ARCH RESOURCES, INC. COVID-19
In the first quarter of 2020, COVID-19 emerged as a global level 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 have 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 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, limiting 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, 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 and continue our Leer South development. Our customers have reacted, and continue to react, 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. During the year endedDecember 31, 2020 , we concluded commercial negotiations with certain customers deferring over three million tons ofPowder River Basin contractual obligations from 2020 to future periods in exchange for over eight million tons of additional commitments in future periods. Approximately 0.25 million tons of North American coking coal contracted for 2020 have been deferred to 2021. Our current view of our customer demand situation is discussed in greater detail in the "Overview" section below. In the fourth quarter of 2020, particularly November and December, we experienced a significant increase in the number of COVID-19 cases in our workforce, in parallel to the trends seen in the counties in which we operate. ByDecember 31, 2020 approximately 11% of our workforce had tested positive for COVID-19. This increase in case level and related absenteeism resulted in the idling of 57 continuous miner production shifts during November and December of 2020, 52 of which were at our metallurgical operations. Our current view of our operational situation is discussed in greater detail in the "Operational Performance" section below.
Overview
Our results for the year endedDecember 31, 2020 were impacted by continued weakness in metallurgical and thermal coal markets. During the course of 2020, the initial responses to the COVID-19 pandemic in March and April precipitated significant demand destruction that further weakened already depressed thermal and metallurgical coal markets. These initial impacts were mitigated to some degree in certain areas of the national and global economy by August, stemming further declines in demand at that time. Unfortunately, a fourth quarter resurgence of COVID-19 cases again drew responses that negatively impacted our markets, though not as severely as the initial responses. The initial industrial shutdowns, particularly in the automotive and oil and gas sectors, that drove significant reductions in steel demand and the idling of multiple blast furnaces globally, began to reverse in the third quarter of 2020, leading to increasing steel demand and the restarting of many idled blast furnaces. In particular, domestic auto production returned to pre-shutdown levels in July, but has declined slightly since. The return of industrial production to pre-pandemic levels has been, and will continue to be uneven; for example, oil and gas drilling activity, although increasing slowly, remains significantly depressed as compared to pre-pandemic levels. The return of overall industrial production to pre-COVID-19 levels is also likely to be lengthy and, as we have seen in the fourth quarter of 2020, is subject to setbacks should COVID-19 become resurgent. During 2020, demand destruction elicited a supply side response, as significant high cost coking coal mine idlings and slowdowns were announced inNorth America and globally. The overall production volume removed from the markets this year is significant. While some of the curtailed production has returned or can return to the market with the right price signal, we believe that the cash cost of a 60
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significant portion of the currently curtailed coking coal production exceeds current prompt pricing. To date, due to our low cost structure, we have avoided idling any of our coking coal operations. 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 COVID-19 pandemic will provide support to coking coal markets as demand continues to return to the steel production supply chain. During the fourth quarter of 2020, a major 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 fromAustralia . This disrupted historical trade patterns, and led to pricing anomalies in the international coking coal markets. Through most of the fourth quarter of the year endedDecember 31, 2020 , the prompt index price forUnited States east coast High-Vol A (HVA), our main product, Low-Vol (LV), and even High-Vol B (HVB) coking coal exceeded the prompt index price for Australian east coast Premium Low Volatile (PLV) coking coal. Recently the PLV index has rapidly risen significantly, returning to a more historically normal price relationship between products. Uncertainty and volatility in pricing and pricing relationships are likely until the larger trade dispute betweenChina andAustralia is settled. While most of our committed but unpriced coking coal volume is linked tothe United States east coast HVA,LV , or HVB indexes, we do have approximately 1.1 million tons of committed but unpriced coking coal linked to the PLV or otherAsia/Pacific indexes for 2021. Demand for domestic thermal coal remained significantly below the prior year due to historically low natural gas prices, COVID-19 related commercial and industrial demand declines and the continued increase in subsidized renewable generation sources, particularly wind. Natural gas pricing recovered in the second half of 2020 from historically low levels seen in the first half of 2020, and as a result coal fired generation, particularlyPowder River Basin fired generation, was competitive in many regions of the country during the second half of the year. Production levels of natural gas were below the prior year's levels, but storage levels remained significantly above last year's levels. Additionally, generator coal stockpiles declined during the second half of 2020, but remain above historical averages based on days of burn. International thermal coal market pricing that had remained at levels that were uneconomic for all of our thermal operations for most of the year, increased significantly late in the year. By late December prompt international thermal coal pricing reached levels that can support economic exports from our West Elk operation. Similar to metallurgical markets discussed above, actions taken to combat the spread of COVID-19 across many regions of the national and global economy continue to negatively impact thermal coal demand and supply. As a result, we expect domestic and global thermal markets to remain challenged. OnSeptember 29, 2020 , theU.S. District Court ruled against our proposed joint venture with Peabody Energy Corporation that would have combined ourPowder River Basin andColorado mining operations with Peabody's. Following the ruling, we announced the termination of our joint venture efforts due to the significant investment of time and resources that would be required to conduct an appeal. In light of the unfavorable ruling and decision to terminate efforts on the joint venture, we continue