Massey Energy Reports 2010 Fourth Quarter and Full Year Operating Resultsadmin
Massey Energy Company today reported a net loss of $70.1 million or $0.69 per share for the quarter ended December 31, 2010. The Company generated $641.1 million of produced coal revenue in the quarter from the sale of 8.9 million tons of coal. EBITDA in the fourth quarter of 2010 was $35.8 million. By comparison, Massey reported net income of $24.4 million on produced coal revenue of $498.7 million in the fourth quarter of 2009 from the sale of 7.8 million tons of coal. EBITDA in the fourth quarter of 2009 was $123.3 million.
Coal production in the fourth quarter was hampered by a significant reduction in the number of shifts operated, lower productivity at deep mines and higher ratios on surface mines. Produced coal shipments were adversely affected by the lower production, inconsistent rail service and delays of export shipments at the ports.
Commenting on the Company’s fourth quarter results, Massey’s Chief Executive Officer and President Baxter Phillips said, “We are disappointed with our results in the fourth quarter but we remain committed to making significant improvements going forward. 2010 was a year of tremendous challenge for everyone at Massey. We are working hard to make the necessary changes and adjustments to get our production back on track even as we prepare for the merger with Alpha.”
Average produced coal revenue per ton was $71.76 in the fourth quarter of 2010 compared to $64.13 in the fourth quarter of 2009. The 12 percent improvement was driven by 16 percent higher average prices on utility coal tons and 23 percent higher average prices on metallurgical coal tons sold during the quarter.
Average cash cost per ton for the fourth quarter of 2010 was $62.67 compared to $49.87 in the fourth quarter of 2009 (2010 Average cash cost per ton is calculated exclusive of UBB related charges; see Notes 2 and 6 in the attached financial statements). Lower productivity in underground mines and higher ratios and supplies costs at surface mines were the key drivers of the cost increases.
Depreciation, depletion and amortization (DD&A) was $99.6 million in the fourth quarter 2010 compared to $63.6 million in the fourth quarter 2009. The increase in DD&A was largely attributable to $11.5 million in pre-tax amortization expense related to above-market sales contracts and other intangible assets acquired in the Cumberland acquisition and $17.8 million in pre-tax expense for impairment charges related to idled mines.
During the fourth quarter of 2010 Massey recorded $12.0 million of Sales, General and Administrative expense (SG&A) for benefits provided to its former Chairman and CEO in accordance with his retirement agreement, which was effective December 31, 2010. This cost more than offset the impact of lower executive incentive compensation that resulted from weaker operating results. The fourth quarter results also include $23.1 million in expenses related to the Upper Big Branch tragedy and investigation and a pre-tax gain of $12.6 million from insurance proceeds received in association with the fire at the Bandmill preparation plant.
Massey’s average produced coal revenue per ton increased by 11 percent for the full year 2010 as compared to the full year 2009. In the same period of comparison, Massey’s average cash cost per ton increased by 19 percent. The key drivers of the increase in cash cost per ton were, in order of magnitude, surface mine supplies and repairs, higher surface mine ratios, lower productivity in underground mines, lower productivity of highwall miners and higher sales related costs driven by higher revenue per ton.
The full year 2010 results include pretax charges of $166.5 million in incurred costs, asset impairments and accrued reserves associated with the tragic accident at the Upper Big Branch mine (UBB) that occurred in April 2010. Excluding the UBB related charges, the Company’s net loss would be $51.6 million or $0.53 per share for the year.
Deep mine production in the fourth quarter was negatively impacted by lost shifts due to both regulatory enforcement actions and challenging labor market conditions. Qualified and experienced underground miners are in increasingly high demand as prices for metallurgical coal continue to rise. As a result, Massey experienced delays hiring personnel to staff several new underground sections that were planned to partially offset production lost at the Upper Big Branch mine.
Surface mine production was negatively impacted by higher strip ratios at several key mines. At Twilight, the Company’s largest surface mine, which is part of the Progress resource group, the ratio was 33% higher year over year. The higher ratio was the result of a mine plan that required a temporary transition through high ratio reserves in order to access additional lower ratio reserves in the future. Massey anticipates that the ratio at the Twilight mine will decline to more favorable levels over the next two quarters. Average costs at surface mining operations increased due to the higher ratios and higher prices for explosives, heavy equipment tires and other supplies.
During the fourth quarter of 2010 Massey commenced operations at the new Zigmond preparation plant at its Logan County resource group and recommenced operations at the Sprouse Creek preparation plant at its Rawl resource group. The Zigmond preparation plant is a state-of-the-art, highly efficient processing plant that was built to replace the Bandmill preparation plant that was lost to a fire in 2009. The Sprouse Creek plant was recently modernized to lower operating costs and improve efficiency of operation. Continued operation of these facilities for the full year 2011 is expected to contribute to an increase in total annual production and additional metallurgical coal production.
Massey has added production shifts on two Saturdays per month at certain underground and surface operations in order to meet anticipated production requirements until staffing delays can be resolved and surface mine productivity improves.
