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| ACI > SEC Filings for ACI > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
This document contains "forward-looking statements" ¯ that is, statements
related to future, not past, events. In this context, forward-looking statements
often address our expected future business and financial performance, and often
contain words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," or "will." Forward-looking statements by their nature address matters
that are, to different degrees, uncertain. For us, particular uncertainties
arise from changes in the demand for our coal by the domestic electric
generation industry; from legislation and regulations relating to the Clean Air
Act and other environmental initiatives; from operational, geological, permit,
labor and weather-related factors; from fluctuations in the amount of cash we
generate from operations; from future integration of acquired businesses; and
from numerous other matters of national, regional and global scale, including
those of a political, economic, business, competitive or regulatory nature.
These uncertainties may cause our actual future results to be materially
different than those expressed in our forward-looking statements. We do not
undertake to update our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by law. For a
description of some of the risks and uncertainties that may affect our future
results, see "Risk Factors" under Item 1A of our Annual Report on Form 10-K for
the year ended December 31, 2008 and under Part III, Item 1A of this report.
Overview
We are one of the largest coal producers in the United States. We sell
substantially all of our coal to power plants, steel mills and industrial
facilities. The locations of our mines enable us to ship coal to most of the
major coal-fueled power plants, steel mills and export facilities located in the
United States.
Our three reportable business segments are based on the low-sulfur U.S. coal
producing regions in which we operate - the Powder River Basin, the Western
Bituminous region and the Central Appalachia region. These geographically
distinct areas are characterized by geology, coal transportation routes to
consumers, regulatory environments and coal quality. These regional similarities
have caused market and contract pricing environments to develop by coal region
and form the basis for the segmentation of our operations.
The Powder River Basin is located in northeastern Wyoming and southeastern
Montana. The coal we mine from surface operations in this region has a very low
sulfur content and a low heat value compared to the other regions in which we
operate. The price of Powder River Basin coal is generally less than that of
coal produced in other regions because Powder River Basin coal exists in greater
abundance, is easier to mine and thus has a lower cost of production. In
addition, Powder River Basin coal is generally lower in heat value, which
requires some electric power generation facilities to blend it with higher Btu
coal or retrofit some existing coal plants to accommodate lower Btu coal. The
Western Bituminous region includes western Colorado, eastern Utah and southern
Wyoming. Coal we mine from underground and surface mines in this region
typically has a low sulfur content and varies in heat value. Central Appalachia
includes eastern Kentucky, Tennessee, Virginia and southern West Virginia. Coal
we mine from both surface and underground mines in this region generally has a
high heat value and low sulfur content. In addition, we may sell a portion of
the coal we produce in the Central Appalachia region as metallurgical coal,
which has high heat content, low expansion pressure, low sulfur content and
various other chemical attributes. As such, the prices at which we sell
metallurgical coal to customers in the steel industry generally exceed the
prices offered by power plants and industrial users for steam coal.
We estimate that year-to-date U.S. power generation has declined
approximately 4.2% through the third week of July 2009 in response to weak
domestic and international economic conditions. U.S. coal consumption has
declined significantly, primarily as a result of weak industrial demand in
geographic regions that traditionally rely more heavily on coal-fueled
electricity generation caused by the current U.S. economic recession. As a
result of these market pressures, coupled with continued geological challenges
in certain regions, cost pressures, regulatory hurdles and limited access to
capital, we expect that coal production and capital spending across the domestic
coal industry have been, and will continue to be, curtailed.
In response to weakened demand caused by challenging domestic and
international economic conditions, we have curtailed production in all operating
regions. In the Powder River Basin, we idled a second dragline and associated
equipment in the second quarter of 2009. In the Western Bituminous region, we
reduced production at our West Elk mine in response to declining demand from
power generation and industrial customers for Western Bituminous coal and
elevated levels of lower-quality, mid-ash coal currently being produced at the
mine resulting from intermittent sandstone intrusions. As a result of the
curtailment, we have laid off 61 employees, discontinued the use of 38
contractors and plan to reduce production by more than 2.5 million tons at
the West Elk mining complex in 2009. In Central Appalachia, we achieved
production cutbacks by slowing the rate of advance of equipment, by shortening
or eliminating shifts at several mining complexes, and by idling an underground
mine and certain surface mining equipment at our Cumberland River mining
complex, which included the layoff of 85 employees. In addition, we have
decreased our expected capital expenditures for 2009 and have established other
process improvement initiatives and cost containment programs.