to pursue other strategic alternatives for our thermal assets. These alternatives include, among other things, potential divestiture. We also continue to evaluate opportunities to shrink our operational footprint at those mines, reduce their asset retirement obligations, and establish self-funding mechanisms to address those long-term liabilities. In alignment with our desire to shrink our operational footprint and associated liabilities, we have committed to closing ourCoal Creek operation in thePowder River Basin once all currently committed sales have been shipped by the end of 2022 or sooner. Operationally we will maintain our focus on aligning our thermal production rates with declining domestic thermal coal demand, adjusting our thermal operating plans in order to minimize future cash requirements, and streamlining our entire organizational structure to reflect our long-term strategic direction as a leading producer of metallurgical products for the steelmaking industry. OnDecember 31, 2020 , we sold our Viper operation inIllinois , which had been part of our Other Thermal segment, toKnight Hawk Holdings, LLC in whom we hold an equity investment. Viper's results for the full year of 2020 are included in our full year 2020 results, and in all preceding periods' results presented herein. For further information on the sale of Viper, and our equity investment inKnight Hawk Holdings, LLC , please see Note 4, "Divestitures", and Note 11, "Equity Method Investments and Membership Interests in Joint Ventures" to the Consolidated Financial Statements. 61
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In the fourth quarter of 2019 we sold our Coal-Mac operation, which had been part of our Other Thermal segment. Coal-Mac's results for the first eleven and a half months of 2019 are included in our full year 2019 results, and in all preceding periods' results presented herein. For further information on the sale ofCoal-Mac LLC , please see Note 4, "Divestitures" to the Consolidated Financial Statements. The following discussion and analysis are for the year endedDecember 31, 2020 , compared to the same period in 2019 unless otherwise stated. For a discussion and analysis of the year endedDecember 31, 2019 , compared to the same period in 2018, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 11, 2020 . Results of Operations
Year 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 for
the years ended
Year Ended December 31,
2020 2019 (Decrease) / Increase
(In thousands)
Coal sales $ 1,467,592 $ 2,294,352 $ (826,760)
Tons sold 63,343 90,305 (26,962)
On a consolidated basis, coal sales in 2020 decreased $826.8 million or 36.0%
from 2019, and tons sold decreased 27.0 million tons or 29.9%. Coal sales from
Metallurgical operations decreased $349.0 million due primarily to lower
realized pricing and secondarily decreased volume. Powder River Basin coal sales
decreased $253.6 million due to lower volume, and Other Thermal coal sales
decreased $237.7 million due to lower volume and pricing. In the year ended
December 31, 2019 , our Coal-Mac operation in our Other Thermal Segment, which
was sold in December 2019 , provided approximately $111.8 million in coal sales
and 2.1 million tons sold in our Other Thermal Segment. See discussion in
"Operational Performance" for further information about segment results.
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Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the years endedDecember 31, 2020
and
2019:
Year Ended December 31,
Increase
(Decrease)
in Net
2020 2019 Income
(In thousands)
Cost of sales (exclusive of items shown
separately below) $ 1,378,479 $ 1,873,017 $ 494,538
Depreciation, depletion and amortization 121,552 111,621 (9,931)
Accretion on asset retirement obligations 19,887 20,548 661
Change in fair value of coal derivatives and
coal trading activities, net 5,219 (18,601) (23,820)
Selling, general and administrative expenses 82,397 95,781 13,384
Costs related to proposed joint venture with
Peabody Energy 16,087 13,816 (2,271)
Asset impairment and restructuring 221,380 - (221,380)
Gain on property insurance recovery related to
Mountain Laurel longwall (23,518) - 23,518
(Gain) loss on divestitures (1,505) 13,312 14,817
Preference Rights Lease Application settlement
income - (39,000) (39,000)
Other operating income, net (22,246) (19,012) 3,234
Total costs, expenses and other $ 1,797,732 $ 2,051,482 $ 253,750
Cost of sales. Our cost of sales for the year ended December 31, 2020 decreased
$494.5 million or 26.4% versus 2019. In the prior year period, our Coal-Mac
operation, which was sold in December 2019 , accounted for approximately $111.3
million in cost of sales. The decline in cost of sales at ongoing operations
consists primarily of reduced repairs and supplies costs of approximately $188.5
million , including approximately $39.5 million in reduced diesel fuel costs,
reduced transportation costs of approximately $99.9 million , reduced operating
taxes and royalties of approximately $78.8 million , and reduced compensation
costs of approximately $25.8 million . These cost decreases were partially offset
by increased purchased coal cost of approximately $10.7 million . See discussion
in "Operational Performance" for further information about segment results.
Depreciation, depletion and amortization. Our depreciation, depletion and
amortization costs for the year ended December 31, 2020 increased versus 2019
primarily due to increased depreciation of plant and equipment, amortization of
development, and depletion in our Metallurgical segment.
Change in fair value of coal derivatives and coal trading activities, net. The
significant benefit in the year ended December 31, 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, while we had
mark-to-market losses on such coal derivatives for the year ended December 31,
2020 .
Selling, general and administrative expenses. Selling, general and
administrative expenses in the year ended December 31, 2020 decreased versus the
year ended December 31, 2019 due primarily to decreased compensation costs of
approximately $14.1 million , which includes the impact of reduced headcount from
our voluntary separation program initiated in the first quarter of 2020.
Costs related to proposed joint venture with Peabody Energy. On June 18, 2019 ,
we entered into a definitive implementation agreement (the "Implementation
Agreement") with Peabody, to establish a joint venture that would have combined
the companies' Powder River Basin and Colorado mining operations. All costs
associated with execution of the Implementation Agreement are reflected herein.
On September 29, 2020 the U.S. District Court for the Eastern District of
Missouri ruled against the proposed joint venture, and we announced the
termination of our joint venture efforts due to the significant investment of
time and resources that would be required to conduct an appeal. For further
information on our proposed joint venture with Peabody Energy see Note 6, "Joint
Venture with Peabody Energy" to the Consolidated Financial Statements.
