ARCH RESOURCES, INC. - Quarter Report: 2016 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

(Mark One)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2016

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                      .

 

Commission file number: 1-13105

 

 

Arch Coal, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: (314) 994-2700

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

At April 22, 2016 there were 21,293,090 shares of the registrant’s common stock outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

		Page
Part 1 FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosure About Market Risk		38
Item 4. Controls and Procedures		39
Part II OTHER INFORMATION		39
Item 1. Legal Proceedings		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 4. Mine Safety Disclosures		42
Item 6. Exhibits		43

 

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Part I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

		Three Months Ended March 31,
		2016			2015
		(Unaudited)
Revenues		$	428,106		$	677,005
Costs, expenses and other operating
Cost of sales (exclusive of items shown separately below)		419,316			562,322
Depreciation, depletion and amortization		63,699			104,874
Amortization of acquired sales contracts, net		(833		)	(3,390		)
Change in fair value of coal derivatives and coal trading activities, net		1,210			1,220
Asset impairment and mine closure costs		85,520			—
Selling, general and administrative expenses		19,826			22,605
Other operating (income) expense, net		(2,220		)	9,086
		586,518			696,717
Loss from operations		(158,412		)	(19,712		)
Interest expense, net
Interest expense (contractual interest of $98,565 in 2016)		(44,451		)	(99,252		)
Interest and investment income		1,138			2,373
		(43,313		)	(96,879		)
Loss before nonoperating expenses		(201,725		)	(116,591		)
Nonoperating expenses
Expenses related to proposed debt restructuring		(2,213		)	—
Reorganization items, net		(3,875		)	—
		(6,088		)	—
Loss before income taxes		(207,813		)	(116,591		)
Benefit from income taxes		(1,111		)	(3,396		)
Net loss		$	(206,702	)	$	(113,195	)
Net loss per common share
Basic and diluted - Net loss per share		$	(9.71	)	$	(5.32	)
Basic and diluted weighted average shares outstanding		21,293			21,266

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

		Three Months Ended March 31,
		2016			2015
		(Unaudited)
Net loss		$	(206,702	)	$	(113,195	)
Derivative instruments
Comprehensive income (loss) before tax		(224		)	5,045
Income tax benefit (provision)		81			(1,817		)
		(143		)	3,228
Pension, postretirement and other post-employment benefits
Comprehensive income (loss) before tax		(1,338		)	294
Income tax benefit (provision)		481			(105		)
		(857		)	189
Available-for-sale securities
Comprehensive income (loss) before tax		2,903			291
Income tax benefit (provision)		(1,043		)	(104		)
		1,860			187
Total other comprehensive income (loss)		860			3,604
Total comprehensive loss		$	(205,842	)	$	(109,591	)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

		March 31,			December 31,
		2016			2015
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	395,398		$	450,781
Short term investments		198,788			200,192
Restricted cash		109,650			97,542
Trade accounts receivable (net of allowance for doubtful accounts of $7.8 million for both periods, respectively		113,005			117,405
Other receivables		15,589			18,362
Inventories		195,987			196,720
Prepaid royalties		8,075			10,022
Coal derivative assets		5,808			8,035
Other current assets		44,830			39,866
Total current assets		1,087,130			1,138,925
Property, plant and equipment, net		3,487,109			3,619,029
Other assets
Prepaid royalties		20,997			23,671
Equity investments		201,517			201,877
Other noncurrent assets		58,657			58,379
Total other assets		281,171			283,927
Total assets		$	4,855,410		$	5,041,881
Liabilities and Stockholders’ Deficit
Liabilities not subject to compromise
Accounts payable		$	70,823		$	128,131
Accrued expenses and other current liabilities		102,590			329,450
Current maturities of debt		—			5,042,353
Total current liabilities		173,413			5,499,934
Long-term debt		—			30,953
Asset retirement obligations		401,569			396,659
Accrued pension benefits		20,646			27,373
Accrued postretirement benefits other than pension		89,779			99,810
Accrued workers’ compensation		113,782			112,270
Other noncurrent liabilities		18,023			119,171
Total liabilities not subject to compromise		817,212			6,286,170
Liabilities subject to compromise		5,487,326			—
Total liabilities		6,304,538			6,286,170
Stockholders’ deficit
Common stock, $0.01 par value, authorized 26,000 shares, issued 21,448 shares and 21,446 shares at March 31, 2016 and December 31, 2015, respectively		2,145			2,145
Paid-in capital		3,055,214			3,054,211
Treasury stock, at cost, 152 shares at March 31, 2016 and December 31, 2015		(53,863		)	(53,863		)
Accumulated deficit		(4,451,669		)	(4,244,967		)
Accumulated other comprehensive loss		(955		)	(1,815		)
Total stockholders’ deficit		(1,449,128		)	(1,244,289		)
Total liabilities and stockholders’ deficit		$	4,855,410		$	5,041,881

