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ANR > SEC Filings for ANR > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for ALPHA NATURAL RESOURCES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ALPHA NATURAL RESOURCES, INC.


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report includes statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "should" and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.
The following factors are among those that may cause actual results to differ materially from our forward-looking statements:
our liquidity, results of operations and financial condition;

decline in coal prices;

worldwide market demand for coal, electricity and steel;

utilities switching to alternative energy sources such as natural gas, renewables and coal from basins where we do not operate;

our production capabilities and costs;

availability of mining and processing equipment and parts;

changes in environmental laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers' coal usage, including potential climate change initiatives;

changes in safety and health laws and regulations and their implementation, and the ability to comply with such changes;

competition in coal markets;

regulatory and court decisions;

our ability to obtain, maintain or renew any necessary permits or rights, and our ability to mine properties due to defects in title on leasehold interests;

global economic, capital market or political conditions, including a prolonged economic downturn in the markets in which we operate and disruptions in worldwide financial markets;

the outcome of pending or potential litigation or governmental investigations, including with respect to the Upper Big Branch explosion;

our relationships with, and other conditions affecting, our customers, including the inability to collect payments from our customers if their creditworthiness declines;

changes in, renewal or acquisition of and terms of long-term coal supply arrangements;

reductions or increases in customer coal inventories and the timing of those changes;

inherent risks of coal mining beyond our control;

cybersecurity attacks or failures, threats to physical security, extreme weather conditions or other natural disasters;

the geological characteristics of the Powder River Basin, Central and Northern Appalachian coal reserves;

the inability of our third-party coal suppliers to make timely deliveries and the refusal by our customers to receive coal under agreed contract terms;

disruptions in delivery or changes in pricing from third party vendors of key equipment and materials that are necessary for our operations, such as diesel fuel, steel products, explosives and tires;

inflationary pressures on supplies and labor;

funding for and changes in postretirement benefit obligations, pension obligations, including multi-employer pension plans, and federal and state black lung obligations;

increased costs and obligations potentially arising from the Patient Protection and Affordable Care Act;

reclamation, water treatment and mine closure obligations;

our assumptions concerning economically recoverable coal reserve estimates;


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significant or rapid increases in commodity prices;

railroad, barge, truck and other transportation availability, performance and costs;

disruption in coal supplies;

attracting and retaining key personnel and other employee workforce factors, such as labor relations, our ability to negotiate new United Mine Workers of America ("UMWA") wage agreements on terms acceptable to us, increased unionization of our workforce in the future, and any strikes by our workforce;

future legislation and changes in regulations, governmental policies or taxes or changes in interpretation thereof;

our ability to integrate successfully operations that we have acquired or developed with our existing operations, as well as those operations that we may acquire or develop in the future, or the risk that any such integration could be more difficult, time-consuming or costly than expected;

the consummation of financing transactions, acquisitions or dispositions and the related effects on our business;

indemnification of certain obligations not being met;

fair value of derivative instruments not accounted for as hedges that are being marked to market;

our substantial indebtedness and potential future indebtedness;

restrictive covenants in our secured credit facility and the indentures governing our outstanding debt securities;

certain terms of our outstanding debt securities, including any conversions of our convertible senior debt securities, that may adversely impact our liquidity;

our ability to obtain or renew surety bonds on acceptable terms or maintain self-bonding status;

goodwill impairment charges; and

other factors, including the other factors discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Risk Factors" sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events, which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this report.

Overview

We are one of America's premier coal suppliers, operating 91 mines and 25 coal preparation and load-out facilities as of March 31, 2013 in Northern and Central Appalachia and the Powder River Basin ("PRB"), with approximately 11,900 employees. We produce, process, and sell steam and metallurgical coal from our operations located throughout Virginia, West Virginia, Kentucky, Pennsylvania, and Wyoming. We also sell coal produced by others, the majority of which we process and/or blend with coal produced from our mines prior to resale, providing us with a higher overall margin for the blended product than if we had sold the coal separately.

For the three months ended March 31, 2013, sales of steam coal were 17.9 million tons, and accounted for approximately 78% of our coal sales volume. Comparatively, for the three months ended March 31, 2012, sales of steam coal were 23.2 million tons, and accounted for approximately 83% of our coal sales volume. For the three months ended March 31, 2013, sales of metallurgical coal, which generally sells at a premium over steam coal, were 5.1 million tons, and accounted for approximately 22% of our coal sales volume. For the three months ended March 31, 2012, sales of metallurgical coal were 4.9 million tons and accounted for approximately 17% of our coal sales volume.

Our sales of steam coal for the three months ended March 31, 2013 and 2012 were made primarily to large utilities and industrial customers throughout the United States, and our sales of metallurgical coal were made primarily to steel companies in the Northeastern and Midwestern regions of the United States and in several countries in Europe, Asia and South America. For the three months ended March 31, 2013, approximately 44% of our total revenues were derived from coal sales made to customers outside the United States, compared to 40% for the three months ended March 31, 2012.

