |
| 9,572 |
| 9,572 | ||||
Other (operating overhead, certain actuarial, etc.) |
| — |
| — |
| 3,930 |
| 3,930 | ||||
Non-GAAP Segment cash cost of coal sales | $ | 221,704 | $ | 315,120 | $ | — | $ | 536,824 | ||||
Tons sold |
| 3,727 |
| 27,496 |
|
|
| |||||
Cash Cost Per Ton Sold | $ | 59.49 | $ | 11.46 |
|
| ||||||
39
Reconciliation of Segment Adjusted EBITDA to Net Income
The discussion in “Results of Operations” above includes references to our Adjusted EBITDA for each of our reportable segments. Adjusted EBITDA is defined as net income attributable to us before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the accretion on asset retirement obligations and nonoperating expenses. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results by excluding transactions that are not indicative of our core operating performance. We use Adjusted EBITDA to measure the operating performance of our segments and allocate resources to our segments. Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDA are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDA should not be considered in isolation, nor as an alternative to net income, income from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. The table below shows how we calculate Adjusted EBITDA.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
|
| ||||||||||||
Net income | $ | 407,563 | $ | 27,866 | $ | 679,435 | $ | 21,824 | |||||
Provision for income taxes |
| 496 |
| 2,006 |
| 951 |
| 2,383 | |||||
Interest expense, net |
| 4,610 |
| 2,794 |
| 11,633 |
| 6,595 | |||||
Depreciation, depletion and amortization |
| 32,780 |
| 27,884 |
| 64,990 |
| 53,681 | |||||
Accretion on asset retirement obligations |
| 4,430 |
| 5,437 |
| 8,860 |
| 10,874 | |||||
Non-service related pension and postretirement benefit costs |
| 459 |
| 539 |
| 1,332 |
| 2,066 | |||||
Net loss resulting from early retirement of debt | 9,629 | — | 13,749 | — | |||||||||
Adjusted EBITDA |
| 459,967 |
| 66,526 |
| 780,950 |
| 97,423 | |||||
EBITDA from idled or otherwise disposed operations |
| 3,957 |
| 3,997 |
| 6,348 |
| 7,563 | |||||
Selling, general and administrative expenses |
| 26,516 |
| 24,119 |
| 53,164 |
| 45,599 | |||||
Other |
| (678) |
| 8,376 |
| 8,804 |
| 7,111 | |||||
Segment Adjusted EBITDA from coal operations | $ | 489,762 | $ | 103,018 | $ | 849,266 | $ | 157,696 | |||||
Other includes primarily (income) loss from our equity investment, changes in fair value of derivatives we use to manage our exposure to diesel fuel pricing, changes in the fair value of coal derivatives and coal trading activities, EBITDA provided by our land company, and certain miscellaneous revenue.
40
Liquidity and Capital Resources
Our primary sources of liquidity are proceeds from coal sales to customers and certain financing arrangements. Excluding significant investing activity, we intend to satisfy our working capital requirements and fund capital expenditures and debt-service obligations with cash generated from operations and cash on hand. We remain focused on prudently managing costs, including capital expenditures, maintaining a strong balance sheet, and ensuring adequate liquidity.
Given the volatile nature of coal markets, and the significant challenges and uncertainty surrounding the COVID-19 pandemic, we believe it remains important to take a prudent approach to managing our balance sheet and liquidity. Additionally, banks and other lenders have become increasingly unwilling to provide financing to coal producers, especially those with significant thermal coal exposure. Due to the nature of our business, we may be limited in accessing debt capital markets or obtaining additional bank financing, or the cost of accessing this financing could become more expensive.
