Alpha has strong results in 2011 – but financial adjustments drag it down

In early February, Alpha Natural Resources (NYSE:ANR) announced cutbacks due to slack markets conditions that are expected to reduce 2012 coal shipments by approximately 4 million tons, but was able to report Feb. 24 strong operating results for all of 2011.

Alpha CEO Kevin Crutchfield said in the earnings statement about the cutbacks: “This decision, which affects several hundred employees in Kentucky and West Virginia, was not made lightly. … A variety of market conditions, including competition from natural gas which recently hit decade low prices, regulatory-driven plant retirements, unusually mild winter weather, and weak demand for certain coal products, all led to the conclusion that these actions were necessary.”

One notable area in 2011 was mine safety performance, since Alpha in June 2011 took over Massey Energy, which was being slammed by critics over its mine safety program. On Feb. 23, the mine safety office in West Virginia issued a critical report about the April 2010 explosion at Massey’s Upper Big Branch (UBB) mine that killed 29 workers. Right after it did the tentative deal to buy Massey, Alpha began trying to repair Massey’s relationships with U.S. Mine Safety and Health Administration (MSHA) and state mine safety inspectors.

“One of the most notable accomplishments was the removal of two legacy Massey mines, Randolph and Revolution, from MSHA’s potential pattern of violation (PPOV) list,” said Crutchfield. “The incident rate at the legacy Massey operations in the fourth quarter showed about a 20 percent improvement compared to the third quarter of 2011. Compliance also improved, as the number of elevated MSHA enforcement actions at the legacy Massey operations decreased by approximately 45 percent compared to the previous quarter. As the integration proceeds, employee engagement at the legacy Massey operations, as measured by the number of Running Right observation cards, has been exceptional. Finally, reducing the annualized voluntary turnover rate at the legacy Massey operations is expected to be the largest driver of operations synergies from the acquisition. The turnover rate has improved steadily for several months and is now in the mid-single digits. Overall the integration has been successful, and we remain on track to achieve our targeted recurring annual synergies of $220 million to $260 million by mid-year 2013.”

Adjustments mask a strong 2011

For the full year 2011, the company achieved record revenue and adjusted EBITDA from continuing operations driven in large part by the acquisition of Massey, which propelled Alpha into the position of the world’s third largest metallurgical coal supplier. However, market conditions have changed rapidly during the last few months, and the fourth quarter 2011 adjusted EBITDA from continuing operations of $261m fell short of expectations.

On Feb. 3, Alpha announced that subsidiaries in Kentucky and West Virginia planned to idle four mines immediately and two others between the date of announcement and early 2013, while several other mines altered work schedules or reduced the number of production crews. Altogether, 10 mining operations are affected, four in eastern Kentucky and six in southern West Virginia. The adjustments are expected to reduce 2012 coal production by about 4 million tons, made up of 2.5 million tons of thermal coal and 1.5 million tons of lower quality, high-vol met coal.

Total revenues in the fourth quarter of 2011 were $2.1bn, up 108% compared to the fourth quarter of 2010, and coal revenues were $1.8bn, a 105% year-over-year increase. The large increases in total revenues and coal revenues were primarily attributable to the inclusion of the legacy Massey operations, which contributed coal revenues of $739m during the quarter, as well as a greater revenue contribution from met coal shipments compared to 2010. Alpha recorded a net loss of $733m during the fourth quarter of 2011, compared with net income of $11m during the fourth quarter of 2010.

In the fourth quarter of 2011, Alpha shipped 13.9 million tons of Powder River Basin (PRB) coal, up from 13.4 million tons in the year-ago period and 12.6 million tons in the third quarter of 2011. Eastern steam coal shipments were 11.9 million tons, compared with 5.8 million tons in the year-ago quarter and 12.7 million tons in the prior quarter. Met coal shipments during the fourth quarter were 5.3 million tons compared with 3 million tons in the fourth quarter of 2010 and 5.9 million tons in the third quarter of 2011.

Average per-ton realization for PRB shipments rose to $11.96, compared to $10.94 in the fourth quarter of 2010. The per-ton average realization for Eastern steam coal shipments was $66.93, compared to $67.04 in the year-ago period, and the average per-ton realization for met coal increased to $156.48 in the fourth quarter, compared to $114.87 in the fourth quarter of 2010.

For the full year 2011, Alpha reported total revenues of $7.1bn, including $6.2bn in coal revenues, compared with total revenues of $3.9bn and coal revenues of $3.5bn in 2010. The year-over-year increase in both total revenues and coal revenues is primarily attributable to the inclusion of the legacy Massey operations for seven months in 2011, as well as increased average per-ton realizations on met coal shipments.

In 2011, Alpha’s coal shipments totaled 106.3 million tons, including 20.9 million tons from the legacy Massey operations, compared with 84.8 million tons for the full year 2010. Met coal shipments in 2011 rose to 19.2 million tons, up 62% from 11.9 million tons shipped during 2010. Shipments of PRB coal and Eastern steam coal in 2011 were 49.9 million tons and 37.2 million tons, respectively, compared with 49 million tons and 24 million tons in the previous year.

