Alpha Natural makes money in Q1 2015, but in a one-off kind of way

Alpha Natural Resources (NYSE: ANR), a leading U.S. coal supplier, reported a first quarter 2015 net income of $68 million, compared with a net loss of $56 million in the first quarter of 2014.

The first quarter net income includes a $364 million gain on early extinguishment of debt. Excluding certain items, the first quarter 2015 adjusted net loss was $176 million, compared with adjusted net income of $15 million in the first quarter of 2014.

“As all participants in the industry are acutely aware, we are more than two years into a prolonged coal market downturn,” said Kevin Crutchfield, Alpha’s chairman and CEO. “In order to mitigate the negative impacts of these market conditions on our business, we continue to take proactive steps to reduce costs, maximize efficiency and manage our balance sheet.”

He added: “In the first quarter we idled additional mines to further adjust our cost structure, and we expect to take further actions to optimize our mine portfolio and reduce overhead costs in order to achieve, and potentially exceed, our target of annualized savings in the $60-75 million range when these actions are fully implemented. These idlings, as well as weaker overall met pricing, longwall panel development work at Emerald, and difficult weather, all contributed to a loss this past quarter on an Adjusted EBITDA basis.” 

Total revenues in the first quarter of 2015 were $0.8 billion compared with $1.1 billion in the first quarter of 2014, and coal revenues were $0.7 billion, down from $1.0 billion in the year-ago period. The decrease in coal revenues was attributable to lower average realizations in all regions and fewer tons sold in the East, mainly due to weather, resulting in reduced shipments and coal revenue by approximately one million tons and more than $50 million, respectively.

During the first quarter of 2015, metallurgical coal shipments were 4.0 million tons, compared with 4.4 million tons in the first quarter of 2014 and 4.9 million tons in the fourth quarter of 2014. Alpha shipped 10.0 million tons of Powder River Basin (PRB) coal during the quarter, compared with 9.4 million tons in the year-ago period and 9.8 million tons in the prior quarter. Eastern steam coal shipments were 5.5 million tons, compared with 7.6 million tons in the year-ago period and 7.3 million tons in the prior quarter.

The average per ton realization on metallurgical coal shipments in the first quarter was $76.75, down from $89.99 in the first quarter last year and down from $83.43 in the prior quarter. The average per-ton realization for PRB shipments was $11.55, compared with $12.26 in the first quarter last year and $12.02 in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $55.20, compared with $58.25 in the year-ago period and $55.47 in the prior quarter.

As of the end of the first quarter of 2015, Alpha had total liquidity of approximately $1.9 billion, consisting of cash, cash equivalents and investments of more than $1.0 billion, which includes approximately 6.0 million shares of Rice Energy valued at approximately $132 million, and more than $0.8 billion available under the company’s secured credit and accounts receivable securitization facilities. Total long-term debt, net of debt discounts and deferred debt issuance costs, and including the current portion of long-term debt as of March 31, 2015, was approximately $3.3 billion, including approximately $154 million of senior convertible notes maturing in 2015.   

During the first quarter, Alpha effectively used approximately $117 million in cash and issued approximately $214 million second lien notes to repurchase $593 million in principal amount of unsecured notes, reducing gross debt outstanding by $379 million.

Subsequent to the first quarter Alpha retired the remaining 2.375% 2015 convertibles notes, totaling $44 million.

Market Overview

Metallurgical Coal

Although the second quarter Asian metallurgical coal benchmark declined further to $109.50 per tonne from $117.00 for the first quarter, the impact thus far on European pricing  has been more limited, with pricing typically more favorable than in Asian markets. India has exhibited strong import volumes with March year-to-date metallurgical coal imports up more than 50% to 12.3 million tonnes, surpassing China as the second largest importer. Unfortunately, Alpha said, market conditions remain very difficult, notably in the U.S. where steel capacity utilization rates have declined to 72% from 77% a year ago, and in China, where GDP growth slowed to 7% in the first quarter, the lowest rate since the first quarter of 2009 and the effects of recent stimulus are yet to take hold.  March year-to-date metallurgical Chinese coal imports declined 16% to 10.9 million tonnes compared with the first quarter of 2014. March imports declined to 2.9 million tonnes from 4.0 million tonnes in February. 

Lower benchmarks and declining spot prices have created a challenging market for U.S. coal companies in the Eastern Mediterranean and India, while Australian and Canadian producers continue to benefit from a strong U.S. dollar. 

