Domestic thermal coal demand and pricing deteriorated in the first quarter as the mild winter and prolonged low natural gas prices resulted in lower coal burn for electricity generation, said Patriot Coal (NYSE: PCX) in its May 8 earnings statement.
Heating degree days were 21% below normal in the 2012 first quarter, said Patriot, a major producer of coal in West Virginia and western Kentucky. These factors caused inventories at utilities to expand to over 200 million tons at the end of March. Railcar loadings for the first quarter were consequently down 10% year-over-year, and the lowest loadings since early 1994. As a result, U.S. coal producers are closing mines and reducing operating shifts.
Other coal producers, like Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU), are also cutting back production for the same reasons and hoping for a hot summer that will key a market rebound.
While the domestic market remains difficult, international thermal coal markets continue to be open to U.S. coals. Patriot expects to ship between 6 million and 7 million tons of thermal coal overseas in 2012, including cargoes to both Europe and Asia. This represents nearly a doubling in thermal exports from the 3.8 million tons the company shipped overseas in 2011.
Patriot said it believes domestic combined-cycle natural gas plants are already running at near-capacity in the shoulder months, so normal summer weather patterns should cause a significant increase in U.S. coal burn as coal-fired plants crank up to meet air conditioning demand. Thermal coal inventory levels this summer and fall will be an important factor as electricity generators assess their needs for coal deliveries in 2013. Continued high inventory levels could result in reduced 2013 contracting, which will likely cause further cuts in coal production industry-wide.
For 2012, Patriot currently anticipates sales volume in the range of 25 million to 27 million tons, including metallurgical coal sales of 7 million to 7.4 million tons. Based on this volume, the company expects cost per ton for the Appalachia segment in West Virginia to be between $72 and $78. For the western Kentucky segment, Patriot expects cost per ton for 2012 to be in the $42 to $46 range. These cost estimates will be influenced by any further modifications to planned production that occur as markets progress.
During the first quarter, Patriot successfully restructured a legacy customer contract that included deliveries through 2017. The contract was previously priced not only below market, but also below cost, so this successful outcome will benefit earnings for the next six years. As a result of the negotiation, the contract volume of about 1.6 million annual tons will not be sold at a loss, but will instead be available for sale in the future at market prices. The company said it continues to have discussions with certain other thermal customers regarding canceling or delaying shipment of coal contracted for 2012 deliveries.
Patriot alters plans to account for the new reality
“Since the beginning of 2012, in response to new challenges facing our business, the Patriot management team has taken numerous swift and decisive actions to put the Company on a more stable footing going forward,” said Patriot President and CEO Richard Whiting. “We have reduced thermal coal production by over four million annual tons, delayed expansions under our Met Build-Out program, implemented major cost reduction initiatives, and worked with our customers to better meet their changing requirements. We have also executed a $625 million underwritten commitment, which will provide a new revolving credit facility and term loan financing. And finally, we have resolved previously-disclosed comments from the Securities and Exchange Commission regarding the accounting for new water treatment facilities, by restating our financial results for 2010 and 2011.”
Whiting added: “While most major global economies have embraced coal as a cornerstone of their electricity generation future, U.S. electricity generators are undergoing a major structural change in their operating portfolios as they respond to low natural gas prices and challenging environmental regulations. This, in turn, is resulting in a period of transition for coal mining companies, as production across the industry is reduced to match less overall U.S. utility demand. At the same time, a strong global thermal market is driving higher U.S. exports, partially offsetting the weaker domestic demand.”
Commenting on costs, Patriot Senior Vice President and CFO Mark Schroeder said: “We have reduced the workforce at our properties by about 1,000 employees since the beginning of the year, and to tighten control, we have assumed full operation of several mines and facilities formerly managed by contractors, including the entire Kanawha Eagle complex.” Kanawha Eagle is a deep mine complex located in southern West Virginia.
Revenues in the 2012 first quarter were $502.6m, compared with $577m in the prior-year quarter. Lower revenues in the 2012 quarter resulted from fewer tons sold, partially offset by higher revenue per ton. Year-over-year, revenues per ton increased $5.73, or 8%, as a result of higher selling prices across all basins.
Sales in the first quarter totaled 6.3 million tons, including 4.9 million tons of thermal and 1.4 million tons of met coal. This compares with 6.1 million tons of thermal and 1.9 million tons of met coal sold in the year-ago quarter. Lower tons sold in the 2012 quarter resulted from weaker demand and deferred shipments.
Adjusted EBITDA in the 2012 first quarter was $36.2m, compared with $48.6m reported in the same quarter of 2011. Lower Adjusted EBITDA in the 2012 quarter resulted primarily from fewer tons sold. The company had a net loss of $75.3m in the first quarter, against a net loss of $15.9m in the year-ago quarter.
Asset retirement obligation expense included a $17.5m adjustment related to the closure of the Big Mountain complex in southern West Virginia in February. A 2012 first quarter restructuring and impairment charge was also due primarily to the closure of the Big Mountain complex.