SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 18, 2003 (July 18, 2003)
Arch Coal, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-13105 43-0921172
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
One CityPlace Drive, Suite 300, St. Louis, Missouri 63141
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (314) 994-2700
Page 1 of 4 pages.
Exhibit Index begins on page 4.
Item 5. Other Events and Item 7. Financial Statements and ProForma Financial
Information
On July 18, 2003, Arch Coal, Inc. (the "Company"), announced via press
release its earnings and operating results for the second quarter of 2003. A
copy of the Company's press release is attached hereto and incorporated herein
by reference in its entirety.
The Company is also providing the following reconciliation of Adjusted
EBITDA for its Arch Western Resources, LLC subsidiary:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- -----------------------------
2003 2002 2003 2002
---------- ---------- ------------ -------------
Net income (loss) $ 7,127 $ 2,489 $ 254 $ 3,317
Cumulative effect of accounting change - - 18,278 -
Interest expense, net 6,476 8,549 13,056 15,038
Depreciation, depletion and amortization - Arch Western Resources 16,115 18,912 30,980 35,558
DD&A - Equity interest in Canyon Fuel Company, LLC 5,826 6,488 11,319 14,204
Expenses from early debt extinguishment 4,896 - 4,896 -
---------- ---------- ------------ -------------
Adjusted EBITDA $ 40,440 $ 36,438 $ 78,783 $ 68,117
========== ========== ============ =============
Note: Adjusted EBITDA is defined as net income before the effect of net
interest expense; income taxes; our depreciation, depletion and
amortization; our equity interest in the depreciation, depletion and
amortization of Canyon Fuel Company, LLC; cumulative effect of
accounting changes; and expenses resulting from early extinguishment
of debt.
Adjusted EBITDA is not a measure of financial performance in
accordance with generally accepted accounting principles, and items
excluded to calculate 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, income from operations, cash flows from operations or as a
measure of our profitability, liquidity or performance under generally
accepted accounting principles. We believe that Adjusted EBITDA
presents a useful measure of our ability to service and incur debt
based on ongoing operations. Furthermore, analogous measures are used
by industry analysts to evaluate operating performance. Investors
should be aware that our presentation of Adjusted EBITDA may not be
comparable to similarly titled measures used by other companies.
Item 7. Financial Statements and Exhibits.
(c) The following Exhibit is filed with this Current Report on Form 8-K:
Exhibit No. Description
99 Press Release dated as of July 18, 2003
Page 2 of 4 pages.
Exhibit Index begins on page 4.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: July 18, 2003 ARCH COAL, INC.
By: /s/ Janet L. Horgan
Janet L.Horgan
Assistant General Counsel
and Assistant Secretary
Page 3 of 4 pages.
Exhibit Index begins on page 4.
EXHIBIT INDEX
Exhibit No. Description
99 Press Release dated as of July 18, 2003
Page 4 of 4 pages.
Exhibit 99
News from
Arch Coal, Inc.
- -------------------------------------------------------------------------------
FOR FURTHER INFORMATION:
Deck S. Slone
Vice President,
Investor and Public Relations
(314) 994-2717
FOR IMMEDIATE RELEASE
July 18, 2003
Arch Coal, Inc. Reports Second Quarter Results
Highlights:
o Income available to common shareholders (excluding items discussed
below) of $2.7 million, or $.05 per share, vs. income of $2.1
million, or $.04 per share, in 2Q02
o Adjusted EBITDA of $54.8 million, vs. $62.7 million in 2Q02
o Total revenues of $403.1 million, vs. $374.5 million in 2Q02
o Coal sales of 25.7 million tons, vs. 24.9 million tons in 2Q02
o Completion of $700 million Senior Notes offering by Arch Western
subsidiary
o Announced agreement to acquire Triton Coal Company, the seventh largest
U.S. coal company
St. Louis - Arch Coal, Inc. (NYSE:ACI) today reported that for its second
quarter ended June 30, 2003, the company had income available to common
shareholders of $2.7 million, or $.05 per share, before special items of $4.0
million principally related to fees associated with the early extinguishment of
debt and severance costs of $2.0 million associated with ongoing cost-reduction
efforts at the company's eastern operations. In the same quarter of 2002, Arch
had income of $2.1 million, or $.04 per share.
