Peabody (NYSE: BTU) yesterday announced its first quarter 2019 operating results, including revenues of $1.25 billion; income from continuing operations, net of income taxes of $133.3 million; net income attributable to common stockholders of $124.2 million; diluted earnings per share from continuing operations of $1.15; and Adjusted EBITDA1 of $253.9 million.
“Peabody’s first quarter was notable for the leading performance by our new Shoal Creek Mine, significant margins in the seaborne thermal business and recognition of maximum North Goonyella insurance recoveries, which combined, overcame an unusual set of first quarter challenges across the logistics chain,” said Peabody President and Chief Executive Officer Glenn Kellow. “In light of our strong ongoing cash flow generating capabilities, Peabody also returned more than $300 million in cash to shareholders during the quarter, which included deployment of another tool in the capital allocation kit through the payment of a $1.85 per share supplemental dividend in March.”
“Looking ahead, Peabody is implementing multiple strategies to create value,” said Kellow. “We are continuing to reweight our investments toward greater seaborne thermal and metallurgical coal access to capture higher-growth Asian demand. We are optimizing our lowest-cost and highest-margin U.S. thermal assets in a low-capital fashion to maximize cash generation. We are executing our financial approach of generating cash, maintaining financial strength, investing wisely and returning cash to shareholders.”
First Quarter 2019 Results
First quarter 2019 revenues totaled $1.25 billion on 40.5 million tons of coal sales, compared to $1.46 billion in revenues and 48.3 million tons of coal sales in the prior year, reflecting the impact of a challenged coal industry logistics chain. Powder River Basin coal shipments declined 22 percent from the prior year, as winter weather and flooding across the plains states heavily impacted rail performance beginning in early February. The loss of revenues and volume year over year related to the idle North Goonyella Mine was largely offset by the Shoal Creek Mine, which shipped approximately 668,000 tons in the first quarter.
Income from continuing operations, net of income taxes totaled $133.3 million, compared to $208.3 million in the prior year. Diluted earnings per share from continuing operations increased $0.32 per share to $1.15 per share due to the company’s ongoing share repurchase program and the conversion of preferred stock in the prior year.
During the quarter, the company reached an agreement on the North Goonyella insurance settlement and recognized the maximum allowable North Goonyella claim of $125.0 million. Of this total, $33.9 million countered ongoing recovery costs and was recorded as a benefit to Adjusted EBITDA. The remaining $91.1 million of the insurance claim related to equipment losses from current and prior quarters was excluded from Adjusted EBITDA, given those charges also were excluded from Adjusted EBITDA when incurred. The North Goonyella charge of $24.7 million relates to additional losses identified in the first quarter and represents the best estimate of potential loss on assessments to date.
Compared to the prior year, Adjusted EBITDA declined $110.0 million to $253.9 million primarily due to lower seaborne metallurgical coal volumes, costs associated with the North Goonyella incident and lower PRB shipments, partially offset by $33.1 million of higher seaborne thermal Adjusted EBITDA driven by increased volumes and elevated pricing. PRB shipments were impacted by approximately $23 million in added expenses attributable to rail issues stemming from winter weather and flooding during the quarter.
First quarter depreciation, depletion and amortization (DD&A) increased $2.9 million over the prior year to $172.5 million primarily due to accelerated DD&A related to the Kayenta Mine closure of $12.5 million and $11.3 million associated with the Shoal Creek Mine, partially offset by lower coal sales contract amortization of $21.1 million. Peabody expects DD&A to decline as the year progresses and is targeting full-year expense of $600 million to $650 million.
Selling, general and administrative expense (SG&A) was in line with the prior year and below quarterly guidance ranges, despite an additional tranche of non-cash equity awards granted.
In the first quarter, the seaborne thermal segment sold 2.6 million tons of export thermal coal at an average realized price of $80.40 per short ton, with the remainder sold under a long-term domestic contract. Export volumes increased 24 percent over the prior year largely resulting from stronger operating performance at the Wambo complex, in part due to the absence of a current-quarter longwall move at the Wambo underground mine. As expected, approximately 71 percent of Peabody’s first quarter export thermal shipments were of the higher-quality Newcastle specification product, with the remainder closer to the API 5 product specification.
Once again, the seaborne thermal segment led the company in total Adjusted EBITDA contributions of $94.7 million and Adjusted EBITDA margins of 38 percent, demonstrating both the low-cost nature of Peabody’s operations and the continued high demand for seaborne thermal coal. Compared to the prior year, first quarter 2019 seaborne thermal Adjusted EBITDA increased 54 percent on higher export thermal sales and $2.06 per ton in lower costs.
