Production Delays Plague Foundation Coal

• The Company: Foundation Coal Holdings, a primary producer of steam coal to United States utilities for use in generating electricity.
• The Filing: FORM 8-K filed with the SEC on October 22, 2008.
• The Finding: Based on the current operating environment, Foundation Coal is cutting its full-year 2008 and 2009 EBITDA guidance to a range of $300 to $320 million and to $500 to $625 million, resulting from expected production constraints in its Eastern operations.

The Upshot: Looking forward, management is reducing production guidance in its Pennsylvania mining operations by approximately one million tons, attributable to uncertain geological conditions, such as sandstone intrusions encountered at the Emerald Mine in Northern Appalachia, and increased inspection activity and a shortage in skilled labor at both Northern and Central Appalachian mining complexes. Foundation now expects total Eastern production in 2009 to range from 19.5 to 20.5 million tons, down about one million tons from previous forecasts. In subsequent years, Eastern production should be in the range of 18.5 to 20.5 million tons.

Although 100 percent and 94 percent of coal shipments for 2008 and 2009, respectively, are contracted and priced for delivery, the aforementioned earnings guidance assumes no further unanticipated disruptions in production.

In addition, management must continue to successfully execute on managing its costs. In the third-quarter ended September 30, cash production costs in the Powder River Basin, Northern Appalachia, and Central Appalachia were $8.32, $37.65, and $64.83, respectively. Average realized price per ton sold on coal shipments in the West, Northern Appalachia, and Central Appalachia were approximately $10.02, $46.30, and $75.13, respectively.

The Question: Can Foundation Coal hold production costs down in an environment where volumes are declining?