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 development of our Leer South mine; 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 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, in accordance withCDC , state, and local guidelines, 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 changes in demand for their products. Our current view of our customer demand situation is discussed in greater detail in the "Overview" section below. 28
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During the first quarter of 2021, the COVID-19 case rate for our employees declined significantly, and vaccines for COVID-19 became available. Through education, monetary incentives, and vaccine logistical assistance, we have actively encouraged our workforce to get vaccinated. We intend to continue encouraging vaccination, and we are hopeful that as the availability of vaccine continues to increase, the case rate of our employees will continue to decline, and economic activity in general will accelerate. Overview Our results for the first quarter of 2021 benefited from improvement in metallurgical and thermal coal markets. During the first quarter of 2021, global economic growth appears to have accelerated as the arrival of vaccines for COVID-19 has allowed some reduction in restrictions in some jurisdictions, and the anticipation of further reductions in restrictions as vaccination rates increase and cases decrease. By the end of the first quarter of 2021, domestic steel industry capacity utilization exceeded the prior year for the first time since the initial COVID related industrial shutdowns began late in the first quarter of 2020. Additionally, global steel prices have risen appreciably, and domestic steel prices were at historic levels by the end of the quarter driven by economic recovery. The return of overall industrial production to pre-COVID-19 levels is still likely to be a lengthy process and, as we saw in the fourth quarter of 2020, is subject to setbacks should COVID-19 become resurgent. North American coking coal supply remains constrained as many of the significant high cost coking coal mine idlings announced during 2020 remain in place. Some of the curtailed production has returned, and more may return to the market. We believe that the cash cost of a significant portion of the currently curtailed coking coal production exceeds current prompt pricing. 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, normal reserve depletion, and accelerating economic growth 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 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, among other export products, fromAustralia . Historical trade patterns remain disrupted, and pricing anomalies continue in the international coking coal markets. Through the first quarter of 2021, indices forUnited States (US) east coast coking coal have remained relatively stable at levels above those seen during the depths of the pandemic. Australian Premium Low Volatile (PLV) coking coal prices were well below US east coast prices for most of the quarter. Uncertainty and volatility in pricing and pricing relationships are likely until the larger political dispute betweenChina andAustralia is settled. While most of our committed but unpriced coking coal volume is linked tothe United States east coast indices, we do have some volume of committed but unpriced coking coal linked to the PLV or otherAsia/Pacific indexes for 2021. Domestic thermal coal burn improved in the first quarter of 2021 due to anticipated winter heating season demand, favorable weather during this heating season, and increased natural gas prices. Thermal coal demand remains pressured by continuing increases in subsidized renewable generation sources, particularly wind. However, increased natural gas prices led to increases in the percentage of coal fired generation to total generation in the first quarter of 2021 compared to the first quarter of 2020. Production levels of natural gas for the first quarter of 2021 were below the prior year's levels, and storage levels of the competing fuel dropped below levels seen this time last year. We believe coal generator stockpiles declined during the current quarter, but remain above historical averages based on days of burn. During the first quarter of 2021, international thermal coal market pricing remained at levels that support economic exports from our West Elk operation and we have layered in export commitments for this operation for the current year. Similar to metallurgical markets discussed above, the availability of COVID-19 vaccines and related reductions of restrictions should positively impact economic growth and power generation generally; however, high generator thermal coal stockpiles and the continued growth of subsidized renewable generation sources will continue to negatively impact thermal coal demand. While we may see a temporary improvement in thermal coal demand due to accelerating economic growth, longer term we expect domestic and global thermal markets to remain challenged. 29
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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. In particular, during the first quarter of 2021, we completed approximately$10.3 million of Asset Retirement Obligation (ARO) work at these operations, compared to approximately$0.6 million in the first quarter of 2020. We are also planning to establish self-funding mechanisms for these long-term liabilities at those operations. Operationally, 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 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 March 31,
