Exhibit 99.1
Arch Coal, Inc. Analyst Day 2006 Steven F. LeerChairman & CEOArch Coal, Inc. Saint Louis, MissouriJune 7, 2006Arch Coal, Inc. Progressive. Responsible. Vital. Growing. |
Forward-looking information This presentation contains “forward-looking statements” 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 that is, statements related to 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. |
Slide 2 |
Agenda Steve Leer, Chairman & CEO John Eaves, President & COO Dave Warnecke, VP-Marketing & Trading Break Dave Peugh, VP-Business Development Bob Messey, Sr. VP & CFO Panel Q&A Session 08:00-08:30 a.m. 08:30-09:00 a.m. 09:00-09:25 a.m. 09:25-09:50 a.m. 09:50-10:15 a.m. 10:15-10:35 a.m. 10:35-11:45 a.m. |
Slide 3 |
Arch Coal Today |
Second largest coal producer in the U.S. and one of the largest coal producers in the world |
Headquartered in St. Louis, MO, with mining operations and strategic reserves spread across the U.S. |
Core business is providing U.S. power generators with clean-burning, low-sulfur coal for electric generation |
Supplies roughly 12% of U.S. coal needs Provides source fuel for roughly 6% of U.S. electricity |
Diverse senior management team with breadth of experience both within the coal industry and at Arch and its predecessor companies Source: ACI |
Slide 4 |
Arch’s national presence encompasses leading positions in the major U.S. low-sulfur basins Central Appalachia |
Source: ACI |
Powder River Basin |
Western BituminousRegion Slide 5 |
Arch’s strategic reserve base is predominately low-sulfur |
80% of Arch’s 3.1 billion-ton reserve base is compliance quality Western BituminousRegion |
2% |
Central Appalachia Source: ACI 0.4B IllinoisHigh-Sulfur 0.3B Low-Sulfur 1.9B Powder River Basin 0.5B Compliance Slide 6 9%Source: ACI |
Arch’s national operations serve a diversified customer base spanning the U.S.West/East: 55% 26%18% 45% 16%18% 11% 4%Arch Coal |
10%Competitor #4 Slide 7 Source: ACI |
34%Competitor #1Enterprise value = market value of equity at 5/31/06 plus book value of debt and preferred less cash 12/31/05 (in mm)10%Competitor #3 |
Arch has the industry’s cleanest balance sheet among major coal producers |
Legacy Liabilities as a Percentage of Enterprise Value Largest U.S. Coal Companies24%Competitor #2 |
mining complex in the Black Thunder mine in the PRB is the largest world for “Web |
Slide 8 Source: Bloomberg, SEC filings compiled by ACI |
CIOand Arch was named one ofBusiness Week’sSmart 50”Magazine’s “CIO 100”the resourceful use of I.T. |
Arch operates some of the largest and most technologically advanced mines in the world Slide 9 |
$29.48CAPP $28.34 |
Cost per Ton$10.75WBITIL |
2 $6.16 |
SO($585 allowance price for marker product)$4.12PRB NAPP |
$30 $25 $20 $15 $10 $5 $0 $5851-Jun-2006 |
Allowance Price$143 |
2Source: Platts, Air Daily, Cantor Fitzgerald, United Market Price Index & ACI calculations SO1-Jan-2003 Our low-sulfur strategy is paying dividends$600$400$200$0Slide 10 |
Fundamental Changes in U.S Coal Industry |
Progressive. Responsible. Vital. Growing. |
dollars per ton)(nominal coal prices bituminousU.S. $40$30$20$10$0 |
781$27.311979Source: EIA & EEI |
1978 1977 1976 1975 1974 |
Arab Oil Embargo1973 1972 |
Growth in production (69-79): +210 mm tons1971 |
613$6.301970Coal prices rise but oil companies begin to reinvest profits into significant coal production capacity, creating a surplus of supply |
850750650550450350U.S. search for energy independence led to a significant investment in the coal industry by oil companies ` |
(in million tons) |
Energy crisis in 1970s led to higher coal prices but set the stage for excess capacityproductionU.S. annual coal Slide 12 |
dollars per ton)(nominal coal prices bituminousU.S. $40$30$20$10$0the 6.6$23.92 |
1998Source: EIA & EEI 1996 1994 1992 1990 1988 1986 1984 1982 $29.17 |
Mine productivity increased over threefold from 1980 to 19991.91980 |
86420Productivity gains and deployment of larger equipment exacerbate demand-supply imbalance In addition, high-priced contracts with escalators subsidize marginal production |
(tons per miner hour) Slide 13 |
Productivity gains and high-priced contracts fueled incremental production in ‘80s and ‘90s |
productivityU.S.coal mine |
of 1990s |
Fuels |
phase Source: EIA & EEI |
CompetingUtilization of nuclear system increases significantly Also, gas “bubble” and increasingly stringent environmental regulations push utilities towards natural gas for new capacity |
89.4%2001 |
U.S. nuclear capacity factors66.1%1990Only the strongest coal companies survive Consolidation increases as firms begin exiting industry Production rationalization begins |
Overproduction in coal continues to create adverse market conditions ` ` ` |
Coal enters a “last man standing”during 1990s100%80%60%40%20%0%Slide 14 |
99-05E+2%2004 |
0220Source: EIA & EEI |
0020 9891 |
89-99+12%6919 |
9419 9291 8 1990 8 |
19 |
79-89+26%8619 |
8491 0 1982 8 |
19 |
7819 |
69-79+37%7691 |
1974 |
7219 |
07019 |
12001000800600400200Changes in structure of the U.S. and world markets suggest a sustained upswing in coal markets |
growth in production(in mm tons) |
Decades in the trough for the U.S. coal industry has laid foundation for current cycle Slide 15 |
2005 |
Restructuring creates cleanest balance sheet & sharpens focus in CAPP (2005) Canyon Fuel, North Rochelle & Little Thunder acquisitions strengthen PRB & WBIT position (2004)Source: ACI Debt reduction & asset divestiture fund future growth (1999-2000)2000 producer (1997)ARCO & Thundercloud acquisitions establish presence in PRB & WBIT (1998) |
