ARCH RESOURCES, INC. Unless the context otherwise requires, all references in this report to "Arch",
"we", "us", or "our" are to
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 COVID-19 pandemic, including its adverse effects on businesses, economies, and financial markets worldwide; from the impact of COVID-19 on efficiency, costs and production; from changes in the demand for our coal by the steel production and electricity generation industries; from our ability to access the capital markets on acceptable terms and conditions; from policy, legislation and regulations relating to the Clean Air Act, greenhouse gas emissions, incentives for alternative energy sources, 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, including the integration of our Leer South mine and its ramp up to full production levels; from operational, geological, permit, labor, transportation, and weather-related factors; 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 service our outstanding indebtedness and fund capital expenditures; from our ability to successfully integrate the operations that we acquire; from our ability to generate significant revenue to make payments required by, and to comply with restrictions related to, our indebtedness, including our ability to repurchase our Convertible Notes; from additional demands for credit support by third parties; from the loss of, or significant reduction in, purchases by our largest customers; from the development of future technology to replace coal with hydrogen in the steelmaking process; 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 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 endedDecember 31, 2020 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 withCDC 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. During the third quarter of 2021, vaccination rates among our workforce began to level off in alignment with national and local trends. Furthermore, with the advent of the Delta variant, infection rates among our workforce increased at certain operations, in alignment with national and local trends, and we reinstated stricter protocols at these operations. During the third quarter of 2021, over thirty unit production shifts in our metallurgical segment were adversely impacted by staffing shortfalls related to increased COVID-19 case rates, and our requisite quarantine protocols. We continue to encourage vaccination among our workforce and adjust our COVID-19 responses. We continually evaluate our policies and procedures, in accordance withCDC , state, and local guidelines, and make any necessary adjustments to respond to the particular circumstances in the areas in which we operate. 30
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We recognize that the COVID-19 outbreak and responses thereto also continue to impact both our customers and suppliers. To date, we have not had any significant issues with critical suppliers, and 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. Our customers have reacted, and continue to react, in various ways and to varying degrees to changes in demand for their products. Our current view of our customer demand situation is discussed in greater detail in the "Overview" section below.
Overview
Our results for the third quarter of 2021 benefited from continued improvement in metallurgical and thermal coal markets. During the third quarter of 2021, global economic growth continued to accelerate as pent up demand from the responses to the global pandemic seeks to be fulfilled. Global steel production appears to currently exceed pre-pandemic levels. At the same time, increased COVID-19 cases in certain coal producing jurisdictions, particularlyMongolia , have constrained coking coal supply, and a wetter than normal rainy season inIndonesia , has constrained thermal coal supply. Furthermore, global supply chain constraints, COVID-19 related and otherwise, have restricted hydrocarbon supplies across the energy sector. Through the third quarter of 2021, supply chain constraints have had a relatively minor impact on our shipment volumes, although we did have two coking coal vessels that we planned to ship late in the third quarter, delayed to early in the fourth quarter. If rail or vessel supply chain constraints increased in our areas of operation, our future results could be negatively impacted. During the third quarter of 2021, accelerating global economic growth, historically high steel prices, and production and supply chain constraints, combined to drive international coking coal indices to historically high levels. Despite historically high coking coal prices, North American coking coal supply remains constrained compared to pre-COVID-19 levels. Some new supplies have been added to the market, in particular, our new Leer South longwall operation that will be ramping up production throughout the fourth quarter of 2021. Still, some of the high cost coking coal mine idlings announced during 2020 remain in place, and more recent supply disruptions also constrain supply. The duration of specific supply disruptions is unknown. We believe that under investment in the sector in recent years underlies the current market situation. In the current environment, we expect coking coal prices to be volatile. Longer term, we believe continued limited global capital investment in new coking coal production capacity, normal reserve depletion, and continuing economic growth will provide support to coking coal markets. During the fourth quarter of 2020, a major political dispute that manifested itself as a trade dispute escalated betweenChina , a major importer of coking coal, andAustralia , the world's largest exporter of coking coal. Specifically,China has effectively banned the import of coking coal and thermal coal, among other export products, fromAustralia . Historical trade patterns remain disrupted, and new trade patterns have emerged in the international coking coal markets. Indices forUnited States (US) East Coast coking coal continued to increase during the third quarter of 2021, as strong demand, particularly fromChina , has had a positive impact on these markets. Australian Premium Low Volatile ("PLV") coking coal indices have also increased to historic levels as demand outside ofChina has increased though Australian