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Asset impairment and restructuring. In the third quarter of 2020, we determined that we had indicators of impairment related to three of our thermal operations,Coal Creek , West Elk, and Viper. Additionally, we determined we had indicators of impairment related to our equity investment in Knight Hawk,Holdings LLC . Our analyses of future expected cash flows from these assets indicated full impairment of our listed thermal operations and partial impairment of our equity investment inKnight Hawk Holdings, LLC . In the fourth quarter of 2020, we determined to close ourCoal Creek operation by the end of 2022, or as soon as all current sales obligations have been fulfilled. This resulted in the acceleration of our asset retirement obligation and the write off of repair parts and supplies inventory. Included in asset impairment costs and restructuring for the year endedDecember 31, 2020 are approximately$13.4 million of employee severance expense related to voluntary separation plans that were accepted by 254 employees of our thermal operations and corporate staff. For further information on our Asset Impairment costs, see Note 5, "Asset impairment and restructuring" to the Consolidated Financial Statements. Gain on property insurance recovery related to Mountain Laurel longwall. In the year endedDecember 31, 2020 we received$23.5 million of insurance proceeds related to the loss of certain longwall shields at our Mountain Laurel operation in November of 2019. For further information on our gain on property insurance recovery, see Note 7, "Gain on Property Insurance Recovery Related to Mountain Laurel Longwall" to the Consolidated Financial Statements. Preference Rights Lease Application (PRLA) settlement income. Our PRLA settlement income relates to a settlement in 2019 with theUnited States Department of Interior over a long-standing dispute on the valuation and disposition of a PRLA Arch controlled in northwesternNew Mexico . For further information on our PRLA settlement income see Note 8, "Preference Rights Lease Application Settlement Income" to the Consolidated Financial Statements. (Gain) Loss on Divestitures. During the year endedDecember 31, 2020 , we recorded a$1.4 million gain on the sale of our idle Dal-Tex andBriar Branch properties toCondor Holdings LLC . OnDecember 31, 2020 we sold our Viper operation toKnight Hawk Holdings, LLC , resulting in a gain of approximately$0.1 million . During the year endedDecember 31, 2019 , we soldCoal-Mac LLC toCondor Holdings LLC , incurring a loss of approximately$9.0 million . During the year endedDecember 31, 2017 , we soldLone Mountain Processing LLC andCumberland River Coal LLC toRevelation Energy LLC , generating a gain of approximately$21.3 million . In the year endedDecember 31, 2019 , we recorded a subsequent loss on the sale of Lone Mountain of approximately$4.3 million related to recognition of certain contingent workers' compensation liabilities, both occupational disease and traumatic, that may accrue to us as a result of the bankruptcy filing byRevelation Energy LLC . For further information on these gains and losses, see Note 4, "Divestitures" to the Consolidated Financial Statements. Other operating income, net. The increase in other operating income, net in 2020 versus 2019 results primarily from the favorable impact of certain coal derivative settlements of approximately$8.8 million , and increased outlease royalty income of$1.8 million , partially offset by reduced transloading income of approximately$4.3 million and a gain on sale of certain right of way rights in the prior year period of approximately$2.3 million .
Non-operating expense. The following table summarizes non-operating expense for
the years ended
Year Ended December 31,
Increase
(Decrease)
2020 2019 in Net Income
(In thousands)
Non-service related pension and
postretirement benefit costs $ (3,884) $ (2,053) $ (1,831)
Reorganization items, net 26 24 2
Total non-operating expenses $ (3,858) $ (2,029) $ (1,829) Non-service related pension and postretirement benefit costs. The increase in non-service related pension and postretirement benefit costs in the year endedDecember 31, 2020 versus the year endedDecember 31, 2019 is primarily due to lower postretirement benefit gain amortization in 2020. 64
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Provision for (benefit from) income taxes. The following table summarizes our
provision for income taxes for the years ended
Year Ended December 31,
Increase (Decrease)
2020 2019 in Net Income
(Inthousands)
Provision for (benefit from) income taxes $ (7) $ 248 $
255
See Note 15, to the Consolidated Financial Statements "Taxes," for a reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual benefit from taxes.
Operational Performance
Year 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 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 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 non-operating income (expense). 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 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 operating results of coal operations for the years
ended
Year Ended Year Ended
December 31, 2020 December 31, 2019 Variance
Powder River Basin
Tons sold (in thousands) 52,366 74,531 (22,165)
Coal sales per ton sold $ 12.38 $ 12.08 $ 0.30
Cash cost per ton sold $ 11.48 $ 10.63 $ (0.85)
Cash margin per ton sold $ 0.90 $ 1.45 $ (0.55)
Adjusted EBITDA (in thousands) $ 50,246 $ 110,528 $ (60,282)
Metallurgical
Tons sold (in thousands) 6,979 7,769 (790)
Coal sales per ton sold $ 74.17 $ 105.33 $ (31.16)
Cash cost per ton sold $ 61.13 $ 66.07 $ 4.94
Cash margin per ton sold $ 13.04 $ 39.26 $ (26.22)
Adjusted EBITDA (in thousands) $ 91,322 $ 305,363 $ (214,041)
Other Thermal
Tons sold (in thousands) 3,356 7,717 (4,361)
Coal sales per ton sold $ 31.67 $ 38.07 $ (6.40)
Cash cost per ton sold $ 36.73 $ 32.85 $ (3.88)
Cash margin per ton sold $ (5.06) $ 5.22 $ (10.28)
Adjusted EBITDA (in thousands) $ (16,211) $ 41,495 $ (57,706)
This table reflects numbers reported under a basis that differs from U.S. GAAP.
