# Ramaco Resources, Inc. (METC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Ramaco Resources, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1687187/000155837022004987/metc-20211231x10k.htm
Accession: 0001558370-22-004987
Filing date: 2022-04-01
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/METC/
All MD&A years: /company/METC/mda/
Next year: /company/METC/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist you in understanding our results of operations and our present financial condition and contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Annual Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Overview

Our primary source of revenue is the sale of metallurgical coal. We are a pure play metallurgical coal company with 39 million and 769 million tons of high-quality metallurgical coal reserves and resources, respectively. Our plan is to continue development of our existing properties and grow production to approximately 5 million clean tons of metallurgical coal, subject to market conditions, permitting and additional capital deployment in the medium-term. We may make acquisitions of reserves or infrastructure that continue our focus on advantaged geology and lower costs.

During 2021, we sold 2.3 million tons of coal. Of this, 51% was sold in North American markets and 49% was sold in export markets, excluding Canada, principally to Europe, South America, Asia and Africa. We also purchase coal from third parties for sale for our own account; these volumes decreased slightly in 2021 from 2020. Sales of higher margin Company produced coal made up 98% of total sales in 2021 as compared with 99% in 2020.

The overall outlook of the metallurgical coal business is dependent on a variety of factors such as pricing, regulatory uncertainties and global economic conditions. Coal consumption and production in the U.S. is driven by several market dynamics and trends including the U.S. and global economies, the U.S. dollar’s strength relative to other currencies and accelerating production cuts.

Metallurgical coal markets weakened significantly during 2020 due to the COVID-19 outbreak. Demand for metallurgical coal greatly increased during 2021 as the economy recovered from the significant market volatility and economic uncertainty and disruption in 2020. Spot pricing for U.S. high-vol A metallurgical coal reached $340 per metric ton FOB port by year-end 2021, and over $500 per metric ton FOB port by early-2022. The Company is responsible for rail and loadout costs for coal sold into export markets.

In the event COVID-19 lingers, metallurgical coal markets could see continued volatility in the future. We continue to actively monitor the situation, including closely communicating with our critical suppliers. We may be required to take actions altering our business operations if we determine they are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities.

The annual contracting season with North American steel producers generally occurs in late-summer through the fall. As of December 31, 2021, we had entered into forward sales contracts with certain North American customers for 2022 on a fixed price basis for 1.8 million tons of coal at an average realizable price of $187/ton FOB mine. Even despite some lower priced 2021 tons getting carried over into early 2022, this level of pricing in 2022 is significantly higher than the average price of $91 per ton FOB mine that was contracted for 2021. This is due to a combination of factors, including the subsiding impact of COVID-19 as discussed above, stronger year-over-year steel prices, changes in types of coal qualities purchased by customers in 2021 and the strong economic upturn in the United States.

In 2021, our capital expenditures were $29.5 million, excluding cash paid for the acquisition of the Amonate assets which totaled $30.1 million. Our capital expenditures in 2020 were $24.8 million. We continued to invest in infrastructure and mine equipment at our Elk Creek Complex and development of the Berwind complex. In 2021, we resumed development at the Berwind Complex due to higher pricing and greater demand driven by the recovery from COVID-19 pandemic in 2020. This complex remains a key part of our anticipated future growth.

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​

On November 5, 2018, one of our three raw coal storage silos that fed our Elk Creek plant experienced a partial structural failure. A temporary conveying system completed in late-November 2018 restored approximately 80% of our plant capacity. We completed a permanent belt workaround and restored the preparation plant to its full processing capacity in mid-2019. The insurance carrier disputed our claim for and on August 21, 2019 we filed suit. The suit went to trial in late-June 2021. In July 2021, the jury returned a verdict in our favor for a total of approximately $32.7 million. On August 12, 2021, the defendants filed a post-trial motion for judgment as a matter of law or in the alternative to alter or amend the judgment or for a new trial. The parties fully briefed the motion and it stood submitted on August 31, 2021. On March 4, 2022, the court entered its memorandum opinion and order on the motion reducing the jury award to a total of $1.8 million, including pre-judgment interest, based largely on the court’s decision to vacate and set aside, in its entirety, the jury award of damages for inconvenience and aggravation. The same day, the court entered the judgment in accordance with the memorandum opinion and order. We are considering our options related to this decision, including an appeal to the US Court of Appeals for the 4th Circuit.

