ARCH RESOURCES, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS. (Form 10-K)
In the first quarter of 2020, COVID-19 emerged as a global pandemic. The continuing responses to the COVID-19 outbreak include actions that have a significant impact on domestic and global economies, including travel restrictions, gathering bans, stay at home orders, and many other restrictive measures. All of our operations have been classified as essential in the states in which we operate. We instituted many policies and procedures, in alignment with
CDCguidelines along with state and local mandates, to protect our employees during the COVID-19 outbreak. These policies and procedures included, but were not limited to, staggering shift times to limit the number of people in common areas at one time, limiting meetings and meeting sizes, continual cleaning and disinfecting of high touch and high traffic areas, including door handles, bathrooms, bathhouses, access elevators, mining equipment, and other areas, limiting contractor access to our properties, limiting business travel, and instituting work from home for administrative employees. We continually evaluate our policies and procedures, in accordance with CDC, state, and local guidelines, and make any necessary adjustments to respond to the particular circumstances in the areas in which we operate. During the second half of 2021, the advent of the Delta and Omicron variants has led to increased infection rates among our workforce at certain operations, and we have reinstated stricter protocols at affected operations. During the second half of 2021, over fifty unit production shifts in our metallurgical segment were adversely impacted by staffing shortfalls related to increased COVID-19 case rates, and our requisite quarantine protocols. We continue to encourage vaccination among our workforce and adjust our COVID-19 responses. We recognize that the COVID-19 outbreak and responses thereto also continue to impact both our customers and suppliers. To date, we have not had any significant issues with critical suppliers, and we continue to communicate with them and closely monitor developments to ensure we have access to the goods and services required to maintain our operations. Our customers have reacted, and continue to react, in various ways and to varying degrees to changes in demand for their products. In early 2022, increased case rates have negatively impacted rail transportation, primarily for our export shipments. We remain in close communication with our rail service providers, and work diligently with them to mitigate potential delays. Our current view of our customer demand and logistics situation is discussed in greater detail in the "Overview" section below.
Our results for the year ended
December 31, 2021benefited from improvement in metallurgical and thermal coal markets. Global economic growth accelerated over the course of the year as pent up demand from the responses to the global pandemic seeks to be fulfilled. Global steel production in 2021 is likely to exceed pre-pandemic levels, and energy demand is increasing with economic growth. At the same time, certain metallurgical and thermal coal producing jurisdictions were, at times during 2021, adversely impacted by the resurgence of COVID-19 and its variants, weather, and logistical constraints. Specifically, the major coal producing regions in Australia, Indonesia, China, Mongolia, and western Canadahave been adversely impacted by one or more of these factors at various points throughout 2021. Through the year ended December 31, 2021, these constraints have had a relatively minor impact on our shipment volumes, although we did have one coking coal vessel and one thermal coal vessel that we planned to ship late in the fourth quarter of 2021, delayed to early 2022. On December 30, 2021, an explosion occurred at the Curtis Bay Terminal, one of two United States East Coastterminals we utilize to export our coking coal product overseas. This event, coupled with the increased COVID-19 case rates our rail service providers are experiencing, has negatively impacted our volume of coking coal shipments in the first quarter of 2022. While we are working diligently with our rail service provider to mitigate these impacts, our first quarter of 2022 coking coal shipment volume could be as much as 25% below our coking coal shipment volume in the fourth quarter of 2021. At this time, we believe we will make up the first quarter of 2022 shipment shortfall over the course of the remainder of 2022; however, our ability to make up this shortfall will, at least in part, be based on factors that are outside of our direct control. 75
During the year ended
December 31, 2021, accelerating global economic growth, led to historically high steel prices. Steel prices did moderate some late in the year, but remain at levels that provide steel producers with healthy margins. On the coking coal supply side, production and supply chain constraints combined to drive international coking coal indices to historically high levels. Despite these historically high coking coal prices, North American coking coal supply remains constrained compared to pre-COVID-19 levels. Some new supplies have been added to the market, in particular, our new Leer South longwall operation that has been be ramping up production throughout the fourth quarter of 2021. Still, some of the high cost coking coal mine idlings announced during 2020 remain in place, and more recent supply disruptions also constrain supply. The duration of specific supply disruptions is unknown. We believe that underinvestment in the sector in recent years underlies the current market situation. In the current environment, we expect coking coal prices to be volatile. Longer term, we believe continued limited global capital investment in new coking coal production capacity, normal reserve depletion, and continuing economic growth will provide support to coking coal markets. During the fourth quarter of 2020, a major political dispute that manifested itself as a trade dispute, escalated between China, a major importer of coking coal, and Australia, the world's largest exporter of coking coal. Specifically, Chinahas effectively banned the import of coking coal and thermal coal, among other export products, from Australia. Historical trade patterns remain disrupted, and new trade patterns have emerged in the international coking coal markets. Indices for United States (US) East Coastcoking coal reached historically high levels in the second half of 2021 and retained most of the increase through the end of the year. In late October, Chinadecided to allow several million tons of impounded Australian coal to clear customs and enter their domestic market. Release of this previously impounded coal alleviated supply constraints and reduced index pricing for coking coal delivered to China. Lower pricing for coal delivered to Chinadid weigh on US East Coastcoking coal indices in the fourth quarter of 2021; however, due to increased demand for coking coal outside of Chinaand related strength of Australian Premium Low Volatile ("PLV") coking coal indices, the impact on US East Coastcoking coal indices has been muted. Despite historically high PLV indices, Australian export volumes remain below pre-pandemic levels. Chinahas also reduced domestic steel production during the fourth quarter of 2021. Continuing reduction in Chinese steel production could negatively impact coking coal prices, but a return to previous production levels could positively impact coking coal prices. Domestic thermal coal consumption increased during the year ended December 31, 2021, compared to the year ended December 31, 2020, due to significantly increased natural