Global steel demand growth has slowed over the past six months. According to an April 2015 World Steel Association (WSA) report, the global apparent steel usage (ASU) growth forecast for 2015 is 0.5% compared with the October 2014 forecast of 2.0%, with the Chinese ASU growth rate forecast declining to -0.5% from 0.8%. The European steel usage growth rate forecast remains solid at 2.1%, while NAFTA’s growth forecast was reduced to a decline of 0.9%.  According to WSA, global steel production declined 2.7% for March, with year-to-date production declining 1.8%.

So far, announced, but not fully implemented global production cuts of nearly 30 million tonnes have not resulted in improved pricing, Alpha report. Given the current state of demand, Alpha believes additional cuts are likely throughout 2015. 

Thermal Coal

Overall thermal markets in the US continue to be weak coming out of the winter burn season, with pricing having declined over the first quarter across all production regions. Natural gas remains a reason with pricing nearly 50% below year ago levels as storage levels nearly doubled to 1.6 trillion cubic feet from approximately 900 billion cubic feet a year ago. PRB coal has experienced further pricing pressure since mid-February. Though pricing remains unattractive, recently Alpha has seen a seasonal uptick in request for proposals (RF)P activity in the PRB, where it has two mines in Wyoming, Eagle Butte and Belle Ayr. 

In Northern Appalachia (NAPP), where Alpha has the Emerald and Cumberland longwall mines in the Pittsburgh coal seam, prices have softened further by roughly $5 a ton since the company’s earnings call in February, and are now in the lower $40s per ton for spot and mid-$40s per ton for calendar year 2016 contracts.  Increased production in NAPP, as well as in the Illinois Basin, continues to put pressure on NAPP pricing, and since mid-February natural gas prices have declined an incremental 10% to approximately $2.50 per mmBtu with large basin differentials.   

In Central Appalachia, prices are relatively flat over the last two months, but have declined sharply since the end of October to the mid-to upper $40s per ton, down almost $10. Natural gas storage levels nearly doubled versus a year ago with prices down to roughly $2.60 per mmBtu from approximately $4.70 a year ago. RFP activity continues to be very slow, with utilities generally preferring shorter term contracts or spot deals. 

In the thermal seaborne market, spot API2 benchmark pricing is down $5 per tonne since mid-February to $59 per tonne, which remains well below breakeven for all U.S. producers. While the strengthening U.S. dollar has helped producers in Colombia and South Africa, the market conditions are difficult for all coal producers, Alpha pointed out. 

2015 Outlook

Alpha maintained its 2015 shipment guidance range of 69 million to 80 million tons, including 14 million to 17 million tons of Eastern metallurgical coal, 19 million to 23 million tons of Eastern steam coal, and 36 million to 40 million tons of Western steam coal.

As of April 16, 2015, 75% of the midpoint of anticipated 2015 metallurgical coal shipments was committed and priced at an average expected per ton realization of $78.67. Based on the midpoint of guidance, 87% of anticipated 2015 Eastern steam coal shipments were committed and priced at an average expected per ton realization of $54.81, and 100% of the midpoint of anticipated 2015 PRB shipments was committed and priced at an average expected per ton realization of $11.40.

Alpha’s 2015 guidance for its Eastern adjusted cost of coal sales per ton remains $58.00 to $64.00, while Western adjusted cost of coal sales per ton is unchanged at a range of $10.00 and $11.00.






























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

$11.40

    Eastern Steam

$54.81

    Eastern Metallurgical

$78.67

Coal Shipments (tons) 3

69 – 80

    West

36 – 40

    Eastern Steam

19 – 23

    Eastern Metallurgical

14 – 17

Committed and Priced (%) 3,4

92%

    West

100%

    Eastern Steam

87%

    Eastern Metallurgical

75%

Committed and Unpriced (%) 3,4

2%

    West

0%

    Eastern Steam

5%

    Eastern Metallurgical

3%

West – Adjusted Cost of Coal Sales per Ton 5,6

$10.00 – $11.00

East – Adjusted Cost of Coal Sales per Ton 5,6

$58.00 – $64.00

Selling, General & Administrative Expense 5

$95 – $115

Depletion, Depreciation & Amortization

$650 – $750

Interest Expense

$290 – $310

Cash Paid for Interest

$230 – $240

Capital Expenditures 7

$200 – $250

Notes:                                                                                                                                                                                                                     

  1. Based on committed and priced coal shipments as of April 16, 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 April 16, 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. Cost coal sales by segment divided by tons sold. Tons sold in the East consist of Eastern steam and metallurgical tons. The company’s All Other category has no sales or production and therefore has not been presented separately above.    
  7. Includes the last of five annual bonus bid payments on the Federal Lease by Application for the Belle Ayr mine of $42 million. 

Virginia-based 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.