In light of the reduced capital requirements and current favorable pricing environment, we generated significant cash flows in the first half of 2022 and expect cash flows to remain strong for the second half of 2022. During the first half of 2022, capital expenditures were approximately $53.2 million, and we expect our capital spending to remain at maintenance levels for the foreseeable future. As evidenced throughout the first half of this year, our priority is to improve our financial position through enhancing liquidity and reducing our debt and other liabilities, while returning significant value to our stockholders. During the first half of 2022, we repaid $272.3 million of our Term Loan, entered into privately negotiated exchanges of approximately $125.2 million in principal amount of our Convertible Notes, paid approximately $154.6 million to our stockholders in the form of dividends, and contributed an additional $80.0 million into our fund to pay for future reclamation costs at our legacy thermal operations. We also contributed an additional $30.0 million to the thermal reclamation fund during July, which brings the total funding level to $130.0 million. During the second quarter of 2022, our working capital requirements increased approximately $123.5 million; primarily in receivables. We ended the second quarter of 2022 with cash and cash equivalents of $281.9 million and total liquidity of $349.7 million. We believe our current liquidity level is sufficient to fund our business and meet both our short-term (the next twelve months) and reasonably foreseeable long-term requirements and obligations including our recently enacted variable rate dividend policy. We expect to maintain minimum liquidity levels of approximately $250 million to $300 million, with a substantial portion of that held in cash. In addition, we expect to hold additional cash at the end of each quarter in an amount that represents a substantial portion of the following quarter’s dividend payment.
We believe we have significantly increased our future cash-generating capabilities, and as a result, in the second quarter of 2022, we launched a comprehensive capital return program that returns 50% of the prior quarter discretionary cash flow to stockholders via a variable rate cash dividend and reserves the remaining 50% for potential share buybacks, special dividends, the repurchase of potentially dilutive securities, and capital preservation. In the second quarter of 2022, we made a combined fixed and variable dividend payment of $8.11 per share based on 50% of the first quarter discretionary cash flow and used the remaining 50% to repurchase approximately $125.2 million in principal amount of our Convertible Notes. For further information regarding the Convertible Notes exchange, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements. Any future dividends and all of these potential uses of capital are subject to board approval and declaration. Any shares acquired would be in the open market or through private transactions in accordance with Securities and Exchange Commission requirements.
Based on the second quarter discretionary cash flow, a combined fixed and variable dividend payment of $6.00 per share will be made to stockholders of record as of August 31, 2022, payable on September 15, 2022.
41
The table below summarizes our second quarter discretionary cash flow and total dividend payout:
Three Months Ended June 30, | |||
| 2022 | ||
|
| ||
Cash flow from operating activities | $ | 268,228 | |
Less: Capital expenditures |
| (30,869) | |
Discretionary cash flow | $ | 237,359 | |
Variable dividend percentage | 50% | ||
Total dividend to be paid | $ | 118,680 | |
Total dividend per share (variable and fixed) | $ | 6.00 | |
During the first half of 2022, we repaid $272.3 million of our Term Loan. The remaining balance of $8.0 million was left as certain terms and conditions governing the Term Loan are incorporated into our outstanding indebtedness. We will continue to make quarterly principal amortization payments in an amount equal to $750,000. The Term Loan Debt Facility will mature on March 7, 2024. For further information regarding the Term Loan Debt Facility, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
During the second quarter of 2022, we entered into privately negotiated exchange agreements with a limited number of holders of our Convertible Notes to exchange approximately $125.2 million principal amount of our Convertible Notes for aggregate consideration consisting of $130.1 million in cash and approximately 2.6 million shares of our common stock. After the exchanges, approximately $30 million in aggregate principal amount of Convertible Notes remained outstanding with the terms unchanged. During the second quarter of 2022, the common stock price condition of the Convertible Notes was satisfied, and as a result, the outstanding Convertible Notes are convertible at the election of the noteholders during the third quarter. As of the date of this Quarterly Report on Form 10-Q, we have not received any conversion requests for the outstanding Convertible Notes and do not anticipate receiving any conversion requests as the market value of the Convertible Notes exceeds the conversion value of the Convertible Notes. As of June 30, 2022, the if-converted value of the outstanding Convertible Notes exceeded the principal amount by approximately $91.1 million. It is our current intent and policy to settle any conversions of Convertible Notes through a combination of cash and shares. For further information regarding the Convertible Notes and the Convertible Notes exchanges, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