export volumes remain below pre-pandemic levels. Recently,China has announced plans to reduce steel production. This planned reduction has not yet impacted coking coal prices, but depending on the magnitude of the reduction, could put pressure on all international coking coal indices. Domestic thermal coal consumption increased in the third quarter of 2021, compared to the third quarter of 2020, due to significantly increased natural gas prices and continuing economic recovery from the responses to COVID-19. Longer term, we continue to believe thermal coal demand 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; the significant increase in natural gas prices has led to an increase in coal fired generation. We believe coal generator stockpiles likely declined significantly during the current quarter, and domestic thermal coal indices have reached historically high levels. Importantly, this increase in domestic prices has allowed us to place significant volumes of domestic term business at prices meaningfully higher than seen prior to the third quarter of 2021. During the third quarter of 2021, international thermal coal market pricing increased to historical highs that economically support exports from our thermal operations. We continue to layer in additional thermal export commitments for the current year and 2022. 31
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OnSeptember 29, 2020 , theU.S. District Court ruled against our proposal with Peabody to form a joint venture that would have combined ourPowder River Basin andColorado mining operations with Peabody's, and we subsequently announced the termination of our joint venture efforts. We continue to pursue other strategic alternatives for our thermal assets, including, among other things, potential divestiture. We are concurrently shrinking our operational footprint at our thermal operations. During the first nine months of 2021, we have completed approximately$32.2 million of Asset Retirement Obligation (ARO) work at these operations, compared to approximately$4.5 million in the first nine months of 2020. We are also planning to establish self-funding mechanisms for these long-term reclamation liabilities at those operations. Currently, we will exercise our operational flexibility to maximize cash generation from our thermal operations. 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. We continue to streamline our entire organizational structure to reflect our long-term strategic direction as a leading producer of metallurgical products for the steelmaking industry.
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 September 30,
2021 2020 (Decrease) / Increase
(In thousands)
Coal sales $ 594,412 $ 382,261 $ 212,151
Tons sold 21,005 17,128 3,877
On a consolidated basis, coal sales in the third quarter of 2021 were
approximately $212.2 million , or 55.5%, more than in the third quarter of 2020,
while tons sold increased approximately 3.9 million tons, or 22.6%. Coal sales
from Metallurgical operations increased approximately $127.2 million , primarily
due to increased pricing. Thermal coal sales increased approximately $85.8
million due to increased pricing and volume. In the prior year quarter, our
Viper operation, which was sold in December 2020 , provided approximately $10.0
million in coal sales and 0.3 million tons sold. 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 September 30,
2021 and 2020:
Three Months Ended September 30,
Increase
(Decrease)
in Net
2021 2020 Income
(In thousands)
Cost of sales (exclusive of items shown
separately below) $ 423,826 $ 345,539 $ (78,287)
Depreciation, depletion and amortization 30,760 32,630 1,870
Accretion on asset retirement obligations 5,437 4,947 (490)
Change in fair value of coal derivatives and
coal trading activities, net 19,641 2,649 (16,992)
Selling, general and administrative expenses 21,081 21,541 460
Costs related to proposed joint venture with
Peabody Energy - 4,423 4,423
Asset impairment and restructuring - 163,106 163,106
Other operating income, net (1,731) (4,894) (3,163)
Total costs, expenses and other $ 499,014 $ 569,941 $ 70,927
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Cost of sales. Our cost of sales for the third quarter of 2021 increased
approximately $78.3 million , or 22.7%, versus the third quarter of 2020. In the
prior year quarter, our Viper operation, which was sold in December 2020 ,
accounted for approximately $11.8 million in cost of sales. The increase in cost
of sales at ongoing operations consists of increased transportation costs of
approximately $30.9 million , increased repairs and supplies costs of
approximately $28.0 million , increased operating taxes and royalties resulting
from higher sales prices of approximately $22.9 million , and increased
compensation costs of approximately $10.7 million . These cost increases were
partially offset by an increase in credit for ARO reclamation work completed
primarily at our Thermal operations of approximately $4.1 million . See
discussion in "Operational Performance" for further information about segment
results.
Depreciation, depletion, and amortization. The decrease in depreciation,
depletion, and amortization in the third quarter of 2021 versus the third
quarter of 2020 is primarily due to the reduced depreciation expense of
approximately
Accretion on asset retirement obligations. The increase in accretion expense in the third quarter of 2021 versus the third quarter of 2020 is primarily related to the changes in the planned timing of reclamation work to be completed at our Thermal operations, specifically at theCoal Creek mine. Change in fair value of coal derivatives and coal trading activities, net. The costs in both the third quarter of 2021 and 2020 are primarily related to mark-to-market losses on coal derivatives that we had entered to hedge our price risk for planned international thermal coal shipments. Selling, general and administrative expenses. Selling, general and administrative expenses in the third quarter of 2021 decreased versus the third quarter of 2020 due to reduced contractor services of approximately$1.6 million , partially offset by increased compensation costs of approximately$1.0 million , primarily related to higher incentive compensation accruals recorded in the third quarter of 2021.
