Alpha Natural loses less money in 2014; cost cutting continues for coal producer

Alpha Natural Resources (NYSE: ANR), a leading U.S. coal supplier, on Feb. 12 reported a fourth quarter 2014 net loss of $122m, compared with a net loss of $359m in the fourth quarter of 2013.

Excluding certain items, the fourth quarter 2014 adjusted net loss was $112m, compared with adjusted net loss of $115m in the fourth quarter of 2013.

“2014 was yet again a challenging year for the coal industry. Against this backdrop, we continue to adjust our production base and cost structure to align with current market conditions,” said Kevin Crutchfield, Alpha chairman and CEO. “These actions are yielding results as shown by our strong 2014 cost performance in the East. Importantly, we expect to achieve additional cost savings in 2015, and we will continue to take aggressive actions to preserve flexibility and respond quickly to changing and challenging market conditions, including a reduction of SG&A and overhead costs in the range of $60 million to $75 million annually throughout the organization to adjust both the operational footprint and support services to our 2015 production guidance. “

Crutchfield continued: “While our business has benefitted from our prudent approach to portfolio rationalization during this prolonged coal market downturn, these have been tough decisions to make and the impact they have had on many Alpha employees is not lost on us. I’m very proud of the Alpha organization and want to commend everyone on their dedication to achieving these objectives, while also maintaining an unwavering commitment to best in class safety and sustainability. As we have said on many occasions, despite such difficult market conditions, we will not lose focus on Running Right.”

Total revenues in the fourth quarter of 2014 were $1.1bn compared with $1.1bn in the fourth quarter of 2013, and coal revenues were $0.9bn, down from $1bn in the year-ago period. The decrease in coal revenues was attributable to lower average realizations in all regions partly offset by increased tons sold.

During the fourth quarter of 2014, metallurgical coal shipments were 4.9 million tons, compared with 4.4 million tons in the fourth quarter of 2013 and 4.8 million tons in the prior quarter of 2014. Alpha shipped 9.8 million tons of Powder River Basin (PRB) coal during the quarter, compared with 9.3 million tons in the year-ago period and 9.3 million tons in the prior quarter. Eastern steam coal shipments were 7.3 million tons, compared with 6.8 million tons in the year-ago period and 7.2 million tons in the prior quarter.

The average per ton realization on metallurgical coal shipments in the fourth quarter was $83.43, down from $96.53 in the fourth quarter last year and up from $82.45 in the prior quarter. The average per-ton realization for PRB shipments was $12.02, compared with $12.48 in the fourth quarter last year and $11.81 in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $55.47, compared with $61.66 in the year-ago period and $58.16 in the prior quarter.

Total costs and expenses during the fourth quarter of 2014 were $1.2bn, compared with $1.3bn in the fourth quarter of 2013 and $1.2bn in the prior quarter. Cost of coal sales was $0.8bn, compared with $0.9bn in the year-ago period and $0.9bn in the prior quarter. The cost of coal sales in the East averaged $55.55 per ton, compared with $68.85 in the fourth quarter last year and $62.32 in the prior quarter. Excluding the $2.71 per ton benefit from immaterial correction of prior period asset retirement obligation calculations, $0.63 per ton merger-related expenses and $0.08 per ton employee benefit related expenses, the adjusted cost of coal sales in the East averaged $57.55 per ton, compared with $66.97 in the fourth quarter last year, which excluded $1.66 per ton of merger-related expenses and $0.22 per ton provision for regulatory costs, and $61.69 in the third quarter of 2014, which excluded $0.47 per ton of employee benefit related expenses and $0.16 per ton of merger-related expenses.

Fourth quarter 2014 Eastern adjusted cost of coal sales per ton benefitted approximately $5 per ton from gains on asset disposals and the net benefit from various liability adjustments. The cost of coal sales per ton for Alpha Coal West’s PRB mines in Wyoming was $11.16 during the fourth quarter of 2014, compared with $10.29 in the fourth quarter of 2013 and $11.32 in the prior quarter.

Full Year 2014 Results

For the full year 2014, Alpha reported total revenues of $4.3bn, including $3.7bn in coal revenues, compared with total revenues of $5bn and coal revenues of $4.3bn in 2013. The year-over-year decreases in both total and coal revenues are primarily attributable to lower average realizations and lower shipments of metallurgical and PRB steam coal.  

During 2014, Alpha’s coal shipments totaled 84.5 million tons, compared with 86.9 million tons in the year-ago period. Met coal shipments were 18.6 million tons for 2014, compared with 20.1 million tons shipped during the same period a year ago. Shipments of PRB and Eastern steam coal were 36.5 million tons and 29.5 million tons, respectively, during 2014, compared with 38.2 million tons and 28.6 million tons, respectively, in 2013. The year-over-year decrease in shipments of PRB coal principally reflects poor rail performance, while the year-over year decrease in metallurgical coal shipments is primarily driven by weak market conditions and production curtailments.

For 2014, the company-wide average realization was $44.05 per ton and the adjusted average cost of coal sales was $39.88 per ton, resulting in a $4.17 per ton, or 9.5 percent, adjusted coal margin. By comparison, company-wide average realization in 2013 was $48.99 per ton and the adjusted average cost of coal sales was $44.40 per ton, resulting in a $4.59 per ton, or 9.4 percent, adjusted coal margin. The decrease in adjusted coal margin per ton was primarily attributable to lower per ton realizations for metallurgical coal, Eastern steam coal and PRB coal, largely offset by lower Eastern adjusted costs of coal sales per ton. Full year 2014 weighted average coal margin per ton was $4.52 or 10.3 percent, with an average cost of coal sales of $39.53 per ton. Cost of coal sales was $3.4 billion for 2014, compared with $4.0 billion in the year-ago period, primarily due to production curtailments and cost reductions.

