Add
ACI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ACI > SEC Filings for ACI > Form 10-Q on 10-May-2012 | All Recent SEC Filings |
10-May-2012
Quarterly Report
Overview
Weakness in the U.S. thermal coal markets impacted our first quarter results resulting from an unprecedented build in power generator coal stockpiles year to date, the continued erosion in natural gas prices and relatively soft global metallurgical demand. We expect U.S. coal consumption for power generation to decline by at least 75 million tons in 2012, as compared to 2011, due to unfavorable weather trends that have reduced power demand and contributed to a natural gas surplus. These factors have led to an increase in U.S. coal generator stockpiles to date in 2012. The industry has responded with supply reductions. Mine Safety and Health Administration data suggests that total domestic production decreased 14 million tons during the first quarter of 2012, and we expect further reductions as 2012 progresses.
In response to these market conditions, we further curtailed our production expectations for 2012 and we have taken steps to increase operational efficiency and productivity. In total, we expect to reduce annual volumes by 25 million tons in 2012 compared to originally planned levels. In the Powder River Basin, we idled one dragline, and placed another into reclamation efforts, and limited railcar loadings from the West loadout at the Black Thunder mine. In Appalachia, we delayed the startup of the longwall at the Mountain Laurel mine following the successful transition to the Cedar Grove seam, and closed five thermal operations and further curtailed production at other thermal mines. We are also taking steps to control costs by eliminating discretionary spending, reducing headcount and consolidating operations. We are controlling capital spending at thermal coal mines and controlling maintenance capital, but we are proceeding with metallurgical coal development projects, namely the Leer mine (previously known as the Tygart mine) in Appalachia, and supporting efforts to expand our coal exporting network.
We expect that coal exports will somewhat offset the weakness in domestic markets. The global cross-border hard coal trade through March is on pace to exceed the 1.2 billion-ton record set in 2011. More than 185 new coal-fueled plants are expected to come online in 2012, resulting in approximately 400 million tons of incremental annual coal demand. Momentum in global steel markets is also increasing, as steel output grew 6% during the first quarter of 2012 from the fourth quarter of 2011. We expect to export 12 million tons in 2012.
Items Affecting Comparability of Reported Results
The comparability of our operating results between the three months ended March 31, 2012 and 2011 is affected by the acquisition of ICG on June 15, 2011. To finance the acquisition, we received net proceeds of $1.3 billion from the sale of our common stock and issued $2.0 billion in aggregate principal amount of senior unsecured notes.
Results of Operations
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Summary. Our results during the first quarter of 2012 when compared to the first quarter of 2011 were impacted substantially by our production cutbacks in response to weak market conditions, which offset the impact of higher sales pricing in all regions.
Revenues. Our revenues consist of coal sales and revenues from our ADDCAR subsidiary acquired with ICG. The following table summarizes information about coal sales during the three months ended March 31, 2012 and compares it with the information for the three months ended March 31, 2011:
Three Months Ended March 31 Increase (Decrease)
2012 2011 Amount %
(Amounts in thousands, except per ton data and percentages)
Coal sales $ 1,039,651 $ 872,938 $ 166,713 19.10 %
Tons sold 35,660 36,608 (948 ) (2.6 )%
Coal sales realization per
ton sold $ 29.15 $ 23.85 $ 5.30 22.2 %
|
Coal sales increased in the first quarter of 2012 from the first quarter of 2011, due to an increase in the overall average price per ton sold, the result of improved pricing on metallurgical-quality coal sold and the contribution from the ICG operations, including higher-priced metallurgical coal sales volumes, as well as the impact of changes in regional mix on our average coal sales realization. Coal sales revenues attributed to acquired ICG operations were $237.2 million in the first quarter of 2012. These factors were offset by lower demand in all operating segments. We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading "Operating segment results".
Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the three months ended March 31, 2012 and compares it with the information for the three months ended March 31, 2011:
Increase (Decrease) in Net
Three Months Ended March 31 Income
2012 2011 Amount %
(in thousands, except percentages)
Cost of sales $ 850,871 $ 653,684 $ (197,187 ) (30.2 )%
Depreciation, depletion and
amortization 139,966 83,537 (56,429 ) (67.5 )
Amortization of acquired sales
contracts, net (14,017 ) 5,944 19,961 335.8
Selling, general and
administrative expenses 30,861 30,435 (426 ) (1.4 )
Change in fair value of coal
derivatives and coal trading
activities, net (3,613 ) (1,784 ) 1,829 102.5
Other operating income, net (18,498 ) (1,116 ) 17,382 1,557.5
$ 985,570 $ 770,700 $ (214,870 ) (27.9 )%
|
Cost of coal sales. Our cost of sales increased in the first quarter of 2012 from the first quarter of 2011 primarily from the impact of the acquisition of the ICG operations, an increase in transportation costs as a result of the increase in export shipments, and an increase in sales-sensitive costs. We have provided more information about the performance and profitability of our operating segments under the heading "Operating segment results".
Depreciation, depletion and amortization. When compared with the first quarter of 2011, higher depreciation, depletion and amortization costs in 2012 resulted primarily from the acquired ICG operations, partially offset by the impact of lower depreciation and amortization on assets amortized or depleted on the basis of tons produced, processed, or sold.
Amortization of acquired sales contracts, net. The fair values of acquired sales contracts are amortized over the tons of coal shipped during the term of the contracts. In the first quarter of 2012, amortization expense related to contracts we acquired in 2009 with the Jacobs Ranch operations in the PRB was offset by amortization income related to the contracts we acquired with the ICG operations. We expect net amortization income of acquired sales contracts, based upon expected shipments, to be approximately $18.0 million in 2012.
Selling, general and administrative expenses. Selling, general and administrative expenses were essentially flat when compared with the first quarter of 2011. Our growth in 2012 has resulted in an increase in salary and benefit costs, travel costs, and other professional service fees. These were offset by a decrease in incentive compensation costs of $2.7 million and the net obligation under the deferred compensation plan of $1.7 million.
Other operating income, net. When compared with 2011, other operating income, net increased in 2012 primarily from a gain of $12.5 million on the sale of non-core business assets, as well contributions from the acquired ICG operations.
Operating segment results. The following table shows results by operating segment for three months ended March 31, 2012 and compares it with the information for the three months ended March 31, 2011:
Three Months Ended March 31 Increase (Decrease)
2012 2011 $ %
(in thousands, except per-ton and percentages)
Powder River Basin
Tons sold (in thousands) 27,215 28,830 (1,615 ) (5.6 )%
Coal sales realization per ton
sold(1) $ 13.87 $ 13.51 $ 0.36 2.7 %
Operating margin per ton
sold(2) $ 1.15 $ 1.60 $ (0.45 ) (28.1 )%
Adjusted EBITDA(3) (in
thousands) $ 74,183 $ 93,716 $ (19,533 ) (20.8 )%
Appalachia
Tons sold (in thousands) 4,666 3,592 1,074 29.9 %
Coal sales realization per ton
sold(1) $ 88.23 $ 80.92 $ 7.31 9.0 %
Operating margin per ton
sold(2) $ 1.97 $ 16.00 $ (14.03 ) (87.7 )%
Adjusted EBITDA(3) (in
thousands) $ 80,165 $ 77,986 $ 3,158 4.1 %
Western Bituminous
Tons sold (in thousands) 3,261 4,186 (925 ) (22.1 )%
Coal sales realization per ton
sold(1) $ 36.77 $ 34.87 $ 1.90 5.4 %
Operating margin per ton
sold(2) $ 9.79 $ 6.36 $ 3.43 53.9 %
Adjusted EBITDA(3) (in
thousands) $ 50,820 $ 47,420 $ 2,422 5.1 %
|
(2) Operating margin per ton sold is calculated as coal sales revenues less cost of coal sales, depreciation, depletion and amortization and sales contract amortization divided by tons sold.
(3) 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. Segment Adjusted EBITDA is reconciled to net income at the end of this "Results of Operations" section.
Powder River Basin - Segment Adjusted EBITDA decreased in the first quarter of 2012 when compared to the first quarter of 2011, due to the lower sales volumes in the Powder River Basin from the production cutbacks in response to market conditions. Per-ton costs were also higher due to the lower production levels, which offset the impact of slightly higher per-ton selling prices.
Appalachia - Segment Adjusted EBITDA increased slightly from the first quarter of 2011 primarily as a result of an increase in the volumes and pricing of metallurgical-quality coal sold. We sold 1.6 million tons of metallurgical-quality coal in the first quarter of 2012 compared to 1.4 million tons in the first quarter of 2011. The volume contributions from the acquired ICG operations were offset by the impact of unfavorable market conditions. The benefit from higher per-ton realizations, net of sales sensitive costs, in the first quarter of 2012 was offset by the impacts of lower production levels and the Mountain Laurel idling, which resulted in an increase on our average per-ton production costs, as well as approximately $7 million in severance and closure related costs.
