Arch Coal, Inc. Reports Second Quarter Results

ST. LOUIS, July 25 /PRNewswire-FirstCall/ -- Arch Coal, Inc. today announced that it had income available to common shareholders of $1.7 million, or $0.03 per fully diluted share, for its second quarter ended June 30, 2005. Excluding special items, Arch had income available to common shareholders of $3.1 million, or $.05 per fully diluted share. In the second quarter of 2004, Arch had income available to common shareholders of $10.7 million, or $0.19 per fully diluted share, excluding special items. (See the table that follows this release for a reconciliation to GAAP numbers.)

"As previously announced, Arch's performance during the second quarter was hampered by highly publicized rail disruptions in both the east and the west," said Steven F. Leer, Arch Coal's president and chief executive officer. "Those disruptions were most pronounced in the Powder River Basin of Wyoming, where shipments from our Black Thunder mine were reduced by a total of 3.8 million tons and production was curtailed by approximately two million tons." In total, poor rail performance reduced Arch's financial results by an estimated $0.35 for the quarter, according to Leer.

"Our mining operations achieved a solid overall performance," said John W. Eaves, Arch's executive vice president and chief operating officer. As expected, the principal exception was the Mingo Logan longwall mine in southern West Virginia, which struggled in April and May as the mine continued to address water-related challenges first encountered following a major longwall move early in 2005. "After an improved performance in June and a good start to July, we are confident that Mingo Logan has overcome these operational challenges," Eaves said.

During the second quarter, revenues totaled $633.8 million, compared to $422.8 million during the same period last year. Sales volumes totaled 34.6 million tons, compared to 26.4 million tons during the same period last year as originally reported, or 30.0 million tons reflecting Canyon Fuel on a 100% basis. (Arch accounted for Canyon Fuel on the equity method prior to acquiring the remaining 35% interest in the company in July 2004.) Operating income for the second quarter totaled $21.5 million, compared to $24.9 million in the second quarter of 2004. Adjusted EBITDA totaled $73.6 million, compared to $65.4 million in last year's second quarter.

For the six months ended June 30, 2005, income available to common shareholders totaled $19.1 million, or $0.30 per fully diluted share, excluding special items. (See the table that follows this release for a reconciliation to GAAP numbers.) That compares to $19.1 million, or $0.35 per fully diluted share, on a comparable basis for the same period of 2004. Revenues for the first six months totaled $1,234.3 million and coal sales volumes totaled 71.7 million tons, vs. $826.3 million and 52.3 million tons in the comparable period of 2004, or 58.7 million tons reflecting Canyon Fuel on a 100% basis. Operating income for the first six months of 2005 totaled $57.4 million excluding special items, compared to $48.9 million in the same period of 2004 on a comparable basis. Adjusted EBITDA totaled $160.4 million for the first six months excluding special items, compared to $130.0 million for the same period of 2004 on a comparable basis.

Strengthening U.S. Coal Markets

Coal markets have strengthened significantly since the beginning of the second quarter in response to a growing U.S. economy, hotter than normal summer temperatures and extremely high prices for competing fuels. Quoted spot prices for Powder River Basin coal have risen nearly 70% since 2005 began, and the robust prices in both the Western Bituminous and Central Appalachia regions have once again begun to edge higher as well.

The major maintenance and repair work currently under way on the joint line rail system in the Powder River Basin is likely to tighten the market still further, according to Leer. Utility stockpiles at the end of June were approximately 15% below the five-year average, according to Arch estimates. "Power generators are likely to see stockpile levels erode still further in coming weeks, with record lows likely by the end of summer," Leer said. "As a result, we expect unprecedented demand for coal as we enter 2006, with utilities competing aggressively for available tonnage."

The summer of 2005 has been approximately 9% warmer than normal, according to the Energy Information Administration. Electric generation is up 1.7% year to date, while coal production has increased 0.8% based on tonnage -- and less than that based on total Btus produced.

Coal consumption is rising most rapidly in the regions of the country most dependent on Powder River Basin coal, according to Arch analysis. The western rail carriers have reported that a number of the power plants on their systems are reaching critically low stockpile levels, and have suggested that those plants evaluate all fuel supply options. "Several Arch customers that generally burn PRB coal exclusively have approached us in recent weeks to inquire about the possible availability of tons in other regions," Leer said. "Such efforts to find replacement tons are causing the market to tighten further in all regions, and underscore the value of Arch's multi-regional portfolio of mines in serving the needs of our customer base."