2021 2020 (Decrease) / Increase
(In thousands)
Coal sales $ 357,543 $ 405,232 $ (47,689)
Tons sold 14,042 16,980 (2,938)
On a consolidated basis, coal sales in the first quarter of 2021 were
approximately $47.7 million or 11.8% less than in the first quarter of 2020,
while tons sold decreased approximately 2.9 million tons or 17.3%. Coal sales
from Metallurgical operations decreased approximately $3.9 million primarily due
to decreased volume. Thermal coal sales decreased approximately $32.7 million
due to decreased volume. In the prior year quarter, our Viper operation, which
was sold in December 2020 , provided approximately $9.9 million in coal sales and
0.2 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 March 31,
2021 and 2020:
Three Months Ended March 31,
Increase
(Decrease)
2021 2020 in Net Income
(In thousands)
Cost of sales (exclusive of items shown
separately below) $ 309,906 $ 374,999 $ 65,093
Depreciation, depletion and amortization 25,797 31,308 5,511
Accretion on asset retirement obligations 5,437 5,006 (431)
Change in fair value of coal derivatives and
coal trading activities, net 528 743 215
Selling, general and administrative expenses 21,480 22,745 1,265
Costs related to proposed joint venture with
Peabody Energy - 3,664 3,664
Asset impairment and restructuring - 5,828 5,828
Gain on property insurance recovery related to
Mountain Laurel longwall - (9,000) (9,000)
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Other operating income, net (5,268) (6,170) (902)
Total costs, expenses and other
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Cost of sales. Our cost of sales for the first quarter of 2021 decreased
approximately $65.1 million or 17.4% versus the first quarter of 2020. In the
prior year quarter, our Viper operation, which was sold in December 2020 ,
accounted for approximately $10.5 million in cost of sales. The decline in cost
of sales at ongoing operations consists primarily of reduced repairs and
supplies costs of approximately $21.7 million , a net positive change in coal
inventory valuation versus the prior year quarter of approximately $11.1
million , an increase in credit for ARO reclamation work completed primarily at
our Thermal operations of approximately $9.1 million , a decrease in purchased
coal cost of approximately $6.9 million , reduced compensation costs of
approximately $6.2 million , and reduced operating taxes and royalties of
approximately $5.4 million . These cost decreases were partially offset by
increased transportation costs of approximately $3.4 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 quarter of 2021 versus the first quarter of 2020 is primarily due to the asset impairment we recorded in the third quarter of 2020 in our Thermal segment and a combination of reduced sales volume and lower depletion rates in our Metallurgical segment.
Accretion on asset retirement obligations. The increase in accretion expense in the first quarter of 2021 versus the first quarter of 2020 is primarily related to the changes in the planned timing of our reclamation work to be completed at our Thermal operations, specifically atCoal Creek . Change in fair value of coal derivatives and coal trading activities, net. The cost in both the first quarter of 2021 and 2020 is primarily related to mark-to-market losses on coal derivatives that we had entered into to hedge our price risk for anticipated international thermal coal shipments. Selling, general and administrative expenses. Selling, general and administrative expenses in the first quarter of 2021 decreased versus the first quarter of 2020 due primarily to decreased compensation costs of approximately$0.9 million and decreased travel related costs of$0.4 million as we adapted to the COVID-19 environment. Costs related to proposed joint venture with Peabody Energy. We incurred expenses of$3.7 million for the three months endedMarch 31, 2020 associated with the regulatory approval process related to the proposed joint venture with Peabody that was terminated jointly by the parties due to the federal trade commission blocking the joint venture.
Asset impairment and restructuring. We recorded
Gain on property insurance recovery related to Mountain Laurel longwall. We recorded a$9.0 million gain related to a property insurance recovery on the longwall shields at our Mountain Laurel operation during the three months endedMarch 31, 2020 . Other operating income, net. The decrease in other operating income, net in the first quarter of 2021 versus the first quarter of 2020 consists primarily of the net unfavorable impact of certain coal derivative settlements of approximately$1.5 million , partially offset by approximately$1.0 million in unfavorable mark-to-market of heating oil derivatives in the first quarter of 2020. 32
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Nonoperating (expenses) income. The following table summarizes our nonoperating
(expenses) income during the three months ended
Three Months Ended March 31,
Increase
(Decrease)
2021 2020 in Net Income
(In thousands)
Non-service related pension and
postretirement benefit costs $ (1,527) $ (1,096) $ (431)
Reorganization items, net - 26 (26)
Total nonoperating expenses $ (1,527) $ (1,070) $ (457)
Non-service related pension and postretirement benefit costs. The increase in non-service related pension and postretirement benefit costs in the first quarter of 2021 versus the first quarter of 2020 is primarily due to lower postretirement benefit gain amortization in the first quarter of 2021.
