Oct 30 2010
Arch Coal, Inc. (NYSE: ACI) today reported third quarter 2010 net income of $46.7 million, or $0.29 per diluted share, compared with net income of $25.2 million, or $0.16 per diluted share, in the prior-year period.
Excluding certain charges, third quarter 2010 adjusted net income was $57.4 million, or $0.35 per diluted share. The charges for the third quarter include a pre-tax charge of $10.0 million related to non-cash amortization of coal supply agreements acquired in the Jacobs Ranch transaction as well as a pre-tax expense of $6.8 million related to non-recurring debt extinguishment costs on the redemption of $500 million of Arch Western Resources senior notes due 2013.
Third quarter 2010 revenues grew 42 percent versus the prior-year quarter on more favorable coal market conditions and the inclusion of Jacobs Ranch volume. Income from operations more than doubled over the same time period and adjusted earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") increased 67 percent to reach $201 million in the third quarter of 2010.
"Arch's strong quarterly financial results were driven by better margins in each of our operating regions compared with a year ago," said Steven F. Leer, Arch's chairman and chief executive officer. "The Powder River Basin – which continues to benefit from the acquisition of Jacobs Ranch on Oct. 1, 2009 and its subsequent integration into Black Thunder – realized higher volume levels, lower cash costs and significant margin expansion. Pricing gains and solid cost control also boosted operating margins in the Western Bituminous Region, despite the temporary outage at Dugout Canyon in the quarter just ended. Moreover, operating margins in Central Appalachia nearly tripled versus a year ago on increased metallurgical coal sales."
Adjusted EBITDA rose nearly 70 percent to reach $532 million year-to-date in 2010. Cash flow from operations totaled $457 million for the nine months ended Sept. 30,2010 – an increase of 85 percent over the prior-year period – while capital expenditures equaled $222 million, resulting in record free cash flow of $235 million for the first nine months of 2010.
"Our strong financial performance to date this year – along with our current expectation for the fourth quarter – has allowed us to raise the midpoint of our 2010 earnings and EBITDA guidance range," said Leer. "An improving earnings outlook coupled with our commitment to control capital spending levels should result in continued free cash flow generation."
Key Pillars
Arch's overall lost-time safety performance and environmental compliance for the first three quarters of 2010 are both on track to beat the previous company records set last year. Seven operations attained a Perfect Zero – operating without a reportable safety incident or environmental compliance violation – during the quarter ended Sept. 30, 2010.
Furthermore, on Oct. 16, 2010, the Black Thunder mine in the Powder River Basin surpassed 7 million employee-hours (more than 30 months) without a lost-time incident. The Coal-Mac complex in Central Appalachia also was honored on Oct. 18, 2010 with a national award from the U.S. Department of Interior for protecting the environment.
"We're proud of our employees for attaining these milestones and awards, which mark our progress towards the ultimate goal of no reportable safety incidents or environmental violations at any of our operations," said John W. Eaves, Arch's president and chief operating officer.
Financial Developments
In the third quarter of 2010, Arch opportunistically issued $500 million in new senior notes due 2020, and subsequently used the proceeds to redeem a portion of its Arch Western Resources senior notes due 2013. Also during the third quarter, Arch used its free cash flow to repay short-term borrowings and reduce its debt-to-total-capital ratio to 43 percent. At Sept. 30, 2010, the company had $954 million of available liquidity – comprised of $64 million of cash on hand and $890 million under its short-term borrowing facilities.
"Arch's successful capital market transaction in the quarter just ended helped to lengthen the maturity profile on $500 million of term debt by seven years, and positions the company well to manage its bond maturities," said John T. Drexler, Arch's senior vice president and chief financial officer. "As evidenced in the third quarter, our first priority for free cash flow continues to be debt reduction and liquidity enhancement to further strengthen the balance sheet."
Operational Results
"Our consolidated operating margin per ton expanded 10 percent in the third quarter of 2010 versus the second quarter, resulting from improved steam coal customer demand and continued, effective cost control at our operations," said Eaves. "In particular, Powder River Basin operating margins improved by nearly 40 percent quarter over quarter – reaching their highest level since mid-2006."
When compared with the second quarter of 2010, consolidated operating margin increased 10 percent and sales volume increased nearly 15 percent during the third quarter in response to improved domestic steam coal market conditions. Consolidated average sales price and operating costs per ton declined modestly over the same time period, largely reflecting a higher percentage of Powder River Basin coal in the company's overall volume mix.
In the Powder River Basin, third quarter 2010 operating margin increased nearly 40 percent versus the second quarter to reach $1.68 per ton. Third quarter sales volume increased versus the prior-quarter period, driven by better rail performance, higher brokered volumes and improved operating efficiencies at the integrated Black Thunder mine. Average sales price rose by $0.24 per ton over the same time period, while operating costs (excluding amortization of acquired coal supply agreements) declined $0.23 per ton, reflecting continued cost controls and the ongoing benefit of acquisition synergies, partially offset by higher sales-sensitive and maintenance costs.