Ashland Coal mergercreates premier CAPP 1995By acquiring assets in the trough, Arch was able to aggregate some of the industry’s best assets Focus on low-sulfur properties proved prescient Arch was extraordinarily well-positioned as the cycle turned |
Implemented wake of CAAAWhile other coal companies exited, Arch doubled down `` ` |
Arch was hard at work during those dark and difficult days of the coal cycle low-sulfur strategy in 1990 Slide 16 |
Future of U.S. Coal IndustryArch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
2000 |
India |
1990 Source: Raymond James |
South KoreaChina1980 1970 |
IndiaJapan1960 |
USA1950 |
1940 |
China South Korea |
1930 |
Oil Consumption and Industrialization1920 |
USA Japan1910 |
1900 |
35302520151050Source: BP Statistical Review of World Energy; Respective Census Bureaus; Marc Faber Limited, RJ&A Estimates |
Economic growth around the world is putting pressure on energy marketsyear) per (Barrels CapitaPer |
Slide 18 |
(market share)50% 57%19% 15%19% 17%7% 5%2% 4% 3% 2% Source: EIA |
3,381 |
2,041 |
871993 774752 |
267 303264 |
116115 115 |
2005 20302005 20302005 20302005 20302005 20302005 2030 |
(Net generation by fuel type in billion megawatt-hours)CoalNuclearNatural GasHydroRenewablesCrude Oil |
Coal will fuel most new electricity demand over the next 25 yearsSlide 19 |
Source: ACI |
Potential to increase capacity utilization at existing plants Build New Coal-Fueled Capacity Announced plans to build 90GW ofcoal-fueled capacity in U.S.Btu-Conversion Technologies Converting coal into natural gas or a transportation fuel can open new markets |
Demand is evolving by boosting coal use in traditional markets and opening new markets Increase Utilization at Existing Power PlantsSlide 20 |
IGCC & CCS should enable coal to prosper in a carbon constrained worldSource: ACI |
Gasification can transform coal into a pipeline-quality natural gas ` |
At current oil prices, a coal to liquids facility is economically feasible |
Coal can be converted into an ultra-low-sulfur diesel fuel ` |
Base load generation can increase by filling in troughs during off-peak demand hours |
Entering transportation markets can transform the energy spaceA plug-in hybrid is one entry for coal into the transportation market `Public policy initiatives aimed at domestic energy security are leading to energy legislation and financial incentives for clean coal technology development. Slide 21 |
Future of Arch CoalArch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Source: ACI |
Highest priced coal is less than half the price of natural gas and one-fifth the price of oil on a mm/Btu basisCoal may displace oil and natural gas since its reserves, located primarily in the U.S., provide domestic energy securityReserves not used in current production are often overlooked in the valuation of coal companies Participation potential in game-changing new technologies yet to be factored in |
Other fossil fuels provide a reference point for coal prices `Majority of oil and natural gas reserves in the world are located in areas of political instability `Perceived value of a Btu is climbing `` |
Key factors that favor coal for future value creation Slide 23 |
an |
Source: ACI |
Pursuing number of organic growth projects expected to result in incremental 23 mm tons per year by 2007 annualized Unique opportunities due to low capital requirements, strategic location of reserves and attractive geology |
Vast majority of Arch’s production resets to market-based pricing over the next three yearsPlowing capital back into business is already under way ``Careful growth through acquisition is possible, if and when the right opportunities ariseParticipation in emerging technologies allows Arch to expand market for its coal |
Arch has potential to generate significant free cash flow in the near future Slide 24 |
which is to identify the dark days of the previous cycle and are now poised to deliver superior returns to our shareholders We will do the right thing ... most profitable way to put capital back to workWe will continue to build our future on the three pillars of safety, environmental stewardship and productivityWe have built this advantageous position through the |
Arch is focused on creating shareholder value Slide 25 |
Arch Coal, Inc. Analyst Day 2006Saint Louis, MissouriJune 7, 2006Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Arch Coal, Inc. Analyst Day 2006John W. EavesPresident & COOArch Coal, Inc.Saint Louis, MissouriJune 7, 2006Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Source: ACI |
Achieving industry-leading rates of productivityIdentifying continuous improvements and cost control initiativesServing the growing needs of our utility and industrial customers Operating the world’s safest coal minesActing as highly responsible stewards of the land and good corporate citizensAchieving superior financial results: ``` |
Our long-term success hinges on three crucial areas of employee performance Slide 2 |
Production |
1,2001,0008006004002000 |
/ e5 00 2 400 2 3020 2020 |
1020Source: Mine Safety & Health Administration |
2000U.S. Production (mm tons) |
1995 |
1990Fatalities |
1985 |
U.S. Coal Mine Safety and Production Trends1980 1975 1970 |
300250200150100500 |
underscore the need for continued diligenceFatalities |
The safety trend is positive, but recent events Slide 3 |
3.490.88 2005 |
3.861.4020044.372003 |
Accident RatesIndustry 5-Year Average = 4.30* Arch Coal 5-Year Average = 1.601.96*MSHA Mine Injury and Worktime Quarterly Statistics |
4.93 |
Ranked by Lost-Time IncidentsPer 200,000 employee-hours worked2.212002 |
4.832001 1.57 |
6543210 |
Arch is focused on operating the industry’s safest minesSlide 4 |
Source: ACI |
Extra caches of SCSRs Lifelines PED communication systems Mine rescue teamsRefuge chambers Test site for new communications |