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

		Three Months Ended March 31,
		2016			2015
		(Unaudited)
Operating activities
Net loss		$	(206,702	)	$	(113,195	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, depletion and amortization		63,699			104,874
Amortization of acquired sales contracts, net		(833		)	(3,390		)
Amortization relating to financing activities		3,150			6,219
Prepaid royalties expensed		1,286			1,674
Employee stock-based compensation expense		1,003			1,760
Asset impairment and non-cash mine closure costs		77,550			—
Non-cash bankruptcy reorganization items		(13,892		)	—
Expenses related to proposed debt restructuring		2,213			—
Gains on disposals and divestitures, net		1			(46		)
Deferred income taxes		(429		)	(3,433		)
Changes in:
Receivables		7,815			18,252
Inventories		734			(49,860		)
Accounts payable, accrued expenses and other current liabilities		39,441			7,186
Income taxes, net		(642		)	40
Other		15,508			25,646
Cash used in operating activities		(10,098		)	(4,273		)
Investing activities
Capital expenditures		(5,926		)	(22,880		)
Additions to prepaid royalties		(71		)	(213		)
Proceeds from disposals and divestitures		—			46
Purchases of marketable securities		(55,132		)	(101,793		)
Proceeds from sale or maturity of marketable securities and other investments		56,134			99,914
Investments in and advances to affiliates		(2,156		)	(1,843		)
Deposits of restricted cash		(12,108		)	(3,532		)
Cash used in investing activities		(19,259		)	(30,301		)
Financing activities
Payments on term loan		—			(4,875		)
Net payments on other debt		(5,410		)	(4,810		)
Expenses related to proposed debt restructuring		(2,213		)	—
Debt financing costs		(18,403		)	—
Cash used in financing activities		(26,026		)	(9,685		)
Decrease in cash and cash equivalents		(55,383		)	(44,259		)
Cash and cash equivalents, beginning of period		450,781			734,231
Cash and cash equivalents, end of period		$	395,398		$	689,972

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Arch Coal, Inc. and Subsidiaries

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Arch Coal, Inc. and its subsidiaries (the “Company”). The Company’s primary business is the production of thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and steel producers both in the United States and around the world. The Company currently operates mining complexes in West Virginia, Kentucky, Virginia, Illinois, Wyoming and Colorado.  All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three months ended March 31, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

 

On August 4, 2015 we effected a 1-for-10 reverse stock split of our common stock.  Each stockholder’s percentage ownership and proportional voting power remained unchanged as a result of the reverse stock split.  All applicable share data, per share amounts and related information in the Condensed Consolidated Financial Statements and notes thereto have been adjusted retroactively to give effect to the 1-for-10 reverse stock split.

 

Filing Under Chapter 11 of the United States Bankruptcy Code

 

On January 11, 2016 (the “Petition Date”), the Company and substantially all of its wholly owned domestic subsidiaries (the “Filing Subsidiaries” and, together with Arch, the “Debtors”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Missouri (the “Court”). The Debtor’s Chapter 11 Cases (collectively, the “Chapter 11 Cases”) are being jointly administered under the caption In re Arch Coal, Inc., et al. Case No. 16-40120 (lead case). Each Debtor will continue to operate its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.

 

The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the documents governing each of its 7.00% senior notes due 2019, 9.875% senior notes due 2019, 8.00% senior secured second lien notes due 2019, 7.25% senior notes due 2020, 7.25% senior notes due 2021 (together, the “senior notes”) and senior secured first lien term loan due 2018 (the “Existing Credit Agreement”) (collectively with the senior notes, the “Debt Instruments”).  Immediately after filing the Bankruptcy Petitions, the Company began notifying all known current or potential creditors of the Debtors of the bankruptcy filings.