Sales Contract Agreements

Arch continues to approach the current market environment in a patient but opportunistic manner, according to Leer. "Our strategy is to layer in attractive new contracts in this rising market environment, while maintaining significant exposure to dynamic U.S. coal markets," he said.

Since the beginning of 2005, Arch has reached agreements to ship approximately 20 million tons of PRB coal per year in 2006, 2007 and 2008, at average realized prices 40% to 60% higher than the company's average realized price for PRB coal during the first half of 2005, factoring in the premium earned for ultra-low-sulfur Black Thunder coal based on current sulfur dioxide emissions allowance prices.

In the Western Bituminous Region, 2006 spot prices quoted in Argus Coal Daily are between 70% and 90% higher than the average price Arch is currently receiving for its tonnage in Utah and Colorado. In Central Appalachia, 2006 spot prices are approximately 30% to 40% higher than Arch's current average realization on shipments from that region. With the vast majority of Arch's existing coal supply agreements scheduled to roll off over the next three years, such a favorable market environment creates significant opportunities for value creation.

At present, Arch has approximately 35 to 45 million tons of its budgeted production yet-to-be-priced for 2006, and 80 to 90 million tons yet-to-be- priced for 2007.

Regional Analysis and Other Data PRB Central App. Western Total Bit.(1) 2Q05 2Q04 2Q05 2Q04 2Q05 2Q04 2Q05 2Q04 Tons sold (in mm) 22.0 17.6 8.0 7.3 4.7 5.0 34.6 30.0 Sales price per ton(2) $8.11 $6.91 $42.44 $36.21 $19.36 $16.09 $17.52 $15.61 Operating cost per ton(2),(3) $7.39 $6.07 $40.87 $33.37 $13.49 $14.34 $15.91 $14.13 Operating margin per ton(4) $0.72 $0.85 $1.57 $2.84 $5.87 $1.75 $1.61 $1.49 Note: Per-ton costs have been adjusted to include the effects of amortization of values attributed to coal supply agreements in purchase accounting. Comparable amounts for all quarters beginning Q1 2003 can be found in the investor section of archcoal.com. (1) For comparative purposes, Western Bituminous Region (WBIT) data reflect the results of Canyon Fuel Company at 100% in both periods, even though Arch accounted for Canyon Fuel on the equity method until acquiring the remaining 35% of the company on July 31, 2004. (2) Per-ton realizations and costs as detailed above exclude transportation costs that are billed to customers. Powder River Basin transportation costs totaled $0.6 million in the second quarter of 2005 and $0.7 million in the second quarter of 2004. Central Appalachia transportation costs totaled $12.1 million in the second quarter of 2005 and $10.1 million in the second quarter of 2004. Western Bituminous transportation costs totaled $14.5 million in the second quarter of 2005 and $13.6 million in the second quarter of 2004. (3) Per-ton costs detailed above exclude postretirement medical costs totaling $14.6 million in the second quarter of 2005 and $14.1 million in the second quarter of 2004. Capital Spending and DD&A (in millions): Q2 2005 Q2 2004 YTD 2005 FY 2005 (proj.) Capital spending $81.1 $38.2 $139.4 $400-$420 DD&A $52.1 $36.1 $103.0 $230-$250 Note: Capital spending and DD&A data reflect Arch's 65% ownership interest in Canyon Fuel Company through July 31, 2004, and its 100% ownership position thereafter.

During the quarter, Arch made steady progress on the previously announced development of the five-million-ton-per-year Mountain Laurel longwall mine in West Virginia and the three-million-ton-per-year Skyline longwall mine in Utah. Skyline is scheduled to ramp to full production in mid-2006, and Mountain Laurel in the second half of 2007. "With strong demand and limited expansion opportunities in both Central Appalachia and the Western Bituminous Region, we expect excellent rates of return on both of these projects," Eaves said.

Arch expects to fund the continuing capital requirements of these expansion projects with available cash, having ended the quarter with a cash balance of approximately $259.4 million.