Results of Operations
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Summary. Our results during the second quarter of 2009 when compared to the
second quarter of 2008 were influenced primarily by lower sales volumes due to
weak market conditions, more production days spent in longwall moves, and a
decrease in gains from our coal trading activities as compared to the second
quarter of 2008.
Revenues. The following table summarizes information about coal sales for the
three months ended June 30, 2009 and compares it with the information for the
three months ended June 30, 2008:
Three Months Ended June 30 Decrease
2009 2008 Amount %
(Amounts in thousands, except per ton data and percentages)
Coal sales $ 554,612 $ 785,117 $ (230,505 ) (29.4 )%
Tons sold 27,658 34,820 (7,162 ) (20.6 )%
Coal sales realization per ton sold $ 20.05 $ 22.55 $ (2.50 ) (11.1 )%
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Coal sales decreased in the second quarter of 2009 from the second quarter of
2008 primarily due to lower sales volumes in all segments, lower volumes of
metallurgical coal sales in our Central Appalachia region, regional sales mix,
and a decrease in transportation costs that are charged to customers. 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"
beginning on page 17.
Costs, expenses and other. The following table summarizes costs, expenses and
other components of operating income for the three months ended June 30, 2009
and compares them with the information for the three months ended June 30, 2008:
Increase (Decrease)
Three Months Ended June 30 in Net Income
2009 2008 $ %
(Amounts in thousands, except percentages)
Cost of coal sales $ 467,521 $ 568,483 $ 100,962 17.8 %
Depreciation, depletion and amortization 68,477 71,953 3,476 4.8
Selling, general and administrative
expenses 21,627 33,022 11,395 34.5
Change in fair value of coal derivatives
and coal trading activities, net (6,458 ) (53,160 ) (46,702 ) (87.9 )
Costs related to acquisition of Jacobs
Ranch 3,025 - (3,025 ) N/A
Other operating income, net (6,889 ) (4,405 ) 2,484 56.4
$ 547,303 $ 615,893 $ 68,590 11.1 %
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Cost of coal sales. Our cost of coal sales decreased in the second quarter of
2009 from the second quarter of 2008 primarily due to the lower sales volumes in
all operating segments. We have provided more information about our operating
segments sales and profitability under the heading "Operating segment results"
beginning on page 17.
Depreciation, depletion and amortization. When compared with the second
quarter of 2008, lower depreciation and amortization costs in the second quarter
of 2009 resulted from the impact of lower volume levels on depletion and
amortization costs calculated on a units-of-production method.
Selling, general and administrative expenses. The decrease in selling,
general and administrative expenses from the second quarter of 2008 to the
second quarter of 2009 is due primarily to a decrease in employee incentive
compensation costs of $2.8 million and a decrease of $10.3 million in costs
associated with our deferred compensation plan, where amounts to be paid to
participants are impacted by changes in the value of our common stock. In the
second quarter of 2008, our stock price rose $31.53 per share, which increased
the amounts due to participants under the plan. An increase in legal and other
professional fees of $1.6 million partially offset the effect of the decrease in
compensation-related costs.
Change in fair value of coal derivatives and coal trading activities, net.
Net gains relate to the net impact of our coal trading activities and the change
in fair value of other coal derivatives that have not been designated as hedge
instruments in a hedging relationship. Our coal trading function enabled us to
take advantage of the significant price movements in the coal markets during the
second quarter of 2008.
Costs related to acquisition of Jacobs Ranch. These costs represent costs we
incurred during the second quarter of 2009 related to our announced acquisition
of the Jacobs Ranch mine. Under accounting rules we adopted in the first quarter
of 2009, the costs of acquiring a business are expensed as incurred.
