Arch Coal, Inc. Reports First Quarter 2014 Results

U.S. thermal coal market strengthening in 2014

Leer mine driving Appalachian cost-per-ton guidance reduction for 2014

Company proactively reducing 2014 metallurgical coal sales due to soft markets

Apr 22, 2014, 07:45 ET from Arch Coal, Inc.

ST. LOUIS, April 22, 2014 /PRNewswire/ -- Arch Coal, Inc. (NYSE: ACI) today reported a net loss of $124.1 million, or $0.59 per diluted share, in the first quarter of 2014. After excluding non-cash accretion of acquired coal supply agreements, Arch's first quarter 2014 adjusted net loss was $126.5 million, or $0.60 per diluted share, compared with an adjusted net loss of $71.8 million, or $0.34 per diluted share, in the prior-year quarter. Revenues totaled $736 million in the first quarter of 2014, and adjusted earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") represented $27.6 million.

 

Earnings Highlights

Quarter Ended

In $ millions, except per share data

3/31/14

3/31/13

Revenues 1

$736.0

$737.4

Loss from Operations 1

(73.1)

(51.4)

Net Loss

(124.1)

(70.0)

Diluted LPS

(0.59)

(0.33)

Adjusted Net Loss 2

(126.5)

(71.8)

Adjusted Diluted LPS 2

(0.60)

(0.34)

Adjusted EBITDA 2

$27.6

$83.6

1/- Excludes discontinued operations.

2/- Defined and reconciled under "Reconciliation of non-GAAP measures."

 

"As expected, our first quarter results reflect a challenging global metallurgical coal market and the impact of rail performance issues," said John W. Eaves, Arch's president and chief executive officer. "At Arch, we are taking proactive steps to manage our controllable costs and capital spending, reduce our cash outflows and preserve our liquidity. Moreover, we are reducing our expected metallurgical coal sales volume by approximately 1 million tons for 2014 in response to soft market conditions and concentrating our metallurgical production in our lowest-cost assets in Appalachia. Based on the smooth start-up of the Leer longwall mine in the first quarter of 2014, we also are lowering our full year cost-per-ton guidance in Appalachia."

"At the same time, we are encouraged by the strengthening dynamics in the U.S. thermal market," added Eaves. "Positive electric generation and coal demand trends to date, declining U.S. coal generator stockpiles and higher competing fuel prices should provide the catalyst for improvement in our domestic thermal coal operations during 2014." 

Liquidity

As of March 31, 2014, Arch had a total liquidity position of $1.4 billion, with more than $1.1 billion of that in cash and short-term investments. The company continues to have no borrowings under its revolving credit facility and has no debt maturities until 2018.

Consistent with the company's strategy to re-align its asset portfolio, Arch divested non-strategic assets in Appalachia during the first quarter of 2014, including its Hazard thermal mining complex in Kentucky and its ADDCAR equipment subsidiary. Total consideration for these divestitures was $46 million. As a result of these sales, Arch recorded a pre-tax gain of $13.8 million in the first quarter of 2014, which is included in other net operating income. Offsetting this gain in that line, Arch recorded a charge of $12.5 million for the three months ended March 31, 2014, associated with minimum port and rail commitments for export tonnage.

Core Values

Arch subsidiaries earned 12 safety and environmental awards in the three months ended March 31, 2014. Most notably, Arch's Leer mine attained the 2013 Greenlands Award, West Virginia's top environmental honor in the U.S. coal industry. This honor marks the tenth time that an Arch subsidiary has earned this prestigious award since 2001. In addition, the Coal-Mac operation completed 2 million employee hours without a lost-time safety incident in March 2014. Furthermore, five of Arch's operations and facilities attained a Perfect Zero – a dual goal of operating without a reportable safety incident or environmental violation – for the three months ended March 31, 2014.

