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| NCOC > SEC Filings for NCOC > Form 10-Q on 17-Nov-2008 | All Recent SEC Filings |
17-Nov-2008
Quarterly Report
FORWARD LOOKING STATEMENTS OR INFORMATION
The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2007 and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements included elsewhere in this Form 10-Q.
This report, including this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation" may contain "forward-looking statements" that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new services; our expectations concerning litigation, regulatory developments or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management's goals and objectives; and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes" and "estimates," and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:
o the worldwide demand for coal;
o the price of coal;
o the supply of coal and other competitive factors;
o the costs to mine and transport coal;
o the ability to obtain new mining permits;
o the costs of reclamation of previously mined properties;
o the risks of expanding coal production;
o industry competition;
o our ability to comply with covenants of our credit facility or obtain waivers in the event of future noncompliance.
o our ability to continue to finance and execute our growth strategies;
o the availability of financing amidst tightened credit standards;
o general economic conditions; and
o other factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended December 31, 2007 in the section entitled "Risk Factors" for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q.
OVERVIEW
We mine, process and sell high quality bituminous steam coal from mines located in East Tennessee and North Alabama and, until March 31, 2008, in Southeast Kentucky. We own the coal mineral rights to approximately 65,000 acres of land and lease the rights to approximately 16,663 additional acres excluding the Southeast Kentucky properties, known as Straight Creek, sold on March 31, 2008. As of September 30, 2008, our mining complexes included three active and two inactive underground mines, one underground mine in the development stage, seven active and two inactive surface mines, and one highwall mine. In addition, we have two preparation plants and two unit train loading facilities served by the Norfolk Southern ("NS") railroad. We are a minority joint venture partner in a barge loading facility on the Warrior River in North Alabama. We hold permits that allow us to open or re-open seven new mines close to our current operations. During the nine months ended September 30, 2008, we acquired a 524 acre mineral lease and a 1,000 acre mineral and surface tract in eastern Tennessee that includes approximately 1.4 million and 2.3 million tons of recoverable high quality coal. As of September 30, 2008, we controlled approximately 32.4 million estimated recoverable tons. During the nine months ended September 30, 2008, we generated total revenues of $100.7 million, a net loss of $28.5 million, an Adjusted Earnings Before Interest, Taxes, Depreciation, Depletion and Amortization ("Adjusted EBITDA") loss (See Adjusted EBITDA NOTE below) of $1.8 million and sold approximately 1.6 million tons of coal.
We plan to acquire additional mines and increase production from existing controlled properties and reserves as market conditions allow.
Our revenues are derived primarily from the sale of coal to electric utility companies and industrial customers in the Southeastern United States. According to the U.S. Department of Energy, Energy Information Administration, the long-term outlook for coal demand is favorable, as domestic electricity consumption is expected to grow at an average annual rate of 0.7% per year through 2030 with 48% to 49% of that growth provided by coal. International coal consumption is expected to grow by 2.0% through 2030. During the nine months ended September 30, 2008, approximately 65% of our revenue was generated from coal sales to electric utility companies in the Southeastern United States. Our largest customers were Georgia Power, Alabama Power, and Solutia, Inc., representing approximately 32.6%, 21.3% and 14.2% of our revenues, respectively.
During the nine months ended September 30, 2008, our mines produced approximately 1.4 million tons of coal. Approximately 20.3% of our production for the nine months ended September 30, 2008 was produced at underground mines and 79.7% was produced at our surface and highwall mining operations. We sell a majority of our coal pursuant to long-term contracts or open purchase order arrangements with long time customers. During 2008, we successfully renegotiated several of our existing coal supply agreements resulting in an increased selling price per ton and additional revenues from those contracts. The average contracted selling price per ton is $70.40 and $77.35 on 2,000,000 and 710,000 contracted tons for 2009 and 2010, respectively. Our liquidity plans include ongoing negotiations with existing and new customers to obtain additional sales for the metallurgical and steam coals from recently acquired properties and permitted mines in Tennessee and Alabama.
We have not yet priced a portion of the coal we have goals to produce over the next several years in order to take advantage of possible future price increases. At September 30, 2008, our un-priced and uncommitted future production was approximately 300,000 to 400,000 tons in 2009 and 1.7 million to 2.0 million tons in 2010.
In March 2008, our dragline equipment utilized on our L. Massey surface mine in Alabama suffered a major mechanical failure. The equipment was repaired and placed back in production on July 29, 2008. This breakdown resulted in estimated lost production of 30,000 and 140,000 tons and lost revenues of $1.8 million and $9.5 million during the three months and nine months ended September 30, 2008, respectively. Production levels and corresponding revenues are increasing now that the dragline is fully operational.