gas prices and economic recovery from the responses to COVID-19. Longer term, we continue to believe thermal coal demand will remain pressured by planned closure of coal fueled generating facilities, continuing increases in subsidized renewable generation sources, particularly wind and solar, and the development of battery storage to support the increase in intermittent renewable generation sources. However, during 2021, the significant increase in natural gas prices led to an increase in coal fired generation. We believe coal generator stockpiles likely declined significantly during 2021, and domestic thermal coal indices have reached historically high levels. Importantly, this increase in domestic prices has allowed us to place significant volumes of domestic thermal coal business at prices meaningfully higher than those seen prior to the third quarter of 2021. During the year ended December 31, 2021, international thermal coal indices also increased to historical highs, and although pricing retreated some during the fourth quarter of 2021, international thermal coal indices remain at levels that economically support exports from our thermal operations. On September 29, 2020, the U.S. District Courtruled against our proposal with Peabody to form a joint venture that would have combined our Powder River Basinand Coloradomining operations with Peabody's, and we subsequently announced the termination of our joint venture efforts. We continue to pursue other strategic alternatives for our thermal assets, including, among other things, potential divestiture. We are concurrently shrinking our operational footprint at our thermal operations. During the year ended December 31, 2021, we completed approximately $33.5 millionof Asset Retirement Obligation (ARO) work at these operations, compared to approximately $6.8 millionin the year ended December 31, 2020. During the fourth quarter of 2021 we established a fund to pay for future ARO costs at our thermal operations, with an initial $20 milliondeposit. We plan to continue to grow this self-funding mechanism for our long-term reclamation ARO liabilities at our thermal operations. For further information on this fund, see Note 16, "Asset Retirement Obligations" to the Consolidated Financial Statements. During the current year, we exercised our operational flexibility to maximize cash generation from our thermal operations, and plan to do so again in the coming year. Longer term, we will maintain our focus on aligning our thermal production rates with the secular decline in domestic thermal coal demand, while adjusting our thermal operating plans to minimize future cash 76 Table of Contents
requirements and maintain flexibility to react to future short-term market fluctuations. We continue to streamline our entire organizational structure to reflect our long-term strategic direction as a leading producer of metallurgical products for the steelmaking industry. During the fourth quarter of 2021, we sold our 49.5% equity interest in
Knight Hawk Holdings, LLC. For further information on the sale of and our prior equity investment in Knight Hawk Holdings, LLC, please see Note 4, "Divestitures", and Note 11, "Equity Method Investments and Membership Interests in Joint Ventures" to the Consolidated Financial Statements. On December 31, 2020, we sold our Viper operation in Illinois, which had been part of our Other Thermal segment, to Knight Hawk Holdings, LLC. Viper's results for the full year of 2020 are included in our full year 2020 results, and in all preceding periods' results presented herein. For further information on the sale of Viper and our prior equity investment in Knight Hawk Holdings, LLC, please see Note 4, "Divestitures", and Note 11, "Equity Method Investments and Membership Interests in Joint Ventures" to the Consolidated Financial Statements. The following discussion and analysis are for the year ended December 31, 2021, compared to the same period in 2020 unless otherwise stated. For a discussion and analysis of the year ended December 31, 2020, compared to the same period in 2019, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SECon February 12, 2021. Results of Operations
Revenues. Our revenues include sales to customers of coal produced at our operations and coal purchased from third parties. Transportation costs are included in the cost of sales of coal and the amounts we charge our customers for transportation are included in revenue.
Coal sales. The following table summarizes our coal sales information for the years ended
Year Ended December 31, 2021 2020 (Decrease) / Increase (In thousands) Coal sales
$ 2,208,042 $ 1,467,592$ 740,450 Tons sold 73,005 63,343 9,662 On a consolidated basis, coal sales in 2021 increased $740.5 millionor 50.5% from 2020, and tons sold increased 9.7 million tons, or 15.3%. Coal sales from Metallurgical operations increased $507.6 milliondue primarily to higher realized pricing and secondarily increased volume. Thermal coal sales increased $255.8 milliondue to increased pricing and volume. In the year ended December 31, 2020, our Viper operation, which was sold in December 2020, provided approximately $34.3 millionin coal sales and 0.9 million tons sold. See discussion in "Operational Performance" for further information about segment results. 77 Table of Contents Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the years ended December 31, 2021
and 2020: Year Ended December 31, Increase (Decrease) in Net 2021 2020 Income (In thousands) Cost of sales (exclusive of items shown separately below)
$ 1,579,836 $ 1,378,479 $ (201,357)Depreciation, depletion and amortization 120,327 121,552 1,225 Accretion on asset retirement obligations 21,748 19,887 (1,861) Change in fair value of coal derivatives and coal trading activities, net (2,392) 5,219 7,611 Selling, general and administrative expenses 92,342 82,397 (9,945) Costs related to proposed joint venture with Peabody Energy - 16,087 16,087 Asset impairment and restructuring - 221,380 221,380 Gain on property insurance recovery related to Mountain Laurel longwall - (23,518) (23,518) Loss (Gain) on divestitures 24,225 (1,505) (25,730) Other operating loss (income), net 4,826 (22,246) (27,072) Total costs, expenses and other $ 1,840,912$
Cost of sales. Our cost of sales for the year ended
December 31, 2021increased $201.4 million, or 14.6%, versus the year ended December 31, 2020. In the prior year period, our Viper operation, which was sold in December 2020, accounted for approximately $45.5 millionin cost of sales. The increase in cost of sales at ongoing operations is directly attributable to higher sales volumes and prices; which consists of increased transportation costs of approximately $118.3 million, increased repairs and supplies costs of approximately $90.5 million, increased operating taxes and royalties of approximately $72.8 million, and increased compensation costs of approximately $21.1 million. These cost increases were partially offset by an increase in credit for ARO reclamation work completed primarily in our Thermal Segment of approximately $24.7 millionand decreased purchased coal cost of approximately $16.4 million. See discussion in "Operational Performance" for further information about segment results. Depreciation, depletion and amortization. Our depreciation, depletion and amortization costs for the year ended December 31, 2021decreased slightly versus the year ended December 31, 2020primarily due to the reduced depreciation expense resulting from the asset impairment we recorded in the third quarter of 2020 in our Thermal Segment, partially offset by the increased depreciation of plant and equipment, amortization of development, and depletion in our Metallurgical Segment.
