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Alpha Natural Resources Announces Results for Fourth Quarter and Full Year 2010

- Alpha announced an agreement to acquire Massey Energy Company on January 29th, creating a global leader in metallurgical coal; closing anticipated in mid-year 2011
- Record 2010 Adjusted EBITDA from continuing operations $796 million, up 47% from 2009
- Income from continuing operations rose 46% to $97 million in 2010
- Metallurgical coal revenues increased 70% to a record $1.35 billion in 2010
- Liquidity reaches a record $1.8 billion at year end 2010
- Alpha updates 2011 guidance and introduces 2012 shipment and average realization guidance

Abingdon, VA, February 9 – Alpha Natural Resources, Inc., a leading U.S. coal producer, reported fourth quarter net income of $10.8 million or $0.09 per diluted share compared to net income of $17.9 million or $0.15 per diluted share in the fourth quarter of 2009.  Alpha reported fourth quarter income from continuing operations of $11.0 million or $0.09 per diluted share compared to income from continuing operations of $20.2 million or $0.17 per diluted share in the fourth quarter of 2009.  Excluding merger related expenses, reversal of certain income tax reserves, and amortization of coal supply agreements, fourth quarter 2010 adjusted income from continuing operations was $32.4 million or $0.27 per diluted share.

Earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) from continuing operations for the fourth quarter 2010 was $154.7 million, compared to $199.1 million in the year ago period.  Excluding merger related expenses, fourth quarter 2010 adjusted EBITDA from continuing operations was $163.4 million.  

"Alpha continued its strong focus on safety performance during the fourth quarter and throughout the year," said Kevin Crutchfield, Alpha's chief executive officer.  "Among our Eastern operations, nine operations in our Southern West Virginia business unit, nine operations in our Virginia/Kentucky business unit, seven operations in our Northern West Virginia business unit, and all of our AMFIRE surface mines completed the year 2010 without a single lost time accident.  We are proud of our entire workforce and their dedication to Alpha's Running Right culture that has driven continuous improvements in safety performance throughout our history.  On a separate note, it is with great sorrow that I inform our investors of the passing earlier this year of Alpha's long-time board member, John W. (Bill) Fox.  As one of our most trusted friends and advisors, he will be deeply missed.

"Alpha announced that it agreed to acquire Massey Energy on January 29th.  This transformational combination delivers on Alpha's long-standing strategic objectives, creating a leader in the United States and globally. When the transaction closes, the Company will be the second largest in the United States in terms of reserves, with approximately 5.1 billion tons; third largest in terms of total shipments; and the leading supplier and exporter of metallurgical coal, with approximately 1.7 billion tons of metallurgical reserves and an expected 24 to 26 million tons of metallurgical coal shipments on a combined pro forma basis in 2011.  Our primary focus going forward will be maintaining operational excellence within Alpha's core business.  At the same time, we are dedicated to closing the Massey acquisition as quickly as practicable, and then executing our detailed plan for integrating our two companies.  This combination has obvious and compelling benefits for both companies, their shareholders and their customers, but it will also require intense focus and unflagging commitment in order to integrate and maximize the performance of both organizations, and this is our singular mission for the foreseeable future.

"Looking back over Alpha's fourth quarter and full year 2010 results, the Company achieved record revenue and EBITDA in 2010 despite subpar rail service, severe weather in the East and vessel delays at the ports experienced during the fourth quarter.  We are pleased with the relatively consistent performance that Alpha has delivered throughout the year, driven by our scale, diversification and business mix, which balances our position as the leading domestic supplier of metallurgical coal with the substantial margin generation power of our Pittsburgh #8 longwall mines and the stable contribution of our Western operations in the Powder River Basin.  After another year of positive free cash flow, Alpha's total liquidity now stands at approximately $1.8 billion, and this strong financial position has enabled us to engage in the transaction with Massey Energy to create a true industry leader.

"Looking forward, on a stand-alone basis Alpha anticipates another record year in 2011.  We expect to ship between 13 and 14.5 million tons of metallurgical coal this year, an all-time high for the Company.  In light of the devastating flooding recently experienced in Australia, spot prices for coking coal have risen above the recent first quarter benchmark settlement, and tight overseas market conditions are expected to persist throughout the year.  As the largest exporter of metallurgical coal among U.S. producers, Alpha is positioned to benefit from our ability to serve the seaborne metallurgical market in 2011, and these market conditions bode well for Alpha's prospects in 2012 with over 90 percent of our 2012 metallurgical coal shipments open to market pricing."

Financial Performance

 

The fourth quarter represents the first fully comparable year-over-year quarter including a full three months of results from the former Foundation operations following the merger, which closed on July 31, 2009.  Total revenues in the fourth quarter of 2010 were $993.1 million versus $893.3 million in the same period of 2009, and coal revenues were $876.0 million versus $787.5 million in the fourth quarter of 2009.  Metallurgical coal shipment volumes increased 17 percent and average realizations increased 18 percent, resulting in a 38 percent year-over-year increase in revenues from metallurgical coal, which reached $342.6 million in the fourth quarter of 2010.  Freight and handling revenues and other revenues were $92.2 million and $24.9 million, respectively, during the fourth quarter of 2010 versus $60.8 million and $45.0 million in fourth quarter of 2009.    

