Arch Coal, Inc. Reports First Quarter Results
Arch Coal, Inc. Reports First Quarter Results
April 21, 2004 at 9:02 PM EDT
- Earnings per fully diluted share increases to $1.14
- Coal sales revenues increase 23% vs. same period in 2003
- Adjusted EBITDA totals $147.4 million vs. $38.7 million in 1Q03
- Excluding special items, earnings per fully diluted share climbs to $0.14
- Debt to total capitalization ratio improves to 47%
- Cash balance grows to $323.0 million
St. Louis (April 21, 2004) - Arch Coal, Inc. (NYSE:ACI) today announced that it had income available to common shareholders of $68.2 million, or $1.14 per fully diluted share, for its first quarter ended March 31, 2004. Included in the company's first quarter results were certain gains related to the sale of a significant portion of the company's remaining interest in Natural Resource Partners (NRP), as well as charges related to severance costs at the soon-to-be-idled Skyline Mine and the termination of hedge accounting for interest rate swaps.
Excluding these items, Arch had income available to common shareholders of $7.7 million, or $0.14 per fully diluted share, for the first quarter of 2004. (See the attached table for a more complete reconciliation.) During the same period of 2003, Arch recorded a net loss available to common shareholders of $18.0 million, or $0.34 per fully diluted share, which included the cumulative effect of an accounting change resulting from the adoption of FAS 143, "Accounting for Asset Retirement Obligations."
"As expected, higher average realizations in both the east and west led to improved margins and stronger overall results during the first quarter," said Steven F. Leer, Arch Coal's president and chief executive officer. "These results were supported by a solid overall performance by our mining operations despite challenges related to rail service."
The March disposition of most of the company's remaining stake in Natural Resource Partners was another highlight of the quarter, according to Leer. "In a period of just 18 months, Arch has been able to convert non-strategic assets valued at $85 million on its balance sheet into proceeds of nearly $250 million," he said. Arch ended the quarter with a cash balance of $323.0 million.
The results for the quarter include the effects of implementing FASB Staff Position FAS 106-b "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FAS 106-b) in anticipation of its ratification by the Financial Accounting Standards Board (FASB) in April 2004. Implementation of FAS 106-b resulted in a reduction in Arch's postretirement benefit obligation of $68 million and a reduction in its anticipated 2004 postretirement medical expenses of $18.1 million. Of this amount, $4.5 million is reflected in Arch's results of operations for the quarter ended March 31, 2004. If the FASB does not ratify the pronouncement prior to the company's filing of its quarterly financial statements on Form 10-Q, Arch will revise its quarterly results to exclude its impact. The impact of this implementation offsets the effects of changes to other actuarial assumptions incorporated at the beginning of the year.
U.S. coal markets strengthened further during the quarter
During the quarter, U.S. coal markets benefited from a strengthening economy, declining utility stockpiles and continuing pressure on natural gas supplies. Through the first three months of 2004, U.S. power output increased approximately 2.8% compared to the comparable period in 2003, according to Edison Electric Institute, due in part to increased industrial activity. Based on recent trends, it appears likely that coal consumption is increasing at an even faster pace than electric generation. As a result, Arch estimates that stockpiles at U.S. power plants declined by more than 15% during the quarter, despite entering January at relatively low levels. In addition, the rebound in global steel demand has boosted requirements for metallurgical coal.
"We believe the drivers are in place for a long and sustained period of growth in U.S. coal demand," Leer said.
Although Arch entered the year with the vast majority of its expected first quarter output already committed and priced, the company benefited from strong pricing on the small volume of coal it had available for spot sales. Arch directed some of that coal into metallurgical markets, with metallurgical shipments increasing by approximately 200,000 tons, or 50%, compared to the same period of last year. At present, Arch expects metallurgical sales to exceed 2.5 million tons for 2004, or roughly double the level of last year.
Arch continues to have unpriced tonnage for delivery in the second half of 2004, due in part to ongoing efforts to add incremental production at the company's eastern operations. "With a relatively modest investment, we believe we can add approximately 500,000 tons of incremental production at our eastern mines this year," Leer said. As a result of these efforts, Arch has raised its 2004 forecast for capital spending from $160 million to approximately $185 million.
Arch continues to have significant volumes open to market-based pricing in 2005 and 2006. At present, Arch has priced approximately 65% of its expected output for 2005, and approximately 50% of its expected output for 2006.
As for the remainder of 2004, Arch still has nearly 5% of its expected production yet to be priced based on expected levels of production and rail availability.