ADJUSTED EBITDA DISCLOSURES
Adjusted EBITDA is defined as net loss plus (i) other (income) expense, net,
(ii) interest expense, (iii) depreciation, depletion, accretion and amortization
minus (iv) interest income, (v) income tax benefits, (vi) income from joint
ventures and (vii) stock compensation expense. We present Adjusted EBITDA to
enhance understanding of our operating performance. We use Adjusted EBITDA as a
criterion for evaluating our performance relative to that of our peers,
including measuring our cost effectiveness and return on capital, assessing our
allocations of resources and production efficiencies and making compensation
decisions. We believe that Adjusted EBITDA is an operating performance measure
that provides investors and analysts with a measure of our operating performance
and permits them to evaluate our cost effectiveness and production efficiencies
relative to competitors. In addition, our management uses Adjusted EBITDA to
monitor and evaluate our business operations. However, Adjusted EBITDA is not a
measurement of financial performance under accounting principles generally
accepted in the United States of America ("GAAP") and may not be comparable to
other similarly titled measures of other companies. Adjusted EBITDA should not
be considered as an alternative to cash flows from operating activities,
determined in accordance with GAAP, as indicators of cash flows. The following
reconciles our net loss to Adjusted EBITDA:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net loss ................................ $ (7,912,617) $ (7,107,470) $(28,502,362) $(19,608,727)
Income tax benefit ...................... (237,221) -- (728,214) --
Other (income) expense, net ............. (38,419) (176,213) 1,708,538 (320,689)
Income from joint venture ............... (108,594) -- (333,723) --
Interest income ......................... (242,464) (275,590) (787,289) (883,407)
Interest expense ........................ 4,820,531 2,194,661 14,056,614 6,515,214
Depreciation, depletion, amortization and
accretion ............................ 3,898,285 4,047,671 11,766,339 11,340,326
------------ ------------ ------------ ------------
EBITDA .................................. 179,501 (1,316,941) (2,820,097) (2,957,283)
Stock compensation expense .............. 546,361 284,593 1,000,294 1,192,219
------------ ------------ ------------ ------------
Adjusted EBITDA ......................... $ 725,862 $ (1,032,348) $ (1,819,803) $ (1,765,064)
============ ============ ============ ============
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SALE OF STRAIGHT CREEK MINING OPERATIONS
On March 31, 2008, our wholly-owned subsidiary, National Coal Corporation, completed the sale of the real and personal property assets that comprise its Straight Creek mining operations in Bell, Leslie and Harlan Counties, Kentucky to Xinergy Corp. ("Xinergy") for $11.0 million in cash in accordance with the terms and conditions of a Purchase Agreement entered into among the parties on February 8, 2008. As a result of the transaction, we relieved approximately $3.6
million in reclamation liabilities, and approximately $2.6 million of equipment related debt which were assumed by Xinergy in the transaction. The sale included property, plant, equipment, and mine development with a net book value of approximately $16.1 million. After a negative working capital adjustment of approximately $288,000, the transaction resulted in a loss of approximately $398,000 which is reflected in OTHER within OTHER INCOME (EXPENSE), NET on our condensed consolidated statement of operations for the nine months ended September 30, 2008. Additionally, the transaction resulted in the subsequent release of approximately $7.0 million in restricted cash that was previously pledged to secure reclamation bonds and other liabilities associated with the Straight Creek mining operations.
Our Straight Creek mining operations recognized revenues of $5.0 million and $9.6 million and operating losses of $2.3 million and $563,000 on sales of 99,669 and 187,095 tons of coal during the three months ended March 31, 2008 and 2007, respectively, and recognized revenues of $26.1 million and operating losses of $1.7 million on the sale of 520,079 tons of coal during the nine months ended September 30, 2007. Pursuant to a Contract Mining and Services Agreement dated April 1, 2008, we will provide highwall mining services to Xinergy at our former properties in Southeast Kentucky for a period of up to twenty-four months.
On March 31, 2008 we used a portion of the proceeds from the sale of the Straight Creek, Kentucky properties to repay $5.0 million of the $10.0 million Term Loan Credit Facility entered into in October 2006 with Guggenheim Corporate Funding, L.L.C. as administrative agent and accrued interest of $50,000. On April 2, 2008, we repaid the remaining $5.0 million and accrued interest of $51,667 which indebtedness otherwise would have matured in December 2008. The repayments resulted in additional interest expense of $1,168,923 for the nine months ended September 30, 2008 from the write-off of deferred financing costs associated with the Term Loan Credit facility.