Costs related to proposed joint venture with Peabody Energy. We incurred
expenses of
Asset impairment and restructuring. In the third quarter of 2020, we recorded$163.1 million of impairment charges relating to three of our thermal operations,Coal Creek , West Elk, and Viper, as well as, our equity investment inKnight Hawk Holdings, LLC . For further information on our Asset Impairment costs, see Note 5, "Asset Impairment and Restructuring" to the Condensed Consolidated Financial Statements. Other operating income, net. The decrease in other operating income, net in the third quarter of 2021 versus the third quarter of 2020 consists primarily of the net unfavorable impact of certain coal derivative settlements of approximately$9.1 million , partially offset by increased income from equity investments
of approximately$3.7 million .
Nonoperating expenses. The following table summarizes our nonoperating expenses
during the three months ended
Three Months Ended September 30,
Increase
(Decrease)
2021 2020 in Net Income
(In thousands)
Non-service related pension and
postretirement benefit costs $ (1,186) $ (878) $ (308)
Non-service related pension and postretirement benefit costs. The increase in non-service related pension and postretirement benefit costs in the third quarter of 2021 versus the third quarter of 2020 is primarily due to the increased postretirement benefit loss amortization in the third quarter of 2021.
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Provision for (benefit from) income taxes. The following table summarizes our
provision for (benefit from) income taxes for the three months ended September
30, 2021 and 2020:
Three Months Ended September 30,
Increase (Decrease)
2021 2020 in Net Income
(In thousands)
Provision for (benefit from) income taxes
1,461
See Note 12, "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.
Nine 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 nine months ended
Nine Months Ended September 30,
2021 2020 (Decrease) / Increase
(In thousands)
Coal sales $ 1,402,345 $ 1,107,014 $ 295,331
Tons sold 52,262 47,367 4,895
On a consolidated basis, coal sales in the first nine months of 2021 were
approximately $295.3 million , or 26.7%, more than in the first nine months of
2020, while tons sold increased approximately 4.9 million tons, or 10.3%. Coal
sales from Metallurgical operations increased approximately $203.9 million due
to increased pricing and volume. Thermal coal sales increased approximately
$109.5 million due to increased pricing and volume. In the prior year period,
our Viper operation, which was sold in December 2020 , provided approximately
$27.1 million in coal sales and 0.7 million tons sold. 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 nine months ended September
30,
2021 and 2020:
Nine Months Ended September 30,
Increase
(Decrease)
in Net
2021 2020 Income
(In thousands)
Cost of sales (exclusive of items shown
separately below) $ 1,089,061 $ 1,036,886 $ (52,175)
Depreciation, depletion and amortization 84,441 94,105 9,664
Accretion on asset retirement obligations 16,311 14,939 (1,372)
Change in fair value of coal derivatives and
coal trading activities, net 28,931 3,263 (25,668)
Selling, general and administrative expenses 66,679 64,024 (2,655)
Costs related to proposed joint venture with
Peabody Energy - 15,938 15,938
Asset impairment and restructuring - 176,371 176,371
Gain on property insurance recovery related to
Mountain Laurel longwall - (23,518) (23,518)
Gain on divestitures - (1,369) (1,369)
Other operating income, net (11,344) (16,768) (5,424)
Total costs, expenses and other $ 1,274,079 $ 1,363,871 $ 89,792
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Cost of sales. Our cost of sales for the first nine months of 2021 increased
approximately $52.2 million , or 5.0%, versus the first nine months of 2020. In
the prior year period, our Viper operation, which was sold in December 2020 ,
accounted for approximately $33.9 million in cost of sales. The increase in cost
of sales at ongoing operations consists of increased transportation costs of
approximately $56.2 million , increased operating taxes and royalties resulting
from higher sales prices of approximately $33.6 million , increased compensation
costs of approximately $15.8 million , and increased repairs and supplies costs
of approximately $14.7 million . These cost increases were partially offset by an
increase in credit for ARO reclamation work completed primarily at our Thermal
operations of approximately $26.3 million and a decrease in purchased coal costs
of approximately $12.5 million . See discussion in "Operational Performance" for
further information about segment results.
Depreciation, depletion, and amortization. The decrease in depreciation,
depletion, and amortization in the first nine months of 2021 versus the first
nine months of 2020 is primarily due to the reduced depreciation expense of
approximately $8.1 million resulting from the asset impairment we recorded in
the third quarter of 2020 in our Thermal segment.
Accretion on asset retirement obligations. The increase in accretion expense in
the first nine months of 2021 versus the first nine months of 2020 is primarily
related to the changes in the planned timing of reclamation work to be completed
at our Thermal operations, specifically at the Coal Creek mine.