We have outstanding an aggregate of $98.1 million of Tax Exempt Bonds issued by the West Virginia Economic Development Authority. The proceeds of the Tax Exempt Bonds were used to finance certain costs of the acquisition, construction, reconstruction, and equipping of solid waste disposal facilities at our Leer South development, and for capitalized interest and certain costs related to the issuance of the Tax Exempt Bonds. For further information regarding the Tax Exempt Bonds, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
We have a trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a special-purpose entity that is a wholly owned subsidiary of Arch Resources (“Arch Receivable”) (the “Securitization Facility”), which supports the issuance of letters of credit and requests for cash advances. The size of the facility is $110 million and the facility has a maturity date of September 29, 2023. For further information regarding the Securitization Facility see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
We have a $50 million senior secured inventory-based revolving credit facility (the “Inventory Facility”) with Regions Bank (“Regions”) as administrative agent and collateral agent, as lender and swingline lender (in such capacities, the “Lender”) and as letter of credit issuer in an aggregate principal amount. The facility has a minimum liquidity requirement of $100 million and a maturity date of September 29, 2023. For further information regarding the Inventory Facility, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
42
The table below summarizes our availability under our credit facilities as of June 30, 2022:
|
|
| Letters of |
| |||||||||||
Borrowing | Credit | Contractual | |||||||||||||
Face Amount | Base | Outstanding | Availability | Expiration | |||||||||||
| (Dollars in thousands) | ||||||||||||||
Securitization Facility | $ | 110,000 | $ | 110,000 | $ | 67,085 | $ | 42,915 | September 29, 2023 | ||||||
Inventory Facility |
| 50,000 |
| 50,000 |
| 27,712 |
| 22,288 | September 29, 2023 | ||||||
Total | $ | 160,000 | $ | 160,000 | $ | 94,797 | $ | 65,203 |
|
| |||||
The above standby letters of credit outstanding have primarily been issued to satisfy certain insurance-related collateral requirements. The amount of collateral required by counterparties is based on their assessment of our ability to satisfy our obligations and may change at the time of policy renewal or based on a change in their assessment. Future increases in the amount of collateral required by counterparties would reduce our available liquidity.
Contractual Obligations
Our contractual obligations include long-term debt and related interest, leases, coal lease rights, coal purchase obligations, and unconditional purchase obligations. As discussed above, we have reduced our long-term debt by repaying $272.3 million of our Term Loan and negotiating exchanges of approximately $125.2 million principal amount of our Convertible Notes during the first half of 2022. There have been no other material changes to our contractual obligations from our Annual Report on Form 10-K for the year ended December 31, 2021. For further information regarding the Term Loan Debt Facility and Convertible Notes exchanges, see Note 8, “Debt and Financing Arrangements” to the Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, indemnifications, financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements. We use a combination of surety bonds and letters of credit to secure our financial obligations for reclamation, workers’ compensation, coal lease obligations and other obligations. There have been no material changes to our off-balance sheet arrangements from our Annual Report on Form 10-K for the year ended December 31, 2021. For further information regarding off-balance sheet arrangements, see Note 14, “Commitments and Contingencies” to the Condensed Consolidated Financial Statements.
Cash Flow
The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2022 and 2021:
| ||||||
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
(In thousands) |
|
|
|
| ||
Cash provided by (used in): |
|
|
|
| ||
Operating activities | $ | 561,167 | $ | 26,109 | ||
Investing activities |
| (42,187) |
| (80,771) | ||
Financing activities |
| (562,231) |
| 21,837 | ||
Cash provided by operating activities increased in the six months ended June 30, 2022 versus the six months ended June 30, 2021, mainly due to the improvement in results from operations discussed in the “Overview” and “Operational Performance” sections above, partially offset by a greater increase in working capital requirements of approximately $85 million in the current year period, primarily in receivables, and by the additional funding of the thermal reclamation fund of $80 million in first half of 2022.
