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Article Excerpt
OPERATOR: Greetings and welcome to the Foundation Coal Holdings Inc. fourth-quarter financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Allen, VP of Investor and Media Relations for Foundation Coal Holdings Inc. Thank you, Mr. Allen. You may begin.
TODD ALLEN, VP, INVESTOR & MEDIA RELATIONS, FOUNDATION COAL HOLDINGS INC.: Thank you, operator. Good morning, everyone and thank you for joining Foundation Coal's fourth-quarter 2008 earnings conference call. This call is being recorded. It will be available for replay for a period of two weeks. The live call can also be heard on the Internet and will be archived on our website at www.foundationcoal.com for one year.
Joining me on today's call are Jim Roberts, Chairman and CEO of Foundation Coal, who will summarize our fourth-quarter and full-year 2008 results and provide a brief market outlook; Kurt Kost, our President and COO, who will address our operating results; and Frank Wood, our CFO, who will provide you the details of our financial performance.
Please let me remind you that various remarks that we make on this call concerning future expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management's views and assumptions regarding future events and business performance as of the time the statements are made. Actual results may differ materially from those expressed or implied. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in our filings with the United States Securities and Exchange Commission, including our annual report on Form 10-K. Now I would like to turn the call over to Jim Roberts. Jim?
JIM ROBERTS, CHAIRMAN & CEO, FOUNDATION COAL HOLDINGS INC.: Thank you, Todd. Good morning, everyone. I am pleased to report that Foundation delivered record performance on several key metrics during the fourth quarter. Foundation achieved record revenue, record adjusted EBITDA, record net income and record diluted earnings per share in the fourth quarter.
Specifically, Foundation generated adjusted EBITDA of $121 million and diluted earnings per share of $0.93 in the fourth quarter. This very strong performance is a direct result of record shipments from northern Appalachia, our highest margin region, which reached 4.1 million tons in the fourth quarter due to excellent execution at both of our mines. Production was particularly strong at the Emerald mine where the first full quarter of dual longwall operation enabled us to ramp production significantly. Strong fourth-quarter results led Foundation to post record full-year adjusted EBITDA of $316 million, near the high end of our guidance.
Subsequent to the end of the quarter, we announced the idling of our Laurel Creek mining complex based on its high cost structure, current market environment and difficult mining conditions. The mining complex located in southern West Virginia produced approximately one million tons of coal in 2008. The decision to idle Laurel Creek was to lower our operating cost structure in Central Appalachia, modestly enhance our EBITDA going forward and eliminate the need for approximately $9 million of capital expenditures in 2009.
Also subsequent to quarter-end, our Central Appalachian affiliate, Kingston Resources Inc., filed a complaint in US District Court for the Western District of Pennsylvania against ArcelorMittal USA Inc. seeking enforcement of an existing coal supply agreement. Other than what is stated in the publicly available complaint, we are unable to comment on this pending litigation.
As we look to 2009, we expect Foundation to deliver record EBITDA and earnings per share by a significant margin, reflecting our highly hedged position and improved cost structure following the idling of Laurel Creek, balanced with current market uncertainty.
Every period of market uncertainty also brings with it opportunity. We believe small private producers are already under considerable stress and public valuations are at historically low multiples. In light of today's market environment, we remain vigilant in evaluating the possibility of growth through acquisition.
Now I would like to give you our view of the current market. In this environment, many people are focused on the economic crisis immediately before us. I would like to start my comments by saying that, long term, we continue to believe the coal industry fundamentals are strong due to projected coal consumption growth in the United States and the more rapid growth projected in developing economies like China and India. In the big picture, the world will need much more energy over time and this growing energy need will continue to be met with coal due to its abundance and low cost.
Specifically, new coal plants representing nearly 20 gigawatts of capacity are coming online in the United States between now and 2012. These new plants will increase domestic coal demand by approximately 50 million to 80 million tons annually. Worldwide consumption of coal is expected to increase by more than 40% by 2030, so our long-term view remains bullish. However, the current economic slowdown is negatively impacting demand for coal in the near term.
Prices for steam and metallurgical coal have declined and new contracting has slowed significantly, especially for metallurgical coal. Overall, we expect the United States coal production needs to be reduced by -- we expect that US coal production needs to be reduced by approximately 50 million tons in 2009 in order to bring supply and demand into balance.
Exports, which grew approximately 40% in 2008 to an estimated 84 million tons, could come down 15 million to 20 million tons in 2009, increasing domestic supply. In addition, domestic electricity generation is expected to fall between 1% and 2% as a result of reduced industrial and commercial usage. This equates to 10 million to 20 million tons of reduced demand.
Finally, US steel mills have sharply reduced production with December 2008 production down over 50% year-over-year. As steel production slows, crossover met coals are returning to the steam market. While the exact number is difficult to ascertain, this reduced met coal consumption and lower direct industrial usage will further increase steam coal supply in 2009. Granted, a decrease of 4% to 6% in US coal demand is concerning, but compared to other sectors of the economy, coal is faring quite well and it demonstrates the recession-resistant nature of coal.
In this environment, producers are responding by closing unprofitable mines. Up to this point, we believe that publicly announced production cutbacks in the United States, including the idling of our Laurel Creek facility, total approximately 35 million tons and additional cutbacks are possible during the rest of the year.
The regulatory challenges that we have discussed on previous calls continue to persist and the 404 permitting issue in central Appalachia remains an open question. It is clear that few permits are being issued and the backlog of permit applications is growing. This is increasingly having a negative impact on surface production in the region both in terms of tonnage and cost. In addition, the current credit crisis puts intense pressure on producers with limited liquidity.
Beyond 2009, we would domestic steam coal consumption to resume a more normal growth rate, roughly in line with the growth in domestic electricity demand. Domestic demand for met coal and exports for both met and steam coals should experience a significant increase when the global economy recovers from the current recession. Consequently, the companies that can weather this economic storm will be rewarded with the benefits of higher demand and limited supply.
Today's economic environment challenges coal companies to make tough decisions and hard choices. Foundation is well-positioned to handle these conditions. First, as previously stated, the economic downturn has created a temporary oversupply of coal. Foundation's position of having 97% of its planned shipments for 2009 committed and priced will allow us to manage through these headwinds and generate record earnings and EBITDA in 2009.
Second, lower prices will remove the safety net that higher prices provide in 2008, forcing high-cost mines to close. All companies will be faced with the decision to close their higher cost operations, resulting in reduced production in 2009 and '10. Foundation has already closed one operation. However, because Foundation sold most of its 2009 production at or near the peak of the market in 2008, and because Foundation produces 95% of its production from low-cost, large reserve, high-volume mines, we are able to increase production in 2009 and generate...
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