  
     
 

During the fourth quarter Alpha shipped 13.4 million tons of Powder River Basin (PRB) coal, up from 12.1 million tons in the year ago period and 12.3 million tons in the third quarter of 2010.  Eastern steam coal shipments were 5.8 million tons compared with 6.6 million tons last year and flat compared to the prior quarter.  Metallurgical coal shipments during the quarter were 3.0 million, flat sequentially and up 17 percent compared with 2.5 million tons in the fourth quarter of 2009.  Average per ton realization for PRB shipments rose to $10.94 compared to $10.52 in the fourth quarter last year.  The per ton average realization for Eastern steam coal shipments rose to $67.04 compared to $62.57 in the year ago period, and the average per ton realization for metallurgical coal increased to $114.87 in the fourth quarter compared to $97.18 last year.

  
     
 

Total costs and expenses during the fourth quarter of 2010 were $980.3 million compared to $863.6 million in the fourth quarter of 2009.  Cost of coal sales was $669.8 million compared to $577.4 million in the year-ago period.  Cost of coal sales in the East averaged $64.18 per ton compared with $51.37 in the fourth quarter last year and $63.04 in the previous quarter.  The higher Eastern cost of coal sales per ton during the fourth quarter primarily reflects the influence of an increased volume of higher-cost purchased coal, the operation of a single longwall at the Emerald mine, and a mix shift with less low-cost longwall production and more high-cost underground metallurgical coal production.  The fourth quarter 2010 cost of coal sales per ton in the East also included $0.45 of merger related expenses.  The cost of coal sales per ton for Alpha Coal West's PRB mines was $7.87 during the fourth quarter of 2010 compared with $8.48 in the fourth quarter of 2009.  

  
     
 

Selling, general and administrative expense in the fourth quarter 2010 was $45.4 million compared with $52.8 million in the fourth quarter of 2009.  Depreciation, depletion and amortization (DD&A) during the fourth quarter 2010 was $90.7 million, and amortization of acquired coal supply agreements resulting from the Foundation merger was $52.8 million.  

  
     
 

Alpha recorded net income of $10.8 million or $0.09 per diluted share during the fourth quarter 2010 compared with $17.9 million or $0.15 per diluted share during the fourth quarter of 2009.  The fourth quarter 2010 income from continuing operations was $11.0 million or $0.09 per diluted share compared with $20.2 million or $0.17 per diluted share in the year-ago quarter.  Fourth quarter 2010 net income and income from continuing operations included $8.7 million of merger-related expenses, $52.8 million of pre-tax amortization of coal supply agreements, and a $14.0 million tax benefit resulting from the reversal of certain income tax reserves.  Excluding these items and the tax impacts of both merger-related expenses and amortization of coal supply agreements, as well as $18.1 million of other revenue from a coal supply agreement modification in the fourth quarter of 2009, adjusted income from continuing operations was $32.4 million or $0.27 per diluted share compared with adjusted income from continuing operations of $62.1 million or $0.51 per diluted share in the fourth quarter of 2009.

  
     
 

EBITDA from continuing operations was $154.7 million in the fourth quarter 2010 compared with $199.1 million in the prior-year period.  Excluding merger-related expenses and other revenue from a coal supply agreement modification in 2009, adjusted EBITDA from continuing operations was $163.4 million in the fourth quarter of 2010 compared with $193.4 million in the fourth quarter of 2009.  

  
     

Full Year 2010 Results

 

For the full year 2010, Alpha reported total revenues of $3.9 billion, including $3.5 billion in coal revenues compared with total revenues of $2.5 billion and coal revenues of $2.2 billion in 2009, which included only five months of results from the former Foundation operations.  The year-over-year increase in both total revenues and coal revenues is primarily attributable to the inclusion of an additional seven months of the former Foundation operations in 2010 and increased metallurgical coal shipments and average per ton realizations.    

  
     
 

During 2010, Alpha's coal shipments totaled 84.8 million tons, including 65.3 million tons from the former Foundation operations, compared with 47.2 million tons for the full year 2009, which included 28.2 tons from former Foundation operations.  Metallurgical coal shipments in 2010 rose to 11.9 million tons, up 46 percent from 8.1 million tons shipped during 2009.  Shipments of PRB coal and Eastern steam coal in 2010 were 49.0 million tons and 24.0 million tons, respectively, compared with 20.8 million tons and 18.3 million tons in the previous year.    

  
     
 

For the full year 2010, the company-wide average per ton realization was $41.22 and the average cost of coal sales was $30.08 per ton, resulting in an $11.14 per ton (or 27 percent) weighted average coal margin.  For 2010, Alpha recorded net income of $95.6 million or $0.79 per diluted share and income from continuing operations of $97.2 million or $0.80 per diluted share.  Excluding amortization of coal supply agreements, merger-related expenses, the loss on early extinguishment of debt, related tax effects of the above items, the reversal of certain income tax reserves, and the deferred tax charge arising from a change in the tax treatment of Medicare Part D deductions, adjusted income from continuing operations in 2010 was $263.6 million or $2.17 per diluted share.  EBITDA from continuing operations for 2010 was $769.1 million and adjusted EBITDA from continuing operations, which excludes merger-related expenses and the loss on early extinguishment of debt, was $796.2 million.