Western Bituminous - Improved Segment Adjusted EBITDA, despite appreciably lower sales volumes, was due to improved pricing resulting from increased export shipments. Operating margins also improved as a result, but export sales also resulted in higher per-ton costs from the cost of moving coal to the point of sale.
Net interest expense. The following table summarizes our net interest expense for three months ended March 31, 2012 and compares it with the information for the three months ended March 31, 2011:
Increase (Decrease) in Net
Three Months Ended March 31 Income
2012 2011 Amount %
(Amounts in thousands, except percentages)
Interest expense, net:
Interest expense (74,772 ) (34,580 ) (40,192 ) 116.2 %
Interest income 1,021 746 275 36.9
$ (73,751 ) $ (33,834 ) $ (39,917 ) 118.0 %
|
The increase in interest expense during the first quarter of 2012 when compared with the first quarter of 2011 is the result of the ICG acquisition financing.
Income taxes. Our effective income tax rate is sensitive to changes in and the relationship between annual profitability and the deduction for percentage depletion. The following table summarizes our income taxes for the three months ended March 31, 2012 and compares it with the information for the three months ended March 31, 2011:
Increase (Decrease) in Net
Three Months Ended March 31 Income
2012 2011 Amount %
(Amounts in thousands, except percentages)
Provision for (benefit from)
income taxes $ (21,079 ) $ 12,530 $ 33,609 268.2 %
|
The income tax provision in the first quarter of 2012 reflects our pretax loss combined with percentage depletion adjustments, including a tax benefit of $5.4 million related to the recognition of tax benefits based on an approved change in accounting method relating to partnership deductions.
Reconciliation of Segment Adjusted EBITDA to Net Income
The discussion in "Results of Operations" includes references to our Adjusted EBITDA results. 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. We believe that Adjusted EBITDA presents a useful measure of our ability to service and incur debt based on ongoing operations. 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,
2012 2011
Reported Segment Adjusted EBITDA $ 205,172 $ 219,122
Corporate and other(1) (25,345 ) (27,676 )
Adjusted EBITDA 179,827 191,446
Depreciation, depletion and amortization (139,966 ) (83,537 )
Amortization of acquired sales contracts, net 14,017 (5,944 )
Interest expense (74,772 ) (34,580 )
Interest income 1,021 746
(Provision for) benefit from income taxes 21,079 (12,530 )
Net income attributable to Arch Coal $ 1,206 $ 55,601
|
Liquidity and Capital Resources
Our primary sources of cash are coal sales to customers, borrowings under our credit facilities and other financing arrangements, and debt and equity offerings related to significant transactions. Excluding any significant mineral reserve acquisitions, we generally satisfy our working capital requirements and fund capital expenditures and debt-service obligations with cash generated from operations or borrowings under our lines of credit. The borrowings under these arrangements are classified as current if the underlying credit facilities expire within one year or if, based on cash projections and management plans, we do not have the intent to replace them on a long-term basis. Such plans are subject to change based on our cash needs.
On April 30, 2012, we received commitment letters with lending institutions to refinance certain of our indebtedness having near-term maturities and to increase our liquidity in order to execute on key long-term growth initiatives, particularly the development of our metallurgical coal properties. As part of the financing package, these lenders have agreed, subject to certain customary conditions, to enter into an amendment to our existing senior secured revolving credit facility which will, among other things, suspend our compliance with the debt-to-EBITDA ratio and other financial covenants in the existing credit agreement over the next 24 months and replace them with minimum performance targets at levels consistent with the current coal market environment. We will also receive a $1 billion, six-year term loan facility, which will contain no financial maintenance covenants, and the maximum borrowing capacity of the revolving credit facility will be reduced from $2 billion to $1 billion. We will use the proceeds of the term loan to retire the outstanding $450.0 million aggregate principal amount of 6 ¾% Senior Notes due 2013 issued by Arch Western Finance, LLC ("Arch Western Finance"), our indirect subsidiary.