Change in fair value of coal derivatives and coal trading activities, net. The
costs in both the first nine months of 2021 and 2020 are primarily related to
mark-to-market losses on coal derivatives that we had entered to hedge our price
risk for planned international thermal coal shipments.
Selling, general and administrative expenses. Selling, general and
administrative expenses in the first nine months of 2021 increased versus the
first nine months of 2020 due to increased compensation costs of approximately
$4.5 million , primarily related to higher incentive compensation accruals
recorded in the first nine months of 2021, partially offset by reduced IT
related costs of approximately $1.4 million .
Costs related to proposed joint venture with Peabody Energy. During the first
nine months of 2020, we incurred expenses of $15.9 million associated with the
regulatory approval process related to the proposed joint venture with Peabody
that was terminated jointly by the parties following the Federal Trade
Commission's successful lawsuit to block the joint venture.
Asset impairment and restructuring. During the first nine months of 2020, we
recorded $163.1 million of impairment charges relating to three of our thermal
operations, Coal Creek , West Elk, and Viper, as well as, our equity investment
in Knight Hawk Holdings, LLC . Also, during the first nine months of 2020, we
recorded $13.3 million of employee severance expense related to voluntary
separation plans that were accepted by 53 employees of the corporate staff and
201 employees of our Thermal operations. For further information on our Asset
Impairment costs, see Note 5, "Asset Impairment and Restructuring" to the
Condensed Consolidated Financial Statements.
Gain on property insurance recovery related to Mountain Laurel longwall. During
the first nine months of 2020, we recorded a
Gain on divestitures. During the first nine months of 2020, we recorded a
Other operating income, net. The decrease in other operating income, net in the first nine months of 2021 versus the first nine months of 2020 consists primarily of the net unfavorable impact of certain coal derivative settlements of approximately$14.0 million , partially offset by increased income from equity investments of approximately$5.9 million and an unfavorable impact of mark to market movements on heating oil positions of approximately$2.0 million recorded in the first nine months of 2020. 35 Table of Contents
Nonoperating expenses. The following table summarizes our nonoperating expenses
during the nine months ended
Nine Months Ended September 30,
Increase
(Decrease)
2021 2020 in Net Income
(In thousands)
Non-service related pension and
postretirement benefit costs $ (3,252) $ (3,076) $ (176)
Reorganization items, net - 26 (26)
Total nonoperating expenses $ (3,252) $ (3,050) $ (202) Non-service related pension and postretirement benefit costs. The increase in non-service related pension and postretirement benefit costs in the first nine months of 2021 versus the first nine months of 2020 is primarily due to the increased postretirement benefit loss amortization in the first nine months of 2021, partially offset by the increased pension settlement recorded in the same nine-month period. Provision for (benefit from) income taxes. The following table summarizes our provision for (benefit from) income taxes during the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, Increase (Decrease) 2021 2020 in Net Income (In thousands)
Provision for (benefit from) income taxes
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.
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Operational Performance
Three and Nine Months Ended
OnDecember 31, 2020 , we sold our Viper operation. As a result, we revised our reportable segments beginning in the first quarter of 2021 to better reflect the manner in which the chief operating decision maker (CODM) views our businesses going forward for purposes of reviewing performance, allocating resources and assessing future prospects and strategic execution. Prior to the first quarter of 2021, we had three reportable segments: MET,Powder River Basin (PRB), and Other Thermal. After the divestment of Viper, we have three remaining active thermal mines: West Elk, Black Thunder, andCoal Creek . With two distinct lines of business, metallurgical and thermal, the movement to two segments better aligns with how we make decisions and allocate resources. No changes were made to the MET Segment and the three remaining thermal mines have been combined as the "Thermal Segment". The prior periods have been restated to reflect the change in reportable segments. 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 (loss) 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. 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 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 nine
months ended
Three Months Ended September 30 ,
Nine Months Ended
2021 2020 Variance 2021 2020 Variance
Metallurgical
Tons sold (in
thousands) 1,980 1,971 9 5,706 5,225 481
Coal sales per ton
sold $ 128.77 $ 67.04 $ 61.73 $ 101.48 $ 74.83 $ 26.65
Cash cost per ton
sold $ 68.84 $ 60.78 $ (8.06) $ 62.74 $ 60.31 $ (2.43)
Cash margin per ton
sold $ 59.93 $ 6.26 $ 53.67 $ 38.74 $ 14.52 $ 24.22
Adjusted EBITDA (in
thousands) $ 118,548 $ 12,407 $ 106,141 $ 221,391 $ 76,037 $ 145,354
Thermal
Tons sold (in
thousands) 19,025 15,131 3,894 46,521 41,649 4,872
Coal sales per ton
sold $ 13.38 $ 13.47 $ (0.09) $ 13.36 $ 13.56 $ (0.20)
Cash cost per ton
sold $ 10.70 $ 11.39 $ 0.69 $ 11.15 $ 13.17 $ 2.02
Cash margin per ton
sold $ 2.68 $ 2.08 $ 0.59 $ 2.21 $ 0.39 $ 1.82
Adjusted EBITDA (in
thousands) $ 52,737 $ 31,616 $ 21,121 $ 107,589 $ 19,600 $ 87,989
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.