Arch’s subsidiaries routinely over-comply with MSHA regulations, including: ````We’re sharing our expertise with industry and Congress We’re considering additional measures `` |
As a leader in mine safety, our practices often go above-and-beyond the law |
Slide 5 |
Source: ACI |
in 2004Coal-Mac awarded 2006 “Excellence in Subsidiaries earned West Virginia’s top reclamation award for past four years West Elk earns Pollution Prevention Award, Conservation Award and Outstanding Contemporaneous Reclamation Award in 2005 & 2006Public Service” Arch earns 2005 and 2004 U.S. Department of Interior “Director’s Award,” the nation’s top reclamation honor Arch earns U.S. Department of the Interior “Nati onal Good Neighbor Award” Earned 25 state and national awards in past five years, most recently: fff |
Arch is a demonstrated leader inenvironmental performance, stewardship Slide 6 |
37Industry AvgSource: MSHA/Platts |
59ArchUnderground Mines 2005 U.S. Productivity in Tons Per Employee-Shift82Industry Avg Surface Mines |
284Arch |
A skilled workforce, favorable reserves and the applicationof new technologies keep productivity strong Slide 7 |
+10%+17%+9%*Source: MSHA/Platts |
83 36035 76 32630*Arch impacted by West Elk mine shutdown in 4Q05 |
2005 Productivity in tons per employee-shiftIndustry Avg. excl. ArchArch CoalIndustry Avg. excl. ArchArch CoalIndustry Avg. excl. Arch Arch Coal |
Arch’s large, modern mines are among the industry’s most productivePRBCAPP(incl. Magnum)Western BituminousSlide 8 |
Source: ACI |
Safety performance Production rate Cost per ton |
Each mine has site-specific targets, such as: ``` Incentive compensation payouts every month or quarter The Arch Coal President’s Awards given annually to operations for outstanding environmental or safety performance |
Miners have incentives to maintain safe, productive and low-cost operations Slide 9 |
1.12% |
10.04%2006 (annualized)Source: ACI |
1.23% 2005 |
Arch Coal Turnover RateAnnualized Comparison8.19%Retirements |
15%10%5%0% |
0.28%Voluntary Turnover |
1Q06 2.51% |
0.22% 1Q05 |
Arch Coal Turnover RateFirst Quarter Comparison2.04%We continue to remain focused on attracting and retaining quality employees, even in a tough employment market Arch Coal’s breadth of jobs, advancement opportunities and our progressive culture give us an edge |
We’re refining our approach to attracting and retaining industry’s best employees Slide 10 |
The strong performance by our operating regions reflects years of strategic planning Sales Price (1Q06, per ton) $60 $51.34 Old contracts continue $40 to roll-off $23.31 $17.53 $20 $11.34 New contracts $0 negotiated in favorable PRB WBIT CAPP ALL market conditions Operating Margin (1Q06, per ton) Managing costs $8 $6.28 $6.75 effectively $6 $3.65 $4 $2.70 Margins expanding $2 $0 PRB WBIT CAPP ALL Slide 11 "All" (Consolidated) includes corporate, eliminations and other Source: ACI |
Powder River BasinArch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
‘05Source: Platts |
‘04 ‘03 ‘02 ‘01 ‘00 ‘99 ‘98 |
CAGR = 5.47%’97 Historical production(in millions of tons)’96 ‘95 ‘94 ‘93 ‘92 |
The Powder River Basin is the nation’s largest and fastest growing supply region500 450 400 350 300 250 200 150 100 |
Slide 13 |
Sources: ACI, Platts |
19.6 |
Kiewit |
43.5on i |
tdaun oF |
87.6ch r |
(2005, mm tons)A |
125.1ttoec |
nen |
K |
Major Producers in Powder River Basin125.7ydo |
abPe |
Arch Coal is a top three producer in the Powder River Basin1501251007550250 |
Slide 14 |
87.6mm tons in 2005Targeting 15mm TPYSource: ACIBlack Thunder Coal Creek Restarting in 2006 |
Two surface mines located on joint rail line ff |
Cordero-RojoCoal Creek Arch CoalJacobs Ranch Kennecott Western Fuels Wyodak Western FuelsKennecott Dryfork |
CaballoArch CoalPeabody |
Buckskin KiewitPeabody Belle Ayr FoundationBlack ThunderAntelope Kennecott Arch Coal’s position in the Powder River Basin is growingRawhide Peabody Eagle Butte FoundationNorth Antelope / Rochelle |
Arch has exclusive use of south loadout and rail spurSource: ACI Thunderthrough 9/30/08 |
Five draglines, 13 shovels, 71 haul trucks GPS-enabled dispatch system Workforce totals 950 1.5 billion tons of reserves Sold south loadout to Peabody for $84.6 million with plan to build new, state-of-the-art facility in more strategic location by 2008 ` |
Black Thunder is world’s largest coal mineBlack |
Slide 16 |
CreekOnly 50 mm tons of coal mined at site since opened in 1982 Initial stripping ratios of less than 2:1Includes relocating, upgrading and erecting dragline Other equipment |
Restarting; Test shipments commenced in May 236 million tons of low-sulfur reserves Exceptional geology ``Investing $50 million to reopen `` |
Coal |
Coal Creek expands Arch’s operations in the Powder River Basin Slide 17 |
These expansions are projected to increase joint line capacity by 75 Source: ACI & Public Sources Western rails have doubled in joint line capacity since 1992 Plan to add nearly 75 miles of third and fourth main line tracks to the PRB joint line by 2008million tons Third main track being added on 18- mile section of joint line adjacent to Black Thunder CANAC has been retained to recommend how to take joint line to 490 mm tons of capacity |
Railroad performance is expected to improve over timeSlide 18 |
Western Bituminous RegionArch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Source: ACI |
Arch Coal is the leading coal producer in the Western Bituminous Region |
5.7 6.2 |
6.5 |
(2005, in mm tons) |
Major Producers in Western Bituminous Region |
Arch Coal operates three highly productive longwall |