The seaborne metallurgical segment shipped 2.3 million tons at an average realized price of $142.33 per ton. Unit costs were temporarily burdened by expected lower-than-ratable metallurgical coal volumes as well as a planned dragline outage at the Coppabella Mine and a required Shoal Creek inventory adjustment. Temporarily higher strip ratios and the cumulative impact of dragline repairs at the Coppabella Mine resulted in an approximately $8 per ton increase to segment costs per ton over the prior year. The required fair value inventory adjustment on the remaining acquired inventory resulted in an increase to segment costs of approximately $3.50 per ton in the quarter. With the exception of Coppabella Mine’s costs, all operating metallurgical mines delivered cash costs within or below the company’s original annual seaborne metallurgical cost guidance range of $85 to $95 per ton.
First quarter North Goonyella results include $36.9 million in project costs that were more than offset by comparable insurance benefit of $33.9 million and $4.3 million in Adjusted EBITDA related to the sale of North Goonyella inventory.
The newly acquired Shoal Creek Mine led the company’s 23 operations in Adjusted EBITDA contributions for the first quarter and its first quarter operating cash flows imply a potential payback period of less than two years.
In addition, Peabody’s share of the Middlemount Mine (not included in the seaborne metallurgical coal segment results) shipped approximately 400,000 tons and contributed $3.9 million to Adjusted EBITDA, which included $7.5 million in DD&A, asset retirement obligation expense, net interest expense and income taxes.
Within the U.S. thermal operations, sales were impacted by severe cold and flooding in the Plains States that restricted rail shipments primarily from the PRB, reversing a January PRB pace that had exceeded full-year expectations. Peabody’s PRB operations shipped 25.3 million tons with temporarily elevated costs of $9.91 per ton, as rail delays and closures increased costs by $1.02 per ton over the prior year.
Adjusted EBITDA from both the Midwestern and Western segments increased 7 percent and 33 percent, respectively, over the prior year. Western Adjusted EBITDA benefited from strong Twentymile Mine performance and continued acceleration of cost recovery at the Kayenta Mine. In total, the U.S. thermal operations earned Adjusted EBITDA of $112.3 million compared to $137.7 million in the prior year, despite a 7.6 million ton reduction in tons sold.
Balance Sheet and Cash Flow
First quarter operating cash flows totaled $197.6 million compared to prior year operating cash flows of $579.7 million, which included the benefit of approximately $214.0 million in returned cash collateral. Free Cash Flow totaled $161.9 million and included $35.8 million in capital expenditures.
“Peabody is well on its way to our stated plan to return to shareholders an amount equal to or greater than our Free Cash Flow in 2019,” said Peabody Executive Vice President and Chief Financial Officer Amy Schwetz. “Peabody returned nearly double its first quarter Free Cash Flow to shareholders through a combination of share repurchases, our ongoing quarterly dividend and the inauguration of a supplemental dividend of $200 million.”
During the quarter, Peabody repurchased $98.8 million of common stock, with an additional $34 million in April, bringing total repurchases to $1.14 billion since August 2017. Since August 2017, the company has repurchased a total of 31.2 million shares under the program, representing 23 percent of shares initially outstanding on a fully converted basis. In addition, the company declared and paid a $1.85 per share supplemental dividend, demonstrating strong confidence in Peabody’s substantial cash flow generating capabilities. The supplemental dividend was in addition to the company’s quarterly dividend of $0.13 per share that was paid in March. Quarter-end cash and cash equivalents totaled $798.1 million.
The first quarter of 2019 was marked by unusual near-term challenges to the coal logistics chain in multiple regions of the world. Traditional coal flows were rerouted by flooding in the heartland of the United States; port restrictions in China; wet weather and train derailments in Australia; and a cyclone in Mozambique.
Global seaborne thermal coal pricing eased during the first quarter of 2019 on reduced LNG prices, above-average stockpiles in several large coal importing nations and a milder winter in the Northern Hemisphere. The average 6000-specification Newcastle thermal coal price declined 8 percent during the quarter, while the average 5500-spec product declined 5 percent through the period. This narrowed the 2019 forward curve price ratio between the two products from approximately 61 percent at the end of the fourth quarter to approximately 70 percent at the end of March.
Peabody is finalizing sales agreements based on the annual benchmark April-to-March Japanese reference price settlement of approximately $94.75 per tonne. Including these expected commitments, the company has priced approximately 5.7 million short tons of Australian export thermal coal shipments for the last three quarters of 2019 at an average price of $83 per short ton, as well as additional volumes in 2020.
Despite widespread reports of custom clearance delays in China targeting Australian coals, total Chinese imports were in line with the prior year as higher metallurgical coal imports offset weaker thermal coal demand.
