Arch Resources(ARCH) - 2018 Q4 - Annual Report

Part I Business Overview Arch Coal is a major global coal producer operating 9 U.S. mines, selling thermal and metallurgical coal, and managing operations through three segments after emerging from Chapter 11 bankruptcy - In 2018, Arch Coal sold approximately 97 million tons of coal from its 9 active U.S. mines[12] - The company emerged from Chapter 11 bankruptcy on October 5, 2016, applying fresh start accounting, which impacts financial statement comparability[20][21] - The business is organized into three reportable segments: Powder River Basin (PRB), Metallurgical (MET), and Other Thermal[54] Active Mining Complexes Summary (as of Dec 31, 2018) | Mining Complex | Tons Sold 2018 (Million tons) | Total Assigned Recoverable Reserves (Million tons) | Total Cost of PP&E (in millions USD) | | :--- | :--- | :--- | :--- | | Powder River Basin | | | | | Black Thunder | 71.1 | 816.5 | 275.7 | | Coal Creek | 8.0 | 94.7 | 43.9 | | Metallurgical | | | | | Mountain Laurel | 1.9 | 11.1 | 30.1 | | Beckley | 1.0 | 25.9 | 54.5 | | Sentinel | 1.2 | 5.0 | 68.0 | | Leer | 3.5 | 29.6 | 228.7 | | Other Thermal | | | | | West Elk | 4.8 | 53.9 | 42.2 | | Viper | 1.8 | 43.2 | 31.7 | | Coal‑Mac | 2.5 | 19.6 | 31.3 | | Totals | 95.8 | 1,099.5 | 806.1 | Introduction and History Arch Coal, organized in 1969, expanded through mergers and acquisitions, becoming a major U.S. coal producer before undergoing Chapter 11 restructuring and applying fresh start accounting - The company, organized in Delaware in 1969, became a major low-sulfur coal producer after merging with Ashland Coal, Inc. in 1997[13] - Arch and its domestic subsidiaries filed for Chapter 11 bankruptcy on January 11, 2016, emerging on October 5, 2016, after court confirmation of its reorganization plan[18][20] The Coal Industry and Mining Methods The global coal industry, dominated by China, the U.S., and India, saw Arch Coal produce both thermal and metallurgical coal using primarily surface and underground mining methods - In 2018, 92% of Arch's coal sales volume was thermal coal, while higher-priced metallurgical coal contributed 42% of sales revenue[32] - The company primarily uses surface mining for reserves close to the surface, and underground mining (longwall and room-and-pillar) for deeper coal seams[44][48] Sales, Marketing and Competition Arch Coal's sales and marketing, with international offices, saw its top three customers account for 20% of 2018 revenues, with 60% of coal sold under long-term contracts, facing intense competition from other producers and alternative energy - In 2018, the three largest customers accounted for approximately 20% of total coal revenues[81] Seaborne Revenues by Destination (2018) | Destination | Revenue (in thousands USD) | | :--- | :--- | | Europe | $ 559,165 | | Asia | $ 452,711 | | Central and South America | $ 79,085 | | Africa | $ 17,567 | | Brokered Sales | $ 2,372 | | Total | $ 1,110,900 | - In 2018, approximately 60% of coal was sold under long-term supply arrangements, with an average remaining term of 2.3 years[84] - The company competes with major domestic and international producers, as well as alternative fuels like natural gas, nuclear, and renewables[101][102] Environmental and Other Regulatory Matters The U.S. coal mining industry is heavily regulated by federal, state, and local authorities, with key acts like SMCRA, Clean Air, and Clean Water imposing significant compliance costs and impacting coal demand - The Surface Mining Control and Reclamation Act (SMCRA) establishes comprehensive standards for mining, environmental protection, and reclamation, requiring permits and performance bonds[110][111] - As of December 31, 2018, the company had posted approximately $536.2 million in surety bonds for reclamation purposes[115] - The Clean Air Act directly affects operations through permitting and indirectly by regulating emissions from coal-fueled power plants[119] - The EPA's proposed Affordable Clean Energy (ACE) rule aims to establish guidelines for states for greenhouse gas emissions from existing coal-fired power plants, potentially reducing regulatory burden[141] - The Clean Water Act restricts pollutant discharge into U.S. waters, requiring numerous costly and time-consuming permits[145][147][152] Risk Factors The company faces significant risks from volatile coal prices, market competition, operational hazards, transportation disruptions, extensive environmental regulations, and limitations on using net operating losses post-bankruptcy - Operational Risks: Profitability depends on volatile coal prices influenced by supply/demand, natural gas competition, and economic conditions, alongside risks from geological conditions, equipment failure, and transportation disruptions[170][179][184] - Regulatory and Environmental Risks: Extensive environmental regulations, particularly those targeting air emissions and climate change, could significantly reduce coal demand, cause plant closures, and increase compliance costs[221][222][235] - Financial and Market Risks: Customer creditworthiness impacts payment collection, declining metallurgical coal demand could force a shift to lower-priced