ARCH RESOURCES, INC. Cautionary Notice Regarding Forward-Looking Statements
This report contains "forward-looking statements" - 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," "appears," "expects," "anticipates," "intends,"
"plans," "believes," "seeks," or "will." Forward-looking statements by their
nature address matters that are, to different degrees, uncertain. For us,
particular uncertainties arise from the impact of the current COVID-19 virus
outbreak and the evolving response thereto; from changes in the demand for our
coal by the domestic electric generation and steel industries; from legislation
and regulations relating to the Clean Air Act and other environmental
initiatives; from competition within our industry and with producers of
competing energy sources; from our ability to successfully acquire or develop
coal reserves; from operational, geological, permit, labor and weather-related
factors, from the Tax Cuts and Jobs Act and other tax reforms; from the effects
of foreign and domestic trade policies, actions or disputes; from fluctuations
in the amount of cash we generate from operations which could impact, among
other things, our ability to resume paying dividends in the future or repurchase
shares; from our ability to successfully integrate the operations that we
acquire; from our ability to complete the joint venture transaction with Peabody
Energy Corporation ("Peabody") in a timely manner, including obtaining
regulatory approvals and satisfying other closing conditions; from our ability
to achieve the expected synergies from the joint venture; from our ability to
successfully integrate the operations of certain mines in the joint venture; and
from numerous other matters of national, regional and global scale, including
those of a political, economic, business, competitive or regulatory nature.
These uncertainties may cause our actual future results to be materially
different than those expressed in our forward-looking statements. 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 law. For a
more detailed 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, 2019 and subsequent
Form 10-Q filings.
COVID-19
In the first quarter of 2020, the COVID-19 virus emerged as a global level pandemic. The still evolving responses to the COVID-19 outbreak include actions that have a significant impact on the domestic and global economies, including travel restrictions, gathering bans, stay home orders, and many other restrictive measures. All of our operations have been classified as essential in the states in which we operate. We have instituted many policies and procedures to protect our employees during the COVID-19 outbreak. These policies and procedures include, but are 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, bath rooms, bath houses, access elevators, mining equipment, and other areas, limiting contractor access to our properties, eliminating business travel, and instituting work from home for administrative employees. We plan to keep these policies and procedures in place and continually evaluate further enhancements for as long as necessary. We recognize that the COVID-19 outbreak and responses thereto will also impact both our customers and suppliers. To date we have not had any significant issues with critical suppliers, but 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 and continue our Leer South development. At this time we believe our customers are reacting in various ways and to varying degrees to declining demand for their products. We have received force majeure letters from certain of our customers, primarily related to our thermal segments. However, no contracted shipments have been cancelled at this time. Our current view of our customer demand situation is discussed in greater detail in the "Overview"
section below.
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Overview
Our results for the first quarter of 2020 were impacted by continued weakness in
metallurgical and thermal coal markets. Demand driven weakness in metallurgical
coal markets that emerged in the second half of 2019 persisted in the first
quarter of 2020, as global economic growth was regionally uneven but generally
slowed and increasingly impacted by the COVID-19 outbreak as the quarter
progressed. Declining margins for steel producers resulted in production
curtailments, particularly in Europe , that have negatively impacted spot demand
for coking coal as well as prompt and forward coking coal prices. We believe the
ongoing softness in coking coal pricing is demand driven, and that higher cost
marginal production sources are pressured at current prompt and forward pricing
levels. Furthermore, recent actions taken to combat the spread of the COVID-19
virus across many regions of the global economy will likely significantly reduce
demand for steel and steel making raw materials including coking coal for at
least the immediate future and possibly much longer. On the supply side,
significant coking coal mine idlings have been announced in reaction to the
COVID-19 virus outbreak, particularly in North America . The duration of these
idlings is highly uncertain. At this time, given our low cost structure and low
coking coal inventories, we have not idled any of our coking coal operations.
Until balance between demand destruction and the ongoing production response
occurs, spot demand and prompt and forward pricing for coking coal will likely
remain under pressure. Longer term, we believe continued limited global capital
investment in new coking coal production capacity, economic pressure on higher
cost production sources, and production responses to the virus outbreak will
provide support to coking coal markets when demand returns to the steel
production supply chain.
