Our Approach to Climate
Arch recognizes the importance of reducing greenhouse gas emissions on a systematic and sustained basis, and has taken significant steps in recent years to reduce its carbon footprint. The company’s pivot towards steel markets — and towards higher quality but lower volume metallurgical products — has driven significant reductions in its emissions profile as well.
Arch believes that the accelerating global effort to combat climate change and to build a low-carbon economy is creating — and will continue to create — significant, value-enhancing opportunities for smart, well-positioned resource providers. In keeping with this longstanding view, Arch initiated a strategic pivot more than a decade ago with the objective of intensifying our focus on steel and metallurgical markets, which we believe will be significant beneficiaries of global de-carbonization efforts. We believe that a significant amount of new steel will be required in a de-carbonizing world, given steel’s importance in sustainable urban design, infrastructure replacement and the construction of essential de-carbonization tools such as mass transit systems, wind turbines and electric vehicles. We also believe that Arch is exceptionally well-positioned to capitalize on this expected growth in global steel demand, given our extensive reserves of high-quality metallurgical coal, which is an essential input in the production of new steel; our large, modern and efficient metallurgical mines; and our deep expertise in the mining, marketing and transportation of coal products. We project that we will generate approximately 80 percent of our adjusted EBITDA from our metallurgical business during the next five years, and an ever-larger percentage over time.
Arch’s strategic pivot is also acting to mitigate our principal climate-related risk — the world’s shift away from thermal coal as a primary source of power generation. As we have expanded our metallurgical portfolio, we have correspondingly reduced our thermal coal asset base via asset sales, mine closures and the continuous streamlining and rightsizing of our thermal portfolio. Over the past decade, we have reduced our thermal coal output by more than 55 percent — from approximately 160 million tons sold in 2010 to approximately 71 million tons sold in 2022 — and continue to drive forward with further reductions. Arch continues to explore strategic alternatives for our remaining thermal assets, while accelerating final reclamation activities at our thermal coal operations in the Powder River Basin of Wyoming. As part of this latter effort, we have completed approximately 75 percent of the final reclamation work at our Coal Creek mine since the beginning of 2021. At the same time, we are continuing to focus on optimizing cash flows from our remaining thermal assets, and to use a portion of this cash to pre-fund our final closure obligations via what we believe to be an industry-first thermal mine reclamation fund. Arch has now built the balance in that fund to approximately $137 million (as of March 31, 2023). That total is roughly equivalent to the asset retirement obligation (ARO) at the Black Thunder mine, which constitutes the vast majority of the legacy thermal segment’s final closure obligation. Arch plans to contribute an additional $10 million to $20 million into this thermal mine reclamation fund over the course of the next several quarters — along with the interest generated by the fund over time — which should ensure that sufficient cash is available to complete final reclamation work at Black Thunder when the time comes.
The systematic, market-driven wind-down of our thermal operations provides key stakeholders — including employees, coal communities and economically sensitive power consumers — the time they need to adjust to a changing landscape.
In May 2021, Arch joined ResponsibleSteelTM, the steel industry’s first global not-for-profit multi-stakeholder standard and certification initiative. Arch is the first and only U.S. metallurgical coal producer to join the organization to date. Arch is targeting securing ResponsibleSteel certification at the Leer mine by 2025, and thereafter plans to secure certification at its other metallurgical operations.
Near-Term Climate Strategy: In keeping with Arch’s strategic pivot, we have built — and continue to expand — a world-class metallurgical franchise, fueled in large part with cash generated from our legacy thermal assets. During the past six-plus years, we have generated nearly $1.2 billion more in cash than we have invested in maintenance capital at our thermal mines, and have directed much of that excess cash to the buildout of our metallurgical portfolio, as well as to perform and establish funding for final reclamation work at our Powder River Basin operations. Since the fourth quarter of 2016, Arch has directed nearly 90 percent of our total capital spending to our metallurgical segment. We recently commissioned another worldclass longwall mine, Leer South, on our high-quality Leer metallurgical reserves in northern West Virginia, at a total investment of approximately $400 million. In support of this buildout of our metallurgical franchise, we have focused intensively in recent years on building a robust customer base in the international arena, including Asia, where new steel production and demand is expected to be greatest.