reserves inmines in Utahsupported by 2 continuous miners mine supported by 2 continuous started May 2006 7.5 mm tons (2005) One of most productive mines in WBIT Longwall Workforce of 330 people 4.9 mm tons (2005) Longwallminers Workforce of 230 people Projected 3 mm tons Longwall One of few remaining longwallregion One of few Utah mines located on rail line Workforce of 180 people |
supported by 3 continuous |
West Elk mine in Colorado is back on track |
Reserve base of 130 mm tons 11,900 Btu/lb. and 1.0# SO2 Highly productive longwall miners Served by Union Pacific rail system Workforce of 400 employees |
Central Appalachia Progressive. Responsible. Vital. Growing. |
Arch has sharpened its focus in Central Appalachia |
Superior geology High-quality coal Low cost structure |
Focusing on assets with a significant competitive advantage Taking a more selective and focused approach Dramatically reduced legacy liabilities and attendant costs |
Even after disposition, Arch is one of the largest producers in CAPP |
(2005, in mm tons) |
Major Producers in Central Appalachia |
Mass |
Arch sold select CAPP assets to Magnum Coal. These tons are reflected in stripes. |
Our CAPP operations are located in West Virginia, Virginia and Kentucky |
mine 2.6 mm tons (2005) Continuous miner operation steam Located on NS and CSX rail 4.7 mm tons (2005) Longwall Located on NS Flexibility to ship met or steam |
Lone Mountain Mingo Logan Mountain Laurel |
3.2 mm tons (2005) Low-cost surface operation with excellent geology Excavator added in 2Q06 Steam coal Located on CSX and NS rail systems 2.3 mm tons (2005) Surface and deep (continuous miners) Flexibility to ship met or steam Located on NS system |
Mountain Laurel complex expected to be cornerstone of Arch’s CAPP operations |
Can be sold met or steam Projected 8 million TPY earlier this year second half of 2007Longwall to begin operation inPrep plant began processing coal inLoadout online in July Permitting continues |
Mountain Laurel Complex Located on CSX system Mountaineer II longwall mine Cardinal preparation plant and loadout facility Spruce No. 1 surface mine |
Achieving Superior Financial Results |
Progressive. Responsible. Vital. Growing. |
We continue to seek new and inventive ways to drive down costs at all our mines |
Efforts showed with improved margins in all regions in first quarter 2006 |
Intensifying process improvement efforts and extending best practices across all operations Shifted focus from optimizing production to optimizing margins Applying advanced technologies where true returns are possible Central purchasing creates stronger buying power and leverages preferred status among vendors |
Equipment reliability delivers consistent productivity at Arch Coal |
Infrared Thermography Vibration Analysis |
Predictive maintenance saved more than $5 million in 2005 In 2006, expanding on predictive techniques and improving maintenance planning, scheduling, reporting and analysis Maintenance Engineer added to each mining complex Examples of predictive maintenance initiatives include: |
Process improvement initiatives are increasing margins and profitability |
Developing Prep Plant Best Practices Improved Conveyor Run-Time Extending Tire Life |
Dedicated “Process Improvement Director”each mining complex Identify 3-5 projects per year per location with high degree of achievability and ROI Examples of process improvement initiatives include: |
Tire life is just one example of a very successful process improvement initiative |
Haul Truck Tire Life |
Through the combined efforts of maintenance and operations, we’ve improved tire life by 32% so far Savings estimated at $3 million for 2004-2005 Our goal is to reach 7,000 hours per tire by continuing our efforts in tire and road maintenance and training |
Operational strategy for achieving superior value for our stakeholders |
Strengthen low-cost position in core basins by driving down costs through process improvement and predictive maintenance initiatives Maintain and improve upon already strong safety and environmental performance Continue to pursue profitable growth in core basins through organic growth, reserve additions and strategic acquisitions Capitalize on Arch’s strong reserve position, modern mines and innovative workforce |
Arch Coal, Inc. Analyst Day 2006 |
Saint Louis, Missouri June 7, 2006 |
Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Arch Coal, Inc. Analyst Day 2006 |
David N. Warnecke Vice President, Marketing and Trading Arch Coal, Inc. Saint Louis, Missouri June 7, 2006 Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Agenda |
U.S. Coal Market Overview U.S. Coal Pricing Update Overview of Low-Sulfur Basins in which Arch operates Arch’s Current Market Position |
U.S. Coal Market Overview |
Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Demand continues to grow at existing plants |
Capacity Factor (%) |
1998 1996 Consumption |
1994 1992 |
Coal-based plants operated at 73% capacity factor average in 2005 Over 95MW of installed coal-based generating capacity (~30% of U.S. coal capacity) operated in excess of 80% capacity factor in 2005 |
Demand for coal for power generation continues to grow Excess capacity at existing plants represents lowest cost incremental MWHr for power generators `` |
Utility stockpile levels may need to increase further Utilities may desire to build stocks in advance of the expiration of the UMWA/BCOA labor agreement Utilities may be targeting higher stock levels going forward |
New coal plants are on the horizon |
Largest number of plants located in high-growth regions |
New coal-fueled power plants coming on-line and will likely be fueled with PRB coal |
New coal-based generation expected to come online by 2010 |
