November 9, 2020 - Peabody (NYSE: BTU) has announced its third quarter 2020 operating results, including revenues of $671.0 million; loss from continuing operations, net of income taxes of $64.8 million; net loss attributable to common stockholders of $67.2 million; diluted loss per share from continuing operations of $0.66; and Adjusted EBITDA1 of $95.4 million.
"Peabody drove strong cost performance within our thermal segments during the third quarter, including record-low PRB costs per ton," said President and Chief Executive Officer Glenn Kellow. "We have had a number of achievements across the portfolio and look to further build upon our progress as we tackle structural improvements within the seaborne met segment. In addition to our ongoing portfolio enhancements, we have been working to achieve specific financing objectives. While we have made progress, there is still more to do. Together, these actions are intended to provide a solid base to strengthen our financial and operating performance."
Third Quarter 2020 Results
Third quarter revenues declined 39 percent from the prior year to $671.0 million due to lower volumes, mix changes and weaker seaborne pricing. U.S. thermal revenues declined $215.4 million, including $82.6 million from Kayenta's closure in the third quarter of 2019.
Operating costs and expenses also fell by 39 percent, reflecting the benefit of cost saving initiatives taken to date, as well as lower volumes. These initiatives included further headcount reductions, which resulted in a restructuring charge of $8.1 million in the third quarter.
The company also modified its approach to its non-represented retiree medical coverage to better align with evolving business conditions and industry benchmarks. Given this change, the company's postretirement benefit obligation was adjusted to fair value, utilizing lower discount rates, which resulted in a $13.0 million loss in the quarter and a $174.5 million reduction in the liability. Peabody ended the third quarter with $814.6 million of cash and cash equivalents and $860.1 million of available liquidity.
During the quarter, the seaborne thermal segment shipped 4.6 million tons, with 2.7 million tons exported at an average realized price of $45.86 per short ton. The remaining 1.9 million tons were sold under a long-term domestic contract.
Seaborne thermal segment costs per ton of $27.59 improved 22 percent compared to the prior year due to strong cost performance from the Wambo surface mine and Wilpinjong. Lower ratio and improved geology contributed to significantly lower year-over-year costs at the surface operations.
In the quarter, the seaborne met segment shipped 1.1 million tons at an average realized price of $71.88 per short ton. Compared to the prior year, third quarter 2020 realized pricing was impacted by lower pricing and a higher mix of PCI sales.
Seaborne met costs per ton, excluding prior year North Goonyella equipment and development costs, improved 15 percent from the prior year to $96.87. Lower costs per ton were driven by ongoing actions to improve the cost structure at Metropolitan, Coppabella and Moorvale. Year-to-date 2020 met costs per ton included an approximately $5 per ton impact related to an adjustment to record certain mines' inventory at net realizable value.
Peabody's U.S. thermal mines delivered strong cost performance driven by optimizing the company's maintenance program through use of condition-based monitoring. These benefits largely offset the impacts of lower demand.
Third quarter PRB Adjusted EBITDA of $78.3 million increased $7.6 million from the prior year on record low PRB costs per ton of $7.93, despite a 22 percent decline in shipments. Third quarter PRB costs benefited from lower maintenance spending, and fuel and sales related costs associated with reduced volumes, including a one-time benefit of $0.35 per ton.
The other U.S. thermal segment earned $51.6 million of Adjusted EBITDA in the quarter on continued strong cost performance. Costs per ton declined 22 percent from the prior year to $26.52 due to reduced maintenance spending, favorable mix impacts, and lower personnel costs, among other items.
As part of the company's comprehensive process to explore financing alternatives, the company engaged with its surety bond providers to reach a mutual agreement to support Peabody's continued reclamation efforts. In early November, Peabody reached a standstill agreement with its surety bond providers for the company's $1.6 billion surety program to resolve approximately $800 million of collateral requests made in the third quarter and limit future collateral requirements.
"We are grateful for the tremendous collaboration with our surety providers to reach a first-of-its-kind solution that offers a greater line of sight into Peabody's future collateral requirements," said Executive Vice President and Chief Financial Officer Mark Spurbeck. "The agreement lays the foundation for stability and provides the necessary support for our longstanding commitment to reclamation. We are now focused on continuing to work with our 2022 noteholders and revolving credit lenders to effectuate a holistic transaction that provides for maturity extensions and covenant relief, while maintaining sufficient operating liquidity and financial flexibility."