  
     

Liquidity and Capital Resources

Cash provided by operations for the quarter ended December 31, 2010 was $182.6 million compared to $194.1 million for the fourth quarter of 2009.  For the full year 2010, cash provided by operations increased to $693.6 million compared with $356.2 million in 2009.

Capital expenditures for the fourth quarter and full year 2010 were $85.9 million and $308.9 million, respectively, compared to $84.3 million and $187.1 million in the fourth quarter and full year 2009.  

At the end of the fourth quarter, Alpha had available liquidity of approximately $1.8 billion, consisting of cash, cash equivalents and marketable securities of an aggregate $832.1 million, plus $932.9 million available under the company's secured credit facility and accounts receivable securitization facility.  Total long-term debt, including current portion of long-term debt at December 31, 2010, was $754.2 million compared with $790.3 million at December 31, 2009.  

Market Overview

The market for thermal coal continues to improve both within the United States and globally.  Utility stockpiles in the United States declined from a peak of greater than 200 million tons in late 2009 to an estimated 166 million tons at the end of 2010.  Coal-fired electricity generation in 2010 increased by approximately six percent, while overall generation increased by approximately four percent, although low-cost natural gas led to fuel switching in favor of gas late in the year.  Demand is expected to continue to exceed domestic supply in 2011, which is anticipated to result in utility inventories returning to more normal levels by the end of the year.  In addition, quoted pricing for seaborne thermal coal bound for Europe has risen on concerns that traditional sources of supply, including coals from South Africa and Colombia, are increasingly being diverted to satisfy rapidly growing Asian demand.  These seaborne price levels suggest that U.S. thermal exports to Europe are likely to increase in 2011.

The global market for metallurgical coal strengthened significantly in 2010, and global market conditions appear likely to continue to improve in 2011, driven by increasing demand primarily in Asia.  China increased its metallurgical coal imports by 37 percent to an estimated 47 million metric tonnes in 2010.  The trend in China is expected to continue with steel production forecast to exceed 650 million metric tonnes in 2011, up from approximately 600 million metric tonnes in 2010.  By December, Chinese metallurgical coal imports had reached an annualized run-rate of 64 million metric tonnes.  Recent severe flooding in Australia has hampered both coal production and the transportation infrastructure, driving spot prices for high quality metallurgical coal above the recent first quarter benchmark settlement.  Given increasing global demand and constrained seaborne supply, producers in the United States should benefit as the United States produces far more metallurgical coal than the domestic steel industry consumes, and the Eastern U.S. is one of the few production regions that has excess export capacity.  U.S. metallurgical coal exports exceeded 50 million tons in 2010, and are likely to increase again in 2011 in response to growing global demand.

Strong export demand and global supply disruptions suggest that more coals are likely to cross over from the steam market into the export metallurgical market.  When viewed together with the prospect of increasing thermal coal exports to Europe, realizations for thermal coal in the Eastern U.S. should improve in the near-term.

Outlook

On a stand-alone basis, both Alpha's 2011 shipment guidance and Alpha's 2011 cost of coal sales guidance remain unchanged from the Company's update provided on January 14, 2011.  As of January 26, 2011, all of Alpha's expected 2011 PRB shipments are committed and priced at an average per ton realization of $11.82.  Expected 2011 Eastern steam coal shipments are 94 percent committed and priced at an average per ton realization of $65.44, and one percent of expected Eastern steam coal shipments is committed and unpriced.  Expected 2011 Eastern metallurgical coal shipments are 68 percent committed and priced at an average per ton realization of $142.23, and 26 percent of Alpha's expected 2011 metallurgical coal shipments are committed and unpriced.  Selling, general and administrative expense is expected to range from $165 million to $175 million on a stand-alone basis in 2011.  Interest expense is projected to be between $60 million and $65 million in 2011, and capital expenditures, including the scheduled lease bonus installment payment at the Eagle Butte mine, are forecast to range between $340 million and $440 million for the year 2011.

Alpha is establishing stand-alone guidance on its contracted position and expected shipments in 2012.  PRB shipments in 2012 are expected to remain flat with 2011 in a range of 48 million tons to 52 million tons, with 62 percent committed and priced at an average per ton realization of $12.50.  Eastern steam coal shipments in 2012 are also expected to remain constant with 2011 shipment levels, ranging from 22 to 25 million tons, with 16 percent committed and priced at an average per ton realization of $69.93, and 36 percent of expected Eastern steam coal shipments are committed and unpriced.  Eastern metallurgical coal shipments in 2012 are expected to range from 13 to 14.5 million tons, with only 9 percent committed and priced and 46 percent committed and unpriced.  Committed and priced metallurgical tons are contracted at an average realization of $133.74 per ton.