Accretion on asset retirement obligations. The increase in accretion expense during the year ended
Change in fair value of coal derivatives and coal trading activities, net. The benefit in the year ended
December 31, 2021is primarily related to mark-to-market gains on coal derivatives that we had entered to hedge our price risk for anticipated international thermal coal shipments, while we had mark-to-market losses on such coal derivatives for the year ended December 31, 2020. Selling, general and administrative expenses. Selling, general and administrative expenses in the year ended December 31, 2021increased versus the year ended December 31, 2020due primarily to increased compensation costs of approximately $11.3 million, primarily related to higher incentive compensation accruals recorded in the year ended December 31, 2021, partially offset by reduced information technology related costs of approximately $1.1 million. Costs related to proposed joint venture with Peabody Energy. We incurred expenses of $16.1 millionin the year ended December 31, 2020associated with the regulatory approval process related to the proposed joint venture with Peabody that was terminated jointly by the parties following the Federal Trade Commission'ssuccessful lawsuit to block 78
the joint venture. For more information on our proposed joint venture with Peabody Energy, see Note 6, “Joint Venture with Peabody Energy,” to the consolidated financial statements.
Asset impairment and restructuring. During the year ended
December 31, 2020, we recorded $208.0 millionof impairment charges primarily relating to three of our thermal operations, Coal Creek, West Elk, and Viper, as well as, our equity investment in Knight Hawk Holdings, LLC. Also, during the year ended December 31, 2020, we incurred $13.4 millionof restructuring expense related to employee severance from the voluntary separation plans that were accepted by 254 employees of our thermal operations and corporate staff. For further information on our Asset Impairment costs, see Note 5, "Asset Impairment and Restructuring" to the Consolidated Financial Statements. Gain on property insurance recovery related to Mountain Laurel longwall. In the year ended December 31, 2020we recorded a $23.5 millionbenefit from insurance proceeds related to the loss of certain longwall shields at our Mountain Laurel operation. For further information on our gain on property insurance recovery, see Note 7, "Gain on Property Insurance Recovery Related to Mountain Laurel Longwall" to the Consolidated Financial Statements. Loss (Gain) on Divestitures. During the fourth quarter of 2021, we sold our 49.5% ownership in Knight Hawk Holdings, LLCfor $38.0 million. We received $20.5 millionduring the fourth quarter of 2021 and will receive the remainder in monthly installments through 2024. We recorded a non-cash loss in the amount of $24.2 millionduring the fourth quarter of 2021. During the year ended December 31, 2020, we recorded a $1.5 milliongain on the sale of our Dal-Tex, Briar Branch, and Viper properties. For further information on these gains and losses, see Note 4, "Divestitures" to the Consolidated Financial Statements. Other operating loss (income), net. The decrease in other operating income, net in the year ended December, 31, 2021 as compared to the year ended December, 31, 2020 results primarily from the net unfavorable impact of certain coal derivative settlements of approximately $36.7 million, partially offset by increased income from equity investments of approximately $7.1 millionand an unfavorable impact of mark to market movements on heating oil positions of approximately $1.8 millionrecorded in the year ended December 31, 2020.
Non-operating expenses. The following table summarizes non-operating expenses for the years ended
Year Ended December 31, Increase (Decrease) in Provision for 2021 2020 Net Income Taxes (In thousands) Non-service related pension and postretirement benefit costs
$ (4,339) $ (3,884)$ (455) Reorganization items, net - 26 (26) Total non-operating expenses $ (4,339) $ (3,858)$ (481)
Non-service related pension and postretirement benefit costs. The increase in non-service related pension and postretirement benefit costs in the year ended
December 31, 2021versus the year ended December 31, 2020is primarily due to increased postretirement benefit loss amortization in the year ended December 31, 2021, partially offset by increased pension settlement recorded in the
same year period. 79 Table of Contents
Provision for (benefit from) income taxes. The following table summarizes our provision for income taxes for the years ended
Year Ended December 31, Increase (Decrease) 2021 2020 in Net Income (In thousands)
Provision for (profit) income taxes
See Note 15 to the Consolidated Financial Statements “Taxes” for a reconciliation of the statutory federal income tax provision (benefit) at the statutory rate to the actual tax benefit.
December 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: Metallurgical, Powder River Basin(PRB), and Other Thermal. After the divestment of Viper, we have three remaining active thermal mines: West Elk, Black Thunder, and Coal 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 Metallurgical Segment and the three remaining thermal mines have been combined as the "Thermal Segment". The prior periods have been recasted 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 the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, the accretion on asset retirement obligations, and non-operating income (expense). Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results by excluding transactions that are not indicative of our core operating performance. Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDA are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDA should not be considered in isolation, nor as an alternative to net income (loss), income (loss) from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Furthermore, analogous measures are used by industry analysts to evaluate the Company's operating performance. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used
by other companies. 80 Table of Contents
The following table shows the operating results of coal operations for the years ended
Year Ended Year Ended December 31, 2021 December 31, 2020 Variance Metallurgical Tons sold (in thousands) 7,690 6,979 711 Coal sales per ton sold $ 126.44 $ 74.17
$ 52.27Cash cost per ton sold $ 68.84 $ 61.13 $ (7.71)Cash margin per ton sold $ 57.60 $ 13.04 $ 44.56Adjusted EBITDA (in thousands) $ 442,830 $ 91,322 $ 351,508Thermal Tons sold (in thousands) 65,280 55,722 9,558 Coal sales per ton sold $ 13.95 $ 13.55 $ 0.40 Cash cost per ton sold $ 11.35 $ 13.00 $ 1.65 Cash margin per ton sold $ 2.60 $ 0.55 $ 2.05 Adjusted EBITDA (in thousands) $ 175,709 $
This table reflects numbers reported under a basis that differs from