Demand for domestic thermal coal in the current quarter came under significant
pressure due to warmer than normal winter season temperatures, historically low
natural gas prices, and the continued increase in renewable generation sources,
particularly wind. Current quarter natural gas pricing reached historically low
levels displacing coal fired generation in most regions of the country.
Production levels of the competing fuel remain at or near all-time highs and
storage levels are significantly above this time last year. At the same time,
generator coal stockpiles are again above historically normal levels based
on days of burn. International thermal coal market pricing remained at depressed
levels that are uneconomic for all of our thermal operations. Additionally, late
in the current quarter we temporarily idled our Viper mine due to failure of the
operation's primary customer to take deliveries due to generating unit issues
and a weak power market. We are currently working with this customer to restart
deliveries as soon as possible. Similar to metallurgical markets discussed
above, recent actions taken to combat the spread of the COVID-19 virus across
many regions of the national and global economy, have reduced and will likely
continue to significantly reduce thermal coal demand and supply. As a result, we
expect domestic thermal markets to remain challenged.
Results of Operations
Three Months Ended
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
Three Months Ended March 31,
2020 2019 (Decrease) / Increase
(In thousands)
Coal sales $ 405,232 $ 555,183 $ (149,951)
Tons sold 16,980 20,725 (3,745)
On a consolidated basis, coal sales in the first quarter of 2020 were
approximately $150.0 million or 27.0% less than in the first quarter of 2019,
while tons sold decreased approximately 3.7 million tons or 18.1%. Coal sales
from Metallurgical operations decreased approximately $70.6 million due to
decreased pricing. Powder River Basin coal sales decreased approximately $34.3
million due to decreased volume, and Other Thermal coal sales decreased
approximately $54.2 million due to decreased volume and pricing. In the prior
year quarter, our Coal Mac operation in our Other
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Thermal Segment, which was sold inDecember 2019 , provided approximately$24.3 million in coal sales and 0.5 million tons sold. See discussion in "Operational Performance" for further information about segment results. Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income during the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, Increase (Decrease) in Net 2020 2019 Income (In thousands) Cost of sales (exclusive of items shown separately below)$ 374,999 $ 438,471 $ 63,472 Depreciation, depletion and amortization 31,308 25,273
(6,035)
Accretion on asset retirement obligations 5,006 5,137 131 Amortization of sales contracts, net - 65 65 Change in fair value of coal derivatives and coal trading activities, net 743 (12,981)
(13,724)
Selling, general and administrative expenses 22,745 24,089
1,344
Costs related to proposed joint venture with Peabody Energy 3,664 -
(3,664)
Severance costs related to voluntary separation plan 5,828 -
(5,828)
Gain on property insurance recovery related to Mountain Laurel longwall (9,000) -
9,000
Other operating income, net (6,170) (1,650)
4,520
Total costs, expenses and other$ 429,123 $ 478,404
$ 49,281 Cost of sales. Our cost of sales for the first quarter of 2020 decreased approximately$63.5 million or 14.5% versus the first quarter of 2019. In the prior year quarter, our Coal Mac operation, which was sold inDecember 2019 , accounted for approximately$25.9 million in cost of sales. The decline in cost of sales at ongoing operations consists primarily of reduced repairs and supplies costs of approximately$21.7 million , transportation costs of approximately$16.4 million , and operating taxes and royalties of approximately$9.4 million . These cost decreases were partially offset by increased purchased coal cost of approximately$8.6 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 quarter of 2020 versus the first quarter of 2019 is primarily due to increased depletion in our Metallurgical segment.