See the "Reconciliation of Non-GAAP measures" below for explanation and
reconciliation of these amounts to the nearest GAAP figures. 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 year ended December 31, 2020 ,
declined from the year ended December 31, 2019 due to decreased volume. Pricing
increased, and cash cost per ton sold increased, driven by the decrease in
volume and the reimposition of a higher Federal Black Lung Excise Tax rate.
Pricing in 2020 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 historically low natural gas
pricing, COVID-19 related demand destruction, and the continued growth of
subsidized renewable generation sources, particularly wind. Natural gas pricing
reached historical lows during the first half of 2020, but pricing of the
competing fuel was higher and volatile in the second half of 2020, and exceeded
prior year prices at times. Natural gas production levels fell below 2019 levels
in the second quarter of 2020, and remained below 2019 production levels for the
remainder of the year. However, 2020 natural gas storage levels remained above
2019 levels the entire year, and these opposing market forces led to pricing
volatility in the second half of 2020. The continued buildout of subsidized
renewable generation sources, particularly wind, significantly increased the
market share of renewable generation in the year ended December 31, 2020 . During
2020, we also experienced reduced electric generation related to demand
destruction due to restrictive responses taken to combat the spread of COVID-19.
In alignment with our stated objective of shrinking our thermal operational
footprint, we are comfortable operating our Powder River Basin operations at our
currently committed volumes in 2021. We have further determined to idle our Coal
Creek operation by the end of 2022 or earlier when all remaining sales
obligations have been fulfilled, and accelerate reclamation activities at the
mine.
In 2019 the Federal Black Lung Excise Tax rate reverted to the pre-1986 rates.
For 2020 and 2021, 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 year ended
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partially offset by reduced cash cost per ton sold. The cost improvement was driven by an increase in the percentage of segment tons sold from our low cost Leer mine in 2020. Additionally, operating tax and royalty costs declined in 2020 due to lower pricing and a severance tax credit. Actions taken to combat the spread of COVID-19 impacted our metallurgical segment throughout 2020. In particular, the initial industrial shutdowns and subsequent uneven recovery discussed in the "Overview" section above had a negative impact on the entire steel making supply chain. These impacts include a significant decline in coking coal pricing and deferral of some shipments out of the year endedDecember 31, 2020 . In the fourth quarter, particularly November and December, of 2020 we experienced a significant increase in the number of active COVID-19 cases at our mines. This increase led to necessary absenteeism that required us to idle 52 continuous miner production shifts at our various Metallurgical Segment operations during the last half of the quarter. Throughout the year endedDecember 31, 2020 our Leer South longwall development project has stayed on schedule. We currently anticipate initial longwall production in the third quarter of 2021. The addition of a second longwall operation to our Metallurgical Segment is expected to significantly increase our volumes and further reduce our already low average segment cost structure. Our metallurgical segment sold 6.0 million tons of coking coal and 1.0 million tons of associated thermal coal in the year endedDecember 31, 2020 , as compared to 6.8 million tons of coking coal and 1.0 million tons of associated thermal coal in the prior year. Longwall operations accounted for approximately 60% of our shipment volume in the year endedDecember 31, 2020 and 71% of our shipment volume in the prior year. Other Thermal- Adjusted EBITDA for the year endedDecember 31, 2020 declined from the year endedDecember 31, 2019 due to reduced sales volume, lower pricing, and increased cash cost per ton sold. All of these metrics are impacted by the inclusion in the year endedDecember 31, 2019 of our former Coal-Mac operation, which was sold inDecember 2019 . Coal-Mac provided approximately 2.1 million tons sold in the year endedDecember 31, 2019 . Tons sold from ongoing operations declined approximately 2.2 million tons in the year endedDecember 31, 2020 , as low natural gas pricing, increased renewable generation, and uneconomic international pricing impacted volume. In addition, in late March of 2020 we temporarily idled our Viper mine due to nonperformance of the mine's primary customer. The customer restarted deliveries in early May, and we reopened the mine at approximately the same time. In late December of 2020, prompt international thermal coal pricing increased to levels that can support economic exports from our West Elk operation but the international thermal coal pricing is volatile. OnDecember 31, 2020 , we sold our Other Thermal operation, Viper, toKnight Hawk Holdings, LLC . For further information on the sale of Viper, please see Note 4, "Divestitures" to the Consolidated Financial Statements.
In December of the year ended
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Reconciliation of NON-GAAP measures
Non-GAAP 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 consolidated income statements, but relate to price protection on the sale
of coal. Segment coal sales per ton sold is not a measure of financial
performance in accordance with generally accepted accounting principles. We
believe segment coal sales per ton sold provides useful information to investors
as it better reflects our revenue for the quality of coal sold and our operating
results by including all income from coal sales. The adjustments made to arrive
at these measures are significant in understanding and assessing our financial
condition. Therefore, segment coal sales revenues should not be considered in
isolation, nor as an alternative to coal sales revenues under generally accepted
accounting principles.
