Arch Coal, Inc. Reports Third Quarter Results
Highlights:
St. Louis - October 20, 2003 - Arch Coal, Inc. (NYSE:ACI) today reported that for its third quarter ended September 30, 2003, the company had income available to common shareholders of $9.3 million, or $.18 per share. Included in these results was a net gain of $8.4 million, or $.16 per share, related to mark-to-market adjustments and charges stemming from the recent termination of hedge accounting for certain interest rate swap agreements. In the third quarter of 2002, Arch had income of $1.6 million, or $.03 per share.
"During the quarter, Arch's mining operations managed costs well despite reduced sales volumes stemming from a relatively mild summer, normally scheduled mine vacation shutdowns and three longwall moves," said Steven F. Leer, Arch Coal's president and chief executive officer. "Meanwhile, U.S. coal markets began a long-awaited rally, with coal prices moving up markedly and contract activity heating up as well."
For the nine months ended September 30, 2003, Arch Coal had a loss available to common shareholders of $10.2 million, or $.19 per share, excluding severance costs of $2.6 million, a $3.7 million non-cash charge related to the cumulative effect of an accounting change resulting from the adoption of FAS 143, charges of $6.9 million related to the early extinguishment of debt and termination of hedge accounting, and an $11.3 million gain related to mark-to-market adjustments. That compares to a loss of $3.6 million, or $.07 per share, during the same period of 2002. Total revenues for the nine months were $1,122.9 million and coal sales totaled 73.6 million tons, vs. $1,143.7 million and 78.3 million tons in the comparable period of 2002. Adjusted EBITDA totaled $144.4 million for the first nine months of 2003, compared to $171.1 million in the same period of 2002.
Cost control efforts
During the quarter, Arch's eastern operations recorded all-in costs of approximately $31.40 per ton, maintaining the improvements achieved in the second quarter despite an 11% decline in sales volumes. Arch's western operations effectively held the line on costs as well, after a more than 4% reduction in costs in the second quarter.
"We continue to make good progress in our efforts to manage costs at all of our operations," Leer said. "Arch's mining operations already rank No. 1 in productivity among major producers in both the Powder River Basin and Central Appalachia for the most recent four quarters for which data is available. However, we expect to enhance our competitive position still further through additional cost reductions in coming quarters." Arch continues to pursue a very deliberate approach to cost-reduction efforts across the corporation.
U.S. coal markets
U.S. coal prices moved up strongly during the quarter, spurred by increased coal consumption at U.S. power plants, declining utility stockpile levels, and the continuing rationalization in eastern coal supply.
"We continue to see many positive signs that point to a sustained rebound in U.S. coal markets," Leer said. "During the first half of 2003, coal consumption at U.S. power plants increased 3.7%, as utilities sought to maximize output from coal-fired units in the face of sharply higher natural gas prices and reduced nuclear availability."
As a result of this increased consumption, Arch projects that coal stockpiles at U.S. power plants declined to approximately 120 million tons at the end of September, nearly 15% lower than at the same time last year.
While the long-term outlook for increased U.S. coal production is positive, output from eastern coalfields has declined, as producers struggle with degraded reserve bases, high costs and a host of other pressures. Last year, U.S. coal production declined by an estimated 3.0%, driven principally by reduced eastern output. In 2003, that trend has continued, with total U.S. coal production down an estimated 2.2% year to date.
"During the past 18 months, many traditional eastern coal producers have closed mines, filed for bankruptcy protection or even exited the business," Leer said. "We believe that this rationalization process will continue, which should translate into a stronger pricing environment for our productive and cost-competitive eastern operations."
Market activity
While Arch has signed commitments for a small percentage of its uncommitted 2004 and 2005 tonnage in recent weeks, the company should benefit substantially from further movements in the market. At present, approximately 25% of Arch's expected 2004 production and 45% of its 2005 production is open to market-based pricing.
"We are currently in the midst of negotiations with several large coal-burning utilities concerning tonnage for delivery in 2004 and beyond," Leer said. "However, we feel no sense of urgency about committing the remainder of our tonnage, and we would be very comfortable entering 2004 with a significant open position."
With eastern low-sulfur coal production struggling, the market is likely to need every available ton of coal in 2004, according to Leer. "After an extended utility stockpile correction, we believe supply and demand are close to equilibrium," Leer said.
Operating statistics 
Safety and environmental stewardship
During the quarter, several Arch Coal subsidiaries received honors for safety and reclamation excellence. Coal-Mac's Phoenix mine was named one of the five safest surface coal mines in 2002 by the Mine Safety and Health Administration for working more than 300,000 employee-hours without a lost time injury. (In 2002, Thunder Basin's Black Thunder mine won the award as the nation's safest surface mine the previous year.) In addition, two Arch Coal subsidiaries - Catenary Coal and Coal-Mac - received national honors for environmental stewardship and community outreach by the National Association of State Land Reclamationists. "We regard safety and environmental stewardship as cornerstones of our future success, and we take great pride in the accomplishments of our operating subsidiaries in these crucial areas of performance," Leer said.
"With the economy showing signs of renewed vigor, the prospects for increased demand for low-cost electricity from coal appear bright," Leer said. "We believe Arch Coal is well positioned to capitalize on this improving market environment."
Arch currently expects earnings of between $.05 and $.15 per share in the fourth quarter of 2003, excluding charges related to the termination of hedge accounting and future mark-to-market adjustments.
The pending Triton acquisition should further strengthen Arch's competitive position, Leer said. "We look forward to integrating the Triton assets into our existing operations," he added. "We are confident that this acquisition will enable us to take a dramatic step forward in our ability to serve our customers and capture new cost-saving opportunities." The Triton acquisition is in the midst of the regulatory review process.
A conference call concerning third 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 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. 