Change in fair value of coal derivatives and coal trading activities, net. The significant benefit in the first quarter of 2019 is primarily related to mark-to-market gains on coal derivatives that we had entered to hedge our price risk for anticipated international thermal coal shipments. Selling, general and administrative expenses. Selling, general and administrative expenses in the first quarter of 2020 decreased versus the first quarter of 2019 due primarily to decreased compensation costs of approximately$1.3 million . Costs related to proposed joint venture with Peabody Energy. OnJune 18, 2019 , we entered into a definitive implementation agreement (the "Implementation Agreement") with Peabody, to establish a joint venture that will combine the companies'Powder River Basin andColorado mining operations. All costs associated with execution of the Implementation Agreement are reflected herein. For further information on our proposed joint venture with Peabody Energy see Note 3, "Joint Venture with Peabody Energy" to the Condensed Consolidated Financial Statements. Severance costs related to voluntary separation plan (VSP). In the current quarter we recorded$5.8 million of employee severance expense related to a voluntary separation package that was accepted by 53 employees of the corporate staff. For further information on our VSP costs see Note 5, "Severance Costs related to Voluntary Separation Plan" to the Condensed Consolidated Financial Statements. Gain on property insurance recovery related to Mountain Laurel longwall. In the current quarter we recorded a$9.0 million benefit for the initial insurance proceeds related to the loss of certain longwall shields at our Mountain Laurel 27 Table of Contents operation in November of 2019. For further information on our gain on property insurance recovery related to Mountain Laurel longwall see Note 4, "Insurance Recovery related to Mountain Laurel longwall" to the Condensed Consolidated Financial Statements.
Other operating income, net. The increased benefit from other operating income,
net in the first quarter of 2020 versus the first quarter of 2019 consists
primarily of the favorable impact of certain coal derivative settlements of
approximately
Nonoperating (expenses) income. The following table summarizes our nonoperating
expense during the three months ended
Three Months Ended March 31,
Increase
(Decrease)
2020 2019 in Net Income
(In thousands)
Non-service related pension and
postretirement benefit costs $ (1,096) $ (1,766) $ 670
Reorganization items, net 26 87 (61)
Total nonoperating (expenses) income $ (1,070) $ (1,679) $ 609
Non-service related pension and postretirement benefit costs. The reduction in non-service related pension and postretirement benefit costs in the first quarter of 2020 versus the first quarter of 2019 is primarily due to postretirement benefit gain amortization in the first quarter of 2020.
Provision for (benefit from) income taxes. The following table summarizes our Provision for (benefit from) income taxes during the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, Increase (Decrease) 2020 2019 in Net Income (In thousands)
Provision for (benefit from) income taxes
1,861
See Note 12, "Income Taxes," to the Condensed Consolidated Financial Statements for a reconciliation of the federal income tax provision (benefit) at the statutory rate to the actual provision for (benefit from) income taxes.
Operational Performance
Three Months Ended
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), and on other non-financial measures, such
as safety and environmental performance. Adjusted EBITDA is defined as net
income (loss) attributable to the Company 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 (loss), income (loss) 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 the Company's operating performance.
Investors should be aware that our presentation of Adjusted EBITDA may not be
comparable to similarly titled measures used by other companies.
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The following table shows results by operating segment for the three months
ended
Three Months Ended March 31,
2020 2019 Variance
Powder River Basin
Tons sold (in thousands) 14,172 17,141 (2,969)
Coal sales per ton sold $ 12.32 $ 12.18 $ 0.14
Cash cost per ton sold $ 12.45 $ 10.98 $ (1.47)
Cash margin per ton sold $ (0.13) $ 1.20 $ (1.33)
Adjusted EBITDA (in thousands) $ (582) $ 20,583 $ (21,165)
Metallurgical
Tons sold (in thousands) 1,779 1,793 (14)
Coal sales per ton sold $ 82.35 $ 118.22 $ (35.87)
Cash cost per ton sold $ 58.42 $ 67.27 $ 8.85
Cash margin per ton sold $ 23.93 $ 50.95 $ (27.02)
Adjusted EBITDA (in thousands) $ 42,720 $ 91,534 $ (48,814)
Other Thermal
Tons sold (in thousands) 743 1,686 (943)
Coal sales per ton sold $ 34.32 $ 38.58 $ (4.26)
Cash cost per ton sold $ 36.61 $ 35.28 $ (1.33)
Cash margin per ton sold
