Arch Coal, Inc. Monday reported a net loss of $1.8 million, or $0.01 per diluted share, in the first quarter of 2010, compared with net income of $30.6 million, or $0.21 per diluted share, in the prior-year quarter.
First quarter 2010 results include the amortization of coal supply agreements acquired in the Jacobs Ranch transaction, which was completed on Oct. 1, 2009. Excluding this non-cash charge, first quarter 2010 adjusted net income was $5.0 million, or $0.03 per diluted share. The company also recorded adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of $131.4 million in the first quarter of 2010, a 14 percent increase versus the first quarter of 2009.
"Effective cost control across all of our operations helped to offset soft domestic steam coal market conditions during the quarter just ended," said Steven F. Leer, Arch's chairman and chief executive officer. "Additionally, strong metallurgical coal markets dramatically increased profitability in our Central Appalachian region in the first quarter compared with a year ago."
First quarter 2010 revenues grew 4.5 percent versus the year-ago quarter on higher sales volume attributed to the addition of Jacobs Ranch. The increase in revenues was offset by higher non-cash costs, higher interest expense and a loss in the company's trading function. Cash flow from operations increased 63 percent over the same time period to reach $93.3 million, while quarterly capital expenditures totaled $32.0 million, the lowest level in six years.
For full year 2010, Arch raised earnings guidance based upon an improving outlook for metallurgical and Powder River Basin coal sales. "Looking ahead, we expect improved results as we progress through 2010, particularly in the year's second half," said Leer. "We will benefit from an improved forward price curve for Powder River Basin coal and as we ramp up metallurgical coal sales in response to robust global steel market conditions."
Arch expects coal markets to continue to strengthen throughout 2010. "Key drivers in domestic and international markets are helping to improve this year's outlook for coal markets," said Leer, "and we remain very bullish on coal's long-term fundamentals."
In particular, power demand increased 2.6 percent through the second week of April, according to the Edison Electric Institute, while coal production declined 5.2 percent year-to-date, according to government estimates. Coal production is estimated to be down year-to-date in 2010 in both the eastern and western United States, with Central Appalachia declining 10 percent and the Powder River Basin declining 4 percent, based on current Energy Information Administration data.
Strength in the global steel sector is pulling high-quality steam coal into robust metallurgical coal markets, reducing the available coal supply to Eastern generators. Arch now expects domestic US coal exports to increase by at least 15 million tons versus 2009.
Over the longer term, approximately 40 million tons of new, incremental annual coal demand will be generated between 2010 and 2012 as 12 gigawatts of new coal-fueled power plants come online in the US More than 6 gigawatts of new coal plants have already come online since 2008, with nearly 1.5 gigawatts beginning operations during the first quarter of 2010. On a global scale, 220 gigawatts of coal-fueled capacity are expected to come online by 2015, translating into an additional 750 million tons of new annual coal demand.
Arch expects sales volumes from company-controlled operations to be in the 147 million to 155 million ton range for 2010. Sales of metallurgical and pulverized coal injection (PCI) coal - which are included within the company's full year volume guidance range - are now expected to reach 6 million to 7 million tons. To attain the higher metallurgical coal sales range, the company has begun placing its uncommitted metallurgical coal volumes, and plans to shift coal that was previously planned as steam sales into more profitable metallurgical and PCI markets.
"We now expect to more than triple our planned metallurgical coal sales in 2010 versus last year, capitalizing on the strength of global metallurgical coal markets," said John W. Eaves, Arch's president and chief operating officer. "In addition, we have plans to expand production of metallurgical grade coal at our Cumberland River complex in Central Appalachia to increase our total metallurgical coal capabilities to approach 8 million tons on an annualized basis, should market conditions warrant."
During the first quarter, Arch committed roughly 1.5 million tons of Central Appalachian coal into metallurgical markets for 2010 delivery, at average netback mine prices in the triple digits. In recent weeks, the company has selectively committed coal into metallurgical markets for 2010 delivery, at netback mine prices in the $140 per short ton to $150 per short ton range.
In the Powder River Basin, Arch signed commitments for its remaining 5 million tons of uncommitted coal for 2010 delivery, at average prices that exceeded the then prevailing applicable forward price curve. The company also signed agreements for less than 5 million tons of coal for 2011 delivery at price premiums to the then prevailing 2011 forward curve.
"The attractive price levels signed during the first quarter should help to expand Arch's future profitability," said Eaves. "At the same time, we remain selective in signing new business to preserve the value of our reserve base and to ensure we obtain satisfactory returns on our capital. We believe this strategy provides the best long-term value for our shareholders."
Based on the company's expected production levels and current sales commitments, Arch has uncommitted volumes of 65 million to 75 million tons in 2011, and uncommitted volumes of 100 million to 110 million tons in 2012. In addition, Arch has approximately 10 million tons of coal committed but not yet priced in 2010 and roughly 20 million tons committed but not yet priced in both 2011 and 2012.
"We believe that the long-term outlook for US coal remains bright, and that Arch is well positioned to capitalize on expected growth in global and domestic coal consumption in 2010 and beyond," said Leer. "Our raised earnings guidance this year reflects our confidence in improving coal market fundamentals and in our ability to generate increasing cash flow for the company's stakeholders."
St. Louis, Missouri-based Arch Coal is the second largest US coal producer, with revenues of $2.6 billion in 2009. Through its national network of mines, Arch supplies cleaner-burning, low-sulfur coal to US power producers to fuel roughly 8 percent of the nation's electricity. The company also ships coal to domestic and international steel manufacturers as well as international power producers.