We expect most of these plants to consume PRB coal |
Current coal-fired capacity is approximately 310GW Approximately 90GW of new coal-based generation has been announced, equating to over 300 mm tons of new coal demand Arch believes that over 20GW of new capacity will be constructed by 2010 (enough to consume over 65 mm tons) ` |
CAPP production has been on the decline Reserve degradation, permitting, labor |
Central Appalachian production has declined by 18% since 1997 While prices for this coal remain at historical highs, production decrease will continue |
Imports can grow, but challenges remain Imported coal represents less than 3% of U.S. coal supply Delivered to U.S. Gulf, price is $61.95/short ton (12500 Btu basis) Assuming inland rail, delivered cost is more than current CAPP prices |
Imports are increasing, however in small increments Colombian labor strike highlights risk of sea borne coal dependence Port expansions are on-going, however rail infrastructure improvements to handle this volume are behind Current spot price of Colombian coal is $53/mt (CIF Colombia) |
Outside U.S., China and India are changing seaborne markets for international coal |
U.S. Coal Pricing Update Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Coal prices remain very strong |
PRB 8,800 Btu/lb. PRB 8800 pricing at $13.25/ton PRB 8400 pricing at $9.95/ton CAPP pricing in the $49.50-$56.75/ton range WBIT prices remain in the $39.25-$40.00/ton range |
Coal prices remain well above historic levels (2007 delivery) |
Coal prices have potential to increase further Marginal cost of CAPP production increasing Demand continues to be very strong, with new generation becoming a real factor in next four years |
Forward Cost Curve Additional scrubbing capacity is planned Conversely, utilities in CAIR states will need two allowances for |
Despite recent declines, market is still paying a significant premium for low-sulfur coal Forward price strip anticipates that premium will continue |
Overview of Low-Sulfur Basins where Arch operates Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Bulk of coal demand growth is likely to benefit Powder River Basin New plants across the country Blend fuel for plants east of Mississippi Ohio River and Great Lakes particularly attractive market |
Expansion possibilities include Rail expansion projects will further extend reach |
Demand for Western Bituminous coal could extend beyond current market |
High-Btu blend-stock with PRB coal on the Ohio River/Lakes Core market of Nevada, Utah, and Colorado growing briskly New generation projects in Utah/Nevada |
Market opportunity could approach 100 mm tons by 2010 |
Central Appalachia will retain a strong core demand despite supply challenges economic growth in the potential for exports to Europe and Brazil Continuing strong Southeast Met market expansion |
Strong core demand remains intact, even as supply declines Expansion in demand Core market place: Rail-served plants in the Southeast and Upper Midwest |
Arch sees current supply portfolio well-positioned for CAIR CAPP coal regions are 200 rail miles closer to this marketplace Congested I-95 corridor currently near capacity |
One of the fastest growing U.S. markets for electric power Current rail corridors limit competition from NAPP NAPP capable of only modest production growth Original boilers favor CAPP coal Ash fusion characteristics suited for CAPP coal Some scrubber designs require low-sulfur coal |
Southeast is highly dependant on CAPP Many Southeast utilities remain principally focused on CAPP coal |
Currently scrubbed plants in the Southeast use large quantities of CAPP coal Geographically closer to these power plants, so transportation costs are lower Better plant operating efficiencies (i.e. less parasitic loss and lower sorbent material costs) |
SE/Rail |
Current scrubbed plants in the Southeast use CAPP coal because it is the most economic choice |
Arch’s Current Market Position Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Arch is layering in new contracts while maintaining exposure to market dynamics Unpriced tons (in millions, at 3/31/06) |
Fundamental changes in Arch’s coal contracts Indexed to third party prices Explicit escalators to cover specific cost items |
Typically have “market adjustment provisions” Arch open to creative approaches ensuring ROA(i.e. all-in cost plus ROI) |
Terms & conditions near bilateral Embedded volume options all but gone Sourcing flexibility has become the norm Payment terms have been shortened Term agreements are making a comeback Indication that many utilities desire to secure their base-load fuel supply with a credit worthy producer |
Arch is a preferred supplier to the power generation industry While difficult to quantify, Arch believes it is a sought-after participant in many utility supply portfolios needs |
Customers’ reliability State commissions are questioning utilities about the merit of signing supply agreements with producers with limited financial wherewithal Broad national portfolio of mines Diverse product slate Significant shipper on all four Class-1 railroads and inland waterways |
Excellent reputation for honoring contracts |
Arch Coal, Inc. Analyst Day 2006 |
Saint Louis, Missouri June 7, 2006 Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Arch Coal, Inc. Analyst Day 2006 David B. Peugh Vice President, Business Development Arch Coal, Inc. Saint Louis, Missouri June 7, 2006 Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Arch has strengthened the company through successful transactions Acquired assets in the trough of the cycle Assembled highly strategic assets at a time when other producers were exiting the industry Focused on low-sulfur assets leading up to the implementation of Phase II of the Clean Air Act Built an inventory of attractive reserves that will enable Arch to continue to grow organically Monetized certain assets and used proceeds to fund more strategic opportunities |