This table reflects numbers reported under a basis that differs fromU.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.Powder River Basin - Adjusted EBITDA for the three months endedMarch 31, 2020 decreased versus the three months endedMarch 31, 2019 , due to decreased volume versus the prior year quarter. Pricing increased slightly, and cash cost per ton sold increased significantly driven by the decrease in volume and the Federal reimposition of a higher Federal Black Lung Excise Tax rate. Pricing in the current quarter benefitted from our ability to recoup the reimposition of the higher Federal Black Lung Excise Tax rate under certain of our term supply contracts. The volume decline was primarily due to low natural gas pricing and continued growth of renewable generation sources, particularly wind. Natural gas pricing reached historical lows during the current quarter as relatively mild winter temperatures, record or near record production levels, and increasing storage levels combined to drive the pricing for the competing fuel significantly lower. By late in the current quarter we were also experiencing reduced electric generation related to demand destruction due to restrictive responses taken to combat the spread of the COVID-19 virus. We expect this demand destruction to continue and possibly accelerate until such responses to control the spread of the virus can be rolled back or mitigated. In 2019 the Federal Black Lung Excise Tax rate reverted to the pre-1986 rates. For 2020,Congress reimposed the higher 1986 to 2018 rates of$0.55 per ton sold or 4.4% of gross selling price on all domestic sales. For 2019, the Federal Black Lung Excise Tax rate for surface mines was$0.25 per ton or 2% of gross selling price on all domestic sales. Metallurgical - Adjusted EBITDA for the three months endedMarch 31, 2020 decreased from the three months endedMarch 31, 2019 due to the decline in coking coal pricing discussed in the "Overview" section above, partially offset by decreased cash cost per ton sold. The cost decrease was driven by an increase in the percentage of segment tons sold from our low cost Leer mine in the current year quarter. Additionally, operating tax and royalty costs declined in the current quarter due to lower pricing and a severance tax credit. Impacts to our metallurgical segment in the current quarter from actions taken to combat the spread of the COVID-19 virus were minimal. However, we believe these actions have caused significant demand destruction to the steel making supply chain and also a production response from higher cost coking coal producers, particularly inNorth America . 29 Table of Contents Our Metallurgical segment sold 1.5 million tons of coking coal and 0.2 million tons of associated thermal coal in the three months endedMarch 31, 2020 , compared to 1.5 million tons of coking coal and 0.3 million tons of associated thermal coal in the three months endedMarch 31, 2019 . Longwall operations accounted for approximately 65% of our shipment volume in the three months endedMarch 31, 2020 compared to approximately 69% of our shipment volume in the three months endedMarch 31, 2019 . Other Thermal - Adjusted EBITDA for the three months endedMarch 31, 2020 decreased versus the three months endedMarch 31, 2019 due to reduced sales volume, decreased pricing, and increased cash cost per tons sold. All of these metrics are impacted by the inclusion of our former Coal Mac operation, which was sold inDecember 2019 , in the prior year quarter. Coal Mac provided approximately 0.5 million tons sold in the prior year quarter. Tons sold from ongoing operations declined approximately 0.5 million tons as low natural gas pricing, increased renewable generation, and uneconomic international pricing impacted volume. In addition, as discussed in the "Overview" section above, we have temporarily idled our Viper mine due to nonperformance of the mine's primary customer. We are working with the customer to restart deliveries. As discussed in thePowder River Basin section above, demand destruction related to reduced electric generation due to actions taken to combat the spread of the COVID-19 virus are expected to continue and possibly accelerate until these actions can be rolled back or mitigated.
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 statement of operations, 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
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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.
Powder River Other Idle andThree Months Ended March 31, 2020 Basin Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the consolidated statements of operations$ 178,460 $ 182,654 $ 31,736 $ 12,382 $ 405,232 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" - (261) (1,328) - (1,589) Coal sales revenues from idled or otherwise disposed operations and pass through agreements not included in segments - - - 12,349 12,349 Transportation costs 3,918 36,388 7,555 33 47,894 Non-GAAP Segment coal sales revenues$ 174,542 $ 146,527
$ 25,509 $ -$ 346,578 Tons sold 14,172 1,779 743 Coal sales per ton sold$ 12.32 $ 82.35$ 34.32 Powder River Other Idle and
Three Months Ended March 31, 2019 Basin Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the consolidated statements of operations$ 212,729 $ 253,262 $ 85,978 $ 3,214 $ 555,183 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" - - 2,044 - 2,044 Coal sales revenues from idled or otherwise disposed operations and pass through agreements not included in segments - - - 3,214 3,214 Transportation costs 4,006 41,298 18,882 - 64,186 Non-GAAP Segment coal sales revenues$ 208,723 $ 211,964 $ 65,052 -$ 485,739 Tons sold 17,141 1,793
1,686
Coal sales per ton sold$ 12.18 $ 118.22
$ 38.58
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 statement of operations, 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
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cost of coal sales should not be considered in isolation, nor as an alternative to cost of sales under generally accepted accounting principles.