Providers of 99 percent of the company's surety bond portfolio have agreed to the following terms and conditions:
Based on the company's current outlook, it is probable that Peabody's fourth quarter 2020 results will not be sufficient to meet the minimum required net leverage ratio as defined under the revolving credit agreement. Peabody has been engaged in discussions with its revolving credit lenders and an ad hoc group of 2022 noteholders. While no agreement has been reached with these parties to date, Peabody expects to continue to have discussions with all or certain of these constituencies in the future. The surety standstill outlined above is contingent upon the company ultimately completing a deal with its revolving credit lenders and 2022 noteholders by Dec. 31, 2020, which can be extended at the company's discretion to Jan. 29, 2021 for purposes of increasing participation.
The additional collateral demands and probable financial covenant noncompliance under the revolving credit facility, requires that the company's debt be reported as current on its balance sheet as of Sept. 30, 2020. Upon completion of a comprehensive resolution with its revolving credit lenders and 2022 noteholders, Peabody would expect its debt to be classified as current or non-current based upon the timing of its stated maturity.
The company has benefited from a comprehensive improvement program with board oversight across operational and functional aspects of the business, and continues to drive structural changes throughout the organization.
Actions recently taken include:
Other initiatives, including the following, are also underway across the portfolio:
The global economy is showing a marked improvement in industrial production, even as the timing of a recovery varies across countries and sectors. Seaborne coal pricing remains muted and below pre-pandemic levels and rising COVID-19 cases worldwide continue to pose a threat to commodity pricing.
Steel industry fundamentals are improving in most regions relative to COVID-driven lows earlier in the year, although seaborne met coal demand has yet to recover to pre-pandemic levels. While China is leading the steel production recovery, met coal imports have been muted given unofficial import controls. In addition, year to date through September, India's met imports fell 8 million tonnes compared to the prior year. Looking ahead, Peabody projects global seaborne met coal demand to show consistent, albeit modest, growth over the next several years. During this time, India is expected to account for the vast majority of overall demand growth amid significant steel capacity additions and lack of domestic reserves. ASEAN countries are also projected to be a notable contributor to growth as demand in Japan and Korea remains largely stable. Australia is projected to continue to account for more than 50 percent of seaborne supply.
Within seaborne thermal, weak demand continues to pressure prices. India imports have declined 24 million tonnes due to inventory overhangs and higher domestic production, while China imports are down 9 million tonnes year to date through September. ASEAN countries are the only major importing regions showing sizable year-over-year growth, with imports up 9 million tonnes year to date through September. Longer term, coal is expected to maintain a leading position in the electricity generation mix. In absolute terms, coal is expected to grow while its share of overall generation is expected to decline. ASEAN countries and India are expected to be drivers for seaborne coal demand growth due to increased electrification and economic gains. This growth is anticipated to more than offset sharp declines in global coal use from developed economies, including the U.S. and Western Europe. From a supply-side perspective, year-to-date thermal exports for every major exporting country are down relative to the prior year. Indonesia leads the decline with thermal exports down 34 million tonnes, followed by Colombia and the United States. In fact, Colombia exports marked an all-time low in September.
In the U.S., the impacts of COVID-19 have accelerated a multi-year decline in coal demand. Year-to-date through September, coal generation is down 24 percent and represents 19 percent of the overall generation mix. While still at elevated levels, strong summer draws have lowered U.S. utility coal inventories to just under 130 million tons, or approximately 56 days based on maximum usage. Current natural gas forwards are above $3.00 for the remainder of the year and into 2021.
Based on current estimates, fourth quarter seaborne volumes are expected to improve modestly, while U.S. thermal volumes are expected to decline slightly compared to the third quarter. Seaborne met costs are anticipated to rise primarily due to a planned longwall move at Metropolitan and changes in product mix, while seaborne thermal costs are expected to be largely in line with the third quarter. Current fourth quarter 2020 priced and committed sales are as follows:
In addition, 2020 full year capital expenditures and SG&A have been reduced to approximately $185 million and $105 million, respectively.
Current 2021 market expectations reflect improvement in seaborne coal demand as economies continue to recover from COVID-19. In addition, modestly higher forward natural gas prices are expected to offset the impact of additional retirements within the U.S. thermal market. Other factors that will determine Peabody's 2021 sales volume include the anticipated resumption of production at Shoal Creek in early 2021 as well as lower production due to the United Wambo joint venture transition.
To read the full results with financial figures included, click here.