"During the second quarter, sales volumes increased at both our eastern and
western operations, which had a positive impact on both revenues and costs,"
said Steven F. Leer, Arch Coal's president and chief executive officer. (Sales
volumes were 1.7 million tons higher at the company's western operations and 1.3
million tons higher at its eastern operations compared to the first quarter of
2003.) "In addition, we made good progress in our cost reduction program at our
eastern mines, where we reduced costs by $1.55 per ton excluding severance
costs. We will continue to pursue aggressive cost reductions across all of our
operations in the year's second half. We are pleased with the trend line these
efforts have established."
For the six months ended June 30, 2003, Arch Coal had a loss available
1
to common shareholders of $11.1 million, or $.21 per share, excluding severance
costs of $2.6 million, the aforementioned charge related to the early
extinguishment of debt, and a $3.7 million non-cash charge related to the
cumulative effect of an accounting change resulting from the adoption of FAS
143. That compares to a loss of $5.3 million, or $.10 per share, during the same
period of 2002. Total revenues for the six months were $752.7 million and coal
sales totaled 48.3 million tons, vs. $742.9 million and 49.6 million tons in the
comparable period of 2002. Adjusted EBITDA totaled $93.5 million for the first
six months of 2003, compared to $111.8 million in the same period of 2002.
Triton acquisition
On May 29, Arch announced that it had signed a definitive agreement to
acquire Vulcan Coal Holdings LLC, which owns all of the equity of Triton Coal
Company, for a purchase price of $364 million. Triton is the nation's seventh
largest coal producer and the operator of two mines in Wyoming's Powder River
Basin.
"We are excited about this acquisition and its potential to create
long-term value for our shareholders and substantial benefits for our
customers," said Steven F. Leer, Arch Coal's president and chief executive
officer. "We view Triton as an ideal fit with our existing operations in the
Powder River Basin, which is the nation's largest and fastest growing coal
supply region."
Consummation of the transaction is conditioned upon obtaining all necessary
governmental and regulatory consents and other customary conditions.
Senior Notes offering
On June 25, Arch Western Finance LLC, which is a subsidiary of Arch Western
Resources LLC, closed on an offering of $700 million of 6-3/4% senior notes due
2013. (Arch Western Resources is an Arch Coal subsidiary.)
"We were pleased with the strong demand for the Arch Western notes and the
favorable coupon we were able to secure," Leer said. "By capitalizing on the
very low interest rate environment that prevailed at the end of June, Arch
Western was able to lock in attractive rates for a period of 10 years. We
believe this transaction will greatly enhance the company's financial
flexibility in the years ahead."
Arch Western used the proceeds to repay term loans expiring in 2007 and
2008 and totaling $675 million, as well as for general corporate purposes and
fees and expenses related to the offering.
Arch expects to incur after-tax charges in future periods related to
interest rate swap agreements entered into in connection with the term loans
discussed above, which no longer qualify as hedge instruments. The after-tax
impact will be recorded in the following periods: $4.1 million in the second
half of 2003; $8.3 million in 2004; $7.7 million in 2005; $4.8 million in 2006;
2
and $1.9 million in 2007. For the five-day period from June 25th through month
end, Arch recognized $115,000 in after-tax charges related to these interest
rate swap positions.
In addition to the charges described above, the interest rate swap
agreements will be marked to market against current interest rates on a
quarterly basis, with changes in market value affecting Arch's results of
operations for as long as these positions are in effect. As of June 30, 2003,
Arch recognized a $1.0 million gain on the re-measurement of these agreements.
The company cannot predict what impact future changes in market value might have
on its financial position.
U.S. coal markets
During the second quarter, U.S. coal markets continued to show signs of a
rebound, despite a slow start to the summer cooling season, according to Leer.
"Despite generally mild temperatures in May and June, coal demand
strengthened modestly in the second quarter," Leer said. "Moreover, we continue
to see encouraging trends in the marketplace - trends that should translate into
increased coal demand and an improving pricing environment in future quarters."
Increasing electricity demand and high natural gas prices resulted in an
increase in coal consumption at U.S. power plants of 20 million tons, or 8.7%,
during the first three months of 2003 compared to the same period of 2002,
according to the most recent data available from the U.S. Energy Information
Administration. During that same period, coal production declined by 18 million
tons, or 6.5%, driven in large part by a rapidly rationalizing eastern coal
market and continuing pressure on high-sulfur coal markets.