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Metallurgical - Adjusted EBITDA for the three and nine months endedSeptember 30, 2021 increased from the three and nine months endedSeptember 30, 2020 due to increased pricing and increased volume in the case of the nine month period. These benefits were partially offset by increased cash cost of sales per ton sold. The improvement in the current year periods over the prior year periods is largely due to the difference in trajectory of the COVID-19 pandemic during the respective periods in time. During the first nine months of 2021, increasing vaccine availability and decreasing infection rates led to accelerating economic growth, and increasing steel demand and pricing, improving prompt coking coal index prices. In contrast, during the first nine months of 2020, coking coal prices fell as large scale industrial shutdowns were initiated in response to the emergence of COVID-19. Particularly, in the three months endedSeptember 30, 2021 , surging coking coal demand, largely fromChina , and constrained supply led to historically high pricing across all coking coal indices. The increase in cash cost per ton sold is largely due to increased taxes and royalties that are based on a percentage of coal sales per ton sold. During the end of the third quarter of 2021, we completed our Leer South longwall development, and initiated longwall production in late August of 2021. The ramp up is ongoing, and we expect to achieve planned productivity levels by early 2022. The addition of this second longwall operation to our Metallurgical Segment is expected to significantly increase our future volumes and strengthen our low average segment cost structure relative to our peers. Our Metallurgical segment sold 1.8 million tons of coking coal and 0.2 million tons of associated thermal coal in the three months endedSeptember 30, 2021 , compared to 1.7 million tons of coking coal and 0.3 million tons of associated thermal coal in the three months endedSeptember 30, 2020 . In the nine months endedSeptember 30, 2021 , we sold 5.1 million tons of coking coal and 0.6 million tons of associated thermal coal compared to 4.5 million tons of coking coal and 0.7 million tons of associated thermal coal in the nine months endedSeptember 30, 2020 . Longwall operations accounted for approximately 70% of our shipment volume in the three and nine months endedSeptember 30, 2021 , compared to approximately 60% of our shipment volume in the three and nine months endedSeptember 30, 2020 . Thermal - Adjusted EBITDA for the three and nine months endedSeptember 30, 2021 increased versus the three and nine months endedSeptember 30, 2020 , due to increased sales volume and decreased cash cost per ton sold, partially offset by decreased coal sales per ton sold. The improvement in the current year periods over the prior year periods is largely due to increased domestic utility coal burn, resulting from higher natural gas pricing and improved economic growth. The reduction in both coal sales per ton sold and cash cost per ton sold is driven by the increased percentage of volume from our lower cost and lower priced Black Thunder operation. Our cash cost per ton sold also benefited from our operational flexibility to take advantage of increasing demand, despite the substantial progress we have made in our efforts to align production levels with the secular decline in domestic thermal coal demand. Also, contributing to the decreases in cost and price is the inclusion of approximately 0.7 million tons sold from our former Viper operation in the nine months endedSeptember 30, 2020 . During the first nine months of 2021, we completed approximately$32.2 million of ARO work at our current Thermal operations, compared to$4.5 million during the first nine months of 2020. 38 Table of Contents
Reconciliation of Non-GAAP measures
Segment coal sales per ton sold
Non-GAAP Segment coal sales per ton sold is calculated as segment coal sales
revenues divided by segment tons sold. Segment coal sales revenues are adjusted
for transportation costs, and may be adjusted for other items that, due to
generally accepted accounting principles, are classified in "other income" on
the statement of operations, but relate to price protection on the sale of coal.
Segment coal sales per ton sold is not a measure of financial performance in
accordance with generally accepted accounting principles. We believe segment
coal sales per ton sold provides useful information to investors as it better
reflects our revenue for the quality of coal sold and our operating results by
including all income from coal sales. The adjustments made to arrive at these
measures are significant in understanding and assessing our financial condition.
Therefore, segment coal sales revenues should not be considered in isolation,
nor as an alternative to coal sales revenues under generally accepted accounting
principles.