Liquidity and Capital Resources
At December 31, 2010, Massey had total liquidity of $450.0 million comprised of cash and cash equivalents totaling $327.2 million and $122.8 million in available credit on its asset-based revolving credit facility. This compared to total liquidity of $764.2 million at December 31, 2009, comprised of $665.8 million in cash and cash equivalents and $98.4 million in available credit on its asset-based revolving credit facility.
During the fourth quarter, Massey entered into an amended and restated asset-based revolving credit agreement, which provides for available borrowings, including letters of credit, of up to $200 million, depending on the level of eligible inventory and accounts receivable. Subject to certain conditions, at any time prior to maturity, the Company may elect to increase the size of the facility up to $250 million. The previous credit limit was $175 million, including letters of credit. The facility’s maturity has been extended to May 2015.
Total debt at December 31, 2010 was $1,316.2 million compared to $1,319.1 million at December 31, 2009. Massey’s total debt-to-book capitalization ratio was 42.5 percent at December 31, 2010 compared to 51.2 percent at December 31, 2009.
Capital expenditures for the fourth quarter 2010 totaled $156.3 million compared to $51.5 million in the fourth quarter 2009. The significant capital projects for the quarter included continued development at the Marianna property where the Company is constructing a new preparation plant and a new low vol metallurgical coal mine and the completion of the Zigmond processing plant and loadout at the Logan County resource group.
During the fourth quarter of 2010, Massey received $12.6 million in cash from insurers related to the Bandmill preparation plant which was destroyed by fire in 2009. Also during the quarter, the Company established a cash reserve associated with Mr. Blankenship’s retirement benefits that reduced cash and cash equivalents by $10 million.
Coal Market Overview
Favorable forward pricing trends continue for thermal coal in 2011, 2012 and 2013. An unusually warm summer followed by colder than normal winter in the eastern United States during 2010 led to increasing coal utilization and declining utility stockpiles. The lower stockpiles combined with declining coal production levels in Central Appalachia and higher export demand are expected to keep thermal coal pricing high.
* Coal burn at utilities in the southeastern United States increased by 7 percent during 2010 as compared to 2009. The total burn of coal produced in Central Appalachia also increased by 7 percent year over year. * Coal stockpiles at Southeastern utilities were down 18 percent at the end of December 2010 as compared to the end of December 2009. Even so, stockpile levels remained approximately 11 percent higher than normal (5 year average) for the month December. * U.S. exports of steam coal increased by 9 percent in the first 11 months of 2010 compared to the same period in 2009. * Total U.S. coal production in the fourth quarter of 2010 was 6 percent higher than in the fourth quarter of 2009. For the full year, total U.S. coal production increased by approximately 1 percent when compared with 2009.
* Coal production in Central Appalachia in the fourth quarter of 2010 was essentially even with production in the fourth quarter of 2009. For the full year 2010, Central Appalachia coal production was down by approximately 4 percent compared to 2009.
Metallurgical coal pricing remained strong throughout 2010 as demand for steel continued to grow in the United States and key developing countries, principally China and India.
* Capacity utilization at U.S. steel mills at the end of the fourth quarter 2010 was approximately 70 percent compared to approximately 65 percent at the same time in 2009. * U.S. crude steel production was up approximately 41 percent during the first 11 months of 2010 compared to the same period last year. * Crude steel production in China increased 11 percent during the first 11 months of 2010 compared to the same period a year ago. Crude steel production in India increased 12 percent in the first 11 months of the year. Total world steel production increased 17 percent in the same period of comparison.
* U.S. exports of metallurgical coal increased 59 percent during the first 11 months of 2010 compared to the same period in 2009.
Massey expects long-term global demand for high quality metallurgical coal to grow faster than the global capacity to produce it. As a result, Massey believes its estimated 1.3 billion tons of metallurgical quality coal reserves, well-capitalized operations and modern infrastructure will provide the Company with increasing opportunities to sell high quality coal to an expanding network of global metallurgical coal customers.
For 2011, Massey projects produced coal shipments in the range of 43.0 to 47.0 million tons. Average produced coal realization in 2011 is expected to be between $81.00 and $86.00 per ton. The Company has commitments for sales of 41.4 million tons of coal in 2011, including 37.3 million tons that are sold and priced at an average price of approximately $78.00 per ton. The sold and priced tons include 6.2 million tons of metallurgical coal. Massey expects met coal shipments for 2011 to be in the range of 10 to 14 million tons.
Average cash cost per ton for the full year 2011 is expected to be in the range of $59.00 to $62.00. Massey anticipates modest increases in costs for supplies and repairs and deep mine labor in 2011 in addition to higher sales related costs associated with higher anticipated revenue. These higher costs are expected to be largely offset by improvement in surface mine ratios. Massey’s current outlook does not anticipate significant improvement in underground mining productivity.
Other income in 2011 is expected to be between $20 and $100 million. The Company expects capital expenditures in 2011 to be in the range of $400 to $550 million. DD&A is expected to be $390 million with approximately $60 million from the amortization of acquired sales contracts and other intangibles.
For 2012, the Company has commitments for sales of 28.3 million tons of coal, including 18.1 million tons that are sold and priced at an average price of approximately $70.00 per ton. The sold and priced tons include approximately 850,000 tons of metallurgical coal.