Results of Operations

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[[/GREPCENT_TABLE]]

​

Net income was $39.8 million or $0.90 per diluted share in 2021 as compared with a net loss of $4.9 million or $0.12 per share in 2020. Our improved results were principally due to higher pricing and volumes sold as compared with the prior year. We sold 2.24 million tons of Company produced tons at realized pricing of $108/ton in 2021. In 2020, we sold 1.72 million tons of Company produced tons at realized pricing of $85/ton.

Adjusted EBITDA was $79.0 million in 2021, which was nearly 330% higher than 2020. The increase in Adjusted EBITDA is principally due to higher pricing and volumes sold in 2021.

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Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Revenue. Our revenue includes sales to customers of Company produced coal and coal purchased from third parties. We include amounts billed by us for transportation to our customers within revenue and transportation costs incurred within cost of sales.

For the year ended December 31, 2021, we had revenue of $283.4 million from the sale of 2.29 million tons of coal including 0.05 million tons of purchased coal. During 2020, we sold 1.75 million tons of coal including 0.03 million tons of purchased coal for total revenue of $168.9 million.

Coal sales information is summarized as follows:

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[[/GREPCENT_TABLE]]

​

Metallurgical coal markets strengthened during 2021, particularly in the second half of the year, due to the ongoing global recovery following 2020’s severe global economic slowdown stemming from the COVID-19 outbreak and resultant pandemic. While variants of the COVID-19 virus continue to evolve and emerge, the decreased severity of these variants along with increased vaccination rates have lessened the economic impacts of the virus compared to 2020. Likewise, the responses by governments in order to slow and stop the spread of these variants have become less restrictive. Many countries have increased stimulus and infrastructure spending in order to revitalize and grow their economies. Coupled with pent-up consumer demand, this has created widespread economic growth in most geographies which has improved demand for steel and the raw materials required for its manufacture.

During 2021, steel prices achieved record highs due to strong demand, low inventories and long lead times on shipments. For the full year 2021, global crude steel production reached a new all-time record level. The strength in the global steel markets led to increased worldwide demand for metallurgical coal throughout the year, with metallurgical coal pricing attaining record high levels in the second half of 2021. At the same time, metallurgical coal demand and pricing have remained robust, in part due to continuing supply chain challenges in the U.S. and abroad as a result of strained logistics caused by the COVID-19 pandemic. While the Company has not been immune to these logistical challenges, our performance during 2021 still led to record levels of tons sold, revenues and adjusted EBITDA.

Cost of sales. Our cost of sales totaled $195.4 million for 2021 as compared to $145.5 million for 2020. The total cash cost per ton sold (FOB mine) during 2021 was approximately $70 for Company produced coal as compared with $72 for 2020. The cost of sales for coal we purchased from third parties increased to $4.1 million in 2021 from $1.6 million in 2020.

Asset retirement obligation accretion. ARO accretion was $0.6 million for both 2020 and 2021.

Depreciation and amortization. Depreciation of our plant and equipment totaled $17.9 million for the year ended December 31, 2021 as compared with $17.1 million for the previous year. Higher depreciation expense for 2021 was principally due to the increase in deployment of additional mining equipment. Amortization of capitalized development costs totaled $7.2 million in 2021 as compared with $3.8 million for the previous year. In addition, the Company entered into several financing leases in 2021. Capitalized equipment under these leases increased depreciation expense by $1.1 million.

Selling, general and administrative expenses. Selling, general and administrative expenses were $21.6 million for the year ended December 31, 2021 as compared with $21.0 million for 2020. This increase reflects the growth of our

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organization including higher stock compensation expense of $1.1 million offset by lower professional services $0.6 million.

Other income. Other income was $7.4 million for 2021 and $11.9 million in 2020. We recognized $5.4 million associated with the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) Employee Retention Tax Credit in 2021. We recognized $8.4 million of other income during 2020 for the anticipated full forgiveness of the Paycheck Protection Program loan (the “PPP Loan”) we received. Other income also includes third-party royalty income and rail rebates received, which were about unchanged in 2021 as compared to 2020.

Interest expense, net. Interest expense, net was approximately $2.6 million in 2021 as compared to $1.2 million in 2020 principally due to closing of our Senior Notes and additional equipment financings during 2021.

Income tax expense. We recognized an income tax expense of $4.6 million in 2021 as compared with income tax benefit of $3.5 million in 2020. The income tax expense for 2021 includes a $2.3 million benefit associated with changes in state income tax regulations for Virginia and West Virginia and $194 thousand benefit for stock-based compensation. The income tax benefit for 2020 included a $1.8 million benefit associated with the recognition of other income for the anticipated PPP Loan forgiveness. Excluding these discrete items, our effective tax rate was 16% for 2021, compared to 20% for 2020. The primary difference from the statutory rate of 21% is related to permanent differences for state income taxes, non-deductible expenses and the difference in depletion expense between generally accepted accounting principles in the U.S.(“U.S. GAAP”) and federal income tax purposes.