In the Western Bituminous Region, third quarter operating margin reached $3.60 per ton, an increase of 16 percent versus the second quarter, despite Dugout Canyon's temporary idling during most of the third quarter. Volumes were flat over the same time period, as increased shipments from the company's other Utah mines offset lower production at the Dugout Canyon mine. Average sales price rose by $0.57 per ton in the third quarter compared with the prior-quarter period, resulting from a more favorable mix of customer shipments. Operating costs increased $0.07 per ton over the same time period, driven by the outage at Dugout Canyon which offset favorable cost performances at the company's other Western Bituminous operations.
In Central Appalachia, Arch earned $15.19 per ton in operating margin in the third quarter of 2010 compared with $16.86 per ton in the second quarter. Third quarter steam coal volumes rose significantly versus the prior-quarter period on increased customer demand, while metallurgical coal volumes declined slightly. Average sales price per ton declined modestly over the same time period, as a larger percentage of lower-priced steam coal sales in the company's overall volume mix offset higher pricing on metallurgical coal sales. Operating costs increased $0.91 per ton in the third quarter of 2010 compared with the prior-quarter period, resulting from the region's production mix during the third quarter.
Coal Market Trends
U.S. coal markets are set to deliver a much improved performance in 2010 versus 2009.
- Electric output was up 4 percent year-to-date through Oct. 23, according to the Edison Electric Institute. For the first nine months of the year, Arch forecasts that coal consumption for electric generation increased 6.5 percent versus the prior-year period.
- U.S. coal production declined more than 6 million tons through the first nine months of 2010, according to MSHA data released to date. Supply in the nation's largest coal producing region – the southern Powder River Basin – increased 2 million tons, while production in the second largest supply basin – Central Appalachia – declined 12 million tons year-to-date through Sept. 30. In addition, supply from the Gulf Lignite region increased roughly 4 million tons over the same time period, mainly driven by increased demand from mine-mouth coal generation facilities that have come online in 2010.
- U.S. coal exports are on pace to reach 80 million tons in 2010, representing an increase of 20 million tons versus 2009. By contrast, Arch expects coal imports into the U.S. to decline by more than 3 million tons in 2010 when compared with last year.
- U.S. generator coal stockpile levels have declined meaningfully since 2009. Arch estimates that power plant stockpiles totaled approximately 160 million tons at the end of September 2010 – a 20-percent decline from the year-ago level but still 10 percent higher than the five-year average. On a days-supply basis, Powder River Basin customer inventories remain the lowest in the country and were below the five-year average at the end of September, according to third-party estimates.
Production and Sales Contract Portfolio
Arch now expects sales volumes from company-controlled operations to be in the range of 155 million to 158 million tons for full year 2010. Included in this volume guidance range are sales into metallurgical coal markets (coking and pulverized coal injection/PCI), which are now projected at around 6 million tons in 2010.
"Arch has moved up its sales volume range modestly for 2010 given better-than-expected operating synergies in the Powder River Basin and improved rail performance," Leer said. "While efficiency has improved markedly at our PRB operations, we will continue to follow a market-driven strategy and, ultimately, the market will dictate whether we return any of our idled equipment to active operation in the quarters ahead."
In the Powder River Basin, Arch placed 20 million tons of coal for 2011 delivery and 15 million tons for 2012 delivery, at average prices above current annual indices for the region. In Central Appalachia, Arch committed 2.5 million tons of PCI and high-volatile coking coal for 2011 delivery, at blended average netback mine prices in the triple digits. The company also re-priced more than 4 million tons of Western Bituminous coal for 2011 and 2012 delivery, at average prices that are roughly 20 percent above Arch's third quarter realizations in that region.
Arch now has uncommitted volumes of 30 million to 40 million tons in 2011, and uncommitted volumes of 70 million to 80 million tons in 2012. These uncommitted volumes include up to 5.5 million tons of coking and PCI coal in 2011. In addition, the company has roughly 15 million tons committed but not yet priced in both 2011 and 2012.
2010 Earnings Guidance
Arch has raised the midpoint of its 2010 adjusted earnings and EBITDA guidance and maintained its capital spending guidance as follows:
- Earnings per diluted share on a GAAP basis is now projected to be between $1.09 and $1.23, including amortization of coal supply agreements and early debt extinguishment costs. Excluding these charges, adjusted earnings per diluted share would be in the range of $1.25 to $1.40.
- Adjusted EBITDA is now forecasted to be in the $750 million to $790 million range.
- Capital spending is expected to remain in the $315 million to $335 million range.
- Depreciation, depletion and amortization expense (excluding non-cash amortization of acquired coal supply agreements) is projected to be between $372 million and $377 million.
"With our unpriced sales position and strong operating platform, Arch is poised to deliver in this current coal market up-cycle," said Leer. "We're targeting record free cash flow in 2010, and given our relatively modest capital needs, we expect continued growth in this cash flow metric going forward. We're absolutely focused on leveraging our superior low-cost asset base to create substantial value for our shareholders over the long-term."
A conference call regarding Arch Coal's third quarter 2010 financial results will be webcast live today at 11 a.m. E.D.T. The conference call can be accessed via the "investor" section of the Arch Coal Web site (http://investor.archcoal.com).