 

Additionally, on the Petition Date, the New York Stock Exchange (the “NYSE”) determined that the Company’s stock was no longer suitable for listing pursuant to Section 8.02.01D of the NYSE continued listing standards and trading in the Company’s common stock was suspended on January 11, 2016.  We expect that the existing common stock of the Company will be extinguished upon the Company’s emergence from Chapter 11 and existing equity holders will not receive consideration in respect of their equity interests.

 

On the Petition Date, the Debtors filed a number of motions with the Court generally designed to stabilize their operations and facilitate the Debtors’ transition into Chapter 11. Certain of these motions sought authority from the Court for the Debtors to make payments upon, or otherwise honor, certain pre-petition obligations (e.g., obligations related to certain employee wages, salaries and benefits and certain vendors and other providers essential to the Debtors’ businesses). The Court has entered orders approving the relief sought in these motions, in certain cases on an interim basis.

 

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of

 

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the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.  Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

 

As required by the Bankruptcy Code, the U.S. Trustee for the Eastern District of Missouri appointed an official committee of unsecured creditors (the “Creditors’ Committee”) on January 25, 2016. The Creditors’ Committee represents all unsecured creditors of the Debtors and has a right to be heard on all matters that come before the Court.

 

For periods subsequent to filing the Bankruptcy Petitions, the Company will apply the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations”, in preparing its consolidated financial statements.  ASC 852 requires that financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings have been recorded in a reorganization line item on the Condensed Consolidated Statement of Operations.  In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the balance sheet as liabilities subject to compromise.  These liabilities are reported as the amounts expected to be allowed by the Court, even if they may be settled for lesser amounts.

 

Restructuring Support Agreement

 

In connection with the filing of the Bankruptcy Petitions, the Company entered into a Restructuring Support Agreement, dated as of January 10, 2016 (as amended on February 25, 2016, March 28, 2016 and April 26, 2016, the “Restructuring Support Agreement”), among the Debtors and holders of over 50% of the Company’s first lien term loans under the Existing Credit Agreement (the “Supporting First Lien Creditors”), providing that the Supporting First Lien Creditors will support a restructuring of the Debtors, subject to the following terms and conditions contemplated therein, among others:

 

·                                  existing common stock of the Company would likely be extinguished upon the Company’s emergence from Chapter 11, and existing equity holders would likely not receive consideration in respect of their equity interests;

 

·                                  claims against the Debtors arising under the DIP Facility (as defined below) would be paid in full in cash or receive such other treatment as may be consented to by the holders of such claims;

 

·                                  claims against the Debtors of holders of first lien term loans would be exchanged for (a) a combination of cash and $326.5 million (principal amount) of new first lien debt that would be issued by the reorganized Company and (b) 100% of the common stock of the reorganized Company outstanding on the effective date of the plan, subject to dilution on account of a proposed new management incentive plan and the distribution to unsecured creditors of any new common stock and warrants (as described below);

 

·                                  first lien term loan deficiency claims (subject to certain exceptions) as well as second lien notes, unsecured notes and general unsecured claims against the Debtors would be exchanged for either (1) common stock in the reorganized Company and warrants or (2) the value of the unencumbered assets of the Company, if any, after giving effect to certain other payments and claims;

 

·                                  either the Company’s existing accounts receivable securitization facility would be reinstated or a new letter of credit facility would be entered into by the Company, in either case on terms acceptable to Supporting First Lien Creditors holding more than 66 2/3% of the aggregate amount of the first lien term loans held by Supporting First Lien Creditors; and

 

·                                  the board of directors of the reorganized Company would consist of seven directors, at least one of whom would be independent, including the Company’s Chief Executive Officer and six directors selected by certain of the Company’s first-lien term lenders in consultation with the Company’s Chief Executive Officer.

 

The Restructuring Support Agreement, if utilized as the basis for a plan of reorganization, is expected to reduce the Company’s long-term debt by more than $4.5 billion.

 

Debtor-In-Possession Financing

 

On January 21, 2016, the Superpriority Secured Debtor-in-Possession Credit Agreement (as amended on March 4, 2016, March 28, 2016 and April 26, 2016, the “DIP Credit Agreement”) was entered into by and among the Company, as borrower, certain of the Debtors, as guarantors (the “Guarantors” and, together with the Company, the “Loan Parties”), the lenders from

 

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time to time party thereto (the “DIP Lenders”) and Wilmington Trust, National Association, as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”).