Given that high-quality metallurgical coal is more valuable than thermal coal, Arch expects to produce far less coal in our new configuration, but to generate significantly greater value for our stakeholders. In short, Arch is transitioning from a supplier of higher-volume, lowervalue thermal products, to a supplier of higher-value, lower-volume metallurgical products. In addition, Arch’s core metallurgical mine portfolio consists exclusively of underground mines, which rely on electricity as their principal energy source, in contrast to our thermal operations, which are largely surface mines that rely principally on diesel fuel. Consequently, Arch’s energy usage will become increasingly climate-compatible as the U.S. power system continues its shift to renewable and other low-carbon resources. In keeping with these developments, Arch’s Scope 1 and Scope 2 emissions have declined by an estimated 47 percent since 2011, and should decline further over the coming decade.
Medium-Term Climate Strategy: Importantly, Arch is focusing on premium-quality products as we build out our metallurgical portfolio, with approximately 90 percent of our total metallurgical coal output consisting of high-quality High-Vol A and Low-Vol metallurgical coals. That’s significant for multiple reasons, including the fact that the use of premium-quality metallurgical coal supports a more efficient steel-making process, which — in turn — lowers the carbon dioxide-equivalent emissions from that process. Arch plans to maintain this focus on high-quality metallurgical coals, and expects the value of such coals to continue to grow as requirements for de-carbonization intensify. In short, we believe our premium metallurgical product slate represents a significant competitive advantage today, and that it will represent an even greater competitive advantage in the future, as steel-makers pursue incremental reductions in their CO2-equivalent (CO2e) emissions.
Long-Term Climate Strategy: While incremental reductions in CO2e emissions will be critical in the intermediate term, we believe steel producers will need to de-carbonize the steelmaking process entirely in time, in keeping with the requirements of a net zero economy. Given the significant amount of integrated steelmaking infrastructure already in place around the globe — as well as the current lack of commercially available low-carbon steel-making solutions — Arch expects metallurgical coal to play an essential role in new steel production for the next several decades or more. At the same time, we are exploring ways in which we can support — and participate in — the development of increasingly low-carbon and ultimately zero carbon steels. Moreover, we believe that maintaining a sophisticated understanding of the pace and shape of steel technology advances will facilitate smart decision-making surrounding our future capital deployment, including reducing the likelihood of stranded investments. Importantly, we also believe such engagement will help to prepare Arch for the next strategic pivot when the time comes.
Arch’s transition towards steel markets, which are expected to play a pivotal role in global de-carbonization efforts, is the driving force behind its long-term financial strategy. Over the course of the past decade, Arch has allocated the vast majority of its capital spending budget to its metallurgical portfolio. In the process, that portfolio has expanded to providing a projected 80 percent of the company’s adjusted EBITDA on average, versus just 25 percent in 2010. With our parallel efforts to identify strategic alternatives for our thermal assets or to execute an accelerated wind-down of those assets, we expect the metallurgical portfolio to approach 100 percent of our EBITDA generation over time.
Estimated 2010 Segment-Level
EBITDA Breakout
(by coal type)
In 2010, Arch’s metallurgical segment furnished approximately 25 percent of cash generation
Arch
Capital Spending
(percent by segment, since Q4 2016)
Arch will continue to direct the vast majority of its capital budget to its core metallurgical segment
Segment-Level
EBITDA Breakout
(by coal type, on an estimated basis for 2023-2027)
Arch’s metallurgical segment is projected to provide approximately 80 percent of segment-level EBITDA in the five-year period from 2023-2027
Targeted Intermediate-Term
EBITDA Breakout
(by coal type)
Arch is executing a systematic transition towards becoming a pure-play metallurgical coal producer
Declining Greenhouse Gas Emissions
Significant reductions across the operating portfolio of Arch and its subsidiaries since 2011
Reducing Energy Intensity
In addition to the structural shift in our business strategy, our operating subsidiaries are sharply focused on reducing energy intensity. Every one of our subsidiary mining operations has an on-site rail-loading facility that allows for the movement of their products to their customer base in a highly energy-efficient manner. In addition, Arch’s Wyoming subsidiary makes extensive use of conveyor systems to reduce truck haul distances, which in turn reduces both energy consumption and diesel requirements. In total, Arch’s Wyoming operations produce products that provide around 200 times more energy than is consumed in the mining process.