U.S.GAAP. See the "Reconciliation of Non-GAAP measures" below for explanation and reconciliation of these amounts to the nearest GAAP figures. Other companies may calculate these per ton amounts differently, and our calculation may not be comparable to other similarly titled measures. Metallurgical - Adjusted EBITDA for the year ended December 31, 2021increased from the year ended December 31, 2020due to increased pricing and increased volume. These benefits were partially offset by increased cash cost of sales per ton sold. The improvement in the current year over the prior year is largely due to the difference in trajectory of the COVID-19 pandemic during the respective periods in time. During 2021, increasing vaccine availability and generally decreasing restrictions led to accelerating economic growth, and increasing steel demand and pricing, improving prompt coking coal index prices. In contrast, during 2020, coking coal prices fell as large-scale industrial shutdowns were initiated in response to the emergence of COVID-19. Particularly, in the second half of 2021, surging coking coal demand, largely from Asia, and supply constrained by various disruptions, led to historically high pricing across all coking coal indices. The increase in cash cost per ton sold is primarily due to increased taxes and royalties that are based on a percentage of coal sales per ton sold, and the expected ramp up of production levels at our new Leer South longwall. During the end of the third quarter of 2021, we completed our Leer South longwall development, and initiated longwall production in late August of 2021. The ramp up to planned production levels is ongoing, and productivity continued to increase over the course of the fourth quarter of 2021. We expect to achieve planned long-term productivity levels by the second quarter of 2022. The addition of this second longwall operation to our Metallurgical Segment is expected to significantly increase our future volumes and strengthen our low average segment cost structure relative to our peers. Our Metallurgical segment sold 7.0 million tons of coking coal and 0.7 million tons of associated thermal coal in the year ended December 31, 2021, compared to 6.0 million tons of coking coal and 1.0 million tons of associated thermal coal in the year ended December 31, 2020. Longwall operations accounted for approximately 71% of our shipment volume in the year ended December 31, 2021, compared to approximately 60% of our shipment volume in the year ended December 31, 2020. Thermal - Adjusted EBITDA for the year ended December 31, 2021increased versus the year ended December 31, 2020, due to increased sales volume, increased coal sales per ton sold, and decreased cash cost per ton sold. The improvement in sales volume in the current year over the prior year is primarily due to increased domestic utility coal burn, resulting from higher natural gas pricing and improved economic growth. Sales volume also benefitted from increased thermal exports, which more than tripled over the prior year to approximately 2.2 million tons. The increase in coal sales per ton sold reflects higher realized prices at all of our thermal operations, and the reduction in 81
cash cost per ton sold is driven by both the increase in sales volume and the increased percentage of volume from our lower cost Black Thunder operation. Our cash cost per ton sold benefited from our operational flexibility to take advantage of increasing demand, despite the substantial progress we have made in our efforts to align production levels with the secular decline in domestic thermal coal demand. Also, contributing to the decreases in cost is the inclusion of approximately 0.9 million tons sold from our former Viper operation in the year ended
December 31, 2020. During 2021, we completed approximately $33.5 millionof ARO work at our current Thermal Segment operations primarily in the Powder River Basin, compared to $6.8 millionduring 2020. On December 31, 2020, we sold our Other Thermal operation, Viper, to Knight Hawk Holdings, LLC. For further information on the sale of Viper, please see Note 4, "Divestitures" to the Consolidated Financial Statements. 82
Reconciliation of NON-GAAP Measures
Non-GAAP segment coal sales per ton sold
Non-GAAP Segment coal sales per ton sold is calculated as segment coal sales revenues divided by segment tons sold. Segment coal sales revenues are adjusted for transportation costs, and may be adjusted for other items that, due to generally accepted accounting principles, are classified in "other income" on the consolidated income statements, but relate to price protection on the sale of coal. Segment coal sales per ton sold is not a measure of financial performance in accordance with generally accepted accounting principles. We believe segment coal sales per ton sold provides useful information to investors as it better reflects our revenue for the quality of coal sold and our operating results by including all income from coal sales. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Therefore, segment coal sales revenues should not be considered in isolation, nor as an alternative to coal sales revenues under generally accepted accounting principles. Idle and Year Ended December 31, 2021 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Consolidated Statements of Operations
$ 1,149,132 $ 1,057,481 $ 1,429 $ 2,208,042Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (1,192) 28,656 - 27,464 Coal sales revenues from idled or otherwise disposed operations not included in segments - - 1,424 1,424 Transportation costs 177,917 118,270 5 296,192 Non-GAAP Segment coal sales revenues $ 972,407 $ 910,555
$ 1,882,962Tons sold 7,690 65,280 Coal sales per ton sold $ 126.44 $ 13.95Idle and Year Ended December 31, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Revenues in the Consolidated Statements of Operations $ 641,536 $ 801,632 $ 24,424 $ 1,467,592Less: Adjustments to reconcile to Non-GAAP Segment coal sales revenue Coal risk management derivative settlements classified in "other income" (577) (8,632) - (9,209) Coal sales revenues from idled or otherwise disposed operations not included in segments - - 24,322 24,322 Transportation costs 124,494 55,477 102 180,073 Non-GAAP Segment coal sales revenues $ 517,619 $ 754,787$ - $ 1,272,406Tons sold 6,979 55,722 Coal sales per ton sold $ 74.17 $ 13.5583 Table of Contents
Non-GAAP Segment Cash Cost per Ton Sold
Non-GAAP Segment cash cost per ton sold is calculated as segment cash cost of coal sales divided by segment tons sold. Segment cash cost of coal sales is adjusted for transportation costs, and may be adjusted for other items that, due to generally accepted accounting principles, are classified in "other income" on the consolidated income statements, but relate directly to the costs incurred to produce coal. Segment cash cost per ton sold is not a measure of financial performance in accordance with generally accepted accounting principles. We believe segment cash cost per ton sold better reflects our controllable costs and our operating results by including all costs incurred to produce coal. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Therefore, segment cash cost of coal sales should not be considered in isolation, nor as an alternative to cost of sales under generally accepted accounting principles. Idle and Year Ended December 31, 2021 Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Consolidated Statements of Operations
$ 707,312 $ 859,070 $ 13,454 $ 1,579,836Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Transportation costs 177,917 118,270 5 296,192 Cost of coal sales from idled or otherwise disposed operations not included in segments - - 5,838 5,838 Other (operating overhead, certain actuarial, etc.) - - 7,611 7,611 Non-GAAP Segment cash cost of coal sales $ 529,395 $ 740,800$ - $ 1,270,195Tons sold 7,690 65,280 Cash Cost Per Ton Sold $ 68.84 $ 11.35Idle and