 

The DIP Credit Agreement, which has been approved by the Court on a final basis, provides for a super-priority senior secured debtor-in-possession credit facility (the “DIP Facility”) consisting of term loans (collectively, the “DIP Term Loan”) in the aggregate principal amount of up to $275 million that may be funded in not more than two draws not later than six months after the effective date of the DIP Facility (such six month period, the “Availability Period”).  Any portion of the DIP Term Loan commitment that has not been funded on or prior to the end of the Availability Period will be permanently cancelled.

 

The maturity date of the DIP Facility is the earliest of (i) January 31, 2017, (ii) the date of the substantial consummation of a plan of reorganization that is confirmed pursuant to an order of the Court, (iii) the consummation of the sale of all or substantially all of the assets of the Loan Parties pursuant to Section 363 of the Bankruptcy Code and (iv) the date the obligations under the DIP Facility are accelerated pursuant to the terms of the DIP Credit Agreement.  Borrowings under the DIP Facility bear interest at an interest rate per annum equal to, at the Company’s option (i) LIBOR plus 9.00%, subject to a 1.00% LIBOR floor or (ii) the base rate plus 8.00%.

 

At a hearing held on February 23, 2016 in the Chapter 11 Cases, the Court approved the DIP Facility on a final basis, overruling the objections of the Creditors’ Committee and certain other parties who asserted, among other things, that the DIP Facility was unnecessary and argued that the Debtors should enter into an alternate debtor-in-possession financing facility proposed by certain members of the Creditors’ Committee.

 

Securitization Agreement

 

On January 13, 2016, the Company agreed with its securitization financing providers (the “Securitization Financing Providers”) that, subject to certain amendments (the “Amendments”), they will continue the $200 million trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a non-debtor special-purpose entity that is a wholly owned subsidiary of the Company (“Arch Receivable”) (the “Securitization Facility”).

 

Pursuant to the Amendments, which have been approved by the Court on a final basis, the Debtors agreed to a revised schedule of fees payable to the administrator and the Securitization Financing Providers.  The cost of an advance backstopping a letter of credit issued under the Securitization Facility is determined by two factors: (a) a program fee of 2.65% per year and payable on each settlement date to each Securitization Financing Provider deemed to have made such an advance and (b) the “discount,” which is calculated based on each Securitization Financing Provider’s costs, including its cost of the issuance and placement of short term promissory notes to fund such an advance.

 

Going Concern

 

As a result of extremely challenging current market conditions, the Company believes it will require a significant restructuring of its balance sheet in order to continue as a going concern in the long term. The Company’s ability to continue as a going concern is dependent upon, among other things, improvement in current market conditions, its ability to become profitable and maintain profitability and its ability to successfully implement its Chapter 11 plan strategy.  As a result of the Bankruptcy Petitions, the realization of the Debtors’ assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Chapter 11 plan is likely to materially change the amounts and classifications of assets and liabilities reported in the Company’s Condensed Consolidated Financial Statements.

 

The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern.  The Company’s ability to continue as a going concern is contingent upon the Company’s ability to restructure its balance sheet with the various creditor parties; there can be no assurance that these efforts will results in any such agreement.  The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

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2.  Accounting Policies

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts.  The company adopted ASU 2015-03 in the first quarter of 2016 as mandated by the standard.  Previously reported “other current assets” and “current maturities of debt” have been revised to reflect the retrospective application of the standard.

 

The following reflects the retrospective application:

 

		December 31,
		2015
		(in thousands)
Other current assets, prior to revision		$	104,723
Revision of debt issuance costs		(64,857		)
Other current assets, as revised		$	39,866
Current maturities of debt, prior to revision		$	5,107,210
Revision of debt issuance costs		(64,857		)
Current maturities of debt, as revised		$	5,042,353

 

3.  Accumulated Other Comprehensive Income

 

The following items are included in accumulated other comprehensive income (“AOCI”):

 

					Pension,
					Postretirement
					and Other						Accumulated
					Post-						Other
		Derivative			Employment			Available-for-			Comprehensive
		Instruments			Benefits			Sale Securities			Income
		(In thousands)
Balance at December 31, 2015		$	325		$	(721	)	$	(1,419	)	$	(1,815	)
Unrealized gains (losses)		1			—			3			4
Amounts reclassified from AOCI		(144		)	(857		)	1,857			856
Balance at March 31, 2016		$	182		$	(1,578	)	$	441		$	(955	)