Arch’s core metallurgical business segment is comprised of large underground mines that rely principally on electricity as their energy source. In each instance, the primary production equipment at these subsidiary operations — as well as the preparation and loading facilities — are electric-powered.
As part of their overall efficiency efforts, Arch subsidiaries employ a variety of electric demand management tools and equipment to reduce their need to draw electric power from the grid. These efforts include the use of variable frequency drives (VFDs) on large-capacity and electric motor-driven equipment; power correction capacitors; voltage regulators; and demand timing measures.
The use of VFDs on belt conveyors, pressure pumps and mine fans allows motor torque to be matched with output demand, resulting in reduced power draw during times of reduced need. Matching output to demand reduces the overall electrical usage required to operate the mine, and reduces the mine’s draw of power from the national grid.
Further, Arch subsidiaries rely on automatic-switching and power-factor-correction capacitors. These capacitors keep the mines’ power factor between 95 and 96 percent, versus a more typical 88 percent. As an example of what this means from an energy savings perspective, the Leer mine’s power demand for a typical month — at a 95 percent power factor — is 24,000 kVA. Without the capacitors, the kVA demand — at an 88 percent power factor — would be 25,909 kVA. In other words, the use of this technology facilitates an ~8 percent reduction in power demand, and thus an ~8 percent reduction in associated carbon emissions.
Over the past six-plus years, Arch has directed nearly 90 percent of its capital spending towards it metallurgical portfolio.
Diesel Usage
After electricity, Arch’s largest energy source is diesel fuel, with the company’s Thunder Basin thermal subsidiary generally — and the Black Thunder mine specifically — the predominant user. Given this fact, Arch launched an initiative at Black Thunder targeting a reduction in diesel fuel use per ton of coal uncovered. Each year, Arch establishes a target for this efficiency and incents its Thunder Basin subsidiary operation to meet it. Operating practices and equipment efficiency factors are monitored and adjusted continually to drive improved operating performance. Through this effort, the Black Thunder mine has improved the efficiency of its fleet and systematically reduced its diesel use per ton of coal uncovered.
Fuel Use at Black Thunder Mine
(gallons of diesel used per ton of coal uncovered as well as total consumption)
| Year | Target | Actual | Gallons (mm) |
|---|---|---|---|
| 2016 | 0.58 | 0.53 | 35.4 |
| 2017 | 0.54 | 0.51 | 35.0 |
| 2018 | 0.54 | 0.49 | 34.3 |
| 2019 | 0.52 | 0.49 | 36.6 |
| 2020 | 0.53 | 0.47 | 27.3 |
| 2021 | 0.65 | 0.56 | 26.7 |
| 2022 | 0.58 | 0.45 | 32.0 |
Fuel Use vs. Target at Black Thunder Mine
(in gallons per ton uncovered)
Total Energy Consumed by Arch Subsidiary Operations
Arch’s subsidiary operations track the total energy they consume in mining and reclamation activities. The table below represents the total energy from both renewable and non-renewable sources and the corporate-wide trend in energy consumption. As discussed, this downward trend represents Arch’s strategic pivot toward steel and metallurgical markets, as well as its transition away from thermal coal production, which tends to rely on more energy-intensive surface mining operations. The total energy consumed by Arch’s subsidiary operations has declined by more than 30 percent since 2015.
Energy Consumed by Arch’s Subsidiary Operations
(in millions of mega-joules)
Arch’s subsidiary operations purchase all of their electrical power from the U.S. electric grid. Our regional electricity suppliers provide regularly updated data on the percentage of power they generate using renewable sources, and Arch relies on these published numbers to quantify our mix of renewable versus non-renewable power purchases. Substantially all non-electrical energy sources used by our subsidiaries come in the form of fossil fuels consumed in the mining fleet. Arch derives none of its non-electrical energy from biofuels or other renewable liquid or solid sources.
