Alpha Natural Resources Reports 2012 Results
02/14/2013 - After a period of cyclical weakness in the global metallurgical coal market in the second half of 2012, developments are beginning to point to gradual improvement, Alpha Natural Resources noted in its quarterly and annual earnings report.
Alpha Natural Resources, Inc., a leading U.S. coal producer, reported a fourth quarter 2012 net loss of US$128 million compared with a net loss of $793 million in the fourth quarter of 2011. Excluding impairment and restructuring charges, and other adjustments, the fourth quarter 2012 adjusted net loss was $41 million compared with an adjusted net loss of $19 million in the fourth quarter of 2011.
The company recorded $228 million of impairment and restructuring charges in the fourth quarter of 2012, which were largely non-cash. These charges include $188 million arising from Alpha's annual goodwill impairment testing, which reflects projected coal market conditions and lower expected future production and shipments particularly for thermal coal, as well as a $40 million impact of charges and asset impairments arising from our recent restructuring initiatives. The restructuring plan announced in September 2012 is now substantially complete. Alpha will continue to assess market conditions and may further adjust its operational footprint and marketing strategy as dictated by evolving industry conditions.
Earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) for the fourth quarter of 2012 was $193 million, compared with a loss of $550 million in the year ago period. Excluding impairment and restructuring charges and other adjustments, the fourth quarter 2012 Adjusted EBITDA was $217 million.
"This was a pivotal quarter for Alpha and concluded a year in which we made tremendous strides across our strategic priorities. Alpha posted strong results in the fourth quarter, reporting adjusted EBITDA of $217 million primarily driven by our ability to control costs in both our Eastern and our Western operations," said Kevin Crutchfield, Alpha's chief executive officer. "We have also been executing well against our internal objectives, and the extensive restructuring initiative we announced in September is largely behind us. And while we do not expect the unit costs reported in the fourth quarter to be sustainable, we do expect to at least hold the line or slightly reduce our unit costs in the East this year compared with full year 2012, and we are guiding to a substantial reduction in SG&A expense for full year 2013."
"Once again Alpha improved its safety performance on several fronts," Kevin continued. "Compared with the prior quarter, both our incident rate and our days-lost declined by 20% in the fourth quarter. Looking at the full year 2012, Alpha achieved a 20% improvement in its incident rate and a 32% reduction in serious and substantial MSHA citations. No matter what market headwinds or other challenges we face, we can never lose our focus on 'Running Right.' The year 2012 was no exception. I would like to congratulate our entire workforce on their successful efforts. While I am pleased with the efforts all of our employees are making on accident reduction, the loss of three of our fellow employees in 2012 is a somber reminder that there remains much work to be done, and we must remain vigilant at all times."
Market conditions in 2012 were challenging for all coal producers, with reduced demand and over-supply in both the global metallurgical market and U.S. thermal market. In this environment, Alpha moved swiftly and decisively to reposition the company for success. Specifically, Alpha:
· Reduced its operating footprint, idling uneconomic and high-cost production;
· Curtailed capital expenditures;
· Streamlined its operations, with the expectation of reducing overhead expenses by an estimated $150 million annually going forward; and,
· Enhanced its liquidity and increased its cash position.
While the restructuring efforts announced in 2012 are largely complete, Alpha will continue to evaluate market conditions and remains poised to adjust as necessary as the industry continues to evolve. Now that market conditions for metallurgical coal are beginning to point toward gradual improvement, Alpha expects to be well-positioned to emerge from the recent market headwinds as an industry leader and take advantage of opportunities in the market as they arise.
Financial Performance
· Total revenues in the fourth quarter of 2012 were $1.6 billion compared with $2.1 billion in the fourth quarter of 2011, and coal revenues were $1.4 billion, down from $1.8 billion in the year-ago period. The decreases in total revenues and coal revenues were primarily attributable to lower coal shipment volumes and lower average realizations for metallurgical and Eastern steam coal. Freight and handling revenues and other revenues were $165 million and $38 million, respectively, during the fourth quarter of 2012 versus $181 million and $95 million, respectively, in fourth quarter of 2011.
· During the fourth quarter of 2012, metallurgical coal shipments were 4.9 million tons, compared with 5.3 million tons in the fourth quarter of 2011 and flat compared with the third quarter of 2012. Alpha shipped 11.6 million tons of Powder River Basin (PRB) coal during the quarter, compared with 13.9 million tons in the year-ago period and 13.2 million tons in the third quarter of 2012. Eastern steam coal shipments were 9.4 million tons, compared with 11.9 million tons in the year-ago period and 9.8 million tons in the prior quarter. Average per-ton realizations on metallurgical coal shipments in the fourth quarter were $121.27, down from $156.48 in the fourth quarter last year and $129.96 in the third quarter of 2012. Average per-ton realization for PRB shipments rose to $13.00, compared with $11.96 in the fourth quarter last year and $12.87 in the prior quarter. The per-ton average realization for Eastern steam coal shipments was $64.55, compared with $66.93 in the year-ago period and $66.40 in the third quarter of 2012.