Overview of Key Arch Transactions Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Ashland Coal Merger Central Appalachia |
Illinois Wyoming |
Arch was formed in June 1997 with the merger of Ashland Coal and Arch Mineral The merger established Arch as a leading producer of low-sulfur coal in the eastern United States |
ARCO Acquisition Powder River Basin Western Bituminous RegionBlack Thunder and Coal Creek in PRB West Elk and 65% of Canyon Fuel in WBIT Quadrupled Arch’s coal production Acquired reserves of 1.3B tons Enhanced cash flow generation Became second largest coal producer in the U.S. Operations in all major low-sulfur basins |
Arch acquired core operations in the western U.S. in June 1998 Transaction valued at $1.14B Established Arch as a national, multi-regional producer of low-sulfur coal |
Canyon Fuel Acquisition |
Dugout Canyon |
Utah mining operations consolidated on Arch’s financial statements after purchase Pricing in region has increased approximately 25% since transaction |
Purchased remaining 35% in July 2004 Transaction valued at $97.4MM Solidified Arch’s position as producer of low-sulfur western bituminous coal |
North Rochelle Acquisition Two mines share 5.5 mile property line Identified initial synergies of over $20 mm Reserve base of 226 mm tons |
Arch expanded its position in the PRB by acquiring Triton’s North Rochelle mine in August 2004 Transaction valued at $309 mm, net of the sale of the Buckskin mine North Rochelle mine was integrated with the operations of Black Thunder, creating the world’s largest coal mine |
Federal Lease Acquisitions Arch added reserves in the PRB through its acquisition of the Thundercloud federal reserve tract in October 1998 Arch further expanded its PRB reserves with Little Thunder acquisition in September 2004 Allowed Arch to obtain high-quality, low-sulfur coal reserves and to expand its low-cost operations at Black Thunder Also expanded WBIT operations with federal lease acquisitions at Canyon Fuel and West Elk |
Arch has proven to be adept at growing via acquisition |
Identifying opportunities Executing strategies Integrating operations efficiently Arch has historically grown by acquisition, with expertise in |
Key Divestitures Strengthened balance sheet Sharpened focus in CAPP Hobet 21 Arch of West Virginia Samples Campbells Creek |
Magnum TransactionSold stock in 3 subsidiaries, including 4 associated mines and reserves. Mines included in the sale: Transaction enabled Arch to lower risk of the company by substantially reducing legacy liabilities by over $500 mm |
Dynamics of MajorCoal Supply Basins Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
(mm)5042302511 |
(-17 mm) (-51 mm) |
Northern Appalachia -11% Central Appalachia-18% (-1 mm)TonsSource: MSHA/Platts Southern Appalachia -1% |
Basin |
Gulf Lignite (-7 mm) |
(-19 mm) -12%ProducingGulf LigniteFour CornersNorthern LigniteSouthern AppalachiaOther |
(1 mm)Illinois Basin -17% +2%(mm)4302361389378 Northern Lignite(1 mm) 2005 Regional Production(Change in Output by Region since 1997) Tons |
Other: +13%Basin(125 mm) (7 mm) (3 mm) |
Powder River Basin +41% Western Bituminous+10% Four Corners +9%ProducingPowder River BasinCentral AppalachiaNorthern AppalachiaIllinois BasinWestern Bituminous |
Major supply shifts are underway in U.S. coal market Slide 12 |
Source: ACI |
Reserve base continues to degrade and deplete Arch projects output will fall below 200 mm tons by 2010 Reserve degradation in process, but at a slower pace Arch projects modest growth through 2010 Announced projects require significant capital, development of seams other than Pitt 8, or are continuous miner operations As a result, marginal production costs are likely to increase Has been in degradation for some time |
Appalachian region is in decline Central Appalachia ` ` Northern Appalachia ` ` ` ` Southern Appalachia ` Arch expects CAPP and SAPP to decline more than NAPP grows Slide 13 |
Source: ACI |
Low-cost surface reserves largely exhausted Low-cost underground reserves being depleted Next generation of mines likely to employ longwalls Significant capital requirements Risky investment without base of long-term contracts Growth likely to be modest until majority of new scrubbers installed Even then, longwall mines will take years to develop Arch believes Illinois will be developed, but appears to be a second decade event Captive market |
Illinois and Lignite regions face challenges to grow Illinois Basin ` ` ` ` ` ` ` ` Gulf/Northern Lignite ` Slide 14 |
Source: ACI |
Economics will remain compelling Source of most new supply growth over next5 years, in Arch’s view Potential to grow substantially, but will require significant investment of time and money Limited prospects for growth Some competitors near end of reserve life Few longwall mineable reserves left |
Some western regions can grow with investment Powder River Basin ` ` ` Western Bituminous ` ` ` Slide 15 |
Arch’s Evolving Strategy Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Source: ACI |
Current operations in PRB, WBIT and CAPP Aren’t limiting ourselves to this strategy as we look ahead Large scale, low-cost mines with quality reserves is criteria used for basis of acquisition opportunities Domestic opportunities still exist International opportunities may exist where Arch can partner to share best practices and add value |