Total Energy Consumed by Source
(renewable vs. non-renewable as a percentage, for Arch and its operating subsidiaries)
| Source | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|
| Renewable | 1.5% | 1.7% | 1.9% | 2.0% | 2.8% | 3.5% | 3.8% | 3.0% |
| Non-Renewable | 98.5% | 98.3% | 98.1% | 98.0% | 97.2% | 96.5% | 96.2% | 97.0% |
Total Energy Consumed by Source
(renewable vs. non-renewable in millions of giga-joules, for Arch and its operating subsidiaries)
| Source | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|
| Renewable | 179 | 157 | 176 | 188 | 233 | 244 | 269 | 241 |
| Non-Renewable | 11,527 | 8,983 | 9,219 | 9,391 | 8,220 | 6,803 | 6,781 | 7,889 |
Total Electricity Consumed by Source
(renewable vs. non-renewable as a percentage, for Arch and its operating subsidiaries)
| Source | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|
| Renewable | 6.0% | 6.5% | 6.8% | 7.0% | 9.5% | 10.8% | 12.3% | 9.3% |
| Non-Renewable | 94.0% | 93.5% | 93.2% | 93.0% | 90.5% | 89.2% | 87.7% | 90.7% |
Total Electricity Consumed by Source
(renewable vs. non-renewable in thousands of megawatt-hours, for Arch and its operating subsidiaries)
| Source | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|
| Renewable | 50 | 44 | 49 | 52 | 65 | 68 | 75 | 67 |
| Non-Renewable | 783 | 633 | 676 | 691 | 616 | 562 | 533 | 656 |
Percentage of Total Energy Consumed from Electrical Grid
(for Arch and its operating subsidiaries)
| Source | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|
| Electrical Grid | 25.6% | 26.6% | 27.8% | 27.9% | 29.0% | 32.2% | 31.0% | 32.0% |
| Other Energy Sources | 74.4% | 73.4% | 72.2% | 72.1% | 71.0% | 67.8% | 69.0% | 68.0% |
As part of its ongoing transition towards steel markets and away from power markets, Arch has embarked upon a plan to systematically reduce the footprint of its subsidiary thermal operations, which will drive a corresponding reduction in the consumption of other energy sources corporation-wide. As discussed, our subsidiary thermal operations are principally surface mines that rely on diesel fuel as their primary energy source, versus our subsidiary metallurgical mines, which are underground and rely principally on electricity from the nation’s electric grid. As a result principally of the planned, systematic wind down of our subsidiary thermal operations, we expect to reduce our consumption of non-renewable energy sources significantly over time.
Emissions Reduction Efforts at the West Elk Mine
As an underground mine, the West Elk mine in Colorado must ventilate the mining space to provide fresh air for our employees and to reduce methane concentrations to safe levels for miners. The mine employs a combination of forced air ventilation and boreholes drilled from the surface to extract the methane from the mine works as operations progress. West Elk’s intensive and focused efforts have led to a significant reduction in methane emissions over the course of the past decade.
In addition, West Elk has captured and concentrated some of the methane gas generated from within the mine for the past 10 years, utilizing it for heating the ventilation air during cold winter months. This heated air improves equipment efficiency as well as worker safety and comfort, and the combustion of the methane serves to reduce emissions significantly. West Elk has engaged an outside specialty contractor, in coordination with the state of Colorado, to fabricate and deploy a specialized flare designed to combust the methane emitted from the boreholes. This flare — when operating — reduces mine methane emissions still further through the elimination of more than 90 percent of borehole emissions. At present, geologic methane levels at West Elk are very low, rendering the use of the flare infeasible and unnecessary.
West Elk has also worked diligently over many years to reduce energy consumption through electrical demand and utility initiatives. These initiatives include:
- The use of capacitor banks and high voltage regulators that enable the mine to normalize the rate of energy draw from the local utility, thus improving overall energy efficiency.
- The deployment of a compressed air system and time-of-use practices, including controls that automatically shut off equipment and conveyors between system demands and during idle times.
- The installation of a blowing ventilation system that has reduced energy requirements by approximately 33 percent.
These efforts result in a reduction in energy usage of more than 2.5 million kilowatt-hours annually.