Powder River Other Idle and
Three Months Ended March 31, 2020 Basin Metallurgical Thermal Other Consolidated
(In thousands)
GAAP Cost of sales in the consolidated
statements of operations $ 179,617 $ 140,331 $ 34,770 $ 20,281 $ 374,999
Less: Adjustments to reconcile to
Non-GAAP Segment cash cost of coal
sales
Diesel fuel risk management derivative
settlements classified in "other
income" (686) - - - (686)
Transportation costs 3,918 36,388 7,555 33 47,894
Cost of coal sales from idled or
otherwise disposed operations and pass
through agreements not included in
segments - - - 17,885 17,885
Other (operating overhead, certain
actuarial, etc.) - - - 2,363 2,363
Non-GAAP Segment cash cost of coal
sales 176,385 103,943 27,215 - 307,543
Tons sold 14,172 1,779743
Cash Cost Per Ton Sold$ 12.45 $ 58.42
$ 36.61 Powder River Other Idle and
Three Months Ended March 31, 2019 Basin Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the consolidated statements of operations$ 191,648 $ 161,911 $ 78,366 $ 6,546 $ 438,471 Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Diesel fuel risk management derivative settlements classified in "other income" (638) - - - (638) Transportation costs 4,006 41,298 18,882 - 64,186 Cost of coal sales from idled or otherwise disposed operations and pass through agreements not included in segments - - - 4,239 4,239 Other (operating overhead, certain actuarial, etc.) - - - 2,307 2,307 Non-GAAP Segment cash cost of coal sales$ 188,280 120,613 59,484 - 368,377 Tons sold 17,141 1,793 1,686 Cash Cost Per Ton Sold$ 10.98 $ 67.27$ 35.28
Reconciliation of Segment Adjusted EBITDA to Net Income (Loss)
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 the Company 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. 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 (loss), income (loss) from
operations, cash flows from operations or as a measure of our profitability,
liquidity or
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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 March 31,
2020 2019
Net income (loss) $ (25,299) $ 72,741
Provision for (benefit from) income taxes (1,791) 70
Interest expense, net 2,129 2,289
Depreciation, depletion and amortization 31,308 25,273
Accretion on asset retirement obligations 5,006 5,137
Amortization of sales contracts, net - 65
Costs related to proposed joint venture with Peabody Energy
3,664 -
Severance costs related to voluntary separation plan 5,828 -
Gain on property insurance recovery related to Mountain Laurel longwall
(9,000) -
Non-service related pension and postretirement benefit
costs 1,096 1,766
Reorganization items, net (26) (87)
Adjusted EBITDA 12,915 107,254
EBITDA from idled or otherwise disposed operations 5,099 (906)
Selling, general and administrative expenses 22,745 24,089
Other 59 (12,201)
Segment Adjusted EBITDA from coal operations $ 40,818 $ 118,236 Other includes income from our equity investments, certain changes in fair value of heating oil and diesel fuel derivatives we use to manage our exposure to diesel fuel pricing, certain changes in the fair value of coal derivatives and coal trading activities, EBITDA provided by our land company, and certain miscellaneous revenue.