Year Ended December 31, 2020 Metallurgical Thermal Other Consolidated (In thousands) GAAP Cost of sales in the Consolidated Statements of Operations
$ 551,133 $ 778,267 $ 49,079 $ 1,378,479Less: Adjustments to reconcile to Non-GAAP Segment cash cost of coal sales Diesel fuel risk management derivative settlements classified in "other income" - (1,788) - (1,788) Transportation costs 124,494 55,477 102 180,073 Cost of coal sales from idled or otherwise disposed operations not included in segments - - 41,322 41,322 Other (operating overhead, certain actuarial, etc.) - - 7,655 7,655 Non-GAAP Segment cash cost of coal sales $ 426,639 $ 724,578$ - $ 1,151,217Tons sold 6,979 55,722 Cash Cost Per Ton Sold $ 61.13 $ 13.0084 Table of Contents
Reconciliation of segment adjusted EBITDA to net income (loss)
The discussion in "Results of Operations" above includes references to our Adjusted EBITDA for each of our reportable segments. Adjusted EBITDA is defined as net income (loss) attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, the amortization of sales contracts, and the accretion on asset retirement obligations. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results by excluding transactions that are not indicative of our core operating performance. We use Adjusted EBITDA to measure the operating performance of our segments and allocate resources to our segments. Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded from Adjusted EBITDA are significant in understanding and assessing our financial condition. Therefore, Adjusted EBITDA should not be considered in isolation, nor as an alternative to net income (loss), income (loss) from operations, cash flows from operations or as a measure of our profitability, liquidity or performance under generally accepted accounting principles. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. The table below shows how we calculate Adjusted EBITDA. Year Ended Year Ended December 31, December 31, 2021 2020 Net income (loss)
$ 337,573 $ (344,615)
Provision for (benefit from) income taxes 1,874 (7) Interest expense, net 23,344
Depreciation, depletion and amortization 120,327
Accretion on asset retirement obligations 21,748
Costs related to proposed joint venture with Peabody Energy -
Asset impairment and restructuring -
Gain on property insurance recovery related to Mountain Laurel longwall -
Loss (Gain) on divestitures 24,225
Preference Rights Lease Application settlement income - - Non-service related pension and postretirement benefit costs 4,339 3,884 Reorganization items, net - (26) Adjusted EBITDA 533,430 23,743
EBITDA from idled or otherwise disposed operations 2,469
Selling, general and administrative expenses 92,342
Segment Adjusted EBITDA from coal operations
Other includes primarily income from our equity investments, certain changes in the fair value of coal derivatives and coal trading activities, certain changes in fair value of heating oil derivatives we use to manage our exposure to diesel fuel pricing, net EBITDA provided by our land company, and certain miscellaneous revenue. For the year ended
December 31, 2021, amounts included in Other increased Adjusted EBITDA by approximately $9.7 millionversus decreasing Adjusted EBITDA approximately $3.4 millionin the year ended December 31, 2020. The net increase in Adjusted EBITDA from Other was primarily related to favorable change in value of coal derivatives of approximately $7.7 million, and increased income from equity investments of approximately $7.1 million. 85
Cash 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. 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 the COVID-19 pandemic, we believe it remains important to take a prudent approach to managing our balance sheet and liquidity. Additionally, banks and other lenders have become increasingly unwilling to provide financing to coal producers, especially those with significant thermal coal exposure. Due to the nature of our business, we may be limited in accessing debt capital markets or obtaining additional bank financing, or the cost of accessing this financing could become more expensive. With the completion of the Leer South development, our capital spending returned to maintenance levels in the fourth quarter of 2021, and we expect our capital spending to remain at maintenance levels for the foreseeable future. In light of the reduced capital requirements and current favorable pricing environment, we generated significant cash flows in the fourth quarter of 2021 and expect cash flows to remain strong in 2022. Our priority is to improve our financial position, through enhancing liquidity and reducing our debt and other liabilities. During the fourth quarter of 2021, our cash balance increased
$129.9 millionand we ended the year with cash of $339.7 millionand total liquidity of $389.9 million. Also, during the fourth quarter, we made an initial deposit of $20.0 millioninto a fund to pay for future ARO costs at our legacy thermal operations, primarily in the Powder River Basin, and repurchased $5.0 millionof our term loan at a slight discount. We believe our current liquidity level is sufficient to fund our business and meet both our short-term (next twelve months) and reasonably foreseeable long-term requirements and obligations, especially in light of reduced capital spending requirements. In 2022, we have continued to reduce debt by repaying an additional $271.3 millionof our term loan throughout January and the first half of February. Additionally, during 2022, we plan to make contributions to the thermal ARO fund on a quarterly basis and expect total contributions could be at least $100.0 millionif market conditions remain favorable. On March 7, 2017, we entered into a senior secured term loan credit agreement in an aggregate principal amount of $300 million(the "Term Loan Debt Facility") with Credit Suisse AG, Cayman IslandsBranch, as administrative agent and collateral agent and the other financial institutions from time to time party thereto. The Term Loan Debt Facility was issued at 99.50% of the face amount and will mature on March 7, 2024. The term loans provided under the Term Loan Debt Facility (the "Term Loans") are subject to quarterly principal amortization payments in an amount equal to $0.8 million. Proceeds from the Term Loan Debt Facility were used to repay all outstanding obligations under our previously existing term loan credit agreement, dated as of October 5, 2016. The interest rate on the Term Loan is, at our option, either (i) the Londoninterbank 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 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. We have entered into a series of interest rate swaps to fix a portion of the LIBOR interest payments due under the term loan. As interest payments are made on the term loan, amounts in accumulated other comprehensive income will be reclassified into earnings through interest expense to reflect a net interest on the term loan equal to the effective yield of the fixed rate of the swap plus 2.75% which is the spread on the LIBOR term loan as amended. For further information regarding the interest rate swaps see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. On September 30, 2020, we extended and amended our existing trade accounts receivable securitization facility provided to Arch Receivable Company, LLC, a special-purpose entity that is a wholly owned subsidiary of Arch Resources("Arch Receivable") (the "Securitization Facility"), which supports the issuance of letters of credit and requests for cash advances. The amendment to the Securitization Facility reduced the facility size from $160 millionto 86