For full year 2014, Alpha recorded a net loss of $875m, compared with a net loss of $1.1bn during the same period a year ago. Excluding various items, Alpha’s adjusted net loss was $334m for 2014, compared with an adjusted net loss of $475m for 2013.

Market Overview

Metallurgical Coal

The global seaborne metallurgical coal market appears to have stabilized over the last several months, with the mid-volatile segment showing relative strength. In fact, the first quarter Australian mid-volatile benchmark increased by $1.50 per tonne to $116.50, while the Australian low volatile hard coking coal benchmark declined $2.00 per tonne to $117.00. Spot assessments have ranged from $110 to $115 per tonne in recent months.

As a result of significant production increases during 2013 and 2014, Australian export volumes increased by more than 41 million tonnes in those years to 186 million tonnes in 2014, leading to an oversupplied market amid slower growth in the Chinese steel industry. However, it appears that nearly all production expansion in Australia is completed, with expectation of only modest export growth over the next two years. Combined with announced global met production cuts in the 25 million tonne range, and additional production cuts likely, the market seems to be nearing more balanced supply and demand as long as at least modest steel production growth continues, Alpha said.

Alpha recently priced approximately 5 million tons of domestic metallurgical coal at a substantial premium to the average global price levels. Its 2015 domestic metallurgical coal pricing declined approximately $7 per ton compared to average domestic realizations in 2014. AMFIRE assets in central Pennsylvania, which Alpha sold at the end of 2014, accounted for approximately 800,000 tons of domestic met shipments during 2014.

Thermal Coal

Recent price trends suggest that the thermal coal market will remain “challenging” for 2015, and the trajectory thereafter will be significantly influenced by the price of natural gas, the pace of economic growth, ongoing regulatory pressures on the domestic coal-fired power fleet and the weather. Domestic utility inventory levels have approached normal levels from historic lows reached a few months ago. Also, softer natural gas prices and muted demand for coal, as evidenced by lackluster RFP activity, have contributed to a continued weak pricing environment. Rail service in the western U.S. has improved meaningfully since October last year.

After remaining reasonably stable for most of 2014, Northern Appalachia (NAPP) pricing has softened over the last three months, while the Central Appalachia (CAPP) and PRB regions experienced price declines throughout 2014.

Lastly, the seaborne thermal market declined significantly after the collapse in oil prices, with API2 spot pricing weakening from the low $70s per tonne in October to the lower $60s per tonne currently, below the break-even point for many suppliers. 

2015 Outlook

Alpha expects to ship between 69 and 80 million tons, including 14 to 17 million tons of Eastern metallurgical coal, 19 to 23 million tons of Eastern steam coal, and 36 to 40 million tons of Western steam coal. As of Jan. 30, 2015, 52 percent of the midpoint of anticipated 2015 metallurgical coal shipments was committed and priced at an average expected per ton realization of $82.88.

Based on the midpoint of guidance, 85 percent of anticipated 2015 Eastern steam coal shipments were committed and priced at an average expected per ton realization of $55.62, and 82 percent of the midpoint of anticipated 2015 PRB shipments was committed and priced at an average expected per ton realization of $11.53.

Alpha’s 2015 guidance for its Eastern adjusted cost of coal sales per ton is $58.00 to $64.00, while Western adjusted cost of coal sales per ton is expected to be between $10.00 and $11.00.

Capital expenditures for 2015 are expected to be $225m to $275m, while SG&A guidance, which excludes merger related expenses, is $100m to $120m.





























Guidance (in millions, except per ton and percentage amounts)

 
 

2015

Average per Ton Sales Realization on Committed  and Priced Coal Shipments 1,2,3

 
    West

$11.53

    Eastern Steam

$55.62

    Eastern Metallurgical

$82.88

Coal Shipments (tons) 3

69 – 80

    West

36 – 40

    Eastern Steam

19 – 23

    Eastern Metallurgical

14 – 17

Committed and Priced (%) 3,4

76%

    West

82%

    Eastern Steam

85%

    Eastern Metallurgical

52%

Committed and Unpriced (%) 3,4

14%

    West

18%

    Eastern Steam

6%

    Eastern Metallurgical

11%

West – Adjusted Cost of Coal Sales per Ton 5

$10.00 – $11.00

East – Adjusted Cost of Coal Sales per Ton 5

$58.00 – $64.00

Selling, General & Administrative Expense 5

$100 – $120

Depletion, Depreciation & Amortization

$650 – $750

Interest Expense

$290 – $310

Cash Paid for Interest

$245 – $255

Capital Expenditures 6

$225 – $275

Notes:                                                                                                                                                                                                                      

1 Based on committed and priced coal shipments as of January 30, 2015.

2 Actual average per ton realizations on committed and priced tons recognized in future periods may vary based on actual freight expense in future periods relative to assumed freight expense embedded in projected average per ton realizations.

3 Contain estimates of future coal shipments based upon contract terms and anticipated delivery schedules.  Actual coal shipments may vary from these estimates.

4 As of January 30, 2015, compared with the midpoint of shipment guidance range.

5 Actual results may be adjusted for various items, such as merger-related expenses, that cannot reasonably be predicted.

6 Includes the last of five annual bonus bid payments on the Federal Lease by Application for the Belle Ayr mine in Wyoming of $42 million. 

Alpha Natural Resources is one of the largest and most regionally diversified coal suppliers in the United States. With affiliate mining operations in Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming, Alpha supplies metallurgical coal to the steel industry and thermal coal to generate power to customers on five continents.

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.