steam coal, and failure to obtain or renew reclamation surety bonds could halt mining operations[186][195][202] - Post-Bankruptcy Risks: Financial statements post-October 2016 are not comparable due to fresh start accounting, and the ability to use pre-emergence net operating losses (NOLs) is substantially limited under Section 382[169][249] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[256] Properties As of December 31, 2018, Arch Coal controlled approximately 1.9 billion tons of proven and probable recoverable coal reserves across several states, with significant western U.S. reserves acquired via the lengthy federal LBA process - At December 31, 2018, the company estimated it owned or controlled approximately 1.9 billion tons of proven and probable recoverable reserves[260] Assigned and Unassigned Recoverable Coal Reserves (Tons in millions, as of Dec 31, 2018) | Region | Total Assigned Reserves (Tons in millions) | Total Unassigned Reserves (Tons in millions) | | :--- | :--- | :--- | | Wyoming | 911 | 271 | | Colorado | 54 | — | | Central App. | 57 | 59 | | Northern App. | 73 | 149 | | Illinois | 43 | 281 | | Total | 1,138 | 760 | - A significant portion of western U.S. coal reserves are acquired through the federal lease-by-application (LBA) process, which can take five to ten years or more to complete[268] Legal Proceedings The company is involved in various ordinary course legal claims, which management believes will not materially adversely affect its financial condition, results of operations, or liquidity - The company is involved in ordinary course legal claims but does not expect them to have a material adverse effect on its financial condition[278] Mine Safety Disclosures Mine safety disclosures required by the Dodd-Frank Act are included in Exhibit 95 of the Annual Report on Form 10-K - Mine safety disclosures required by Section 1503(a) of the Dodd-Frank Act are included in Exhibit 95 to this Form 10-K[279] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Arch Coal's common stock trades on the NYSE under "ARCH" since its 2016 bankruptcy emergence, with the company paying $31.3 million in 2018 dividends and repurchasing $584 million in shares under a $750 million authorization 2018 Quarterly Common Stock Prices and Dividends | Quarter | High (USD) | Low (USD) | Dividends per share (USD) | | :--- | :--- | :--- | :--- | | First | 101.84 | 83.84 | 0.40 | | Second | 102.61 | 76.00 | 0.40 | | Third | 95.72 | 75.09 | 0.40 | | Fourth | 98.25 | 78.05 | 0.40 | - The Board authorized a $750 million share repurchase program, with $584 million used to repurchase 7.2 million shares as of December 31, 2018, leaving $166 million authorized[288][289] Selected Financial Data The company's financial data is not comparable pre- and post-October 2016 due to fresh start accounting, with 2018 revenues at $2.45 billion and net income at $312.6 million, up from 2017 Selected Financial Data (Successor) | (in thousands USD, except per share data) | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Revenues | $ 2,451,787 | $ 2,324,623 | | Income from operations | $ 279,138 | $ 234,336 | | Net income | $ 312,577 | $ 238,450 | | Diluted earnings per common share | $ 15.15 | $ 9.84 | | Total assets | $ 1,887,060 | $ 1,979,632 | | Long-term debt, less current maturities | $ 300,186 | $ 310,134 | | Cash provided by operating activities | $ 417,963 | $ 396,474 | - Financial statements on or prior to October 1, 2016 (Predecessor) are not comparable with subsequent statements (Successor) due to fresh start accounting post-bankruptcy emergence[292] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported 2018 results benefited from strong metallurgical and international thermal coal markets, with consolidated sales increasing 5.5% to $2.45 billion, driven by the Metallurgical segment, while maintaining strong liquidity and continuing capital returns Results of Operations For 2018, revenues increased 5.5% to $2.45 billion due to higher metallurgical coal pricing, resulting in $312.6 million net income, with the Metallurgical segment's Adjusted EBITDAR growing significantly, offsetting declines in other segments Consolidated Coal Sales (2018 vs. 2017) | Metric | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | Change | | :--- | :--- | :--- | :--- | | Coal Sales (in thousands USD) | $ 2,451,787 | $ 2,324,623 | $ 127,164 | | Tons Sold (in thousands) | 96,792 | 98,218 | (1,426) | Segment Operational Performance (2018 vs. 2017) | Segment | Metric | 2018 | 2017 | Variance | | :--- | :--- | :--- | :--- | :--- | | Powder River Basin | Cash margin per ton | $1.58 | $1.96 | ($0.38) | | | Adjusted EBITDAR (in thousands USD) | $126,525 | $158,882 | ($32,357) | | Metallurgical | Cash margin per ton | $44.87 | $29.41 | $15.46 | | | Adjusted EBITDAR (in thousands USD) | $349,524 | $243,616 | $105,908 | | Other Thermal | Cash margin per ton | $7.11 | $10.65 | ($3.54) | | | Adjusted EBITDAR (in thousands USD) | $68,620 | $102,006 | ($33,386) | Liquidity and Capital Resources The company's liquidity, primarily from operations and financing, totaled approximately $498 million at year-end 2018, with $418.0 million in operating cash