Until recently, excess coal inventories at U.S. power plants had dampened
the market's response to these broad trends, according to Leer. However, Arch
estimates that utility stockpiles are currently 10% to 15% lower than at the
same time last year.
"We believe that the inventory correction that has been under way at U.S.
power plants since early last year is nearing an end," Leer said. "Stockpiles
now appear to be approaching the new and historically very low target levels set
by our customers, who have been aggressively seeking to reduce working capital
in the face of highly competitive U.S. power markets. In coming months, we
expect growing electricity demand to boost customer fuel requirements, and that
should provide an impetus for improving coal demand and pricing."
Edison Electric Institute estimates that U.S. electricity requirements
increased 2.4% during the first six months of 2003 vs. the same period of 2002.
Arch continues to have significant leverage to improvements in coal prices,
according to Leer. At the end of the second quarter, the company had
approximately 35% of its expected 2004 production open to market-based pricing,
and 50% of its 2005 production. (Arch has committed nearly all of its expected
production for the remainder of 2003.)
3
Other developments
The value of Arch's equity investment in Natural Resource Partners
continued to grow during the quarter. In October 2002, Arch contributed reserves
to NRP that had been valued on the company's balance sheet at $84.9 million. In
exchange, Arch received 1.9 million common units of NRP that it sold in an
initial public offering for $33.6 million; an additional 7.7 million common and
subordinated units that the company continues to hold; and 42.25% of the general
partner interest. At NRP's closing price of $32.74 on July 17, Arch's 7.7
million units of NRP were worth more than $250 million.
"We continue to be pleased with the performance of Natural Resource
Partners," Leer said. "The creation of this new entity has been a great vehicle
for unlocking value for our shareholders."
As previously announced, Arch agreed to terms in early April with a large
customer seeking to buy out of the remaining term of an above-market contract.
The buyout resulted in the receipt of approximately $52 million in cash during
the quarter. Arch recorded a deferred gain of approximately $15 million related
to this transaction, which will be recognized ratably through 2012.
Operating statistics
Second Quarter 2003 Regional Analysis:
Eastern Operations Western Operations Total
- ------------------------------ ----------------------------- ------------------------------ --------------------------
Tons sold (in mm) 8.1 17.6 25.7
- ------------------------------ ----------------------------- ------------------------------ --------------------------
Sales price per ton $30.74 $7.37 $14.76
- ------------------------------ ----------------------------- ------------------------------ --------------------------
Cost per ton $31.67 $6.55 $14.50
- ------------------------------ ----------------------------- ------------------------------ --------------------------
Margin $ (.93) $ .82 $ .26
Note: Western operations data do not include the results of 65%-owned Canyon Fuel Company, which is accounted for on the equity
method.
Capital spending and DD&A (in millions):
Q2 2003 Q2 2002 FY 2003 (projected)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Capital spending $21.4 $26.4 $160
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
DD&A $45.4 $50.4 $190
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Note: Actual and projected data on capital spending and depreciation, depletion and amortization include Arch's ownership percentage
in Canyon Fuel Company.
4
Looking ahead
"During the year's second half, Arch will continue to focus on reducing
costs across the corporation as we seek to ensure that we are positioned to
capitalize fully on a rebounding coal market, and to operate profitably during
periods of market weakness," Leer said. "The trends in U.S. coal markets
continue to be encouraging. U.S. coal consumption is on the rise, eastern coal
production continues to rationalize, and natural gas remains prohibitively
expensive for power generation. Moreover, there is a growing consensus in
Washington, D.C. and within the power generation industry that coal must play a
still greater role in meeting America's future electricity requirements. With
our highly productive mines, experienced workforce, and extensive reserves of
clean-burning, low-sulfur and compliance coal in both the eastern and western
United States, Arch Coal should be well positioned to capitalize on such an
environment."
Leer indicated that Arch expected breakeven results in the third quarter of
2003, excluding mark-to-market adjustments and charges related to the
termination of hedge accounting for the interest rate swap agreements discussed
above. Rising interest rates could have a positive impact on the mark-to-market
adjustments, and thus may offset the impact related to the termination of hedge
accounting described above.
A conference call concerning second quarter earnings will be webcast live
today at 11 a.m. EDT. The conference call can be accessed via the "investor"
section of the Arch Coal Web site (www.archcoal.com).
Arch Coal is the nation's second largest coal producer, 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.
