S&P cuts Arch Coal loan, rates notes BB+

Standard & Poor's confirmed its ratings on Arch Coal Inc. and its 99%-owned subsidiary Arch Western Resources LLC and removed the ratings from CreditWatch where they were placed with negative implications on May 29, following the company's announcement that it intended to acquire Vulcan Coal Holdings LLC for $364 million. S&P also lowered its rating on Arch Coal's $350 secured million revolving credit facility to BB from BB+ and assigned a BB+ rating to Arch Western Finance LLC's planned $700 million senior secured notes due 2013. Ratings confirmed include Arch Coal's preferred stock at B+ and Arch Western Resources LLC's senior secured debt at BB+. The outlook is negative.

S&P said it cut Arch Coal's bank loan rating to reflect the increased borrowings under the revolving credit facility to partially fund the $364 million acquisition of Vulcan, the equity owner of Triton Coal Co.

S&P said the ratings were removed from CreditWatch based on its expectation that upon conclusion of the acquisition (expected sometime near the end of the year) Arch will utilize alternative means of funding for the transaction, resulting in a neutral to slightly positive impact on Arch's financial profile.

However, irrespective of the acquisition, the confirmed ratings incorporate minimal tolerance for further deterioration of already weak credit protection measures and S&P expects that the company will rapidly restore margins and key credit protection measures commensurate with the ratings.

Sustained cost improvement, particularly at its eastern operations and negotiations that achieve higher realizations with electric utilities on expiring coal supply contracts for the 50% of its uncommitted 2004 expected production, could prevent a downgrade.

Conditions in the domestic coal industry have begun to show signs of improvement following a period of abnormal weather patterns and soft demand that led to high coal inventories at electric utilities and depressed prices, S&P noted.

Arch Coal's debt to capital ratio and the total debt to last 12 month EBITDA ratio at 52% and 4.3x respectively ending March 31, 2003, improved from 58% and 4.2x ending Dec. 31, 2002, due to $139 million in proceeds from a 5% perpetual preferred stock issuance, S&P said. Including capitalized operating leases, debt to capital increases to an aggressive 60% at March 31, 2003.

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