Our focus has been low-sulfur ` ` With any resource business, acquiring and developing reserves is an essential component ` Changing national and international landscape will dictate where opportunities lie ` ` |
Where does Arch go from here? Slide 17 |
Source: ACI |
CentralAppalachiaMt. LaurelWesternBituminousSkyline |
Powder RiverBasinCoal CreekBoth federal lease reserve and mine acquisitionsWill remain judicious in spending and not overpay Create new markets for coal supply beyond electric generation |
Organic growth remains a centerpiece of our strategy M&A remains a contributor to growth in an extractive industry `` Potential to participate in technologies to move along the value chain ` Slide 18 |
Arch has three avenues with which to pursue growth strategies |
Source: ACI |
Eastern Chemical, IGCC plants in IN & FL |
Two-step process involving gasification and liquefaction Increasingly stringent diesel requirements (CA) Constraints to refining capacity Fueled German war machine in WWII Sasol operates 2 CTL facilities today in S. Africa New projects using gasification or liquefaction»Public policy geared to domestic energy security DoD interested in a single battlefield fuel |
CTL viewed as economic at $35-$40/bbl oil ` ` ` Proven technology ` ` ` Government incentives could facilitate adoption ` ` |
Conversion technologies are increasingly economically viable at elevated oil & gas prices Slide 19 |
Source: ACI |
Technology works, but how quickly will a new plant achieve targeted utilization rates? Several leading FT providers have yet to employ technology at full-scale plants |
Uncertainty about future oil prices Perceived first-mover disadvantage Scaling up of the liquefaction process ` `Concerns about future constraints on CO |
So why aren’t new plants already under development? Slide 20 |
[Graphic Appears Here] |
Source: ACI |
CTL hinges on low-cost fuel source Can leverage current undeveloped reserves Long-term supply agreements with current operations to supply coal to a CTL facility Opportunities for equity participation Expect to be presented with attractive opportunities |
Small number of players in the industry that can provide the reserve base to participate as a host to a CTL facility ` Role for Arch to play as a fuel supplier ` ` Arch can leverage its strategic position to participate more fully in Btu-conversion technologies ` ` |
Arch can leverage its existing asset base to participate Slide 22 |
Source: ACI |
DKRW granted option on Arch’s reserves Arch operates coal mine Proximity to pipeline system Equity stake |
Construct CTL facility on Arch’s Carbon Basin reserves ` `` Licensed for GE gasifier and Rentech FT process Potential for Arch’s role to expand ` |
Option to build plant adjacent to Coal Creek mine Arch to become the fuel supplier for the plant (coal supply agreement) Equity stake |
Arch has option to expand its current participation in Btu conversion technologies Process enriches and upgrades low-grade subbituminous coal and lignite into a high Btu, low moisture, low emission product Potential for Arch’s role to expand ` ` ` Slide 23 |
Organic growth projects in key operating basins continue to provide the central vehicle for growth Acquisitions provide an additional avenue for growth and one in which Arch has demonstrated proficiency Btu conversion technologies can create an entire new market for coal and provide significant upside |
Arch’s future strategic growth possibilities are exciting Slide 24 |
Arch Coal, Inc. Analyst Day 2006 Saint Louis, MissouriJune 7, 2006 Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
Arch Coal, Inc. Analyst Day 2006 Robert J. MesseySenior Vice President and Chief Financial OfficerArch Coal, Inc. Saint Louis, MissouriJune 7, 2006 Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
“plans,” “intends,” that is, statements related to future, not “anticipates,” |
– Forward-looking statements by their nature address matters that are, to In this context, forward-looking statements often address our expected future business or “will.” “seeks,” |
Forward-looking information This presentation contains “forward-looking statements”past, events.and financial performance, and often contain words such as “expects,”“believes,”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. This presentation includes certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA. These non-GAAP financial measures are not measures of financial performance in accordance with generally accepted accounting principles and may exclude items that are significant in understanding and assessing our financial results. Therefore, these measures should not be considered in isolation or as an alternative to net income from operations, cash flows from operations, earnings per fully-diluted share or other measures of profitability, liquidity or performance under generally accepted accounting principles. You should be aware that our presentation of these measures may not be comparable to similarly-titled measures used by other companies. A reconciliation of these financial measures to the most comparable measures presented in accordance with generally accepted accounting principles has been included at the end of this presentation. Slide 2 |
Source: ACI |
Magnum transaction completed in December 2005 Peabody swap effectuated in December 2005 Preferred stock conversion to common in December 2005 $100 mm asset securitization program launched in February 2006 Renewed shelf registration to maintain flexibility in March 2006 2-for-1 common stock split effective May 16, 2006 Dividend increase of 50% beginning in June 2006 |
Arch has been busy in recent months Slide 3 |
45.3% 12/31/05 12/31/04 Source: ACI |
12/30/03 12/31/02 12/31/01 |
