Peabody Energy (NYSE: BTU), the biggest U.S. coal producer, reported Oct. 22 strong earnings at least in part based on improved results at U.S. operations that had been hammered lately by soft demand from U.S. power producers.
St. Louis-based Peabody, which is also a major producer of metallurgical coal in Australia, reported third quarter 2012 revenues of $2.06bn, leading to Adjusted EBITDA of $459.9m. Income from continuing operations totaled $122.9m, with diluted earnings per share from continuing operations of $0.46 and adjusted diluted earnings per share of $0.51.
“The Peabody team delivered strong third quarter results, as expanded U.S. margins, record Australian volumes and aggressive cost control largely offset price declines in Australia,” said Peabody Chairman and CEO Gregory Boyce. “Peabody remains focused on significant cost containment and capital discipline activities and expects to realize the benefit of these programs over the next year. While the global coal environment remains challenged, there are indications that markets are stabilizing through U.S. gas-to-coal switching, higher European coal-fueled generation and increased China infrastructure spending.”
Third quarter sales volumes rose 6% over the prior year to 66.6 million tons due to increases in the Australia and Trading and Brokerage segments. U.S. revenues increased 1% over the prior year to $1.1bn on higher Western U.S. shipments and greater realized pricing.
Adjusted EBITDA totaled $459.9m compared with $508.5m in the prior year. U.S. mining Adjusted EBITDA rose 7% to $347.4m due to higher realized pricing and cost containment activities that drove an 8% increase in margin per ton. Trading and Brokerage contributions totaled $35.7 million compared to $57.4 million in the prior year due largely to lower realized margins on export volumes.
During the quarter, the company closed the venerable Air Quality deep mine in Indiana, resulting in after-tax non-cash charges of approximately $75m ($0.28 per share) recorded within discontinued operations.
U.S. coal demand up due to summer heat, higher gas prices
U.S. coal demand rose sharply in the third quarter given higher natural gas prices and a 22% rise in cooling degree days over the long-term average, which led to an increase in coal’s market share of U.S. electricity from the low 30% range during the second quarter to 39% in September.
Peabody is projecting U.S. coal demand will decline about 120 million tons in 2012, the vast majority of which has already occurred. Natural gas prices have nearly doubled from their yearly lows to more than $3.50/mmBtu, resulting in greater generation from plants using Powder River Basin and Illinois Basin coals. Peabody is the top producer in both of those regions. Peabody believes that PRB coal is competitive in most plants at natural gas prices of $2.50 to $2.75 per mmBtu, and Illinois Basin is competitive at $3.25 to $3.50 per mmBtu.
Year-to-date U.S. coal-fueled generation reflects the ongoing shift in demand from Appalachia to Midwestern and Western regions, Peabody said. Generation by plants using Central Appalachian coal is down nearly 40% year to date, while coal-fueled generation in the rest of the U.S. is down just over 10%. Peabody exited Central App production a few years ago with the spinoff of Patriot Coal.
Peabody estimates that third quarter U.S. coal stockpiles fell almost 70% more than the five-year average due to improved demand. Coal stockpiles among PRB coal plants are at the lowest levels among U.S. coal regions on a days-use basis, the company added.
Peabody projects a rebound in U.S. coal demand in 2013 as higher natural gas prices cause an increase in PRB and Illinois Basin coal burn. The U.S. Energy Information Administration now projects U.S. coal consumption to rise by more than 40 million tons in 2013.
Peabody said its projected 2012 U.S. production remains fully contracted, and 2013 U.S. production is 80% to 85% priced based on targeted current-year volumes.
Peabody said it is working hard to manage costs in a still weak market. The company has identified about $100m of annual overhead and other cost savings primarily through workforce reductions, lower outside services spending and elimination of contractors across its global platform. Third quarter capital investments totaled $308.4m, and the company has reduced the midpoint of its 2012 capital targets by $250m since the start of the year to $1.0bn to $1.1bn in response to the current global environment. Cost reductions also relate to deferred project work that will lead to 2013 capital targets meaningfully below 2012 levels.
Peabody is targeting 2012 Adjusted EBITDA of $1.75bn to $1.85bn and Adjusted Diluted EPS of $2.10 to $2.30, including the $0.22 net tax benefit recorded in the second quarter relating to the integration of acquired assets. Factors affecting results include two fourth quarter longwall moves, lower volumes in the United States as well as lower average realized pricing and higher royalty rates in Australia.
Total sales for 2012 are targeted at 240 million to 250 million tons, including Australian sales of 31 million to 33 million tons, 188 million to 192 million tons from the United States and the remainder from Trading and Brokerage activities.
“Global macroeconomic conditions continue to be constrained due to the sluggish U.S. economy, European recession and decelerating China growth,” said Boyce. “At the same time, we are seeing record global coal imports, increasing coal generation, and improving U.S. coal consumption from higher natural gas prices.”
Export market showing mixed strength
Metallurgical and thermal coal prices have been impacted by lower than expected global GDP, generation and steel demand, leading to a widespread supply response. In addition to production cutbacks in China, market conditions have driven reductions in the U.S., South Africa, Australia and Indonesia.
- China’s coal imports remained strong in the third quarter to serve coastal demand, despite softening underlying demand in China, Peabody noted. China’s net coal imports year to date have risen more than 60 million tonnes over prior-year levels, and imports from Australia have more than doubled. China’s steel production has begun to increase in October. China continues to close small, inefficient thermal and met coal mines and, in recent months, coal rail deliveries are about 12% below prior-year levels.
- Europe has continued to increase coal-fueled generation given high-cost global natural gas and declining nuclear generation. Despite ongoing recession in Europe, year-to-date coal generation has risen 14% over prior-year levels, led by increases in the United Kingdom, Spain, France, Germany and Italy.
- India thermal coal imports have risen 15% year to date and reached 10 million tonnes in August, with the country on pace to set a new import record this year.
- Japan’s coal generation is up 26% year to date as high natural gas prices continue to make coal-fueled generation attractive and nuclear utilization continues to remain low.
Peabody projects global seaborne thermal coal demand will rise by about 100 million tonnes in 2012 to 900 million tonnes, with continued increases in 2013. Anticipated global economic growth and China’s infrastructure spending should lead to global seaborne met coal demand growth of 10% to 15% in 2013, and consultant Wood Mackenzie projects coal to overtake oil as the world’s largest energy source in 2013 as global coal demand further increases next year.
At its Australia operations, the company is settling its available fourth quarter met coal contracts largely in line with benchmark settlements of $170 per tonne for high quality hard coking coal and $125/tonne for low-vol pulverized coal injection (PCI). The company continues to target 2012 met coal sales of 13 million to 14 million tons and seaborne thermal coal sales of 11 million to 12 million tons. Peabody now targets 2012 Australia sales of 31 million to 33 million tons compared with 2011 sales of 25 million tons.