Arch Coal, Inc. Reports Second Quarter 2011 Results
Arch completes acquisition of ICG

ST. LOUIS, July 29, 2011 /PRNewswire/ --

Earnings Highlights



Quarter Ended



Six Months Ended

In $ millions, except per share data


6/30/11


6/30/10



6/30/11


6/30/10











Revenues


$985.1


$764.3



$1,858.0


$1,476.2

Income from Operations


102.8


106.5



205.1


138.7

Net Income 1


11.1


66.2



66.7


64.4

Fully Diluted EPS


0.06


0.41



0.39


0.40

Adjusted Fully Diluted EPS 2


0.44


0.43



0.81


0.46

Adjusted EBITDA 2


$247.8


$199.4



$439.3


$330.8











1/- Net income attributable to ACI.

2/- Defined and reconciled under "Reconciliation of non-GAAP measures" in the release.



Arch Coal, Inc. (NYSE: ACI) today reported second quarter 2011 earnings per diluted share of $0.06 versus $0.41 in the prior-year quarter.  Second quarter 2011 results include after-tax charges of $67 million that encompass acquisition-related expenses, debt financing and retirement fees for the International Coal Group ("ICG") transaction, and non-cash amortization of acquired coal supply agreements.  Excluding these charges, adjusted net income for the second quarter of 2011 was $78 million, or $0.44 per diluted share.

"The second quarter was a momentous one for Arch Coal – we announced, completed and made considerable progress in integrating the largest acquisition in our company's history," said Steven F. Leer, Arch's chairman and chief executive officer.  "With this acquisition, we have expanded and strengthened Arch's value proposition – by creating a world-class global metallurgical and thermal coal franchise poised for growth – while maintaining our sharp focus on mine safety and environmental stewardship."

Adjusted earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") rose nearly 25 percent versus the prior-year period to reach a record $248 million in the second quarter of 2011.  Quarterly revenues also grew nearly 30 percent versus a year ago to hit a record $985 million, led by higher per-ton sales prices across all regions.  

"Arch achieved record revenues and EBITDA in the quarter just ended – a combination of solid operating results and the addition of ICG on June 15," said Leer.  "In particular, per-ton margins expanded meaningfully in our Appalachian and Western Bituminous regions, both of which benefitted from higher sales prices, increased volumes and lower operating costs."

In the first half of 2011, Arch generated adjusted EBITDA of $439 million, an increase of 33 percent versus the prior-year period.  Cash flow from operations increased 21 percent to $314 million for the first six months of 2011, while capital expenditures totaled $108 million, resulting in record free cash flow of $206 million year-to-date.

"Looking ahead, we have updated our full-year earnings guidance to reflect our current expectation for metallurgical and thermal coal markets, contributions from newly acquired assets, acquisition-related financing considerations and reduced volume expectations in the Powder River Basin stemming from ongoing flooding in the Midwest," added Leer.  "We currently expect 2011 to be the company's best year yet and project a very strong second half."

Strategic Acquisition

As previously announced, Arch completed the acquisition of ICG on June 15, 2011.  The aggregate value of the transaction totaled $3.5 billion, including the redemption of ICG's outstanding debt.  This acquisition establishes Arch as the second largest U.S. – and a top 10 global – metallurgical coal supplier, while creating a powerful platform for future growth in international metallurgical and thermal markets.

"We expect the addition of ICG to create tremendous value for shareholders, and we have now turned our attention to unlocking the full potential of this highly strategic acquisition," said Leer.  Based upon the milestones achieved during the first six weeks of integration, Arch has increased its annual synergy estimate to between $100 million and $120 million, starting in 2012.  Roughly 65 percent of those synergies relate to operational cost savings and administrative cost reductions, and 35 percent stem from marketing and blending optimization efforts.

"The integration of ICG has been smooth and swift, and is materially complete from both an operations and administrative perspective," said John W. Eaves, Arch's president and chief operating officer.  "We're now charged with delivering the synergies we have quantified, identifying new ways to streamline operations, further improving the combined company's cost structure, liberating incremental tons into seaborne markets and accelerating metallurgical development projects."

Arch recorded $98 million in pre-tax acquisition-related expenses in the second quarter of 2011, comprised of advisory, bridge financing and legal fees as well as severance and other costs stemming from the integration of the operations.  The company also anticipates incurring some additional expenses related to the acquisition during the third quarter of 2011.

