Coal Tattoo

Here’s the big coal-related financial news out early this morning:

Alpha Natural Resources, Inc. (NYSE: ANR), a leading U.S. coal producer, reported a second quarter loss of $2.2 billion or $10.14 per diluted share, compared with a loss of $50 million or $0.32 per diluted share in the second quarter of 2011.

A couple of important points:

— In the second quarter, Alpha recorded restructuring and long-lived asset impairment charges totaling $1.0 billion, primarily associated with current market conditions and the continued optimization of Eastern operations which included reductions in operating levels and idling of several operations, as well as actions to streamline the company’s organizational structure.

— In addition, Alpha recorded a non-cash goodwill impairment charge of $1.5 billion, reflecting the current coal market conditions, and lower expected production and shipment levels. None of these charges are anticipated to materially impact the company’s liquidity position or the future operation of its business.

Kevin Crutchfield, Alpha’s Chairman and CEO, said:

These are extremely challenging times in the U.S. coal industry, with softness in both the thermal and now the metallurgical coal markets and the pace at which the fundamentals changed. Alpha has taken decisive actions to ensure that our business is both well-suited to today’s demand environment and efficient enough to provide us with the flexibility to ramp-up our world-class asset base once market conditions improve. We have continued to optimize our Central Appalachia operations by adjusting our footprint, idling high cost thermal coal and lower-quality metallurgical coal production while focusing on our higher-margin metallurgical products. Additionally, we have reduced our overhead expenses. Unfortunately, this occurred at a time of heightened and sustained unemployment rates and a very tepid economic recovery in the United States. We sincerely regret the impact our production curtailments have had on good employees and their families, but the market environment with which we are faced left us no other options. We will continue to evaluate market conditions and will make further adjustments if market conditions warrant.

We have also taken proactive steps to ensure significant financial flexibility by amending our secured credit facility and relaxing certain of our covenants in the near-term. The amendment does not alter our total liquidity position, maintains all of our available credit facilities, does not increase our current borrowing rates, and does not force us to incur any additional debt.

Alpha described the current coal market this way:

The domestic market for thermal coal has been extraordinarily weak in the first half of 2012, as the combination of low-priced natural gas and mild winter weather led to a sharp reduction in coal burn and a rapid increase in utility stockpiles. Exacerbating the situation is a regulatory environment designed to constrain the mining and use of coal for electricity generation and promote the use of natural gas and heavily-subsidized renewable sources, raising the prospect of higher electricity prices in the future. Court decisions suggest that environmental regulation has gone too far, demonstrated by the recent decision to reject the EPA’s overreaching efforts to direct the process of mine permitting that rightfully belongs to the states, and the decision to overturn the EPA’s veto of the Spruce No. 1 permit.

Not for nothing, but here’s what Platts reported the Energy Information Administration had to say about what’s going on in the coal market:

While some Republicans in Congress pound a constant drumbeat about the negative effects of President Barack Obama’s “war on coal,” a government official had a different take as to why large amounts of coal generation are looking at retirement.

Although environmental regulations have an effect, it is low natural gas prices relative to historic coal prices and drops in electricity demand that are driving the retirements, an Energy Information Administration official said in late June at a Bipartisan Policy Center event in Washington that focused on the EIA’s Annual Energy Outlook 2012.

Director of EIA’s Office of Electricity, Coal, Nuclear and Renewables Analysis Alan Beamon said that “it’s the market forces that are pushing it out of the market,” referring to coal-fired generation. He added that “to the degree that it leads to retirements, it is often because these plants are marginal in the first place. … It’s really the demand situation and the coal price versus gas price that is really making those determinations.”

And as for “heavily-subsidized renewables,” while that’s a popular line of attack for coal officials, it simply isn’t true that government heavily subsidizes wind and solar, while leaving coal operators to fend for themselves (see previous posts here, here and here).

Alpha went on to explain more about its view of the current coal situation:

Thermal coal consumption in 2012 is expected to decrease by more than 120 million tons compared with last year, and spot prices for thermal coal in Central Appalachia and the Powder River Basin (PRB) have languished at levels below each basin’s typical cash production costs. However, the domestic thermal coal market is showing signs of gradual improvement. Natural gas prices have risen approximately 50 percent from their recent lows. Domestic utility inventories, which peaked at approximately 212 million tons in April, inflected and decreased slightly in the month of May, demonstrating the impact of production cutbacks implemented by U.S. producers in the first half of 2012. Inventories stood at an estimated 204 million tons at the end of June, a level that implies the drawdown was slightly greater than the historical average due to reduced production and a heat wave throughout much of the country. While stockpiles have fallen and thermal coal spot prices have begun to improve, inventories remain elevated, new contracting is limited, and spot pricing remains unattractive, both domestically and in the Atlantic market. As expected, the need for baseload coal-fired generation and an uptick in natural gas prices drove a quick resurgence in PRB shipments, which have recently returned to more historically normal levels for Alpha. Despite the signs of improvement in the domestic thermal coal market, conditions remain challenging. In this environment, Alpha will continue to assess expected demand and adjust its thermal coal production accordingly.

In light of the burgeoning utility inventories in the U.S., producers, traders and some utilities have attempted to move thermal coal onto the seaborne market. As a result, U.S. exports are on pace for a record year, with thermal coal exports in the first five months of 2012 up approximately 77 percent to 25 million tons. Given this significant increase in supply, primarily into the Atlantic basin, seaborne prices for thermal coal have fallen, and opportunities for additional near-term export business have diminished. Metallurgical coal export volumes have remained relatively healthy by historical standards but are down approximately 6 percent year-over-year through May at 28 million tons. Alpha’s metallurgical coal exports during the second quarter of 2012 increased to just over 4 million tons, a 17 percent increase from the first quarter.

While export volumes have held up reasonably well, the global market for metallurgical coal has been softening across the board recently. Spot pricing for benchmark quality coals in Asia has disconnected from the third quarter benchmark of $225 per tonne and is reportedly under the $200 per metric tonne mark due to slowing steel production in China and the expected recovery of Australian export volumes following the reported resolution of recent labor disputes. In the face of European economic weakness, year-to-date European steel production is down approximately 4 percent compared with 2011. Given the challenging conditions in Europe, metallurgical coals are being contracted at a discount to similar qualities sold into Asia, and the market is awash with lower-quality metallurgical coals, placing significant downward pressure on pricing. In the near-term, Alpha has pared back production of its lower quality metallurgical coals, but the company believes it is well-positioned to capitalize on improving global market fundamentals for metallurgical coal with up to 30 million tons of export terminal capacity and the ability to rapidly increase metallurgical coal shipments in the future.

For those who want to hear more, Alpha will be having its quarterly earnings announcement conference call at 10 a.m. today.

And along with all of this financial information, it’s worth noting what Alpha had to say about its miner safety situation:

“It is a credit to our entire workforce, and to our ongoing dedication to Running Right, that our safety and compliance performance continues to improve despite broader market uncertainty and a regulatory environment that threatens the long-term competitive position of America. During the second quarter, Alpha’s overall incident rate improved 13 percent compared with the first quarter of 2012, and our legacy Massey operations improved 9 percent from the prior quarter and a remarkable 39 percent since the third quarter of 2011, the first full quarter following our acquisition of Massey. Seven of our Virginia operations were recognized by the Virginia Coal Mine Safety Board and Department of Mines, Minerals and Energy for their outstanding safety performance, and four of our West Virginia operations received 2011 Joseph A. Holmes Safety Association awards during the quarter. I commend all of the hard working people in the Alpha family for their dedication to Running Right.”