Powder River Other Idle and
Year Ended December 31, 2020 Basin Metallurgical Thermal Other Consolidated
(In thousands)
GAAP Revenues in the Condensed
Consolidated Statements of
Operations $ 662,135 $ 641,536 $ 139,497 $ 24,424 $ 1,467,592
Less: Adjustments to reconcile to
Non-GAAP Segment coal sales revenue
Coal risk management derivative
settlements classified in "other
income" - (577) (8,632) - (9,209)
Coal sales revenues from idled or
otherwise disposed operations not
included in segments - - - 24,322 24,322
Transportation costs 13,625 124,494 41,852 102 180,073
Non-GAAP Segment coal sales
revenues $ 648,510 $ 517,619 $ 106,277 $ - $ 1,272,406
Tons sold 52,366 6,979 3,356
Coal sales per ton sold $ 12.38 $ 74.17 $ 31.67
Powder River Other Idle andYear Ended December 31, 2019 Basin Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 915,750 $ 990,550 $ 377,202 $ 10,850 $ 2,294,352 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" - (1,122) (6,782) - (7,904) Coal sales revenues from idled or otherwise disposed operations not included in segments - - - 10,820 10,820 Transportation costs 15,079 173,352 90,151 30 278,612 Non-GAAP Segment coal sales revenues$ 900,671 $ 818,320 $ 293,833 -$ 2,012,824 Tons sold 74,531 7,769 7,717 Coal sales per ton sold$ 12.08 $ 105.33 $ 38.07 68 Table of Contents
Non-GAAP 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 consolidated income statements, but relate directly to the costs incurred to
produce coal. Segment cash cost per ton sold is not a measure of financial
performance in accordance with generally accepted accounting principles. We
believe segment cash cost per ton sold better reflects our controllable costs
and our operating results by including all costs incurred to produce coal. The
adjustments made to arrive at these measures are significant in understanding
and assessing our financial condition. Therefore, segment cash cost of coal
sales should not be considered in isolation, nor as an alternative to cost of
sales under generally accepted accounting principles.
Powder River Other Idle and
Year Ended December 31, 2020 Basin Metallurgical Thermal Other Consolidated
(In thousands)
GAAP Cost of sales in the Condensed
Consolidated Statements of
Operations $ 613,177 $ 551,133 $ 165,090 $ 49,079 $ 1,378,479
Less: Adjustments to reconcile to
Non-GAAP Segment cash cost of coal
sales
Diesel fuel risk management
derivative settlements classified
in "other income" (1,788) - - - (1,788)
Transportation costs 13,625 124,494 41,852 102 180,073
Cost of coal sales from idled or
otherwise disposed operations not
included in segments - - - 41,322 41,322
Other (operating overhead, certain
actuarial, etc.) - - - 7,655 7,655
Non-GAAP Segment cash cost of coal
sales 601,340 426,639 123,238 - 1,151,217
Tons sold 52,366 6,979 3,356
Cash Cost Per Ton Sold $ 11.48 $ 61.13 $ 36.73
Powder River Other Idle andYear Ended December 31, 2019 Basin Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Condensed Consolidated Statements of Operations$ 803,996 $ 686,673 $ 343,656 $ 38,692 $ 1,873,017 Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Diesel fuel risk management derivative settlements classified in "other income" (3,036) - - - (3,036) Transportation costs 15,079 173,353 90,151 30 278,613 Cost of coal sales from idled or otherwise disposed operations not included in segments - - - 28,712 28,712 Other (operating overhead, certain actuarial, etc.) - - - 9,950 9,950 Non-GAAP Segment cash cost of coal sales$ 791,953 513,320 253,505 - 1,558,778 Tons sold 74,531 7,769 7,717 Cash Cost Per Ton Sold$ 10.63 $ 66.07 $ 32.85 69 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 the Company before the effect of net
interest expense, income taxes, depreciation, depletion and amortization, the
amortization of sales contracts, and the accretion on asset retirement
obligations. 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.
Year Ended Year Ended
December 31, December 31,
2020 2019
Net income (loss) $ (344,615) $ 233,799 Provision for (benefit from) income taxes (7)
248
Interest expense, net 10,624
6,794
Depreciation, depletion and amortization 121,552
111,621
Accretion on asset retirement obligations 19,887
20,548
Costs related to proposed joint venture with Peabody Energy 16,087
13,816
Asset impairment and restructuring 221,380 - Gain on property insurance recovery related to Mountain Laurel longwall (23,518) - (Gain) loss on divestitures (1,505)
13,312
Preference Rights Lease Application settlement income -
(39,000)
Net loss resulting from early retirement of debt and debt restructuring - - Non-service related pension and postretirement benefit costs 3,884 2,053 Reorganization items, net (26) (24) Adjusted EBITDA 23,743 363,167
EBITDA from idled or otherwise disposed operations 15,858
12,926
Selling, general and administrative expenses 82,397
95,781
Other 3,359
(14,488)
Segment Adjusted EBITDA from coal operations$ 125,357 $
457,386
Other includes primarily income from our equity investments, certain changes in
the fair value of coal derivatives and coal trading activities, certain changes
in fair value of heating oil derivatives we use to manage our exposure to diesel
fuel pricing, net EBITDA provided by our land company, and certain miscellaneous
revenue.
For the year ended December 31, 2020 , amounts included in Other decreased EBITDA
by approximately $3.4 million versus increasing EBITDA approximately $14.5
million in the year ended December 31, 2019 . The decrease in EBITDA was
primarily related to unfavorable change in value of coal derivatives of
approximately $16.4 million , and unfavorable transloading income and expense of
approximately $2.3 million .
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.