Financial Developments

Arch financed the purchase of ICG with a combination of new debt and equity offerings completed in June, as well as borrowings under the company's amended credit facility.  During the second quarter, Arch secured a $2 billion revolving credit facility, increasing the capacity from $860 million previously, and extending the term of the facility through June 2016.

Also during the second quarter, Arch issued $2.0 billion in senior notes and sold $1.3 billion in common stock to raise funds for – and maintain its credit rating after – the ICG acquisition.  At June 30, 2011, Arch's debt totaled $3.8 billion, net of cash, and its net debt-to-total-capital ratio was 52 percent.

"Arch successfully executed capital markets transactions to prudently finance the ICG acquisition, retain our existing credit ratings and preserve a strong balance sheet," said John T. Drexler, Arch's senior vice president and chief financial officer. "Looking ahead, our ability to advance future growth projects and bring forward those cash flows, while maintaining a low-cost operating structure across our regions, should unlock further value for our stakeholders."

Operational Results

"Our second quarter results reflect solid operating performances at our legacy and newly acquired operations," said Eaves.  "We are capturing higher prices in each region, effectively managing our costs and seamlessly integrating ICG's operations into the fold."

"In addition, the power of our diverse operating platform was on display in the second quarter, as strong contributions from our Appalachian and Western Bituminous segments helped to overcome the impact of Midwestern flooding, which affected planned quarterly shipments out of the Powder River Basin," added Eaves.


Arch Coal, Inc.



2Q11



1Q11



2Q10










Tons sold (in millions)


36.7



36.2



38.1

Average sales price per ton


$24.67



$22.30



$19.16

Cash cost per ton


$17.17



$16.25



$14.17

Cash margin per ton


$7.50



$6.05



$4.99

Total operating cost per ton


$19.75



$18.55



$16.47

Operating margin per ton


$4.92



$3.75



$2.69










Consolidated results may not tie to regional breakout due to exclusion of other assets, rounding.

Operating cost per ton includes depreciation, depletion and amortization per ton.

Amortization of acquired coal supply agreements not included in results.  

Amounts reflected in this table exclude certain coal sales and purchases which have no effect

on company results.  For further description of the excluded transactions, please refer to

the supplemental regional schedule that can be found at http://investor.archcoal.com.



Second quarter 2011 consolidated operating margin per ton expanded more than 30 percent versus the first quarter, primarily due to strong performances from Arch's Western Bituminous Region and its Appalachian operations, which include the ICG mines since June 15.  Average sales price per ton rose 10.6 percent, led by higher pricing in each region and a larger percentage of higher-priced tons in the company's overall volume mix.  Consolidated operating costs per ton increased 6.5 percent over the same time period, reflecting the impact of lower Powder River Basin volume levels, a larger volume contribution from the company's Appalachian segment and higher sales-sensitive costs.



Powder River Basin



2Q11



1Q11



2Q10










Tons sold (in millions)


28.0



28.8



31.0

Average sales price per ton


$13.70



$13.51



$11.88

Cash cost per ton


$10.79



$10.26



$9.23

Cash margin per ton


$2.91



$3.25



$2.65

Total operating cost per ton


$12.26



$11.71



$10.67

Operating margin per ton


$1.44



$1.80



$1.21










Above figures exclude transportation costs billed to customers.

Operating cost per ton includes depreciation, depletion and amortization per ton.

Amortization of acquired coal supply agreements not included in results.  



In the Powder River Basin, second quarter 2011 operating margin per ton declined when compared with the first quarter, resulting from higher per-ton costs associated with lower shipment levels.  Second quarter sales volumes were lower than expected, with 1.5 million tons lost during the quarter just ended due to the aforementioned flooding in the Midwest.  Sales price increased $0.19 per ton over the same time period, while operating costs rose on the impact of lower volume levels, increased maintenance expense and higher sales-sensitive costs.



Appalachia



2Q11



1Q11



2Q10










Tons sold (in millions)


3.8



3.2



3.1

Average sales price per ton


$91.41



$85.10



$73.96

Cash cost per ton


$58.16



$60.57



$49.19

Cash margin per ton


$33.25



$24.53



$24.77

Total operating cost per ton


$66.28



$67.14



$57.10

Operating margin per ton


$25.13



$17.96



$16.86










Note: Appalachia segment includes ICG operations (ex. Illinois) since June 15, 2011.

