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Coal firms coping with low demand

Coal producers are making further cuts in production as the recession throttles demand for energy and steel, undermining second quarter sales and profits, three of the nation’s largest producers said this week.

Abingdon, Va.-based Alpha Natural Resources blamed the weakness for a 77 percent decline in its second-quarter profit. Rivals Foundation Coal Holdings and International Coal Group said they continued to reduce production because electric utilities are unwilling to take more deliveries and have stopped buying thermal coal on the spot market altogether.

Coal producer Massey Energy Co. said Tuesday it turned a betterthan expected profit in the second quarter as it booked fewer charges and increased shipments to power plants despite slumping demand for electricity amid the recession.

Richmond, Va.-based Massey said it earned $20.2 million, or 24 cents per share, in the period, compared with a loss of $93.3 million, or last year, when it recorded a $245.3 million charge related to a lawsuit.

Total revenue fell to $697.6 million from $826.8 million, as coal revenue slipped to $603.2 million from $710.3 million and freight revenue declined.

The results topped expectations of Wall Street analysts surveyed by Thomson Reuters, who were expecting, on average, earnings of 16 cents per share on $660.6 million in revenue. Shares rose $1.16, or 5 percent, to $23.90 in after-hours electronic trading following the report.

Demand for coal, which produces about half the nation’s electricity, has slumped with the economy this year, prompting mine operators to slash production goals. Massey has made cuts as well — slashing expenses to $648.9 million from $935.4 million in the year-ago period — but said it has gained market share anyway.

“Our coal tons shipped to utilities increased 8 percent compared to the first half of 2008 while it is estimated that total shipments of Central Appalachia coal to utilities declined by Executive Don Blankenship said in a statement.

Massey said coal burn at utilities in its key southeastern U.S. market dropped 19 percent during the same period and central Appalachian coal consumption dropped 25 percent over the same time frame.

Alpha, which has operations in Letcher County, said it earned $15.4 million, or 22 cents per share, in the quarter, down from $67.1 million, or 94 cents per share, a year earlier. Coal revenue dropped to $333.9 million, from $604.7 million. Analysts polled by Thomson Reuters expected, on average, Alpha to report a profit of 38 cents per share on revenue of $446.3 million.

Linthicum Heights, Md.-based Foundation said it earned $30.7 million, or 67 cents per share, in the quarter, including $4.8 million in one-time, pretax expenses related to a proposed $1.4 billion takeover by Alpha. Foundation lost $4.4 million, or 10 cents per share, in second-quarter 2008. Analysts were expecting 71 cents per share on $445.2 million in revenue.

Scott Depot, W.Va.-based ICG said it earned $10.4 million, or 7 cents per share, compared with $13.8 million, or 8 cents per share, in second-quarter 2008. ICG said the 2009 results included a noncash $7.7 million gain related to terminating a coal sales deal, while the second-quarter 2008 numbers included a $24.6 million gain on a property swap. Revenue from operations in West Virginia, Kentucky, Maryland, Virginia and Illinois was essentially flat at $277.8 million, compared with $277.9 million in 2008. Analysts were predicting 2 cents per share on $307.33 million in revenue.

All three saw demand falter, though they continued to benefit from contracts signed in 2008, when prices more than doubled in some cases.

ICG Chief Executive Ben Hatfield told analysts during a conference call that there are signs the market is stabilizing.

“We are cautiously optimistic that the bottom of the market was reached in mid-April,” Hatfield said. “Coal demand remains very weak and meaningful thermal production recovery may not occur until 2010.

“We expect the coal producers will continue to curtail production.”

Foundation, for instance, said its coal sales dipped to 16.4 million tons from 17 million tons and coal sales revenue declined to $399 million from $404.8 million a year earlier. The amount of money Foundation received per ton sold rose 19 percent in central Appalachia, 18 percent in northern Appalachia and 7 percent in Wyoming. Costs, meanwhile, dropped $50.8 million to $279.5 million, from $330.2 million in second-quarter 2008.

ICG said it shipped 600,000 fewer tons than expected during the quarter and slashed production 1.4 million tons.

Separately, ICG said one of its customers has agreed to pay $27 million to get out of supply contracts calling for 1 million tons annually. The payments are expected by Friday and ICG says they will be reflected in its thirdquarter results.

Foundation, which said it’s negotiating with utilities that want to delay deliveries, further reduced production plans. Foundation now expects to produce between 68.5 million and 71.5 million tons in 2009, down from an earlier range of 70 million to 73 million tons.

Alpha and Foundation shareholders are due to vote on their proposed deal Friday. Combined, they would be the nation’s thirdlargest coal producer, with mines in Pennsylvania, West Virginia, Virginia, Kentucky and Wyoming.

Massey said its cash margin dipped to $10.48 per ton, from $15.94 in second-quarter 2008 as prices slipped and some expenses increased. The company blamed lower shipments of high-priced metallurgical coal to steelmakers for the lower average price it received per ton in the quarter. Global steel output has plummeted as the recession curbs demand for cars and construction.

Following the lead of Peabody Energy, Arch Coal and other big producers, Massey lowered production, cut jobs, idled mines and revised price estimates for the rest of the year. The company now expects production ranging from 38.5 million to 40.5 million tons, down from earlier projections of 38 million to 41 million.

But Massey now sees per ton price estimates in a range of $61.50 to $63.50, up from a prior estimate of $60 to $63. Costs now are expected to range from $51.50 per ton to $53 per ton, also up from an earlier estimate of $50 to $53 per ton.

For 2010 Massey expects produced coal shipments to be in the range of 37.0 to 42.0 million tons, with an average sales price rising to $60 to $65 per ton. Cash costs for 2010 are expected to range between $48 to $52 per ton.

The company expects capital expenditures in 2010 will remain in the range of $100 million to $200 million. With results in these ranges, Massey said it believes it would generate solid free cash flow for the year.

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