Looking Ahead

"Despite ongoing transportation challenges, we are increasingly confident about the long-term prospects for the U.S. coal industry in general, and Arch

Coal in particular," Leer said. "Virtually every major indicator points to an attractive and sustainable U.S. coal market well into the future."

Even the railroads' decision to perform major maintenance on the entire joint line rail system in the Powder River Basin should prove beneficial in the long run, Leer said. "It is absolutely imperative U.S. rail carriers devote the appropriate level of resources and make the necessary investments in infrastructure to support America's growing demand for coal in the years ahead," Leer said. "We have been assured by the railroads that the work being done currently will translate into significant improvements in service levels next year -- and a more efficient and reliable rail system for many years to come."

Arch currently expects full year 2005 earnings to be in the range of $0.75 to $1.25 per share, based on current assumptions about rail performance.

"Between now and 2008, the vast majority of Arch's coal supply agreements will expire and reset to market-based pricing, and new low-cost production will come on line for Arch in both the east and west," Leer said. "We expect these developments to drive progressively stronger earnings and cash flow over that time period, and to create significant new value for our shareholders."

A conference call concerning second 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 ( http://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 provides the fuel for approximately 7% 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.

Arch Coal, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended Six Months Ended June 30 June 30 2005 2004 2005 2004 (Unaudited) (Unaudited) Revenues Coal sales $633,797 $422,778 $1,234,262 $826,268 Costs and expenses Cost of coal sales 542,073 364,083 1,061,714 712,621 Depreciation, depletion and amortization 52,142 36,080 103,045 72,185 Selling, general and administrative expenses 17,979 11,717 40,255 26,630 Other expenses 12,498 6,853 25,545 12,497 624,692 418,733 1,230,559 823,933 Other operating income Income from equity investments - 5,995 - 9,685 Gain on sale of units of Natural Resource Partners, LP - 317 - 89,955 Other operating income 12,388 14,513 43,743 29,804 12,388 20,825 43,743 129,444 Income from operations 21,493 24,870 47,446 131,779 Interest expense, net: Interest expense (19,389) (14,101) (37,460) (28,842) Interest income 1,681 903 3,526 1,613 (17,708) (13,198) (33,934) (27,229) Other non-operating income (expense): Expenses resulting from early debt extinguishment and termination of hedge accounting for interest rate swaps (2,066) (2,066) (4,133) (4,132) Other non-operating income (expense) 455 202 70 373 (1,611) (1,864) (4,063) (3,759) Income before income taxes 2,174 9,808 9,449 100,791 (Benefit from) provision for income taxes (1,300) (1,300) (600) 19,700 Net income 3,474 11,108 10,049 81,091 Preferred stock dividends (1,797) (1,797) (3,594) (3,594) Net income available to common shareholders $1,677 $9,311 $6,455 $77,497 Earnings per common share Basic earnings per common share $0.03 $0.17 $0.10 $1.43 Diluted earnings per common share $0.03 $0.17 $0.10 $1.31 Weighted average shares outstanding Basic 63,494 54,582 63,140 54,206 Diluted 64,520 55,550 64,158 62,021 Dividends declared per common share $0.0800 $0.0800 $0.1600 $0.1375 Adjusted EBITDA (A) $73,635 $65,413 $150,491 $212,817 (A) Adjusted EBITDA is defined and reconciled under "Reconciliation of Non-GAAP Measures" later in this release. Arch Coal, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands) June 30, December 31, 2005 2004 Assets (Unaudited) Current assets Cash and cash equivalents $259,382 $323,167 Trade receivables 243,306 180,902 Other receivables 19,674 34,407 Inventories 135,782 119,893 Prepaid royalties 6,913 12,995 Deferred income taxes 24,789 33,933 Other 27,317 25,560 Total current assets 717,163 730,857 Property, plant and equipment, net 2,065,591 2,033,200 Other assets Prepaid royalties 105,641 87,285 Goodwill 36,132 37,381 Deferred income taxes 252,934 241,226 Other 104,979 126,586 499,686 492,478 Total assets $3,282,440 $3,256,535 Liabilities and