We have two reportable segments, Eastern Coal Operations and Western Coal Operations. Eastern Coal Operations consists of our operations in Northern and Central Appalachia and our coal brokerage activities. All of the active mines we acquired from Massey were located in Central Appalachia and accordingly are included in our Eastern Coal Operations. Western Coal Operations consists of two Powder River Basin mines in Wyoming. Our All Other category includes an idled underground mine in Illinois; expenses associated with closed mines; Dry Systems Technologies; revenues and royalties from the sale of coalbed methane and natural gas extraction; equipment sales and repair operations; terminal services; the leasing of mineral rights; general corporate overhead and corporate assets and liabilities.


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Coal Pricing Trends, Uncertainties and Outlook

Nationwide utility inventories are still elevated relative to historical averages. Elevated utility inventories and the gradual, secular shift away from coal-fired generation continue to drive weakness in the domestic thermal coal market; however, differences are clearly emerging between the various production basins in the United States. In the PRB, the annualized production in the first quarter of 2013 was well below the total production capacity. Even with the forecast of a modest recovery in nationwide coal consumption as a result of sustained natural gas prices above the $4 level, barring any unforeseen supply or transportation disruption, it is unrealistic to expect the latent capacity in the PRB to be absorbed in the near-term, suggesting a period of relatively stagnant market conditions for PRB coal. Based on weekly coal production reporting through March 31, 2013 from the EIA, year-over-year Appalachian production decreased by approximately 7.2% and western coal production decreased by approximately 12.6% in the first three months of 2013.

The Energy Information Administration ("EIA") 2013 Annual Energy Outlook forecasts that coal-fired electrical generation will decrease by an average annual rate of 0.4% through 2016. In the eastern United States, inventories of Northern Appalachia thermal coal at utilities are approximately equal to the 5-year historical average providing a fairly balanced supply-demand landscape, and opportunities exist for producers to contract additional volumes with utility customers. However, despite the current inventory levels, the ability of electrical generators to switch to other low cost coals, such as from the Illinois Basin, has created a somewhat stagnant pricing environment. Inventories of Central Appalachia ("CAPP") thermal coals have roughly doubled from their historical average in terms of days of burn as of the end of March 2013. This inventory situation has been driven by a reduction in utility consumption owing to a host of factors, including: fuel switching in favor of gas due to the relatively high cost of CAPP thermal coal; coal-fired plant retirements which are disproportionately impacting the regions served by CAPP thermal coal; and encroachment of other lower cost coals, such as Illinois Basin. We believe a significant portion of the decreased consumption of CAPP thermal coal is a structural and permanent phenomenon, and Alpha has accordingly substantially reduced its production of CAPP thermal coal through its recent restructuring activities. Furthermore, at today's seaborne thermal coal prices in the Atlantic, most eastern U.S. production is uneconomic, adding to the difficult over-supply situation and general market weakness.

We are primarily focused on supporting and augmenting our global metallurgical coal business, which is the third largest in the world. The second quarter Asian benchmark price announced in March 2013 increased $7 to $172 per metric tonne on an FOBT basis. However, recent transactions have been reported at levels below the benchmark, likely due to the perception of slowing growth in Chinese steel production, which accounts for a majority of global blast furnace steel production, along with continuing economic weakness in Europe. Chinese steel production is projected to grow in 2013, and any uptick in Chinese imports should lead to improved conditions for the seaborne met market. Steel production in Europe during the first two months of 2013 was down year-over-year, reducing demand for metallurgical coals in the Atlantic basin and weighing on the prices of U.S. exports. Lower quality met coals remain over-supplied and are being discounted, pressuring margins which may trigger additional production cutbacks. In general, conditions in the metallurgical coal markets remain challenging. However, met coal is a highly cyclical and volatile product, with the highest qualities found in relatively few locations around the globe. In the intermediate to long run, the world is expected to require increasing volumes of met coal, and when market conditions improve, we believe we are well-positioned to benefit from our leadership position in met coal reserves, met coal production and export terminal capacity.

For additional information regarding some of the risks and uncertainties that affect our business, see Item 1A "Risk Factors."

Results of Operations

EBITDA is defined as net income (loss) plus interest expense, income tax expense, depreciation, depletion, and amortization, and amortization of acquired intangibles, net, less interest income and income tax benefit. EBITDA is a non-GAAP financial measure used by management to measure operating performance, and management also believes it is a useful indicator of our ability to meet debt service and capital expenditure requirements. Because EBITDA is not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies.

