Peabody Energy Announces Results For The Quarter Ended September 30, 2015
"Peabody's third quarter results reflect a solid operational performance across the portfolio that continues to limit the pricing impacts from unprecedented market conditions," said Peabody Energy President and Chief Executive Officer Glenn Kellow. "Our mining platform is operating well, and we are balancing our dual financial objectives of optimizing liquidity in response to the prolonged industry downturn whilst keeping a strategic eye on deleveraging."
RESULTS FROM CONTINUING OPERATIONS
Third quarter revenues totaled $1.42 billion compared with $1.72 billion in the prior year due to a 7 percent decline in volume and lower realized pricing. Third quarter Adjusted EBITDA of $129.0 million reflects approximately $200 million in lower operating and administrative costs that mitigated the impact of nearly $120 million in lower pricing and $123.7 million in hedging losses.
U.S. Mining Adjusted EBITDA declined $44.3 million to $238.0 million, primarily due to a volume reduction of 2.5 million tons largely driven by lower natural gas prices and a longwall move in Colorado. U.S. costs per ton declined 5 percent due to lower fuel expense, cost reduction initiatives and a higher mix of PRB volumes, partially offset by higher overburden ratios. Third quarter PRB margins improved 5 percent to $3.39 as a result of higher revenues per ton on shipment mix and lower fuel prices.
Australian Mining Adjusted EBITDA increased $24.6 million to $34.0 million in the third quarter, as nearly $150 million in cost improvements overcame approximately $110 million in lower pricing. Australian costs per ton improved 28 percent to $48.11, a record low for this platform, which includes the benefit of lower currency and fuel rates, productivity improvements, workforce reductions and operational changes implemented in the second quarter. Australian volumes totaled 9.3 million tons, including 4.0 million tons of metallurgical coal at an average realized price of $68.53 and 3.3 million tons of export thermal coal at $52.97 per ton, with the remaining 2.0 million tons delivered under domestic thermal contracts.
Trading and Brokerage Adjusted EBITDA totaled $29.4 million compared to $3.3 million in the prior year and reflects favorable trading activities primarily around the company's New South Wales thermal coal positions settled in the third quarter and approximately $7 million in litigation settlement benefit.
Peabody's third quarter income tax provision improved $72.5 million to $6.9 million primarily due to the repeal of the Australian Minerals Resource Rent Tax in 2014. Loss from Continuing Operations totaled $(144.4) million compared to $(154.0) million in the prior year. Diluted Loss from Continuing Operations totaled $(8.08) per share and Adjusted Diluted EPS totaled $(8.13). Loss from Discontinued Operations totaled $157.5 million, primarily as a result of a $155.1 million charge related to Patriot Coal black lung and Combined Benefit Fund Coal Act liabilities, with expected cash payments to occur over a number of years.
Third quarter operating cash flow of $(34.2) million includes $88.6 million related to interest payments, while capital spending totaled $26.0 million. Liquidity totaled $1.81 billion at the end of September, which included $334.3 million in cash and $1.42 billion available under the company's fully committed credit facility. Liquidity declined $246.8 million during the quarter primarily due to providing approximately $195 million in letter-of-credit support for existing surety bonds and bank guarantees, as well as completing $89.3 million in PRB reserve installments. Peabody has $187.6 million in PRB reserve installments and $135.7 million in interest payments remaining in the fourth quarter. The company is actively monitoring liquidity and any additional collateral required to support surety bonds, bank guarantees and other obligations.
Regarding the company's $1.47 billion in self-bonding obligations as of Sept. 30, Peabody continues to qualify for self-bonding in all relevant states, has no collateral related to these obligations and recently received approval to continue self-bonding in New Mexico.
GLOBAL COAL MARKETS
The broader commodity sector declined in the third quarter on concerns over slowing global growth and economic weakness in China. This resulted in a reduction in global coal demand that more than offset recent supply reductions and pressured seaborne coal prices.
Seaborne metallurgical coal markets have been impacted by a 5 percent decline in domestic Chinese steel consumption through September as a result of a slowing economy and excess supply in the property sector. Chinese steel exports increased 27 percent to 83 million tons through September, and has reduced metallurgical coal demand in other regions. As a result, the fourth quarter metallurgical coal benchmark for premium hard coking coal declined 4 percent to $89 per tonne, and the benchmark for low-vol PCI eased from $73 to $71 per tonne, both the lowest levels since 2004.
In seaborne thermal markets, India has surpassed China as the largest thermal coal importer. India's 18 million tonne year-to-date increase in thermal coal imports has not been enough to offset China's 59 million tonne decline through September. Chinese imports declined primarily from reduced coal generation demand, an increase in hydroelectric generation and protectionist policies that support domestic coal producers.
Industry reports estimate that over 80 percent of seaborne metallurgical coal supply is not covering cash costs at current pricing, and Peabody projects 2015 seaborne metallurgical coal supply to decline 15 million tonnes to 295 million tonnes. U.S. metallurgical coal exports fell 17 percent through September and are expected to decline 10 to 15 million tons in 2015. Australian metallurgical exports have modestly increased compared with 2014 levels and benefit from lower currency, while domestic Chinese coal production is down 5 percent. Cutbacks have accelerated in the seaborne thermal market, particularly in the U.S. and Indonesia, where exports are down 39 percent and 8 percent, respectively.
Peabody expects additional coal production curtailments in response to current prices. In addition, limited capital spending is anticipated to act as a future supply constraint. Industry reports indicate a 70 percent decline in capital investment from the top coal producers from recent highs in 2012. The company anticipates that coal prices will need to rise well above current levels to incentivize new investment to maintain adequate supply to meet seaborne demand over time.
Within U.S. coal markets, Peabody now projects utility coal demand to decline approximately 100 million tons in 2015, primarily due to lower natural gas prices, with coal's share of U.S. electricity generation expected to be 35 percent. U.S. coal shipments are projected to decline 90 million tons this year, and additional production cutbacks are expected. The largest share of production decreases is occurring in coal regions outside of the PRB, where demand pressures are the greatest. The reduction in demand has currently outpaced the supply response, resulting in rising stockpiles totaling approximately 75 days of supply in the PRB and approximately 90 days in the Illinois Basin.
Peabody expects 2016 utility coal consumption to be below 2015 levels based on current natural gas prices and expected plant closures; these factors more than offset higher capacity utilization within the remaining U.S. coal fleet. Over the next few years, the company projects rising coal demand over 2015 levels as natural gas prices increase on growing LNG exports, onshore demand and pipeline exports to Mexico. The PRB remains most competitive with natural gas and is expected to represent a greater share of the U.S. coal generation profile in coming years due to its delivered cost advantages and emissions benefits.