Idle andThree Months Ended September 30, 2021 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 295,291 $ 299,096 $ 25 $ 594,412 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (502) 6,997 - 6,495 Coal sales revenues from idled or otherwise disposed operations not included in segments - - 26 26 Transportation costs 40,845 37,565 (1) 78,409 Non-GAAP Segment coal sales revenues$ 254,948 $ 254,534 $ -$ 509,482 Tons sold 1,980 19,025 Coal sales per ton sold$ 128.77 $ 13.38 Idle and
Three Months Ended September 30, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 168,054 $ 213,299 $ 908 $ 382,261 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (29) (2,552) - (2,581) Coal sales revenues from idled or otherwise disposed operations not included in segments - - 903 903 Transportation costs 35,951 11,996 5 47,952 Non-GAAP Segment coal sales revenues$ 132,132 $ 203,855 $ -$ 335,987 Tons sold 1,971 15,131 Coal sales per ton sold $ 67.04$ 13.47 39 Table of Contents Idle and
Nine Months Ended September 30, 2021 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 693,522 $ 707,394 $ 1,429 $ 1,402,345 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (1,192) 8,200 - 7,008 Coal sales revenues from idled or otherwise disposed operations not included in segments - - 1,424 1,424 Transportation costs 115,682 77,631 5 193,318 Non-GAAP Segment coal sales revenues$ 579,032 $ 621,563 $ -$ 1,200,595 Tons sold 5,706 46,521 Coal sales per ton sold$ 101.48 $ 13.36 Idle and
Nine Months Ended September 30, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 489,660 $ 597,887 $ 19,467 $ 1,107,014 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (548) (6,366) - (6,914) Coal sales revenues from idled or otherwise disposed operations not included in segments - - 19,395 19,395 Transportation costs 99,188 39,418 72 138,678 Non-GAAP Segment coal sales revenues$ 391,020 $ 564,835 $ -$ 955,855 Tons sold 5,225 41,649 Coal sales per ton sold $ 74.83$ 13.56 40 Table of Contents
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 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 September 30, 2021 Metallurgical Thermal Other Consolidated
(In thousands)
GAAP Cost of sales in the Condensed
Consolidated Statements of Operations $ 177,146 $ 241,158 $ 5,522 $ 423,826
Less: Adjustments to reconcile to
Non-GAAP Segment cash cost of coal
sales
Transportation costs 40,845 37,565 (1) 78,409
Cost of coal sales from idled or
otherwise disposed operations not
included in segments - - 4,012 4,012
Other (operating overhead, certain
actuarial, etc.) - - 1,511 1,511
Non-GAAP Segment cash cost of coal
sales $ 136,301 $ 203,593 $ - $ 339,894
Tons sold 1,980 19,025
Cash Cost Per Ton Sold $ 68.84 $ 10.70
Idle andThree Months Ended September 30, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Condensed Consolidated Statements of Operations$ 155,729 $ 184,045 $ 5,765 $ 345,539 Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Diesel fuel risk management derivative settlements classified in "other income" - (278) - (278) Transportation costs 35,951 11,996 5 47,952 Cost of coal sales from idled or otherwise disposed operations not included in segments - - 4,007 4,007 Other (operating overhead, certain actuarial, etc.) - - 1,753 1,753 Non-GAAP Segment cash cost of coal sales$ 119,778 $ 172,327 $ -$ 292,105 Tons sold 1,971 15,131 Cash Cost Per Ton Sold $ 60.78$ 11.39 41 Table of Contents Idle and
Nine Months Ended September 30, 2021 Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Condensed Consolidated Statements of Operations$ 473,687 $ 596,344 $ 19,030 $ 1,089,061 Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Transportation costs 115,682 77,631 5 193,318 Cost of coal sales from idled or otherwise disposed operations not included in segments - - 13,584 13,584 Other (operating overhead, certain actuarial, etc.) - - 5,441 5,441 Non-GAAP Segment cash cost of coal sales$ 358,005 $ 518,713 $ -$ 876,718 Tons sold 5,706 46,521 Cash Cost Per Ton Sold $ 62.74$ 11.15 Idle and
Nine Months Ended September 30, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Condensed Consolidated Statements of Operations$ 414,301 $ 585,837 $ 36,748 $ 1,036,886 Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Diesel fuel risk management derivative settlements classified in "other income" - (1,976) - (1,976) Transportation costs 99,188 39,418 72 138,678 Cost of coal sales from idled or otherwise disposed operations not included in segments - - 30,960 30,960 Other (operating overhead, certain actuarial, etc.) - - 5,716 5,716 Non-GAAP Segment cash cost of coal sales$ 315,113 $ 548,395 $ -$ 863,508 Tons sold 5,225 41,649 Cash Cost Per Ton Sold $ 60.31$ 13.17 42 Table of Contents
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 (loss) 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 (loss), income (loss) 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 September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(In thousands)
Net income (loss) $ 89,143 $ (191,467) $ 110,967 $ (266,090)
Provision for (benefit from) income
taxes (1,082) 379 1,301 (206)
Interest expense, net 6,151 2,530 12,746 6,389
Depreciation, depletion and
amortization 30,760 32,630 84,441 94,105
Accretion on asset retirement
obligations 5,437 4,947 16,311 14,939
Costs related to proposed joint venture
with Peabody Energy - 4,423 - 15,938
Asset impairment and restructuring - 163,106 - 176,371
Gain on property insurance recovery
related to Mountain Laurel longwall - - - (23,518)
Gain on divestitures - - - (1,369)
Non-service related pension and
postretirement benefit costs 1,186 878 3,252 3,076
Reorganization items, net - - - (26)
Adjusted EBITDA 131,595 17,426 229,018 19,609
EBITDA from idled or otherwise disposed
operations 3,074 2,896 10,637 10,691
Selling, general and administrative
expenses 21,081 21,541 66,679 64,024
Other 15,535 2,160 22,646 1,313
Segment Adjusted EBITDA from coal
operations $ 171,285 $ 44,023 $ 328,980 $ 95,637
Other includes primarily 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.