 

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The following amounts were reclassified out of AOCI:

 

		Amounts Reclassified from AOCI
		Three Months Ended March 31,						Line Item in the Condensed Consolidated
Details About AOCI Components		2016			2015			Statement of Operations
		(In thousands)
Derivative instruments		$	226		$	481		Revenues
		(82		)	(174		)	Benefit from income taxes
		$	144		$	307		Net of tax
Pension, postretirement and other post-employment benefits
Amortization of prior service credits (1)		$	2,672		$	2,084
Amortization of actuarial gains (losses), net (1)		(1,334		)	(2,378		)
		1,338			(294		)
		(481		)	105			Benefit from income taxes
		$	857		$	(189	)	Net of tax
Available-for-sale securities		$	(2,895	)	$	(2,797	)	Interest and investment income
		1,038			1,007			Benefit from income taxes
		$	(1,857	)	$	(1,790	)	Net of tax

 

(1) Production-related benefits and workers’ compensation costs are included in inventoriable production costs.

 

4.  Reorganization items, net

 

In accordance with Accounting Codification Standard 852, “Reorganizations,” the statement of operations shall portray the results of operations of the reporting entity while it is in Chapter 11.  Revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from reorganization and restructuring of the business shall be reported separately as reorganization items.

 

During the first quarter of 2016, the Company recorded a charge of $3.9 million in “Reorganization items, net” comprised of professional fee expense of $17.8 million, partially offset by non-cash gains on rejected contracts of $13.9 million.  Net cash paid for “Reorganization items, net” totaled $1.5 million during the first quarter of 2016.

 

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5.  Liabilities Subject to Compromise

 

Liabilities subject to compromise include unsecured or under-secured liabilities incurred prior to the Chapter 11 filing.  These liabilities represent the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 proceedings and remain subject to future adjustments based on negotiated settlements with claimants, actions of the Court, rejection of executory contracts, proofs of claims or other events.  Additionally, liabilities subject to compromise also include certain items that may be assumed under a plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed.

 

Liabilities subject to compromise consists of the following:

 

Previously Reported Balance Sheet Line		March 31, 2016
		(in thousands)
Debt		$	5,067,938
Accrued expenses and current liabilities		213,667
Accounts payable		106,590
Noncurrent liabilities		93,709
Accrued pension benefits		5,422
Total Liabilities Subject to Compromise		$	5,487,326

 

The debt balance included above is net of debt issuance costs of $64.9 million; for additional information on debt, see Note 11, “Debt and Financing Arrangements.”

 

6.  Asset Impairment and Mine Closure Costs

 

During the first quarter of 2016, the company recorded $85.5 million of “Asset impairment and mine closure costs” in the Condensed Consolidated Statements of Operations.  The amount includes the following:  a $74.1 million impairment of coal reserves and surface land in Kentucky that are being leased to a mining company that announced plans to idle its current mining operations related to those reserves during the quarter; $5.1 million of severance expense related to headcount reductions at Company operations; $3.4 million related to an 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.

 

7.  Inventories

 

Inventories consist of the following:

 

		March 31,			December 31,
		2016			2015
		(In thousands)
Coal		$	85,987		$	85,043
Repair parts and supplies		110,000			111,677
		$	195,987		$	196,720

 

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $6.4 million at March 31, 2016 and $6.0 million at December 31, 2015.

 

8.  Investments in Available-for-Sale Securities

 

The Company has invested in marketable debt securities, primarily highly liquid investment grade corporate bonds.  These investments are held in the custody of a major financial institution.  These securities, along with the Company’s investments in marketable equity securities, are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.

 

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The Company’s investments in available-for-sale marketable securities are as follows:

 

		March 31, 2016
														Balance Sheet
														Classification
					Gross Unrealized						Fair			Short-Term			Other
		Cost Basis			Gains			Losses			Value			Investments			Assets
		(In thousands)
Available-for-sale:
U.S. government and agency securities		$	47,001		$	66		$	—		$	47,067		$	47,067		$	—
Corporate notes and bonds		$	151,782		$	38		$	(99	)	$	151,721		$	151,721		$	—
Equity securities		1,049			676			—			1,725			—			1,725
Total Investments		$	199,832		$	780		$	(99	)	$	200,513		$	198,788		$	1,725

 