· Total costs and expenses during the fourth quarter of 2012 were $1.6 billion, compared with $2.9 billion in the fourth quarter of 2011. Cost of coal sales was $0.9 billion, compared with $1.6 billion in the year-ago period. The cost of coal sales in the East averaged $55.51 per ton, a level notably lower than in previous quarters due primarily to the impact of a $154 million ($10.73 per ton) reduction in estimated asset retirement obligations arising largely from changes in engineering estimates of future water treatment costs, including the impacts of evolving treatment technologies and maturing treatment plans, and a benefits-related accrual reversal. This compares with Eastern cost of coal sales per ton of $81.21 in the fourth quarter last year and $75.84 in the previous quarter. Excluding the above mentioned estimate change, the impact of benefits-related accrual reversal, merger-related expenses, UBB-related expenses, and mineral lease terminations, the adjusted cost of coal sales in the East averaged $68.55 per ton, compared with $78.57 in the fourth quarter last year and $75.93 in the previous quarter. The decrease in adjusted Eastern cost of coal sales per ton during the fourth quarter primarily reflects the impact of Alpha's restructuring and cost control measures, the related shift in mix with the relatively lower-cost Pennsylvania longwall mines contributing a larger%age of overall Eastern production, and certain normal course of business expense benefits not treated as adjustments. The cost of coal sales per ton for Alpha Coal West's PRB mines was $9.21 during the fourth quarter of 2012, and the adjusted cost of coal sales per ton, which excludes the impact of a benefits-related accrual reversal, was $9.43, compared with cost of coal sales per ton of $9.44 in the fourth quarter of 2011 and $9.40 in the third quarter of 2012.
· Selling, general and administrative expense in the fourth quarter of 2012 was $49 million, compared with selling, general and administrative expense of $50 million in the fourth quarter of 2011 which included $8 million of pre-tax merger-related expenses. Depreciation, depletion and amortization (DD&A) decreased to $240 million during the fourth quarter of 2012 from $286 million in the year-ago period primarily due to lower production volumes. The benefit from amortization of acquired intangibles, net, fell to $6 million, compared with a benefit of $51 million last year, primarily due to the completion of shipments under most of the coal supply agreements acquired from Massey.
· Alpha recorded a net loss of $128 million, or $0.58 per diluted share, during the fourth quarter of 2012, compared with a net loss of $793 million, or $3.62 per diluted share, during the fourth quarter of 2011. The year-over-year decrease in Alpha's net loss is primarily attributable to goodwill impairment charges of $802 million in the fourth quarter of 2011. During the fourth quarter of 2012, impairment and restructuring charges totaled $228 million. Fourth quarter 2012 net loss included the following items.
Excluding these items, the adjusted net loss was $41 million, or $0.19 per diluted share, compared with an adjusted net loss of $19 million, or $0.09 per diluted share, in the fourth quarter of 2011.
· EBITDA was $193 million in the fourth quarter of 2012, compared with a loss of $550 million in the prior-year period. Excluding impairment and restructuring charges, and various other items detailed in the "Reconciliation of EBITDA and Adjusted EBITDA to Net Loss," adjusted EBITDA was $217 million in the fourth quarter of 2012, compared with $261 million in the fourth quarter of 2011.
Full Year 2012 Results
· For the full year 2012, Alpha reported total revenues of $7.0 billion, including $6.0 billion in coal revenues, which included a full year contribution from the former operations of Massey that were acquired on June 1, 2011. This compares with total revenues of $7.1 billion and coal revenues of $6.2 billion in 2011, which included the Massey operations for the last seven months of the year. The slight decrease in coal revenue in 2012, despite the inclusion of a full 12 months of legacy Massey operations, is primarily attributable to ramping down the quarterly run-rate for metallurgical shipments in 2012 together with a 19% decrease in average per-ton realizations on metallurgical coal which resulted in a 14% decrease in metallurgical coal revenues. This decrease was partially offset by an 11% increase in Eastern steam coal revenues largely due to a 12% increase in shipment volumes in 2012 primarily resulting from a full year of the acquired Massey operations.
· During 2012, Alpha's coal shipments totaled 108.8 million tons, compared with 106.3 million tons for the full year 2011. Metallurgical coal shipments in 2012 were 20.3 million tons, compared with 19.2 million tons shipped during 2011. Shipments of PRB coal and Eastern steam coal in 2012 were 46.7 million tons and 41.8 million tons, respectively, compared with 49.9 million tons and 37.2 million tons, respectively, in the previous year.
· For the full year 2012, the company-wide average per-ton realization was $55.29 and the adjusted average cost of coal sales was $46.45 per ton, resulting in an adjusted weighted average coal margin of $8.84 per ton, or 16%. This compares with the company-wide average per-ton realization of $58.22 and the adjusted cost of coal sales per ton of $44.56 in 2011, which resulted in an adjusted weighted average coal margin of $13.66 per ton, or 23%.