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Given the volatile nature of coal markets, and the significant challenges and
uncertainty surrounding the COVID-19 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. 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; however, given the uncertainty in the
global economy and our primary markets, we believe it is prudent to explore
opportunities to secure additional capital to further enhance our liquidity
position as we drive forward with our Leer South development. 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
outbreak and the responses thereto.
On March 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 on March 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 of October 5, 2016 .
On April 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) the London 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 Note 14, "Debt and Financing
Arrangements" to the 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 14, "Debt and Financing
Arrangements" to the Consolidated Financial Statements.
On September 30, 2020 , we extended and amended our existing trade accounts
receivable securitization facility provided to Arch Receivable Company, LLC , a
special-purpose entity that is a wholly owned subsidiary of Arch Resources
("Arch Receivable") (the "Extended Securitization Facility"), which supports the
issuance of letters of credit and requests for cash advances. The amendment to
the Extended Securitization Facility changed the facility size from $160 million
to $110 million and extended the maturity date to September 29, 2023 .
Additionally, the amendment eliminated the provision that accelerated maturity
of the facility upon falling below a specified level of liquidity and modified
the pricing for the Extended Securitization Facility. Pursuant to the Extended
Securitization Facility, we 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 Extended Securitization Facility see Note 14,
"Debt and Financing Arrangements" to the Consolidated Financial Statements.
On September 30, 2020 , we amended the senior secured inventory-based revolving
credit facility in an aggregate principal amount of $50 million (the "Inventory
Facility") with Regions Bank ("Regions") as administrative agent and collateral
agent, as lender and swingline lender (in such capacities, the "Lender") and as
letter of credit issuer. 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 amendment of the Inventory Facility extended the maturity date
to September 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
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inventory and parts and supplies, depending on liquidity. For further information regarding the Inventory Facility, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements.
OnMarch 4, 2020 , we entered into an equipment financing arrangement accounted for as debt ("Equipment Financing"). 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 14, "Debt and Financing Arrangements" to the 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") between theIssuer andCitibank, N.A ., as trustee (the "Trustee"). 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 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 issuance of the Tax Exempt Bonds. As ofDecember 31, 2020 , we have received$47.1 million of the total Tax Exempt Bonds proceeds. The remaining$6.0 is held in trust and is recorded on our balance sheet as restricted cash. The remainder of the funds will be released as qualified expenditures are made over the first half of 2021. For further information regarding these Tax Exempt Bonds, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. OnNovember 3, 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 cost of a "Capped Call Transaction" as defined below 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, beginning onMay 15, 2021 , and will mature onNovember 15, 2025 , unless earlier converted or repurchased by us. The Convertible Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 26.7917 shares of common stock per$1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately$37.325 per share, subject to adjustment pursuant to the terms of the Indenture governing the Convertible Notes (the "Indenture"). The Convertible Notes may be converted at any time after, and including,July 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date. For further information regarding the Convertible Notes, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. In connection with the offering of the Convertible Notes onOctober 29, 2020 , we entered into privately negotiated convertible note hedge transactions (collectively, the "Capped Call Transactions"). The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the Convertible Notes. The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset any cash payments we are required to make in excess of the principal amount due upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the conversion price but lower than the strike price of the Capped Call Transactions, which was initially$37.325 per share (subject to adjustment under the terms of the Capped Call Transactions). The number of shares underlying the Capped Call Transactions is 4.2 million. The cost of the Capped Call Transaction was approximately$17.5 million . For further information regarding the Capped Call Transactions, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements.
On
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have used $827.4 million . During the year ended December 31, 2020 , we did not
repurchase any shares of our stock. We paid a dividend of $0.50 per common share
on March 13, 2020 to stockholders of record at the close of business on March 3,
2020 . On April 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. Since March 13, 2020 , we have not
paid any further dividends on shares of our stock. The timing and amount of any
future dividends or 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 with Securities and Exchange Commission requirements.
On
Letters of
Borrowing Credit Contractual
Face Amount Base Outstanding Availability Expiration
(Dollars in thousands)
Securitization Facility
50,000 33,307 29,196 4,111 September 29, 2023
Total $ 160,000 $ 115,107 $ 85,521 $ 29,586
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The following is a summary of cash provided by or used in each of the indicated
types of activities:
Year Ended December 31,
2020 2019
(In thousands)
Cash provided by (used in):
Operating activities $ 61,106 $ 419,714
Investing activities (226,009) (239,111)
Financing activities 205,328 (292,520)
Cash Flow
Cash provided by operating activities decreased in the year endedDecember 31, 2020 versus the year endedDecember 31, 2019 mainly due to the deterioration of results from operations discussed in the "Overview" and "Operational Performance" sections above. Offsetting that slightly was a reduction in working capital requirements of approximately$21 million . Cash used in investing activities decreased in the year endedDecember 31, 2020 versus the year endedDecember 31, 2019 primarily due to an approximately$10 million increase in net proceeds from short term investments, and approximately$24 million in property insurance proceeds on our Mountain Laurel longwall claim, partially offset by increased capital expenditures of approximately$19 million . Capital spending in the year endedDecember 31, 2020 includes approximately$206 million , excluding capitalized interest, related to our Leer South mine development. Cash was provided by financing activities in the year endedDecember 31, 2020 increased versus the year endedDecember 31, 2019 primarily due to suspension of treasury stock purchases and dividend payments, and proceeds from the new$54 million Equipment Financing, proceeds of approximately$53 million from the new Tax Exempt Bond issuance, and net proceeds of approximately$132.7 million from issuance of the Convertible Notes. For further information regarding the Equipment Financing, Tax Exempt Bonds, and the Convertible Notes, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements.