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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 COVID-19 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. Given the volatile nature of coal markets, and the significant challenges and uncertainty surrounding COVID-19, we believe it remains important to take a prudent approach to managing our balance sheet and liquidity. Due to the current economic uncertainties related to COVID-19 and the related disruption in the financial markets, we may be limited in accessing capital markets or obtaining additional bank financing, or the cost of accessing this financing could become more expensive. We believe our current liquidity level is sufficient to fund our business, and given the completion of our Leer South development and current favorable pricing environment, we expect our liquidity to grow in the near term. With the improvement in liquidity, we plan to begin funding a sinking fund for our long-term reclamation liabilities at our thermal operations in thePowder River Basin , and have committed to make contributions of$15 million in the fourth quarter of 2021 and$30 million in 2022. If cashflows are supportive, we will also make contributions above those minimum amounts. Additionally, we are reinstating our quarterly dividend, and will pay a$0.25 per share quarterly dividend in the fourth quarter of 2021. In the near term, our financial priorities will be to increase liquidity and reduce debt and other obligations. Moving forward, 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 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 . The interest rate on the Term Loan is, 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 Loans. As interest payments are made on the Term Loans, amounts in accumulated other comprehensive income will be reclassified into earnings through interest expense to reflect a net interest on the Term Loans equal to the effective yield of the fixed rate of the swap plus 2.75%, which is the spread on the Term Loans as amended. For further information regarding the interest rate swaps, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnSeptember 30, 2020 , we extended and amended our existing trade accounts receivable securitization facility provided toArch Receivable Company, LLC , a special-purpose entity that is a wholly owned subsidiary ofArch 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 facility size from$160 million to$110 million and extended the maturity date toSeptember 29, 2023 . For further information regarding the Securitization Facility see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnSeptember 30, 2020 , we amended the senior secured inventory-based revolving credit facility in an aggregate principal amount of$50 million (the "Inventory Facility") withRegions Bank ("Regions") as administrative agent and collateral agent, as lender and swingline lender (in such capacities, the "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, plus (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), plus (iii) 100% of our Eligible 44
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Cash (defined in the Inventory Facility), subject to reduction for reserves imposed by Regions. The amendment of the Inventory Facility extended the maturity date toSeptember 29, 2023 , eliminated the provision that accelerated maturity of the facility upon falling below a specified level of liquidity, and reduced the minimum liquidity requirement from$175 million to$100 million . Additionally, the amendment includes provisions that reduce the advance rates for coal inventory and parts and supplies, depending on liquidity. During the second quarter of 2021, we entered into an amendment to temporarily suspend certain of the Liquidity requirements within the existing facility through the filing of theSeptember 2021 borrowing base. For further information regarding the Inventory Facility, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnJuly 2, 2020 , theWest Virginia Economic Development Authority (the "Issuer") issued$53.1 million aggregate principal amount of Solid Waste Disposal Facility Revenue Bonds (Arch Resources Project ), Series 2020 (the "Tax Exempt Bonds") pursuant to an Indenture of Trust dated as ofJune 1, 2020 (the "Indenture of Trust") between theIssuer andCitibank, N.A ., as trustee (the "Trustee"). As a follow-on to our$53.1 million offering, onMarch 4, 2021 , the Issuer issued an additional$45.0 million in Series 2021 Tax Exempt Bonds. The proceeds of the Tax Exempt Bonds are loaned to us as we make qualifying expenditures pursuant to a Loan Agreement dated as ofJune 1, 2020 , as supplemented by a First Amendment to the Loan Agreement datedMarch 1, 2021 (collectively, the "Loan Agreement"), each between the Issuer and us. The Tax Exempt Bonds are payable solely from payments to be made by us under the Loan Agreement as evidenced by a Note from us to the Trustee. 