"We commend our employees for achieving such safety and environmental accomplishments, and for their ongoing commitment to living our core values," said Paul A. Lang, Arch's executive vice president and chief operating officer. "We are constantly striving for improvement at all of our operations, with an ultimate goal of a Perfect Zero across our entire operating platform each and every quarter."

Operational Results

"During the first quarter of 2014, our Appalachian region, anchored by the Leer mine, delivered its strongest cost performance since 2011, prompting a reduction in our 2014 expected cost per ton for that region," said Lang. "In addition, increased domestic thermal demand has resulted in an improving outlook for the West Elk mine in Colorado, prompting us to reduce our 2014 cost per ton for that region. In the Powder River Basin, we remain focused on achieving further improvement during 2014 as rail congestion eases and customer demand climbs."

 

Arch Coal, Inc.

1Q14

4Q13

1Q13

Tons sold (in millions)

31.4

32.3

31.9

Average sales price per ton

$20.09

$19.91

$20.45

Cash cost per ton

$18.39

$18.10

$17.42

Cash margin per ton

$1.70

$1.81

$3.03

Total operating cost per ton 

$21.70

$21.10

$20.82

Operating margin per ton

($1.61)

($1.19)

($0.37)

Consolidated results may not tie to regional breakout due to exclusion of other assets, rounding.

Operating results exclude former Canyon Fuel subsidiary. 

Cash cost per ton is defined and reconciled under "Reconciliation of non-GAAP measures."

Operating cost per ton is the sum of cash costs and depreciation, depletion  

and amortization expense divided by tons sold.

 

Compared with the fourth quarter of 2013, consolidated cash margin per ton declined in the first quarter of 2014, partly due to lower earned margins in the company's Bituminous Thermal segment. Consolidated sales price per ton increased slightly over the same time period, but was offset by a 2 percent increase in consolidated cash cost per ton.  

 

Powder River Basin

1Q14

4Q13

1Q13

Tons sold (in millions)

25.7

26.4

26.6

Average sales price per ton

$12.73

$12.28

$12.68

Cash cost per ton

$11.45

$11.37

$10.65

Cash margin per ton

$1.28

$0.91

$2.03

Total operating cost per ton 

$12.98

$12.90

$12.24

Operating margin per ton

($0.25)

($0.62)

$0.44

Cash cost per ton is defined and reconciled under "Reconciliation of non-GAAP measures."

Operating cost per ton is the sum of cash costs and depreciation, depletion  

and amortization expense divided by tons sold.

 

In the Powder River Basin, first quarter 2014 cash margin increased more than 40 percent to $1.28 per ton versus the fourth quarter of 2013. The improvement was driven by a 4 percent increase in average sales price per ton, reflecting higher pricing on contracted and market-based tons. Cash cost per ton increased slightly versus the prior-quarter period, due to the impact of lower shipment levels resulting from continued rail service issues.

 

Appalachia

1Q14

4Q13

1Q13

Tons sold (in millions)

3.6

3.5

3.4

Average sales price per ton

$67.70

$69.54

$74.76

Cash cost per ton

$65.48

$67.41

$67.16

Cash margin per ton

$2.22

$2.13

$7.60

Total operating cost per ton 

$80.80

$80.36

$83.50

Operating margin per ton

($13.10)

($10.82)

($8.74)

Cash cost per ton is defined and reconciled under "Reconciliation of non-GAAP measures."

Operating cost per ton is the sum of cash costs and depreciation, depletion  

and amortization expense divided by tons sold.

 

In Appalachia, Arch earned a cash margin of $2.22 per ton in the first quarter of 2014, representing a 4 percent increase compared with the fourth quarter of 2013. Average sales price per ton decreased in the first quarter of 2014 versus the prior-quarter period, driven by lower pricing on metallurgical tons. Offsetting this decline, cash cost decreased by $1.93 per ton over the same time period, due to the addition of the Leer longwall and improving geological conditions at Mountain Laurel.