5
ARCH COAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ---------------------------
2003 2002 2003 2002
------------------------------ ---------------------------
(Unaudited) (Unaudited)
Revenues
Coal sales $ 378,892 $ 358,990 $ 706,282 $ 717,585
Income from equity investments 12,191 (198) 23,301 1,070
Other revenues 11,995 15,684 23,085 24,287
------------ ------------ ------------ -----------
403,078 374,476 752,668 742,942
------------ ------------ ------------ -----------
Costs and expenses
Cost of coal sales 372,323 340,928 705,963 688,139
Selling, general and administrative expenses 11,890 10,071 23,763 19,940
Amortization of coal supply agreements 4,526 5,374 10,320 10,488
Other expenses 4,972 5,781 9,520 13,373
------------ ------------ ------------ -----------
393,711 362,154 749,566 731,940
------------ ------------ ------------ -----------
Income from operations 9,367 12,322 3,102 11,002
Interest expense, net:
Interest expense (11,667) (14,356) (23,219) (26,358)
Interest income 493 314 826 582
------------ ----------- ------------ -----------
(11,174) (14,042) (22,393) (25,776)
------------ ----------- ------------ -----------
Other nonoperating income (expense):
Expenses resulting from early debt extinguishment (4,823) - (4,823) -
Other nonoperating income 873 - 873 -
------------ ----------- ------------ -----------
(3,950) - (3,950) -
------------ ------------ ------------ -----------
Loss before income taxes and cumulative effect of accounting
change (5,757) (1,720) (23,241) (14,774)
Benefit from income taxes (4,300) (3,800) (8,600) (9,500)
------------ ------------ ------------ -----------
Income (loss) before cumulative effect of accounting change (1,457) 2,080 (14,641) (5,274)
Cumulative effect of accounting change, net of taxes - - (3,654) -
------------ ------------ ------------ -----------
Net income (loss) (1,457) 2,080 (18,295) (5,274)
Preferred stock dividends (1,797) - (2,995) -
------------ ------------ ------------ -----------
Net income (loss) available to common shareholders $ (3,254) $ 2,080 $(21,290) $ (5,274)
============ ============ ============ ===========
Basic and diluted earnings (loss) per common share $ (0.06) $ 0.04 $ (0.41) $ (0.10)
============ ============ ============ ===========
Weighted average shares outstanding
Basic 52,418 52,377 52,401 52,367
Diluted 52,700 52,672 52,654 52,591
============ ============ ============ ===========
Dividends declared per common share $ 0.0575 $ 0.0575 $ 0.1150 $ 0.1150
============ ============ ============ ===========
Adjusted EBITDA (A) $ 54,779 62,658 93,518 $ 111,795
============ ============ ============ ===========
(A) Adjusted EBITDA is defined as net income before the effect of net
interest expense; income taxes; our depreciation, depletion and
amortization; our equity interest in the depreciation, depletion and
amortization of Canyon Fuel Company, LLC; cumulative effect of
accounting changes; expenses resulting from early extinguishment of
debt; and mark-to-market adjustments in the value of derivative
instruments.
Adjusted EBITDA is not a measure of financial performance in
accordance with generally accepted accounting principles, and items
excluded to calculate 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, income from operations, cash flows from operations or as a
measure of our profitability, liquidity or performance under generally
accepted accounting principles. We believe that Adjusted EBITDA
presents a useful measure of our ability to service and incur debt
based on ongoing operations. Furthermore, analogous measures are used
by industry analysts to evaluate operating performance. 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.