Contractual Obligations
Payments Due by Period
2021 2022-2023 2024-2025 after 2025 Total
(Dollars in thousands)Long-term debt, including related interest$ 31,774 $ 73,350 $
528,968 $ -$ 634,092 Leases 4,577 9,022 9,707 4,614 27,920 Coal lease rights 3,748 6,062 5,543 38,131 53,484 Coal purchase obligations 5,574 - - - 5,574
Unconditional purchase obligations 95,039 - - - 95,039 Total contractual obligations$ 140,712 $ 88,434 $
544,218$ 42,745 $ 816,109
The related interest on long-term debt was calculated using rates in effect at
Coal lease rights represent non-cancelable royalty lease agreements, as well as lease bonus payments due.
Unconditional purchase obligations include open purchase orders and other purchase commitments, which have not been recognized as a liability. The commitments in the table above relate to contractual commitments for the purchase of materials and supplies, payments for services and capital expenditures.
The table above excludes our asset retirement obligations. Our consolidated
balance sheet reflects a liability of
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approved reclamation plan. Asset retirement obligations are recorded at fair value when incurred and accretion expense is recognized through the expected date of settlement. Determining the fair value of asset retirement obligations involves a number of estimates, as discussed in the section entitled "Critical Accounting Policies" below, including the timing of payments to satisfy the obligations. The timing of payments to satisfy asset retirement obligations is based on numerous factors, including mine closure dates. Please see Note 16, "Asset Retirement Obligations" to our Consolidated Financial Statements for further information about our asset retirement obligations. The table above also excludes certain other obligations reflected in our consolidated balance sheet, including estimated funding for pension and postretirement benefit plans and worker's compensation obligations. The timing of contributions to our pension plans varies based on a number of factors, including changes in the fair value of plan assets and actuarial assumptions. Please see the section entitled "Critical Accounting Policies" below for more information about these assumptions. We expect to make no contributions to our pension plans in 2021. Please see Note 20, "Workers' Compensation Expense", and Note 21, "Employee Benefit Plans" to our Consolidated Financial Statements for more information about the amounts we have recorded for workers' compensation and pension and postretirement benefit obligations respectively.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, indemnifications, financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
We use a combination of surety bonds, letters of credit and cash to secure our
financial obligations for reclamation, workers' compensation, coal lease
obligations and other obligations as follows as of
Workers'
Reclamation Lease Compensation
Obligations Obligations Obligations Other Total
(Dollars in thousands)
Surety bonds $ 552,401 $ 31,691 $ 53,778 $ 8,872 $ 646,742
Letters of credit 20,000 - 64,167 1,354 85,521Cash on deposit with others 590 -
5,000 - 5,590
Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles that are generally accepted inthe United States . The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management bases our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Additionally, these estimates and judgments are discussed with our audit committee on a periodic basis. Actual results may differ from the estimates used under different assumptions or conditions. We have provided a description of all significant accounting policies in the notes to our Consolidated Financial Statements. We believe that of these significant accounting policies, the following may involve a higher degree of judgment or complexity:
Derivative Financial Instruments
We utilize derivative instruments to manage exposures to commodity prices and
interest rate risk on long-term debt. Additionally, we may hold certain coal
derivative instruments for trading purposes. Derivative financial instruments
are recognized in the balance sheet at fair value. Certain coal contracts may
meet the definition of a
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derivative instrument, but because they provide for the physical purchase or
sale of coal in quantities expected to be used or sold by us over a reasonable
period in the normal course of business, they are not recognized on the balance
sheet.
Certain derivative instruments are designated as the hedge instrument in a
hedging relationship. In a cash flow hedge, we hedge the risk of changes in
future cash flows related to the underlying item being hedged. Changes in the
fair value of the derivative instrument used as a hedge instrument in a cash
flow hedge are recorded in other comprehensive income. Amounts in other
comprehensive income are reclassified to earnings when the hedged transaction
affects earnings and are classified in a manner consistent with the transaction
being hedged.
We formally document all relationships between hedging instruments and hedged
items, as well as our risk management objectives for undertaking various hedge
transactions. We evaluate the effectiveness of our hedging relationships both at
the hedge inception and on an ongoing basis.
Impairment of Long-lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These events and circumstances include, but are not limited to, a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment is recorded for the excess of the carrying amount over the estimate fair value, which is generally determined using discounted future cash flows. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes the new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of the asset. We make various assumptions, including assumptions regarding future cash flows in our assessments of long-lived assets for impairment. The assumptions about future cash flows and growth rates are based on the current and long-term business plans related to the long-lived assets. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the long-lived assets. These assumptions require significant judgments on our part, and the conclusions that we reach could vary significantly based upon these judgments. In the third quarter of 2020, we determined that we had indicators of impairment related to three of our thermal operations,Coal Creek , West Elk, and Viper. Additionally, we determined we had indicators of impairment related to our equity investment inKnight Hawk Holdings, LLC . Our analyses of future expected cash flows from these assets indicated full impairment of our listed thermal operations and partial impairment of our equity investment inKnight Hawk Holdings, LLC . In the fourth quarter of 2020, we determined to close ourCoal Creek operation by the end of 2022, or as soon as all current sales obligations have been fulfilled. This resulted in the acceleration of our Asset Retirement Obligation (ARO) and the write off of repair parts and supplies inventory forCoal Creek . Please see the Note 5, "Asset impairment and restructuring" to our Consolidated Financial Statements for more information about the amounts we have recorded for Asset Impairment.