September 30, 2020, we amended the senior secured inventory-based revolving credit facility in an aggregate principal amount of $50 million(the "Inventory Facility") with Regions Bank("Regions") as administrative agent and collateral agent, as lender and swingline lender (in such capacities, the "Lender") and as letter of credit issuer. Availability under the Inventory Facility is subject to a borrowing base consisting of (i) 85% of the net orderly liquidation value of eligible coal inventory, plus (ii) the lesser of (x) 85% of the net orderly liquidation value of eligible parts and supplies inventory and (y) 35% of the amount determined pursuant to clause (i), plus (iii) 100% of our Eligible Cash (defined in the Inventory Facility), subject to reduction for reserves imposed by Regions. The amendment of the Inventory Facility extended the maturity date to September 29, 2023, eliminated the provision that accelerated maturity of the facility upon falling below a specified level of liquidity, and reduced the minimum liquidity requirement from $175 millionto $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 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. On July 2, 2020, the West Virginia Economic Development Authority(the "Issuer") issued $53.1 millionaggregate principal amount of Solid Waste Disposal Facility Revenue Bonds ( Arch Resources Project), Series 2020 (the "2020 Tax Exempt Bonds") pursuant to an Indenture of Trust dated as of June 1, 2020(the "Indenture of Trust") between the Issuerand Citibank, N.A., as trustee (the "Trustee"). As a follow-on to our $53.1 millionoffering, on March 4, 2021, the Issuer issued an additional $45.0 millionin Series 2021 Tax Exempt Bonds (the "2021 Tax Exempt Bonds" and together with the 2020 Tax Exempt Bonds, the "Tax Exempt Bonds"). The proceeds of the Tax Exempt Bonds were loaned to us as we made qualifying expenditures pursuant to a Loan Agreement dated as of June 1, 2020, as supplemented by a First Amendment to the Loan Agreement dated March 1, 2021(collectively, the "Loan Agreement"), each between the Issuer and us. The Tax Exempt Bonds are payable solely from payments to be made by us under the Loan Agreement as evidenced by Notes from us to the Trustee. The proceeds of the Tax Exempt Bonds were used to finance certain costs of the acquisition, construction, reconstruction, and equipping of solid waste disposal facilities at our Leer South development, and for capitalized interest and certain costs related to the issuance of the Tax Exempt Bonds. As of December 31, 2021, we have utilized the total Tax Exempt Bond proceeds. For further information regarding the Tax Exempt Bonds, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. In November, 2020, we issued $155.3 millionin 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 millionand the cost of a capped call transaction of $17.5 million, were approximately $132.7 million. The Convertible Notes bear interest at the annual rate of 5.25%, payable semiannually in arrears on May 15and November 15of each year, and will mature on November 15, 2025, unless earlier converted, redeemed or repurchased by us. For further information regarding the Convertible Debt, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements. During the fourth quarter of 2021, the common stock price condition of the Convertible Notes was satisfied, as the closing stock price exceeded 130% of the conversion price of approximately $37.208for at least 20 trading days of the last 30 trading days prior to quarter end. As a result, the Convertible Notes are convertible at the election of the noteholders during the first quarter of 2022, and due to our stated intent to settle the principal value in cash, the liability portion of $121.6 millionof the Convertible Notes is included in current maturities of debt on our Consolidated Balance Sheet at December 31, 2021. As of the date of this Annual Report on Form 10-K, we have not received any conversion requests for the Convertible Notes and do not anticipate receiving any conversion requests, as the market value of the Convertible Notes exceeds the conversion value of the Convertible Notes. As of December 31, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $225.3 million. For further information regarding the Convertible Notes and the capped call transactions, see Note 14, "Debt and Financing Arrangements" to the Consolidated Financial Statements.
87 Table of Contents have used
$827.4 million. During the year ended December 31, 2021, we did not repurchase any shares of our stock. On April 23, 2020, we announced the suspension of our quarterly dividend due to the significant economic uncertainty surrounding the COVID-19 pandemic and the steps being taken to control the virus. On October 26, 2021, as a result of improved liquidity, we announced the initiation of a $0.25per share quarterly dividend. Through the addition of Leer South, we believe we have significantly increased our future cash-generating capabilities and as a result we plan to launch an adjusted and more comprehensive capital return program in the second quarter of 2022. We plan to return to stockholders approximately 50% of the prior quarter's discretionary cash flow via a variable rate quarterly cash dividend that will complement our existing fixed rate cash dividend of $0.25per share, and to use the remaining 50% of our discretionary cash flow for potential share buybacks, special dividends, the repurchase of potentially dilutive securities, and capital preservation. All of these potential uses of capital are subject to board approval and declaration. Any shares acquired would be in the open market or through private transactions in accordance with Securities and Exchange Commissionrequirements. On December 31, 2021, we had total liquidity of approximately $389.9 millionincluding $339.7 millionin 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 of December 31, 2021: Letters of Borrowing Credit Contractual Face Amount Base Outstanding Availability Expiration (Dollars in thousands) Securitization Facility $ 110,000 $ 110,000 $ 67,483 $ 42,517September 29, 2023 Inventory Facility 50,000 34,111 27,712 6,399 September 29, 2023 Total $ 160,000 $ 144,111 $ 95,195 $ 48,916
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 table below summarizes our contractual obligations as of
December 31, 2021: Payments Due by Period 2022 2023-2024 2025-2026 after 2026 Total (Dollars in thousands)
Long-term debt, including related interest
$ 133,624 $ 279,017$
267,075 $ -
$ 679,716Leases 4,599 8,976 8,376 1,533 23,484 Coal lease rights 3,248 6,082 5,037 37,009 51,376
Coal purchase obligations 3,336 - - - 3,336 Unconditional purchase obligations 129,351 - - - 129,351 Total contractual obligations
$ 274,158 $ 294,075$
The related interest on long-term debt was calculated using rates in effect at
December 31, 2021, for the remaining term of outstanding borrowings. In 2022, we have continued to reduce debt by repaying an additional $271.3 millionof our term loan throughout January and the first half of February.