 

Bituminous Thermal

1Q14

4Q13

1Q13

Tons sold (in millions)

2.1

2.4

1.9

Average sales price per ton

$28.64

$32.17

$32.39

Cash cost per ton

$22.64

$20.65

$23.50

Cash margin per ton

$6.00

$11.52

$8.89

Total operating cost per ton

$27.17

$25.51

$29.15

Operating margin per ton

$1.47

$6.66

$3.24

Operating results exclude former Canyon Fuel subsidiary. 

Cash cost per ton is defined and reconciled under "Reconciliation of non-GAAP measures."

Operating cost per ton is the sum of cash costs and depreciation, depletion  

and amortization expense divided by tons sold.

 

In the Bituminous Thermal segment, Arch earned a cash margin of $6.00 per ton in the first quarter of 2014 compared with $11.52 per ton in the fourth quarter of 2013. Average sales price per ton declined over the same time period, driven by customer contract roll-offs and lower pricing on export tons. First quarter 2014 cash cost per ton increased versus the fourth quarter of 2013, due to the expected impact of lower volume levels at the West Elk mine.

Market Trends

"We are seeing a strengthening domestic thermal market in 2014, supported by improved power demand, depleting customer coal stockpiles, higher natural gas prices and low natural gas storage levels that will need to be rebuilt," said Eaves.

U.S. power generation hit record levels during the first two months of 2014, and Arch expects U.S. coal consumption for power generation to increase more than 25 million tons in 2014 versus 2013 levels. Even with modest supply increases, Arch expects strong reductions in utility coal stockpiles throughout the year, due to solid demand and continued higher prices for competing fuels. Based on internal estimates, U.S. utility coal stockpiles could be below 110 million tons by the end of the summer burn season, or nearly 30 percent below the 10-year average.

While the domestic thermal market is trending upward, the seaborne market remains challenged, as oversupply has pressured global prices for metallurgical and thermal coals. However, Arch believes the long-term outlook for the seaborne coal trade remains positive and the opportunities for U.S. coal significant. Global coal trade is projected to exceed 1.5 billion metric tonnes by 2020, with approximately 100 gigawatts of new coal-fueled power projected to come online in 2014 alone. That new coal-fueled power could result in more than 300 million metric tonnes of incremental annual coal demand this year.

Arch currently expects the global metallurgical coal market to remain soft in 2014, even as global steel production is projected to grow. However, recent and ongoing closures of some high-cost capacity and an improving demand outlook should lead to a more balanced market over time.

Company Outlook

Arch now expects thermal sales volumes for 2014 to be in the range of 124 million to 132 million tons. The company has lowered its metallurgical coal sales guidance, and now expects to ship between 6.3 million and 7.3 million tons for 2014. In addition, Arch has reduced its annual cash cost-per-ton guidance range for both its Appalachian and Bituminous Thermal segments, while maintaining its cost outlook for the Powder River Basin. The company has modestly reduced its capital spending levels to a range of $180 million to $190 million for full year 2014.

"Going forward, we will continue to focus on managing costs and capital across the organization and look for opportunities to offset the impact of external market challenges," said Eaves. "With strong liquidity, low-cost assets, superior reserves and access to growing global coal markets, Arch is strategically positioned to capitalize as coal markets recover."  

 

2014

2015

 Tons 

 $ per ton 

 Tons 

 $ per ton 

Sales Volume (in millions tons)

Thermal

124.0

-

132.0

Met

6.3

-

7.3

Total

130.3

-

139.3

Powder River Basin

Committed, Priced

102.0

$13.08

57.8

$13.76

Committed, Unpriced

5.8

8.6

Total Committed

107.8

66.4

Average Cash Cost

$10.70

-

$11.00

Appalachia

Committed, Priced Thermal

6.0

$56.88

2.6

$55.34

Committed, Unpriced Thermal

0.2

-

Committed, Priced Metallurgical

5.0

$83.50

1.6

$85.68

Committed, Unpriced Metallurgical

0.5

0.2

Total Committed

11.7

4.4

Average Cash Cost

$63.00

-

$66.00

Bituminous Thermal

Committed, Priced

6.2

$31.90

2.5

$38.95

Committed, Unpriced

0.2

-

Total Committed

6.4

2.5

Average Cash Cost

$23.00

-

$26.00

Corporate (in $ millions)