On May 1, 2012, Arch Western Finance commenced a cash tender offer for any and all of its outstanding senior notes. In connection with the tender offer, Arch Western Finance is soliciting consents from the holders of the senior notes for certain proposed amendments to the indenture governing the notes that would eliminate most of the covenants and certain default provisions applicable to the senior notes, as well as reduce the minimum notice period in the optional redemption provision of the senior notes from 30 days to three days. If Arch Western Finance purchases less than all of the outstanding senior notes in the tender offer, it intends to redeem any senior notes that remain outstanding. The terms and conditions of the tender offer and consent solicitation are described in an Offer to Purchase and Consent Solicitation Statement (the "Statement") and a related Consent and Letter of Transmittal (the "Letter of Transmittal"), which have been sent to holders of the senior notes. Arch Western Finance's obligations to accept any senior notes tendered and to pay the applicable consideration for them are set forth solely in the Statement and the Consent and Letter of Transmittal. This Quarterly Report on Form 10-Q is not an offer to purchase, a solicitation of an offer to sell, or a solicitation of consents with respect to any securities. Neither we nor Arch Western Finance is making any recommendation in connection with the tender offer and the consent solicitation. The Consent Solicitation expires on May 14, 2012, prior to which the consideration for each $1,000 of principal is $1,002.50. For notes tendered after the expiration of the Consent Solicitation and before May 29, 2012, the end of the tender offer, the consideration for each $1,000 of principal is $972.50.
Our strategy to maintaining our liquidity in the near term includes a reduction of our dividend from $0.11 to $0.03 per share.
We believe that cash generated from operations and borrowings under our credit facilities or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for at least the next several years. We manage our exposure to changing commodity prices for our non-trading, long-term coal contract portfolio through the use of long-term coal supply agreements. We enter into fixed price, fixed volume supply contracts with terms greater than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt service obligations, to fund planned capital expenditures, to make acquisitions, to repurchase our common shares and to pay dividends will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.
March 31, December 31,
2012 2011
(In thousands)
Indebtedness to banks under credit facilities $ 515,300 $ 481,300
6.75% senior notes ($450.0 million face value) due
July 1, 2013 450,809 450,971
8.75% senior notes ($600.0 million face value) due
August 1, 2016 589,463 588,974
7.00% senior notes due June 15, 2019 at par 1,000,000 1,000,000
7.25% senior notes due October 1, 2020 at par 500,000 500,000
7.25% senior notes due June 15, 2021 at par 1,000,000 1,000,000
Other 14,580 21,903
4,070,152 4,043,148
Less current maturities of debt and short-term
borrowings 102,356 280,851
Long-term debt $ 3,967,796 $ 3,762,297
|
The Company's average borrowing level under lines of credit and short term borrowings was approximately $489 million and $60 million for the three months ended March 31, 2012 and 2011, respectively.
The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2012 and March 31, 2011.
Three Months Ended March 31
2011 2011
(in thousands)
Cash provided by (used in):
Operating activities $ 54,990 $ 86,145
Investing activities (83,750 ) (93,529 )
Financing activities 8,381 (16,989 )
|
Cash provided by operating activities decreased in the first quarter of 2012 compared to 2011, driven by lower operating income.
We used less cash in investing activities in the first quarter of 2012 compared to the amount used in 2011, primarily due to the disposition of non-core assets and a decrease in investments and prepaid royalties in 2012. These factors were offset by an increase in capital expenditures, we spent approximately $37 million during the first quarter of 2012 on the development of the Leer mine, previously the Tygart Valley mine.
Cash provided by financing activities was $8.4 million in the first quarter of 2012, compared to the cash used in financing activities during 2011 of $17.0 million due to an increase in borrowings under lines of credit of $29.3 million, partially offset by an increase in dividends paid of $7.1 million, due to an increase in shares outstanding as a result of the shares issued in 2011 to finance the ICG acquisition and an increase of $0.01 in the dividend rate.
Ratio of Earnings to Fixed Charges
The following table sets forth our ratios of earnings to combined fixed charges and preference dividends for the periods indicated:
Three Months Ended
March 31
2012 2011
Ratio of earnings to combined fixed charges and
preference dividends(1) 0.74x 2.84x
|
(1) Earnings consist of income from operations before income taxes and are adjusted to include only distributed income from affiliates accounted for on the equity method and fixed charges (excluding capitalized interest). Fixed charges consist of interest incurred on indebtedness, the portion of operating lease rentals deemed representative of the interest factor and the amortization of debt expense.
|
|