43
Cash used in investing activities decreased in the six months ended June 30, 2022 versus the six months ended June 30, 2021, primarily due to decreased capital expenditures of approximately $95 million resulting from the completion of the Leer South development in 2021, partially offset by a net decrease in proceeds from sale of short-term investments of approximately $55 million.
Cash was used in financing activities during the six months ended June 30, 2022 compared to cash provided by financing activities during the six months ended June 30, 2021. In the current year period, we made repayments of the Term Loan of approximately $272 million, consummated exchanges of Convertible Notes with the cash component of the exchange consideration consisting of approximately $130 million in cash in the aggregate, and paid dividends of approximately $155 million. During the prior year period we received proceeds from the 2021 Tax Exempt Bonds of approximately $45 million.
Critical Accounting Estimates
We prepare our financial statements in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management bases our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. There have been no material changes to our critical accounting estimates from our Annual Report on Form 10-K for the year ended December 31, 2021.
44
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We manage our commodity price risk for our non-trading, thermal coal sales through the use of long-term coal supply agreements, and to a limited extent, through the use of derivative instruments. Sales commitments in the metallurgical coal market are typically not long term in nature, and we are therefore subject to fluctuations in market pricing.
Our sales commitments for 2022 were as follows as of June 30, 2022:
| 2022 | ||||
Tons |
| $ per ton | |||
Metallurgical | (in millions) | ||||
Committed, North America Priced Coking |
| 0.7 | $ | 216.36 | |
Committed, North America Unpriced Coking |
| 0.2 |
|
| |
Committed, Seaborne Priced Coking |
| 3.6 | 284.82 | ||
Committed, Seaborne Unpriced Coking |
| 2.0 |
|
| |
Committed, Priced Thermal |
| 0.4 | 23.48 | ||
Committed, Unpriced Thermal |
| — |
|
| |
Thermal |
|
|
|
| |
Committed, Priced |
| 73.9 | $ | 18.57 | |
Committed, Unpriced |
| 1.4 |
|
| |
We are exposed to fluctuations in the fair value of coal derivatives that we enter into to manage the price risk related to future coal sales, but for which we do not elect hedge accounting. Gains or losses on these derivative instruments would be largely offset in the pricing of the physical coal sale. During the three months ended June 30, 2022, Value at Risk “VaR” for our risk management positions that are recorded at fair value through earnings ranged from $2.5 million to $8.0 million. The linear mean of each daily VaR was $4.8 million. The final VaR at June 30, 2022 was $2.5 million.
We monitor and manage market price risk for our hedging activities with a variety of tools, including VaR, position limits, management alerts for mark to market monitoring and loss limits, scenario analysis, sensitivity analysis and review of daily changes in market dynamics. Management believes that presenting high, low, end of year and average VaR is the best available method to give investors insight into the level of commodity risk of our risk management positions. Illiquid positions, such as long-dated trades that are not quoted by brokers or exchanges, are not included in VaR.
VaR is a statistical one-tail confidence interval and down side risk estimate that relies on recent history to estimate how the value of the portfolio of positions will change if markets behave in the same way as they have in the recent past. The level of confidence is 95%. The time across which these possible value changes are being estimated is through the end of the next business day. A closed-form delta-neutral method used throughout the finance and energy sectors is employed to calculate this VaR. VaR is back tested to verify its usefulness.
We are exposed to price risk with respect to diesel fuel purchased for use in our operations. We anticipate purchasing approximately 40 to 45 million gallons of diesel fuel for use in our operations annually. To protect our cash flows from increases in the price of diesel fuel for our operations, we use forward physical diesel purchase contracts, purchased heating oil call options and New York Mercantile Exchange (“NYMEX”) gulf coast diesel swaps and options. At June 30, 2022, the Company had protected the price of expected diesel fuel purchases for 2022 with approximately 11 million gallons of heating oil call options with an average strike price of $3.28 per gallon. These positions are not designated as hedges for accounting purposes, and therefore, changes in the fair value are recorded immediately to earnings.