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. As we continue to evaluate the impacts of the COVID-19 virus and the responses thereto on our business, we remain focused on prudently managing costs, including capital expenditures, maintaining a strong balance sheet, and ensuring adequate liquidity. OnApril 27, 2017 , our Board of Directors authorized a capital return program consisting of a share repurchase program and a quarterly cash dividend. The share repurchase plan has a total authorization of$1.05 billion of which we have used$827.4 million . During the quarter endedMarch 31, 2020 , we did not repurchase any shares of our stock, and we paid a dividend of$0.50 per common share onMarch 13, 2020 to stockholders of record at the close of business onMarch 3, 2020 . OnApril 23, 2020 we announced the suspension of our quarterly dividend due to the significant economic uncertainty surrounding the COVID-19 virus and the steps being taken to control the virus. 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 performance, and other capital priorities. Any shares acquired would be in the open market or through private transactions in accordance withSecurities and Exchange Commission requirements. Given the volatile nature of coal markets, and the significant challenges and uncertainty surrounding the COVID-19 virus outbreak, we believe it is increasingly important to take a prudent approach to managing our balance sheet and liquidity, as demonstrated by the suspension of our dividend and share repurchases. While we continue to prefer targeted liquidity levels of at least$400 million , with a significant portion of that being cash, it is likely that our liquidity will remain below our preferred levels while the COVID-19 virus outbreak and the responses thereto continue. Absent significant deterioration in our business and market outlook, we believe our current liquidity level is sufficient to fund our business and continue our Leer South development. We expect to augment our 2020 cash flows with approximately$100 million related to receipts from a federal land settlement and additional proceeds from the Mountain Laurel 33 Table of Contents
longwall insurance recovery, along with alternative minimum tax recoveries and the deferral of certain payroll taxes associated with the federal CARES Act initiatives. In the future, we will continue to evaluate our capital allocation initiatives in light of the current state of, and our outlook, for coal markets; the amount of our planned production that has been committed and priced; the capital needs of the business; other strategic opportunities; and developments in the COVID-19 virus outbreak and the responses thereto. OnMarch 7, 2017 , we entered into a senior secured term loan credit agreement in an aggregate principal amount of$300 million (the "Term Loan Debt Facility") with Credit Suisse AG,Cayman Islands Branch, as administrative agent and collateral agent and the other financial institutions from time to time party thereto. The Term Loan Debt Facility was issued at 99.50% of the face amount and will mature onMarch 7, 2024 . The term loans provided under the Term Loan Debt Facility (the "Term Loans") are subject to quarterly principal amortization payments in an amount equal to$750,000 . Proceeds from the Term Loan Debt Facility were used to repay all outstanding obligations under our previously existing term loan credit agreement, dated as ofOctober 5, 2016 . OnApril 3, 2018 , we entered into the Second Amendment (the "Second Amendment") to the Term Loan Debt Facility. The Second Amendment reduced the interest rate on the Term Loans to, at our option, either (i) theLondon interbank offered rate ("LIBOR") plus an applicable margin of 2.75%, subject to a 1.00% LIBOR floor, or (ii) a base rate plus an applicable margin of 1.75%. For further information regarding the Term Loan Debt Facility see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. We have entered into a series of interest rate swaps to fix a portion of the LIBOR interest payments due under the term loan. As interest payments are made on the term loan, amounts in accumulated other comprehensive income will be reclassified into earnings through interest expense to reflect a net interest on the term loan equal to the effective yield of the fixed rate of the swap plus 2.75% which is the spread on the LIBOR term loan as amended. For further information regarding the interest rate swaps see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnAugust 27, 2018 , we extended and amended our trade accounts receivable securitization facility provided toArch Receivable Company, LLC , a special -purpose entity that is a wholly owned subsidiary ofArch Coal ("Arch Receivable") (the "Extended Securitization Facility"), which supports the issuance of letters of credit and requests for cash advances. The Extended Securitization Facility maintained the$160 million borrowing capacity and extended the maturity date toAugust 27, 2021 . Additionally, the amendment provided us the opportunity to utilize credit insurance to increase the pool of eligible receivables. Pursuant to the Extended Securitization Facility, Arch Receivable also agreed to a revised schedule of fees payable to the administrator and the providers of the Extended Securitization Facility. For further information regarding the Securitization