Oct 21 2010
Patriot Coal Corporation (NYSE: PCX) today reported its financial results for the quarter ended September 30, 2010.
The Company reported revenues of $500.7 million, EBITDA of $13.2 million, net loss of $46.0 million and loss per share of $0.51 for the 2010 third quarter. For the nine months ended September 30, 2010, the Company reported revenues of $1.5 billion, EBITDA of $99.0 million, net loss of $55.3 million and loss per share of $0.61. EBITDA for the first nine months of 2010 increased $20.8 million, or 27 percent, compared with the first nine months of 2009.
Summary:
- Third quarter EBITDA of $13.2 million on lower production; year-to-date EBITDA of $99.0 million
- Court ruling on selenium lawsuits resulted in $20.7 million charge
- New Black Oak high-quality metallurgical mine began in September
- More than 1.0 million tons of met coal sold at favorable prices for 2011 delivery, with more than 5.0 million tons remaining to be priced into a strong market
- Solid reduction of Appalachian coal inventories sets the stage for a dynamic thermal market in 2011
"Third quarter production levels were disappointing at Patriot's underground operations, due to increased regulatory activities and geological issues. Operational and commercial improvements partially offset those issues, and we again saw double-digit EBITDA per ton in the Appalachia segment, for the fifth consecutive quarter. Moreover, in September we began production at our new Black Oak metallurgical mine," said President & Chief Executive Officer Richard M. Whiting. "In September, Charles Ebetino, Jr. assumed the role of Chief Operating Officer, and we look forward to positive results as he applies his experience to Patriot's operations."
"The third quarter proved to be very demanding for Patriot. Continued regulatory changes, as well as geological challenges at several of our mines, caused our production to be lower than we had anticipated. Absolute costs were in-line with our expectations, so the lower production resulted in a higher cost per ton for the third quarter," noted Patriot Senior Vice President and Chief Financial Officer Mark N. Schroeder. "Looking to the fourth quarter, we expect our production level to rebound, resulting in lower per-ton costs and improved margins."
"Demand and pricing for all of our metallurgical products remain very strong, as we move through the negotiation period for 2011 deliveries," continued Whiting. "Regarding thermal markets, many factors point to a much tighter market for Appalachian coal as we enter 2011. The entire coal industry in the eastern U.S. is seeing the impact of external forces on productivity levels, setting the stage for completely different market dynamics when utility buyers return to the marketplace for additional 2011 volume. Coal is still the workhorse for U.S. electricity generation, especially in the peak seasons, and current inventories are not positioned to absorb extra demand this coming winter."
Financial Overview
Sales in the third quarter totaled 7.5 million tons, including 5.9 million tons of thermal and 1.6 million tons of metallurgical coal. Total sales were lower than the 7.8 million tons sold in the third quarter of 2009, which included 6.3 million tons of thermal and 1.5 million tons of metallurgical coal. As a result of strong global met coal demand, 76 percent of Patriot's third quarter met shipments moved to export markets.
Revenues in the 2010 third quarter were $500.7 million, compared with $506.2 million in the prior year third quarter. Slightly lower revenues in the 2010 third quarter compared with the prior year largely resulted from lower sales volume, partially offset by higher average selling prices.
EBITDA in the 2010 third quarter was $13.2 million, compared with $25.4 million in the same quarter of 2009. Lower EBITDA resulted primarily from reduced volume associated with the current quarter production shortfall. EBITDA for the third quarter 2009 benefited from gains related to renegotiated sales agreements.
Operating cost per ton totaled $58.35 in the 2010 third quarter, compared with $54.70 in the prior year third quarter. Increased cost per ton in the 2010 quarter was primarily due to the lower production divisor.
Production at several underground mines in the 2010 third quarter was lower due to major moves of both longwalls, heightened regulatory oversight, new regulatory interpretations and geological conditions. The Federal longwall was idled for almost two weeks during the quarter as a result of a ventilation change required by regulatory authorities in an area of the mine that did not require sampling under prior interpretations of the law. The Panther complex experienced lower production as a result of the scheduled extended longwall move, exacerbated by equipment start-up issues. On a combined basis, production from the Federal and Panther longwalls was lower than normalized run-rates by more than 400,000 tons, or about 25 percent, in the third quarter.
During the 2010 third quarter, the Federal District Court in Huntington, West Virginia ruled on selenium lawsuits brought by various environmental constituencies against the Company's Apogee and Hobet subsidiaries. Pursuant to the court order, Apogee was ordered, among other things, to install a biological-based fluidized bed reactor system to treat selenium discharges at certain affected outfalls. Additionally, Hobet was ordered to submit and implement a treatment plan to come into compliance with applicable selenium discharge limits under its Hobet 22 permit. As a result of this order, the Company recognized a charge of $20.7 million, which is expected to be spent over the estimated operating life of the treatment system. The charge was included in reclamation and remediation obligation expense in the 2010 third quarter. Additionally, the Company estimates the capital investment required as part of the order will be approximately $50.0 million.