stockholders' equity Current liabilities Accounts payable $162,043 $148,014 Accrued expenses 224,624 217,216 Current portion of debt 5,008 9,824 Total current liabilities 391,675 375,054 Long-term debt 974,045 1,001,323 Accrued postretirement benefits other than pension 395,500 380,424 Asset retirement obligations 182,103 179,965 Accrued workers' compensation 76,242 82,446 Other noncurrent liabilities 142,090 157,497 Total liabilities 2,161,655 2,176,709 Stockholders' equity Preferred stock 29 29 Common stock 643 631 Paid-in capital 1,319,289 1,280,513 Retained deficit (169,965) (166,273) Unearned compensation (4,508) (1,830) Treasury stock, at cost (5,047) (5,047) Accumulated other comprehensive loss (19,656) (28,197) Total stockholders' equity 1,120,785 1,079,826 Total liabilities and stockholders' equity $3,282,440 $3,256,535 Arch Coal, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In Thousands) Six Months Ended June 30, 2005 2004 (Unaudited) Operating activities Net income $10,049 $81,091 Adjustments to reconcile to cash provided by operating activities: Depreciation, depletion and amortization 103,045 72,185 Prepaid royalties expensed 10,687 7,853 Accretion on asset retirement obligations 7,475 5,893 Net gain on disposition of assets (20,103) (607) Gain on sale of units of Natural Resource Partners, LP - (89,955) Income from equity investments - (9,685) Net distributions from equity investments - (2,739) Other nonoperating expense 4,063 3,759 Changes in: Receivables (47,371) (40,495) Inventories (15,889) (13,399) Accounts payable and accrued expenses 21,521 2,417 Income taxes 2,515 4,729 Accrued postretirement benefits other than pension 15,076 11,625 Asset retirement obligations (5,338) (4,542) Accrued workers' compensation benefits (6,204) 95 Federal income tax receipts 14,701 - Other 34 (8,243) Cash provided by operating activities 94,261 19,982 Investing activities Capital expenditures (139,355) (69,132) Proceeds from sale of units of Natural Resource Partners, LP - 105,365 Proceeds from dispositions of property, plant and equipment 20,395 1,010 Additions to prepaid royalties (22,961) (22,663) Cash (used in) provided by investing activities (141,921) 14,580 Financing activities Net payments on revolver and lines of credit (31,411) - Payments on long-term debt - (6,300) Deferred financing costs (2,298) (1,160) Dividends paid (13,741) (11,062) Proceeds from sale of common stock 31,325 25,719 Cash (used in) provided by financing activities (16,125) 7,197 (Decrease) increase in cash and cash equivalents (63,785) 41,759 Cash and cash equivalents, beginning of period 323,167 254,541 Cash and cash equivalents, end of period $259,382 $296,300 Canyon Fuel Company cash flow information (for Arch Coal's 65% ownership percentage through July 31, 2004) Depreciation, depletion and amortization - 8,853 Additions to property, plant and equipment - (5,164) 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 net income as reported under GAAP. Adjusted EBITDA and Adjusted EBITDA Excluding Special Items: (A) Adjusted EBITDA is defined as net income before the effect of net interest expense; income taxes; our depreciation, depletion and amortization; our equity interest in the depreciation, depletion and amortization of Canyon Fuel Company, LLC (for periods prior to our July 31, 2004 purchase of the remainder of Canyon Fuel); expenses resulting from early extinguishment of debt; and mark-to-market adjustments in the value of derivative instruments. Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded to calculate 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 service and incur debt based on ongoing operations. Furthermore, analogous measures are used by industry analysts to evaluate operating performance. 