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ------------------------------
2003 2002 2003 2002
----------- ------------ -------------- ------------
Net income (loss) $ (1,457) $ 2,080 $ (18,295) (5,274)
Cumulative effect of accounting change - - 3,654 -
Benefit from income taxes (4,300) (3,800) (8,600) (9,500)
Interest expense, net 11,174 14,042 22,393 25,776
Depreciation, depletion and amortization - Arch Coal, Inc. 39,586 43,848 79,097 86,589
DD&A - Equity interest in Canyon Fuel Company, LLC 5,826 6,488 11,319 14,204
Expenses from early debt extinguishment and other nonoperating 3,950 - 3,950 -
----------- ------------ -------------- ------------
Adjusted EBITDA $ 54,779 $ 62,658 $ 93,518 $ 111,795
=========== ============ ============== ============
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2003 2002
-------------------- --------------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 108,779 $ 9,557
Trade receivables 131,123 135,903
Other receivables 29,344 30,927
Inventories 69,434 66,799
Prepaid royalties 4,916 4,971
Deferred income taxes 27,775 27,775
Other 12,612 15,781
--------------------- --------------------
Total current assets 383,983 291,713
--------------------- --------------------
Property, plant and equipment, net 1,319,251 1,284,968
--------------------- --------------------
Other assets
Prepaid royalties 67,078 51,078
Coal supply agreements 12,700 59,240
Deferred income taxes 235,958 221,116
Equity investments 230,092 231,551
Other 52,160 43,142
--------------------- ---------------------
597,988 606,127
--------------------- ---------------------
Total assets $ 2,301,222 $ 2,182,808
===================== =====================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 95,427 $ 113,527
Accrued expenses 146,025 133,287
Current portion of debt 106 7,100
--------------------- ----------------------
Total current liabilities 241,558 253,914
Long-term debt 700,062 740,242
Accrued postretirement benefits other than pension 337,483 324,539
Asset retirement obligations 144,990 117,804
Accrued workers' compensation 80,261 80,985
Other noncurrent liabilities 154,523 130,461
--------------------- ----------------------
Total liabilities 1,658,877 1,647,945
--------------------- ----------------------
Stockholders' equity
Preferred stock 29 -
Common stock 529 527
Paid-in capital 976,350 835,763
Retained deficit (281,266) (253,943)
Treasury stock, at cost (5,047) (5,047)
Accumulated other comprehensive loss (48,250) (42,437)
--------------------- ----------------------
Total stockholders' equity 642,345 534,863
--------------------- ----------------------
Total liabilities and stockholders' equity $ 2,301,222 $ 2,182,808
===================== ======================
NOTE: Certain amounts in the December 31, 2002 balance sheet have been
reclassified to conform with the classifications in the 2003 balance sheet with
no effect on previously reported stockholders' equity.
Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 30,
---------------------------------------------
2003 2002
--------------- ---------------
(Unaudited)
Operating activities
Net loss $ (18,295) $ (5,274)
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion and amortization 79,097 86,589
Prepaid royalties expensed 7,259 3,674
Accretion on asset retirement obligations 7,204 -
Net gain on disposition of assets (1,688) (607)
Income from equity investments (23,301) (1,070)
Net distributions from equity investments 23,622 17,778
Cumulative effect of accounting change 3,654 -
Expenses resulting from early debt extinguishment 4,823 -
Changes in:
Receivables 6,363 3,971
Inventories (2,635) (15,951)
Accounts payable and accrued expenses (21,556) 13,898
Income taxes (8,668) (9,640)
Accrued postretirement benefits other than pension 12,944 (2,527)
Asset retirement obligations (7,592) 3,796
Accrued workers' compensation benefits (724) 3,863
Other 4,326 (1,029)
--------------- ---------------
Cash provided by operating activities 64,833 97,471
--------------- ---------------
Investing activities
Additions to property, plant and equipment (66,941) (96,089)
Proceeds from dispositions of property, plant and equipment 1,839 2,162
Proceeds from coal supply agreements 52,548 -
Additions to prepaid royalties (23,204) (20,037)
--------------- ---------------
Cash used in investing activities (35,758) (113,964)
--------------- ---------------
Financing activities
Net (payments on) proceeds from revolver and lines of credit (72,174) 23,283
Payments on term loans (675,000) -
Proceeds from issuance of senior notes 700,000 -
Debt financing costs (15,468) (8,127)
Proceeds from sale and leaseback of equipment - 9,213
Reductions of obligations under capital lease - (7,691)
Dividends paid (7,829) (6,021)
Proceeds from issuance of preferred stock 139,024 -
Proceeds from sale of common stock 1,594 289
--------------- ---------------
Cash provided by financing activities 70,147 10,946
--------------- ---------------
Increase (decrease) in cash and cash equivalents 99,222 (5,547)
Cash and cash equivalents, beginning of period 9,557 6,890
--------------- ---------------
Cash and cash equivalents, end of period $ 108,779 $ 1,343
=============== ===============
Canyon Fuel Company cash flow information (Arch Coal ownership percentage)
Depreciation, depletion and amortization 11,319 14,204
Additions to property, plant and equipment (5,164) (5,021)