The following table reconciles EBITDA to net loss, the most directly comparable GAAP measure:


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                                              Three Months Ended
                                                  March 31,
                                              2013          2012
                                                (in thousands)
Net loss                                  $ (110,788 )   $ (28,768 )
Interest expense                              59,401        45,434
Interest income                               (1,026 )      (1,097 )
Income tax benefit                           (76,358 )     (43,785 )
Depreciation, depletion and amortization     239,013       285,772
Amortization of acquired intangibles, net     (5,431 )     (35,512 )
EBITDA                                    $  104,811     $ 222,044

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Summary

Total revenues decreased $601.0 million, or 31%, for the three months ended March 31, 2013 compared to the prior year period. The decrease in total revenues was due to decreased coal revenues of $499.2 million, decreased freight and handling revenues of $52.2 million and decreased other revenues of $49.7 million. The decrease in coal revenues was due primarily to lower steam coal sales volumes and lower average coal sales realization per ton for metallurgical and eastern steam coal. The decrease in coal revenues consisted of decreased steam coal revenues of $308.1 million and decreased metallurgical coal revenues of $191.0 million. The decrease in freight and handling revenues was due primarily to decreased freight rates. The decrease in other revenues was due primarily to derivative contracts accounted for at fair value.

Net loss increased $82.0 million for the three months ended March 31, 2013 compared to the prior year period. The increase was largely due to decreased coal and other revenues discussed above, increased restructuring expenses of $7.0 million and increased other expense, net of $12.7 million, partially offset by a decrease in certain operating costs and expenses, which are described below, of $454.0 million, and increased tax benefits of $32.6 million.

The decrease in certain operating costs and expenses of $454.0 million consisted of decreased cost of coal sales of $403.6 million, or 29%, decreased selling, general and administrative expenses of $21.4 million, or 33%, decreased other expenses of $12.4 million, or 64%, and decreased depreciation, depletion and amortization expenses of $46.8 million, partially offset by decreased credits to expense for amortization of acquired intangibles, net of $30.1 million.

Coal sales volumes decreased 5.2 million tons, or 19%, compared to the prior year period. The decrease in coal sales volumes was due to decreases of 3.6 million and 1.8 million tons of eastern steam and western steam coal, respectively, partially offset by an increase of 0.2 million tons of eastern metallurgical coal. The decreases in eastern and western steam coal were due primarily to decreased demand and the impacts of planned production curtailments and mine idlings implemented during 2012.

The consolidated average coal sales realization per ton for the three months ended March 31, 2013 was $49.79 compared to $58.25 in the prior year period, a decrease of $8.46 per ton, or 15%. The decrease was largely attributable to decreases of $42.23 per ton, or 29%, and $5.58 per ton, or 8%, in metallurgical and eastern steam average coal sales realization per ton, respectively. The average coal sales realization per ton for metallurgical coal and eastern steam coal was $103.28 and $61.90, respectively, for the three months ended March 31, 2013 compared to $145.51 and $67.48 in the prior year period. The average coal sales realization per ton for western steam coal was $13.03 for the three months ended March 31, 2013 compared to $12.95 in the prior year period.

Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other segment), divided by consolidated coal revenues, was 12% for the three months ended March 31, 2013 compared to 15% in the prior year period. Coal margin percentage for our Eastern and Western Coal Operations was 11% and 23%, respectively, for the three months ended March 31, 2013 compared to 15% in each case in the prior year period. Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton, was $6.12 for the three months ended March 31, 2013 compared to $8.72 in the prior year period. Coal margin per ton for our Eastern and Western Coal Operations was $8.52 and $3.01, respectively, for the three months ended March 31, 2013 compared to $13.57 and $1.99 in the prior year period.


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                                    Three Months Ended
                                         March 31,              Increase (Decrease)
                                    2013           2012          $ or Tons        %
                                     (in thousands, except per ton data)
Revenues:
Coal revenues:
Eastern steam                   $   489,044    $   774,424    $    (285,380 )   (37 )%
Western steam                       129,690        152,441          (22,751 )   (15 )%
Metallurgical                       521,655        712,693         (191,038 )   (27 )%
Freight and handling revenues       157,167        209,350          (52,183 )   (25 )%
Other revenues                       36,035         85,705          (49,670 )   (58 )%
Total revenues                  $ 1,333,591    $ 1,934,613    $    (601,022 )   (31 )%
Tons sold :
Eastern steam                         7,901         11,476           (3,575 )   (31 )%
Western steam                         9,953         11,772           (1,819 )   (15 )%
Metallurgical                         5,051          4,898              153       3  %
Total                                22,905         28,146           (5,241 )   (19 )%
Coal sales realization per ton:
Eastern steam                   $     61.90    $     67.48    $       (5.58 )    (8 )%
Western steam                   $     13.03    $     12.95    $        0.08       1  %
Metallurgical                   $    103.28    $    145.51    $      (42.23 )   (29 )%
Average                         $     49.79    $     58.25    $       (8.46 )   (15 )%

Coal revenues. Coal revenues decreased $499.2 million, or 30%, for the three months ended March 31, 2013 compared to the prior year period. The decrease in coal revenues consisted of decreases in eastern steam, western steam and metallurgical coal revenues.