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. As ofSeptember 30, 2021 , the Company has utilized the total Tax Exempt Bond proceeds. For further information regarding the Tax Exempt Bonds, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. In November, 2020, we issued$155.3 million in aggregate principal amount of 5.25% convertible senior notes due 2025 ("Convertible Notes" or "Convertible Debt"). The net proceeds from the issuance of the Convertible Notes, after deducting offering related costs of$5.1 million and the cost of a capped call transaction of$17.5 million , were approximately$132.7 million . The Convertible Notes bear interest at the annual rate of 5.25%, payable semiannually in arrears onMay 15 andNovember 15 of each year, and will mature onNovember 15, 2025 , unless earlier converted, redeemed or repurchased by us. For further information regarding the Convertible Debt, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. During the third quarter of 2021, the common stock price condition of the Convertible Notes was satisfied, as the closing stock price exceeded 130% of the conversion price of approximately$37.325 for at least 20 trading days of the last 30 trading days prior to quarter end. As a result, the Convertible Notes are convertible at the election of the noteholders during the fourth quarter, and due to our stated intent to settle the principal value in cash, the liability portion of$120.0 million of the Convertible Notes was included in current maturities of debt on our Condensed Consolidated Balance Sheet atSeptember 30, 2021 . As of the date of this Quarterly Report on Form 10-Q, we have not received any conversion requests for the 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 ofSeptember 30, 2021 , the if-converted value of the Convertible Notes exceeded the principal amount by$230.5 million . For further information regarding the Convertible Notes and the capped call transactions, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. OnJuly 29, 2021 , we entered into an equipment financing arrangement accounted for as debt. We received$23.5 million in exchange for conveying an interest in certain equipment in operation at ourPowder River Basin operations and entered into a master lease arrangement for that equipment. The financing arrangement contains customary terms and events of default and provides for 42 monthly payments with an average implied interest rate of 7.35% maturing onFebruary 1, 2025 . Upon maturity, we will have the option to purchase the equipment. For further information regarding the Equipment Financing, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. 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 three months endedSeptember 30, 2021 , we did not repurchase any shares of our 45
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stock. The timing and amount 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. OnApril 23, 2020 , we announced the suspension of our quarterly dividend due to the significant economic uncertainty surrounding the COVID-19 pandemic and the steps being taken to control the virus. During the three months endedSeptember 30, 2021 , we did not pay any dividends on shares of our stock. OnOctober 26, 2021 , we announced the initiation of a$0.25 per share quarterly dividend. The first dividend payment will be made to shareholders of record as ofNovember 30, 2021 , payable onDecember 15, 2021 . OnSeptember 30, 2021 , we had total liquidity of approximately$254 million , including$210 million in unrestricted cash and equivalents and short-term investments in debt securities, with the remainder provided by availability under our credit facilities and funds withdrawable from brokerage accounts. The table below summarizes our availability under our credit facilities as ofSeptember 30, 2021 : Letters of Borrowing Credit Contractual Face Amount Base Outstanding Availability Expiration (Dollars in thousands) Securitization Facility$ 110,000 $ 91,700 $ 61,183 $ 30,517 September 29, 2023 Inventory Facility 50,000 40,968 27,712 13,256 September 29, 2023 Total$ 160,000 $ 132,668 $ 88,895 $ 43,773
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. The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 (In thousands) Cash provided by (used in): Operating activities $ 91,582 $ 55,914 Investing activities (132,834) (111,945) Financing activities 38,615 73,585 Cash Flow Cash provided by operating activities increased in the nine months endedSeptember 30, 2021 versus the nine months endedSeptember 30, 2020 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$117 million in the current year period, primarily in receivables; receipt of an approximately$38 million income tax refund in the prior year period; and an increase in reclamation work completed of approximately$26 million in the current year period. Cash used in investing activities increased in the nine months endedSeptember 30, 2021 versus the nine months endedSeptember 30, 2020 primarily due to the approximately$24 million in property insurance proceeds received on our Mountain Laurel longwall claim in the nine months endedSeptember 30, 2020 , and approximately$6 million in increased capital spending in the nine months endedSeptember 30, 2021 , partially offset by a net increase in proceeds from sale of short term investments in the nine months endedSeptember 30, 2021 of approximately$10 million .
Cash provided by financing activities decreased in the nine months ended
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approximately $34 million and a net decrease in proceeds from the issuance of
our Tax Exempt Bonds of approximately $8 million , partially offset by a dividend
payment of approximately $8 million in the first nine months of 2020.
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