		December 31, 2015
														Balance Sheet
														Classification
					Gross Unrealized						Fair			Short-Term			Other
		Cost Basis			Gains			Losses			Value			Investments			Assets
		(In thousands)
Available-for-sale:
U.S. government and agency securities		$	10,007		$	—		$	(12	)	$	9,995		$	9,995		$	—
Corporate notes and bonds		$	190,496		$	—		$	(299	)	$	190,197		$	190,197		$	—
Equity securities		3,938			668			(2,888		)	1,718			—			1,718
Total Investments		$	204,441		$	668		$	(3,199	)	$	201,910		$	200,192		$	1,718

 

The aggregate fair value of investments with unrealized losses that were owned for less than a year was $78.5 million and $184.6 million at March 31, 2016 and December 31, 2015, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year, and were also in a continuous unrealized loss position during that time, was $8.0 million and $15.8 million at March 31, 2016 and December 31, 2015, respectively.  During the quarter, the Company identified and recorded an other-than-temporary impairment charge of $2.9 million which represented the unrealized loss in accumulated other comprehensive income related to an individual available-for-sale security.  This charge is included in the line item “Asset impairment and mine closure costs” within the Condensed Consolidated Statement of Operations.  The unrealized losses in the Company’s portfolio at March 31, 2016 are the result of normal market fluctuations.  The Company does not currently intend to sell these investments before recovery of their amortized cost base.

 

The debt securities outstanding at March 31, 2016 have maturity dates ranging from the second quarter of 2016 through the third quarter of 2017.  The Company classifies its investments as current based on the nature of the investments and their availability to provide cash for use in current operations.

 

9.  Derivatives

 

Diesel fuel price risk management

 

The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates purchasing approximately 50 to 55 million gallons of diesel fuel for use in its operations during 2016.  To protect the Company’s cash flows from increases in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts and purchased heating oil call options.  At March 31, 2016, the Company had protected the price of approximately 66% of its expected purchases for the remainder of the year with out-of-the-money call options with an average strike price of $2.26 per gallon.  Due to the drop in heating oil prices, the Company has layered in 16.5 million gallons of at-the-money call options for the remainder of 2016 representing 42% of expected purchases at an average strike price of $1.30 per gallon.  Additionally, the Company has protected approximately 5%  of our expected 2017 purchases with out-of-the-money call options with an average strike price of $1.40 per gallon.  At March 31, 2016, the Company had outstanding heating oil call options for approximately 29 million gallons for the purpose of managing the price risk associated with future diesel purchases.  These positions are not accounted for as hedges.

 

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Coal price risk management positions

 

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.

 

At March 31, 2016, the Company held derivatives for risk management purposes that are expected to settle in the following years:

 

(Tons in thousands)		2016
Coal sales		325
Coal purchases		225

 

The Company has also entered into a nominal quantity of natural gas put options to protect the Company from decreases in natural gas prices, which could impact coal demand.  These options are not accounted for as hedges.  Additionally, the company has also entered into a nominal quantity of foreign currency put options protecting for decreases in the Australian to United States dollar exchange rate, which could impact coal demand.  These options are not accounted for as hedges.

 

Coal trading positions

 

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The estimated future realization of the value of the trading portfolio is $4.9 million of gains during the remainder of 2016.

 

Tabular derivatives disclosures

 

The Company has master netting agreements with all of its counterparties which allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the Condensed Consolidated Balance Sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not the net position presented in the accompanying Condensed Consolidated Balance Sheets. The fair value and location of derivatives reflected in the accompanying Condensed Consolidated Balance Sheets are as follows:

 

		March 31, 2016									December 31, 2015
Fair Value of Derivatives		Asset			Liability						Asset			Liability
(In thousands)		Derivative			Derivative						Derivative			Derivative
Derivatives Designated as Hedging Instruments
Coal		$	2		$	—					$	4		$	(20	)
Derivatives Not Designated as Hedging Instruments
Heating oil — diesel purchases		1,173			—						1,017			—
Coal — held for trading purposes		76,276			(71,370		)				110,653			(104,814		)
Coal — risk management		1,531			(681		)				3,912			(1,947		)
Natural gas		61			(11		)				494			(247		)
Foreign currency		208			—						—			—
Total		79,249			(72,062		)				116,076			(107,008		)
Total derivatives		79,251			(72,062		)				116,080			(107,028		)
Effect of counterparty netting		(72,062		)	72,062						(107,028		)	107,028
Net derivatives as classified in the balance sheets		$	7,189		$	—		$	7,189		$	9,052		$	—		$	9,052