Coal lease rights represent non-cancellable royalty leases, as well as lease premiums due.
Unconditional purchase obligations include outstanding purchase orders and other purchase commitments, which have not been recognized as a liability. The commitments shown in the table above relate to contractual commitments for the purchase of materials and supplies, payments for services and capital expenditures.
88 Table of Contents The table above excludes our asset retirement obligations. Our consolidated balance sheet reflects a liability of
$214.5 millionincluding amounts classified as a current liability for asset retirement obligations that arise from SMCRA and similar state statutes, which require that mine property be restored in accordance with specified standards and an approved reclamation plan. Asset retirement obligations are recorded at fair value when incurred and accretion expense is recognized through the expected date of settlement. Determining the fair value of asset retirement obligations involves a number of estimates, as discussed in the section entitled "Critical Accounting Estimates" below, including the timing of payments to satisfy the obligations. The timing of payments to satisfy asset retirement obligations is based on numerous factors, including mine closure dates. Please see Note 16, "Asset Retirement Obligations" to our Consolidated Financial Statements for further information about our asset retirement obligations. The table above also excludes certain other obligations reflected in our consolidated balance sheet, including estimated funding for pension and postretirement benefit plans and worker's compensation obligations. The timing of contributions to our pension plans varies based on a number of factors, including changes in the fair value of plan assets and actuarial assumptions. Please see the section entitled "Critical Accounting Estimates" below for more information about these assumptions. We expect to make no contributions to our pension plans in 2022. Please see Note 20, "Workers' Compensation Expense", and Note 21, "Employee Benefit Plans" to our Consolidated Financial Statements for more information about the amounts we have recorded for workers' compensation and pension and postretirement benefit obligations, respectively.
Off-balance sheet arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, indemnifications, financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.
We use a combination of surety bonds and letters of credit to secure our financial obligations for reclamation, workers’ compensation, coal lease obligations and other obligations as follows from
Workers' Reclamation Lease Compensation Obligations Obligations Obligations Other Total (Dollars in thousands) Surety bonds
$ 500,486 $ 26,013 $ 50,028 $ 7,530 $ 584,057Letters of credit 20,000 - 65,683 1,354 87,037 Cash Flow
The following is a summary of the cash provided or used in each of the types of activities indicated during the year ended
Year Ended December 31, 2021 2020 (In thousands) Cash provided by (used in): Operating activities
$ 238,284 $ 61,106Investing activities (141,215) (226,009) Financing activities 35,781 205,328
Cash provided by operating activities increased in the year ended
December 31, 2021versus the year ended December 31, 2020mainly due to the improvement in results from operations discussed in the "Overview" and "Operational Performance" sections above, partially offset by a greater increase in working capital requirements of 89 Table of Contents
Cash used in investing activities decreased in the year ended
December 31, 2021versus the year ended December 31, 2020primarily due to an approximately $49 millionincrease in net proceeds from short term investments; decreased capital expenditures of approximately $40 million, as the Leer South mine completed development; and an approximately $20 millionincrease from proceeds of disposals and divestitures, mainly proceeds from the divestiture of Knight Hawk Holdings; which were partially offset by an approximately $24 millionin property insurance proceeds on our Mountain Laurel longwall claim in the prior year period. Cash provided by financing activities decreased in the year ended December 31, 2021versus the year ended December 31, 2020primarily due to the net proceeds of approximately $138 millionfrom issuance of the Convertible Notes in the prior year period; a net decrease in proceeds from Equipment Financing transactions of approximately $34 million; and a net decrease in proceeds from the issuance of our Tax Exempt Bonds of approximately $8 million; which were partially offset by a decrease in debt financing costs of approximately $8 million; and a decrease in dividends paid of approximately $4 million.
Critical accounting estimates
We prepare our financial statements in accordance with accounting principles that are generally accepted in
the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management bases our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Additionally, these estimates and judgments are discussed with our audit committee on a periodic basis. Actual results may differ from the estimates used under different assumptions or conditions. We have provided a description of all significant accounting policies in the notes to our Consolidated Financial Statements. We believe that of these significant accounting policies, the following may involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations:
Derivative financial instruments
We utilize derivative instruments to manage exposures to commodity prices and interest rate risk on long-term debt. Additionally, we may hold certain coal derivative instruments for trading purposes. Derivative financial instruments are recognized in the balance sheet at fair value. Certain coal contracts may meet the definition of a derivative instrument, but because they provide for the physical purchase or sale of coal in quantities expected to be used or sold by us over a reasonable period in the normal course of business, they are not recognized on the balance sheet and changes in the fair value of the derivative instrument are recorded in the consolidated statements of operations. Certain derivative instruments are designated as the hedge instrument in a hedging relationship. In a cash flow hedge, we hedge the risk of changes in future cash flows related to the underlying item being hedged. Changes in the fair value of the derivative instrument used as a hedge instrument in a cash flow hedge are recorded in other comprehensive income. Amounts in other comprehensive income are reclassified to earnings when the hedged transaction affects earnings and are classified in a manner consistent with the transaction being hedged. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives for undertaking various hedge transactions. We evaluate the effectiveness of our hedging relationships both at the hedge inception and on an ongoing basis.
See note 12 to the consolidated financial statements, “Derivatives”, for further information on the Company’s derivative instruments.
