Patriot Coal Corp. (PCX), the third largest producer and marketer of coal in the Eastern United States reported on Tuesday a fourth-quarter profit due in large part to gains related to its purchase of Magnum Coal last year. Patriot, who has 15 mining complexes in Appalachia and the Illinois Basin, said net income for the quarter was $65.2 million, or 85 cents per share.
The results weren’t all they seem on the surface.
When excluding purchase price accounting adjustments from Magnu”s below-market sales and purchase contracts, Patriot had a loss of 82 cents per share for the quarter — well below the loss of 69 cents per share analysts were expecting according to Reuters Estimates. Revenue rose to $541 million as a result of including Magnum’s contribution but also due to higher average selling prices.
Analysts were expecting revenue of about $506 million.
Fiscal 2008 was a topsy-turvy year for the coal producers. Record-high prices were seen mid-year, followed by an economy-driven downturn by year-end. Patriot’s CEO Richard M. Whiting said that even as those unprecedented swings were occurring in the coal markets Patriot completed its acquisition of Magnum and made significant progress in realizing synergies and integrating the companies.
Still, there is much work to be done as Patriot transforms itself into a more cost-competitive long-term coal supplier. Mr. Whiting said the company has reacted quickly to changes in demand by refining its production plans and optimizing its mining complexes.
“We have implemented a specific management action plan that included key decisions to close high-cost mines, cut capital expenditures, transfer equipment to more productive locations, reduce the prices we pay for materials and supplies, and fill open positions with displaced miners from idled operations,” said Whiting.
Among the chal! lenges P atriot faces (as well as the entire industry) are a more costly regulatory landscape with new regulations and aggressive enforcement concerning both environmental and mining statutes, Mr. Whiting noted. Given the more costly regulatory environment Patriot is seeking customer reimbursement under applicable coal supply agreements, as well as actively pursuing the restructuring of certain below-market legacy coal-supply agreements which Mr. Whiting says place an unreasonable burden on the company.
Mr. Whiting acknowledges that the weak economy is negatively affecting the coal industry in the short-term, but is upbeat about the long-term future for coal. He says coal continues to be the primary fuel powering the U.S., as well as China, India and other developing economies.
He believes that as the economy recovers supply and demand will come back into balance and mine closures in 2009 will accelerate the return to market equilibrium.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, visit www.InvestorPlace.com.
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