Arch Resources(ARCH) - 2019 Q4 - Annual Report

PART I This section provides an overview of Arch Coal's business, operations, sales, regulatory environment, and key risk factors Item 1. Business Arch Coal, Inc. is a major global coal producer with operations segmented into Powder River Basin thermal coal, Metallurgical coal, and Other Thermal coal Introduction and History Arch Coal is a leading global coal producer, selling approximately 90 million tons in 2019 and emerging from Chapter 11 bankruptcy in 2016 - In 2019, the company sold approximately 90 million tons of coal from 8 active mines located in major U.S. coal-producing regions[14] - The company emerged from Chapter 11 bankruptcy in October 2016 after filing for reorganization in January 2016[20][21] - In June 2019, Arch agreed to form a joint venture with Peabody Energy, combining their Powder River Basin and Colorado mining operations, with Arch holding a 33.5% economic interest[23] The Coal Industry and Mining Operations The company operates in a competitive global coal market, producing both thermal and metallurgical coal through surface and underground mining methods - In 2019, thermal coal represented 92% of sales volume, while metallurgical coal contributed 43% of sales revenue, highlighting the significant price premium for metallurgical products[34] - The company's operations are divided into three reportable segments: Powder River Basin (PRB), Metallurgical (MET), and Other Thermal[55] Active Mining Complexes Summary (as of Dec 31, 2019) | Mining Complex | Segment | Tons Sold 2019 (millions) | Assigned Reserves (million tons) | Property, Plant & Equipment ($ millions) | | :--- | :--- | :--- | :--- | :--- | | Black Thunder | Powder River Basin | 72.0 | 747.7 | 299.4 | | Coal Creek | Powder River Basin | 2.6 | 92.2 | 44.5 | | Mountain Laurel | Metallurgical | 1.4 | 21.4 | 32.6 | | Beckley | Metallurgical | 1.0 | 25.5 | 63.5 | | Leer South/Sentinel | Metallurgical | 1.1 | 43.2 | 197.5 | | Leer | Metallurgical | 4.1 | 48.3 | 252.9 | | West Elk | Other Thermal | 4.1 | 50.5 | 49.9 | | Viper | Other Thermal | 1.5 | 40.4 | 35.3 | | Totals | | 87.8 | 1,069.2 | 975.6 | Sales, Marketing and Customers Arch Coal markets its products to a diverse customer base, with significant international exports and a substantial portion of sales under long-term contracts - The three largest customers accounted for approximately 21% of total coal revenues in 2019, and the ten largest customers accounted for 47%[79] Seaborne Revenues by Destination (2019) | Region | Revenue (in thousands) | | :--- | :--- | | Europe | $ 537,117 | | Asia | $ 322,029 | | Central and South America | $ 82,476 | | Africa | $ 18,698 | | Total | $ 960,320 | - In 2019, approximately 56% of coal was sold under long-term supply arrangements, with remaining tons under these agreements totaling about 129 million tons and an average remaining term of 2.7 years as of December 31, 2019[83] Environmental and Other Regulatory Matters The company's operations are subject to extensive federal, state, and local environmental and safety regulations, significantly impacting costs and demand - The company is required to obtain numerous governmental permits for mining, which can be costly, time-consuming, and subject to legal challenges[104][105][106] - As of December 31, 2019, the company had posted approximately $528.9 million in surety bonds for reclamation purposes and $156.5 million for other obligations like workers' compensation[114] - Air quality regulations, particularly those targeting emissions of sulfur dioxide, nitrogen oxides, mercury, and greenhouse gases from coal-fueled power plants, indirectly but significantly affect the demand for coal[118] - The EPA finalized the Affordable Clean Energy (ACE) rule in June 2019 to replace the Clean Power Plan, establishing new guidelines for states to address greenhouse gas emissions from existing coal-fired power plants, though its ultimate effect is subject to litigation[137] Item 1A. Risk Factors The company faces significant risks from volatile coal prices, competition, extensive environmental regulations, and the proposed joint venture with Peabody - Profitability is highly dependent on coal prices, which are volatile and influenced by factors beyond the company's control, including demand for electricity and steel, competition from other