Xinergy was founded and is controlled by Jon Nix, who is a founder and former officer, director and stockholder of National Coal. Mr. Nix served as a director of National Coal Corp. from January 2003 until July 2007, and as Chairman of the Board from March 2004 until July 2007. Mr. Nix also served as our President and Chief Executive Officer from January 2003 until August 2006.
Along with the November 2007 sale and option of our properties at Pine Mountain, Kentucky, the sale of our Straight Creek properties substantially completes our exit of mining operations in Kentucky. Management believes this will allow National Coal to focus resources on our assets in Tennessee and Alabama as well as on potential acquisitions in the region.
RESULTS OF OPERATIONS
The following table presents consolidated statement of operations data for each
of the periods indicated as a percentage of revenues.
24
THREE MONTHS NINE MONTHS
ENDED ENDED
(in percentages) SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2008 2007 2008 2007
------ ------ ------ ------
Revenues ................................ 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Cost of sales ....................... 92.0 98.3 95.7 96.0
Depreciation, depletion, amortization
and accretion .................... 11.7 19.4 11.7 19.3
General and administrative .......... 7.4 8.0 7.1 9.1
------ ------ ------ ------
Total operating expenses ............ 111.1 125.7 114.5 124.4
------ ------ ------ ------
Loss from operations .................... (11.1) (25.7) (14.5) (24.3)
Other income (expense):
Interest expense .................... (14.3) (10.5) (14.0) (11.1)
Interest income ..................... 0.7 1.3 0.8 1.5
Income from joint venture ........... 0.3 0.0 0.3 0.0
Other income (expense), net ......... 0.1 0.8 (1.6) 0.5
------ ------ ------ ------
Loss before income taxes ................ (24.3) (34.1) (29.0) (33.4)
Income tax benefit ...................... 0.7 0.0 0.7 0.0
------ ------ ------ ------
Net loss ................................ (23.6) (34.1) (28.3) (33.4)
====== ====== ====== ======
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COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2008 AND THREE MONTHS ENDED
SEPTEMBER 30, 2007
PRODUCTION
During the three months ended September 30, 2008 and 2007, our mines produced
493,944 and 288,179 tons of coal, respectively, as follows:
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2008 2007
------------------- -------------------
Tons % Tons %
-------- -------- -------- --------
Production:
Surface mines ................. 344,925 68.3 99,074 25.6
Highwall mines ................ 46,085 9.1 41,187 10.6
Underground mines ............. 104,686 20.7 147,918 38.5
-------- -------- -------- --------
Total tons produced ................ 495,696 98.1 288,179 74.7
Purchased coal ..................... 8,996 1.9 97,912 25.3
-------- -------- -------- --------
Total tons available ............... 504,692 100.0 386,091 100.0
======== ======== ======== ========
Tons produced by contract
miners (included above) ....... 48,391 9.5 99,896 25.9
======== ======== ======== ========
The 2008 figures above include 230,749 tons from National Coal of Alabama. The
2007 figures above include 74,088 tons from our Straight Creek mining
operations.
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REVENUE
During the three months ended September 30, 2008 and 2007, approximately 94.9%
and 90.0% of coal sales were made to four utilities and four industrial
customers under contracts and open purchase order arrangements with original
terms of twelve months or longer. The remaining coal sales for the three month
period were made under short term contracts or purchase orders. Tons sold and
the associated revenue for the three month period ended follows:
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/DECREASE
------------------------- -------------------------
2008 2007 $ %
----------- ----------- ----------- -----------
Coal sales ................... $32,508,955 $20,561,737 $11,947,218 58.1
Tons sold .................... 492,410 405,685 86,725 21.4
Average price per ton sold ... $ 66.02 $ 50.68 $ 15.34 30.3
Other revenues ............... $ 976,683 $ 295,558 $ 681,125 230.5
----------- ----------- ----------- -----------
|
The increase in revenue from coal sales for the three months ended September 30, 2008 as compared to the same period in 2007 was primarily the result of the average price per ton sold increasing from $50.68 during the three month period in 2007 to $66.02 during the three month period in 2008, based on the addition of National Coal of Alabama which sold 221,895 tons of coal during the period at an average price of $67.17 per ton, reduced by the sale of the Straight Creek operations, which sold 178,654 tons at an average price of $49.62 per ton during the same period in 2007. Additionally, the average selling price for coal sold from the Company's Tennessee operations increased from $51.52 per ton sold during the three-month period in 2007 to $61.08 per ton sold during the three-month period in 2008.