· For 2012, Alpha recorded a net loss of $2.4 billion, or $11.06 per diluted share. Excluding various items detailed in the attached "Reconciliation of Adjusted Net Income (Loss) to Net Loss", the adjusted net loss in 2012 was $207 million, or $0.94 per diluted share. EBITDA for 2012 was a loss of $1.8 billion and adjusted EBITDA, which excludes goodwill impairment and restructuring charges and various other items detailed in the "Reconciliation of EBITDA and Adjusted EBITDA to Net Loss," was $792 million. EBITDA for 2011 was $28 million and adjusted EBITDA was $1.2 billion.
Market Overview
After a period of cyclical weakness in the global metallurgical coal market in the second half of 2012 during which approximately 30 million tons of uneconomic production was removed from the seaborne market, developments are beginning to point to gradual improvement. Chinese coking coal imports rose 30% from November to December 2012, reaching a record 7.6 million metric tonnes in the last month of the year, and full year 2012 coking coal imports were a record 53.6 million metric tonnes, a 20% increase over 2011. China's purchasing managers' index (PMI) has been rising for several months and now stands at a 9-month high. Recently, tropical storms have hampered activity at Australian ports and disrupted rail shipments, although the impact is not as severe as the extreme weather events witnessed in early 2011.
In the Atlantic basin, European demand has been muted by economic headwinds, Brazil slowed its importation of coking coal somewhat in 2012, and U.S. demand has been generally stable. As a result, for the last several quarters, the Atlantic market has been characterized by market weakness and over-supply, particularly for lower quality metallurgical coals. Currently the Atlantic basin remains disconnected from Asia where the impact of production cuts and strengthening demand have begun to spark gradual improvement in the met market. Spot transactions of Australian met coal in Asia have reportedly risen above the recent benchmark price, and are some 20% higher than the low point in the spot market in September of 2012. As the leading U.S. producer of metallurgical coal, Alpha expects to be well-positioned to benefit from an eventual recovery in the global metallurgical coal market, particularly in the Atlantic.
Throughout 2012, the market for domestic steam coal remained challenging due in part to the fourth warmest winter ever recorded, low natural gas prices and the long-term secular trend of coal-fired plant retirements all of which contributed to reduced coal usage and led to record-high inventory levels that peaked at an estimated 213 million tons in the spring of the year. As natural gas prices have increased from their lows below $2 per MCF to a level in the low $3s and with forward pricing hovering around the $4 mark, coal has recovered some of its market share which bottomed at 32% of U.S. electricity generation and reached approximately 38% by year-end. As a result of the increased usage of coal in the second half of the year, along with production cuts estimated at around 100 million tons during 2012, utility inventories have started to retreat but remain elevated at approximately 197 million tons as of the end of the year.
In light of the continuing weakness in the U.S. steam coal market, Alpha adjusted its shipment levels and implemented a restructuring plan to right-size its operating footprint. With respect to the PRB, Alpha has reduced its planned shipments in the near-term until elevated inventories eventually correct, allowing acceptable profit levels. In the East, Alpha's Pittsburgh seam longwalls, with high heat content and relatively lower costs, are expected to produce an estimated 9 million to 10 million tons in 2013. In Central Appalachia, Alpha has idled or closed a number of higher production cost steam coal operations in order to control costs and match supply with structurally diminished demand that has decreased markedly over the course of the last year. At the same time, Alpha more than doubled its Eastern thermal coal exports in 2012 to nearly six million tons, and the company plans to continue to build its export thermal franchise in 2013, and beyond.
2013 Outlook
Alpha expects to ship between 81 and 92 million tons during 2013, including 19 to 22 million tons of Eastern metallurgical coal, 25 to 30 million tons of Eastern steam coal, and 37 to 40 million tons of Western steam coal out of the PRB. As of January 25, 2013, 47% of the midpoint of anticipated metallurgical coal shipments were committed and priced at an average per ton realization of $113.25; 94% of the midpoint of anticipated Eastern steam coal shipments were committed and priced at an average per ton realization of $62.71; and 97% of the midpoint of anticipated PRB shipments were committed and priced at an average per ton realization of $12.84. The company's 2013 cost of coal sales is expected to range between $71 and $75 per ton in the East and between $10.00 and $11.00 per ton in the West. Selling, general and administrative expenses are anticipated to range from $140 million to $160 million for 2013. Interest expense and DD&A expense are anticipated to be in the ranges of $230 million to $240 million and $875 million to $975 million, respectively. And capital expenditures for 2013 are expected to fall within the range of $300 million to $350 million.
With $7.0 billion in total revenue in 2012, Alpha Natural Resources ranks as America's third-largest coal producer by revenue and third-largest by production. Alpha is the nation's largest supplier of metallurgical coal used in the steel-making process and is a major supplier of thermal coal to electric utilities and manufacturing industries. In 2012, the company had more than 200 customers on five continents.