Other operating income, net. The change in net other operating income in the
second quarter of 2009 from the second quarter of 2008 is primarily the result
of an increase of approximately $4.0 million in net income from bookouts (the
offsetting of coal sales and purchase contracts) and customer tonnage
cancellations, partially offset by a decrease in transloading and leasing
income.
Operating segment results. The following table shows results by operating
segment for the three months ended June 30, 2009 and compares it with
information for the three months ended June 30, 2008:
Three Months Ended June 30 Increase (Decrease)
2009 2008 $ %
Powder River Basin
Tons sold (in thousands) 21,305 24,810 (3,505 ) (14.1 )%
Coal sales realization per ton sold (1) $ 12.56 $ 11.38 $ 1.18 10.4 %
Operating margin per ton sold (2) $ 0.72 $ 0.94 $ (0.22 ) (23.3 )%
Western Bituminous
Tons sold (in thousands) 3,475 5,722 (2,247 ) (39.3 )%
Coal sales realization per ton sold (1) $ 29.93 $ 29.91 $ 0.02 0.1 %
Operating margin per ton sold (2) $ (1.56 ) $ 7.54 $ (9.10 ) (120.7 )%
Central Appalachia
Tons sold (in thousands) 2,879 4,288 (1,409 ) (32.9 )%
Coal sales realization per ton sold (1) $ 58.54 $ 67.18 $ (8.64 ) (12.9 )%
Operating margin per ton sold (2) $ 3.10 $ 18.30 $ (15.20 ) (83.1 )%
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(1) Coal sales prices per ton exclude certain transportation costs that we pass through to our customers. We use these financial measures because we believe the amounts as adjusted better represent the coal sales prices we achieved within our operating segments. Since other companies may calculate coal sales prices per ton differently, our calculation may not be comparable to similarly titled measures used by those companies. For the three months ended June 30, 2009, transportation costs per ton were $0.05 for the Powder River Basin, $2.33 for the Western Bituminous region and $1.88 for Central Appalachia. For the three months ended June 30, 2008, transportation costs per ton were $0.03 for the Powder River Basin, $4.09 for the Western Bituminous region and $4.23 for Central Appalachia.
(2) Operating margin per ton sold is calculated as coal sales revenues less cost of coal sales and depreciation, depletion and amortization divided by tons sold.
Powder River Basin - The decrease in sales volume in the Powder River Basin
in the second quarter of 2009 when compared with the second quarter of 2008 is
due to weak market conditions. At the Black Thunder mining complex, in response
to these conditions, we reduced production and idled one dragline in the fourth
quarter of 2008 and another dragline in May 2009, along with related equipment.
Increases in sales prices during the second quarter of 2009 when compared with
the second quarter of 2008 primarily reflect higher pricing from contracts
committed during 2008, when market conditions were more favorable, partially
offset by the effect of lower pricing on market-index priced tons. On a per-ton
basis, operating margins in the second quarter of 2009 decreased from the second
quarter of 2008 due to an increase in per-ton costs, which more than offset the
contribution from higher sales prices. The increase in per-ton costs, despite
our cost containment efforts, resulted primarily from the effect of spreading
fixed costs over lower volume levels and higher hedged diesel fuel costs. Our
diesel fuel purchases are hedged under our risk management program as discussed
further under Quantitative and Qualitative Disclosures About Market Risk
beginning on page 24.
Western Bituminous - In the Western Bituminous region, we sold fewer tons in
the second quarter of 2009 than in the second quarter of 2008 due to more
production days spent in longwall moves in 2009 as well as quality issues at the
West Elk mining complex. We have encountered sandstone intrusions at the West
Elk mining complex that have resulted in a higher ash content in the coal
produced, and declining coal demand has had an impact on our efforts to market
this coal. As a result of the weak market demand for this coal, we have reduced
our production levels at the mine. To address any ongoing quality issues, we
plan to build a preparation plant at the mine by mid-
2010, with estimated capital costs of $25 million to $30 million. The
detrimental impact on our per-ton realizations of selling coal with a higher ash
content offset the beneficial impact of the roll-off of lower-priced legacy
contracts in 2008. Lower per-ton operating margins in the second quarter of 2009
were the result of the West Elk quality issues and lower production levels.