Total Debt as Percentage of Capitalization 84.0% 12/31/00 Total Debt ($ in millions) $982 12/31/05 |
$1,370 12/31/98 Arch has significantly reduced its debt level since 1998 Current debt to capital ratio is in the targeted range for Arch and is comparable to major coal competitors |
Arch is committed to maintaining astrong balance sheet Slide 4 |
Workers’ CompReclamation $285Arch Coal OPEBs $385 Competitor #4 Source: SEC filings compiled by ACI |
12/31/05 (in mm) $639 Competitor #3 Legacy Liabilities of Largest U.S. Coal Companies $1,733 Competitor #2 |
$2,772 Competitor #1 |
Arch has the industry’s cleanest balance sheet among major coal producers Slide 5 |
Source: ACI |
Expect to generate significant free cash flow in 2007 and 2008 as majority of contracts roll over to market pricing Capacity of $700 mm is substantially all undrawn Gives Arch an additional $100 mm of liquidity Reduced exposure to surety market by $230 mm Represents approximately $4 mm in annual savings |
Internally generated cash flow f Revolver funding f Asset securitization f Self-bonding f f |
Arch has liquidity to fund its future growth Slide 6 |
ceD Source: ACI |
Nov |
Oct |
Sep |
Aug |
ulJ2006nJu2005 |
Days Sales OutstandingMay 33.98 32.45Apr |
Mar Close to 80% of customers are investment grade companies |
Feb |
Focused on credit worthiness of customers f |
Arch has focused on improving its working capital position# of days40 35 30 25JanSlide 7 |
Source: ACI |
Q1 2005 37.0 $600.5 519.6 50.9 22.3 26.0 6.6 $0.07 $76.9 Highlights Q1 2006 31.7 $634.6 483.0 45.8 17.9 94.1 60.7 $0.84 $140.0 |
Financial |
Select Reported Tons SoldNote: Reconciliation appears on last page of handout |
In millions (except per share data)Revenue COS DD&A SG&A Income from Operations Net Income EPS Adjusted EBITDA |
Arch’s recent financial results validate its strategy Slide 8 |
$23.31 1Q06 $17.53 1Q06 Source: ACI |
Western Bituminous (sales price per ton) $19.01 FY05 Consolidated (sales price per ton) $17.25 FY05 $15.67 FY04 $15.34 FY04 $30.00 $20.00 $10.00 $0.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 |
$11.34 1Q06 $51.34 1Q06 |
Powder River Basin (sales price per ton) $8.26 FY05 Central Appalachia (sales price per ton) $42.73 FY05 $7.20 FY04 $36.08 FY04 $15.00 $10.00 $5.00 $0.00 $75.00 $50.00 $25.00 $0.00 |
Arch has sequentially improved its pricing realization per ton Slide 9 |
(2007 delivery)$13.25**$39.25-$40.00$49.50-$56.75 |
CO/UT 11,700 Btu/Lb. 1/1/2006Spot Prices per TonSource: ACI, United & Argus |
Coal Daily (6/2/06)1/1/2005Per-Ton Realization(1Q06)$11.34$23.31$51.34 |
CAPP NYMEXallowance price of $5851/1/2004Targeted Sales* (in mm tons)100+20+13-142 |
PRB 8,800 Btu/lb.Arch’s average per-ton realization by basin vs. current spot price From operations (excludes brokered tons)Includes a premium of almost $0.80 per ton vs. benchmark for ultra-low-sulfur Black |
200% 150% 100% 50% 0% -50% 1/1/2003***Thunder coal, based on an SO |
Percent change in spot prices by basin Based on prices quoted insince Jan 2003Change %Operating RegionPowder River BasinWestern BituminousCentral Appalachia Slide 10 |
1Q06 Operating cost 1Q06 Operating cost Source: ACI (per ton basis) FY05 (per ton basis) FY05 Western Bituminous Sales price Consolidated Sales price FY04FY04 $25.00 $20.00 $15.00 $10.00 $5.00$25.00 $20.00 $15.00 $10.00 $5.00 1Q06 Operating cost 1Q06 Operating cost (per ton basis) FY05 (per ton basis) FY05 |
Powder River Basin Sales price Central Appalachia Sales price FY04 FY04Note: Operating cost per ton represent fully loaded cost including DD&A. |
Arch achieved margin expansion in all regions in 1Q06 $15.00 $10.00 $5.00 $0.00 $55.00 $45.00 $35.00 $25.00 $15.00 Slide 11 |
Source: ACI |
Percentage depletion accounting for resource companies Arch projects that it will be an AMT payer for next several years Book taxes at 10% (AMT less valuation allowance changes) Over long-term, expect cash taxes to be in line with book taxes Valuation allowance established to reserve NOL and AMT credits Expect valuation allowance to be reduced as NOL and AMT credits are utilized |
Why is Arch an AMT payer? f f Cash vs. book taxes f f Arch has accumulated a significant deferred tax asset offset by a valuation allowance f f |
Arch expects to be an AMT tax payer for the next several years Slide 12 |
mine, by Source: ACI Reserve Additions($130 million) Maintenance/Replacement($165 million) |
$550 Million Projected for 2006 Capital Spending Major Expansion Projects($185 million) |
Productivity Enhancements($70 million) Expansion projects: Mountaineer II longwall mine, Spruce surfaceSkyline’s North Lease longwall mine, Coal Creek surface mine Reserve additions: Little Thunder federal lease reserve payment Identified expansion projects will boost wholly owned productionaround 23 million tpy in 2007 annualized |
Arch has the financial flexibility to support maintenance and organic growth projects Slide 13 |
Source: ACI |
Three major organic growth projects currently in progress Share repurchase Dividend increase |
Invest in core businesses to enhance profit growth and return on capital f Constantly evaluating opportunities to further upgrade and expand reserve base Consider acquisitions or investments that strategically fit and create shareholder value Arch believes its current level of debt is appropriate If growth opportunities are not sufficiently attractive, we will return cash to shareholders via f f |
Arch prioritizes its use of free cash flow Slide 14 |
Panel Q&A Discussion Arch Coal, Inc. |
Progressive. Responsible. Vital. Growing. |
6,575 700 16,226 50,903 2,451 76,85576,855 9,937 86,792 2005 March 31,(Unaudited) $ $$$ Three Months Ended 60,687 17,900 14,157 45,821 1,393 - |