Above figures exclude transportation costs billed to customers.

Operating cost per ton includes depreciation, depletion and amortization per ton.

Arch acts as an intermediary on certain pass-through transactions that have no effect

on company results.  These transactions are not reflected in this table.  



Second quarter 2011 operating margin per ton in Arch's newly designated Appalachian segment rose 40 percent versus the first quarter, benefiting from strong metallurgical coal markets and solid mine operating performances.  Second quarter sales volumes rose nearly 20 percent versus the first quarter with the return of Mountain Laurel's longwall production in mid-April and the addition of ICG volumes.  Average sales price increased $6.31 per ton over the same time period, reflecting a larger percentage of metallurgical coal shipments and higher pricing on metallurgical coal sales, offset to some degree by lower-priced steam coal sales shipped in the second quarter.  Operating costs declined $0.86 per ton in the second quarter when compared with the first quarter, due to the effect of higher volume levels and the return of Mountain Laurel's longwall.



Western Bituminous Region



2Q11



1Q11



2Q10










Tons sold (in millions)


4.7



4.2



4.0

Average sales price per ton*


$35.59



$34.87



$32.91

Cash cost per ton*


$21.75



$23.61



$25.21

Cash margin per ton


$13.84



$11.26



$7.70

Total operating cost per ton*


$26.43



$28.51



$29.81

Operating margin per ton


$9.16



$6.36



$3.10










*Beginning with this report, sales prices and costs in the region are presented f.o.b.

point for all domestic customers.  There is no impact to reported cash and

operating margin per ton.

Operating cost per ton includes depreciation, depletion and amortization per ton.



In the second quarter of 2011, operating margin in the Western Bituminous Region rose nearly 45 percent versus the first quarter to reach $9.16 per ton.  Second quarter average sales price increased slightly compared with the first quarter, reflecting a more favorable mix of customer shipments, including volumes destined for the eastern U.S. and for export out of the West Elk mine in Colorado.  Operating costs fell 7 percent over the same time period, due to the effect of higher volume levels and solid operational cost control.

Coal Market Trends

Arch believes coal market fundamentals continue to improve as 2011 progresses.

  • Although down modestly from record levels set earlier this year, global metallurgical coal prices remain strong, benefiting from continued growth in worldwide steel demand and supply constraints due to infrastructure, transportation and geologic mine challenges.
  • Forward 2012 prices for seaborne steam coal into northern Europe are trading above $125 per metric tonne, which should support continued U.S. coal exports into Europe and Asia.  Moreover, index prices for Powder River Basin coal have increased more than 10 percent for forward year deliveries since the shoulder season lows.
  • Arch projects U.S. coal exports will reach 106 million tons (including overland shipments in North America) during 2011, an increase of 25 million tons versus 2010.  In addition, Arch estimates coal imported into the United States will continue to decline in 2011, further tightening U.S. coal supply.
  • Domestic power demand so far in 2011 is even with last year, through the third week of July, according to the Edison Electric Institute.  U.S. coal consumption through May has declined due to strong contributions from other fuel sources, but is expected to increase meaningfully during the summer burn season, particularly in light of hot summer temperatures across much of the country in recent weeks.
  • U.S. coal production in the first half of 2011 remained essentially flat versus a year ago, according to recently released MSHA data and company estimates.  Notably, second quarter Powder River Basin production totaled 99 million tons, a decline of 7 million tons versus the first quarter, likely due to rail transportation disruptions caused by Midwest flooding.  Arch also expects that shipments in the basin will be negatively impacted in the third quarter.  
  • Arch projects continued reductions in total U.S. generator coal stockpile levels during 2011.  According to government data, coal power plant stockpiles experienced a much smaller-than-normal build in May.  Coupled with rail disruptions and warm temperatures in June and July, Arch believes that stockpiles on a national basis could be below the five-year average by the end of August, which should further support domestic price levels into 2012 and beyond.

"Strengthening fundamentals have buoyed coal prices in recent weeks, especially in the PRB, and we expect that trend to continue as the year progresses," said Leer.