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Please see Part I, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K for a discussion of the results of operation for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Non-GAAP Financial Measures

Adjusted EBITDA. Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.

We define Adjusted EBITDA as net income plus net interest expense, stock-based compensation, depreciation and amortization expenses and any transaction related costs. A reconciliation of net income to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.

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[[/GREPCENT_TABLE]]

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Non-GAAP revenue per ton. Non-GAAP revenue per ton (FOB mine) is calculated as coal sales revenue less transportation costs, divided by tons sold. We believe revenue per ton (FOB mine) provides useful information to investors as it enables investors to compare revenue per ton we generate against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal prices from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Revenue per ton sold (FOB mine) is not a measure of financial performance in accordance with U.S. GAAP and therefore should not be considered as an alternative to revenue under U.S. GAAP.

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[[/GREPCENT_TABLE]]

Non-GAAP cash cost per ton sold. Non-GAAP cash cost per ton sold is calculated as cash cost of sales less transportation costs, divided by tons sold. We believe cash cost per ton sold provides useful information to investors as it enables investors to compare our cash cost per ton against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal cost from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Cash cost per ton sold is not a measure of financial performance in accordance with U.S. GAAP and therefore should not be considered as an alternative to cost of sales under U.S. GAAP.

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2022 Sales Commitments

As of December 31, 2021, we had entered into forward sales contracts for 1.8 million tons at an average realizable price of $188/ton FOB mine. The majority of these 2022 sales are to North American customers on a fixed price basis. These volumes were mostly metallurgical quality coal.

Liquidity and Capital Resources

Our primary source of cash is proceeds from the sale of our coal production to customers. Our primary uses of cash include the cash costs of coal production, capital expenditures, royalty payments and other operating expenditures.

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Cash flow information is as follows:

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​

Cash flows from operating activities during 2021 increased from the comparable period of the prior year primarily resulting from higher cash earnings and offset by higher amounts required for working capital (receivables, inventories and accounts payable).

Net cash used in investing activities, all of which was used for capital expenditures, was $59.6 million for the year ended December 31, 2021 as compared with $24.8 million for 2020. The increase is principally due to the acquisition of the Amonate assets for $30.1 million in late-2021.

Cash flows from financing activities were $22.4 million for 2021, which was primarily due to proceeds of $34.5 million from the issuance of our Senior Notes offset by payments made on our revolving credit facilities. Cash flows from financing activities were $11.3 million for 2020, which was due to net proceeds from short term borrowings.

Restricted cash balances at December 31, 2021 and 2020 were $0.9 million and $1.4 million, respectively, consisted of funds held in escrow for potential future workers’ compensation claims and were classified in other current assets in the consolidated balance sheets.

Indebtedness

Revolving Credit Facility and Term Loan—On November 2, 2018, we entered into a Credit and Security Agreement (as amended or amended and restated, the “Revolving Credit Facility” or the “Credit Agreement”) with KeyBank National Association (“KeyBank”), as the administrative agent, and other lenders party thereto. The Credit Agreement was amended on February 20, 2020 and March 19, 2021. On October 29, 2021, we entered into an Amended and Restated Credit and Security Agreement (the “Amendment and Restatement”) with KeyBank. Prior to the Amendment and Restatement, the Credit Agreement consisted of a $10.0 million term loan (the “Term Loan”) and up to $30.0 million revolving line of credit, including $3.0 million letter of credit availability. The Amendment and Restatement increased the overall availability under the revolving credit line to $40.0 million and extended the maturity date to December 31, 2024. All personal property assets, including, but not limited to accounts receivable, coal inventory and certain mining equipment are pledged to secure the Revolving Credit Facility.

The Revolving Credit Facility has a maturity date of December 31, 2024 and bears interest based on Secure Overnight Financing Rate (“SOFR”) + 2.0% or Base Rate + 1.5%. “Base Rate” is the highest of (i) KeyBank’s prime rate, (ii) Federal Funds Effective Rate + 0.5%, or (iii) SOFR + 2.0%. Advances under the Revolving Credit Facility are made initially as base rate loans but may be converted to SOFR rate loans at certain times at our discretion. At December 31, 2021, there was no amount outstanding under the Revolving Credit Facility and we had remaining availability of $39.1 million.