45
We have exposure to price risk for supplies that are used directly or indirectly in the normal course of production, such as diesel fuel, steel, explosives and other items. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers. We may sell or purchase forward contracts, swaps and options in the over-the-counter market in order to manage its exposure to price risk related to these items.
Item 4.Controls and Procedures
We performed an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date. There were no changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1.Legal Proceedings
We are involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. After conferring with counsel, it is the opinion of management that the ultimate resolution of these claims, to the extent not previously provided for, will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to the “Risk Factors” disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 except for the following additional risk factor:
We may not be able to pay dividends or repurchase shares of our common stock in accordance with our announced intent or at all.
The Board of Directors’ determinations regarding fixed or variable dividends and share repurchases will depend on a variety of factors, including our net income, cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions and organic growth opportunities, as well as economic conditions and expected future financial results.
Our ability to declare future dividends and make future share repurchases will depend on our future financial performance, which in turn depends on the successful implementation of our strategy and on financial, competitive, regulatory, technical and other factors, general economic conditions, demand and selling prices for our products and other factors specific to our industry, many of which are beyond our control. Therefore, our ability to generate cash depends on the performance of our operations and could be limited by decreases in our profitability or increases in costs, regulatory changes, capital expenditures or debt servicing requirements.
The frequency and amount of dividends, if any, may vary significantly from amounts paid in previous periods. The Company can provide no assurance that it will continue to pay fixed or variable dividends or repurchase shares. Any failure to pay dividends or repurchase shares of our common stock could negatively impact our reputation, lessen investor confidence in us, and cause the market price of our common stock to decline.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2022, the Board of Directors increased the remaining outstanding authorization for share repurchases to $500 million. The timing of any future share purchases, and the ultimate number of shares to be purchased, will depend on a number of factors, including business and market conditions, our future financial
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performance, and other capital priorities. The shares will be acquired in the open market or through private transactions in accordance with Securities and Exchange Commission requirements. The share repurchase program has no termination date, but may be amended, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market conditions. We did not purchase any shares of our common stock under this program for the quarter ended June 30, 2022.
Item 4.Mine Safety Disclosures
The statement concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022.
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10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 |
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10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
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10.26 | ||
10.27 | ||
10.28 | Coal Lease Agreement dated as of March 31, 1992, among Allegheny Land Company, as lessee, and UAC and Phoenix Coal Corporation, as lessors, and related guarantee (incorporated by reference to the Current Report on Form 8-K filed by Ashland Coal, Inc. on April 6, 1992). | |
10.29 | ||
10.30 | ||
10.31 | ||
10.32 | ||
10.33 | ||
10.34 | ||
10.35 | ||
10.36* | ||
10.37* | ||
10.38* | ||
10.39 |
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10.40* | ||
10.41* | ||
10.42* | ||
10.43* | ||
10.44 | ||
10.45 | ||
10.46* | ||
10.47 | ||
10.48 | ||
31.1** | ||
31.2** | Rule 13a-14(a)/15d-14(a) Certification of Matthew C. Giljum. | |
32.1 | ||
32.2 | ||
95 | ||
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL: (1) Condensed Consolidated Income Statements, (2) Condensed Consolidated Statements of Comprehensive Income (Loss), (3) Condensed Consolidated Balance Sheets, (4) Condensed Consolidated Statements of Cash Flows, (5) Condensed Consolidated Statements of Stockholders’ Equity and (6) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
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| * | Denotes a management contract or compensatory plan or arrangement. |
**Furnished herein
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Arch Resources, Inc. | ||
By: | /s/ Matthew C. Giljum | |
Matthew C. Giljum | ||
Senior Vice President and Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) | ||
July 28, 2022 | ||
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