Production and Sales Contract Portfolio

Arch has updated its 2011 sales volume forecast to include ICG volumes since June 15 and to take into account lower-than-expected shipments from its Powder River Basin operations due to flooding, and now forecasts the full year range to be between 160 million and 165 million tons.  Arch's sales volume guidance includes tons destined for metallurgical coal markets (coking and pulverized coal injection/PCI), which the company projects will reach approximately 9 million tons in 2011, assuming roughly a half year contribution from ICG.




2011


2012




Tons



Price



Tons



Price















Powder River Basin













Committed, Priced


115.4



$13.57



81.5



$14.23


Committed, Unpriced


2.3






11.0





Appalachia













Committed, Priced (Coking/PCI)


7.8



$121.29



0.6



$136.90


Committed, Priced (Steam)


12.1



$66.43



7.2



$67.84


Western Bituminous Region













Committed, Priced


18.0



$35.61



11.3



$38.88



"Arch committed or priced volumes across all operating regions during the second quarter, with a focus on growing our export thermal and met business," said Eaves.  "In particular, our Appalachian commitments rose with the inclusion of ICG contracts, while our Powder River Basin commitments – approximately one-third of which were 8,400-Btu coal – reflect improving domestic thermal market conditions."

2011 Earnings Guidance

Arch has updated its 2011 earnings guidance as follows:

  • Earnings per diluted share on a GAAP basis is projected to be between $1.49 and $1.93, including advisory, financing and legal fees, severance, amortization of acquired coal supply agreements and other costs stemming from the acquisition of ICG.  
  • Excluding the aforementioned charges, adjusted earnings per diluted share would be in the range of $1.75 to $2.15.
  • Adjusted EBITDA is forecasted to be in the $1.08 billion to $1.2 billion range.  
  • Capital spending is expected to be in the $480 million to $520 million range, including $75 million to $80 million for the development of Tygart Valley No. 1.
  • Depreciation, depletion and amortization expense (excluding non-cash amortization of acquired coal supply agreements) is projected to be between $452 million and $470 million.

"As mentioned, we expect Arch's shipments in the Powder River Basin to be impacted into the third quarter – with up to 4.5 million tons affected for the full year – due to flooding and rail disruptions," said Leer.  "Despite that fact, our forecast points to a strong second half, as global markets remain strong and domestic markets appear poised to tighten further."

"The enhanced Arch is keenly focused on integrating and managing our operations to excel in our three key areas: safety, stewardship and shareholder value," added Leer.  "We believe Arch's expanded size, superior metallurgical and thermal coal asset base, low-cost operations and highly productive workforce will enable us to deliver substantial value over the long term."

A conference call regarding Arch Coal's second quarter 2011 financial results will be webcast live today at 11 a.m. E.D.T.  The conference call can be accessed via the "investor" section of the Arch Coal website (http://investor.archcoal.com).

U.S.-based Arch Coal is a top five global coal producer and marketer, with 179 million tons of coal sold pro forma in 2010.  Arch is the most diversified American coal company, with mining complexes across every major U.S. coal supply basin.  Its core business is supplying cleaner-burning, low-sulfur thermal and metallurgical coal to power generators and steel manufacturers on four continents.

Forward-Looking Statements:  This press release 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, you should see the risk factors described from time to time in the reports we file with the Securities and Exchange Commission.

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In thousands, except per share data)










Three Months Ended June 30,


Six Months Ended June 30,


2011


2010


2011


2010


(Unaudited)


(Unaudited)

Revenues








 Coal sales

$ 985,087


$ 764,295


$ 1,858,025


$ 1,476,169









Costs, expenses and other








 Cost of coal sales

709,953


570,861


1,363,637


1,121,611

 Depreciation, depletion and amortization

95,183


87,759


178,720


176,278

 Amortization of acquired sales contracts, net

1,489


5,214


7,433


15,967

 Selling, general and administrative expenses

29,039


35,344


59,474


62,510

 Change in fair value of coal derivatives and coal trading activities, net

2,672


4,587


888


10,464

 Acquisition and transition costs related to ICG

48,666


-


48,666


-

 Gain on Knight Hawk transaction

-


(41,577)


-


(41,577)

 Other operating income, net

(4,732)