fuels (especially natural gas), and environmental regulations[163][166] - Competition from low-priced natural gas has decreased demand for thermal coal and contributed to the closure of coal-fired power plants, a trend that could continue to adversely affect the business[173] - Extensive and evolving environmental regulations, particularly those related to air emissions and climate change (e.g., Clean Power Plan/ACE rule, Paris Agreement), could significantly reduce future demand for coal and increase customer costs[221][222] - The proposed joint venture with Peabody faces risks, including failure to obtain regulatory approval, inability to realize expected synergies, and diversion of management attention[254][255] Item 2. Properties As of December 31, 2019, Arch Coal controlled approximately 1.8 billion tons of proven and probable recoverable coal reserves, primarily through long-term federal leases - The company estimated it owned or controlled approximately 1.8 billion tons of proven and probable recoverable reserves at year-end 2019[269] Assigned and Unassigned Recoverable Coal Reserves (Tons in millions, as of Dec 31, 2019) | Reserve Type | Wyoming | Central App. | Northern App. | Illinois | Colorado | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Assigned | 840 | 47 | 92 | 40 | 51 | 1,070 | | Unassigned | 260 | 49 | 139 | 284 | - | 732 | | Total | 1,100 | 96 | 231 | 324 | 51 | 1,802 | - A significant portion of western U.S. coal is controlled through the federal Lease by Application (LBA) process, which can take five to ten years or more to complete[278] Item 3. Legal Proceedings The company is involved in various legal claims arising in the ordinary course of business, which management does not expect to have a material adverse financial effect - The company states that ongoing legal proceedings arising from the ordinary course of business are not expected to have a material adverse effect on its financial condition[288] Item 4. Mine Safety Disclosures Information regarding mine safety violations and other regulatory matters is included in Exhibit 95 of this Annual Report on Form 10-K - Mine safety disclosures required under the Dodd-Frank Act are provided in Exhibit 95 of the Form 10-K[289] PART II This section covers Arch Coal's common equity market, selected financial data, management's discussion and analysis, and market risk disclosures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Arch Coal's common stock trades on the NYSE, with the company paying dividends and actively repurchasing shares under an authorized program 2019 Quarterly Common Stock Prices and Dividends | Quarter | High Price | Low Price | Dividends per Share | | :--- | :--- | :--- | :--- | | First | $93.64 | $80.69 | $0.45 | | Second | $99.96 | $86.71 | $0.45 | | Third | $93.81 | $69.31 | $0.45 | | Fourth | $86.00 | $70.41 | $0.45 | Share Repurchases (Q4 2019) | Period | Total Shares Purchased | Average Price Paid | Remaining Authorization ($ thousands) | | :--- | :--- | :--- | :--- | | Oct 2019 | 127,002 | $78.73 | $223,118 | | Nov 2019 | 6,377 | $78.39 | $222,618 | | Dec 2019 | 0 | - | $222,618 | | Total Q4 | 133,379 | $78.72 | $222,618 | - Since the inception of the stock repurchase program, the company has repurchased 10,088,378 shares for approximately $827 million, with $223 million remaining under the authorization as of year-end 2019[300] Item 6. Selected Financial Data This section provides a five-year summary of key financial and operating data, including revenues, net income, and tons sold Selected Financial Data (Year Ended Dec 31) | Metric (in thousands, except per share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenues | $2,294,352 | $2,451,787 | $2,324,623 | | Income from operations | $242,870 | $279,138 | $234,336 | | Net income | $233,799 | $312,577 | $238,450 | | Diluted EPS | $13.52 | $15.15 | $9.84 | | Total assets | $1,867,756 | $1,887,060 | $1,979,632 | | Long-term debt | $290,066 | $300,186 | $310,134 | | Cash from operating activities | $419,714 | $417,963 | $396,474 | | Tons sold | 90,305 | 96,792 | 98,218 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2019 financial results, highlighting revenue decline due to market softness, strong liquidity, and increased capital expenditures for the Leer South mine Results of Operations (2019 vs. 2018) In 2019, revenues decreased by 