Facility see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnApril 27, 2017 (the "Inventory Facility Closing Date"), we entered into a senior secured inventory-based revolving credit facility in an aggregate principal amount of$40 million (the "Inventory Facility") withRegions Bank ("Regions") as administrative agent and collateral agent, as lender and swingline lender, and as letter of credit issuer. Availability under the Inventory Facility is subject to a borrowing base consisting of (i) 85% of the net orderly liquidation value of eligible coal inventory, (ii) the lesser of (x) 85% of the net orderly liquidation value of eligible parts and supplies inventory and (y) 35% of the amount determined pursuant to clause (i), and (iii) 100% of our Eligible Cash (defined in the Inventory Facility), subject to reduction for reserves imposed by Regions. The commitments under the Inventory Facility will terminate on the date that is the earliest to occur of (i) the third anniversary of the Inventory Facility Closing Date, (ii) the date, if any, that is 364 days following the first day that Liquidity (defined in the Inventory Facility and consistent with the definition in the Securitization Facility is less than$250 million for a period of 60 consecutive days and (iii) the date, if any, that is 60 days following the maturity, termination or repayment in full of the Securitization Facility. Revolving loan borrowings under the Inventory Facility bear interest at a per annum rate equal to, at our option, either the base rate or theLondon interbank offered rate plus, in each case, a margin ranging from 2.00% to 2.50% (in the case of LIBOR loans) and 1.00% to 1.50% (in the case of base rate loans) determined using a Liquidity-based grid. 34
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Letters of credit under the Inventory Facility are subject to a fee in an amount equal to the applicable margin for LIBOR loans, plus customary fronting and issuance fees.
OnNovember 19, 2018 , we amended and extended the Inventory Facility to increase the total aggregate principal amount available to$50 million subject to borrowing base calculations described above. For further information regarding the Inventory Facility see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnMarch 4, 2020 , we entered into an equipment financing arrangement accounted for as debt. We received$53.6 million in exchange for conveying an interest in certain equipment in operation at ourLeer Mine and entered into a 48 month master lease arrangement for use of that equipment. Upon maturity, all interests in the equipment will revert back to us. For further information regarding this equipment financing arrangement see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnMarch 31, 2020 we had total liquidity of approximately$323 million including$234 million in unrestricted cash and equivalents, and short term investments in debt securities, with the remainder provided by availability under our credit facilities, and funds withdrawable from brokerage accounts. The table below summarizes our availability under our credit facilities as ofMarch 31, 2020 : Letters of Borrowing Credit Contractual Face Amount Base Outstanding Availability Expiration (Dollars in thousands) Securitization Facility$ 160,000 $ 84,300 $ 15,040 $ 69,260 August 27, 2021 Inventory Facility 50,000 50,000 32,446 17,554 August 27, 2021 Total$ 210,000 $ 134,300 $ 47,486 $ 86,814
The following is a summary of cash provided by or used in each of the indicated
types of activities during the three months ended
Three Months Ended March 31,
2020 2019
(In thousands)
Cash provided by (used in):
Operating activities $ (12,035) $ 84,984
Investing activities (74,880) (42,200)
Financing activities 39,052 (88,971)
Cash Flow
Cash was used in operating activities in the three months ended March 31, 2020
compared to the cash provided by operating activities in the three months ended
March 31, 2019 mainly due to the deterioration of results from operations
discussed in the "Overview" and "Operational Performance" sections above. Both
the current and prior year quarters exhibited significant use of cash for
working capital, particularly inventories and payables.
Cash used in investing activities increased in the three months ended March 31,
2020 versus the three months ended March 31, 2019 primarily due to increased
capital expenditures, including approximately $62 million on our Leer South mine
development. The increase in capital expenditures was partially offset by an
approximately $7 million increase in net proceeds from short term investments,
and approximately $7 million in property insurance proceeds on our Mountain
Laurel longwall claim. The remaining cash due on the $9 million recorded on the
Mountain Laurel longwall claim was received by April 3,2020 .
Cash was provided by financing activities in the three months ended March 31,
2020 compared to cash used in financing activities in the three months ended
March 31, 2019 primarily due to suspension of treasury stock purchases, and
proceeds from the new $54 million equipment financing arrangement. For further
information regarding this
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equipment financing arrangement see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements.
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