(4,392)


(5,848)


(7,783)


882,270


657,796


1,652,970


1,337,470

















     Income from operations

102,817


106,499


205,055


138,699









Interest expense, net:








 Interest expense

(42,249)


(35,125)


(76,829)


(70,208)

 Interest income

755


623


1,501


961


(41,494)


(34,502)


(75,328)


(69,247)









Other non-operating expense








 Bridge financing costs related to ICG

(49,490)


-


(49,490)


-

 Net loss resulting from early retirement of ICG debt

(250)


-


(250)


-


(49,740)


-


(49,740)


-

















     Income before income taxes

11,583


71,997


79,987


69,452

Provision for income taxes

186


5,723


12,716


4,948

     Net income

11,397


66,274


67,271


64,504

     Less: Net income attributable to noncontrolling interest

(318)


(118)


(591)


(144)

     Net income attributable to Arch Coal, Inc.

$   11,079


$   66,156


$      66,680


$      64,360









Earnings per common share








Basic earnings per common share

$       0.06


$       0.41


$          0.40


$          0.40

Diluted earnings per common share

$       0.06


$       0.41


$          0.39


$          0.40









Weighted average shares outstanding








 Basic

174,244


162,388


168,442


162,380

 Diluted

175,272


163,130


169,554


163,105









Dividends declared per common share  

$       0.11


$       0.10


$          0.21


$          0.19









Adjusted EBITDA (A)

$ 247,837


$ 199,354


$    439,283


$    330,800









(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,



2011


2010



(Unaudited)

Assets




 Current assets





   Cash and cash equivalents


$        82,345


$        93,593

   Restricted cash


350,966


-

   Trade accounts receivable


335,052


208,060

   Other receivables


91,064


44,260

   Inventories


350,201


235,616

   Prepaid royalties


38,119


33,932

   Deferred income taxes


7,015


-

   Coal derivative assets


12,780


15,191

   Other


121,123


104,262

                             Total current assets


1,388,665


734,914






 Property, plant and equipment, net


7,726,456


3,308,892






 Other assets





   Prepaid royalties


94,382


66,525

   Goodwill


539,963


114,963

   Deferred income taxes


-


361,556

   Equity investments


207,646


177,451

   Other


194,333


116,468

                             Total other assets


1,036,324


836,963

                             Total assets


$ 10,151,445


$   4,880,769






Liabilities and Stockholders' Equity





 Current liabilities





   Accounts payable


$      286,437


$      198,216

   Coal derivative liabilities


5,791


4,947

   Deferred income taxes


-


7,775

   Accrued expenses and other current liabilities


395,020


245,411

   Current maturities of debt and short-term borrowings


428,610


70,997

                             Total current liabilities


1,115,858


527,346

 Long-term debt


3,773,923


1,538,744

 Asset retirement obligations


412,324


334,257

 Accrued pension benefits


36,047


49,154

 Accrued postretirement benefits other than pension


87,626


37,793

 Accrued workers' compensation


65,027


35,290

 Deferred income taxes


863,970


-

 Other noncurrent liabilities


258,261


110,234

                             Total liabilities


6,613,036


2,632,818






 Redeemable noncontrolling interest


11,032


10,444






Stockholders' Equity





   Common stock


2,127


1,645

   Paid-in capital


2,991,550


1,734,709

   Treasury stock, at cost


(53,848)


(53,848)

   Retained earnings


593,896


561,418

   Accumulated other comprehensive loss


(6,348)


(6,417)

                             Total stockholders' equity


3,527,377


2,237,507

                             Total liabilities and stockholders' equity


$ 10,151,445


$   4,880,769



Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)







Six Months Ended June 30,


2011


2010


(Unaudited)

Operating activities




Net income

$     67,271


$  64,504

Adjustments to reconcile to cash  provided by operating activities:




 Depreciation, depletion and amortization

178,720


176,278

 Amortization of acquired sales contracts, net

7,433


15,967

 Bridge financing costs related to ICG

49,490


-

 Net loss resulting from early retirement of ICG debt

250


-

 Write down of assets acquired from ICG

7,316


-

 Prepaid royalties expensed

19,491


16,048

 Employee stock-based compensation expense

7,071


7,439

 Amortization of debt financing costs

5,093


4,901

 Gain on Knight Hawk transaction

-


(41,577)