The increase in other revenues of $681,125 resulted primarily from a new contract mining and services agreement between Xinergy and National Coal Corporation to extract coal from a highwall mine previously sold to Xinergy under the Straight Creek sale on March 31, 2008.
COST OF SALES
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/DECREASE
------------------------- -------------------------
2008 2007 $ %
----------- ----------- ----------- -----------
Cost of sales ................. $30,816,401 $20,502,468 $10,313,933 50.3
Tons sold ..................... 492,410 405,685 86,725 21.4
Average cost per ton sold ..... $ 62.58 $ 50.54 $ 12.04 23.8
----------- ----------- ----------- -----------
|
Total cost of sales increased 50.3% during the three months ended September 30, 2008 as compared to the same three month period in 2007 primarily as a result of:
(i) The addition of National Coal of Alabama, selling 221,895 tons at an average cost of $60.94 per ton during the 2008 period as compared to no production during the 2007 period.
(ii) The sale of the Straight Creek mining operations, which sold 178,654 tons at an average cost of $49.32 per ton during the 2007 period as compared to no production during the 2008 period.
Additionally, the cost per ton sold in the Tennessee operations increased from $51.50 per ton on 227,031 tons sold for the three month period in 2007 to $63.93 per ton on 270,515 tons sold for the three month period in 2008, principally as follows: (i) costs associated with the aforementioned contract mining agreement with Xinergy of $0.9 million or $3.42 per ton; (ii) increases in fuel and transportation costs of $1.3 million, or $3.03 per ton; (iii) increases in payroll costs of $1.4 million or $3.87 per ton; and (iv) increases in parts, supplies and purchased coal of $1.2 million or $4.08 per ton.
DEPRECIATION, DEPLETION, AMORTIZATION AND ACCRETION
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/DECREASE
------------------------ -------------------------
2008 2007 $ %
----------- ----------- ----------- -----------
Depreciation, depletion, amortization
and accretion .................... $ 3,898,285 $ 4,047,671 $ (149,386) (3.7)
Tons sold ........................... 492,410 405,685 86,725 21.4
Average cost per ton sold ........... $ 7.92 $ 9.98 $ (2.06) (20.6)
----------- ----------- ----------- -----------
|
The 3.7% decrease in depreciation, depletion, amortization, and accretion expense for the three months ended September 30, 2008 as compared to the same period in 2007, is principally due to: (i) the sale of $16.1 million in property, plant, equipment, and mine development, and a resulting decrease of $0.9 million of related expense, associated with the sale of the Straight Creek properties on March 31, 2008; (ii) $0.9 million for assets that were fully depreciated; offset by (iii) the addition of National Coal of Alabama, which sold 221,895 tons of coal with an associated average cost of depreciation, depletion, amortization, and accretion per ton of $9.20, or $2.0 million of related expense.
GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/DECREASE
------------------------ ------------------------
2008 2007 $ %
----------- ----------- ----------- -----------
General and administrative
expense ............... $ 2,489,736 $ 1,671,768 $ 817,968 48.9
Tons sold ................ 492,410 405,685 86,725 21.4
Average cost per ton sold $ 5.06 $ 4.12 $ 0.94 22.8
----------- ----------- ----------- -----------
|
The 48.9% increase in general and administrative expenses for the three months ended September 30, 2008 as compared to the same period in the previous year is primarily attributable to increased professional fees of $0.2 million, $0.3 million of additional share based compensation expense and the addition of $0.2 million of general and administrative expenses for National Coal of Alabama.
OTHER INCOME (EXPENSE)
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/DECREASE
------------------------- --------------------------
2008 2007 $ %
----------- ----------- ----------- -----------
12.0% senior secured notes, due 2012 $ 3,170,429 $ -- $ 3,170,429 100.0
10.5% senior secured notes, due 2010 1,375,696 1,711,482 (335,786) (19.6)
Term loan credit facility .......... -- 338,660 (338,660) (100.0)
Installment obligations and notes .. 232,740 55,892 176,848 316.4
Capital lease obligations .......... 30,864 81,127 (50,263) (62.0)
Other .............................. 10,802 7,500 3,302 44.0
----------- ----------- ----------- -----------
Total interest expense ............. $ 4,820,531 $ 2,194,661 $ 2,625,870 119.6
=========== =========== =========== ===========
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