Weak market cuts into Armstrong Energy coal sales in Q3 2015

Western Kentucky coal producer Armstrong Energy said Nov. 12 that it sold 1.93 million tons of coal in the third quarter of this year, down from 2.31 million tons in the year-ago quarter.

Revenue from coal sales of $89.2 million and $278.7 million for the three and nine months ended Sept. 30, 2015, respectively, are 18.1% and 17.1% lower than the comparable periods of the prior year, and primarily attributable to the decrease in sales volume. The unfavorable revenue variances related to this decrease in volume were approximately $18.0 million and $56.8 million for the three and nine months ended Sept. 30, 2015, respectively, and are the result of a decline in customer demand resulting from the continued weak market conditions and low natural gas prices.

In addition, Armstrong experienced an unfavorable price variance of $1.7 million and $0.6 million for the three and nine months ended Sept. 30, 2015, respectively, due largely to customer mix and unfavorable transportation adjustments included as a component of the sales price in certain of its long-term coal supply agreements as a result of declining diesel prices. 

Costs of coal sales of $69.8 million and $218.8 million for the three and nine months ended Sept. 30, 2015, respectively, are 20.7% and 19.9% lower than the comparable periods of the prior year due to both the decrease in volume and improved operating efficiency, primarily related to favorable repair and maintenance costs at the underground mines, lower diesel fuel costs and better mining conditions.  The operating efficiencies in the current year were partially offset by adverse weather conditions that occurred in the first quarter of 2015. Cost of coal sales per ton for the three and nine months ended Sept. 30, 2015 totaled $36.19 and $36.87, respectively, which represent declines of 5.0% and 3.7%, respectively, as compared to the same periods of 2014. 

Adjusted EBITDA of $16.1 million and $52.8 million for the three and nine months ended Sept. 30, 2015, respectively, which is consistent and 9.3% higher, respectively, than the comparable periods of the prior year. Positively impacting Adjusted EBITDA in the first nine months of 2015, as compared to the same period of the prior year, is the refund of previously paid Kentucky sales and use tax of $4.5 million and lower general and administrative costs, partially offset by a year-over-year decline in gross margin.

During the three months ended Sept. 30, 2015, Armstrong recognized asset impairment and restructuring charges of $138.7 million as a result of the continued adverse market conditions experienced during the current year. 

During the third quarter of 2015, Armstrong completed development of an additional underground mine at its Parkway mine complex to extract coal from the West Kentucky #8 seam. Annual production capacity at the mine is eventually expected to be expanded to approximately 2.4 million tons. Capitalized development costs associated with the new mine totaled approximately $25.2 million.

Armstrong said it believes that existing cash balances, cash generated from operations and availability under its revolving credit facility will be sufficient to meet working capital requirements, anticipated capital expenditures and debt service requirements for the remainder of 2015 and 2016.

Short-term Outlook

Said the company: “Low natural gas prices continue to put downward pressure on the coal markets causing utility demand to decline. This, along with the retirement of a portion of the coal-fired power plant capacity due to new regulations, has led to coal’s market share of electricity generation to decline year over year. As a result of the current economic environment, Armstrong anticipates forecasted production for 2015 to be lower than actual production during 2014. Armstrong currently has 8.4 million tons priced and committed for 2015 at an average price of $46.29 per ton.

“In addition, due to the continued weakness in the coal markets, we have reduced our expected capital spending for 2015 to be in the range of $20.0 million to $23.0 million. The majority of the current year expenditures incurred to date were associated with the development of our new mine at the Parkway complex, which will replace capacity that is depleting over the next several years.”

Armstrong is a producer of low-chlorine, high-sulfur thermal coal from the Illinois Basin, with both surface and underground mines. Armstrong controls over 560 million tons of proven and probable coal reserves in western Kentucky and currently operates seven mines. Armstrong also owns and operates three coal processing plants and river dock coal handling and rail loadout facilities, which support its mining operations.

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.