Accretion related to shipments on below-market sales and purchase contracts obtained in the Magnum Coal acquisition in July 2008 totaled $30.9 million in the third quarter of 2010, compared with $94.0 million in the prior year. Lower accretion in 2010 resulted because certain contracts acquired with Magnum expired at the end of 2009, and the associated accretion was fully recognized by that time.
Credit and Capital
As of September 30, 2010, Patriot had a cash balance of $208.2 million and no borrowings on its revolving credit facility or its receivables securitization program. Available liquidity was just over $400 million at September 30, 2010.
Capital expenditures totaled $30.9 million in the 2010 third quarter and $94.6 million year-to-date. Capital expenditures in the third quarter included spending at the Black Oak mine, which began producing high-quality metallurgical coal in early September.
Safety
During the quarter, the Wells preparation plant received the prestigious Sentinels of Safety Award for outstanding safety performance in the large coal processing facility group. The Wells preparation plant processes over three million tons of metallurgical coal on an annual basis.
Sentinels of Safety Awards are co-sponsored by the Mine Safety and Health Administration and the National Mining Association. The Awards recognize achievement of strong safety records in mining operations and are granted based on the highest hours worked in a calendar year without a lost-time injury. Each year, one facility is recognized in each of ten award categories.
Market Overview
"Metallurgical coal markets are among the strongest and most sustained we have seen in several decades. Internationally, steel production has not only rebounded from the lows of 2009, but is near the robust levels of 2008. As has been well-documented, the rapid growth in worldwide steel production has been driven by China, which has put substantial demand and pricing pressure on all international met coal markets," continued Whiting. "And China's strong demand for met coal imports continues in 2010, with its imports for the first eight months of 2010 far outpacing the robust rate of 2009. Year-to-date through August, China has imported nearly 30 million tons of met coal, compared with just over 20 million tons a year ago."
"In the domestic market, steel mill utilization now stands at just under 70 percent, with U.S. coke plants running near capacity. This means that met coal demand at domestic steel mills is also solid," stated Whiting.
"These international and domestic steel production levels are very positive signs as we discuss 2011 contracts with our customers," noted Whiting. "As evidence of current market conditions, since our last quarterly earnings call we have booked more than 1.0 million tons of met coal for 2011 delivery at an average price of more than $140 at the mine, raising our average 2011 priced metallurgical coal to $119 per ton. Importantly, more than half of these newly booked tons represent our Panther-type met product. We expect pricing to remain at elevated levels as we conclude our 2011 pricing."
"Turning to thermal markets, cooling degree days in the eastern U.S. in the last five months were 36 percent above normal levels. And as a result, Central Appalachian inventories now stand at the low end of the five-year range," added Whiting. "As we have stated previously, we believe that increasing customer demand and lower inventory levels, coupled with supply constraints, will result in strengthening markets for high-Btu Central Appalachian thermal coal as we move into 2011."
"As a reminder, Patriot has leverage to rising coal prices as two significant underwater legacy customer contracts covering 6.5 million tons expire by the end of 2012," concluded Whiting. "Assuming current market pricing, we expect incremental EBITDA of around $50 million in 2012 and $150 million in 2013 as these tons are re-priced."
Outlook
As with most Appalachian producers, production levels are difficult to predict due to the changing regulatory requirements. The Company currently anticipates sales volume in the range of 8.0 to 8.4 million tons for the fourth quarter of 2010. This includes metallurgical coal sales of 1.9 to 2.1 million tons at an average price of $116 per ton, Appalachia thermal coal sales of 4.3 to 4.5 million tons at an average price of $57 per ton, and Illinois Basin thermal coal sales of 1.7 to 1.9 million tons at an average price of $40 per ton. Cost per ton for the 2010 fourth quarter is expected to be in the range of $59.00 to $61.00 for the Appalachia segment. Cost per ton for the Illinois Basin segment is expected to be in the $41.00 to $43.00 range for the fourth quarter.
"Looking forward, we have more than 4.5 million tons of thermal coal for 2011 delivery available to be priced. A solid reduction of Appalachian coal inventories in recent months sets the stage for a dynamic thermal market in 2011. This lines up well with our unpriced thermal position, which is weighted toward the back half of 2011," continued Schroeder. "On the metallurgical side, we have more than 5.0 million tons of met coal for 2011 delivery available to be priced in a very tight market. Assuming that the met coal market remains strong, we anticipate continuing our expansion of met production in 2011. As a result, we expect our total met sales in 2011 will exceed 8.0 million tons."
Priced thermal business for 2011 and 2012 includes 8.3 million tons and 4.7 million tons, respectively, related to legacy contracts priced significantly below the current market.
Source: Patriot Coal Corporation