Alpha Natural Resources (NYSE: ANR), which like many other U.S. coal producers is trying to ride out a poor coal market that has endured for nearly two years now, on Oct. 31 reported a third quarter 2013 net loss of $458m compared with a net loss of $46m in the third quarter of 2012.
Excluding certain items, the third quarter 2013 adjusted net loss was $134m compared with adjusted net loss of $36m in the third quarter of 2012.
The company sold 21.8 million tons of coal in the third quarter, down from 27.9 million tons in the third quarter of 20112. Its weighted average coal margin per ton plunged, coming in at $2.47 in the latest quarter, against $7.73 in the third quarter of 2012.
“Although our third quarter results this quarter reflect the tough market environment and downtime at our Cumberland mine, we are encouraged that the metallurgical coal market appears to be gradually improving from its recent apparent low point, and domestic thermal coal inventories have trended down, planting the seeds for healthier market conditions in the future,” said CEO and Chairman Kevin Crutchfield. “Regardless, we are not standing still and we continued to make significant progress this quarter enhancing our competitiveness and flexibility by managing those aspects of our business within our direct control.”
Key recent actions include:
- Returning the Cumberland longwall mine, working the Pittsburgh seam in southwest Pennsylvania, to full production in mid-August, at the early end of the projected timeframe;
- Arranging for the relaxation of the interest coverage covenant in Alpha’s secured credit facility through 2016;
- Substantially completing mine optimization and right-sizing actions;
- Developing a plan to further reduce operating and support expenses by at least $200m annually in 2014 and beyond; and
- Reducing capital expenditures, which it now expects to be $260m to $290m in 2013.
As of Sept. 30, Alpha maintained total liquidity at about $2bn, with cash and marketable securities of around $1bn, levels that have remained essentially flat throughout the year. However, cash outlays in the fourth quarter of 2013 of about $42m for an annual lease-by-application bonus bid payment in the Powder River Basin and about $38m for the satisfaction of a commitment to fund an industry safety trust fund by year-end, along with scheduled cash interest payments that are concentrated in the second and fourth quarters, are anticipated to reduce Alpha’s year-end cash and liquidity from current levels.
Alpha has also made significant progress toward reaching a tentative understanding to settle for $265m the securities class action brought by Massey Energy stockholders in early 2010 alleging deficiencies in Massey’s disclosures of safety information. Alpha bought Massey in June 2011. Additional material terms must still be negotiated. If a definitive settlement agreement is achieved and approved by the court, the settlement would result in the dismissal of the action. Alpha expects insurance recoveries of about $70m to help cover the cost of the settlement. In connection with these developments, Alpha recorded an increase in its loss contingency accruals of approximately $115m in the third quarter.
Things were mostly down last quarter, including revenues
Total revenues in the third quarter of 2013 were $1.2bn compared with $1.6bn in the third quarter of 2012, and coal revenues were $1bn, down from $1.5bn in the year-ago period. The decreases in total revenues and coal revenues were primarily attributable to lower average realizations for metallurgical and steam coal, and lower shipments of both Eastern and Western steam coal.
During the third quarter of 2013, met coal shipments were 5.0 million tons, compared with 4.9 million tons in the third quarter of 2012 and 5.6 million tons in the prior quarter.
Alpha shipped 10.1 million tons of Powder River Basin (PRB) coal during the quarter, compared with 13.2 million tons in the year-ago period and 8.8 million tons in the prior quarter.
Eastern steam coal shipments were 6.7 million tons, compared with 9.8 million tons in the year-ago period and 7.2 million tons in the prior quarter.
The average per ton realization on met coal shipments in the third quarter was $94.73, down from $129.96 in the third quarter last year and $100.95 in the prior quarter. Third quarter 2013 average per ton realizations for met coal were lower than the second quarter due to a combination of lower quarterly prices for export shipments and reduced high quality shipments partly due to a work stoppage at a customer’s facility.
The average per-ton realization for PRB shipments was $12.58, compared with $12.87 in the third quarter last year and $12.37 in the prior quarter.
The per-ton average realization for Eastern steam coal shipments was $63.21, compared with $66.40 in the year-ago period and $62.54 in the prior quarter.
Special charges drag down third quarter results
Including a goodwill impairment charge of $0.3bn, total costs and expenses during the third quarter of 2013 were $1.7bn, compared with $1.7bn in the third quarter of 2012 and $1.5bn in the second quarter of 2013.
Including the impact of a goodwill impairment charge of $253m resulting from a longer than expected recovery period in the metallurgical markets and lower production and shipment levels compared with previous estimates, Alpha recorded a net loss of $458m during the third quarter of 2013, compared with a net loss of $46m during the third quarter of 2012.
The year-over-year increase in Alpha’s net loss is primarily attributable to lower average realizations for metallurgical and steam coal, lower shipments of both Eastern and Western steam coal, and the increase to loss contingency accruals and the goodwill impairment charge.