Provision for (benefit from) income taxes. The following table summarizes our provision for (benefit from) income taxes during the three months endedMarch 31, 2021 and 2020: Three Months Ended March 31, Increase (Decrease) 2021 2020 in Net Income (In thousands)
Provision for (benefit from) income taxes $ 378
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.
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Operational Performance
Three 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 months
ended
Three Months Ended March 31,
2021 2020 Variance
Metallurgical
Tons sold (in thousands) 1,719 1,779 (60)
Coal sales per ton sold $ 83.76 $ 82.35 $ 1.41
Cash cost per ton sold $ 59.63 $ 58.42 $ (1.21)
Cash margin per ton sold $ 24.13 $ 23.93 $ 0.20
Adjusted EBITDA (in thousands) $ 41,597 $ 42,720 $ (1,123)
Thermal
Tons sold (in thousands) 12,292 14,915 (2,623)
Coal sales per ton sold $ 13.16 $ 13.41 $ (0.25)
Cash cost per ton sold $ 12.18 $ 13.65 $ 1.47
Cash margin per ton sold
This table reflects numbers reported under a basis that differs fromU.S. GAAP. See "Reconciliation of Non-GAAP measures" below for explanation and reconciliation of these amounts to the nearest GAAP measures. Other companies may calculate these per ton amounts differently, and our calculation may not be comparable to other similarly titled measures.
Metallurgical - Adjusted EBITDA for the three months ended
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margin per ton sold. While the year over year results are similar, the dynamics of the periods are very different. The first quarter of 2021 featured improved economic growth, stable promptAtlantic basin index prices, and increased steel demand and pricing. In contrast, the first quarter of 2020 featured declining pricing and concluded with the initial industrial shutdowns in response to the emergence of COVID-19. At the end of the first quarter of 2021, our Leer South longwall development project remains on schedule, with initial longwall production anticipated in the third quarter of 2021. All primary longwall equipment has been delivered to the mine site. The addition of a second longwall operation to our Metallurgical Segment is expected to significantly increase our volumes and strengthen our low average segment cost structure. Our Metallurgical segment sold 1.5 million tons of coking coal and 0.2 million tons of associated thermal coal in both the three months endedMarch 31, 2021 , and the three months endedMarch 31, 2020 . Longwall operations accounted for approximately 58% of our shipment volume in the three months endedMarch 31, 2021 , compared to approximately 65% of our shipment volume in the three months endedMarch 31, 2020 . Thermal - Adjusted EBITDA for the three months endedMarch 31, 2021 increased versus the three months endedMarch 31, 2020 , due to decreased cash cost per ton sold, partially offset by decreased volume. The reduction in cash cost per ton sold is driven by reduced unit cost at our Black Thunder operation, despite reduced volume, as we have made substantial progress on our efforts to align production levels with the secular decline in domestic demand. Also, contributing to the decreases in volume, cost and price is the inclusion of approximately 0.2 million tons sold from our former Viper operation in the three months endedMarch 31, 2020 . During the first quarter of 2021 we completed approximately$10.3 million of Asset Retirement Obligation (ARO) work at our Thermal operations, compared to$0.6 million during the first quarter of 2020.
On
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Reconciliation of Non-GAAP measures
Segment coal sales per ton sold
Non-GAAP Segment coal sales per ton sold is calculated as segment coal sales
revenues divided by segment tons sold. Segment coal sales revenues are adjusted
for transportation costs, and may be adjusted for other items that, due to
generally accepted accounting principles, are classified in "other income" on
the statement of operations, but relate to price protection on the sale of coal.
Segment coal sales per ton sold is not a measure of financial performance in
accordance with generally accepted accounting principles. We believe segment
coal sales per ton sold provides useful information to investors as it better
reflects our revenue for the quality of coal sold and our operating results by
including all income from coal sales. The adjustments made to arrive at these
measures are significant in understanding and assessing our financial condition.
Therefore, segment coal sales revenues should not be considered in isolation,
nor as an alternative to coal sales revenues under generally accepted accounting
principles.