 Changes in:




     Receivables

(25,329)


(44,057)

     Inventories

(37,113)


2,458

     Coal derivative assets and liabilities

4,902


11,631

     Accounts payable, accrued expenses and other current liabilities

8,912


32,060

     Income taxes, net

(15,186)


(309)

     Deferred income taxes

20,873


(4,719)

     Other

15,006


18,731





   Cash provided by operating activities

314,200


259,355





Investing activities




Acquisition of ICG, net of cash acquired

(2,910,380)


-

Increase in restricted cash

(74,814)


-

Capital expenditures

(107,725)


(171,958)

Proceeds from dispositions of property, plant and equipment

1,411


229

Purchases of investments and advances to affiliates

(38,059)


(14,249)

Additions to prepaid royalties

(25,212)


(23,466)





   Cash used in investing activities

(3,154,779)


(209,444)





Financing activities




Proceeds from the issuance of senior notes

2,000,000


-

Proceeds from the issuance of common stock, net

1,249,407


-

Payments to retire ICG debt

(307,984)


-

Increase in restricted cash for retirement of ICG debt

(260,663)


-

Net increase (decrease) in borrowings under lines of credit and commercial paper program

303,096


(15,555)

Net payments on other debt

(8,845)


(8,249)

Debt financing costs

(112,334)


(437)

Dividends paid

(34,192)


(30,870)

Issuance of common stock under incentive plans

846


137

Contribution from noncontrolling interest

-


891





   Cash provided by (used in) financing activities

2,829,331


(54,083)





Decrease in cash and cash equivalents

(11,248)


(4,172)

Cash and cash equivalents, beginning of period

93,593


61,138





Cash and cash equivalents, end of period

$     82,345


$  56,966



Arch Coal, Inc. and Subsidiaries

Schedule of Consolidated Debt

(In thousands)








June 30,


December 31,



2011


2010



(Unaudited)




Commercial paper


$              -


$        56,904

Revolving credit agreement


360,000


-

9.125% senior notes ($200.0 million face value) due 2018


250,000


-

4.00% convertible senior notes ($16.5 million face value) due 2017


42,902


-

9.00% convertible senior notes ($18 thousand face value) due 2012


44


-

6.75% senior notes ($450.0 million face value) due 2013


451,294


451,618

8.75% senior notes ($600.0 million face value) due 2016


588,029


587,126

7.25% senior notes due 2020 at par


500,000


500,000

7.00% senior notes due in 2019 at par


1,000,000


-

7.25% senior notes due 2021 at par


1,000,000


-

Other


10,264


14,093



4,202,533


1,609,741

Less: current maturities of debt and short-term borrowings


428,610


70,997

Long-term debt


$ 3,773,923


$   1,538,744






Restricted cash


$    350,966


$               -



Arch Coal, Inc. and Subsidiaries



Reconciliation of Non-GAAP Measures



(In thousands)











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 and cash flows as reported under GAAP.


Adjusted EBITDA


      Adjusted EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income

      taxes, depreciation, depletion and amortization and the amortization of acquired sales contracts.  Adjusted EBITDA

      may also be adjusted for items that may not reflect the trend of future results.


   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. In addition, acquisition related expenses are excluded to make results more comparable

   between periods.  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 June 30,


Six Months Ended June 30,


2011


2010


2011


2010


(Unaudited)


(Unaudited)

Net income

$                   11,397


$                 66,274


$                 67,271


$                 64,504

    Income tax expense

186


5,723


12,716


4,948

    Interest expense, net

41,494


34,502


75,328


69,247

    Depreciation, depletion and amortization

95,183


87,759


178,720


176,278

    Amortization of acquired sales contracts, net

1,489


5,214


7,433


15,967

    Acquisition and transition costs

48,666


-


48,666


-

    Bridge financing costs related to ICG

49,490


-


49,490


-

    Net loss resulting from early retirement of ICG debt

250


-


250


-

    Net income attributable to noncontrolling interest

(318)


(118)


(591)


(144)









    Adjusted EBITDA

$                 247,837


$               199,354


$               439,283


$               330,800

















Adjusted net income and adjusted diluted earnings per common share


   Adjusted net income and adjusted diluted earnings per common share are adjusted for the after-tax impact of acquisition

   related costs and are not measures of financial performance in accordance with generally accepted accounting

   principles.  We believe that adjusted net income and adjusted diluted earnings per common share better reflect the trend of our future

   results by excluding items relating to significant transactions. The adjustments made to arrive at these measures are

   significant in understanding and assessing our financial condition.  Therefore, adjusted net income and adjusted diluted earnings per

   share should not be considered in isolation, nor as an alternative to net income or diluted earnings per common share under generally

    accepted accounting principles.