flow, supporting $281.8 million in stock repurchases and $31.3 million in dividends - As of December 31, 2018, the company had total liquidity of approximately $498 million, including $428 million in unrestricted cash, equivalents, and short-term investments[374] Summary of Cash Flows (in thousands USD) | Activity | Year Ended Dec 31, 2018 (in thousands USD) | Year Ended Dec 31, 2017 (in thousands USD) | | :--- | :--- | :--- | | Operating activities | $ 417,963 | $ 396,474 | | Investing activities | $ (103,952) | $ (130,638) | | Financing activities | $ (322,676) | $ (368,656) | Contractual Obligations Summary (in thousands USD) | Obligation Type | Total (in thousands USD) | Due after 2023 (in thousands USD) | | :--- | :--- | :--- | | Long-term debt, including interest | $ 403,399 | $ 283,087 | | Operating leases | $ 18,242 | $ 6,248 | | Coal lease rights | $ 120,808 | $ 84,913 | | Unconditional purchase obligations | $ 64,907 | $ — | | Total | $ 612,491 | $ 374,248 | Critical Accounting Policies Critical accounting policies requiring significant judgment include Fresh Start Accounting post-bankruptcy, valuation of Derivative Financial Instruments, impairment of Long-lived Assets, Asset Retirement Obligations, Employee Benefit Plans, and Income Taxes - Key critical accounting policies include fresh start accounting, derivative financial instruments, impairment of long-lived assets, asset retirement obligations, employee benefit plans, and income taxes[390] - Upon emergence from bankruptcy, the company applied fresh start accounting, establishing an equity value of $687.5 million based on an enterprise value range of $650 million to $950 million[391] - Asset retirement obligations, estimated at $243.4 million on the balance sheet as of December 31, 2018, are based on estimates of future reclamation costs, timing, and discount rates[406] - As of December 31, 2018, the company maintained a valuation allowance of $530.6 million against its deferred tax assets, reflecting uncertainty about their future realization[418] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from commodity prices, interest rates, and diesel fuel costs, managing thermal coal price risk via contracts and partially mitigating interest rate risk on $294.8 million variable-rate debt with swaps 2019 Sales Commitments | Segment | Type | Tons (in millions) | Avg. Price per ton (USD) | | :--- | :--- | :--- | :--- | | Metallurgical | | | | | | Committed, Priced Coking (North America) | 0.7 | 119.45 | | | Committed, Unpriced Coking (North America) | 1.0 | - | | | Committed, Priced Coking (Seaborne) | 0.2 | 115.37 | | | Committed, Unpriced Coking (Seaborne) | 3.9 | - | | | Committed, Priced Thermal | 0.8 | 32.64 | | Powder River Basin | | | | | | Committed, Priced | 56.6 | 12.13 | | | Committed, Unpriced | 1.8 | - | | Other Thermal | | | | | | Committed, Priced | 6.5 | 40.53 | | | Committed, Unpriced | 1.2 | - | - The company uses Value at Risk (VaR) to monitor commodity price risk, with 2018 VaR for coal trading positions ranging from $0.1 million to $0.3 million, averaging $0.1 million[428] - The company is exposed to interest rate risk on approximately $294.8 million of variable-rate debt, partially mitigated by interest rate swaps[432] Financial Statements and Supplementary Data The company's consolidated financial statements and supplementary data are included in the Annual Report on Form 10-K, starting on page F-1 - The company's consolidated financial statements and supplementary data are included in the report starting on page F-1[433] Changes In and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - There were no disagreements with accountants on accounting and financial disclosure[433] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[434] Other Information The company reports no other information under this item - None[435] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 proxy statement - Information regarding directors, corporate governance, and compliance is incorporated by reference from the 2019 proxy statement[436] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2019 proxy statement - Information regarding executive compensation is incorporated by reference from the 2019 proxy statement[437] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2019 proxy statement - Information regarding security ownership is incorporated by reference from the 2019 proxy statement[438] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2019 proxy statement - Information regarding related transactions and director independence is incorporated by reference from the 2019 proxy statement[439] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2019 proxy statement - Information regarding principal accounting fees and services is incorporated by reference from the 2019 proxy statement[440] Part IV Exhibits and Financial Statement Schedules This section provides an index to the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K - This section references the index to financial statements (page F-1), financial statement schedules, and the exhibit index[442][443] Form 10-K Summary The company reports no summary for the Form 10-K under this item - None[443]