Impairment of long-lived assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These events and circumstances include, but are not limited to, a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment is recorded for the excess of the carrying amount over the estimate fair value, which is generally determined using discounted future cash flows. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes the new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of the asset. We make various assumptions, including assumptions regarding future cash flows in our assessments of long-lived assets for impairment. The assumptions about future cash flows and growth rates are based on the current and long-term business plans related to the long-lived assets. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the long-lived assets. These assumptions require significant judgments on our part, and the conclusions that we reach could vary significantly based upon these judgments. During the year ended December, 31, 2020, we determined that we had indicators of impairment related to three of our thermal operations,
Coal Creek, West Elk, and Viper, as well as, our equity investment in Knight Hawk Holdings, LLC. Our analyses of future expected cash flows from these assets indicated full impairment of our listed thermal operations and partial impairment of our equity investment in Knight Hawk Holdings, LLC. As of December 31, 2021, there were no indicators of impairment identified. Please see the Note 5, "Asset impairment and restructuring" to our Consolidated Financial Statements for more information about the amounts we have recorded for Asset Impairment.
Asset retirement obligations
Our asset retirement obligations arise from SMCRA and similar state statutes, which require that mine property be restored in accordance with specified standards and an approved reclamation plan. Significant reclamation activities include reclaiming refuse and slurry ponds, reclaiming the pit and support acreage at surface mines, and sealing portals at deep mines. Our asset retirement obligations are initially recorded at fair value, or the amount at which the obligations could be settled in a current transaction between willing parties. This involves determining the present value of estimated future cash flows on a mine-by-mine basis based upon current permit requirements and various estimates and assumptions, including estimates of disturbed acreage, reclamation costs and assumptions regarding equipment productivity. We estimate disturbed acreage based on approved mining plans and related engineering data. Since we plan to use internal resources to perform the majority of our reclamation activities, our estimate of reclamation costs involves estimating third-party profit margins, which we base on our historical experience with contractors that perform certain types of reclamation activities. We base productivity assumptions on historical experience with the equipment that we expect to utilize in the reclamation activities. In order to determine fair value, we discount our estimates of cash flows to their present value. We base our discount rate on the rates of treasury bonds with maturities similar to expected mine lives, adjusted for our credit standing. Accretion expense is recognized on the obligation through the expected settlement date. On at least an annual basis, we review our entire reclamation liability and make necessary adjustments for permit changes as granted by state authorities, changes in the timing and extent of reclamation activities, and revisions to cost estimates and productivity assumptions, to reflect current experience. Any difference between the recorded amount of the liability and the actual cost of reclamation will be recognized as a gain or loss when the obligation is settled. We expect our actual cost to reclaim our properties will be less than the expected cash flows used to determine the asset retirement obligation. At
December 31, 2021, our balance sheet reflected asset retirement obligation liabilities of $214.5 million, including 91
amounts classified as current liabilities. From
See the deferral of the asset retirement obligation liability in Note 16, “Asset retirement obligations”, to the consolidated financial statements.
Employee benefit plans
We have non-contributory defined benefit pension plans covering certain of our salaried and hourly employees. Benefits are generally based on the employee's years of service and compensation. The actuarially-determined funded status of the defined benefit plans is reflected in the balance sheet. The calculation of our net periodic benefit costs (pension expense) and benefit obligation (pension liability) associated with our defined benefit pension plan requires the use of a number of assumptions. These assumptions are summarized in Note 21, "Employee Benefit Plans", to the Consolidated Financial Statements. Changes in these assumptions can result in different pension expense and liability amounts, and actual experience can differ from the assumptions. ? The expected long-term rate of return on plan assets is an assumption reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. We establish the expected long-term rate of return at the beginning of each fiscal year based upon historical returns and projected returns on the underlying mix of invested assets. The pension plan's investment targets are 15% equity and 85% fixed income securities. Investments are rebalanced on a periodic basis to approximate these targeted guidelines. The long-term rate of return assumptions are less than the plan's actual life-to-date returns. ? The discount rate represents our estimate of the interest rate at which pension benefits could be effectively settled. Assumed discount rates are used in the measurement of the projected, accumulated and vested benefit obligations and the service and interest cost components of the net periodic pension cost. The determination of the discount rate was updated from our actuary's proprietary Yield Curve model, under which the expected benefit payments of the plan are matched against a series of spot rates from a market basket of high quality fixed income securities. The differences generated from changes in assumed discount rates and returns on plan assets are amortized into earnings using the corridor method, whereby the unrecognized (gains)/losses in excess of 10% of the greater of the beginning of the year projected benefit obligation or market-related value of assets are amortized over the average remaining life expectancy of the plan participants.
We also currently provide certain post-retirement health and life insurance coverage to eligible employees. Generally, covered employees who terminate their employment after meeting the eligibility criteria are eligible for post-retirement coverage for themselves and their dependents. The post-retirement benefit plans for salaried employees are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing elements such as deductibles and coinsurance.
Actuarial assumptions are required to determine the amounts reported as obligations and costs related to the postretirement benefit plan. The discount rate assumption reflects the rates available on high-quality fixed-income debt instruments at year-end and is calculated in the same manner as discussed above for the pension plan. 92 Table of Contents Income Taxes
We provide for deferred income taxes for temporary differences arising from differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates expected to be in effect when the related taxes are expected to be paid or recovered. We initially recognize the effects of a tax position when it is more than 50% likely, based on the technical merits, that that position will be sustained upon examination, including resolution of the related appeals or litigation processes, if any. Our determination of whether or not a tax position has met the recognition threshold considers the facts, circumstances, and information available at the reporting date. On the basis of this evaluation, a full valuation allowance has been in place against the Company's net deferred tax assets since 2015. Through
December 31, 2018, the Company was in a cumulative loss position. Since 2019, the Company has been in a cumulative income position, however, the Company has fluctuated between income and loss for individual years and quarters within each cumulative three-year period. We utilize three years of pre-tax income or loss to measure of our cumulative results in recent years. A valuation allowance is difficult to avoid when a company is in a cumulative loss position, as it constitutes significant negative evidence with regards to future taxable income. However, a cumulative loss is not solely determinative of the need for a valuation allowance. The Company considers all other positive and negative evidence available as part of its assessment of the need for a valuation allowance, including but not limited to future taxable income, available tax planning strategies and the reversal of temporary differences.
See Note 15 to the consolidated financial statements, “Taxes”, for further information on income taxes.
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