Asset Retirement Obligations
Our asset retirement obligations arise from SMCRA and similar state statutes,
which require that mine property be restored in accordance with specified
standards and an approved reclamation plan. Significant reclamation activities
include reclaiming refuse and slurry ponds, reclaiming the pit and support
acreage at surface mines, and sealing portals at deep mines. Our asset
retirement obligations are initially recorded at fair value, or the amount at
which the obligations could be settled in a current transaction between willing
parties. This involves determining the present value of estimated future cash
flows on a mine-by-mine basis based upon current permit requirements and various
estimates and assumptions, including estimates of disturbed acreage, reclamation
costs and assumptions regarding equipment
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productivity. We estimate disturbed acreage based on approved mining plans and related engineering data. Since we plan to use internal resources to perform the majority of our reclamation activities, our estimate of reclamation costs involves estimating third-party profit margins, which we base on our historical experience with contractors that perform certain types of reclamation activities. We base productivity assumptions on historical experience with the equipment that we expect to utilize in the reclamation activities. In order to determine fair value, we discount our estimates of cash flows to their present value. We base our discount rate on the rates of treasury bonds with maturities similar to expected mine lives, adjusted for our credit standing. Accretion expense is recognized on the obligation through the expected settlement date. On at least an annual basis, we review our entire reclamation liability and make necessary adjustments for permit changes as granted by state authorities, changes in the timing and extent of reclamation activities, and revisions to cost estimates and productivity assumptions, to reflect current experience. Any difference between the recorded amount of the liability and the actual cost of reclamation will be recognized as a gain or loss when the obligation is settled. We expect our actual cost to reclaim our properties will be less than the expected cash flows used to determine the asset retirement obligation. AtDecember 31, 2020 , our balance sheet reflected asset retirement obligation liabilities of$257.8 million , including amounts classified as a current liability. As ofDecember 31, 2020 , we estimate the aggregate uninflated and undiscounted cost of final mine closures to be approximately$395.7 million .
See the roll forward of the asset retirement obligation liability in Note 16, "Asset Retirement Obligations" to the Consolidated Financial Statements.
Employee Benefit Plans
We have non-contributory defined benefit pension plans covering certain of our
salaried and hourly employees. Benefits are generally based on the
employee's years of service and compensation. The actuarially-determined funded
status of the defined benefit plans is reflected in the balance sheet.
The calculation of our net periodic benefit costs (pension expense) and benefit
obligation (pension liability) associated with our defined benefit pension plans
requires the use of a number of assumptions. These assumptions are summarized in
Note 21, "Employee Benefit Plans", to the Consolidated Financial Statements.
Changes in these assumptions can result in different pension expense and
liability amounts, and actual experience can differ from the assumptions.
? The expected long-term rate of return on plan assets is an assumption
reflecting the average rate of earnings expected on the funds invested or to be
invested to provide for the benefits included in the projected benefit
obligation. We establish the expected long-term rate of return at the beginning
of each fiscal year based upon historical returns and projected returns on the
underlying mix of invested assets. The pension plan's investment targets are 27%
equity and 73% fixed income securities. Investments are rebalanced on a periodic
basis to approximate these targeted guidelines. The long-term rate of return
assumptions are less than the plan's actual life-to-date returns.
? The discount rate represents our estimate of the interest rate at which
pension benefits could be effectively settled. Assumed discount rates are used
in the measurement of the projected, accumulated and vested benefit obligations
and the service and interest cost components of the net periodic pension cost.
The determination of the discount rate was updated from our actuary's
proprietary Yield Curve model, under which the expected benefit payments of the
plan are matched against a series of spot rates from a market basket of high
quality fixed income securities.
The differences generated from changes in assumed discount rates and returns on
plan assets are amortized into earnings using the corridor method, whereby the
unrecognized (gains)/losses in excess of 10% of the greater of the beginning of
the year projected benefit obligation or market-related value of assets are
amortized over the average remaining life expectancy of the plan participants.
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We also currently provide certain postretirement medical and life insurance coverage for eligible employees. Generally, covered employees who terminate employment after meeting eligibility requirements are eligible for postretirement coverage for themselves and their dependents. The salaried employee postretirement benefit plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance.
Actuarial assumptions are required to determine the amounts reported as obligations and costs related to the postretirement benefit plan. The discount rate assumption reflects the rates available on high-quality fixed-income debt instruments at year-end and is calculated in the same manner as discussed above for the pension plan. Income Taxes
We provide for deferred income taxes for temporary differences arising from differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates expected to be in effect when the related taxes are expected to be paid or recovered. We initially recognize the effects of a tax position when it is more than 50 percent likely, based on the technical merits, that that position will be sustained upon examination, including resolution of the related appeals or litigation processes, if any. Our determination of whether or not a tax position has met the recognition threshold considers the facts, circumstances, and information available at the reporting date. The Company assesses the need for a valuation allowance by evaluating future taxable income, available tax planning strategies and the reversal of temporary differences. A valuation allowance is difficult to avoid when a company is in a cumulative loss position, as it constitutes significant negative evidence with regards to future taxable income. A cumulative loss position is defined as a cumulative pre-tax loss for the current and two preceding years.
As of
In 2019, the Company was no longer in a cumulative loss position. However, based on significant near-term uncertainty in market pricing and uncertainty surrounding other planned changes in our operating structure, the Company maintained a full valuation allowance.
As of
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