 

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				March 31, 2016			December 31, 2015
Net derivatives as reflected on the balance sheets (in thousands)
Heating oil and foreign currency		Other current assets		$	1,381		$	1,017
Coal and natural gas		Coal derivative assets		5,808			8,035
		Accrued expenses and other current liabilities		—			—
				$	7,189		$	9,052

 

The Company had a current liability for the obligation to post cash collateral of $0.9 million at March 31, 2016 and the right to reclaim cash collateral of $1.7 million at December 31, 2015, respectively. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” and “other current assets”, respectively, in the accompanying Condensed Consolidated Balance Sheets.

 

The effects of derivatives on measures of financial performance are as follows:

 

Derivatives used in Cash Flow Hedging Relationships (in thousands)

Three Months Ended March 31,

 

		Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)						Gains (Losses) Reclassified from Other Comprehensive Income into Income (Effective Portion)
		2016			2015			2016			2015
Coal sales	(1)	$	13		$	10,265		$	1,369		$	882
Coal purchases	(2)	(11		)	(4,738		)	(1,143		)	(401		)
Totals		$	2		$	5,527		$	226		$	481

 

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended March 31, 2016 and 2015.

 

Derivatives Not Designated as Hedging Instruments (in thousands)

Three Months Ended March 31,

 

		Gain (Loss) Recognized
		2016			2015
Coal — unrealized	(3)	$	(1,115	)	$	(411	)
Coal — realized	(4)	$	163		$	1,091
Natural gas — unrealized	(3)	$	(469	)	$	159
Heating oil — diesel purchases	(4)	$	(443	)	$	(2,365	)
Foreign currency	(4)	$	(171	)	$	—

 

Location in statement of operations:

 

(1) — Revenues

(2) — Cost of sales

(3) — Change in fair value of coal derivatives and coal trading activities, net

(4) — Other operating (income) expense, net

 

Based on fair values at March 31, 2016, amounts on derivative contracts designated as hedge instruments in cash flow hedges to be reclassified from other comprehensive income into earnings during the next twelve months are immaterial.

 

Related to its trading portfolio, the Company recognized net unrealized and realized gains of $0.1 million and net unrealized and realized losses of $1.0 million during the three months ended March 31, 2016 and 2015, respectively.  Gains and losses from trading activities are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying Condensed Consolidated Statements of Operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.

 

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10.  Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

		March 31,			December 31,
		2016			2015
		(In thousands)
Payroll and employee benefits		$	52,458		$	58,423
Taxes other than income taxes		97,361			104,755
Interest		127,773			119,785
Acquired sales contracts		543			3,852
Workers’ compensation		15,429			16,875
Asset retirement obligations		13,788			13,795
Other		8,905			11,965
		$	316,257		$	329,450
Less: liabilities subject to compromise		(213,667		)	—
		$	102,590		$	329,450

 

11.  Debt and Financing Arrangements

 

		March 31,			December 31,
		2016			2015
		(In thousands)
Term loan due 2018 ($1.9 billion face value)		$	1,875,429		$	1,875,429
7.00% senior notes due 2019 at par		1,000,000			1,000,000
9.875% senior notes due 2019 ($375.0 million face value)		365,600			365,600
8.00% senior secured notes due 2019 at par		350,000			350,000
7.25% senior notes due 2020 at par		500,000			500,000
7.25% senior notes due 2021 at par		1,000,000			1,000,000
Other		41,766			47,134
Debt issuance costs		(64,857		)	(64,857		)
		5,067,938			5,073,306
Less: liabilities subject to compromise		5,067,938			—
Less: current maturities of debt		—			5,042,353
Long-term debt		$	—		$	30,953

 

Acceleration of Debt Obligations; Automatic Stay

 

The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the documents governing each of its 7.00% senior notes due 2019, 9.875% senior notes due 2019, 8.00% senior secured second lien notes due 2019, 7.25% senior notes due 2020, 7.25% senior notes due 2021 (together, the “senior notes”) and senior secured first lien term loan due 2018.  Immediately after filing the Bankruptcy Petitions, the Company began notifying all known current or potential creditors of the Debtors of the bankruptcy filings.

 

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.  Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

 

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