6.4% to $2.29 billion due to lower volumes and weaker metallurgical pricing, leading to a decline in net income Consolidated Sales Performance (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Coal Sales (in thousands) | $2,294,352 | $2,451,787 | $(157,435) | | Tons Sold (in thousands) | 90,305 | 96,792 | (6,487) | - Cost of sales decreased by $52.2 million, or 2.7%, in 2019 compared to 2018, primarily due to lower operating taxes, reduced purchased coal costs, and a build in coal inventories[311] - The company recorded $13.8 million in costs related to the proposed joint venture with Peabody and a $9.0 million loss on the sale of its Coal-Mac operation[311][317][318] Operational Performance by Segment (2019 vs. 2018) In 2019, all segments experienced a decline in Adjusted EBITDA, primarily driven by lower sales prices in Metallurgical and reduced volumes in Powder River Basin and Other Thermal Segment Performance Comparison (2019 vs. 2018) | Segment | Metric | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Powder River Basin | Tons Sold (k) | 74,531 | 79,542 | | | Cash Margin/ton | $1.45 | $1.58 | | | Adjusted EBITDA (k) | $110,528 | $126,525 | | Metallurgical | Tons Sold (k) | 7,769 | 7,747 | | | Cash Margin/ton | $39.26 | $44.87 | | | Adjusted EBITDA (k) | $305,363 | $349,524 | | Other Thermal | Tons Sold (k) | 7,717 | 9,089 | | | Cash Margin/ton | $5.22 | $7.11 | | | Adjusted EBITDA (k) | $41,495 | $68,620 | Liquidity and Capital Resources The company maintained strong liquidity of $412 million at year-end 2019, with significant cash usage for capital expenditures and shareholder returns - Total liquidity at December 31, 2019 was approximately $412 million, including $289 million in cash, equivalents, and short-term investments[379] Summary of Cash Flows (Year Ended Dec 31, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Operating Activities | $419,714 | $417,963 | | Investing Activities | $(239,111) | $(103,952) | | Financing Activities | $(292,520) | $(322,676) | - Capital expenditures increased significantly to $266.4 million in 2019 from $95.3 million in 2018, primarily due to development of the Leer South mine[384][302] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from commodity prices and interest rates, with hedging strategies in place for a portion of its sales and debt 2020 Sales Commitments (as of Dec 31, 2019) | Segment | Commitment Type | Tons (millions) | Avg. Price/ton | | :--- | :--- | :--- | :--- | | Metallurgical | N. America Priced Coking | 1.8 | $107.11 | | | Seaborne Priced Coking | 0.2 | $83.44 | | | Seaborne Unpriced Coking | 2.2 | - | | Powder River Basin | Priced | 58.1 | $12.22 | | | Unpriced | 1.8 | - | | Other Thermal | Priced | 3.1 | $33.65 | | | Unpriced | 0.3 | - | - The company is exposed to interest rate risk on approximately $291.8 million of variable-rate debt, though this risk is largely mitigated by interest rate swaps[429] Item 8. Financial Statements and Supplementary Data This section presents the company's consolidated financial statements, accompanying notes, and the independent auditor's report for 2017-2019 - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[451][452] - A critical audit matter identified was the valuation of the Asset Retirement Obligation (ARO) liability, which totaled $252.8 million and involves significant management judgment and subjective assumptions regarding reclamation costs, timing, and discount rates[456][457] PART III This section incorporates information regarding the company's directors, executive compensation, security ownership, and principal accountant fees by reference Items 10-14. Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for these items is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information regarding directors, executive compensation, security ownership, and related matters is not included directly in the 10-K but is incorporated by reference from the forthcoming 2020 proxy statement[433][434][435] PART IV This section details the exhibits and financial statement schedules filed as part of the Form 10-K report Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including material contracts and credit facilities - This section provides an index of all financial statements, schedules, and exhibits filed with the 10-K, including material contracts and credit facilities[439][440]