"As previously announced, Arch Coal realized very strong margins on the limited tonnage that was open to market-based pricing during the quarter," said Steven F Leer, Arch Coal's president and chief executive officer. "Moreover, nearly all of our mines performed well during the period, and continue to operate at high levels of efficiency today."
The one operation that struggled during the quarter was the West Elk mine in Colorado, which encountered higher-than-expected methane levels following the relocation of its longwall mining system to a new reserve area in late February.
"We have made progress in combating the problem, and we are optimistic that the mine can return to reasonably strong levels of production in the second half of the year," Leer said. "However, the problem did lead to a substantial curtailment of planned shipments in the first quarter, and it will have an impact on shipments during the second quarter as well."
In addition to strong market-based pricing on its open tonnage, the company also benefited from income tax credits related to depletion and a $US3.5 million pre-tax gain associated with the reversal of certain previously recorded reclamation liabilities. Offsetting those benefits were accruals related to stock-based compensation benefit programs that could be realized in future periods as a result of improved stock performance.
Revenues during the quarter totaled $US381.4 million while coal sales amounted to 27.2 million tons ($US357.8 million and 27.8 million tons in the same period of 2000.) Adjusted EBITDA for the quarter totaled $80.3 million, compared to $63.6 million in the first quarter of 2000.
Coal markets continued to strengthen during the quarter, especially in Arch's two principal producing regions. "The spot price of Powder River Basin coal has tripled in the past 12 months, and the spot price of central Appalachian compliance coal has doubled," Leer said. "We are particularly encouraged by the fact that prices continued to improve in both regions during March and April, months when electricity demand typically falls off and coal prices soften."
After committing almost all its expected 2001 production, Arch has only about 1.5 million tons of coal to ship at current spot pricing for the remainder of 2001. The company currently has approximately 30% of its expected production open to market-based pricing in 2002, 50% in 2003, and 75% in 2004.
"In recent years, power generators have waited until the summer months or even later before seeking to secure new supply commitments for the following year," Leer said. "In contrast, we have already received a substantial number of solicitations for 2002 business and are engaged in active negotiations with some of these generators. We view this development as a positive indication that pricing for our open-to-market business in 2002 could be quite strong."
"Moreover, we continue to be encouraged by other developments that should continue to exert a positive influence on coal prices," Leer continued. "Natural gas prices remain high, hydroelectric output is being adversely affected by drought-like conditions in the western United States, and the nuclear system is producing at near its practical capacity. Furthermore, coal stockpiles at U.S. power plants were 35% lower at the outset of 2001 than a year earlier, and given current coal production levels we could see a further erosion of those stockpiles this summer."
Meanwhile, coal-fired power plants are operating at a utilization rate of only 70% and Arch expects coal demand to continue climbing as power generators seek to run these plants at ever-higher levels of efficiency.
The company said that in recent weeks, the West Elk mine has completed revisions to its ventilation plan and has made progress in diluting the liberated methane levels. "We are making strides in addressing the higher methane levels, and we are optimistic about our ability to effectively manage the problem over the long term," Leer said.
West Elk is in the process of drilling degasification holes inside the mine and will soon drill similar holes from the surface that should help control methane levels over time. The mine was idle for roughly six months in 2000 due to a fire that occurred in the western section of the mine. In February 2001, West Elk completed mining the last longwall panel in the western section and moved its longwall mining system to a new reserve area on the mine's east side. West Elk recently completed efforts to permanently seal the entire west side of the mine.
Of the 27.2 million tons of coal that Arch sold during the first quarter, approximately 8.9 million tons originated at its eastern operations and 18.3 million tons originated at its western operations. Arch Coal had an average operating realization of $US13.24 per ton and average operating costs of $US12.12 per ton. The eastern operations had an average realized sales price of $US27.76 per ton and an average cost of $US24.57 per ton during the quarter. The western operations had an average realized sales price of $US6.28 per ton and an average cost of $US6.14 per ton during the quarter.
In the east, Arch expects to sell a total of approximately 34 million tons of coal in 2001 from its mines in central Appalachia. In the west, Arch expects to sell approximately 65 million tons of coal at its Black Thunder mine in the Powder River Basin of Wyoming and between 4 million and 6 million tons of coal at the West Elk mine in Colorado. The actual volume produced at West Elk will be largely dependent on the company's ability to manage the high methane levels currently being experienced there.