The Term Loan is secured under a Master Security Agreement with a pledge of certain underground and surface mining equipment, bears interest at LIBOR + 5.15% and is required to be repaid in monthly installments of $278 thousand including accrued interest. The outstanding principal balance under the Term Loan was $3.3 million at December 31, 2021.

The Credit Agreement contains usual and customary covenants including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary

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limitations, as well as financial covenants. At December 31, 2021, we were in compliance with all debt covenants under the Credit Agreement.

Key Equipment Finance Loan—On April 16, 2020, we entered into an equipment loan with Key Equipment Finance, a division of KeyBank, as lender, in the principal amount of approximately $4.7 million for the financing of existing underground and surface equipment (the “Equipment Loan”). The Equipment Loan bears interest at 7.45% per annum and is payable in 36 monthly installments of $147 thousand. There is a 3% premium for prepayment of the note within the first 12 months. This premium declines by 1% during each successive 12-month period. The outstanding principal balance under the Equipment Loan was $2.2 million at December 31, 2021.

9.00% Senior Unsecured Notes due 2026—On July 13, 2021, we completed an offering of $34.5 million, in the aggregate, of the Company’s 9.00% Senior Unsecured Notes due 2026 (the “Senior Notes”), less $2.4 million for note offering costs. The Senior Notes mature on July 30, 2026, unless redeemed prior to maturity. The Senior Notes bear interest at a rate of 9.00% per annum, payable quarterly in arrears on the 30th day of January, April, July and October of each year, commencing on July 30, 2021. We may redeem the Senior Notes in whole or in part, at our option, at any time on or after July 30, 2023, or upon certain change of control events, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but not including, the date of redemption The outstanding principal balance under the Senior Notes was $34.5 million at December 31, 2021.

J. H. Fletcher & Co. Loan—On July 23, 2021 and November 24, 2021, we entered into an equipment loans with J. H. Fletcher & Co., as lender, in the principal amount of approximately $0.9 million and $3.9 million, respectively, for the financing of underground equipment (the “Fletcher Equipment Loan”). The Fletcher Equipment Loan bears interest at 0% per annum and is payable in 24 monthly installments totaling $200 thousand. The outstanding principal balance under the Fletcher Equipment Loan was approximately $4.6 million at December 31, 2021.

Komatsu Financial Limited Partnership Loan—On August 16, 2021, we entered into an equipment loan with Komatsu Financial Limited Partnership, as lender, in the principal amount of approximately $1.0 million for the financing of surface equipment (the “Komatsu Equipment Loan”). The Komatsu Equipment Loan bears interest at 4.6% per annum and is payable in 36 monthly installments of $36 thousand for the first six months and then at $28 thousand until maturity. The outstanding principal balance under the Komatsu Equipment Loan was approximately $0.9 million at December 31, 2021.

SBA Paycheck Protection Program Loan— On April 20, 2020, we received proceeds from the PPP Loan in the amount of approximately $8.4 million from KeyBank, as lender, pursuant to the PPP of the CARES Act. The purpose of the PPP was to encourage the continued employment of workers. We used all of the PPP Loan proceeds for eligible payroll expenses, lease, interest and utility payments. On July 29, 2021, we were notified by KeyBank that full forgiveness had been approved by the SBA.

​

Refer to Notes 6 and 7 to the Consolidated Financial Statements included in Item 8 of Part I in this Annual Report on Form 10-K for additional information on indebtedness.

Liquidity

As of December 31, 2021, our available liquidity was $61.0 million, comprised of cash and availability under our Revolving Credit Facility. We expect to fund our capital and liquidity requirements with cash on hand, borrowings discussed above and projected cash flow from operations. Factors that could adversely impact our future liquidity and ability to carry out our capital expenditure program include the following:

[[GREPCENT_TABLE]]
[["","\u25cf","Timely delivery of our product by rail and other transportation carriers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Timely payment of accounts receivable by our customers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Cost overruns in our purchases of equipment needed to complete our mine development plans;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Delays in completion of development of our various mines which would reduce the coal we would have available to sell and our cash flow from operations; and"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Adverse changes in the metallurgical coal markets that would reduce the expected cash flow from operations."]]
[[/GREPCENT_TABLE]]

​

Capital Requirements

Our primary use of cash includes capital expenditures for mine development and for ongoing operating expenses. During 2021 we spent $29.5 million primarily for the purchase of mining equipment, infrastructure and development of mines at our Elk Creek and Berwind Complexes. We also used cash to acquire the Amonate assets for $30.1 million. We anticipate capital expenditures of approximately $65-85 million in 2022 as we continue to grow production and take advantage of strong coal markets conditions and refurbish the Amonate preparation plant acquired in December 2021.