Central Appalachia - The decrease in sales volumes in the second quarter of
2009 when compared with the second quarter of 2008 was due to weaker market
demand. In response to the weakened demand, we reduced our production by slowing
the rate of advance of equipment, by shortening or eliminating shifts at several
mining complexes, and by idling an underground mine and certain surface mining
equipment at our Cumberland River mining complex. Weak economic conditions have
affected demand for metallurgical coal, and lower realizations in 2009 compared
to 2008 resulted from a decrease in our metallurgical coal sales volumes, which
offset the impact of higher base pricing during the second quarter of 2009 on
steam coal contracts signed during 2008, when market conditions were more
favorable. We sold 0.3 million tons into metallurgical markets in the second
quarter of 2009 compared to 1.3 million tons in the second quarter of 2008, and
because metallurgical coal generally commands a higher price than steam coal,
the decrease had a detrimental impact on our average realizations. Also
impacting our operating margin was an increase in operating costs per ton of
$6.56 for the second quarter of 2009 from the second quarter of 2008 due
primarily to the lower production levels.
Net interest expense. The following table summarizes our net interest expense
for the three months ended June 30, 2009 and compares it with the information
for the three months ended June 30, 2008:
Three Months Ended June 30 Decrease in Net Income
2009 2008 $ %
(Amounts in thousands, except percentages)
Interest expense $ (20,657 ) $ (18,721 ) $ (1,936 ) (10.3 )%
Interest income 417 468 (51 ) (10.9 )
$ (20,240 ) $ (18,253 ) $ (1,987 ) (10.9 )%
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The increase in net interest expense in the second quarter of 2009 compared
to the second quarter of 2008 is primarily due to a decrease in interest costs
capitalized in the second quarter of 2009 and higher borrowing levels, partially
offset by the impact of lower interest rates and a $1.4 million reduction of
interest expense in the second quarter of 2009 related to tax settlements.
Interest costs capitalized were $0.2 million during the second quarter of 2009,
compared with $3.0 million during the second quarter of 2008.
Income taxes. Our effective income tax rate is sensitive to changes in
estimates of annual profitability and the deduction for percentage depletion.
The following table summarizes our income taxes for the three months ended
June 30, 2009 and compares it with information for the three months ended
June 30, 2008:
Three Months Ended June 30 Increase in Net Income
2009 2008 $ %
The provision for income taxes for the three months ended June 30, 2009 represents the adjustment needed to reflect the benefit for the six months ended June 30, 2009 at the estimated annual effective tax rate for the year ended December 31, 2009.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Summary. Our results during the first six months of 2009 when compared to the
first six months of 2008 were influenced primarily by lower sales volumes due to
weak market conditions, more production days spent in longwall moves, and a
decrease in gains from our coal trading activities.
Revenues. The following table summarizes information about coal sales for the
six months ended June 30, 2009 and compares it with the information for the six
months ended June 30, 2008:
Six Months Ended June 30 Decrease
2009 2008 Amount %
(Amounts in thousands, except per ton data and percentages)
Coal sales $ 1,235,652 $ 1,484,467 $ (248,815 ) (16.8 )%
Tons sold 58,550 69,648 (11,098 ) (15.9 )%
Coal sales realization per ton sold $ 21.10 $ 21.31 $ (0.21 ) (1.0 )%
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Coal sales decreased in the six months ended June 30, 2009 from the six
months ended June 30, 2008 primarily due to lower sales volumes in all operating
regions. Average sales prices during the six months ended June 30, 2009 were
lower than during the six months ended June 30, 2008 due to regional sales mix,
a decrease in metallurgical sales volumes in our Central Appalachia region and a
decrease in transportation costs that we charge to customers, which offset the
impact of generally higher base pricing. 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" beginning on page 20.