D,D&A

$420

-

$450

S,G&A

$122

-

$128

Interest Expense 

$382

-

$392

Capital Expenditures

$180

-

$190

 

A conference call regarding Arch Coal's first quarter 2014 financial results will be webcast live today at 10 a.m. Eastern time. The conference call can be accessed via the "investor" section of the Arch Coal website (http://investor.archcoal.com).

U.S.-based Arch Coal, Inc. is one of the world's top coal producers for the global steel and power generation industries, serving customers on five continents. Its network of mining complexes is the most diversified in the United States, spanning every major coal basin in the nation. The company controls more than 5 billion tons of high-quality metallurgical and thermal coal reserves, with access to all major railroads, inland waterways and a growing number of seaborne trade channels. For more information, visit www.archcoal.com.  

Forward-Looking Statements:  This press release contains "forward-looking statements" – that is, statements related to future, not past, events.  In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will."  Forward-looking statements by their nature address matters that are, to different degrees, uncertain.  For us, particular uncertainties arise from changes in the demand for our coal by the domestic electric generation industry; from legislation and regulations relating to the Clean Air Act and other environmental initiatives; from operational, geological, permit, labor and weather-related factors; from fluctuations in the amount of cash we generate from operations; from future integration of acquired businesses; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature.  These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.  We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.  For a description of some of the risks and uncertainties that may affect our future results, you should see the risk factors described from time to time in the reports we file with the Securities and Exchange Commission.

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended March 31,

2014

2013

(Unaudited)

Revenues

$       735,971

$       737,370

Costs, expenses and other operating

Cost of sales

686,314

649,743

Depreciation, depletion and amortization

104,423

110,193

Amortization of acquired sales contracts, net

(3,696)

(2,810)

Change in fair value of coal derivatives and coal trading activities, net

914

1,308

Selling, general and administrative expenses

29,136

33,209

Other operating income, net

(7,998)

(2,842)

809,093

788,801

   Loss from operations

(73,122)

(51,431)

Interest expense, net

  Interest expense

(96,471)

(95,074)

  Interest and investment income

1,843

2,836

(94,628)

(92,238)

Loss from continuing operations before income taxes

(167,750)

(143,669)

Benefit from income taxes

(43,611)

(59,353)

   Loss from continuing operations

(124,139)

(84,316)

Income from discontinued operations, net of tax

14,267

   Net loss

$      (124,139)

$        (70,049)

Loss from continuing operations

Basic and diluted loss per common share

$           (0.59)

$           (0.40)

Net loss

Basic and diluted loss per common share

$           (0.59)

$           (0.33)

Basic and diluted weighted average shares outstanding

212,171

212,062

Dividends declared per common share

$            0.01

$            0.03

Adjusted EBITDA (A)

$         27,605

$         83,629

Adjusted diluted loss per common share (A)

$           (0.60)

$           (0.34)

(A) Adjusted EBITDA and Adjusted diluted loss per common share are defined and reconciled under "Reconciliation of Non-GAAP Measures" later in this release.

