Peabody sees the 2016 U.S. coal market as being worse than expected

Peabody Energy (NYSE: BTU) reported Feb. 11 that full-year 2015 revenues were $5.61 billion, while adjusted EBITDA totaled $434.6 million, which includes $23.5 million in restructuring charges related to reductions in corporate and regional staff and Australian Mining Operations.

Full-year Adjusted EBITDA excludes the impact of $1.28 billion in charges related to asset impairments. Diluted Loss Per Share from Continuing Operations totaled $(102.62) and Adjusted Diluted EPS totaled $(36.39).

“Against a brutal industry backdrop, the Peabody team delivered a strong operating performance as we improved safety, achieved over $620 million in lower costs, further reduced capital, streamlined the organization and advanced multiple work streams to address our portfolio and financial objectives,” said Peabody Energy President and Chief Executive Officer Glenn Kellow. “It is clear that more must be done, and we are taking further steps to confront a prolonged industry downturn by targeting additional cost reductions, advancing non-core asset sales and pursuing aggressive actions to preserve liquidity and delever our balance sheet.”  

2015 revenues totaled $5.61 billion compared with $6.79 billion in the prior year due to lower realized pricing in the U.S. and Australia and a 21.0 million ton decline in sales. These factors drove full-year Adjusted EBITDA down 47 percent to $434.6 million as approximately $620 million in cost improvements mitigated more than $450 million in lower pricing and $387.2 million in hedge losses compared to the prior year. Adjusted EBITDA also includes $23.5 million in charges related to reductions in corporate and regional staff and Australian Mining Operations.

In the fourth quarter, Adjusted EBITDA declined 59% from the third quarter to $53.0 million as a result of a $32.8 million reduction in Trading and Brokerage results, a $14.3 million charge related to the assignment of excess Australian port capacity, a decline in U.S. shipments and a decrease in Australian pricing. U.S. sales were impacted by lower energy demand, declining natural gas prices and high customer stockpiles that resulted in approximately 4 million tons of deferrals from the fourth quarter, with a significant portion of the deferrals occurring in December. 

2015 U.S. Mining Adjusted EBITDA declined $145.6 million to $937.2 million, primarily due to a 13.5 million ton volume decrease as a result of lower utility coal demand based on natural gas prices and a planned reduction in volumes associated with export shipments from the Twentymile Mine in Colorado. U.S. Mining costs per ton improved 5 percent as a result of lower fuel expense and cost savings initiatives. 

Despite approximately $420 million in impacts from lower pricing, 2015 Australian Mining Adjusted EBITDA increased $62.4 million to $175.4 million on sharply lower costs. Cost improvements included the benefit of a weaker Australian dollar, lower fuel prices, operational improvements and mine plan changes announced previously in the year. These resulted in record low costs for this platform of $51.07 per ton, even with lower volumes.  2015 Australian Metallurgical gross margins were adversely impacted by over$2.50 per ton from the Burton Mine, the company’s only contractor-operated mine. Australian volumes decreased to 35.8 million tons and included 15.7 million tons of metallurgical coal sold at $75.04 per ton and 12.6 million tons of export thermal coal at $53.76 per ton, with the remainder delivered under domestic thermal contracts.

Loss from Continuing Operations totaled $1.86 billion compared to $749.1 million in the prior year. Diluted Loss from Continuing Operations totaled $(102.62) per share and Adjusted Diluted EPS totaled $(36.39), which reflects adjustments from the 1-for-15 reverse stock split enacted in the fourth quarter. Loss from Discontinued Operations totaled $182.2 million.      

Peabody noted that it continues to qualify for self-bonding in all relevant states and, in the fourth quarter, the state of Wyoming reaffirmed self-bonding eligibility for the North Antelope Rochelle and Rawhide surface mines in the Powder River Basin. 

Global Coal Markets

Slowing global economic growth drove a wide range of commodity prices lower in 2015, resulting in the largest broad commodity market decline since 1991, Peabody reported. Seaborne coal prices continued to fall in 2015 as a reduction in Chinese imports more than offset supply cutbacks, and U.S. coal demand was impacted by lower natural gas prices.

Within seaborne metallurgical coal markets, domestic Chinese steel demand declined approximately 5% in 2015 due to reduced economic growth and oversupply in the property sector, while steel production declined 2%. As a result, China was a net exporter of “refined” met coal in 2015 as steel exports increased 20% to a new record of 110 million tonnes, while Chinese met coal imports decreased more than 20%.

Met coal price settlements declined throughout the year, and first quarter 2016 settlements for premium hard coking coal fell 9% to $81 per tonne. The benchmark for low-vol PCI eased from $71 to $69 per tonne, showing relative strength to the premium coking coal product. Seaborne metallurgical coal demand declined approximately 15 million tonnes in 2015 resulting in accelerated production cutbacks primarily in the U.S. and Canada. Peabody projects modest seaborne met coal supply reductions in 2016 as further declines in the U.S. overcome small production increases from other exporting nations. 

In seaborne thermal coal markets, demand declined 8% on a nearly 75 million tonne reduction in Chinese imports, lower European demand and a decline in international liquefied natural gas prices. The overall decline in seaborne thermal demand primarily impacted U.S. and Indonesian exports, which were down 41% and 23%, respectively. 