NRP sale enhances financial condition
In March, Arch sold 2.6 million of its 2.9 million common units in Natural Resource Partners in a private transaction for $100 million. The transaction, which resulted in a gain of approximately $81.5 million, nearly completes a multi-phased effort to unlock the value of certain non-strategic assets that had been undervalued on the company's balance sheet.
"Through this effort which began with the formation of Natural Resource Partners in October 2002, we believe we have created tremendous value for our shareholders, while greatly enhancing Arch's financial flexibility," Leer said.
Arch still holds approximately 279,000 shares of NRP, which had a market value of approximately $10.5 million based on the closing price of NRP on April 20.
Arch is currently in its strongest financial condition since it acquired its western assets in July 1998. Arch's debt to total capitalization has declined by 37 points in the past three years and currently stands at 47%. Arch's net debt to total capitalization - which reflects the corporation's current cash balance of $323.0 million - now stands at just 33%.
"We are in an excellent position to grow in a marketplace that is likely to create many exciting opportunities in the years ahead," Leer said. "We are particularly excited about the potential for internal growth on our large and strategic reserve base."
Arch plans to defend Triton acquisition in court
In early April, the Federal Trade Commission filed a lawsuit in federal district court to block Arch's proposed acquisition of Triton Coal Company. Arch continues to view the acquisition of Triton as pro-competitive and plans to defend the transaction in court.
"We believe that the FTC incorrectly excluded from its analysis the fact that competition in the coal business is intense," Leer said. "Coal companies must work tirelessly to reduce costs and improve productivity in order to survive in this challenging marketplace, which includes hundreds of competitors in many different coal supply regions. Consumers of electricity are the clear beneficiaries of this effort to continuously improve."
The hearing is scheduled to begin on June 21 in U.S. District Court. "We look forward to presenting the facts in court," Leer said.
Note: Western operations data do not include the results of 65%-owned Canyon Fuel Company, which is accounted for on the equity method.
(1) Per ton realizations and costs as detailed above exclude transportation costs that are billed to customers. Eastern transportation costs totaled $10.4 million in the first quarter of 2004 and $9.0 million in the first quarter of 2003. Western transportation costs totaled $1.5 million in the first quarter of 2004 and $2.4 million in the first quarter of 2003.
(2) Per ton costs detailed above exclude postretirement medical costs totaling $13.8 million in the first quarter of 2004 and $14.7 million in the first quarter of 2003.
Note: Data on capital spending and depreciation, depletion and amortization include Arch's ownership percentage in Canyon Fuel Company. Projected capital spending and DD&A do not include Triton Coal Company, other potential acquisitions or reserve additions.
During 2004, Arch expects to benefit significantly from higher average sales prices in both the east and west, despite the fact that the vast majority of its expected output was committed and priced prior to the recent strengthening in coal markets. "We believe Arch has great potential for higher levels of profitability over the course of the next several years, as an increasing percentage of our contracts expire and is repriced in the prevailing market environment," Leer said.
For the second quarter of 2004, Arch expects profits of between $0.20 and $0.30 per fully diluted share, excluding charges related to the termination of hedge accounting for interest rate swaps. The company expects each quarter of 2004 to be stronger than the last, due principally to the timing of when new commitments were signed.
A conference call concerning first quarter earnings will be webcast live today at 11 a.m. Eastern. The conference call can be accessed via the "investor" section of the Arch Coal Web site (www.archcoal.com).
Arch Coal is one of the nation's largest coal producers, with subsidiary operations in West Virginia, Kentucky, Virginia, Wyoming, Colorado and Utah. Through these operations, Arch Coal provides the fuel for approximately 6% of the electricity generated in the United States.
Forward-Looking Statements: Statements in this press release which are not statements of historical fact are forward-looking statements within the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on information currently available to, and expectations and assumptions deemed reasonable by, the company. Because these forward-looking statements are subject to various risks and uncertainties, actual results may differ materially from those projected in the statements. These expectations, assumptions and uncertainties include: the company's expectation of continued growth in the demand for electricity; belief that legislation and regulations relating to the Clean Air Act and the relatively higher costs of competing fuels will increase demand for its compliance and low-sulfur coal; expectation of continued improved market conditions for the price of coal; expectation that the company will continue to have adequate liquidity from its cash flow from operations, together with available borrowings under its credit facilities, to finance the company's working capital needs; a variety of operational, geologic, permitting, labor and weather related factors; and the other risks and uncertainties which are described from time to time in the company's reports filed with the Securities and Exchange Commission.