S&P lowers Arch Coal outlook

Standard & Poor's lowered its outlook on Arch Coal Inc. to negative from stable and confirmed its ratings including its senior secured debt at BB+ and preferred stock at B+.

S&P said the outlook revision reflects its concern over Arch Coal's rising unit production costs, coal demand and upcoming contract negotiations for uncommitted 2004 production.

Following a very difficult 2002, coal prices have stabilized as a result of a return to cold winter weather, high natural gas prices - which promotes the use of coal in base load electric utilities - and shuttered capacity, S&P noted.

Nonetheless, the rating agency said it had expected spot coal prices to be somewhat higher than current levels. Price improvement has been muted, however because electric utilities are still working off existing inventories while others are delaying purchases given liquidity and credit concerns in the industry.

Hence, the overall outlook for coal demand and pricing for 2003 and 2004 will depend largely on summer weather patterns, the economic picture and natural gas prices. A mild summer coupled with soft economic conditions and lower gas prices, would negatively affect the company's upcoming contract negotiations for 2004 production and 2005. Arch currently has 50% (50 million) of its expected 2004 production uncommitted. Still, with so much of its production uncommitted, this strategy could prove highly beneficial to Arch's operating performance if coal demand and prices improve, S&P said.

The company's debt to capital ratio has improved to 52% in the first quarter of 2003 from 58% in the fourth quarter of 2002 because of recently issued preferred stock, S&P said. After adjusting for capitalized operating leases, the debt to capital ratio and the total debt to last 12-month EBITDA ratio a fairly aggressive 60% and 4.1x (excluding investment income) respectively. Also, the company's financial leverage is burdened by unfunded postretirement and pension obligations totaling $504 million.

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