Total eastern steam coal revenues decreased $285.4 million, or 37%, as decreased domestic coal revenues of $310.5 million, or 43%, were partially offset by increased export coal revenues of $25.1 million, or 45%, compared to the prior year period. The decrease in eastern steam coal revenues was largely due to fewer coal shipments as a result of decreased demand and the impacts of production curtailments and mine idlings implemented during 2012, and lower coal sales realization per ton. Eastern steam coal shipments decreased 3.6 million tons, which consisted of decreased domestic shipments of 4.1 million tons, or 39%, partially offset by increased export shipments of 0.5 million tons, or 64%, compared to the prior year period. Coal sales realization per ton for eastern steam domestic sales was $62.95 per ton compared to $67.71 per ton in the prior year period and coal sales realization per ton for eastern steam export sales was $57.07 per ton compared to $64.69 per ton in the prior year period.

Total metallurgical coal revenues decreased $191.0 million, or 27%, which consisted of decreased export coal revenues of $165.0 million, or 32%, and decreased domestic coal revenues of $26.0 million, or 14%, compared to the prior year period. The decrease in metallurgical coal revenues was largely due to lower average coal sales realization per ton, which was impacted by weaker market conditions as well as the mix of coal qualities as a larger portion of lower quality metallurgical tons were sold in the three months ended March 31, 2013 compared to the prior year period. Metallurgical coal shipments increased 0.2 million tons, which consisted of increased export shipments compared to the prior year period. Coal sales realization per ton for eastern metallurgical export sales was $93.16 per ton compared to $142.11 per ton in the prior year period and coal sales realization per ton for eastern metallurgical domestic sales was $135.74 per ton compared to $155.87 per ton in the prior year period.

The decrease in western steam coal revenues was primarily due to decreased coal shipments as a result of decreased demand and the impacts of production curtailments, partially offset by an increase of $0.08 in average coal sales realization per ton. Western coal sales volumes decreased 1.8 million tons compared to the prior year period.

Our sales mix of metallurgical coal and steam coal based on volume was 22% and 78%, respectively, for the three months ended March 31, 2013 compared with 17% and 83% in the prior year period. Our sales mix of metallurgical coal and steam


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coal based on coal revenues was 46% and 54%, respectively, for the three months ended March 31, 2013 compared with 43% and 57%, respectively, in the prior year period.

Freight and handling. Freight and handling revenues and costs were $157.2 million for the three months ended March 31, 2013, a decrease of $52.2 million, or 25%, compared to the prior year period. The decrease was primarily due to decreased freight rates compared to the prior year period.

Other. Other revenues decreased $49.7 million, or 58%, and other expenses decreased $12.4 million, or 64%, for the three months ended March 31, 2013 compared to the prior year period resulting in a net decrease to income from operations of $37.3 million. The decrease was due primarily to decreased mark-to-market gains for derivative contracts accounted for at fair value, partially offset by increased contractual settlement related income.

                                       Three Months Ended
                                           March 31,                   Increase (Decrease)
                                      2013            2012           $ or Tons            %
                                       (in thousands, except per ton data)
Cost of coal sales (exclusive of
items shown separately below)    $  1,011,841     $ 1,415,396     $    (403,555 )         (29 )%
Freight and handling costs            157,167         209,350           (52,183 )         (25 )%
Other expenses                          6,999          19,393           (12,394 )         (64 )%
Depreciation, depletion and
amortization                          239,013         285,772           (46,759 )         (16 )%
Amortization of acquired
intangibles, net                       (5,431 )       (35,512 )          30,081           (85 )%
Selling, general and
administrative expenses
(exclusive of depreciation,
depletion and amortization shown
separately above)                      43,626          65,011           (21,385 )         (33 )%
Restructuring expenses                 11,076           4,056             7,020           173  %
Total costs and expenses         $  1,464,291     $ 1,963,466     $    (499,175 )         (25 )%
Cost of coal sales per ton:1
Eastern coal operations          $      69.52     $     77.25     $       (7.73 )         (10 )%
Western coal operations          $      10.02     $     10.96     $       (0.94 )          (9 )%
Average                          $      43.67     $     49.53     $       (5.86 )         (12 )%
EBITDA:
Eastern Operations               $    128,685     $   216,738     $     (88,053 )         (41 )%
Western Operations               $     26,238     $    19,948     $       6,290            32  %

1 - Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal Operations.

Cost of coal sales. Cost of coal sales decreased $403.6 million, or 29%, for the three months ended March 31, 2013 compared to the prior year period. The decrease in cost of coal sales was due primarily to decreased supplies and . . .

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