St. Louis-based Peabody Energy (NYSE: BTU), the largest U.S. coal producer, on July 22 reported second quarter 2014 revenues of $1.76bn, leading to Adjusted EBITDA of $213.1m. The loss from continuing operations totaled $72m.
“Peabody’s U.S. operations delivered higher second quarter results, and our Australian platform completed multiple operational milestones and improved costs in the face of challenging market conditions,” said Peabody Energy Chairman and Chief Executive Officer Gregory Boyce. “U.S. coal demand has been expanding for the last two years, and our team continues to respond to seaborne market conditions by improving operational efficiencies, reducing costs and maximizing cash flow generation. Peabody expects that accelerating supply cutbacks and rising demand will lead to improving seaborne market fundamentals heading into 2015.”
Second quarter revenues increased 2% to $1.76bn, primarily due to a 1% increase in sales volumes to 61.7 million tons and the finalization of pricing on a long-term Western U.S. coal supply agreement, partly offset by lower Australian realizations. U.S. Mining revenues rose to $1.03bn as an increase in both Western shipments and realizations overcame a decline in Midwestern volumes and revenues per ton.
Australian revenues declined 5% on lower realized pricing. Australian sales totaled 9.7 million tons, including 4.8 million tons of metallurgical coal and 3.1 million tons of seaborne thermal coal.
Loss from continuing operations totaled $72m compared to income from continuing operations of $101.4m in the prior year. The change was primarily driven by a $188.7m tax provision differential as a result of a lower Australian tax benefit and higher U.S. earnings compared with the prior year.
Peabody says worldwide coal fundamentals are still strong
“While the current seaborne markets are still experiencing supply pressures, coal remains in strong demand and now accounts for its largest share of global energy use in more than 40 years,” said Boyce. “The world continues to turn to coal as a competitive fuel source, and ongoing urbanization and industrialization trends are expected to drive long-term global coal demand growth. In the U.S., coal supplied 92 percent of the incremental electricity demand in the first quarter, and second quarter coal generation remains strong. Southern Powder River Basin inventory levels are expected to fall further below normal by the end of the summer on higher demand and continued rail performance issues.”
The third quarter met coal price benchmark for high-quality low-vol hard coking coal settled at $120 per tonne ($108 per short ton) with benchmark low-vol PCI at $100 per tonne ($91 per short ton), in line with second quarter settlements.
Recently announced seaborne metallurgical coal cutbacks total nearly 20 million tonnes, and the third quarter price settlement is expected to place additional pressure on seaborne suppliers.
By 2016, annual global coal demand is expected to rise 600 million tonnes. Peabody estimates that approximately 250 GW of new coal-fueled generation will be built over the next three years, requiring an additional 750 million tonnes of annual thermal coal at expected capacity utilization.
The company targets 2014 Australian sales of 35 million to 37 million tons, including 16 million to 17 million tons of metallurgical coal and 11 million to 12 million tons of export thermal coal.
Coal generation in the U.S. stages mild 2014 rebound
U.S. coal generation increased 6% through June while natural gas generation declined 2% as utilities continue to switch from gas to coal. Coal as a fuel accounted for 41% of electricity generation in the U.S. through June, and 2014 coal demand is expected to rise 30 million to 40 million tons over 2013 levels.
Southern Powder River Basin inventories are at 49 days of supply, a nearly 30% improvement over the prior year on rising coal demand and stable shipment. Transportation concerns have impacted the Southern PRB, where Peabody’s giant North Antelope Rochelle mine is located, leading to greater coal conservation measures at certain utilities. Rail performance continues to fall short of expectations, resulting in an estimated 15 million tons of lower shipments through the first six months of 2014.
Peabody’s projected 2014 U.S. production is essentially fully priced, with 2015 sales 20% to 30% unpriced based on comparable 2014 production levels.
The last several months have resulted in new policy initiatives regarding carbon dioxide in both Australia and the United States. Against a backdrop of widespread unpopularity, political change and soaring electricity costs, Australia repealed its carbon tax in a major policy reversal. The U.S. Environmental Protection Agency has in the meantime proposed carbon dioxide rules that would require states to reduce emissions from existing electric generating plants. Should the rules be finalized in their current form, third parties have projected the potential for negative impacts to generation, consumer electricity rates, jobs and economic development. Significant opposition to the proposed rules has emerged from states, congressional delegations, labor unions, businesses, citizen groups and others. Peabody said it believes the proposed rules represent poor policy, with significant economic harm.
Operational initiatives this year include advancing the reserve development at the Gateway North Mine in Illinois to replace production from the existing operation in 2015. Slope construction is underway and ahead of targeted schedule.
Peabody is targeting third quarter 2014 Adjusted EBITDA of $140m to $190m and Adjusted Diluted Loss Per Share of $(0.53) to $(0.40). Targets reflect the impact of lower realizations in Australia and the Western U.S., three longwall moves, improved performance at the North Goonyella Mine in Australia and the repeal of the carbon tax in Australia.
Additional full-year 2014 targets include:
- New total sales targets of 245 million to 260 million tons, including U.S. sales of 185 million to 190 million tons and Australian sales of 35 million to 37 million tons;
- U.S. costs per ton 1% to 3% below 2013 levels on cost containment efforts, with U.S. revenues per ton 4% to 7% below 2013 levels due to price re-openers in contracts;
- Australian costs in the low-to-mid $70 per ton range; and
- Full-year depreciation, depletion and amortization approximately 5% to 10% below 2013 levels.