Through March, China thermal coal imports eased 8 percent, reflecting a strong January due to clearance of backlog, while February and March imports were weaker due to customs clearance delays primarily of Australian coal. India and Southeast Asian nation thermal coal imports are all running above prior-year levels.
For 2019, Peabody expects imports from Southeast Asian nations to drive thermal coal demand increases. According to Wood Mackenzie, for the first time ever in 2018, global coal-fueled generating capacity topped 2,000 gigawatts, a massive 62 percent increase since the year 2000. In addition, an estimated 50 gigawatts of new coal-fueled generation are expected to come online in 2019, primarily in Asia.
Seaborne metallurgical coal prices remained robust during the first quarter, averaging $206 per tonne. The first quarter index settlement price for premium hard coking coal was $210 per tonne, compared with $237 per tonne in the prior year. Peabody achieved low-vol PCI settlement pricing for the first quarter of $141 per tonne. The second quarter low-vol PCI settlement was recently agreed to at $138.50 per tonne.
Continued safety checks in China, strong steel production and quality limitations are leading to tight domestic supplies, which in turn, have resulted in netbacks supportive of imports. As a result, Chinese imports rose 35 percent through March.
Peabody anticipates global steel demand growth of approximately 2 percent in 2019, following 5 percent growth in 2018, with increases in India leading to an estimated 5 million to 10 million tonne increase in global metallurgical coal imports. Supply increases are largely expected to be sourced from Australia.
Customer demand for U.S. thermal coal products remained strong in the first quarter, as evidenced by requested rail shipment nominations by utilities, even as rail performance due to flooding hampered shipments. U.S. coal-fueled electricity generation declined approximately 9 percent in the first quarter on reduced total load and increased natural gas generation. Total U.S. electricity generation declined 1 percent year over year in the quarter, with wind power declining 6 percent from the prior year. U.S. coal production declined an estimated 12 percent, above Peabody’s expectations as Powder River Basin shipments were impacted by approximately 5 million to 10 million tons on the basis of reduced rail cycling due to heavy flooding in the Plains States during the last half of the quarter. Reduced coal shipments have further driven down already low utility stockpiles, with Southern PRB utility stockpiles declining an estimated 4 million tons in March versus a typical build of coal stocks in the month.
For 2019, Peabody estimates domestic U.S. coal demand to be reduced by coal plant retirements and gains by natural gas generation. U.S. metallurgical exports in 2019 are expected to remain largely stable with prior-year levels, while thermal exports will be more dependent on fluctuations in seaborne thermal pricing.
Peabody anticipates a strong second half of 2019 to contribute more than half of full-year Adjusted EBITDA, driven by increased PRB, seaborne thermal and seaborne metallurgical coal volumes as well as reduced metallurgical coal costs. Second quarter performance is expected to reflect the impact of two longwall moves in Australia, with PRB shipments in line with the first quarter as rail recoveries offset the impact of typical shoulder season demand. In addition, North Goonyella project costs for the second quarter are expected to come in toward the low-end of the quarterly guidance range of $30 million to $35 million.
In the first quarter, the company completed segmenting of the mine into multiple zones to facilitate a phased reventilation and re-entry of North Goonyella. In addition, all physical activities in advance of reventilating the first segment of the mine have been completed. Peabody is currently complying with a directive concerning documentation from the Queensland Mines Inspectorate, following a thorough review, which has resulted in a multi-week delay to the initial project plan. Should the company’s reventilation and re-entry plan now progress as originally contemplated, Peabody would expect to produce approximately 2 million tons from North Goonyella in 2020. If further delays occur, the company will re-evaluate its reventilation and re-entry plans, including longwall production targets, quarterly project costs and capital expenditures.
From a cash perspective, Peabody is continuing to accelerate cash collections to support reclamation and post-retirement liabilities at Kayenta Mine. In addition, Peabody is lowering its 2019 annual capital expenditure guidance range to $350 million to $375 million as project spending is deferred to subsequent periods.
Peabody remains committed to executing on its stated financial approach of generating cash, maintaining financial strength, investing wisely and returning cash to shareholders. The company has stated it plans to return to shareholders an amount equal to or greater than its Free Cash Flow in 2019.
Today’s earnings call is scheduled for 10 a.m. CDT and will be accompanied by a presentation available at PeabodyEnergy.com.
Peabody (NYSE: BTU) is the leading global pure-play coal company and a member of the Fortune 500, serving power and steel customers in more than 25 countries on six continents. The company offers significant scale, high-quality assets, and diversity in geography and products. Peabody is guided by seven core values: safety, customer focus, leadership, people, excellence, integrity and sustainability.News Source: Peabody