Idle andThree Months Ended March 31, 2021 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 178,781 $ 177,540 $ 1,222 $ 357,543 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (690) 552 - (138) Coal sales revenues from idled or otherwise disposed operations not included in segments - - 1,217 1,217 Transportation costs 35,489 15,167 5 50,661 Non-GAAP Segment coal sales revenues$ 143,982 $ 161,821 $ -$ 305,803 Tons sold 1,719 12,292 Coal sales per ton sold $ 83.76$ 13.16 $ Idle and
Three Months Ended March 31, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Condensed Consolidated Statements of Operations$ 182,654 $ 210,196 $ 12,382 $ 405,232 Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (261) (1,328) - (1,589) Coal sales revenues from idled or otherwise disposed operations not included in segments - - 12,349 12,349 Transportation costs 36,388 11,473 33 47,894 Non-GAAP Segment coal sales revenues$ 146,527 $ 200,051 $ -$ 346,578 Tons sold 1,779 14,915 Coal sales per ton sold $ 82.35$ 13.41 36 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 March 31, 2021 Metallurgical Thermal Other Consolidated
(In thousands)
GAAP Cost of sales in the Condensed
Consolidated Statements of Operations $ 138,002 $ 164,941 $ 6,963 $ 309,906
Less: Adjustments to reconcile to
Non-GAAP Segment cash cost of coal
sales
Diesel fuel risk management derivative
settlements classified in "other
income" - - - -
Transportation costs 35,489 15,167 5 50,661
Cost of coal sales from idled or
otherwise disposed operations not
included in segments - - 5,218 5,218
Other (operating overhead, certain
actuarial, etc.) - - 1,740 1,740
Non-GAAP Segment cash cost of coal
sales 102,513 149,774 - 252,287
Tons sold 1,719 12,292
Cash Cost Per Ton Sold $ 59.63 $ 12.18
Idle andThree Months Ended March 31, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Condensed Consolidated Statements of Operations$ 140,331 $ 214,387 $ 20,281 $ 374,999 Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Diesel fuel risk management derivative settlements classified in "other income" - (686) - (686) Transportation costs 36,388 11,473 33 47,894 Cost of coal sales from idled or otherwise disposed operations not included in segments - - 17,885 17,885 Other (operating overhead, certain actuarial, etc.) - - 2,363 2,363 Non-GAAP Segment cash cost of coal sales 103,943 203,600 -$ 307,543 Tons sold 1,779 14,915 Cash Cost Per Ton Sold $ 58.43$ 13.65 37 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 March 31,
2021 2020
Net income (loss) $ (6,042) $ (25,299) Provision for (benefit from) income taxes 378
(1,791)
Interest expense, net 3,800
2,129
Depreciation, depletion and amortization 25,797
31,308
Accretion on asset retirement obligations 5,437
5,006
Costs related to proposed joint venture with Peabody Energy -
3,664
Asset impairment and restructuring -
5,828
Gain on property insurance recovery related to Mountain Laurel longwall -
(9,000)
Non-service related pension and postretirement benefit costs 1,527 1,096 Reorganization items, net - (26) Adjusted EBITDA 30,897 12,915
EBITDA from idled or otherwise disposed operations 3,566
5,099
Selling, general and administrative expenses 21,480
22,745
Other (1,265) 59
Segment Adjusted EBITDA from coal operations
40,818
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 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 and complete 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. OnMarch 7, 2017 , we entered into a senior secured term loan credit agreement in an aggregate principal amount of$300 million (the "Term Loan Debt Facility") with Credit Suisse AG,Cayman Islands Branch, as administrative agent and collateral agent and the other financial institutions from time to time party thereto. The Term Loan Debt Facility was issued at 99.50% of the face amount and will mature onMarch 7, 2024 . The term loans provided under the Term Loan Debt Facility (the "Term Loans") are subject to quarterly principal amortization payments in an amount equal to$750,000 . Proceeds from the Term Loan Debt Facility were used to repay all outstanding obligations under our previously existing term loan credit agreement, dated as ofOctober 5, 2016 . OnApril 3, 2018 , we entered into the Second Amendment (the "Second Amendment") to the Term Loan Debt Facility. The Second Amendment reduced the interest rate on the Term Loans to, at our option, either (i) theLondon interbank offered rate ("LIBOR") plus an applicable margin of 2.75%, subject to a 1.00% LIBOR floor, or (ii) a base rate plus an applicable margin of 1.75%. For further information regarding the Term Loan Debt Facility, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. We have entered into a series of interest rate swaps to fix a portion of the LIBOR interest payments due under the term loan. As interest payments are made on the term loan, amounts in accumulated other comprehensive income will be reclassified into earnings through interest expense to reflect a net interest on the term loan equal to the effective yield of the fixed rate of the swap plus 2.75%, which is the spread on the LIBOR term loan as amended. For further information regarding the interest rate swaps, see Note 11, "Debt and Financing Arrangements" to the Condensed Consolidated Financial Statements. 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 "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 toSeptember 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 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, (ii) the lesser of (x) 85% of the net orderly liquidation value of eligible parts 39