As of the date of this Annual Report, management believes that current cash on hand, cash flow from operations and available liquidity under our Revolving Credit Facility will be sufficient to meet its capital expenditure and operating plans. We expect to fund any new reserve acquisitions from cash on hand, cash from operations and potential future issuances of debt or equity securities.

If future cash flows are insufficient to meet our liquidity needs or capital requirements, we may reduce our expected level of capital expenditures and/or fund a portion of our capital expenditures through the issuance of debt or equity securities, the entry into debt arrangements or from other sources, such as asset sales.

Contractual Obligations

The following table summarizes our contractual obligations, excluding debt, as of December 31, 2021:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Payments due by period"],["\u200b","","\u200b","\u200b","","Less Than","","1 \u2013 3","","3 \u2013 5","","More than 5"],["(In thousands)","\u200b","Total","","1 year","","years","","years","","years"],["Minimum royalty obligations","\u200b","$","38,288","\u200b","$","5,965","\u200b","$","11,950","\u200b","$","8,785","\u200b","$","11,588"],["Asset retirement obligations, discounted","\u200b","","22,549","\u200b","","489","\u200b","","2,701","\u200b","","1,594","\u200b","","17,765"],["Take or pay obligations","\u200b","","13,184","\u200b","","11,079","\u200b","","2,105","\u200b","","\u2014","\u200b","","\u2014"],["Total","\u200b","$","74,021","\u200b","$","17,533","\u200b","$","16,756","\u200b","$","10,379","\u200b","$","29,353"]]
[[/GREPCENT_TABLE]]

​

Minimum royalties represent the contractual minimum amounts to be paid monthly, quarterly or annually for the right to access mineral properties and mine certain reserves and resources. The amounts are generally recoupable against future production royalties to be paid. Asset retirement obligations represent those costs to be paid in the future to retire a tangible long-lived asset. Take or pay obligations represent those liquidated damage obligations as determined by contract volume minimums for transportation of coal at the representative rates of transportation or a portion thereof.

​

Off-Balance Sheet Arrangements

As of December 31, 2021, we had no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenue and expenses reported for the period then ended.

Mine Development Costs. Mine development costs represent the costs incurred to prepare future mine sites and/or seams of coal for mining. These costs include costs of acquiring, permitting, planning, research, and developing access to identified mineral reserves and other preparations for commercial production as necessary to develop and

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permit the properties for mining activities. Mine development costs are capitalized and amortized on a units-of-production basis as mining of the associated mine’s assigned reserves takes place. Operating expenditures, including certain professional fees and overhead costs, are not capitalized but are expensed as incurred.

Asset Retirement Obligations. We recognize as a liability an asset retirement obligation, or ARO, associated with the retirement of a tangible long-lived asset in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. The initially recognized asset retirement cost is amortized using the same method and useful life as the long-lived asset to which it relates. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.

Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the related asset.

Occupational Disease (Pneumoconiosis) Obligations. We recognize as a liability to provide for occupational illness (pneumoconiosis) benefits to eligible employees, former employees and dependents as required by the Mine Act. The occupational illness benefit obligation represents the present value of the actuarially computed present and future liabilities for such benefits over the employees’ applicable years of service using a discount rate.

Estimating the future occupational disease (pneumoconiosis) benefits requires management to make estimates and judgments regarding timing and existence of a liability utilizing third-party actuaries assist in preparing what constitutes adequate liability amounts. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement awards in the legal and regulatory environments.

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 estimated fair value.

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.

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. We initially recognize the effects of a tax position when it is more than 50% likely, based on the technical merits that the position will be sustained upon examination. Our determination of whether or not a tax position has met the recognition threshold depends on the facts, circumstances, and information available at the reporting date.

A valuation allowance may be recorded to reflect the amount of future tax benefits that management believes are not likely to be realized. The assessment takes into account expectations of future taxable income or loss, available tax planning strategies and the reversal of temporary differences. The development of these expectations involves the use of estimates such as production levels, operating profitability, timing of development activities and the cost and timing of reclamation work. If actual outcomes differ from our expectations, we may record an additional valuation allowance through income tax expense in the period such determination is made.

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Recent Accounting Pronouncements. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 2—Summary of Significant Accounting Policies—Recent Accounting Pronouncements.”