Arch Coal reports $2bn loss for Q3 2015, mostly due to impairment charge

Arch Coal (NYSE: ACI), one of the nation’s largest coal producers, reported a net loss of $2.0 billion for the third quarter, which includes a $2.1 billion asset impairment charge and $149 million of losses related to the bankruptcy of Patriot Coal.

Patriot Coal, which recently had its primary assets sold in a bankruptcy court-administered auction process, had bought a number of Arch Coal operations last decade and Arch still had financial ties to that company.

Excluding asset impairments, losses related to the Patriot Coal bankruptcy and amortization of sales contracts, Arch’s third quarter 2015 adjusted net loss was $3.38 per diluted share compared with an adjusted net loss of $4.52 per adjusted diluted share in the prior-year quarter. Revenues totaled $689 million in the third quarter of 2015, and adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) was $135 million.  

For the first nine months of 2015, Arch generated adjusted EBITDA of $262 million compared with $164 million in the prior-year period. Total revenues declined to $2.0 billion for the nine months ended Sept. 30, 2015, largely due to lower metallurgical coal prices and output.

“From an operational perspective, Arch delivered an exceptionally strong performance during the quarter,” said John W. Eaves, Arch’s chairman and chief executive officer. “Our results reflect the actions we have taken to respond to the challenging market environment, including reducing costs and enhancing efficiency across the company. Thanks to the efforts of our skilled employees, we increased cash margins in each of our three operating regions and continued to build on our industry-leading safety and environmental stewardship records.  Despite these efforts, however, the difficult conditions impacting the coal industry persist, and we expect they will continue throughout 2016.” 

“As demonstrated by our third quarter results, our operations continue to generate a significant amount of cash; and we are maintaining sufficient liquidity to continue operating as normal,” said John T. Drexler, Arch’s senior vice president and chief financial officer. “Our cash flow, however, is not sufficient to service our debt sustainably in this operating environment. As a result, Arch will require a significant restructuring of its balance sheet to continue to operate as a going concern over the long term. We are currently in active dialogue with various creditors with respect to a restructuring of our balance sheet. Our mining operations and customer shipments are continuing as normal and we continue to have sufficient liquidity and no near-term maturities. Regardless of what path we ultimately choose, we expect to continue providing our customers the same high quality services they have come to expect from Arch.”

Arch has elected to terminate its $250 million revolver which will become effective on Nov. 11, 2015. The company had no borrowings under its revolver and no intention to borrow under it. On a pro-forma basis, taking into consideration the termination of the revolver, Arch had liquidity of $704.4 million at Sept. 30, 2015 with $694.5 million of that in cash and liquid securities.

The company sold 34.8 million tons of coal in the third quarter, against 35.1 million tons in the year-ago quarter. Averages sales price per ton last quarter was $18.45, against $19.97 in the third quarter of 2014.

Arch’s operations increased operational cash flow margins during the third quarter. On a consolidated basis, Arch earned $4.35 per ton in cash margin during the third quarter of 2015 compared with $2.82 per ton in the second quarter of 2015, reflecting the impact of increased volumes in the company’s Powder River Basin segment, high productivity in its Appalachian segment and lower per-ton costs across the operating platform. Consolidated sales price per ton decreased more than 6 percent due to continued weakness in coal markets and a larger percentage of Powder River Basin volumes, but was more than offset by a decrease in per-ton cash costs.

Low natural gas prices, record high natural gas inventories, weak electric power demand and multiple coal plant closures stemming from the implementation of new environmental regulations led to a steep decline in domestic coal-based power generation. As a result of these factors, Arch now expects domestic thermal coal consumption to decline by 95 million tons during 2015. While supply cuts are well underway and will reduce U.S. thermal coal production markedly during the year, Arch nevertheless expects stockpiles at U.S. power generators to climb to more than 185 million tons, or over 90 days of supply, at year-end. These inflated levels are expected to dampen thermal coal demand and pricing throughout next year.

Conditions in U.S. metallurgical coal markets remain “challenging” as well due to deteriorating global steel demand, continued strong output from Australia and a strong U.S. dollar that hinders U.S. competitiveness, the company said.

The company expects a sales volume of 126 million to 130.8 million tons this year, with no projection for next year.

In light of the company’s ongoing discussions with various creditors, Arch said it will not host a conference call for investors this quarter.

St. Louis-based Arch Coal is one of the world’s top coal producers for the global steel and power generation industries, serving customers on five continents. Its network of mining complexes is the most diversified in the United States, spanning every major coal basin in the nation. The company controls more than 5 billion tons of high-quality metallurgical and thermal coal reserves, with access to all major railroads, inland waterways and a growing number of seaborne trade channels.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.