Arch Coal files first post-bankruptcy quarterly Form 10-Q report

Arch Coal (NYSE: ARCH) on Nov. 9 filed with the SEC its first Form 10-Q quarterly financial statement since emerging from Chapter 11 bankruptcy protection on Oct. 5.

The company, while in bankruptcy, slashed its debt load and says it is now well positioned to survive. It is one of the nation’s top coal producers, with coal sales of 67.1 million tons in the first nine months of this year, down from 98.5 million tons in the same nine-month period of 2015.

During the third quarter of 2016, Arch recorded an immaterial amount of severance expense to “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations bringing the year-to-date total to $129.3 million. The amount includes: a $74.1 million impairment of coal reserves and surface land in Kentucky that are being leased to a mining company that idled its mining operations; a $38.0 million impairment of the company’s equity investment in a brownfield bulk commodity terminal on the Columbia River in Longview, Washington, as the company relinquished its ownership rights in exchange for future throughput rights; $7.2 million of severance expense related to headcount reductions during the year; a $3.6 million curtailment charge related to the company’s pension, postretirement health and black lung actuarial liabilities due to headcount reductions in the first half of the year; $3.4 million impairment charge on the portion of an advance royalty balance on a reserve base mined at the company’s Mountain Laurel operation that will not be recouped; and $2.9 million related to an other-than-temporary-impairment charge on an available-for-sale security.

Said the Form 10-Q: “Our regional results during the third quarter of 2016, when compared to the third quarter of 2015, were impacted by significant declines in volume and pricing, reflecting the lingering effects of long term weakness in all of the markets in which we participate. We have responded by rationalizing volumes and shifting volumes to lower cost operations wherever possible. Additionally, we continue to manage input costs and capital expenditures.

“Pricing for our metallurgical sales during the current quarter declined compared to the prior year quarter due to the overhang from the persistent global oversupply that had driven pricing to multi-year lows. Forward pricing continued to improve during the current quarter as supply rationalization took effect, economic growth, although slow, remained positive, and the U.S. dollar weakened slightly versus key foreign currencies. Late in the current quarter, forward metallurgical pricing improvement accelerated substantially as supply scarcity became evident. We believe this significant improvement was driven by supply rationalization in North America, a Chinese mandate to restrict its domestic supply, years of global underinvestment in the industry, and some specific international supply disruptions, particularly in Australia. We sold 1.8 million tons of metallurgical coal during the third quarter of 2016 compared to 1.6 million tons during the third quarter of 2015. Overseas thermal markets remained uneconomic for most U.S. production during the current quarter.

“Domestic thermal coal volumes continued their significant year over year decline in all of our operating segments. The historically mild winter, low natural gas pricing, high generator stockpiles, and the effects of the implementation of the Mercury [and] Air Toxics Standards (MATS), combined to significantly reduce demand in domestic thermal markets. The mild winter weather resulted in decreased space heating demand for natural gas, driving pricing of the competing fuel during the first half of 2016 to levels low enough to displace significant amounts of coal-fueled electric generation throughout the country. Even PRB coal, with its lower cost structure, was significantly impacted by competition from low natural gas prices. The reduced coal burn has left utilities with historically high coal stockpile levels, further depressing demand. Closure of some coal fueled facilities to comply with the MATS regulation further reduced demand compared to the prior year periods. Although the closed coal-fueled plants were generally older, smaller, and less utilized than the remaining fleet, the closures have nevertheless had a negative impact on demand. In the current quarter natural gas pricing increased as hotter than normal summer temperatures, increased gas exports, and stagnant gas production levels led to rising gas pricing, allowing coal burn to improve significantly from the first half of the current year. Utility coal stockpiles were reduced during the current quarter, but remain above historical averages.

“At September 30, 2016, we had committed 2.1 million tons of our expected 7.0 to 7.5 million tons of metallurgical coal production in 2017. Nearly half the total was associated with a two-year commitment with a major customer covering 2016 and 2017 and negotiated earlier in the year; 0.5 million tons relate to commitments to supply a pulverized coal injection (PCI) product; and most of the remainder was offered in July or August, prior to the significant increase in metallurgical coal prices.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.