Peabody says coal cost containment helps Q2 earnings

Peabody Energy (NYSE: BTU), the nation’s largest coal producer, on July 23 reported second quarter 2013 revenues of $1.73bn, resulting in Adjusted EBITDA of $254.3m, compared with $450.1m in the prior year.

Second quarter Adjusted EBITDA includes the impact of $32.5m in charges relating to a $20.6m court judgment and a $11.9m voluntary employee separation program in the United States.

“The strength of Peabody’s global platform and the significant progress of our cost containment actions helped us overcome a number of challenges during the quarter,” said Peabody Chairman and CEO Gregory Boyce. “Our progress in reducing capital and moving our operations down the cost curve highlights the actions we are taking to succeed in all market conditions. Peabody continues to drive improvements across our platform, which remains very well positioned with competitive assets in the growth regions of the United States and Australia.”

Second quarter revenues declined 13% to $1.73bn on lower realized pricing from Mining Operations as well as lower Trading and Brokerage results. Australian price declines were partly offset by a 5% volume increase. Australian sales totaled 8.6 million tons, including 4.1 million tons of metallurgical coal and 2.6 million tons of seaborne thermal coal. U.S. revenues of $970.9m fell from the prior year on lower realized pricing and a higher percentage of lower-priced Western U.S. shipments.  

U.S. Mining Adjusted EBITDA totaled $261.7m, in line with the prior year, as a 6% decline in average unit costs mitigated lower realized pricing. 

“Both U.S. and global coal demand continue to grow, and we expect the seaborne market to exceed 1.2 billion tonnes this year as China and India set new import records,” said Boyce. “While seaborne coal supplies remain at elevated levels, the world’s largest producers – China and the United States – have reduced production, and we expect additional cutbacks in the second half of the year.”

The third quarter metallurgical coal price benchmark for high-quality low-vol hard coking coal settled at $145 per tonne with benchmark low-vol PCI pricing settling at $116 per tonne, Peabody noted. The annual thermal price benchmark for Newcastle-quality coal beginning in the third quarter settled at about $90per tonne.

Peabody is projecting global seaborne thermal demand to rise approximately 50 million tonnes in 2013 as about 75 GW of new coal generation are scheduled to come on line. Between 2012 and 2017, annual world coal demand is estimated to grow by approximately 1.2 billion tonnes, driven by 425 GW of new coal generation expected to come on line, along with rising global steel production and increasing coal conversion activities. 

Peabody expects to settle the majority of its 2013 Australian met coal production in line with quarterly or monthly benchmarks, with about 40% sold on a shorter-term basis. Peabody is targeting total 2013 Australian sales of 33 million to 36 million tons, including 15 million to 16 million tons of metallurgical coal and 11 million to 12 million tons of export thermal coal.

Peabody sees some U.S. rebound for sluggish steam coal demand

“Despite a slow start to summer, U.S. coal generation is up significantly year to date and natural gas generation has declined sharply,” said Boyce.  “Combined with reduced coal production, U.S. coal inventories are expected to improve to their lowest levels in several years with Powder River Basin stockpiles leading the decline.”

Within U.S. coal markets:

  • Peabody projects 2013 U.S. coal consumption for electricity generation will grow by 50 million to 70 million tons over prior-year levels as coal has regained significant market share from more expensive natural gas;
  • Coal demand increased 11% in the first half of the year and accounted for approximately 40% of total electricity generation. Natural gas prices have been significantly above prior-year levels, leading to gas-to-coal switching and a 15% decline in natural gas generation;
  • Coal shipments have fallen 5% through June, leading to an above-average customer stockpile drawdown. Customer inventories of Powder River Basin coal are approximately 25% below prior-year levels on a days-burn basis; and
  • Longer term, Peabody expects U.S. coal consumption of PRB and Illinois Basin coals (Peabody is a dominant producer out of both of those basins) to continue to increase, led by higher coal plant utilization and basin switching.

Peabody’s projected 2013 U.S. production is essentially fully priced, with 2014 sales 70% to 80% priced based on comparable 2013 production levels.

Peabody said it continues to be focused on cost containment and tight capital discipline. It is reducing 2013 Australian cost targets to the mid-$70 per ton range, with 2013 U.S. costs per ton expected to be 2% to 3% lower than last year. 

Capital spending continues to be tightly managed, and Peabody has reduced 2013 capital targets by $100m to $350m to $450m. 

Full-year 2013 targets include:

  • Total sales of 230 million to 250 million tons, including U.S. sales of 180 million to 190 million tons, Australian sales of 33 million to 36 million tons, and the remainder from Trading and Brokerage activities;
  • Expected U.S. revenues per ton 5% to 10% below 2012 levels; and
  • Full-year depreciation, depletion and amortization levels about 10% higher than 2012 levels.

St. Louis-based Peabody Energy is the world’s largest private-sector coal company and a global leader in sustainable mining and clean coal solutions. The company serves metallurgical and thermal coal customers in more than 25 countries on six continents.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.