Three Months Ended June 30,


Six Months Ended June 30,


2011


2010


2011


2010


(Unaudited)


(Unaudited)

Net income attributable to Arch Coal

$                   11,079


$                 66,156


$                 66,680


$                 64,360









    Amortization of acquired sales contracts, net

1,489


5,214


7,433


15,967

    Acquisition and transition costs

48,666


-


48,666


-

    Bridge financing costs related to ICG

49,490


-


49,490


-

    Net loss resulting from early retirement of ICG debt

250


-


250


-

    Tax impact of adjustments

(33,005)


(1,903)


(35,205)


(5,828)









Adjusted net income attributable to Arch Coal

$                   77,969


$                 69,467


$               137,314


$                 74,499

Diluted weighted average shares outstanding

175,272


163,130


169,554


163,105

















Diluted earnings per share

$                       0.06


$                     0.41


$                     0.39


$                     0.40









    Amortization of acquired sales contracts, net

0.01


0.03


0.04


0.10

    Acquisition and transition costs

0.28


-


0.29


-

    Bridge financing costs related to ICG

0.28


-


0.29


-

    Net loss resulting from early debt extinguishment

-


-


-


-

    Tax impact of adjustments

(0.19)


(0.01)


(0.20)


(0.04)









Adjusted diluted earnings per share

$                       0.44


$                     0.43


$                     0.81


$                     0.46









Free Cash Flow


Free cash flow is defined as operating cash flows minus capital expenditures and is not a measure of cash flow in accordance

with generally accepted accounting principles.  We use free cash flow as a measure of our ability to make

investments, acquisitions and payments to our debt and equity security holders.  Free cash flow should not be

considered in isolation, nor as an alternative to cash flows generated from operations.  










Six Months Ended June 30,






2011


2010






(Unaudited)





Cash provided by operating activities

$                 314,200


$               259,355





Capital expenditures

(107,725)


(171,958)













Free cash flow

$                 206,475


$                 87,397













Reconciliation of 2011 Targets








Adjusted EBITDA

















Targeted Results






Year Ended December 31, 2011






Low


High






(Unaudited)





Net income attributable to Arch Coal

284,000


369,000





    Income tax expense

46,000


80,000





    Interest expense, net

224,000


221,000





    Depreciation, depletion and amortization

452,000


470,000





    Amortization of acquired sales contracts, net

(27,000)


(43,000)





    Acquisition and transition costs

51,260


53,260





    Bridge financing costs related to ICG

49,490


49,490





    Net loss resulting from early retirement of ICG debt

250


250













    Adjusted EBITDA

$              1,080,000


$            1,200,000













Adjusted net income and adjusted diluted earnings per share
















Targeted Results






Year Ended December 31, 2011






Low


High






(Unaudited)





Net income attributable to Arch Coal

$                 284,000


$               369,000













    Amortization of acquired sales contracts, net

(27,000)


(43,000)





    Acquisition and transition costs

51,260


53,260





    Bridge financing costs related to ICG

49,490


49,490





    Net loss resulting from early retirement of ICG debt

250


250





    Tax impact of adjustments

(23,424)


(18,244)













Adjusted net income attributable to Arch Coal

$                 334,576


$               410,756





Diluted weighted average shares outstanding

191,092


191,092













Diluted earnings per share

$                       1.49


$                     1.93













    Amortization of acquired sales contracts, net

(0.14)


(0.23)





    Acquisition and transition costs

0.27


0.28





    Bridge financing costs related to ICG

0.26


0.26





    Net loss resulting from early debt extinguishment

-


-





    Tax impact of adjustments

(0.13)


(0.09)













Adjusted diluted earnings per share

$                       1.75


$                     2.15







SOURCE Arch Coal, Inc.

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