Costs, expenses and other. The following table summarizes costs, expenses and
other components of operating income for the six months ended June 30, 2009 and
compares them with the information for the six months ended June 30, 2008:
Increase (Decrease)
Six Months Ended June 30 in Net Income
2009 2008 $ %
(Amounts in thousands, except percentages)
Cost of coal sales $ 1,014,647 $ 1,082,887 $ 68,240 6.3 %
Depreciation, depletion and amortization 141,518 144,995 3,477 2.4
Selling, general and administrative
expenses 46,741 58,702 11,961 20.4
Change in fair value of coal derivatives
and coal trading activities, net (6,986 ) (83,718 ) (76,732 ) (91.7 )
Costs related to acquisition of Jacobs
Ranch 6,375 - (6,375 ) N/A
Other operating income, net (12,524 ) (4,347 ) 8,177 188.1
$ 1,189,771 $ 1,198,519 $ 8,748 0.7 %
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Cost of coal sales. Our cost of coal sales decreased in the six months ended
June 30, 2009 from the six months ended June 30, 2008 due to the lower sales
volumes across all operating segments. We have provided more information about
our operating segments under the heading "Operating segment results" beginning
on page 20.
Depreciation, depletion and amortization. When compared with the six months
ended June 30, 2008, lower depreciation and amortization costs in the six months
ended June 30, 2009 resulted from the impact of lower volume levels on depletion
and amortization costs calculated on a units-of-production method.
Selling, general and administrative expenses. The decrease in selling,
general and administrative expenses from the six months ended June 30, 2008 to
the six months ended June 30, 2009 is due primarily to a decrease in employee
incentive compensation costs of $5.2 million and a decrease of $10.4 million in
costs associated with our deferred compensation plan, where amounts to be paid
to participants are impacted by changes in the value of our common stock,
primarily due to changes in our stock price in the first half of 2008. An
increase in legal and other professional fees of $1.9 million and a $1.5 million
contribution expense in 2009 to a company participating in the research and
development of technologies for capturing carbon dioxide emissions partially
offset the effect of the decrease in compensation-related costs.
Change in fair value of coal derivatives and coal trading activities, net.
Net gains relate to the net impact of our coal trading activities and the change
in fair value of other coal derivatives that have not been designated as hedge
instruments in a hedging relationship. Our coal trading function enabled us to
take advantage of the significant price movements in the coal markets during
2008.
Costs related to acquisition of Jacobs Ranch. These costs represent costs we
incurred during the six months ended June 30, 2009 related to our announced
acquisition of the Jacobs Ranch mine. Under accounting rules we adopted in the
first quarter of 2009, the costs of acquiring a business are expensed as
incurred.
Other operating income, net. The increase in net other operating income in
2009 from 2008 is primarily the result of an increase in net income of
approximately $7.0 million from bookouts (the offsetting of coal sales and
purchase contracts) and customer tonnage cancellations, and an increase in
income from equity investments of $2.4 million, primarily from our interest in
Knight Hawk Holdings, LLC. In addition, in 2008 we recognized unrealized losses
of $1.9 million on investments in marketable equity securities.
Operating segment results. The following table shows results by operating
segment for the six months ended June 30, 2009 and compares it with information
for the six months ended June 30, 2008:
Six Months Ended June 30 Increase (Decrease)
2009 2008 $ %
Powder River Basin
Tons sold (in thousands) 44,437 50,574 (6,137 ) (12.1 )%
Coal sales realization per ton sold (3) $ 12.92 $ 11.27 $ 1.65 14.6 %
Operating margin per ton sold (4) $ 1.04 $ 1.09 $ (0.05 ) (4.6 )%
Western Bituminous
Tons sold (in thousands) 7,426 10,773 (3,347 ) (31.1 )%
Coal sales realization per ton sold (3) $ 28.96 $ 28.43 $ 0.53 1.9 %
Operating margin per ton sold (4) $ (1.92 ) $ 7.09 $ (9.01 ) (127.1 )%
. . .
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