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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 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. 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 "Bonds") pursuant to an Indenture of Trust dated as ofJune 1, 2020 (the "Indenture") 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 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 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 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 Bonds. As ofMarch 31, 2021 , we have received$81.8 million of the total bonds issues. The remaining$16.3 million 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 next several quarters. For further information regarding these bonds, see Note 11, "Debt and Financing Arrangements" to the Condensed 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 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. 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. 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 endedMarch 31, 2021 , we did not repurchase any shares of our stock. OnApril 23, 2020 we announced the suspension of our quarterly dividend due to the significant economic uncertainty surrounding the COVID-19 virus and the steps being taken to control the virus. During the three months endedMarch 31, 2021 , we did not pay any 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 withSecurities and Exchange Commission requirements. OnMarch 31, 2021 we had total liquidity of approximately$250 million , including$237 million in unrestricted cash and equivalents, and short term investments in debt securities, with the remainder provided by availability under our credit facilities, and funds withdrawable from brokerage accounts. The table below summarizes our availability under our credit facilities as ofMarch 31, 2021 : Letters of Borrowing Credit Collateral Contractual Face Amount Base Outstanding Posted Availability Expiration (Dollars in thousands) Securitization Facility$ 110,000 $ 55,700 $ 58,323 $ 2,623 $ - September 29, 2023 Inventory Facility 50,000 41,256 29,196 - 12,060 September 29, 2023 Total$ 160,000 $ 96,956 $ 87,519 $ 2,623 $ 12,060 40 Table of Contents
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 three months ended
2021 2020
(In thousands)
Cash provided by (used in):
Operating activities $ 5,686 $ (12,035)
Investing activities (42,765) (74,880)
Financing activities 32,189 39,052
Cash Flow
Cash was provided by operating activities in the three months ended March 31,
2021 versus cash used in the three months ended March 31, 2020 mainly due to the
improvement in results from operations discussed in the "Overview" and
"Operational Performance" sections above. Both the current and prior quarters
had significant increases in working capital requirements due to increases in
inventories in both quarters, and receivables in the three months ended March
31, 2021 , and a decrease in payables in the three months ended March 31, 2020 .
Cash used in investing activities decreased in the three months ended March 31,
2021 versus the three months ended March 31, 2020 primarily due to an
approximately $29 million increase in net proceeds from short term investments,
and a reduction in capital expenditures of approximately $11 million , partially
offset by approximately $7 million in property insurance proceeds on our
Mountain Laurel longwall claim in the three months ended March 31, 2020 . Capital
spending in the three months ended March 31, 2021 includes approximately $60
million related to our Leer South mine development and approximately $6 million
in capitalized interest.
Cash provided by financing activities decreased in the three months ended March
31, 2021 compared to the three months ended March 31, 2020 primarily due to
proceeds of approximately $54 million from our Equipment Financing in the first
quarter of 2020 and approximately $4 million more in net payments on other debt
in the first quarter of 2021, partially offset by approximately $45 million in
proceeds from our follow on issuance of Tax Exempt Bonds in the first quarter of
2021 and a dividend payment of approximately $8 million in the first quarter of
2020. For further information regarding the Equipment Financing arrangement and
Tax Exempt Bonds, see Note 11, "Debt and Financing Arrangements" to the
Condensed Consolidated Financial Statements.
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