Alpha Natural Resources, Inc. (ANR)

Q4 2011 Earnings Call

February 24, 2012 10:00 AM ET

Executives

Paul H. Vining - Chief Commercial Officer

Kurt D. Kost - President

Frank J. Wood - Chief Financial Officer, Executive Vice President and Chairman of Safety, Health, Environmental & Sustainability Committee

Todd Allen - Vice President of Investor Relations

Kevin S. Crutchfield - Chief Executive Officer, Director and Member of Safety, Health, Environmental & Sustainability Committee

Analysts

Shneur Gershuni – UBS

Brian Gamble – Simmons and Company

Michael Dudas – Sterne, Agee & Leach

James Rollyson – Raymond James

Lucas Pipes – Brean Murray Carret

Kuni Chen – CRT Capital Group

Brett Levy – Jefferies & Company, Inc

Mark Levin – BB&T

Brandon Blossman – Tudor, Pickering, Holt

Justine Fisher – Goldman Sachs

Chris Haberlin – Davenport & Co

Presentation

Operator

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Greetings and welcome to the Alpha Natural Resources' Fourth Quarter 2011 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Todd Allen, Vice President of Investor Relations for Alpha Natural Resources. Thank you, Mr. Allen. You may begin.

Todd Allen

Thank you operator. And thank everyone for participating in today's Alpha Natural Resources fourth quarter 2011 earnings conference call.

Before I turn the call over to Kevin, I would like to remind our listeners that we will be meeting with investors at several conferences in the near future including the JPMorgan High Yield and Leveraged Finance Conference in Miami on February 27

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, the BMO Capital Markets 2011 Global Metals & Mining Conference in Hollywood, Florida on 28, the Brean Murray Carret 2012 Global Resource and Infrastructure Conference in New York on February 29, and finally the Simmons 12th Annual Energy Conference in Las Vegas on March 1st.

Now joining me on the call today are Kevin Crutchfield, Alpha Natural Resources' CEO who will summarize our fourth quarter and full year 2011 results and provide a brief market outlook; Frank Wood, our CFO who will comment on Alpha's financial results and update our guidance; and Kurt Kost, President of Alpha Natural Resources. Along with Kurt, Paul Vining, Alpha's Chief Commercial Officer will be available to address operational and marketing questions following our prepared remarks.

Please let me remind you that various remarks that we make on this call concerning future expectations for the Company constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management's views and assumptions, regarding future events and business performance as of the time the statements are made. Actual results may differ materially from those expressed or implied. Information concerning factors that could cause actual results to differ materially from those in forward-looking statements are contained in our filings with the United States Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequently filed Form 10-Qs.

This call is being recorded and will be available for replay for a period of two weeks. The call can also be heard live on the Internet and both a replay and a downloadable podcast of the event will be archived on our website at alphanr.com, for a period of three months.

With that, I'll turn it over to Kevin.

Kevin Crutchfield

Thanks Todd and good morning everyone. Alpha continued to demonstrate excellent safety performance since our last earnings call. Six of our operations recently received the 2011 Mountaineer Guardian Award including the Edwight surface mine, the Green Valley processing plant, Rockspring's Camp Creek Number 1 mine, the Ewing Number 1 mine, the Hatfield Energy mine; and White Flame's mine Number 10.

Also, we recently received notice that two of the legacy Massey mines, Randolph and Revolution were removed from MSHA's potential pattern of violation or PPOV list. The removal of these two operations from PPOV status is just one indication of the success that we have achieved thus far in integration of Massey following the June 1, 2011, acquisition.

As safety performance improved in the fourth quarter, we experienced a market decrease in MSHA enforcement actions, with MSHA orders down approximately 45% compared to the previous quarter. Employee engagement, through running right, is very strong across all of Alpha's operations. Turnover has improved steadily for several months and is now solidly in the middle single digits for both legacy Massey and the entire organization, reduced turnover, heightened employee engagement and vastly improved safety performance is expected to drive improvements in efficiency and productivity as well as improved cost performance going forward. So, we continue to be confident that significant operating synergies will be realized in 2012 and Alpha remains on track to achieve our previously stated synergy target of $220 million to $260 million annually by mid-2013.

While our integration efforts have proven successful, the market environment turned out to be challenging in the fourth quarter. Alpha reported fourth quarter of 2011 adjusted EBITDA from continuing operations of $261 million compared to $369 million in the preceding quarter. Frank will discuss the fourth quarter results in more detail in just a moment, but the sequential decrease in adjusted EBITDA was primarily due to lower shipments in the east, particularly met shipments as some European customers stretched out delivery schedules as well as the mainly volume driven increase in cost of coal sales per ton in the east.

By now the headwinds facing U.S. coal producers are well known to most everyone on the call. The industry continues to confirm a general lack of permit issuances in the east and regulatory uncertainties stemming from a rap of pending regulations be it CSAPR, MACT, the new source performance standards for greenhouse gases among others, that have collectively been dubbed train wrecks.

In addition, the challenges facing the industry have intensified in the last few months due to concerns about global economic growth impacting the steel market, extremely mild weather in much of the United States and competition from natural gas, which recently hit decade low prices, driving incremental fuel switching and effectively capping thermal coal prices at levels that render a portion of Central Appalachia products uneconomic. Alpha responded swiftly to these changes in market conditions and on February 3rd we announced 4 million tons of production cutbacks in Central Appalachia, including approximately 2.5 million tons of thermal coal and 1.5 million tons of high-vol B metallurgical coal, in order to match our production with anticipated demand. We believe these actions are sufficient at this time.

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