 

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

March 31,

December 31,

2014

2013

(Unaudited)

Assets

Current assets

   Cash and cash equivalents

$    865,761

$    911,099

   Short term investments

248,572

248,414

   Trade accounts receivable

230,002

198,020

   Other receivables

44,810

31,553

   Inventories

224,806

264,161

   Prepaid royalties

6,896

8,083

   Deferred income taxes

48,869

49,144

   Coal derivative assets

12,316

14,851

   Other current assets

55,296

56,746

   Total current assets

1,737,328

1,782,071

Property, plant and equipment, net

6,616,144

6,734,286

Other assets

Prepaid royalties

87,552

87,577

Equity investments

223,235

221,456

Other noncurrent assets

158,925

164,803

   Total other assets

469,712

473,836

Total assets

$  8,823,184

$  8,990,193

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$    160,361

$    176,142

Accrued expenses and other current liabilities

328,561

278,587

Current maturities of debt

29,950

33,493

   Total current liabilities

518,872

488,222

Long-term debt

5,112,995

5,118,002

Asset retirement obligations

390,408

402,713

Accrued pension benefits

10,484

7,111

Accrued postretirement benefits other than pension

37,995

39,255

Accrued workers' compensation

75,817

78,062

Deferred income taxes

368,057

413,546

Other noncurrent liabilities

181,866

190,033

   Total liabilities

6,696,494

6,736,944

Stockholders' equity

Common stock

2,141

2,141

Paid-in capital

3,040,946

3,038,613

Treasury stock, at cost

(53,848)

(53,848)

Accumulated deficit

(897,611)

(771,349)

Accumulated other comprehensive income

35,062

37,692

   Total stockholders' equity

2,126,690

2,253,249

Total liabilities and stockholders' equity

$  8,823,184

$  8,990,193

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

Three Months Ended March 31,

2014

2013

(Unaudited)

Operating activities

Net loss

$        (124,139)

$          (70,049)

Adjustments to reconcile to cash provided by operating activities:

   Depreciation, depletion and amortization

104,423

118,868

   Amortization of acquired sales contracts, net

(3,696)

(2,810)

   Amortization relating to financing activities

3,236

6,167

   Prepaid royalties expensed

1,803

3,537

   Employee stock-based compensation expense

2,333

2,713

   Gains on disposals and divestitures, net

(15,129)

(595)

   Changes in:

     Receivables

(27,245)

(12,340)

     Inventories

7,441

(2,816)

     Accounts payable, accrued expenses and other current liabilities

43,989

38,249

     Income taxes, net

(115)

458

     Deferred income taxes

(43,698)

(54,993)

     Other

10,522

16,902

     Cash provided by (used in) operating activities

(40,275)

43,291

Investing activities

Capital expenditures

(14,454)

(54,522)

Additions to prepaid royalties

(591)

(9,142)

Proceeds from disposals and divestitures

28,195

714

Purchases of short term investments

(119,176)

(26,787)

Proceeds from sales of short term investments

117,681

11,534

Investments in and advances to affiliates

(3,242)

(4,298)

Change in restricted cash

1,163

   Cash provided by (used in) investing activities

8,413

(81,338)

Financing activities

Payments on term loan

(4,875)

(4,125)

Net payments on other debt

(4,521)

(5,964)

Debt financing costs

(1,957)

Dividends paid

(2,123)

(6,367)

   Cash used in financing activities

(13,476)

(16,456)

Decrease in cash and cash equivalents

(45,338)

(54,503)

Cash and cash equivalents, beginning of period

911,099

784,622

Cash and cash equivalents, end of period

$         865,761

$         730,119

Arch Coal, Inc. and Subsidiaries

Schedule of Consolidated Debt

(In thousands)

March 31,

December 31,

2014

2013

(Unaudited)

Term loan due 2018 ($1.92 billion and $1.93 billion face value, respectively)

$    1,902,731

$    1,906,975

7.00% senior notes due 2019 at par

1,000,000

1,000,000

9.875% senior notes due 2019  ($375.0 million face value)

362,573

362,358

8.00% senior secured notes due 2019 at par

350,000

350,000

7.25% senior notes due 2020 at par

500,000

500,000

7.25% senior notes due 2021 at par

1,000,000

1,000,000

Other

27,641

32,162

5,142,945

5,151,495

Less: current maturities of debt

29,950

33,493

Long-term debt

$    5,112,995

$    5,118,002

Calculation of net debt

Total debt

$    5,142,945

$    5,151,495

Less liquid assets

Cash and cash equivalents

865,761

911,099

Short term investments

248,572

248,414

1,114,333

1,159,513

Net debt

$    4,028,612

$    3,991,982

Arch Coal, Inc. and Subsidiaries

Reconciliation of Non-GAAP Measures

(In thousands, except per share data)

Included in the accompanying release, we have disclosed certain non-GAAP measures as defined by Regulation G.