The company-wide average per-ton realization in 2011 was $58.22 and the adjusted average cost of coal sales was $44.57 per ton, resulting in an adjusted weighted average coal margin of $13.65 per ton.

For 2011, Alpha recorded a net loss and a loss from continuing operations of $677m. Excluding various adjustments, adjusted income from continuing operations in 2011 was $287m. EBITDA from continuing operations for 2011 was $77m and adjusted EBITDA from continuing operations, which excludes goodwill impairment, merger and UBB-related expenses, change in fair value and settlement of derivative instruments, closed-mine asset retirement obligation-related charges, mineral lease terminations expense, and loss on early extinguishment of debt, was $1.21bn. EBITDA from continuing operations for 2010 was $769m and adjusted EBITDA from continuing operations, which excludes merger-related expenses, change in fair value and settlement of derivative instruments, and loss on early extinguishment of debt, was $808m.

Markets sag in both the U.S. and abroad

Said Alpha about market prospects: “After achieving record high pricing early in 2011, metallurgical coal has experienced three successive quarters of decreasing benchmark prices due to a number of factors, including: the recovery of Australian exports following severe flooding events early in 2011; ramping Mongolian production which is becoming a leading source of supply to the Chinese steel industry; concerns over the prospect of slowing growth in China; and the ongoing European financial crisis. In the current environment, demand for higher quality coking coals remains robust; however, demand for lower quality, high-volatility metallurgical coals has waned, and margins for these coals have compressed. In response, Alpha acted swiftly by announcing its plan to reduce production of lower quality metallurgical coal by 1.5 million tons in 2012 in order to match production with anticipated demand. While the seaborne market for coking coal has experienced some downward pricing pressure in the near-term, domestic steel mills continue to run at capacity utilizations in the upper 70 percent range, and domestic demand for steel and coking coal remains stable.”

In the short-run, the U.S. market for thermal coal also faces a number of challenges, Alpha noted. Unusually mild winter weather has reduced electricity generation and thus both coal and gas burn, resulting in a rapid build in coal inventories that now stand at greater than 180 million tons nationwide, an increase of more than 30 million tons from just three months ago. The mild weather, bloated inventories and high production of natural gas has recently driven the price of natural gas to decade lows, which has increased fuel switching in favor of gas and forced the price of thermal coals lower across all production basins.

Regulatory uncertainties, particularly surrounding the U.S. Environmental Protection Agency’s recently delayed Cross-State Air Pollution Rule, plus the newer Maximum Achievable Control Technology rule from EPA, are causing utilities to defer coal purchasing decisions, and in some cases to retire coal-fired generating facilities. The Feb. 3 announcement of thermal coal production cutbacks was designed to respond to this slack demand.

“While the near-term environment is marked by headwinds for both met and thermal coals, the long-term fundamentals remain constructive,” Alpha said. “With few regions in the world capable of producing high quality coking coal and long-range growth in global steel production fueled by emerging economies in Asia, the best quality metallurgical coals are anticipated to remain relatively supply-constrained for the foreseeable future. Likewise, the Eastern Hemisphere is projected to drive long-term growth in thermal coal demand. According to the Energy Information Administration, by 2030 the world is projected to consume approximately 9.7 billion tons of coal annually, approximately a 30 percent (or greater than two billion tons) increase over annual global consumption in 2011.”

Alpha continued: “The majority of the growth is expected to come from developing economies, particularly China and India. Powerful and permanent shifts in the world’s seaborne trading patterns are already evident as this Asian demand grows over time. South African thermal coal exports, which historically served the European utility market, are now primarily moving east into India and China. Thermal coal from the Americas is filling the void in Europe, with Colombian exports to Europe up 41 percent during the first 11 months of 2011, alone. Given the shifting seaborne trading patterns, Alpha will be poised to leverage its leading U.S. export terminal position, with 25 million to 30 million tons of capacity, to further access seaborne markets for both metallurgical and thermal coal in response to expected seaborne demand growth in the coming years.”

Alpha trims 2012 production guidance

In order to reflect recent production cutbacks and the current market environment, Alpha is revising its 2012 shipment guidance ranges.

  • The company now expects to ship between 20 million tons and 25 million tons of Eastern met coal, compared to the previous range of 23.5 million tons to 26.5 million tons.
  • Eastern steam coal shipments in 2012 are now expected to range from 42 million tons to 48 million tons, compared to the previous range of 46 million tons to 52 million tons.
  • Western steam coal shipments out of the PRB in 2012 are anticipated to be in the range of 45 million tons to 51 million tons, compared to the previous range of 49 million tons to 53 million tons.

As of Feb. 8, 50% of the midpoint of anticipated met coal shipments were committed and priced at an average per ton realization of $152.91; 92% of the midpoint of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $68.17; and 100% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.78.

Alpha’s 2012 cost of coal sales is expected to range between $72 and $77 per ton in the East and between $10.50 and $11.50 per ton in the West. Capital expenditures for 2012 are expected to fall within the range of $550m to $750m, compared to prior guidance of $650m to $850m.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.