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 Six Months Ended June 30 June 30 2005 2004 2005 2004 (Unaudited) (Unaudited) Net income $3,474 $11,108 $10,049 $81,091 Provision for income taxes (1,300) (1,300) (600) 19,700 Interest expense, net 17,708 13,198 33,934 27,229 Depreciation, depletion and amortization - Arch Coal, Inc. 52,142 36,080 103,045 72,185 DD&A - Equity interest in Canyon Fuel Company, LLC - 4,463 - 8,853 Expenses from early debt extinguishment and other nonoperating 1,611 1,864 4,063 3,759 Adjusted EBITDA $73,635 $65,413 $150,491 $212,817 Adjusted EBITDA Excluding Special Items Adjusted EBITDA $73,635 $65,413 $150,491 $212,817 Gain on sale of units of Natural Resource Partners, L.P. - (317) - (89,955) Long-term incentive compensation plan expense - - 9,937 5,003 Severance costs related to Skyline idling - - - 2,110 Adjusted EBITDA excluding special items $73,635 $65,096 $160,428 $129,975 Operating Income Excluding Special Items: Operating income $21,493 $24,870 $47,446 $131,779 Gain on sale of units of Natural Resource Partners, L.P. - (317) - (89,955) Long-term incentive compensation plan expense - - 9,937 5,003 Severance costs related to Skyline idling - - - 2,110 Operating income excluding special items $21,493 $24,553 $57,383 $48,937 Net Income Available to Common Shareholders and Earnings Per Common Share Excluding Special Items: Three Months Ended Six Months Ended June 30 June 30 2005 2004 2005 2004 (Unaudited) (Unaudited) Net income $3,474 $11,108 $10,049 $81,091 Preferred stock dividends (for periods where preferred shares are assumed to be converted) (1,797) (1,797) (3,594) (3,594) Net income available to common shareholders $1,677 $9,311 $6,455 $77,497 Other non-operating expense 1,611 1,864 4,063 3,759 Gain on sale of units of Natural Resource Partners, L.P. - (317) - (89,955) Long-term incentive compensation plan expense - - 9,937 5,003 Severance costs related to Skyline idling - - - 2,110 Tax impact of the excluded items (161) (110) (1,400) 20,718 Net income available to common shareholders excluding special items $3,127 $10,748 $19,055 $19,132 Fully diluted shares outstanding 64,520 55,550 64,158 62,021 Adjustment to exclude impact of convertible preferred shares that would not be dilutive - - - (6,896) Fully diluted shares outstanding 64,520 55,550 64,158 55,125 Earnings per fully diluted common share excluding special items $0.05 $0.19 $0.30 $0.35 Note: Payout under the company's long-term incentive compensation plan that was triggered in March 2005 when Arch's common stock achieved an average closing price of $40 or more during a period of 20 consecutive trading days. The current plan does not provide for additional payouts of this type in the future. Arch Western Resources, LLC Condensed Financial Information (In thousands) Three Months Ended Six Months Ended June 30 June 30 2005 2004 2005 2004 (Unaudited) (Unaudited) Tons sold 25,718 18,572 53,634 36,475 Coal sales revenues $274,700 $141,773 $552,116 $281,621 Income from operations 39,937 20,482 79,332 33,989 Net income 22,079 8,022 48,150 8,944 Adjusted EBITDA 64,254 41,705 129,167 76,237 Capital Expenditures 20,048 13,661 41,963 30,613 June 30 December 31 2005 2004 (Unaudited) Receivable from Arch Coal, Inc. $724,052 $677,934 Reconciliation of net income to adjusted EBITDA Three Months Ended Six Months Ended June 30 June 30 2005 2004 2005 2004 (Unaudited) (Unaudited) Net income $22,079 $8,022 $48,150 $8,944 Interest expense, net 6,720 9,073 13,929 18,270 Depreciation, depletion and amortization - Arch Western Resources 24,316 16,759 49,835 33,395 DD&A - Equity interest in Canyon Fuel Company, LLC - 4,463 - 8,853 Other nonoperating expense 3,388 3,388 6,775 6,775 Minority interest 7,751 - 10,478 - Adjusted EBITDA (A) $64,254 $41,705 $129,167 $76,237 (A) Adjusted EBITDA is defined as net income before the effect of net interest expense; our depreciation, depletion and amortization; our equity interest in the depreciation, depletion and amortization of Canyon Fuel Company, LLC (for periods prior to our July 31, 2004 purchase of the remainder of Canyon Fuel); expenses resulting from early extinguishment of debt; mark-to-market adjustments in the value of derivative instruments; and the minority interest that Arch Western Resources holds in Canyon Fuel (Arch Coal, Inc. owns the remaining 35% as of July 31, 2004). Adjusted EBITDA is not a measure of financial performance in accordance with generally accepted accounting principles, and items excluded to calculate 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 service and incur debt based on ongoing operations. Furthermore, analogous measures are used by industry analysts to evaluate operating performance. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. The table above shows how we calculate Adjusted EBITDA.