The following reconciles these items to the respective figures under GAAP.

Adjusted EBITDA

Adjusted EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization, and the amortization of acquired sales contracts.   Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results.

 

Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting

principles, and items excluded from 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 incur and service debt based on ongoing operations. Furthermore, analogous measures are used by industry analysts to evaluate our operating performance. In addition, acquisition related expenses are excluded to make results more comparable between periods.  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 March 31,

2014

2013

Total Company

Continuing Operations

Discontinued Operations

Total Company

Net loss

$     (124,139)

$     (84,316)

$      14,267

$     (70,049)

    Income tax benefit

(43,611)

(59,353)

4,722

(54,631)

    Interest expense, net

94,628

92,238

13

92,251

    Depreciation, depletion and amortization

104,423

110,193

8,675

118,868

    Amortization of acquired sales contracts, net

(3,696)

(2,810)

(2,810)

Adjusted EBITDA

$        27,605

$      55,952

$      27,677

$      83,629

Adjusted net loss and adjusted diluted loss per share

Adjusted net loss and adjusted diluted loss per common share are adjusted for the after-tax impact of acquisition

related costs and are not measures of financial performance in accordance with generally accepted accounting

principles.  We believe that adjusted loss and adjusted diluted loss per common share better reflect the trend of our future results by excluding items relating to significant transactions. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition.  Therefore, adjusted net loss and adjusted diluted loss per share should not be considered in isolation, nor as an alternative to net loss or diluted loss per common share under generally accepted accounting principles.

Three Months Ended March 31,

2014

2013

(Unaudited)

Net loss

$     (124,139)

$     (70,049)

     Amortization of acquired sales contracts, net

(3,696)

(2,810)

    Tax impact of adjustments

1,331

1,012

Adjusted net loss attributable to Arch Coal

$     (126,504)

$     (71,847)

Diluted weighted average shares outstanding

212,171

212,062

Diluted loss per share attributable to Arch Coal

$          (0.59)

$        (0.33)

    Amortization of acquired sales contracts, net

(0.02)

(0.01)

    Tax impact of adjustments

0.01

Adjusted diluted loss per share

$          (0.60)

$        (0.34)

Cash costs per ton

Cash costs per ton exclude the costs of depreciation, depletion and amortization and pass-through transportation costs, and may be adjusted for other items that, due to accounting rules, are classified in "other income/expense" on the statement of operations, but relate directly to the costs incurred to produce coal. Cash costs per ton are not measures of financial performance in accordance with generally accepted accounting principles.  We believe cash costs per ton better reflect our controllable costs and our operating results by including all cash costs incurred to produce coal. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition.  Therefore, cash costs per ton should not be considered in isolation, nor as an alternative to cost of sales per ton under generally accepted accounting principles. 

The following reconciles cost of sales on our condensed consolidated statement of operations to cash cost per ton.

Three Months Ended March 31,

2014

2013

(Unaudited)

Cost of sales on condensed consolidated statement of operations

$      686,314

$    649,743

Transportation costs billed to customers

(106,959)

(92,816)

Settlements of heating oil derivatives used to manage diesel fuel purchase price risk

1,879

4,662

Other (other operating segments, operating overhead, land management, etc.)

(4,689)

(5,347)

Total cash costs 

$      576,545

$    556,242

Total Tons sold

31,357

31,925

Total cash cost per ton

$         18.39

$        17.42

 

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SOURCE Arch Coal, Inc.



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