The longwall production outage and longer than scheduled longwall move at the Cumberland mine is estimated to have reduced third quarter Eastern steam coal shipments and adjusted EBITDA by approximately 700,000 tons and $30m, respectively.
For the first nine months of 2013, Alpha reported total revenues of $3.9bn, including $3.3bn in coal revenues, compared with total revenues of $5.4bn and coal revenues of $4.7bn during the first nine months of 2012. The year-over-year decreases in both total revenues and coal revenues were primarily attributable to lower average realizations for met and steam coal, as well as lower steam coal shipment volumes.
During the first nine months of 2013, Alpha’s coal shipments totaled 66.3 million tons, compared with 82.9 million tons in the year-ago period. Met coal shipments were 15.7 million tons year-to-date, compared with 15.4 million tons shipped during the first nine months of 2012. Shipments of PRB coal and Eastern steam coal were 28.8 million tons and 21.8 million tons, respectively, during the first nine months of 2013, compared with 35.2 million tons and 32.4 million tons, respectively, during the first nine months of 2012. The year-over-year decreases in shipments of PRB and Eastern steam coal primarily reflect Alpha’s efforts to match production with demand.
Alpha sees signs of life in U.S. coal market, including lower coal inventories
“Domestic utility inventories continued to trend lower during the third quarter of 2013, falling to an estimated 153 million tons by the end of September,” Alpha said about its market outlook. “Importantly, inventory levels as measured by days of burn are now below average at utilities served by both Northern Appalachian (NAPP) and the Powder River Basin (PRB) coals, with NAPP coal inventory at 55 days of burn compared with the historical five-year average of 57 days at the end of September, and PRB inventory at 60 days of burn compared with the historical five-year average of 66 days. The decreasing inventory levels point to improving supply/demand dynamics which should lead to healthier market conditions in the near to intermediate-term. However, pricing currently remains constrained in both regions. In the PRB, pricing remains constrained due to latent capacity, and, while supply and demand for NAPP coal appears to be in a state of relative balance, pricing remains constrained due to the availability of relatively low-cost coal from other regions, primarily from the Illinois Basin.
“Inventories of Central Appalachian (CAPP) thermal coals have also been decreasing but remain elevated at 119 days of burn at the end of September 2013, compared with the five-year historical average of 82 days of burn. However, most CAPP thermal coal production remains out of the money relative to natural gas at today’s prices, and demand for CAPP thermal coal continues to decline with utilities such as [the Tennessee Valley Authority] and Southern Company announcing plans to decrease reliance on CAPP coal. We continue to believe that a significant portion of the decreased consumption of CAPP thermal coal is structural, driven by fuel switching in favor of gas, regulatory-driven plant retirements that are disproportionately impacting the regions served by CAPP coal, and encroachment of other lower cost coals, such as from the Illinois Basin.
“In light of decreased demand for CAPP thermal coals, Alpha significantly reduced its production of CAPP thermal coal beginning in 2012 and continuing through the most recent quarter. In addition to contracting activity in the domestic utility market, Alpha has recently placed approximately 4 million tons of CAPP thermal coal for 2014 with various European customers at prices tied to the API 2 index. As a result of these actions, Alpha’s current level of CAPP thermal coal production is approaching a level that Alpha believes to be sustainable over the intermediate term.”
Low end of 2013 shipment range is 86 million tons, and 79 million in 2014
Currently, Alpha expects to ship 86 million to 91 million tons during 2013, including 20 million to 21 million tons of Eastern met coal, 28 million to 30 million tons of Eastern steam coal, and 38 million to 40 million tons of Western PRB coal. As of Oct. 18, 96% of the midpoint of anticipated 2013 metallurgical coal shipments were committed and priced at an average per ton realization of $99.20, including over 1 million tons of crossover thermal coal at realizations slightly better than were available in the thermal markets.
Based on the midpoint of guidance, 100% of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $62.07; and 100% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.60.
For 2013, Alpha has reduced its guidance ranges for its Eastern and Western adjusted cost of coal sales per ton. Guidance for Eastern cost of coal sales per ton has been reduced to a range of $71.00 to $73.00, down from the previous range of $72.00 to $76.00, and guidance for Western costs of coal sales per ton has been reduced to a range of $9.75 to $10.00 per ton, down from the previous range of $10.00 to $10.50 per ton.
Alpha is introducing 2014 guidance, and currently anticipates total 2014 coal shipments between 79 million and 90 million tons, including between 18 million and 22 million tons of metallurgical coal, between 24 million and 28 million tons of Eastern steam coal, and between 37 million and 40 million tons of Western PRB coal.
As of Oct. 18, based on the midpoint of the current shipment volume guidance: 3% of Alpha’s anticipated 2014 metallurgical coal volume was committed and priced at average per-ton realizations of $86.20 which primarily represents a single legacy contract; 59% of Alpha’s anticipated 2014 Eastern steam coal volume was committed and priced at average per-ton realizations of $60.32; and 86% of Alpha’s anticipated 2014 PRB volume was committed and priced at average per-ton realizations of $12.32.