Low-Carbon Opportunities
Arch recently commissioned a high-quality, highly efficient metallurgical mine in West Virginia, at an investment of approximately $400 million. As an underground longwall mine, it uses electricity as its primary energy source, and its high-quality products should — in some circumstances — help facilitate potential reductions in the emissions profile of its customer base. Perhaps most significantly, it will contribute to Arch’s transition from a producer of high-volume, lower-quality products to a producer of low-volume, higher-quality products, which will facilitate the ongoing reduction in the company’s overall CO2e emissions.
Arch’s transition towards metallurgical mines is accompanied by a transition towards a greater reliance on electricity, which is increasingly reliant on renewable resources. As a result, Arch’s subsidiary operations are generally targeting increasing the percentage of renewable energy in their aggregate energy use mix over time. In 2022, Arch’s electricity providers sourced 9.3 percent of their power generation from renewable resources.
Greenhouse Gas Emissions
Arch has been tracking carbon emissions from its subsidiary operations for many years. The company tracks Scope 1 and 2 emissions — including power purchases, materials usage, fuel utilization, and anthropogenic sources — across its operational fleet to calculate the direct or, in the case of purchased power, indirect functional emissions generated in the mining and transferring of resources. While acquisitions and divestitures, as well as other factors, have caused significant swings in emissions levels on a year-to-year basis, the company’s combined Scope 1 and Scope 2 emissions have declined by 47 percent since 2011 and are expected to fall further as production levels at its subsidiary thermal operations continue to decline over time.
Arch Greenhouse Gas Emissions
(in thousands of metric tons CO2e)
Summary of Scope 3 Emissions
In 2021, we developed initial Scope 3 GHG emissions calculations based on downstream categories 9, 10, and 11 in the GHG Protocol. These include the Scope 3 emissions categories of Downstream Transportation and Distribution, Processing of Sold Products, and Use of Sold Products for thermal and metallurgical coal products produced by Arch. For 2022 GHG emissions, Arch is in the process of updating our Scope 3 emissions to include additional categories 1, 2, 3, 4, 5, 6, 7, 8, and 12. We anticipate updated Scope 3 calculations for 2022 emissions to be completed by Q3 2023.
Scope 3 emissions are estimated using Arch’s operational data as inputs, the GHG Protocol Corporate Value Chain (Scope 3) Standard as the primary guidance for carbon accounting, and the established emission factors from the U.S. Environmental Protection Agency (EPA), U.S. Department of Energy (DOE), and GHG Protocol Standard Tools. Results are presented in a range of values to demonstrate the variability in these emission estimates.
Specific Accounting Methods for Coal Transportation, Processing, and End Use
GHG emissions for coal transportation are estimated using the distance-based method; input data from Arch operations (product transportation modes, routes, and product delivery volumes for each Arch facility); and the GREET 2019 model developed by Argonne National Laboratory. The distance for international shipping via colliers is estimated using public online shipping estimators.
GHG emissions for the direct use-phase of coal combustion are estimated using the fuel-based method and are based on the volumes and heat contents of Arch’s coal products. Emission factors are applied from established sources including U.S. EPA, U.S. DOE, and GHG Protocol Standard Tools.
GHG emissions for coal processing include coke production for steelmaking from metallurgical coal. Emissions are calculated using the average-data method and are estimated based on the metallurgical coal product volume and emissions factors from the 2006 Intergovernmental Panel on Climate Change (IPCC) Guidelines for National Greenhouse Gas Inventories for the processing of metallurgical coal into coke for steelmaking.
Summary of Scope 3 Emissions Results
| Scope 3 Category | Supply Chain Activities | Emissions (MMT CO2e) | ||
|---|---|---|---|---|
| High | Low | Average | ||
| Downstream Transportation and Distribution | Shipment of products by rail and ocean vessel. | 7.34 | 7.34 | 7.34 |
| Processing of Sold Products | Conversion of metallurgical coal into coke for use in steelmaking. | 2.68 | 2.68 | 2.68 |
| Use of Sold Products | Combustion of thermal coal for electricity production and metallurgical coal (as coke) for steelmaking. | 138.44 | 117.63 | 129.75 |
| Totals | 148.45 | 127.65 | 139.76 | |