Within U.S. coal markets, demand from electric utilities declined approximately 110 million tons in 2015 on mild weather and lower natural gas prices. Natural gas prices fell nearly 40% in 2015 to an average of $2.63 per mm/Btu, which drove coal’s share of electricity generation in the power sector down to 34% compared with 40% in the prior year. U.S. coal production declined about 105 million tons in 2015 as production cutbacks accelerated during the year. As a result, fourth quarter production was down approximately 50 million tons compared with the same period in 2014. Despite supply rationalizations, reduced coal demand led to utility inventories rising nearly 30% above prior-year levels.  

Peabody expects 2016 U.S. utility coal consumption to decline by 40 million to 60 million tons based on projected plant retirements and lower natural gas prices. The decline in demand, combined with an expected significant reduction in utility stockpiles and lower exports, is projected to result in a 150 million to 170 million ton decline in 2016 U.S. coal shipments. As a result, Peabody is lowering its 2016 U.S. sales targets by 13% at the midpoint, and is now fully priced for the year.

Peabody lays out its priorities

Peabody’s core priorities for 2016 include:

  • Driving continuous improvement in safety, productivity and costs. In 2015, Peabody transformed its operations to respond to difficult market conditions. The company set a new record for safety. In the U.S. and Australia, Peabody improved costs by 5% and 24%, respectively, and gross margins across four of the company’s five operating segments averaged 26%. 2015 capital spending declined 35%, and extensive efforts were advanced to streamline the organization leading to a 22% reduction in SG&A expenses, the lowest levels in nearly a decade. Given ongoing market challenges, the company continues to drive cost improvements at all levels of the organization.
  • Preserving liquidity while reducing debt. The company continued to preserve liquidity in 2015 by completing a bond offering, modifying its credit agreement, reducing costs and lowering capital spending. Peabody and its advisors are in discussions with debt holders to evaluate financial alternatives, including potential debt exchanges, debt buybacks and new financing, to preserve liquidity and delever the balance sheet. Peabody also has a number of committed obligations that expire or meaningfully decline in the next two years. That includes the fact that the company’s final Powder River Basin reserve installment of approximately $250 million is scheduled to be paid in the second half of 2016. The payment is related to the company’s last federal lease-by-application process in 2012. As a result of investments in prior years, Peabody’s PRB reserves represent more than 25 years of current production, which provides a competitive advantage relative to other producers.
  • The company proactively assigned excess Australian port capacity to another producer, which is expected to reduce infrastructure costs by about $60 million through 2020. In addition, Peabody recently amended contracts to reduce certain U.S. transportation and logistics costs expected to be due in early 2017. In connection with these amendments, Peabody will realize a net reduction of approximately $45 million in estimated liquidated damage payments that otherwise would have become due in early 2017.
  • The company recently amended its 2013 agreement with the United Mine Workers of America, improving Peabody’s expected 2017 cash flows by $70 million while deferring the 2016 payments over 10 months.
  • Reshaping the portfolio to unlock value. Peabody announced the planned sale of its New Mexico and Colorado assets for $358 million in November, and the purchaser is currently arranging financing. Peabody also announced plans to divest its interest in the Prairie State Energy Campus power plant in Illinois for $57 million. In 2015, the company realized cash proceeds of $70 million related to its ongoing resource management activities through the sale of surplus land and coal reserves. Peabody continues to evaluate its portfolio to target the best markets, with a filter that includes strategic fit, value consideration, growth and cash requirements as the company further emphasizes its core mining assets in the PRB, Illinois Basin and Australia.

Outlook

Peabody said it has lowered 2016 U.S. sales guidance by 18 million to 28 million tons below 2015 levels. As a result, projected 2016 U.S. production is now fully priced, with 2017 production 35% to 45% unpriced based on targeted 2016 production levels. After incorporating deferrals to later periods and a change in customer mix, Peabody now has 116 million tons of PRB priced for 2016 delivery at an average of $13.30 per ton. 

2016 U.S. revenues and costs per ton targets primarily reflect a reduced proportion of PRB sales compared to 2015. In the PRB, the company is working to optimize production levels and mix at the North Antelope Rochelle Mine, the nation’s largest coal mine, to maximize margins. 2016 guidance includes the contributions from mines in Colorado and New Mexico, for which a sales agreement is in place.  

In Australia, Peabody is lowering targeted metallurgical coal production levels in 2016 to reflect operational changes made in 2015, which is expected to result in lower PCI sales. The company also plans to place the Burton Mine on care and maintenance by the end of 2016. 

Peabody expects first quarter Adjusted EBITDA to reflect current reduced seaborne coal pricing, lower PRB volumes, the impact of planned longwall moves at the Wambo and Twentymile mines, and the realization of fuel and currency hedges that are expected to improve each quarter as the year progresses. While cost improvements continue to remain a priority for Peabody, current pricing levels are a strong headwind. The company also expects to have an approximately $70 million benefit to continuing operations from the recently amended 2013 agreement with the United Mine Workers of America.

St. Louis-based Peabody Energy is the world’s largest private-sector coal company and a global leader in sustainable mining, energy access and clean coal solutions. The company serves metallurgical and thermal coal customers in 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.